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Business Law Quarterly Volume 1, Issue 3May — July 2006

We are pleased to provide our readers with the third issue of McCarthy Tétrault Co-Counsel: Business Law Quarterly, our overview of important developments of interest to our business clients.

As we prepare each issue, general themes emerge simply by recording developments in different areas of the law. For example, in this issue, there are reports on two cases where the plaintiffs’ counsel sought (unsuccessfully in each instance) to have the court apply certain rules from the statutes governing business corporations by analogy to other areas of the law. The areas where these issues arose were securities law and lending law. You can find the commentaries on these cases on pages 7, and 24, respectively.

Plaintiffs’ counsel are clearly becoming more resourceful in marshalling arguments that (they hope) have some degree of plausibility. Although the courts to date have been unwilling to apply these corporate law principles outside of the sphere where they explicitly apply, it is entirely possible that, in a different case and on different facts, another court may well be persuaded to make that leap. Given that many current corporate law rules came from common law rules, which in turn arose from cases where plaintiffs’ counsel were urging greater protection for their clients, it would not be surprising to see developments that come from analogizing to existing corporate law rules.

Another trend we see relates to secondary market civil liability legislation. For example, our first issue had several articles on the Ontario legislation that had just come into force in that province. Now Alberta and Manitoba have each passed similar legislation, with B.C. looking to adopt rules in this area, but debating whether its approach should be similar to or different from that taken in other provinces. Once again, we have several articles examining different aspects of this developing area.

These articles are, of course, in addition to others that we hope you will find of interest. As always, we welcome your questions and comments.

If you are not a current subscriber and wish to subscribe to McCarthy Tétrault Co-Counsel: Business Law Quarterly, please click here.

Edward P. Kerwin and Robert D. Chapman Managing Editors, Co-Counsel: Business Law Quarterly Eva Sommer-Ng and John S. Gillies Business Law Group Knowledge Management Lawyers August 2006

Co-Counsel: Business Law Quarterly Volume 1, Issue 3

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Co-Counsel: Business Law Quarterly Vol. 1 Issue 3

Table of Contents

Securities ........................................................................................... 1

PUBLIC OFFERINGS........................................................................................ 1 Potential Limitation on Size Options and Greenshoes in Bought Deals ...................................1 New AIM Guidance for Resource Companies ..................................................................2 McCarthy Tétrault Top Canadian Firm in AIM Rankings/AIM Roadshow Update .........................4 AMF Recommends Derivatives Act ..............................................................................4 CSA Issues Guidance on Principal Protected Notes...........................................................5 Proposed Consolidation of the Investment Dealers Association of Canada and Market Regulation Services................................................................................................6

INVESTMENT FUNDS....................................................................................... 7

Unitholders in Investment Fund do not Have a Common Law Dissent Redemption Right ..............7

STRUCTURED PRODUCTS................................................................................. 9

Recent Developments in the Canadian Residential Mortgage-Backed Securitization Market..........9

REGULATION .............................................................................................. 10

A Single Canadian Securities Commission.................................................................... 10

Continuous Disclosure & Corporate Governance ..........................................12

SECONDARY MARKET CIVIL LIABILITY ................................................................. 12 Manitoba Adopts Secondary Market Civil Liability Legislation; B.C. Considers Legislation that Differs from the Others......................................................................................... 12 Proposed OSC Guidance on Defence for Misrepresentations in Forward-Looking Information ...... 14 Using Evidence From Canadian Proceedings in U.S. Securities Proceedings ........................... 15

DIRECTORS & OFFICERS ................................................................................. 17

Directors’ and Officers’ Insurance—Coverage in Liquidation and Bankruptcy ......................... 17

STOCK EXCHANGES ...................................................................................... 18 TSX to End Grace Period for Amendments to Stock Option Plans........................................ 18

FINANCIAL DISCLOSURE ................................................................................. 20

Limitations on Auditors’ Liability ............................................................................. 20

INTERNAL CONTROLS .................................................................................... 21

Internal Control Reporting Requirements—External Auditor Attestation ............................... 21

Finance & Banking ...............................................................................22

New Canadian Regime for the Transfer of, and Taking Security in, Securities ........................ 22 Federal Government White Paper on Financial Services Sector Reform................................ 22 English Court Holds that the Majority of Lenders in a Multi-Lender Credit Agreement Loan can Bind the Minority Lenders ............................................................................................ 24

Mergers & Acquisitions ..........................................................................26

Fairmont Arrangement.......................................................................................... 26 Virtual Data Rooms: The More Efficient Way to Conduct M&A Data Reviews.......................... 27 Proposed National Instrument for Takeover Bids and Issuer Bids ........................................ 28 E.U. Develops a Common Takeover Regime in Watered-Down Form.................................... 29

Corporate Restructuring ........................................................................30

Stelco Arrangement ............................................................................................. 30

Corporate Law ....................................................................................32

ABCA: Fair Value Determination on Exercise of Dissent Rights........................................... 32 Use of Shareholder Lists in a Not-For-Profit Corporation ................................................. 32

Commercial Law ..................................................................................35

Recent Commercial Law Cases of Interest................................................................... 35

Updates.............................................................................................38

ABORIGINAL LAW UPDATE .............................................................................. 38 Recent Development on the Crown’s Duty to Consult and Accommodate Aboriginal Peoples ...... 38

COMPETITION LAW UPDATE ............................................................................ 40

Federal Court of Appeal Discusses Abuse of Dominance for the First Time............................ 40

LABOUR & EMPLOYMENT LAW UPDATE ............................................................... 41

Ontario Moves to Modernize its Human Rights Legislation ................................................ 41

PENSION LAW UPDATE................................................................................... 43

Purchaser of Shares Required to Reimburse Pension Plan Expenses Related to Pre-Acquisition Period .......................................................................................... 43 Employee Beneficiaries Cannot Terminate Company Pension Plan— A Matter of Trust Law ........ 43

TRADE LAW UPDATE ..................................................................................... 46

Effective Use of International Trade and Investment Treaties........................................... 46

Page 1 Co-Counsel: Business Law Quarterly Vol. 1 Issue 3

Securities

PUBLIC OFFERINGS

Potential Limitation on Size Options and Greenshoes in Bought Deals

On April 21, 2006, the Canadian Securities Administrators (CSA) published CSA Staff Notice 47-302 Pre-marketing of Underwriters' Options on Bought Deals. The Notice addresses the options granted by an issuer to the underwriters exercisable either prior to closing (the underwriter or size option) or post-closing (the over-allotment option or greenshoe).

Underwriter’s Options

The CSA took the position that, rather than being underwritten securities, the securities that are the subject of the underwriter’s option are ‘agency securities’ and that the pre-marketing exemption in NI 44-101 does not extend to such securities because they are not the subject of an enforceable agreement with an underwriter who has agreed to purchase the securities.

Over-allotment Options

The CSA also recognized in the April 21 Notice that the pre-marketing exemption does not extend to the pre-marketing of securities underlying post-closing over-allotment (or ‘greenshoe’) options. The CSA are, however, willing to consider recommending exemptive relief on a case-by-case basis to the extent that there is pre-marketing of securities underlying an over-allotment option.

In response to the April 21 Notice, provincial securities commissions other than the Ontario Securities Commission issued blanket orders granting relief from the prospectus requirement for ‘pre-marketing’ of securities underlying an over-allotment option subject to certain conditions, including that the over-allotment:

• is granted for purposes of covering over-allocation positions;

• expires within 60 days of closing; and

• is limited to the lesser of

• the over-allocation position; and

• 15 per cent of the number or principal amount of the securities qualified for distribution.

No such blanket exemption has been granted in Ontario. On May 24, 2006, the OSC issued a notice indicating that it will consider exemption applications on a case-by-case basis. Acknowledging that granting such relief on a case-by-case basis for an extended period would be impractical, the OSC issued on July 14, 2006 a proposed amendment to NI 44-101 (applicable only in Ontario) to exempt from the prospectus requirement the pre-marketing of securities underlying an over-allotment option subject to the same conditions set out above. The amendment is expected to come into force on September 20, 2006.


In practice, regardless of the blanket orders in the other jurisdictions, and until the proposed amendment comes into force in Ontario, a specific exemption order will need to be sought from the OSC for any bought deal marketed in Ontario where an over-allotment option is contemplated. Should such order be needed, the OSC undertook to grant the exemption on an expedited basis and, based on our recent experience, is doing so.

As stated in the April 21 Notice, the CSA will be considering whether NI 44-101 should be amended to specifically permit the marketing of securities subject to an underwriter’s option and, more likely, those subject to an over-allotment option. It is conceivable that the OSC amendment will be extended in the other jurisdictions and approved as an amendment to NI 44-101, which would harmonize the applicable rules.

For a more detailed examination of these issues, please click here to read a longer article written by Karl Tabbakh that appears on our website.

Contact: Karl Tabbakh in Montréal at [email protected] or Frank A. DeLuca in Toronto at [email protected] or David F. Phillips in Calgary at [email protected] or Michael G. Urbani in Vancouver at [email protected]

New AIM Guidance for Resource Companies

On March 16, 2006, the London Stock Exchange published a Guidance Note on the interpretation of the AIM Rules as they apply to companies in the resource sector. The Guidance imposes a number of new duties and requirements on resource companies, nominated advisers (Nomads) and competent persons (CPs).

While compliance with the Guidance should provide more protection to investors, it will nevertheless increase compliance costs and limit the flexibility and discretion of resource companies and Nomads alike.

Admission Requirements—Competent Person’s Report (CPR)

Market practice has been that although a CPR was inevitably prepared, its scope, presentation and extraction in the AIM admission document were generally left to the Nomad and the broker to determine. The Guidance now stipulates that a CPR must be prepared on all material assets and liabilities of the company, current within six months and be reproduced, in full and without adjustment, in the admission document.

In order to deter the ‘cherry picking’ of positive conclusions, CPR information incorporated in the ‘front end’ of the admission document must be extracted directly from the CPR and be presented in a fair and balanced manner, all of which the CP must review and confirm. The conclusions of any CPR prepared





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within 12 months of the current CPR must also be included, presumably to deter a company from ‘CP shopping’ leading up to admission.

A CP must have at least five years’ relevant experience in the estimation, assessment and evaluation of the type of mineral or fluid deposit under consideration, be independent, and not have its remuneration linked to AIM admission or the company’s value.

The CPR must be prepared using a standard acceptable under certain internationally recognized codes/organizations, which includes reports under Canadian NI 51-101 for oil & gas assets and Canadian NI 43-101 for mineral assets, using standards of the Canadian Institute of Mining, Metallurgy and Petroleum.

Admission Requirements—Due Diligence

As part of the Nomad’s full due diligence exercise, where the company’s assets are located outside the U.K., formal legal opinions must be obtained in respect of the good standing of any subsidiary and the title, validity and enforceability of assets. The Nomad and the CP will also generally be expected to undertake a site visit of the company’s physical assets.

Ongoing Obligations

The Guidance requires that all announcements that contain a statement on reserves and resources, including exploration drilling updates, must comply with a number of requirements and procedures prior to being released, such as being notified according to

the standard set out above and providing a glossary of key terms.

