Commentary
What was the point of that again?
- Banking on Corporate
Corporate law is, I suppose, like a lot of specialized activities — users of corporate legal services seem generally to have little interest in, or understanding of, the ugly machinery of the industry (in this case, the vagaries of statutory requirements, the overlay of common law dictates, and the realities of common practice). And really, why should they? When someone comes to fix my hard drive, I don’t want to know details about the processor, the circuitry, or the history of the PC. I just want to know that there are either no problems, or that whatever problems there were have been fixed.
This dynamic creates interesting results when the service provider, like most corporate lawyers, charges by the hour. Client confusion is natural and predictable when presented with a large invoice for a corporate lawyer having (a) identified a problem the client never imagined (much less knew it had) and (b) invested significant time in crafting a solution for that problem.
Many “technical issues” raised by corporate lawyers are matters where a legitimate interest is served. But the law does tend to accumulate, and some requirements outlast the mischief they were originally designed to address. A good way to identify this legal baggage is the classic test of going back to “first principles,” to consider the original objective of the legal requirement. If a lawyer struggles to articulate the purpose of a given rule, that is a healthy clue that the requirement may have outlived its usefulness (I’m too polite to mention that it may also, however, be an indication that the question is being asked of the wrong lawyers). It is not difficult to understand how some of these things survive: it is much easier to leave the anachronisms alone, there is no easy way to calculate the societal costs of leaving them alone, and there are collective action problems in seeking to fix them. But there is a cost.
Three examples leap quickly to mind. The first is the “solvency test” that continues to apply under some provincial corporate statutes to dividends and other returns of capital. That requirement imported into corporate law an element of creditor protection that may have served a necessary purpose at inception. However, in a modern era, with evolutions in creditor protections and increased creditor awareness of their risks, the need for these provisions is debatable. More curious, the formula for assessing “solvency” under some corporate statutes continues to use the concept of “stated capital,” an anachronism that oddly enough can be varied by the shareholders themselves (interesting from a creditor protection perspective). This type of seemingly benign requirement can result in much corporate, tax, and tactical structuring that has little or nothing to do with the original intent of the requirement.
Another example is “corporate incest,” which describes a phenomenon less sensational than its label. Statutory “corporate incest” provisions prohibit corporations from owning shares in themselves, or in their parent corporations. When adopted, these provisions were targeted at potential distortions in voting or financial reporting that might result from “incestuous” share ownership, but those concerns have either been superseded by developments in reporting or can be easily better addressed directly. The hangover of the “corporate incest” provisions, however, often results in transactions being contorted into knots. Thinking around that type of legal obstacle can be a challenging mental exercise, but the social benefits of the required expenditure of effort are not all that apparent (that is my lawyerly way of describing a complete waste of time).
One last example is the prohibition, subject to limited exceptions, on share transfer restrictions for publicly traded corporations in some corporate statutes. The provision was presumably implemented to facilitate trading in securities of those corporations. The requirement, however, is not necessary to achieve that objective today, and the nature of the limited exceptions makes clear that the rule was developed a long time before the legislators envisaged international securities offerings and the use of highly detailed regulatory restrictions to achieve all manner of governmental objectives. Bottom line, the lingering requirement is an unjustifiable impediment to transaction structuring.
One effect of these anachronisms is jurisdiction shopping. Though that too imposes costs, it is in some ways a healthy process in that it should result in re-examination of local legal requirements. However, though clients may not be interested in discussing the technicalities, corporate law, like every other area of law, must keep abreast of the reality it regulates. Continuous re-examination to ensure the law remains relevant is the least the public, the ultimate client, deserves (even if it doesn’t understand the circuitry). And besides, I have enough trouble on most days explaining the stuff that actually makes sense.
Neill May is a partner at Goodmans LLP in Toronto. His practice focuses on all aspects of securities law, with an emphasis on M&A and corporate finance. E-mail him at
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. The opinions expressed are those of the author alone.
Corporate law is, I suppose, like a lot of specialized activities — users of corporate legal services seem generally to have little interest in, or understanding of, the ugly machinery of the industry (in this case, the vagaries of statutory requirements, the overlay of common law dictates, and the realities of common practice). And really, why should they? When someone comes to fix my hard drive, I don’t want to know details about the processor, the circuitry, or the history of the PC. I just want to know that there are either no problems, or that whatever problems there were have been fixed.
Does your law firm wield clout in the cloud? It’s a question law firm managers and marketers need to ask in the exploding world of social media, such as Facebook, LinkedIn, Twitter, and YouTube. These sites draw hundreds of millions of users and present law firms with an unprecedented opportunity to market their knowledge worldwide.
