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Balancing act

Litigation and Arbitration
Balancing act

For a private company involved in legal proceedings, a request by other parties for the disclosure of its financial statements can be cause for concern, due to the sensitivity of information and issues that may arise from disclosure.

When faced with such a request, judges often seek to balance the rights of the parties to ensure that no one is prejudiced or gains an undue advantage over the other.

This article examines how the protective measures ordered by the Superior Court of Quebec in Moose International Inc. v. Moose Knuckles Canada Inc. illustrate such a balancing act.

In that case, the plaintiffs allege that the defendants, one of which is a minority shareholder of the plaintiff Moose International Inc., are engaged in unfair competition and trademark infringement. In two judgments, the court orders two different sets of protective measures with respect to the disclosure of financial statements. The protective measures ordered by the court differ depending on whether the request for disclosure is made by a shareholder or a non-shareholder.

The first judgment (2017 QCCS 850) stems from a minority shareholder seeking access to the books and records of plaintiff Moose International Inc. under s. 247 of the Canada Business Corporations Act in order to value its shares in the company and offer them for sale. This judgment tries to balance the defendant’s right as a shareholder to access the financial statements and the plaintiff’s right not to suffer damages that may result from disclosure.

First, the court rules that the plaintiff must communicate the unanimous shareholder agreement and the financial statements of the company to the minority shareholder. However, the defendant shareholder can only disclose those documents to its lawyers, an expert business evaluator or to a prospective purchaser of its shares, subject to entering into a confidentiality agreement for the latter two. The minority shareholder is also ordered to use the information in the documentation solely to value or sell its shares.

Moreover, upon request from the court or the plaintiffs, the defendant shareholder must produce a list of all persons given access to the documentation as well as the confidentiality agreements signed. However, the plaintiffs may only access this information with the court’s authorization. The foregoing measures will allow the shareholder to sell its shares without interference from the plaintiff, while preserving the confidential nature of the plaintiff’s financial statements and the unanimous shareholder agreement.

The other judgment rendered on the same day (2017 QCCS 851) is further to a request for access to the financial statements by a non-shareholder defendant. The court rules the documents must be disclosed to said defendant’s lawyers and the experts retained but not to the non-shareholder defendant or its representatives unless authorized by the court.

As a non-shareholder, this defendant does not benefit from any statutory right to the financial statements. This, combined with the fact that plaintiffs allege this defendant is competing unfairly against them, leads the judge to order more stringent disclosure requirements.These two judgments of the Superior Court of Quebec were later confirmed by the Court of Appeal of Quebec (2017 QCCA 358), which found that the judge had reasonably balanced the rights of the various parties involved.

The Court of Appeal also reminds us that the Supreme Court of Canada provides another safeguard in Lac d’Amiante du Québec Ltée. In that case, the SCC confirms that the implied rule of confidentiality applies in Quebec law. According to this principle, private information disclosed during the pre-trial discovery stage of legal proceedings must not be used outside of the proceedings, nor disclosed to third parties, unless leave has been granted by the court.

However, this rule does not always offer sufficient protection. In another case (2004 CanLII 73143), the Court of Appeal of Quebec acknowledges the implied rule of confidentiality but notes the competitive business environment warrants and orders the parties to keep the disclosed documentation confidential. The measures ordered in Moose International Inc. are examples of courts seeking to balance rights of the parties when a request is made for confidential information.

Gerry Apostolatos is a partner and Caroline Dunberry is a lawyer with Langlois lawyers in Montreal.

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