It is common for lawyers, whether for altruistic, humanitarian, community service or even business promotion reasons, to sit on Boards of Directors. When lawyers do so, it is typical to rely upon provincial and federal legislation (Canadian Business Corporation Act and the provincial equivalents) to allow those lawyers to be indemnified and defended at the cost of the company or its insurer, in the event they are sued in their capacity as directors (presuming that their actions were in good faith and in the best interests of the company).
It is also typical for law firms, where their lawyers sit on Boards and may be exposed to potential liability, to ensure that directors and officers liability insurance coverage to a certain limit has been placed by the company in question and that the company provides an indemnity in the event that coverage is not available.
Even with these safeguards in place, a recent and somewhat startling decision of the Ontario Superior Court of Justice may send a chill through law firms across Canada where their lawyers sit on a Board of Directors for a company that is also a client of the law firm.
In Allen v. Aspen Group Resources Corporation, 2012 ONSC 3498, the action arose from the takeover by Aspen Group Resources Corporation of Endeavour Resources Inc.
It was alleged by the Plaintiff that WeirFoulds was negligent in the preparation of the Takeover Bid Circular and failed to ensure that it disclosed material facts. The lawyer that prepared the Circular, Egan, was a partner at WeirFoulds. Egan also sat as a director of Aspen Group Resources Corporation. Not only did he prepare the Circular but he also signed it certifying that the Circular contained no untrue statement of fact and did not omit any material fact or contain any misrepresentation likely to affect the value of the securities that were the subject of the takeover bid offer.
The Plaintiff claimed that WeirFoulds was liable for Egan's negligence in the preparation of the Circular and also that it breached Section 131 of the Securities Act, R.S.O. 1990 c. S.5.
Keeping in mind that this was a motion for summary judgment by WeirFoulds to have the claim against it dismissed, it nonetheless will give a number of law firms pause when they consider having one of their lawyers sit on a Board of Directors of a client corporation.
While WeirFoulds suggested that the law firm and its lawyer, Egan, owed no duty to the shareholders of Endeavour, the Court found that the factors of expectation, representation and reliance all existed to some degree and the shareholders of Endeavour could reasonably have expected that a lawyer who prepared and signed the Circular would ensure that it was accurate. This was especially so given the express representation by Egan on the Circular.
While WeirFoulds, among other things, argued that to allow an action such as this to proceed would set a "dangerous precedent" because it would unduly expand the scope of liability under the Securities Act, the Court found that:
... imposing liability on those who employ a director or who are in partnership with the director, is in keeping with the purpose of the Securities Act. It promotes the goals of compensation, loss distribution and risk management. Any other result would be unfair.
The Court also found that:
Egan sat on the Board of Aspen because Aspen was a client of WeirFoulds. He was acting in the ordinary course of business and as a partner of WeirFoulds when he sat at Aspen's boardroom table and when he signed the Circular. WeirFoulds billed for his work and the proceeds of those billings were shared by the partnership. To hold that WeirFoulds is insulated from his liability would be inconsistent with the Partnerships Act and would not promote the objectives of the Securities Act.
The Court also refused to accept the submission that this decision would deter lawyers from acting as directors. In fact, it felt the contrary would be true in the sense that it would share risk and responsibility between the lawyer and his or her law firm. It would also provide greater protection for the public, result in higher standards and controls, and put the risk on the party most able to control and insure it, being the law firm. This seems consistent with one of the policy reasons for the principle of vicarious liability.
Certainly, lawyers and law firms can, in fact, insulate itself if they choose to do so, through the purchase of outside directors liability coverage. Nothing would seem to preclude this from having been done by Egan or WeirFoulds in the circumstances but this case is nevertheless a cautionary tale going forward for law firms who have lawyers who sit on Boards of Directors of client corporations.
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