A few years ago, one of the biggest issues law firms were dealing with was associate retention. Well, you won’t hear anyone talking about that anymore. Now, the topic on everyone’s lips is articling. There have been rumblings about it for years; in 2008 the Law Society of Upper Canada looked at the future of articling, reports were written, nothing much happened. The status quo continues to this day. However, in December the LSUC put out a 134-page consultation report again looking at the future of articling.
It offers up five ways to deal with the current crisis: maintaining the status quo; the status quo with quality assurance improvements; the replacement of a pre-licensing transition requirement with a post-licensing transition requirement; a choice of either articling or a practical legal training course; or only a practical legal training course.
The law society is in the midst of consultations with the profession on which option is the best to move forward (you have until March 15 to submit your thoughts to the LSUC or attend one of the consultation meetings). From attending a recent consultation, one would get the impression the society already has made up its mind on what’s best: the combo of articling and a practical legal training course. While on first glance that may seem like a good idea, I think in the long run, it probably won’t be.
Firstly, it will mean that in terms of bureaucracy, the LSUC will have to run two systems to monitor both streams. I think we can all agree that is not what the LSUC needs. Secondly, how will there be equality between a training course and articling? And even if that gets worked out, will a young lawyer who has taken the course instead of articling be treated the same by prospective employers? Will there be inherent biases creating roadblocks to success for lawyers who take the course? All I can foresee is problems and inequity in that approach. It apparently works in parts of Australia, but I say choose one or the other.
The reality is that there are articling position shortages, not just in Ontario but in other provinces as well. Although from what I hear, Saskatchewan firms are thriving and looking for articling students. It would seem that the option of maintaining articles as they are or with some extra checks and balances wouldn’t work. The idea of a course, likely costing prospective lawyers more money on top of their law school and other student loan debt, may work. But what you don’t see is the U.S.-style option of letting students write bar exams and then go out into the world as licensed lawyers to either find employment or start their own firms.
Personally, I think there is great value in articling but the system is broken. We’ll see in a few months, how the LSUC thinks it’s going to fix it. This is undoubtedly a turning point in the future of the profession.
A few years ago, one of the biggest issues law firms were dealing with was associate retention. Well, you won’t hear anyone talking about that anymore. Now, the topic on everyone’s lips is articling. There have been rumblings about it for years; in 2008 the Law Society of Upper Canada looked at the future of articling, reports were written, nothing much happened. The status quo continues to this day. However, in December the LSUC put out a 134-page consultation report again looking at the future of articling.
It took the U.S. legal system 15 weeks to convict Conrad Black of fraud charges, the majority of which were overturned by the U.S. Supreme Court. It will take the Law Society of Upper Canada almost two years to decide whether or not Black’s lawyers, Beth DeMerchant and Darren Sukonick of Torys LLP, were in a conflict of interest when they advised him and his companies on the non-compete agreements at the centre of his criminal charges.
It’s a sign of stunning ineptitude that the LSUC can’t prosecute lawyers in a timely fashion. It informed them in January 2006 that they were under investigation for actions dating back to 2000. A discipline hearing, which started as an important test of the law society’s conflict rules, has become a prosecutorial folly.
What many thought should have been a slam-dunk for outside prosecutor Paul Stern has turned into a shambles, which should leave benchers shaking their heads and asking hard questions.
Even Black in his book, A Matter of Principle, questions the law society. In a fascinating, inside look at the U.S. justice system through the eyes of an accused, he writes of the now-retired DeMerchant, a former Torys partner, and Sukonick, who was an associate at the time: “I was never overly impressed with their imagination, and some of their advice was incorrect, but I don’t think they were unethical or negligent. The singling out of them, as well as the Law Society’s rather banal allegations, seems to me to be shabby and tokenistic placation of opinion by the Toronto legal establishment, at the expense of two relatively defenceless scapegoats.” (Black’s book provides a candid opinion of lawyers and personalities he dealt with in his career and legal tribulations.)
The Torys lawyers are charged with six counts of failing to adequately disclose their conflicts of interest and obtain consent of their clients in breach of Rule 2.04 of the Rules of Professional Conduct. The discipline hearings started badly for the LSUC in 2009; 168 boxes of materials were unearthed that hadn’t been disclosed by Torys, prompting an adjournment.
It has been downhill since. A major law society witness about conflicts — lawyer Gar Emerson — was kicked off the case because of a conflict. Another witness withdrew after it was determined he was not qualified to provide expert testimony on the matters in question.