Ongoing Obligations—Review by “Qualified Person” and Nomad

A ‘qualified person’ must review and approve the announcement; their name, position and qualifications, together with a statement that they have reviewed the information in the announcement, must be included. The qualified person may be sourced within the company or be an appointed adviser such as its CP, and must have at least five years’ relevant experience.

The Nomad must also have at its disposal an appropriate person, who need not be an employee or full-time consultant of the Nomad, to review resource announcements prior to their release. As ‘appropriate person’ is not defined in the Guidance, there is some question as to what experience this person must have (e.g. would a sector analyst suffice?) or indeed whether the CP could represent both Nomad and the company in the way a CPR is commonly addressed to both parties.

McCarthy Tétrault Notes:

Although there had been some initial concern that the Guidance was in essence new AIM ‘rules’ to be blindly followed, recent experience in the admission context has happily shown that there are a number of areas—notably in respect of the form and use made of the CPR—where AIM is prepared to adopt a practical approach to interpretation in the circumstances.


To read a more detailed summary of the Guidance Note, LSE Tightens Rules on IPOs from Resource Sector, please click here.

Contact: Richie Clark in London, U.K. at [email protected] or Paul Airley in London, U.K. at [email protected]

McCarthy Tétrault Top Canadian Firm in AIM Rankings/AIM Roadshow Update

McCarthy Tétrault has been ranked top among Canadian law firms and fourth internationally in the most recent ranking of law firms in the AIM market in terms of the total market capitalization of AIM clients for which our firm acts as U.K. counsel. The total market capitalization of McCarthy Tétrault clients listed on AIM is just under $5 billion, with Ashurst, Berwin Leighton Paisner and Norton Rose ranked one to three with between $9 billion and $7.2 billion.

As reported in our last issue, McCarthy Tétrault co-sponsored, with the London Stock Exchange, a roadshow on AIM throughout Canada in May, which attracted just under 500 guests in total. Attendance at the roadshow demonstrates that interest in the AIM market remains very strong across Canada in a number of sectors, including technology, energy and mining. Virtually all Canadian investment dealers are currently considering obtaining the necessary approvals from the U.K. securities authorities to enable them to sponsor companies on AIM. To learn

more about the roadshow or AIM generally, contact a member of our U.K. office.

Contact: Robert J. Brant in London, U.K. at [email protected] or Richie Clark in London, U.K. at [email protected]

AMF Recommends Derivatives Act

The Autorité des marchés financiers (AMF) published for comment on May 25, 2006 a proposal on the regulation of derivatives markets in Québec. The proposal is the fruit of a study by AMF staff of international best practices in derivatives regulation. AMF staff also consulted with a committee composed of industry members. Two key features of the proposal are:

• the adoption of a separate statute—a Derivatives Act—based on core principles rather than prescriptive and specific rules; and

• significant collaboration between the AMF and self-regulatory organizations.

The Proposal recommends that the Derivatives Act include:

• as a starting point, that the Derivatives Act apply to “derivatives such as futures contracts, options and swaps, which constitute instruments, agreements or securities, the market price, value or payment obligations of which are derived







from, referenced to or based on one or more underlying interests”;

• broad jurisdiction for the AMF over already regulated products such as futures and options, as well as over-the-counter (OTC) products and swaps through this broad definition of derivatives—describing the features of a derivative rather than a defined list of contracts, underlying instruments or trading facilities;

• exemptions based on the type of person trading in derivatives, such as sophisticated parties trading OTC products traded by mutual agreement; and

• licensing of clearing houses and derivatives exchanges operating in Québec, based on compliance with core principles such as a governance model and rules permitting the self-certification of derivative products.

Contact Sonia J. Struthers in Montréal at [email protected]

CSA Issues Guidance on Principal Protected Notes

The CSA issued guidance on Principal Protected Notes (PPNs) and sketched a course of action in CSA Staff Notice 46-303 on July 7, 2006.

PPNs include the principal guaranteed notes issued by banks and other financial institutions offering potential returns based on underlying investments such as stock market indices and mutual or hedge funds—often called ‘structured notes’ but referred to as ‘market-linked GICs’ in the notice—which are sold without a prospectus under a prospectus exemption or on the basis that they fall outside the scope of securities legislation as ‘deposits.’

The CSA’s key concerns include:

• that investors are not getting sufficient disclosure about how PPNs are structured, how they work, the fees and associated investment risks such as:

• sales material that contains poor or overly promotional presentation of performance returns;

• disclosure in information statements that is lengthy, complex and difficult to understand;

• investors who may not be aware of the full cost of, or even that there is a cost for, the PPN guarantee and that there may be multiple layers of fees significantly reducing returns; and



• investors who may not understand that PPNs often do not permit sale before maturity without a significant discount;

• that a dealer or adviser selling a PPN often does not understand the PPN well enough to comply with the know-your-client rule and to assess suitability; and

• that PPNs are vehicles for retail distribution of complex alternative investment products like hedge funds, funds of funds or managed futures without general securities law protection or sufficient disclosure.

The CSA proposes to consult with industry about the structuring and marketing of PPNs, including discussions on the scope of existing prospectuses and dealer registration exemptions, before determining the form and content of any new regulatory requirements. The CSA will give notice of any further course of action.

The CSA requires that PPN disclosure documents be clear, comprehensive and balanced and provide sufficient information to permit investors and advisers to make informed decisions or recommendations. Dealers selling PPNs must ensure that salespeople have appropriate training and put in place policies for ensuring that PPNs recommended are suitable.

Contact: Sonia J. Struthers in Montréal at [email protected] or Michael C. Nicholas in Toronto at [email protected]

Proposed Consolidation of the Investment Dealers Association of Canada and Market Regulation Services

In April 2006, the Boards of Directors of the Investment Dealers Association of Canada (IDA) and Market Regulation Services (RS) approved in principle a proposal to consolidate and create a national self-regulatory organization (SRO). The new entity, expected to operate on a not-for-profit basis, will regulate the securities industry as well as equity and fixed-income markets.

Advantages cited for the consolidated SRO include:

• strengthened self-regulation in the Canadian securities industry;

• enhanced levels of investor protection;

• improved ability to deal with regulatory gaps and overlaps;

• reduced investor confusion;

• improved investor confidence in the regulatory system;

• more effective participation in domestic policy initiatives; and

• enhanced global status of the Canadian capital markets.




This proposal would also result in splitting the IDA into two separate and unrelated organizations:

• the consolidated IDA/RS, as the new SRO responsible for the regulation of securities trading industry; and

• an investment dealer industry association representing the interests of the dealer community.

A joint steering committee has already been established to develop a detailed implementation plan. In a recent speech, Joseph J. Oliver, president and CEO of the IDA, indicated that a merger proposal would be presented to the IDA membership for approval some time this fall.

Contact Sean D. Sadler in Toronto at [email protected]

INVESTMENT FUNDS

Unitholders in Investment Fund do not Have a Common Law Dissent Redemption Right

In August 2005, one Mr. Silber noted that an investment fund managed by the CI Group (the Fund) was to hold a unitholder vote to alter its investment strategy and term. He invested almost $1.1 million to buy Fund units, dissented on the (ultimately successful) vote, and then demanded that the Fund redeem his units for their net asset value.

There were, however, some obstacles to his right to payment. The Fund was a trust, and the investor did not have a dissent redemption right either by statute or under the express terms of its trust agreement. Further, because the Fund was a closed-end trust, the Units traded on the TSX at a discount, so the order he sought would of necessity lessen the value of the investment of all other Fund unitholders. The Fund accordingly refused the requested redemption. Mr. Silber then sued.

The court, on a motion brought by McCarthy Tétrault on behalf of the Fund, dismissed the claim as “disclosing no reasonable cause of action.” The judge rejected the plaintiff’s arguments that the Fund owed him a dissent redemption right:

• as an implied contractual term of the Trust Agreement; or

• under trust law; or



• under existing common law; or

• as a new common law right by analogy to various statutory provisions (dissent rights, oppression remedies, derivative action rights or under plan of arrangement powers).

This decision affirms that the rights of unitholders in investment trusts are determined primarily by the terms of the relevant trust agreement, and not by analogy to the statutory rights of shareholders in corporations.

Mr. Silber has appealed to the Ontario Court of Appeal, so this decision will not be the final word on the subject.


Mr. Silber’s argument that the court should create rights for investment trust unitholders analogous to statutory shareholder rights was rejected. However, those shareholders rights are the product of a lengthy evolution of corporate law by the legislatures.

It remains to be seen whether Canadian governments will, over time, create similar rights for investors in investment trusts. On this point, it is instructive to note that the judge expressly observed, in an added comment, that it is likely that investors in income trusts will, over time, be granted such statutory rights, since income trusts are “for all intents and purposes business corporations reconstituted as trusts for tax reasons.”

Contact: Dana M. Peebles in Toronto (Litigation) at [email protected] or John Kruk in Toronto (Business Law) at [email protected]




STRUCTURED PRODUCTS

Recent Developments in the Canadian Residential Mortgage-Backed Securitization Market

The Canadian mortgage securitization market has experienced significant growth recently through the securitization of ‘non-conforming’ residential mortgages.

A conforming residential mortgage is a residential mortgage originated using lending criteria traditionally applied by the major Canadian banks, such as the mortgage is secured against a residential property with a loan-to-value ratio that does not exceed 75 per cent. These mortgages are commonly referred to as ‘A’ mortgages.

Alternatively, a non-conforming residential mortgage is a residential mortgage that does not satisfy those traditional lending criteria. Reasons for this non-conformity may include:

• income is difficult to verify or predict as a result of the borrower being self-employed or paid on a commission basis;

• the mortgage is secured against a second residence or a recreational or cottage property; or

• the mortgage is secured against a residential property with a loan-to-value ratio in excess of 75 per cent. Non-conforming residential mortgages are commonly referred to as ‘Alternative A’ or ‘Alt-A’ mortgages.

A sub-category of non-conforming residential mortgages are commonly referred to as ‘sub-prime’ mortgages. These mortgages typically involve borrowers with (i) prior bankruptcies, (ii) credit histories that contain delinquent mortgage or consumer debt payments (or both) or (iii) credit scores that fall below certain thresholds.

Over the past several months, three key developments have occurred in the Canadian non-conforming residential mortgage-backed securitization market. First, fixed interest rate or ‘bullet’ interest rate non-conforming residential mortgage-backed securities were publicly offered in Canada for the first time. Prior to this offering, all public offerings of non-conforming residential mortgage-backed securities were ‘pass-through’ securities in which all funds received in respect of the pool of mortgages pass through the issuer to the security holders. Secondly, this market recently gained its second public issuer of non-conforming mortgage-backed securities. The first Canadian public issuer of such securities completed four public offerings of such securities in Canada prior to the entry of this recent competitor.

