Canada: Court Enjoins Bidder From Pursuing Unsolicited Bid Following Financial Advisor's Breach Of Confidentiality Obligations To Target

On February 10, 2009, Justice Cumming of the Ontario Superior Court of Justice released the reasons for his decision in Gold Reserve Inc. v. Rusoro Mining Ltd. and Endeavour Financial International Corporation. Gold Reserve Inc. ("Gold Reserve") successfully obtained an interlocutory injunction preventing Rusoro Mining Ltd. ("Rusoro") from advancing its hostile bid for Gold Reserve on the basis that Rusoro had benefited from the misuse of confidential information obtained by its financial advisor, Endeavour Financial International Corporation ("Endeavour"), while it was previously retained as a financial advisor to Gold Reserve. The Court's order also prevents Endeavour from having any involvement on behalf of Rusoro, or at all, in a hostile bid for Gold Reserve, and requires that both Rusoro and Endeavour return to Gold Reserve all of its confidential information and anything produced from such confidential information.


On April 3, 2007, Rusoro engaged Endeavour to act as its financial advisor. Key Endeavour employees who had worked on a retainer with Gold Reserve since 2004 also became engaged in the Rusoro retainer. Between August and October 2008, Rusoro made a number of attempts to engage in friendly discussions with Gold Reserve with respect to a potential business combination, but Gold Reserve remained uninterested. Rusoro subsequently determined to make a hostile take-over bid for Gold Reserve and to proceed with Endeavour as its financial advisor, but neither Rusoro nor Endeavour advised Gold Reserve of Rusoro's intention until three days before the commencement of the bid.

Endeavour had previously acted as financial advisor to Gold Reserve for over four years pursuant to an advisory agreement entered into in 2004, which was subsequently amended and restated in 2007. The services provided by Endeavour to Gold Reserve included making presentations to potential lenders and investors, and advising on potential business transactions and project debt financing. In connection with its services for Gold Reserve, Endeavour was provided with confidential information of Gold Reserve, including financial, technical, geological and operational records, analyses and data. In response to the unsolicited bid, Gold Reserve claimed that the bid could not proceed because it was tainted by Endeavour's possession of Gold Reserve's confidential information.

The advisory agreements between Endeavour and Gold Reserve both included confidentiality provisions imposing strict conditions on Endeavour to protect Gold Reserve's confidential information. These agreements contained negative covenants restricting Endeavour from disclosing confidential information of Gold Reserve without its consent, and from using such information for its own purposes or to the detriment of Gold Reserve, but included an acknowledgment by Gold Reserve that Endeavour acts, and will act, as consultant or financial advisor to other clients in the same business as Gold Reserve, and that the interests of such clients may come into conflict with those of Gold Reserve. However, the advisory agreements also contained a specific negative covenant which, notwithstanding the Gold Reserve acknowledgment, restricted Endeavour from acting against the interest of Gold Reserve in a material way. The agreements also provided that in the event of a potential material conflict between the interests of Gold Reserve and those of Endeavour or its other clients, Endeavour would inform Gold Reserve of the conflict and would either act solely for Gold Reserve, agree with Gold Reserve on an appropriate resolution to the matter, or terminate the agreement in accordance with its terms.

The Court's record indicated, in Justice Cumming's view, that Endeavour did not inform Gold Reserve of its conflict in advising Rusoro with respect to the preparation of the hostile bid, and did not terminate the advisory agreements with Gold Reserve prior to the making of the bid. As such, Justice Cumming left aside the question of whether the negative covenants regarding confidentiality in the advisory agreements would have extended post-termination of such agreements.

The Court found that, in the particular circumstances of this case, Endeavour owed Gold Reserve a duty of confidence and a fiduciary duty of loyalty arising from the confidentiality provisions of the advisory agreements and from Endeavour's position as a fiduciary with respect to Gold Reserve's confidential information. The Court intervened on the basis that (i) Endeavour may have breached these duties in its dealings with Rusoro, (ii) Rusoro was liable as a knowing and willing recipient of services rendered by Endeavour in breach of these duties, and (iii) by advising Rusoro with respect to a hostile bid, Endeavour may have knowingly acted against the interest of Gold Reserve in a material way and therefore breached the negative covenants of the advisory agreements. Justice Cumming determined that interlocutory injunctive relief was available to Gold Reserve on the basis that Endeavour had contractually consented to such relief upon a breach of its confidentiality obligations, and because the nature of the harm caused to Gold Reserve could not be quantified monetarily.

Justice Cumming likened the position of Rusoro in retaining Endeavour's services to that of a friendly bidder having access to the data room of a target, but noted that, because it was not subject to a standstill agreement,1 Rusoro enjoyed an unfair imbalance of knowledge and had obtained unfair timing and tactical advantages with respect to other potential bidders. These advantages prejudiced the interests of the shareholders of Gold Reserve by allowing Rusoro to opportunistically submit a bid while privy to non-public knowledge regarding the value of one of Gold Reserve's mining projects2 and by reducing the time available to Gold Reserve to determine the best course of action with respect to the company and maximizing shareholder value.

Also of note is that, while there were indications that confidential information of Gold Reserve may have been used by Endeavour in the preparation of the hostile bid, the Court did not specifically require that Gold Reserve prove that Endeavour or Rusoro actually used such confidential information in connection with the bid. Justice Cumming noted that Endeavour did not erect any institutional ethical walls to protect Gold Reserve's confidential information, that several key employees of Endeavour who had gained confidential information of Gold Reserve also acted for Rusoro in respect of the hostile bid, that Endeavour had intertwined relationships with principals of Rusoro and an existing financial stake in Rusoro as both a creditor and a shareholder, and that arguments by Endeavour that its employees acted only on publicly available information and did not use any confidential information obtained from Gold Reserve were lacking in reality and were tainted by self-interest. Justice Cumming held that, absent evidence to the contrary, the reasonable inference in such a situation is that confidential information will be taken into account and used, even inadvertently, to the detriment of the provider of such information.

Implications for Bidders and Financial Advisors

The decision confirms that Ontario courts generally tend to give a broad effect to confidentiality provisions restricting the unauthorized use of a party's confidential information in connection with an M&A transaction, even in the absence of a standstill provision. It could have important ramifications on the selection of financial advisors by bidders in M&A transactions, and serves as a cautionary statement that bidders should ensure the independence of their financial advisors, especially where such advisors have previously acted for the target of a proposed take-over bid or have financial interests in the parties involved in an M&A transaction that could taint their independence. Bidders should also satisfy themselves that their financial advisors will not be acting in violation of any pre-existing duties of confidentiality or loyalty in favour of the target.

Financial advisors should consider the impact of this decision on their existing and prior client relationships. The decision highlights the importance of clearly specifying in engagement letters the scope and duration of the confidentiality obligations undertaken by financial advisors in favour of their clients, and of implementing effective institutional ethical firewalls in situations that could lead to an actual or apparent misuse of confidential information.


1 Justice Cumming stated that a standstill agreement was not necessary because Endeavour would not reasonably be expected to be a bidder for Gold Reserve and the negative covenants in the advisory agreements were intended to restrict Endeavour from misusing Gold Reserve's confidential information.
2 The market valuation of Gold Reserve at the time of the offer was particularly depressed due to uncertainty with respect to the Venezuelan government's position vis-à-vis Gold Reserve and its project at Las Brisas del Chuyuni in Venezuela.

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