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Ruling escalates debate over lawyers who serve on boards

|Written By Tim Shufelt

A recent Superior Court ruling is escalating the thorny debate over whether lawyers should serve on corporate boards.

Edward Waitzer, a partner at Stikeman Elliott LLP who has expertise in corporate governance issues, says lawyers wade into perilous waters when they accept directorships, particularly when the company is also a client of the firm.

“There are a lot of hazards,” he says. “The first set of issues it raises are conflicts. The second set of issues are liability issues.”

Last month, the Ontario Superior Court certified a securities class action against Aspen Group Resources Corp., a Yukon oil-and-gas company.

Among the defendants are WeirFoulds LLP and one of its lawyers, Wayne Egan, who acted as counsel for Aspen and who sat on its board.

In his written decision, Justice George Strathy considered whether Egan’s liability as a director extended to his 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,” Strathy wrote.

“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.”

The debate over lawyer-directors has played out more in courts in the United States, Waitzer says, but Canadian judges have examined the issues as well.

As to how common the practice is in Canada, Waitzer says he believes that the number of lawyer-directors has plummeted over the last decade.

“But there are probably more than most people would like,” he adds.

It’s not difficult to understand the attraction for companies to have their lawyers on the board since they come equipped with both legal knowledge and business acumen. Lawyers, in turn, are tempted by the opportunity to closely engage an important client, Waitzer says.

“It’s always difficult to say no when a client asks you to go on the board,” he says. “And for some, the fees are attractive.”

Waitzer says he served on a half-dozen boards a number of years ago, but today that number is zero.

Stikeman’s policy doesn’t prohibit directorships but, recognizing the ethical and liability risks, discourages its lawyers from serving dual roles.

“Basically, it says the only time we’re going to allow it is for not-for-profit activity. Although I know there are some exceptions here,” Waitzer says.

The difficulty in fulfilling two roles is in distinguishing one from the other, he explains.

When do a lawyer-director’s recommendations constitute legal advice as opposed to business advice?

“Can you ever really take your lawyer hat off? It’s doubtful a lawyer could ever cease to be viewed as a lawyer in a business setting,” he says.

The blurry line separating the two roles can lead to a loss of solicitor-client privilege, such as when a lawyer-director’s input can’t solely be distinguished as legal advice, Waitzer says.

In addition, a lawyer’s actions as a board member may inadvertently engage the liability of the firm, a possibility raised in the Aspen class action.

That lawsuit arises from Aspen’s takeover of Endeavour Resources Inc., a Calgary-based oil-and-gas company.

In 2001, Aspen distributed a takeover bid circular to Endeavour shareholders offering an exchange of shares at a specified transfer ratio.

All shareholders, including Charles Allen, a former Endeavour board member, then received Aspen shares.

Allen now claims the circular contained misrepresentations, failed to disclose “improper self-dealing,” and resulted in an overvaluation of Aspen shares, the ruling said.

In the year after the closing of the acquisition, and after allegations came to light regarding Aspen’s management and financial reporting, the company’s stocks dropped from 50 cents per share to 10 cents.

Allen is now claiming damages on behalf of former Endeavour shareholders.

He alleged liability falls partly on Egan, who was both an Aspen director and the company’s counsel on the takeover bid. Other defendants included the company’s auditor as well as some of its officers and directors. None of the allegations against any of the defendants has been proven in court.

In addition, Egan was acting in the ordinary course of his firm’s business in fulfilling both roles, Allen claimed.

Les O’Connor, a WeirFoulds lawyer who represented the firm at the proceedings, argued Egan signed the circular solely as an Aspen director, not as a lawyer and not as a WeirFoulds partner.

 “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 nationwide flood of resignations of directorships,” the ruling said.

According to many, however, having fewer lawyer-directors would not necessarily be a bad thing.

“People make compromises all the time,” Waitzer says. “But you’d have a hard time finding someone advocating that a lawyer should serve as a director for a company that is also a client.”

  • John
    I actually find this certification decision a bit refreshing. Lawyers like to find ways they can have their cake and eat it too. A lawyer must maintain the distance required to give legal advice and not become mired in the corporate decision-making. A lawyer will claim solicitor-client privilege when convenient, and will claim the exact opposite if liability issues become involved.

    Yes, law firms are big business - but there are real limits on how a firm can make money, and the kinds of liabilities attached because they are law firms and not ordinary for-profit companies.

    It will be interesting to see how this plays out if a settlement is not reached first.
  • Frank Shostack
    Never let it be said that our Canadian judges are not prepared to invent new legal concepts (whether or not they make any sense) - we will not take second place to our pro-active American neighbours. Or perhaps this decision is just another example of why litigators, when they reach the bench, should not be adjudicating business and corporate disputes.
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