Many participants in this market believe that it will continue its impressive growth due to the ongoing strength of the Canadian housing market. As well, the entry of new participants in this market, such as U.S. originators that have established operations in Canada and several of the major Canadian banks, bodes well for continued growth. One originator of non-conforming residential mortgage loans in


Canada recently estimated that this market could increase to 10 per cent of the Canadian residential mortgage market, or $50 billion.

Lastly, the first note-insured or ‘wrapped’ non-conforming residential mortgage-backed securitization recently occurred in Canada. In this transaction, an insurance company guaranteed the timely payment of interest and principal on a note that was secured by a pool of non-conforming residential mortgages. This insured note was then sold on a private placement basis to a Canadian bank-sponsored issuer of asset-backed commercial paper.

As this market continues to grow, new structures and types of non-conforming residential mortgage-backed securities offerings are likely to be seen in Canada.

Contact: Dirk E. Rueter in Toronto at [email protected] or Dean C. Masse in Toronto at [email protected] or Pierre-Denis Leroux in Montréal at [email protected] or Byran Gibson in Vancouver at [email protected]

REGULATION

A Single Canadian Securities Commission

On June 7, 2006, the Crawford Panel on a Single Canadian Securities Regulator released its final report titled A Blueprint for a Canadian Securities Commission. The Crawford Panel was appointed in May 2005 by Ontario’s Minister of Government Services and published its discussion paper recommending a model for a common securities regulator for Canada on September 7, 2005. After a consultation period, the panel published its final report. The panel’s activities were funded by Ontario, but its recommendations are not made on behalf of Ontario and the panel’s members are respected business and academic leaders from Alberta, Québec, Nova Scotia and Ontario. The report is a response to the federal government’s Wise Persons’ Committee report, published in December 2003, proposing a federal securities commission with a head office in Ottawa. The action by Ontario in establishing the panel also reflects Ontario’s decision not to join the passport system adopted by all other provinces and the territories in August 2005.

The panel’s final report recommends that all provinces and the federal government work together to create a single Canadian securities regulator, the Canadian Securities Commission (CSC), with no one jurisdiction dominating it. A single Canadian securities act and rules would apply in all jurisdictions. This would be achieved by one province enacting the legislation and all other provinces and territories that choose to join adopting it






by reference. Each participating jurisdiction would have a seat on a Council of Ministers that would appoint, from candidates proposed by an independent nominating committee, the board of directors of the CSC, the members of a separate tribunal to adjudicate offences under the act, and the senior management of the CSC.

The final report does not vary from the draft report in any substantive way.

In commenting on submissions received, the panel noted that strong views had been expressed that the CSC should not emerge as a re-branded Ontario Securities Commission and that the inclusion of the federal government was important in order to demonstrate seamless enforcement of securities laws in Canada. The final report also noted that it might be appropriate or necessary to address compensation for loss of revenue to some participating jurisdictions. However, it stated that such compensation should not come from the CSC itself, which is intended to be self-funding.

The establishment of the CSC would not require the participation of all provinces and territories. The next steps recommended by the panel are to establish a task force to write the legislation, to establish a nominating committee to identify candidates for the board of directors, the chair and chief commissioner of the CSC and the chief adjudicator of the Canadian Securities Tribunal, and to negotiate a memorandum of understanding among jurisdictions deciding to participate.

Subsequent to the publication of the panel’s report, the Ontario Minister of Government Services stated that Ontario would consider joining the passport system to which all Canadian provinces and territories other than Ontario are parties, if that action was recognized by the other jurisdictions as a step on the path to establishing the Canadian Securities Commission.

On June 19, 2006, the federal Minister of Finance endorsed the panel’s recommendations and said that “Canadians would be best served by a common securities regulator responsible for a single set of rules.”

On June 28, 2006, he convened a meeting with provincial and territorial ministers at which he advocated movement to a single regulator. Following that meeting, the provincial and territorial ministers confirmed their intention to continue with the passport model.

You will find a more detailed discussion of the panel’s draft report in the McCarthy Tétrault Legal Update, Crawford Panel Framework for a Single Canadian Securities Regulator.

The panel’s report is available at www.crawfordpanel.ca.

Contact: Edward P. Kerwin in Toronto at [email protected] or Robert D. Chapman in Ottawa at [email protected]

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Continuous Disclosure & Corporate Governance

SECONDARY MARKET CIVIL LIABILITY

Manitoba Adopts Secondary Market Civil Liability Legislation; B.C. Considers Legislation that Differs from the Others

In previous issues, we have reported on the secondary market liability legislation in place in Ontario and passed, but only proclaimed in part, in Alberta. In June, Manitoba joined Ontario and Alberta by passing legislation aligned with what was passed in the other two provinces. The Manitoba statute has not yet been proclaimed in force.

Now a fourth province is ‘testing the waters.’ The British Columbia Ministry of the Attorney General has recently requested comments from the public on whether B.C. should implement such legislation. The request also sought input on whether B.C. should follow Alberta and Manitoba in adopting legislation implementing a regime identical to that already in place in Ontario or whether B.C. should implement the regime proposed in B.C.’s 2004 Securities Act, which was passed but never proclaimed.

While the Ontario regime and the B.C. regime are largely similar, there are certain key differences that make the Attorney General’s ultimate decision of interest:

• the Ontario regime relates only to secondary market purchases. Primary market purchasers have separate remedies. The B.C. regime integrates the primary and secondary market remedies;

• the Ontario regime imposes different burdens of proof on a plaintiff and different levels of culpability on a defendant, depending on whether the misrepresentation is contained in either a ‘core document’ or a ‘non-core document’ or an oral statement. The B.C. regime does not distinguish between the nature of the documents or statements with respect to what a plaintiff must establish when seeking damages. In all instances, issuers and directors can avoid liability if reasonable systems were in place to ensure compliance;

• the Ontario regime requires a plaintiff to make a case against directors individually based on the extent of the director’s knowledge and complicity in the misrepresentation or failure to disclose. The B.C. regime does not require an individual analysis of each director’s role in a contravention, but instead provides a defence where reasonable compliance systems were in place;


• the two regimes have different thresholds for granting leave to proceed. Under the Ontario regime, the court must grant leave if the action is brought in good faith and there is a reasonable possibility of the proceeding being resolved in the plaintiff’s favour. Under the B.C. regime, a plaintiff must establish a reasonable prospect of success;

• unlike the Ontario regime, which has detailed provisions for calculating damages, the B.C. regime leaves the calculation of damages to the courts, subject to a regulatory cap;

• under the Ontario regime, an expert could be liable for an amount of damages up to the greater of $1 million and the amount the expert received from the issuer over a one-year period. Under the B.C. regime, an expert’s liability cannot exceed the amount actually received in the one-year period;

• the B.C. regime provides a defence in a claim against experts that is not available under the Ontario regime. An expert would be able to avoid liability under the B.C. regime if the misrepresentation was based on information provided to the expert on which it was reasonable for the expert to rely; and

• unlike in Ontario, class action legislation in B.C. does not contain a ‘loser-pay costs’ provision.


To the extent that the differences make the laws of one jurisdiction more advantageous to a plaintiff, adoption by B.C. of a regime different from that adopted in the other provinces could lead to forum shopping. In extreme circumstances, it could possibly even lead to different results if separate actions are allowed to proceed in different provinces by different plaintiffs concerning the same alleged misrepresentations. Such a result would be a setback to efforts to harmonize securities laws across Canada.

Contact: Alasdair J. Federico in Ottawa (Business Law) at [email protected] or Robert W. Cooper in Vancouver (Litigation) at [email protected]




Proposed OSC Guidance on Defence for Misrepresentations in Forward-Looking Information

The secondary market civil liability regime, now in force in Ontario, includes an important defence for misrepresentations in forward-looking information included in an issuer’s disclosure. There has been uncertainty about how to meet the requirements of the defence relating to forward-looking information. Issuers have taken different approaches to drafting and presenting cautionary language relating to forward-looking information; the Ontario Securities Commission has received recurring questions as to how the defence should be interpreted. In response to this, on June 2, 2006, Commission staff published proposed guidance in connection with the defence. The purpose of the proposed guidance is to outline the OSC’s views on some of the policy considerations underlying the defence and explain how the OSC approaches the interpretation of certain aspects of the defence.

The Ontario regime creates a safe harbour from misrepresentations in forward-looking information contained in written and oral public disclosure if the public disclosure contains:

• reasonable cautionary language identifying the forward-looking information as such;

• reasonable cautionary language identifying material factors that could cause actual results to differ materially from a

conclusion, forecast or projection in the forward-looking information; and

• a statement of the material factors or assumptions that were applied in drawing a conclusion or in making a forecast or projection set out in the forward-looking information. The identifier and disclosure of risk factors and assumptions must appear proximate to the forward-looking information and the issuer must have a reasonable basis for drawing the conclusions or making the forecast or projection.

With respect to the ‘proximate’ requirement, the OSC acknowledges that under certain circumstances, broader cautionary references prefacing or following several instances of forward-looking information may be clearer and simpler than including cautionary language in every instance of forward-looking information. The OSC’s policy also suggests that the use of cross-references to cautionary language may be appropriate in certain circumstances. Issuers are expected to balance the value of brevity accomplished by cross-referencing with the user-friendliness of having all relevant information stated in each instance. The OSC provides guidance on the meaning of ‘materiality’ for purposes of establishing the required content of applicable risk factor and assumption disclosure: the cautionary statements should identify significant and reasonably foreseeable factors that could reasonably cause results to differ materially from those projected in the forward-looking statement. This does not


require an issuer to anticipate and discuss everything that could conceivably cause results to differ. The OSC suggests that ‘reasonable basis’ for forward-looking statements not only refers to the reasonableness of assumptions, but also of inquiries made and the process followed in preparing and reviewing forward-looking information.

With respect to oral forward-looking information, the proposed guidance provides that the requirements of the defence may be satisfied in appropriate circumstances by one person making the required cautionary statements on behalf of another person making the forward-looking statement. Finally, the OSC does not interpret the defence for misrepresentations in forward-looking information as imposing upon any person or company a duty to update forward-looking information beyond any duty imposed under Ontario securities law or otherwise.


It is important to note that the proposed policy is just proposed guidance. Even once it is published in final form, the policy will represent only the views of the OSC; it will not have the force of law. It is, however, likely to influence market practice. And while courts will ultimately establish the adequacy of issuers’ cautionary language in the context of actions brought by plaintiff’s lawyers, the courts may be influenced by the OSC’s views. However, this remains to be confirmed since, to date, there is no

court decision regarding the adequacy of issuers' cautionary language.

Contact: Arman J. Kuyumjian in Montréal (Business Law) at [email protected] or Patrick Boucher in Montréal (Business Law) at [email protected] or Joan Beck in Toronto (Business Law) at [email protected] or R. Paul Steep in Toronto (Litigation) at [email protected]

Using Evidence From Canadian Proceedings in U.S. Securities Proceedings

The secondary market civil liability regime that is in effect in Ontario and passed, but not yet proclaimed, in Alberta and Manitoba creates a significant risk that U.S. plaintiffs will commence Canadian legal proceedings to obtain otherwise unavailable evidence for use in parallel American civil actions.

