Appeal ruling on Hollinger deals includes lots of fodder for commercial lawyers

In upholding the exoneration of two Torys LLP lawyers in relation to transactions involving the Hollinger group of companies, the Law Society of Upper Canada’s tribunal’s appeal panel has not only provided a detailed overview of the allegations at issue, it has also provided guidance on conflicts of interest in commercial transactions.

“The hearing panel’s reasons suggest that there will rarely be a conflict of interest on a transaction if the lawyer advises on legal, and not commercial, issues in a transaction; that general practice in a sector of the legal community may determine the standard for finding a conflict; and that a finding of conflict of interest requires that a lawyer in fact preferred the interests of one client to another. None of these propositions is correct,” wrote appeal panel chairman David Wright in the Feb. 18 decision dismissing the LSUC's appeal of a 2013 hearing panel’s ruling on the issue.

He continued: “We agree with the law society that it is inappropriate to make a general distinction between legal and commercial interests as the hearing panel did. Whether there is a serious or substantial risk of an adverse effect on duties to the client or former client depends on the context, the particular retainer and the work done for both parties. We reject the suggestion that commercial lawyers merely ‘document’ an agreement and that in doing so they can always avoid any conflict between clients or former clients.”

The comments deal with conflict of interest allegations against Torys’ Darren Sukonick and former partner Elizabeth DeMerchant, both of whom were key lawyers on the sale of Hollinger newspaper assets in the early 2000s and who led the firm’s Hollinger work.

As the appeal panel explained, at issue was a related-party transaction involving a dominant figure such as an executive or a controlling shareholder who stands to profit in a different manner from public shareholders, who in this case held shares of Hollinger Inc. Hollinger International Inc., and Hollinger Canadian Newspapers LP. In general, related-party transactions require the approval of independent directors, Wright noted.

Some of the allegations related to the infamous non-competition payments paid by CanWest Global Communications Corp. as part of the deal to buy Hollinger assets. While the deal didn’t spell out the allocation of the $80 million CanWest was to pay, all of it ended up going to Hollinger executives such as Conrad Black as well as the private company, Ravelston Corp. Ltd., in which he held 60 per cent of the shares. Hollinger and Hollinger International received no payment from their participation in the non-competition agreements.

The allegations against Sukonick and DeMerchant included acting while in a conflict of interest by advising on whether the non-competition payments could be non-taxable; providing advice on how to characterize the payments in the books of the related companies; and participating in the preparation of a memorandum to the audit committee after the closing that addressed the fact the initial approval had been improper and recommended approving them again.

On the tax issue, Sukonick at one point suggested it might be possible to split the $80 million for internal purposes to include both the non-competition amount and a break fee to Ravelston.

The law society, Wright noted, argued “that advice on the tax treatment affected the commercial arrangements between the parties on the related party transactions because the tax treatment of the non-compete payments would have affected the bargaining between the parties on the amounts to be attributed to the different entities.”

Wright, however, rejected that allegation, finding the lawyers weren’t in a solicitor-client relationship with the executives.

“The tax advice did not create a solicitor-client relationship between the executives and Torys. The lawyers were representing HI and HII in the transaction,” he wrote.

“There is no evidence or finding that either the lawyers or the executives intended that the lawyers agreed to render legal services for them as individuals, nor that the individuals reasonably concluded they had done so in all the circumstances. They could not have expected that Torys would keep their information confidential or that it would have an equivalent duty to look out for their personal interests as for those of HII. Rather, all of the circumstances suggested that they were giving information about the tax treatment of the payments as part of their retainer to act for HI and HII,” he added.

Wright also noted lawyers may give advice to a company that affects it and its executives as long as they make it clear they’re doing so on behalf of the company rather than the individuals.

In fact, Wright found the two lawyers had taken a strong stance against one of the executives, Jack Boultbee, in regards to a plan to offset debt among the companies that the law society alleged could have resulted in Hollinger International having to pay it twice.

While the law society argued the lawyers acted against Hollinger International in drafting a promissory note, the appeal panel found otherwise and suggested they had, in fact, advised against undertaking the debt offset unilaterally.

“On this transaction, the lawyers strongly stood up when an executive attempted to take actions that impaired the interests of the public shareholders of HII,” wrote Wright.

“It was largely through their insistence that the offset proposal was placed before the HII audit committee, as was required. They held firm against the resistance of Mr. Boultbee and kept a proper focus on the interests of the companies and their shareholders as opposed to the desires of those instructing them.”

While the appeal panel has dismissed the law society’s appeal, still at issue is the LSUC’s appeal and the lawyers’ cross-appeal of the hearing panel’s order of partial costs against the regulator. Last year, the hearing panel ordered $250,000 in costs to each lawyer despite their submission for $4 million.

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