A securities class action certification decision handed down by the Ontario Superior Court of Justice in December 2009, Allen v. Aspen Group Resources Corporation, et al., is attracting attention from the perspective of potential liability for law firms. Although not a merits-based decision, the Court's analysis will prompt law firms and boards of directors of public corporations to review their policies and practices in light of the court's conclusion that the plaintiff's claim, that a law firm may be responsible for the statutory civil liability under section 131(1) of the OSA of one of its partners serving both as a director of the corporation and legal counsel to the corporation, is not unsustainable in law and is a cause of action that can proceed to trial on its merits.
The Allen case involved a class action claim for damages made on behalf of shareholders as a result of alleged misrepresentations in a securities-exchange take-over bid transaction pursuant to which Endeavour Resources Inc. was acquired in 2001 by Aspen Group. Mr. Allen, a former Endeavour shareholder, alleged that the take-over bid circular of Aspen Group sent to all shareholders of Endeavour Resources contained misrepresentations and failed to disclose that insiders of Aspen Group had engaged in improper self-dealing thereby resulting in Endeavour shareholders receiving over-valued Aspen Group shares and entitling them to claim statutory and common law damages from Aspen Group, all its directors and certain officers together with its auditors and its law firm, WeirFoulds LLP. WeirFoulds acted as legal counsel on behalf of Aspen Group in connection with the Endeavour Resources take over transaction and Mr. Egan, a named director defendant and a partner in WeirFoulds, had provided the legal advice to Aspen Group concerning its bid for and acquisition of Endeavour Resources. The plaintiff pleaded a statutory civil liability cause of action under section 131(1) of the OSA against Mr. Egan in his capacity as a director of Aspen Group together with a similar claim against all the other individuals who were members of the board of directors of Aspen Group when the take-over bid circular was signed. Claims were also made against certain Aspen Group officers and its auditors. As well, the plaintiff made independent common law liability claims in negligence against WeirFoulds and Mr. Egan and made a discrete claim against WeirFoulds for Mr. Egan's liability as a defendant director under section 131(1) of the OSA.
Justice Strathy granted an order certifying the Allen action under section 131(1) of the OSA as a class proceeding under the Class Proceedings Act. In arriving at its affirmative certification decision, the Court concluded that it is arguable that the defendant WeirFoulds may be liable, as a firm, for its partner's statutory liability as a director of Aspen Group under section 131(1) of the OSA. This potential statutory liability for the law firm is distinct from any potential common law liability as a matter of contract and/or tort and is not related to the statutory liability for damages against any person or company filing a consent with respect to reports, opinions or statements that have been made by that person or company. This potential firm statutory liability could arise in Allen because one of the firm's partners was a member of the board of directors of the offeror and was acting as external corporate counsel to the offeror presumably with a view to improving the firm's profile and prospects with the offeror, its client.
In argument, WeirFoulds had conceded the possibility that a law firm can, as a matter of law, be statutorily liable for the acts of one of its partners acting qua director of a defendant corporation in the context of section 131(1) of the OSA.
… WeirFoulds… submits that in signing the Circular in his capacity as a director Mr. Egan was not acting in his capacity as a lawyer or in his capacity as a partner in the law firm. [Weir¬Foulds] submits that the firm cannot have a liability for Mr. Egan's actions qua director unless, in carrying out his duties as a director, he was carrying on the usual ordinary business of the law firm. Mr. O'Connor submits that to hold the law firm liable for the lawyer's actions as a director will have a chilling effect on the legal profession and will result in a nation-wide flood of resignations of directorships.
The Court concluded that the partner's acting as external legal counsel and sitting as a director were consistent with the law firm's best interests and, at this stage of the case, it could not be said that WeirFoulds' potential liability for the actions of Mr. Egan, both as a director and for common law negligence, was unsustainable in law. Specifically, Justice Strathy commented:
It seems to me that it is arguable that a lawyer who, through his or her law firm, acts as external corporate counsel to a corporation and who also sits on the corporation's board, may well be acting in the ordinary course of the law firm's business when he or she takes a seat at the boardroom table. Indeed, such a relationship with the corporation may be encouraged by the law firm to strengthen the relationship with the client, to raise the profile of the lawyer and the law firm and to increase business. To the extent there are risks for the lawyer and the law firm, they undoubtedly can be offset by appropriate liability insurance.
… I cannot say that the claim that WeirFoulds is liable for the actions of Mr. Egan, both as a director or for common law negligence, is unsustainable in law.
The defendants have sought leave to appeal.
Consistent with good governance practices, law firms and public corporations should undertake a review of their policies and practices regarding the role of a law firm partner as both a member of the board of directors of a corporation and the legal counsel to a corporation. This should not mean that an impulsive reaction of mass resignations and wholesale bans on lawyers serving as directors will be necessary or appropriate. Best practice requires clear delineations of when one is acting as a lawyer and when one is acting as a director, and distinctions can be made about law firm services and individual lawyer director service. Law firms could also mandate that legal advice and legal services delivered to corporate clients must be provided solely by lawyers of the firm who are not acting at the time as a director of the corporate client. This may have benefits beyond insulating against the liability claimed in Allen.
As an element of this professional relationship between the firm, its partner, the board of directors and the client corporation, it may be prudent for the terms of this type of retainer to be set forth in writing, reviewed periodically with the board of directors and ideally noted in the corporation's disclosures relating to individual board nominees. The key is for it to be clear to all of the corporation's stakeholders that the law firm partner is serving the corporation personally, in the capacity of director, and is not acting on behalf of the firm in any legal capacity vis a vis the corporation.
Law firms may also be advised to review the scope and policy limits of the professional liability insurance available to the firm and any partner in circumstances similar to those in Allen, and may seek to maximize the opportunity to access coverage. A firm should also develop and use practice protocols and other arrangements to enhance the ability of a firm partner acting as both a director and legal counsel to a defendant corporation to satisfy, if necessary, the burden of proof under section 131 of the OSA to demonstrate due care and a reasonable investigation in a claim for an actionable misrepresentation.
In an era when corporate governance is in sharp focus, having lawyers who are willing to serve as directors is good for the client and for the business community, as well as being possibly good for the lawyer. Whether the Allen decision survives appellate scrutiny, or ultimately results in a finding of liability, firms and corporations that adopt best practices, with care and clarity as the touchstones, should continue to benefit from the synergies created and contributions made by the lawyer/director without undue fear of unjustified liability.