To bring an action under the new provisions, the plaintiff must make a motion to court for leave (leave motion). As part of the leave motion, the parties must each file affidavits setting forth the material facts upon which they intend to rely. The makers of such affidavits may then be examined upon them. This right of examination will be of particular significance where a similar civil action has been brought in the United States, since






discovery rights in such actions are generally stayed under U.S. securities legislation, while the action is the subject of a pending motion to dismiss. Unfortunately, defendants in Canada have only a limited ability to resist the institution of leave motions for the purpose of obtaining examination evidence for use in parallel U.S. proceedings, even where discovery rights in the U.S. proceedings have been stayed.

The primary basis for preventing a party from introducing evidence that was obtained in an earlier legal proceeding is the ‘implied undertaking rule.’ In general terms, the implied undertaking rule is a promise by a discovering party to a proceeding, to whom testimony or documents have been provided by the discovered party in the course of the discovery process, that he or she will not use that information for purposes other than the proceeding in which the information was produced. The implied undertaking is treated as a promise to the court, and its breach may result in sanctions such as contempt.

Because the evidence obtainable in a leave motion is based upon affidavit cross-examination rather than discovery, there is considerable doubt whether Alberta, Manitoba and Ontario defendants may attempt to rely upon the implied undertaking rule in order to prohibit the use of leave motion evidence in parallel American litigation. Because of this uncertainty, defendants should consider requesting that evidence obtained in leave motions be subject to sealing orders if

there is a possibility that the evidence could be used in parallel American litigation.

Defendants may, in any event, wish to apply directly to the court for an express undertaking or confidentiality order prior to submitting to the cross-examination process. Such restrictions may take the form of an express undertaking order (e.g. requiring that a party tender a formal undertaking to the court that it will not misuse the information) or a confidentiality order (e.g. directly prohibiting a party from misusing the information).

The courts have indicated a willingness to grant express undertaking and confidentiality orders in circumstances where the protection afforded by the implied and deemed undertaking rules is insufficient, although it is unclear how applications for such orders will be received in the context of a leave motion.

In summary, the new secondary market civil liability legislation in Ontario, Alberta and Manitoba will create significant issues concerning the cross-border use of evidence that may be compelled from defendants in these actions.

For an article that describes these issues in greater detail, please click here.

Contact: Richard A. Shaw, Q.C. in Calgary (Business Law) at [email protected] or Brandon Kain in Calgary (Litigation) at [email protected] or Thomas G. Heintzman in Toronto (Litigation) at [email protected]






DIRECTORS & OFFICERS

Directors’ and Officers’ Insurance—Coverage in Liquidation and Bankruptcy

In an action commenced in the Ontario Superior Court by the liquidator of a general insurance company alleging negligence on the part of a company’s directors and officers and a breach of their fiduciary duties, the liquidator was seeking to recover in excess of $30 million, representing the excess of the company’s liabilities over its assets on liquidation. The appointment of the liquidator was made by a court under the Winding-up and Restructuring Act (Canada).

The insurers, which had entered into a policy of directors’, officers’ and private company liability insurance and an excess coverage policy, brought an application for a declaration that the claim against the former directors and officers of the company was excluded from coverage under those policies as a claim coming within one of the exclusions of the policy. The exclusion was for claims brought against an insured by another insured or the company or any security holder of the company. This type of exclusion clause is commonly referred to as an “insured vs. insured” exclusion.

The court described the underlying reason for the exclusion clause as the prevention of abusive actions instigated with collusion between insureds, such as, for example, where a company may have suffered a loss by virtue of a business decision due to an error in

judgment of the directors, who might then cause the company to sue themselves with a view to indemnity from the insurer. In the event that the claim was found to be within the exclusion, then the directors and officers would be equally denied coverage for their costs of defending the claim. The insurers argued that the liquidator should be treated as standing in the shoes of the company.

The court reviewed the provisions of the Winding-up and Restructuring Act and concluded that the liquidator is separate and distinct from the company being liquidated, is an officer of the court and acts as a quasi-trustee for creditors. The court cited the 2004 decision of the Supreme Court of Canada in People’s Department Stores Inc. (Trustee of) v. Wise where, at the trial level in the Quebéc Superior Court, it was held that an insured vs. insured exclusion does not preclude coverage under a directors’ and officers’ liability insurance policy where a trustee in bankruptcy of a company sues its former directors and officers. The court also noted that, consistent with the rationale for such an exclusion clause, as the liquidator and the directors and officers were parties adverse in interest, any concern as to potential collusion was not present. It also noted that the exclusionary language in the policy did not cover a derivative action by a security holder, consistent with the assumption of no collusion in that circumstance.



The court’s decision provides some comfort to directors and officers in the difficult circumstance of claims being brought against them after their business closes its doors.

Insurers may be willing to enhance so-called ‘Side A’ coverage by limiting the insured vs. insured exclusion such that it does not operate in a bankruptcy or liquidation context, or by providing coverage for directors who have not held office for at least several years. Of course, coverage is provided on a ‘claims-made’ basis absent a run-off policy, so departing directors and officers need to be vigilant with respect to what protection they will have after they leave the company.

Contact: Robert D. Chapman in Ottawa at [email protected] or Richard A. Shaw, Q.C. in Calgary at [email protected]

STOCK EXCHANGES

TSX to End Grace Period for Amendments to Stock Option Plans

The rules relating to security-based compensation arrangements (Plans) such as stock option plans, of issuers listed on the Toronto Stock Exchange (TSX), have been changing for over a year. Effective January 1, 2005, the TSX introduced new rules for Plans. Then, in September 2005, NI 45-106, Prospectus and Registration Exemptions became effective and changed the prospectus and registration exemptions for trades in connection with Plans. These changes include, among other things, the elimination of the requirement for a stock option to be non-assignable. Options may now be assigned to ‘permitted assigns’ as defined in NI 45-106, which includes an RRSP or RRIF of the optionholder or his or her spouse.

Listed issuers will want to amend their Plans to conform to the new rules. Their Plans may currently contain a provision authorizing the board of directors of the issuer to amend the Plan, subject to obtaining any required regulatory approvals (referred to as the ‘general amendment provision’ in TSX Staff Notice #2004-0002). However, as stated in such Notice, the TSX staff considers that the new TSX rules require that all amendments to a Plan must be specifically approved by security holders.




The TSX has given a grace period for listed issuers with a general amendment provision in their Plans to make the following types of amendments without security holder approval:

• amendments of a ‘housekeeping’ nature;

• a change to the vesting provisions of a security or a Plan;

• a change to the termination provisions of a security or a Plan which does not entail an extension beyond the original expiry date; and

• the addition of a cashless exercise feature, payable in cash or securities, which provides for a full deduction of the number of underlying securities from the Plan reserve.

Any other amendments require security holder approval unless a Plan specifically provides that security holder approval is not required for that type of amendment.

On June 6, 2006, the TSX released Staff Notice #2006-0001 which, in effect, ends the grace period for the above four types of amendments effective June 30, 2007. After June 30th, 2007, listed issuers with only a general amendment provision in their Plans will not be able to make any amendments to their Plans without security holder approval. It is not sufficient to have a provision to the effect that amendments can be made without security holder approval. The types of amendments that can be made without security holder approval must be listed. Notwithstanding the provisions of a

Plan, the TSX will always require specific disinterested security holder approval of amendments for extensions to, and repricing of, options benefiting insiders.

The recent TSX Staff Notice also states that Plans may provide that the expiry date of an option may be the later of a fixed date or a date shortly after such date, should such date fall within or immediately after a blackout period, if such a provision has been approved by security holders.


Listed issuers should review their Plans to determine what amendments should be made to the Plan for approval at the next meeting of security holders. Materials to be provided to security holders must be pre-cleared by the TSX.

This article was previously published as a McCarthy Tétrault eAlert, TSX to End Grace Period for Amendments to Stock Option Plans.

Contact Daryl E. McLean in Toronto at [email protected]




FINANCIAL DISCLOSURE

Limitations on Auditors’ Liability

Our clients have recently experienced an increase in the number of requests or demands from their auditors for a limitation on the dollar amount of their liability in providing audit services. These limitations on liability are included in the auditors’ annual engagement letter. This development is commented upon by the Canadian Public Accountability Board (CPAB), the body that oversees auditing firms that provide audit services to public companies in Canada, in its report dated December 2005.

The CPAB also noted that these limitations are prohibited by the Securities and Exchange Commission for audit engagements for U.S. public companies and, in the Province of Quebéc, by the Code of Ethics of the Ordre des Comtables Agréés du Québec for all engagements with companies in Québec.

At the heart of this issue is the concern that such limits put into question the auditors’ independence.

Apart from financial limits on liability, further issues have arisen in the United States, where the inclusion of provisions in public company engagement letters requiring that disputes and claims be submitted to arbitration or mediation and barring claims for punitive damages are perceived by corporate governance advocates as limitations on liability, and therefore threats to the auditors’ independence. The public accounting firms in the U.S. have disagreed with that characterization in the case of

submissions to arbitration or mediation. Another form of limitation used by some public accounting firms is a restriction on a company’s right to assign or transfer a claim to a successor entity if the company is acquired or merges.


Canadian public and non-public companies may wish to take a closer look at their audit engagement letters.

Audit committees of Canadian public companies may wish to consider proxy circular disclosure of liability limitations to which they agree with their auditors.

To read the complete article that canvasses in detail the approaches taken on this topic in the U.S., Canada and the United Kingdom, click here.

Contact: Robert D. Chapman in Ottawa at [email protected] or Robert J. Brant in London, U.K. at [email protected] or Philippe Leclerc in Québec City at [email protected] or Tim McCafferty in Vancouver at [email protected]







INTERNAL CONTROLS

Internal Control Reporting Requirements—External Auditor Attestation

Would a Canadian issuer and its officers and directors be better served by obtaining an audit report from its external auditor concerning management’s assessment of the effectiveness of internal control over financial reporting?

In a previous issue, we discussed the notice issued in March 2006 by the Canadian Securities Administrators (CSA) announcing the withdrawal of proposed Multilateral Instrument 52-111 Reporting on Internal Control Over Financial Reporting, which would have required, among other things, issuers listed on the TSX to obtain a report from their external auditors on management’s evaluation of the effectiveness of internal control over financial reporting. In that notice, the CSA proposed to expand existing Multilateral Instrument 52-109 Certification of Disclosure in Issuer’s Annual and Interim Filings. See Volume 1, Issue 2 of our Co-Counsel: Business Law Quarterly and our Legal Update, Canadian Securities Administrators Propose Revised Internal Control Reporting Requirements.

With the recent implementation in Ontario and planned implementation in other provinces of statutory civil liability for continuous disclosure, misrepresentations in officer certifications or in MD&A disclosure with respect to internal controls may result in corporate, as well as personal, exposure to such liability. A defendant can avoid such

liability by establishing a due diligence defence. A due diligence defence can be established with the aid of a report from an independent expert, such as external auditor attestation of reporting on the effectiveness of internal controls.