There was also an earlier attempt by LSUC counsel to take the hearing in camera, much to the chagrin of the discipline panel and defence lawyers Phil Campbell and Ian Smith. That turned into a needless sideshow over public access to the hearings and if companies involved had waived their privilege, even though much of the material had been publicly disclosed in court documents.
The panel sat for one day in 2009, 31 days in 2010, and 35 days in 2011 (at press time). Despite that, and 16 days of DeMerchant cross-examination, they are only through a couple of the charges. Another seven days of hearings were expected in 2011 and 24 days are set for 2012.
Compounding matters, one of the panelists hearing the complaint, Paul Henderson, was appointed to the bench.
LSUC spokeswoman Susan Tonkin says, “a number of factors can affect the length of a hearing, including the complexity of the proceeding, volume of materials, number of witnesses, number of motions, and, occasionally, unforeseen events.” Law society officials wouldn’t disclose the cost of the prosecution. A six-year case wouldn’t come cheap and if the LSUC loses, the fees will easily reach millions of dollars when defence costs are added in. Then there are the likely appeals.
Yet, if convicted, it’s unlikely the lawyers would be disbarred. They’re not accused of misappropriating funds. Rather, a suspension would likely be in order. Any victory at this stage would be Pyrrhic at best.
Sadly, Sukonick will almost spend more time fighting these charges than he has practising law and his career has been, if not destroyed, then certainly waylaid.
There’s a strong feeling on the street that DeMerchant, who earned as much as $900,000 annually, should have fallen on her sword and saved her junior by pleading guilty, taking her lumps, and moving on. The handling of this case, combined with the persecution of Joe Groia for his comments towards the prosecutor in the Bre-X/Felderhof case, has shaken the confidence of many lawyers when it comes to the law society’s judgment involving prosecutorial decisions affecting members.
The profession desperately needs guidance when it comes to matters of conflict of interest and commercial deals. The LSUC should draft new rules; there’s a good chance they would pass before this prosecution ends. This test case had the potential to clear the air. But it has become a circus — much like the Groia affair.
Jim Middlemiss is an Ontario lawyer and co-owner of WebNews Management Corp. You can reach him by e-mail at
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It took the U.S. legal system 15 weeks to convict Conrad Black of fraud charges, the majority of which were overturned by the U.S. Supreme Court. It will take the Law Society of Upper Canada almost two years to decide whether or not Black’s lawyers, Beth DeMerchant and Darren Sukonick of Torys LLP, were in a conflict of interest when they advised him and his companies on the non-compete agreements at the centre of his criminal charges.
With this January 2012 issue of Canadian Lawyer, we kick off our 36th year of covering the issues and trends that matter to the legal profession in Canada. And we have seen a lot of changes, particularly in the last few years. One of the biggest shifts has been the arrival of global law practices on our shores. This month, Macleod Dixon LLP will be folded into the Norton Rose Group, which rocked the Canadian legal establishment last year when it merged with Ogilvy Renault LLP. The face of law practice is changing here and so this year, we have launched a new series on canadianlawyermag.com called the Managing Partner Forum, in which law firm leaders from across the country and all types of firms will discuss the hurdles, successes, and other travails of making it work in today’s market. We launch the series this month with a column from John Coleman, who helmed Ogilvy Renault through its initial merger as well as the marriage with Macleod Dixon to form the new Norton Rose Canada. I look forward to the columns creating some interesting discussions in the profession.
Expect a strong and growing law-and-order bias
- Top Court Tales
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| Illustration: Matt Daley |
Once again in this issue, we share the results of the annual Canadian Lawyer corporate counsel survey, which gauges the relationship between in-house counsel and their outside legal service providers. It’s not surprising that one of our main findings is that the economy, and its current state of instability, is having an effect on corporate law departments.
With five provinces scheduled to go to the polls in 2011 and three more expected to go next year, it’s a good time for the legal community to be advancing its election wish list.
In September, the Competition Bureau released a post-study assessment to its 2007 report that looked at restrictions impeding competition in five professions, including the law. The profession had been on tenterhooks as to what the assessment would say and how it would affect the regulation, in particular, of the profession across the country.
This month’s cover story, “A decade on,” examines the state of anti-terrorism laws in Canada over the decade since the Sept. 11, 2001 attacks in the United States. These efforts have two difficult issues to surmount, and they are the same ones faced by many countries, including the U.S.: how to heighten security while balancing individual rights and freedoms, and how to fight a “war” on terror that’s often beyond national borders and doesn’t involve a state player. Not an easy task for any government.
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