Lawyers expose themselves and law firms when taking on directorships

A securities class action recently certified by the Ontario Superior Court of Justice highlights the perils of lawyers taking on directorships, draws attention to potential conflicts of interests and indirectly raises questions over privilege.

While a growing number of law firms across the country have over the past few years discouraged partners from becoming directors due to conflicts of interest and increased exposure to suits, the class action certification will likely lead to even more wariness.

“There certainly has been a chill over the last five years, and this certification may result in a further chill,” noted Wendy Berman, a partner in Heenan Blaikie’s Toronto office who practices commercial litigation with an emphasis on securities-related litigation. “It’s a difficult role, and law firms are starting to recognize that.”

In Allen v. Aspen Group Resources Corporation, Justice George Strathy certified a class action against Yukon oil-and-gas firm Aspen Group Resources Corporation that is seeking damages on behalf of shareholders as a result of alleged misrepresentations in a take-over bid circular. Among the defendants are WeirFoulds LLP, a prominent Toronto law firm that acted on behalf of Aspen and advised it in connection with the take-over bid of Calgary-based Endeavour Resources Inc., and Wayne Egan, one of its lawyers. A partner in WeirFoulds, Egan acted as legal counsel for Aspen from February 1995, was a member of Aspen’s Board of Directors since 1996 and has served on the Board’s compensation committee.

In a 43-page ruling that has captured the interest of the Canadian legal community, Justice Strathy found the plaintiff properly pleaded a cause of action pursuant to s.131 of the Ontario Securities Act against Egan in his capacity as a director of Aspen. Judge Strathy also considered the “more difficult question” of whether Egan’s statutory liability as a director could engage the liability of the law firm.

“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,” said Judge Strathy in a passage that will likely be scrutinized by law firms across the country.

According to Malcolm Ruby, the head of the national class action practice group with Gowling Lafleur Henderson LLP, the decision itself is not surprising, as failing to disclose material facts in circulars attracts statutory liability for “anyone” involved.

It nevertheless is a “sobering” ruling for lawyers involved in “these kinds of transactions because it appears that the lawyer and the law firm appear to have legal responsibility for what is in the circular, which is really something they prepare for their client. So it is a warning for any lawyer who sits on Boards of Directors, and does their legal work,” added Ruby.

The case, however, also underlines the challenge of determining when a lawyer who through his law firm acts as external corporate counsel and who sits on the corporation’s board provides business as opposed to legal advice. While Ruby maintains that it is a factual determination, hinging on context and the kind of advice provided by the lawyer, Berman believes that Judge Strathy does not seem to make a huge distinction between the two. Indeed, Berman asserts that the decision appears to suggest that it is an “artificial distinction,” not unlike the dual roles played by in-house counsel who act as both business and legal advisors.

“The difficulty is that – and this you see all the time – when does a lawyer take off his hat as the external legal advisor to the firm and when is he wearing his hat as a director when occupying both roles,” said Berman. “That’s what this case brings to a head. It’s really artificial to say at one moment you are taking off one hat and putting the other. So if you have a liability as a lawyer and you’re a partner in a law firm, your law firm is on the hook. That’s a change. Whether the claim will ultimately succeed because the test on certification is very low, who knows. But the door has been opened.”

The hazy lines between the two roles can potentially lead to the loss of lawyer-client privilege, warns Berman. She wonders how privilege can be protected if there is a blurring of the distinction between providing business and legal advice, or if such a distinction exists.

“This case does not open a Pandora’s box but it will lead to some difficult determinations, and depending on how the law develops, this may lead to future problems or it may not,” said Berman.

This story was originally published in The Lawyers Weekly.

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