The elimination of the requirement for external auditor attestation of internal control over financial reporting has the result that issuers, officers and directors stand to lose an element of protection against civil liability for continuous disclosure that would have been provided by such external auditor attestation. Issuers, officers and directors may want to obtain such external auditor attestation, whether it is required by the securities regulators or not.

You will find a fuller discussion of this issue in the article “Internal Control Reporting Requirements: A Reason for External Auditor Attestation” by clicking here.

Contact: G. Blair Cowper-Smith in Toronto at [email protected] or Roger J. Chouinard in Toronto at [email protected]

http://www.mccarthy.ca/pubs/BLQ_Vol1_Issue2_Final.pdf






Finance & Banking

New Canadian Regime for the Transfer of, and Taking Security in, Securities

In May 2006, both the Alberta and Ontario governments gave Royal Assent to new legislation that creates a comprehensive system of rules dealing with the transfer and holding of securities and interests in securities. Each statute is called the Securities Transfer Act (STA) and is derived from proposed uniform provincial legislation developed by the Canadian Securities Administrators’ Uniform Securities Transfer Act Task Force in 2003. The STA is modelled on Revised Article 8 of the United States Uniform Commercial Code.

The STA will be of particular importance to financial institutions engaged in securities lending, lenders obtaining a pledge of book-based and indirectly held securities and institutions which maintain securities accounts. When the STA is proclaimed in force, it will change how we perfect security interests in book-based and/or indirectly held securities and similar types of collateral.

It is anticipated that the Alberta and Ontario STA will be proclaimed in force at the end of the year, when all other provinces have passed similar legislation, thereby allowing the new laws to take effect simultaneously nation-wide and minimizing problems arising during the transition period.

Look for an overview of the STA and its accompanying amendments this fall in a Legal Update to be prepared by the firm’s Financial Services Group, to inform clients as to what, if any, steps must be taken under the new system.

Contact: Jill Pereira in Vancouver at [email protected] or J. Michel Deschamps in Montréal at [email protected]

Federal Government White Paper on Financial Services Sector Reform

The Bank Act and other federally regulated financial institutions statutes must be reviewed every five years to ensure that they keep apace of developments in the industry. On June 14, 2006, the Minister of Finance released a White Paper that sets forth proposed changes to these statutes.

While there are some changes to streamline the cheque processing system that will be of benefit to the industry, the primary focus is on consumer matters. Most significantly, however, and despite a change of government, there are no proposed changes that would enable bank mergers, nor is there any expansion of the banks’ insurance networking powers.




There is a technical annex to the White Paper that contains myriad small changes; the summary below touches only on the high points.

Changes relating to cheques

Currently, banks and other institutions that issue and pay cheques are required to process the physical cheques. Given the size of the country, this can impose delays on customers. The White Paper proposes to allow institutions to image cheques and process the images. In a related development, the government will finalize an agreement with the banking industry to reduce the maximum hold period on cheques from 10 to seven days, and ultimately to four days. This will give customers quicker access to funds that are subject to holds.

Existing regulatory rules to apply to all aspects of electronic banking

Current rules relating to such things as fees and cost of borrowing disclosure were developed well before the advent of electronic banking, and were drafted on a product-by-product basis. This has resulted in discrepancies between what, if any, disclosure must be made depending upon the type of product and where the disclosure must be posted (e.g. in-branch vs. online). The government intends to introduce consistency of rules across product lines and delivery channels.

Foreign Bank Entry

Current rules on the entry of foreign banks into the Canadian market sweep in institutions that might not otherwise be thought of as banks. The government will narrow the regulatory framework to focus on what it calls ‘real foreign banks.’ It proposes to remove near banks from the foreign bank entry framework and eliminate the entry approval for near banks undertaking unregulated financial services.

Swifter Regulatory Approvals

The government proposes to streamline the regulatory approval process by eliminating the ministerial approval currently required for a number of relatively routine matters.

Contact: J. Michel Deschamps in Montréal at [email protected] or Stephen D.A. Clark in Toronto at [email protected] or J. Michael McIntosh in Calgary at [email protected] or Byran Gibson in Vancouver at [email protected]






English Court Holds that the Majority of Lenders in a Multi-Lender Credit Agreement Loan can Bind the Minority Lenders

A recently reported English decision will be of particular interest to lenders, but the case has potential implications beyond multi-lender credit agreements. In summary, the court held that all of the lenders were bound by the agreement they signed (or bought into), which provided that the majority of lenders had the right to agree with the borrower to amend the terms of the agreement, even if such amendment was contrary to the interests of a minority of the lenders.

The credit agreement involved a group of 38 lenders, with credits totalling almost €4 billion and three facilities (A, B and C). When the borrowers experienced financial difficulties and appeared to be unable to make the required payments, an amendment agreement was proposed that involved cancellation of parts of Facilities A and B.

Part of the repayment and cancellation of Facility B was to be effected by a drawing on Facility A. For those lenders who held only or predominantly Facility A participations, it meant advancing funds and increasing their exposure to the borrowers at a time when the borrowers were attempting an insolvent restructuring.

The credit agreement provided that the agreement could be amended at any time with the approval of two-thirds of the lenders in value, and that the resulting amendments

were binding on all lenders. A substantial majority of the lenders voted in favour of the amending agreement. Six Facility A lenders who considered that they had been improperly dealt with sued the majority banks.

The dissenting A lenders argued that they were not bound by the amending agreement, because it amounted to a fraud against them in that it discriminated against A lenders as a class and exposed them to an unfair amount of risk to the benefit of B lenders.

The court held that the dissenting lenders were in fact bound by the amending agreement that had been approved by the majority provided for under the credit agreement.


In one sense, this case is not revolutionary in that the court simply held that lenders are bound by the plain meaning of credit agreements that they sign. In another sense, however, the case is of interest because of the analogies that the minority lenders tried to draw to corporate law concepts of ‘fraud on the minority.’

In the commercial world, simple two-party credit agreements are rapidly being replaced by increasingly complex and intricate multi-party contracts. The traditional rights and obligations of bank lenders are being split into differing interests traded on private or public markets. It is inevitable that, in the event of difficulties, the interests of


holders of various interests in a borrower’s debt will clash. This clash is already apparent in the cases dealing with proper categorization of creditors in insolvent reorganizations (CCAA proceedings). In this case, the court refused to imply obligations of ‘fairness’ between groups of lenders. There are sure to be more cases in which fairness, good faith and ‘fraud on the minority’ are issues as lenders struggle to allocate loss in the complex world of credit derivatives, credit guarantees by third parties (monolines) and credit divided into separately traded tranches. To read Byran Gibson’s complete article reviewing this case, click here.

Contact Byran Gibson in Vancouver at [email protected]




Mergers & Acquisitions

Fairmont Arrangement

On May 11, 2006, Fairmont Hotels & Resorts Inc. effected an arrangement under the Canada Business Corporations Act (CBCA) that was the culmination of months of planning and a myriad of intricate interim steps. One of the interim transactions involved a challenging CBCA arrangement presenting an interesting issue of interpretation of Section 192 of the CBCA dealing specifically with arrangements. The proposed arrangement involved Fairmont as parent, as well as five wholly-owned Fairmont subsidiaries.

To facilitate the tax objectives of the parties, the plan of arrangement indicated that the parties would ‘merge’ with the same effect as if they were amalgamated under Sections 184 and 186 of the CBCA, except that the separate legal existence of the parent would not cease, but survive the merger. By contrast, the separate legal identity of each subsidiary was to cease on the arrangement date without the need to effect any liquidation or wind-up.

The position of the applicant, Fairmont, was that case law clearly characterizes CBCA arrangements flexibly, with Section 192 of the CBCA (permitting arrangements) designed to facilitate proposals that might not quite fit into other categories or transactions otherwise contemplated by the CBCA.

The CBCA Director, being concerned that the transaction could be construed as permitting the CBCA arrangement provisions to endorse U.S. merger-style transactions, took the rare step of appearing at the interim hearing to clarify his position. The CBCA Director noted that the transaction was not expressly contemplated by the CBCA, but also that the short-form amalgamation provisions of the CBCA were historically based on U.S. merger laws. The Director, in positioning the proposed transaction administratively as an amalgamation within an arrangement, felt he could approve the transaction.

Mr. Justice Farley permitted the arrangement to go forward, and in doing so, confirmed the flexible nature of the CBCA arrangement provisions.

Contact: Anna Tosto in Ottawa at [email protected] or Philip C. Moore in Toronto at [email protected]




Virtual Data Rooms: The More Efficient Way to Conduct M&A Data Reviews

It is getting difficult to remember what the physical data rooms in an M&A deal were like ‘in the old days.’ Does anyone really miss those often windowless, oxygen-deprived rooms stocked to the ceiling with boxes or shelves of binders packed with information that became outdated almost before the room opened for visitors? A virtual data room is a website onto which confidential documents are loaded and to which access is granted only with permission. Today, there are more than a few providers offering virtual data room services with powerful software, but it is important to know what is available and at what cost. At the outset of any transaction, among other considerations, is whether the seller wants to ‘go virtual’ with its disclosure to prospective buyers.

Both sellers and buyers should be aware of a number of things before setting up a virtual data room or entering one as a reviewer of posted documents. For the party setting up a virtual data room, devoting time, up-front, and sensibly organizing materials pays dividends later by allowing for varied uses of the room by different types of interested parties.

Given the state of the technology, it is not surprising that many think a virtual data room can be set up faster than a paper one, but the opposite is often true. Documents that are not in electronic form have to collected, scanned and coded to match an index. Consideration has to be given to which documents will be

permissioned for access at which stage of the transaction and the type of access a viewer will be given, namely, ‘view only,’ ‘print access’ or an ability to save and manipulate documents. From our experience, it is the lawyers, rather than the clients or their investment advisers, who manage these rooms, and accordingly, more time of associates and students is involved in the early stages than might have been the case with a paper data room.

With the initial investment, however, there are some real advantages to a seller with a virtual data room:

• a potentially unlimited number of users (who cannot know who else may be in the room) can be granted access around the clock, enabling a seller to run a faster and more efficient auction;

• buyer teams no longer have to travel to data room locations and can assign any number of specialists to review relevant documents from anywhere they have a computer terminal;

• access to documents can be granted and changed in real-time, almost on a document-by-document basis, letting a seller expand the access to selected parties or delete a party’s access very quickly;

• if the seller’s representations in the purchase agreement are to be qualified by the disclosure it has given, a ‘snapshot’ of the room as of a given date can be captured, downloaded to a DVD and maintained for evidentiary purposes; and


• documents can be added and disclosure kept up-to-date more easily, allowing the parties after completion of the transaction to use the room as an ongoing warehouse for important documents, and permitting the seller to get more value out of its initial investment of time and money.

There is an important point that buyers should be aware of before entering a virtual data room: the data room managers can, at any time, determine who has been accessing the room and what documents they may have been looking at or not looking at, perhaps thereby giving the seller a strategic advantage in identifying what might be of concern to the buyer or its value considerations.

