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CCCA_V4No2_IMAX-FIN.qxd:CCCA_V1No1_DriversSeat-FIN.qxd 4/29/10 4:31 PM Page 35 work in every instance; in fact, there are some serious risks asso- potential to survive the motion for certification. Feature ciated with this approach.” “In Bre-X, the key issue was whether you could bring a com- In fact, points out Laing,“now that we have the super-impo- mon law fraud on the market case in Canada and the court said sition of a leave requirement before someone can even com- you could not. In IMAX, the judge allowed the case to proceed, mence an action, and in opposing leave a defendant could but questioned whether it would ultimately succeed,” says Alan expose itself to very invasive documentary production obliga- D’Silva, a partner with Stikeman Elliott LLP. tions, everyone needs to think seriously, when they are faced But the fact that IMAX “got past the first hurdle means that with one of these leave applications, as to whether they should corporate counsel need to deal with the possibility and take this be consenting to it. into account in dealing with the exposure,” says D’Silva, a class “As the IMAX decision has shown us, the threshold for action defence lawyer who “has been defending eight of the 15 obtaining leave is very low for a plaintiff so there may not be a active secondary market class actions.” lot to be gained for a defendant in opposing leave and in fact there may be a lot to lose,” she adds. Reviewing your insurance defendant files affidavits in opposition to the leave application, it 5 “My No. 1 piece of advice for in-house counsel is to As a result, in-house counsel should consider that “when a review your D&O insurance,” says D’Silva. may be opening the door to very extensive cross-examination “In many cases where we are defending a securities class on the merits of the claim being advanced against it,” she says. action, or even before that, one of the critical issues we are see- In Laing’s view, “this is really quite extraordinary.You could ing is that corporations either have inadequate D&O insurance, have a situation where permission has not yet been obtained the wrong insurance, or their insurance coverage does not go far from the court for the action to even be commenced. enough,” he says. “Yet all of a sudden you can be asked for all kinds of highly For example, in terms of inadequate coverage,“the company sensitive,confidential documents and information that you would may have $100-million worth of exposure and $10-million not otherwise have to produce until perhaps many months or worth of insurance,” he says. even years after the litigation has actually been commenced… Or, the company “may have coverage that doesn’t go far and not at all, if you succeed in defeating certification.” enough in that they are missing a very important piece of cov- One of the issues is that “in the normal course of a class pro- erage. This is “entity insurance” which also covers the company, ceeding, the discovery process occurs after certification is grant- and often doesn’t cost them any more money,” he adds. ed,” points out Laing.Yet in this type of proceeding,“in contrast, D’Silva has also seen instances where the corporation “may if the potential defendant opposes the leave application by filing have the wrong type of D&O insurance because, “it may be a an affidavit, a plaintiff may be able to demand extensive docu- U.S.-based insurer that has given them a policy based on U.S. ment production and come up with creative new claims that law that does not cover what is required in Canada.” they may not have had any basis to assert until they had the Based on what he has seen, D’Silva suggests that in-house opportunity to review the documents.” counsel “make sure their insurance broker is sophisticated “This is a legitimate concern. If in-house counsel are faced enough to understand securities class actions and have your with an application for leave to commence a securities class external counsel review your D&O policies.” action under Part XXIII.I, they need to resist the automatic “When you look at the numbers and the kinds of exposures impulse to fight it,” she says. that some of these cases have — in the millions of dollars — it’s [In-house counsel] “need to weigh the prospect of leave being very important to have the right D&O coverage,” he points out. denied, which will be low in most cases, against the potential downsides of being forced to make early documentary disclosure. Vetting ALL core documents uncover ‘support’ for even more threatening claims, the associat- 6 In-house counsel need to expand the range of docu- “These downsides include the risk that the plaintiff will ments vetted. ed legal costs, and the demand on internal company resources “Public issuers should not only be focusing on vetting and that large-scale documentary production can entail. In many verification of core documents such as financial statements, cases it just won’t be worth it,” says Laing. prospectuses, or bid circulars, which I think everyone has always understood have to be absolutely accurate,” says Laing. Now, documents that might not have been paid the same kind 4 Forward planning for possible exposure of attention in the past can also be the source of very threatening In-house counsel need to understand the potential expo- sure to a common law claim, at least a claim that has the lawsuits,she says.Press releases,for example,are something issuers ÉTÉ 2010 CCCA Canadian Corporate Counsel Association 35