When it comes to related-party transactions, are the roles of in-house counsel, audit committees, and external lawyers always clearly defined?
The situation can vary from transaction to transaction and depends on the strength of the in-house team, says Carol Hansell of Hansell LLP.
“If you take a very sophisticated in-house group, for many matters they don’t need to go to external counsel to sort things out, so there may not be external counsel,” says Hansell. “On a particular issue that the audit committee needs advice on, the external counsel may not be the right person to advise the audit committee.”
That scenario is one familiar to Bombardier Inc. senior vice president and general counsel Daniel Desjardins.
“Whether it’s the audit committee or a special committee of independent board members, they will retain their own counsel but the in-house legal department also has a role to play,” he says.
“You work with external counsel and they provide their opinions, but we usually run the deals and say what’s been negotiated and then outside counsel comes in and says, ‘Yes, it’s fair market’ or ‘No, it’s not.’”
It all depends on the context, says Hansell. “Does external counsel sometimes appear before the audit committee and provide them with advice? Absolutely. If there is a matter on which external counsel has been engaged and it is relevant to the audit committee, it wouldn’t be unusual to have them also speak to them. But I think the more common result is for inside counsel, assuming they have the background to do it, be the ones providing the advice to the audit committee.”
The question arose when the Law Society of Upper Canada dealt with conflict of interest allegations against Torys LLP lawyers Darren Sukonick and Beth DeMerchant (now retired) in relation to their work on the sale of the Hollinger group of companies between 2000 and 2003 to companies including CanWest and Osprey Media. In October 2013, the LSUC panel said it had no evidence to find the pair guilty of professional misconduct, a finding the law society has appealed.
Among their arguments for costs, DeMerchant and Sukonick alleged shortcomings in the LSUC’s investigation.
The recent costs decision noted the lack of “assistance of a corporate and commercial lawyer” to interpret some of the transactions raised at the hearing in the face of assertions by the lawyers that they had followed prevailing practices for external counsel.
“All of the witnesses called on behalf of the lawyers testified that it was usual, with sophisticated corporate client groups, that the external counsel would take no part in commercial negotiations and that the in-house counsel would brief the audit committee on the facts where the audit committee’s approval was sought for a related-party transaction. As it turned out, the law society never called any reply evidence disputing the evidence for the lawyers,” wrote LSUC hearing panel chairman William Simpson.
But Simpson did note: “The fact that there is a general practice does not necessarily mean that the practice is correct; but the fact that it has been adopted widely in Canada and the U.S. must be given significant weight.”
Simpson indicated the panel “received evidence from a number of lawyers . . . that, in dealing with interrelated companies, the usual practice is that outside counsel receives all information on a transaction from the same senior officer or officers, and that outside counsel never gets involved with any of the business or commercial terms. As a result, all testified that there was no conflict of interest.”
Some corporate commercial lawyers object to the idea external counsel wouldn’t be part of negotiations.
“That’s a pretty strong statement,” says Kevin West, founder of SkyLaw PC. “Outside counsel has to be very familiar with the business and commercial terms and very often are negotiating them. It really depends on the situation. There are times when we get much more involved on the business side.”
West says it depends on the size of the company and the significance of the transaction. It also depends on the general counsel and how much transaction experience they have and what the issues are. Audit committees deal with approving financial statements and the general counsel may not have that skillset.
“In my experience, it’s very unique in each situation. I don’t know that there’s a general way to do it. A lot of times, there is a special committee formed and that may or may not be the same people as on the audit committee,” says West.
Where there is a large in-house counsel group, external counsel wouldn’t expect to be dealing directly with the audit committee, says Marion Shaw, head of the corporate finance and securities group at Bull Housser & Tupper LLP in Vancouver.
“I would expect to be advising management and in-house counsel on what their legal obligations are and expect in-house counsel to carry that forward to the audit committee,” says Shaw.
“If your client is a corporate group, you wouldn’t wade into the business dealings between the entities in the corporate group or the related parties.”
Desjardins agrees the lawyer advising the audit or special committee isn’t also involved in the deal. “Otherwise, they are judge and jury at the same time.”
Ultimately, the executive team looks to general counsel for any final recommendations, says Marni Dicker, executive vice president, general counsel, and corporate secretary with Infrastructure Ontario.
“I don’t think the external law firms always have the commercial expertise to make the final recommendations to the audit committee,” says Dicker. “They are operating in a bit of a vacuum. They are focused on the case at hand. The other risks that can arise —business risk, financial risk, reputational risk — those are all items in-house counsel worry abut when making a decision and not only the legal risk.”