Contact Iain Morton in Toronto at [email protected]

Proposed National Instrument for Takeover Bids and Issuer Bids

At present, Canada is a patchwork quilt of rules and regulations relating to takeover and issuer bids. Of the 10 provinces and three territories, nine have similar but not identical takeover bid and issuer bid requirements and four do not currently regulate bids. Offerors that wish to conduct a multi-jurisdictional takeover bid or issuer bid must familiarize themselves with the regimes of the jurisdictions in which offeree security holders are located. This typically necessitates consulting the various acts, regulations and rules of the different jurisdictions.

In a commendable step to address this issue, the CSA has published for comment a proposed national instrument and companion policy that would:

• consolidate and harmonize most of the requirements and restrictions governing takeover bids and issuer bids and related early-warning requirements in a single, national instrument;

• update selected takeover bid and issuer bid provisions; and

• provide exemptions from the bid requirements currently contained in various provincial statutes, regulations and rules.

The CSA expects that the instrument will eliminate duplication and inconsistencies in existing takeover bid and issuer bid regimes and codify discretionary exemptions that the CSA has routinely granted.

On implementation of the instrument, offerors and other market participants will generally have to look no further than the instrument for a single set of requirements and restrictions governing a bid made in Canada. It is intended that the instrument will be finalized and implemented by the end of 2006.



Click here to view a copy of proposed National Instrument 62-104 Take-Over Bids and Issuer Bids, proposed Companion Policy 62-104CP Take-Over Bids and Issuer Bids and click here to view proposed Rule 62-801, Implementing National Instrument 62-104 Take-Over Bids and Issuer Bids, which were published in April 2006. To read our firm’s letter of comments submitted to the CSA in July 2006 in respect of the proposed instrument, click here.

Contact: Joan Beck in Toronto at [email protected] or Edward P. Kerwin in Toronto at [email protected]

E.U. Develops a Common Takeover Regime in Watered-Down Form

This article originally appeared in the July 14, 2006 issue of The Lawyer’s Weekly published by LexisNexis Canada Inc.

After 15 years of negotiations, the member states that make up the European Union finally have a common takeover regime, sort of. Not surprisingly, in order to get agreement from the requisite number of member states, the final form of the E.U. Directive on Takeovers watered down most of the controversial areas, such as the position on takeover defences, and gave member states opting in and opting out powers so that important differences will continue to exist within European takeover law.

The takeover directive had to be implemented by all member states no later than May 20, 2006 and set out, for the first time, minimum E.U. rules concerning the regulation of takeovers of companies whose shares are traded on a regulated market. In the U.K., the Main Market of the London Stock Exchange is a regulated market for these purposes, but the AIM market is not. AIM has deliberately opted out of ‘regulated market’ status and continues to enjoy an unique status within Europe. For example, even the new European prospectus rules generally do not affect AIM-listed companies.

The interesting aspects from a Canadian perspective of implementation of the takeover directive are that:

• a regulatory framework only now exists for the body that supervises takeover bids in the U.K.;

• provisions restricting barriers to takeovers (such as action that might be taken to prevent a takeover by a company or its board of directors) have been codified; and

• in the U.K., many of the rules that governed substantial acquisitions of shares, similar to early warning requirements in Canada, have been abolished.

To read further detail about the three perspectives described above, click here.

Contact Robert J. Brant in London, U.K. at [email protected]




http://www.osc.gov.on.ca/Regulation/Rulemaking/Current/Part6/csa_20060428_62-801_implement-tobs.pdf

http://www.osc.gov.on.ca/Regulation/Rulemaking/Current/Part6/csa_20060428_62-801_implement-tobs.pdf


http://www.mccarthy.ca/pubs/July28-Letter.pdf


http://www.osc.gov.on.ca/Regulation/Rulemaking/Current/Part6/csa_20060428_62-104_take-over-bids.pdf


Corporate Restructuring

Stelco Arrangement

Like most other steel companies, particularly because of the worldwide drop in steel prices, Stelco Inc. experienced financial difficulties in recent years, which eventually prompted it to seek the protection of the courts under the Companies’ Creditors Arrangement Act (CCAA). Because of the complexity of the company’s operations and the challenges it faced, it was under CCAA protection for an extended period of time. An Amended and Restated Plan of Arrangement under the CCAA and Reorganization under the Canada Business Corporations Act (CBCA) was presented in early 2005. A separate CBCA plan of arrangement was subsequently required. (Although it is very unusual to have a plan of arrangement reorganization transaction occur in the midst of a CCAA proceeding; in this case, the proposed lender, Tricap Management Limited, required that the business be broken up into a number of limited partnerships, with the assets distributed amongst them. This could only be done via a plan of arrangement.)

Two issues presented concern. Firstly, in preparing the arrangement application, counsel was required to address the CBCA ‘impracticability’ issue. That is to say, the CBCA permits an application to court for an arrangement where it is not practical for the corporation in question to effect a fundamental

change in the nature of arrangement under any other provision of the CBCA.

Secondly, while the Stelco arrangement could have occurred under the court’s CCAA authority, concerns existed about the absence of express shareholder approval. In addition, while the reorganization provisions of section 191 of the CBCA clearly do not contemplate court sanctioning of the sale of assets subsection 189(3), by contrast, mandates shareholder approval in the context of a sale of all or substantially all of the assets. The arrangement was, in essence, an asset sale.

On January 20, 2006, Mr. Justice Farley ordered the CBCA arrangement to be filed with the court by February 3, 2006, with a final hearing to occur on February 10, 2006. Although an interim hearing typically occurs in a CBCA arrangement proceeding, no interim hearing was required in this case. As well, no stakeholder approval or vote was ordered. The conventional and anticipated notice and disclosure provisions that are set out in the CBCA arrangement policy could not, given the timing, apply.


Acknowledging the complexity of the Stelco arrangement, the length of time in which it had been in CCAA proceedings, the fact that the reorganization proceedings in section 191 would not apply, and possibly taking into account the fact that the Ontario courts would construe Stelco’s common shareholders not to have an economic interest in Stelco going forward, the CBCA Director did not oppose the arrangement. On February 10, 2006, Mr. Justice Farley issued a final order approving the arrangement.

Contact: Anna Tosto in Ottawa at [email protected] or Daryl E. McLean in Toronto at [email protected]




Corporate Law

ABCA: Fair Value Determination on Exercise of Dissent Rights

A recent Alberta case considered certain aspects of the dissent provisions of the Canada Business Corporations Act, and in particular, whether embedded taxes should be deducted from the value of a publicly-traded company when a court is asked to fix the fair value of shares of the company, and what weight should be given to the actual marketing of the company in assessing fair value.

In this case, a publicly-traded company was the subject of a takeover bid. The purchaser acquired approximately 87 per cent of the shares of the company, and subsequently sought to acquire the balance of the shares through a plan of arrangement. The plan of arrangement provided for the dissent rights that gave rise to this case.

The court reviewed the various submissions of the company and the dissenting shareholder, who provided differing opinions from experts on the fair value of the shares in question to the court. The opinions assumed differing approaches to the deduction of embedded taxes to support their conclusions. The court held that there should be no deduction for embedded taxes, being taxes that would be paid on a distribution of assets of the company on dissolution. The judge said that although a “prudent purchaser in determining fair market value may take the eventual impact of such taxes into account in setting a price and

deciding how it might structure an acquisition… I am not satisfied that such a prudent purchaser would base its offered price directly on such considerations…”

With respect to the weight that should be given to marketing efforts in assessing fair value, the court held that the results of the marketing efforts are relevant and persuasive evidence, although not completely determinative of fair value, as in this case, the pool of potential purchasers for the company was relatively limited and the shares of the company were thinly traded.

Contact Peter C. Goode in Calgary at [email protected]

Use of Shareholder Lists in a Not-For-Profit Corporation

In Volume 1, Issue 1 of our publication, we reported on an Alberta Court of Appeal decision (Encana Corporation v. Douglas) on the use of shareholder lists of a Canada Business Corporations Act corporation. The court there decided that a CBCA corporation could not refuse to comply with a technically compliant request for such a list. The corporation would have to apply to the court for direction if it wished to refuse the request.

Recently, the Ontario Court of Appeal, in Lawrence v. The Toronto Humane Society, dealt with the same issue for corporations


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governed by the Ontario Corporations Act (OCA), which deals with (among other things) not-for-profit corporations and their members.

The OCA provides that any person, upon filing an affidavit with the corporation, may require the corporation to furnish a list of names of all its members. The affidavit must recite that the list is required “only for purposes connected with” the corporation and will be used only for such purposes. The statute sets out a non-inclusive list of purposes that are deemed to be “connected with the corporation,” including any effort to influence the voting of members at any meeting of the corporation.

The vice-president of the trade union that is the certified bargaining agent for the unionized employees of The Toronto Humane Society applied under the statute for a list of members of the society. The Society refused, and the matter went to court. The trial judge ruled that the purpose of the applicant’s request was to obtain a benefit for the union, namely to persuade the Society’s members to apply pressure on the directors of the Society to capitulate in their dealings with the union. Since this was not “a reason connected to the corporation,” the trial judge said the Society did not have to honour the request. The matter then went to the Court of Appeal.

The Court of Appeal noted that the statute does not explicitly require, as a pre-condition to the exercise of the right to obtain a membership list, that either

the corporation or the court be satisfied that the information contained in the list will be used for “purposes connected with the corporation.” However, the court does have authority to enquire into the purpose for which such a request is made to ensure that a membership list is not being sought for a subsequent unlawful use.

The Court of Appeal held that the purpose of the request was to allow the union to advocate with other Society members on behalf of the Society’s unionized employees for changes to the Society’s management and general labour relations policies and practices. This purpose, although perhaps unwelcome to the management of the Society, affects the Society’s membership as a whole and is clearly related to or associated with the Society.

The Court of Appeal cited Encana Corporation v. Douglas for the principle that a distinction must be made between the purpose in using the list and the personal motivation in using the list. In this case, the applicant’s purpose was to influence voting by the members, which was a permitted and unobjectionable use of the membership list.

Privacy Aspect

In Volume 1, Issue 1, we also reported on the privacy law aspects of Encana Corporation v. Douglas. In this case, having found that Lawrence’s request did not comply with Section 307 of the OCA, the application judge determined that there was no need to decide the issue of whether the federal

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privacy legislation, the Personal Information and Protection of Electronic Documents Act, applied to Lawrence’s request. The Society did not advance the privacy argument in the Court of Appeal.

Contact: Anna M. Tosto in Ottawa (Business Law) at [email protected] or Barbara A. McIsaac in Ottawa (Litigation) at [email protected] or Shanon O.N. Grauer in Toronto (Business Law) at [email protected]





Commercial Law

Recent Commercial Law Cases of Interest

Three decisions reported in this edition of Co-Counsel: Business Law Quarterly involved the courts giving effect to the express terms of the contracts. They are the English decision on multi-lender credit agreements on page 24, above, and the first two cases noted below. Although the courts in the first two decisions below came to similar conclusions, they did so in different circumstances and by applying different lines of cases or reasoning.

