Publication
title
Court Likens Relationship of Underwriter's Attorneys with Issuer to Solicitor-Client Relationship
DATE
May 20, 2005
EXPERTISE
The decision of the Quebec Court of Appeal in Métro c. Regroupement des marchands actionnaires inc.[1] is the first decision handed down by a Quebec court that likens the relationship between an underwriter's attorneys and an issuer to a solicitor-client relationship; consequently, if the required conditions are fulfilled, the underwriter's attorneys could be disqualified if they later act against the issuer. The reason given by the Court for its decision was to maintain open and frank discussions between issuers and underwriters in connection with public offerings.
On October 20, 2004, the Quebec Court of Appeal disqualified the law firm of Fasken, Martineau, DuMoulin and its lawyers from acting for the Regroupement against Metro and Metro Richelieu in an oppression remedy proceeding resulting from actions allegedly taken by Metro's senior management in order to modify the contractual relationship between Metro and the Regroupement.
The Court of Appeal summarized the rules established by the Supreme Court and applicable to a motion to disqualify by reason of a conflict of interest in two questions: 1) Did the lawyer receive confidential information relevant to the subject matter of the litigation as a result of a previous solicitor-client relationship? 2) Is there a risk that the information will be used to the client's detriment? In order to answer the first question, the client must establish the existence of a previous relationship that is sufficiently related to the mandate from which the attorney is sought to be disqualified. If the client is able to satisfy this requirement, the court should infer that confidential information that could affect the outcome of the litigation was imparted and conclude that there is a conflict of interest and that the attorney should thus be disqualified, unless clear and convincing evidence to the contrary is submitted.
With respect to the issue of the previous relationship that must be sufficiently related to the mandate from which the attorney is sought to be disqualified, Fasken represented the investment dealers which underwrote Metro's public offerings of shares. Fasken thus gained access to highly confidential information. In fact, for each of the three offerings, lawyers at Fasken prepared a due diligence questionnaire and attended meetings in which Metro's management answered the questionnaire and other questions. Some questions were directly or indirectly related to the method of operation of Metro's stores and the relationship between Metro and its shareholder-retailers, who form the Regroupement.
In conducting due diligence, the dealer/underwriter is required to ask for any information that could influence the stock price. The issuer's management is required to put all their cards on the table. Relevant information will appear in the prospectus prepared for the public offering and will be made public; other information that is not directly related to the investment will not be disclosed and will remain confidential.
Metro maintained that lawyers for the underwriters gain access to privileged and confidential information about the issuer because of the role they play in public offerings, arguing that the test developed by the Supreme Court should be applied even if there was no true solicitor-client relationship between Metro and Fasken. In fact, Metro was represented by Ogilvy Renault in the three public offerings.
The Regroupement maintained that, to be protected, the information must have been disclosed in a true solicitor-client relationship. They argued that such a relationship did not exist between Metro and Fasken in the three public offerings and, moreover, Metro did not establish that the mandates were suffiently related to obtain Fasken's disqualification.
The trial judge accepted the Regroupement's arguments, but the Court of Appeal reversed the judgment. Even though the Court of Appeal acknowledged that no solicitor-client relationship existed between Metro and Fasken in connection with the three public offerings, it likened the exceptional relationship between the underwriter's attorneys and the issuer to a solicitor-client relationship, thus making the presumption that confidential information was disclosed applicable, assuming the mandates were sufficiently related.
In this case, the Court of Appeal stated as follows: "To not recognize a relationship in this case comparable to the one between a solicitor and client would [.] run the risk of affecting the openness and generosity of these crucial exchanges between issuer and underwriter. It would encourage the issuer to be reserved and prudent and to refrain from disclosing anything unless it appears absolutely indispensable to do so. Ultimately, this would be to the detriment of the public purchasers of securities."[2]
Once it had been established that a material relationship existed between Fasken and Metro akin to a solicitor-client relationship, the Court reviewed whether the previous relationship was related to the mandate from which Metro wanted to disqualify Fasken. After reviewing the due diligence questionnaires, the Court concluded that the information sought in the questionnaires was sufficiently related to the dispute between the Regroupement and Metro.
Given that Fasken was unable to demonstrate that it had taken all reasonable measures to preserve the confidentiality of the information concerning the issuance of securities by Metro in 1986, 1991 and 1992, to which Fasken had had access while acting for the dealers, the Court of Appeal allowed the appeal and ordered the Regroupement to appoint a new attorney.
On April 21, 2005, the Supreme Court of Canada dismissed the Regroupement's application for leave to appeal from the Court of Appeal judgment, which has thus become enforceable.
The purpose of this document is to provide information as to developments in the law. It does not contain a full analysis of the law nor does it constitute an opinion of Ogilvy Renault or any member of the Firm on the points of law discussed.
[1]. [2004] R.J.Q. 2665
[2]. Unofficial translation posted on the Court of Appeal website
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