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