The other case noted below provides helpful insights of the judicial view of the oppression remedy and the appraisal remedy in determining fair value on a going-private transaction.

Termination of a contract

Credit Security Insurance Agency Inc. v. CIBC Mortgages Inc. (Ontario Superior Court of Justice, April 25, 2006).

The parties sought an interpretation of a termination clause in a contract. The question for the court was whether that clause defined the only circumstances under which a party could terminate the agreement or whether a term permitting unilateral termination on reasonable notice should be implied.

The court noted that there was a line of cases in which courts have implied a right to terminate on reasonable notice. After reviewing the terms of the contract, the court held that there was no commercial necessity in this instance to imply a term permitting unilateral termination on reasonable notice.

The court observed that the parties had very clearly and unambiguously expressed their intent and had enumerated specific circumstances, requiring mutual agreement, under which the contract could be ended. The court declined to imply into the contract a term that would permit unilateral termination because that would contradict or be inconsistent with the express terms of the written contract.

Upholding an ‘as is’ provision in a contract

First Gulf Development Corporation et al. v. Alfa Laval Inc. et al. (Ontario Superior Court of Justice, April 19, 2006).

The claim concerned environmental contamination on land purchased by the plaintiffs. After the agreement of purchase and sale had been signed, and as a result of due diligence investigations, the plaintiffs became aware of some environmental contamination on the land. Following negotiations between the parties, they had agreed to amend the contract by reducing the purchase price and adding an ‘as is’ clause, which stated:


“The purchaser agrees to accept the property ‘as is’ without regard to its state of repair and environmental condition. The vendor shall have no liability or obligation to the purchaser for repair of the roof or any other part of the building and improvements or for site remediation and compliance with applicable environmental and other laws, and the purchaser, on closing, accepts all responsibility therefor.”

Subsequently, more extensive environmental contamination became known to the plaintiffs, and they brought a claim against the defendants, essentially alleging fraud, but also based on breach of contract and negligent misrepresentation.

The defendant moved to strike out portions of the claim to the extent that it was related to causes of action claiming breach of contract, inducing breach of contract, negligent misrepresentation and misrepresentation, as well as the facts supporting those causes of action.

The court was of the view that the ‘as is’ clause did constitute a bar to the action in contract. The court struck out the claim in contract and for negligent misrepresentation because the claim was in direct contradiction to the ‘as is’ clause. The court also looked to the ‘entire agreement’ provision of the contract in reaching its decision.

Contact Edward P. Kerwin in Toronto at [email protected]

Oppression remedy, appraisal remedy and fair value

Ford Motor Company of Canada, Ltd. v. Ontario Municipal Employees Retirement Board, (Ontario Court of Appeal, January 6, 2006)

In a series of transactions, Ford Motor Company (Ford U.S.) took its subsidiary, Ford Motor Company of Canada, Limited (Ford Canada) private. At the time, Ford U.S. owned approximately 94 per cent of Ford Canada. The remaining 6 per cent of the shares were widely held.

A majority of the minority shareholders dissented from the transaction. Shareholder approval was not required by the minority, however, because Ford U.S. owned more than 90 per cent of the shares. The dissenting shareholders were entitled by statute to require Ford Canada to purchase their shares for the fair value determined as of the close of business on the day before the resolutions for the going-private transaction were adopted.

Ford Canada commenced an action for a declaration to fix the fair value of the common shares held by the dissenting shareholders. Certain of the dissenting shareholders, including the Ontario Municipal Employees Retirement Board (collectively, OMERS), later asserted a counterclaim against Ford Canada and Ford U.S. on the grounds of historical oppression. The basis of the oppression claim was the transfer pricing system used by Ford Canada and Ford U.S. over the prior decade. This system determined



the prices that the two entities paid each other for the purchase of parts and vehicles.

The trial judge held that Ford Canada had oppressed the minority shareholders. He dismissed the oppression claim against Ford U.S. The trial judge held that an oppression claim is subject to a six-year limitation period. Further, the oppression remedy was available only to shareholders who held shares at the time of the oppression. The trial judge held that the oppression was relevant to fair value under the appraisal remedy only on a “go-forward” basis to reflect adjustments to the transfer pricing system that would be negotiated by a hypothetical buyer so as to reflect the company’s true earning power.

There were several issues on appeal. The Court of Appeal upheld the oppression claim against Ford Canada and also allowed the claim against Ford U.S. The trial judge’s limitation of the oppression remedy to persons who held shares at the time of the oppression, as well as the finding that historical oppression is irrelevant to fair value, was also upheld. The Court of Appeal found it unnecessary to determine whether a limitation period applied to an oppression claim, though it made note of a previous case in which the oppression claim was not subject to a limitation period.

To read our more detailed description of the case and the reasons on appeal, click here.

Contact: Matthew Cumming in Toronto (Litigation) at [email protected] or Edward P. Kerwin in Toronto (Business Law) at [email protected]






Updates

ABORIGINAL LAW UPDATE

Recent Development on the Crown’s Duty to Consult and Accommodate Aboriginal Peoples

In 2004, the Supreme Court of Canada confirmed the existence and nature of the Crown’s duty to consult and accommodate Aboriginal peoples with respect to claimed Aboriginal rights (Haida Nation v. British-Columbia [Minister of Forest]). Since that time, several First Nations have challenged the Crown for its failure to perform its duty to consult and accommodate.

In June 2005, the Québec Superior Court granted a safeguard order (a type of interlocutory injunction) against the Government of Québec and Kruger Inc. in the context of a litigation in which the Innus of Betsiamites were seeking the recognition of an Aboriginal title. The effect of the decision was to ban certain of Kruger’s forestry activities in an area located on the North Shore on the basis of the Court’s declaration that the government of Québec had failed to meet its duty to consult in 1997 when it entered into a timber supply and forest management agreement with Kruger.

On April 28, 2006, in a landmark ruling on Aboriginal law in Québec, the Québec Court of Appeal overturned the trial decision. The Québec Court of Appeal decision is a major development in the wake of the Haida Nation case.

According to the three-judge panel, the trial judge did not have the authority to make a final decision on complex issues such as the sufficiency of the consultation at an interim stage of the proceedings. In reaching its decision, the court took into consideration the negative economic impact that a halt of significant forestry operations would have on the company and on the workers who depend on it.

Here are some of the highlights of the court’s decision:

• the rules of procedure for obtaining injunctive relief in actions involving the assertion of aboriginal and treaty rights are the same as the rules of procedure in any other civil case. Therefore, in a motion to obtain a safeguard order in an aboriginal context, the following criteria will apply:

• extreme urgency;

• appearance of a right;

• irreparable harm; and

• balance of convenience.

• the Crown’s duty to consult and accommodate Aboriginal people does not give Aboriginal communities a veto over the possible uses of the territory they claim. The court rather focuses its attention on


the accommodation of Aboriginal interests where appropriate.

• although the duty to consult and accommodate lies with governments, the efforts of natural resource companies to develop good relations with the affected Aboriginal communities were considered relevant. These companies have an interest in encouraging the Crown to see to its duty to consult and accommodate.

• a process of negotiation and reconciliation, which takes account of the complex and competing interests of the various players involved, is preferable to litigation to deal with Aboriginal issues and concerns.

This decision is final since it has not been appealed to the Supreme Court of Canada.


This decision is important for major enterprises involved in the energy, forestry, mining and transportation sectors that carry on activities on lands that are subject to Aboriginal land claims and Aboriginal rights. It is also of interest for financial institutions investing in natural resource projects.

The decision may bring more certainty to the relationships between industry, the Aboriginal communities and the Crown. It also highlights the importance of seeking legal advice concerning Aboriginal issues prior to entering into new development projects.

McCarthy Tétrault represented Kruger Inc. in this case. It is also acting for Kruger Inc. and several forestry companies in other significant Aboriginal law proceedings in Québec.

Further details and a copy of the decision can be found in the McCarthy Tétrault E-alert, Recent Key Ruling in Aboriginal Law in Québec.

Contact: Simon V. Potter in Montréal at [email protected] or Ann M. Bigué in Montréal at [email protected] or Marc-André Blanchard in Montréal at [email protected] or Alexandre-Philippe Avard in Montréal at [email protected] or Thomas F. Isaac in Vancouver at [email protected]








COMPETITION LAW UPDATE

Federal Court of Appeal Discusses Abuse of Dominance for the First Time

On June 23, 2006, the Federal Court of Appeal rendered two decisions in the Canada Pipe case, which considered the abuse of dominance provisions of the Competition Act. This is the first time that an appellate court has been called upon to interpret the current civil abuse of dominance provisions since they were enacted in 1986.

The conduct at issue was Canada Pipe’s ‘loyalty rebate program,’ known as the stocking distributor program (SDP). At first instance, the Competition Tribunal had dismissed the application by the Commissioner of Competition seeking an order against Canada Pipe to cease the SDP on the grounds that it constituted abuse of dominance. However, the Tribunal dismissed the Commissioner’s application. The Tribunal agreed with the Commissioner that Canada Pipe was ‘dominant’ in the supply of cast iron-made drain, waste and ventilation fittings, but held that the SDP did not constitute an ‘anti-competitive act’ and that it did not ‘substantially lessen competition.’ The Commissioner appealed the Tribunal’s decision on both of these points.

The court held that the Tribunal did not apply the correct legal tests to determine whether the SDP constituted an anti-competitive act and whether it substantially lessened competition. As a result, the court returned

the matter to the Tribunal for reconsideration on the basis of the relevant legal tests.


The immediate impact of the court’s decision is that loyalty rebates as well as other forms of exclusivity-inducing discount programs, when adopted by dominant firms, may well receive increased scrutiny under the abuse of dominance provisions. However, even though the Canada Pipe case dealt with such loyalty rebate programs, the Court of Appeal’s decision, in discussing the tests for each of the statutory elements required for a finding of abuse of dominance, certainly has broader application to any conduct by firms enjoying a significant presence in an industry.

Several aspects of the Court’s decision will undoubtedly be subject to further discussion:

• in analyzing whether a conduct constitutes ‘a practice of anti-competitive acts,’ the court has arguably limited the scope of valid business justifications that may be invoked by dominant firms. Although the court’s reasoning in this regard remains far from clear, it may well be more difficult for dominant firms adopting conduct that has, or is likely to have, negative effects on competitors to establish that the overarching purpose of such conduct


was not to discipline or exclude competitors.

• the application of the test articulated by the court for a finding of substantial lessening or prevention of competition promises to be challenging. Proving substantial lessening of competition will require the application of a ‘but for’ test in order to determine a market’s likely competitiveness in the absence of the impugned conduct. The court’s test not only adds to the complexity of the Commissioner’s task when making her case, but also increases the difficulty for companies facing abuse of dominance challenges to counter the Commissioner’s allegations.

For a more complete analysis of the decision, click here.

Contact: Yves Comtois in Montréal at [email protected] or Dominic Thérien in Montréal at [email protected] or Taline Sahakian in Montréal at [email protected]

LABOUR & EMPLOYMENT LAW UPDATE

Ontario Moves to Modernize its Human Rights Legislation

The current human rights system in Ontario was established in 1962, when the Ontario Human Rights Commission and the Ontario Human Rights Tribunal were created to enforce the Ontario Human Rights Code. The Commission receives and investigates complaints, and decides whether a matter should go forward to a hearing before the Tribunal. The entire process can take several years from start to finish.

Ontario’s Attorney General has introduced Bill 107, An Act to Amend the Human Rights Code, with the purpose of ‘modernizing’ Ontario’s human rights system.

Highlights of Bill 107 include:

• complaints would go straight to the Tribunal, which would have the authority to hold a hearing or to dispose of the application through an alternative dispute mechanism;

• the Commission would focus its efforts on the prevention of discrimination, through public education, promotion and public advocacy, research and analysis. The Commission would maintain the ability to bring a complaint on its own behalf, or to intervene in individual complaints where the Commission believes there are systemic issues affecting the public interest;







• the Chief Commissioner would have primary responsibility for a new Anti-Racism Secretariat and a new Disability Rights Secretariat aimed at undertaking, directing and encouraging research into discriminatory practices; and

• the Attorney General would be allowed to enter into agreements for the provision of legal services and other services to parties to a proceeding. Although no specific details are provided, the Attorney General has announced that there would be a new legal centre to support complainants.


Employers should anticipate that the proposed changes may result in an increase in the number of complaints being filed by employees and prospective employees. In theory, the proposed changes should also mean that complaints are processed more quickly. Currently, very few complaints are actually litigated at the Tribunal. Bill 107 would result in far more litigation at the Tribunal.

Employers may want to consider taking this opportunity to review their anti-discrimination and anti-harassment policies and practices, and ensure that all managers and supervisors have been properly trained with respect to those policies and practices before Bill 107 is passed.

For a more in-depth discussion of the proposed changes under Bill 107, please see the McCarthy Tétrault Legal Update, Bill 107, An Act to Amend the Human Rights Code, Receives Second Reading at the Ontario Legislature.

Contact: Karen M. Sargeant in Toronto at [email protected] or Sarah Armstrong in Toronto at [email protected]





PENSION LAW UPDATE

Purchaser of Shares Required to Reimburse Pension Plan Expenses Related to Pre-Acquisition Period

A recent Ontario Divisional Court decision highlights new areas of due diligence that should be undertaken in the realm of pensions and benefits and their application to mergers and acquisitions. The case is bad news for many employers and makes it increasingly difficult for vendors of shares to represent that the pension plan has been properly administered.

The court applied a traditional trust law analysis to find that plan administration expenses could not be charged to the plan fund. The court also concluded that, in the circumstances of the pension plan, a defined benefit surplus could not be used to meet the employer’s contribution obligations in the defined contribution component of the plan (which was added in 2000).

This decision is troubling since a company that succeeds another as sponsor of a pension plan may find itself responsible for plan expenses charged to the plan fund even before its assumption of the plan. Any company with a defined benefit pension plan, the assets of which are held in trust, that charges expenses to the plan fund, whether or not the plan was assumed by it at some point, would be well advised to review the terms of the plan and trust to determine its potential exposure. Any company that is contemplating assigning a plan to another company should make sure that it can give the relevant representations, and any

company contemplating assuming a pension plan should keep this decision in mind.

A motion seeking leave to appeal the Divisional Court’s decision to the Court of Appeal of Ontario was granted on July 17, 2006.

To read a more detailed description of this case, click here.

Contact Lorraine Allard in Toronto (Pension Law) at [email protected]

Employee Beneficiaries Cannot Terminate Company Pension Plan— A Matter of Trust Law

In a recent decision, the Supreme Court of Canada held that beneficiaries of a trust established to fund an employment pension plan could not unilaterally terminate that trust and cause its assets to be distributed to them.

In 1974, a corporate predecessor of Rogers Communications Inc. established a defined benefit pension plan for its employees. The plan was to be funded under a trust, the beneficiaries of which were member employees. Under the plan’s rules:

• the plan would be financed exclusively by the company;

• the company retained the right to terminate the plan; and

• in the event that the company terminated the plan, the surplus funds would be distributed to the member employees.




Rogers closed the plan to new employees in 1984, and the following year began taking ‘contribution holidays’ based on actuarial calculations suggesting a considerable surplus of funds. By 2002, the surplus was valued at approximately $11 million. Despite this, Rogers declined either to terminate the plan and distribute the surplus to the member employees or to increase the benefits payable under the plan. Instead, it attempted, unsuccessfully, to withdraw the surplus for itself.

In a somewhat creative move, members of the plan applied to court to terminate the trust so as to obtain immediately the plan surplus for themselves. They relied on the common law rule in Saunders v. Vautier, first established in 1841. The rule states that a trust can be terminated if all beneficiaries of the trust, being of full legal capacity, consent.

In a decision that was unanimous on this point, Buschau v. Rogers Communications Inc., the Supreme Court held that the rule in Saunders v. Vautier does not apply to trusts used to fund pension plans. Deschamps J., writing for the majority of the court, cited as the basis for this conclusion:

• the heavy regulation of pension plans;

• the inextricable link between such trusts and the plans they fund;

• the expectations of employers who establish pension plans; and

• the societal purposes served by the maintenance of pension plans.

She did, however, leave open the possibility for application of the rule to a trust underlying a ‘very small’ pension plan.

Bastarache J., writing for the minority of the court, held that the rule in Saunders v. Vautier had no potential for application on the facts of the case, since the members of the pension plan did not hold the entire beneficial interest in the trust. However, for reasons similar to those of Deschamps J., he considered that the rule in Saunders v. Vautier could not be applied to terminate a pension trust in any case.

The majority of the court did not, however, leave the members of the plan without recourse. Deschamps J. held that the members of the plan might seek to have the Superintendent of Financial Institutions declare the plan to be terminated. She cited the Superintendent’s “broad power” under the statute, which gives the Superintendent the power to declare a pension plan terminated where there is a suspension or cessation of employer contributions. In this regard, Deschamps J. observed that “[c]ontribution holidays, although legitimate for funding purposes, can nevertheless be considered illegitimate if they hide an improper refusal to terminate a plan.”



The Supreme Court’s decision in this case may have implications that resonate far beyond the field of pension law.

The decision indicates that all trusts are not always subject to the same rules. Based on the reasoning of both the majority and the minority, it is necessary to examine the purpose for which a trust is created, as well as the commercial and regulatory context in which it exists, in order to determine whether a particular aspect of the common law of trusts applies to it. This approach may affect, for example, the trusts underlying mutual funds, income funds and corporate bonds, as well as real estate investment trusts and stock voting trusts.

Only time and further decisions will indicate how far courts are prepared to depart from the ordinary law of trusts by reason of the context and purpose of a specific type of trust. However, before implementing, becoming involved in or litigating in relation to a commercial arrangement dependent upon the use of a trust, one should consider the extent to which the circumstances of that arrangement may invite or justify a departure from the law traditionally thought to govern trusts.

Contact: Michael A. Feder in Vancouver (Litigation) at [email protected] or Byran Gibson in Vancouver (Business Law) at [email protected] or Gregory J. Winfield in Toronto (Pension Law) at [email protected]





TRADE LAW UPDATE

Effective Use of International Trade and Investment Treaties

Does a regulatory barrier impede your access to an export market? Does a government measure discriminate against or otherwise harm your business operations? In recent years, there have been significant developments in international trade and investment protection law that offer potential responses to regulatory measures that have a negative impact on business. These changes have enhanced both the scope of the obligations under these agreements and their enforcement.

Trade and Investment Treaty Obligations

The disciplines in these agreements no longer apply just to trade in goods, but also to trade in services, intellectual property, government procurement, technical barriers and other impediments to trade, and foreign direct investment. Dispute settlement and enforcement mechanisms contained in these treaties have also been strengthened.

Obligations under most trade agreements are ‘binding’ in the sense that one country’s failure to comply with them will permit other countries to impose sanctions, most often by suspending benefits and concessions accorded to the offending country under the particular trade agreement at issue. Further, most bilateral investment treaties (BITs), including Canada’s, enable private investors to sue governments for losses arising out of a violation of their treaty obligations.

Most developing and industrialized countries are subject to obligations arising from these agreements, because they are World Trade Organization (WTO) members or parties to regional free trade agreements or BITs. These obligations apply to government policies, administrative and legislative measures, and even judicial action. They apply not only to national governments but also in many cases at the provincial, state and other sub-federal levels.

Canadian Commitments

Canada, in addition to being a WTO member and party to the North American Free Trade Agreement (NAFTA), is also a party to regional free trade agreements with Chile, Israel and Costa Rica, and to BITs with over 20 developing countries. Almost all of these agreements have come into force in the last 10 to 15 years. A complete listing of these agreements, as well as ongoing negotiations for additional trade and investment treaties can be found by clicking here.

To date, at the WTO alone, Canada has brought 27 cases against other member countries who have taken measures alleged to violate WTO obligations. Canada has been the target of 14 WTO complaints by other countries and, as a result, has had to terminate or revise offending measures across a wide range of sectors, including automotive products, magazine publishing, pharmaceuticals, dairy products and regional aircraft.

So far, Canada has been sued by investors 13 times under NAFTA’s investment chapter,




the template for most of Canada’s BITs, with awards amounting to US$27 million.

Impact on Strategic Decision-Making

Business decisions must take into account the impact of, and the opportunities afforded by, these agreements. The strategic benefit of staying abreast of developments in this area is at least threefold:

• identifying market opportunities: For example, an exporter may become aware of, and seek to improve its access to, new geographic or product markets as a result of trade negotiations under prospective or existing agreements. More than ever before, governments encourage input into the negotiations from interested parties;

• tools to deal with market access or competitive issues: Importers encountering difficulties in accessing the Canadian market can look to Canada’s obligations under these agreements as one of the available avenues for addressing the situation. Foreign investors may also rely on the investment dispute provisions of BITs or Canada’s free trade agreements, including NAFTA, to sue governments imposing discriminatory or expropriatory measures; and

• planning for the potential negative or positive impact: If a measure that has protected a domestic producer’s market must be removed (either through negotiations or as required by a trade agreement ruling), or if importers find

themselves in the crossfire of a trade dispute, the result of which can be the imposition of sanctions in the form of import surtaxes, all players in the market can use this information to jostle for market advantage.


As the significance of trade and investment agreements grows, companies will need mechanisms in place to ensure that this information is fed into their strategic decision-making process and in their business planning systems. This distant early warning system should cover all trade and investment agreements, including the NAFTA, the WTO agreements, Canada’s regional and bilateral agreements, and agreements currently being negotiated as set out here.

Contact: John W. Boscariol in Toronto at [email protected] or Orlando E. Silva in Toronto at [email protected] or Simon V. Potter in Montréal at [email protected] or Brenda C. Swick in Ottawa at [email protected]






Every effort has been made to ensure the accuracy of this publication, but the comments are necessarily of a general nature, are for information purposes only and do not constitute legal advice in any matter whatsoever. Clients are urged to seek specific advice on matters of concern and not rely solely on the text of this publication.

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