Late last November, just prior to the federal election, the government passed Bill C-55 – omnibus legislation designed to update the state of the law with respect to bankruptcies, insolvencies, and other issues relating to creditors and debtors. In large measure, Bill C-55 will create new priorities for certain creditors, making it imperative that legal professionals who deal with proceedings that involve creditors familiarize themselves with the bill.

The legislative process is actually assisting in this regard. The Senate’s Standing Committee on Banking, Trade and Commerce complied with the government’s timetable, but also unanimously expressed concern about several matters. (The Senate Committee’s report to Parliament is available online). In response, the previous government assured the committee that the bill would not be proclaimed into force earlier than June 30, 2006. Thus, amendments may be made this spring and brought before the committee, which will then be given the opportunity to make a more careful deliberation. Thus, it is expected that stakeholders will have some time in which to consider Bill C-55’s implications.

While certain changes are particular to individuals, such as adjustments in the treatment of student loans and RRSPs, many of the more fundamental changes will largely affect corporate debtors and creditors.

The new legislation is wide ranging. Some of the changes are totally new, some effectively codify existing practice, and some are meant to clean up difficulties that have arisen since the last round of legislative reforms. While certain changes are particular to individuals, such as adjustments in the treatment of student loans and RRSPs, many of the more fundamental changes will largely affect corporate debtors and creditors. The following is a brief overview of the latter.

New Components

Among Bill C-55’s new measures are two that stem from public policy goals. First, publicly traded income trusts with assets in Canada will be made subject to the Bankruptcy and Insolvency Act (BIA) and to the Companies’ Creditors Arrangement Act (CCAA). Secondly, a new type of super-priority will hang over an employer-debtor’s assets to sustain a Wage Earner Protection Program. Under the program, certain employees of insolvent or bankrupt employers will be compensated, generally up to $3,000, on an application to the minister for wages and vacation pay that were owing to them over the six months prior to their employer’s bankruptcy or receivership. The government will then take a subrogated priority claim against the debtor’s “current assets” that ranks ahead of most other claims. Similarly, priorities will also be granted for unremitted pension contributions and certain unpaid employer contributions, but only in the context of bankruptcies and receiverships – not BIA proposals or CCAA proceedings.

Some important changes are particular to the CCAA. For example, the supervisory role of the Office of the Superintendent of Bankruptcy will now cover that Act, where it formerly only had responsibility under the BIA. Also of special interest for the CCAA environment is a new provision for “critical suppliers” (an undefined concept), by which certain suppliers will be subject to the possibility that a court will require their continued supply to debtors – either on terms that are consistent with the prior relationship or on terms that the court considers appropriate in the circumstances. The “critical suppliers” will be given a specially secured position ahead of other secured creditors.

More generally, other noteworthy changes include: creditors’ equity interests will be subordinated (i.e., creditors will be disentitled to claim certain dividends); courts will be prohibited from staying the powers of regulatory agencies; and trustees, receivers and interim receivers will be freed from any exposure to successor employer liability for carrying on the debtor’s business.

Clarifications

Bill C-55 also clarifies certain concepts. For example, subject to a number of qualifications, it sanctions the use of debtor-in-possession (DIP) interim financing during a restructuring, which is a mechanism that the courts have employed. Since the resulting security that is granted under these circumstances takes priority over prior secured creditors, the amendments in Bill C-55 provide certain criteria that a court must consider. Further, in order for the DIP orders to be effective after the initial 30-day stay, they will have to be sought on notice to all of the secured creditors likely to be affected.

Other clarifications include: directors can be removed for unreasonably impairing (or being likely to impair) the arrival at a viable compromise, arrangement, or proposal, or for acting inappropriately as a director; and the court can make an order assigning the debtor’s rights and obligations pursuant to a contract (subject to some exceptions, given certain considerations, and only if the debtor is not in default). Also, it will be clear that trustees are free to sell the assets of a debtor to arm’s-length parties without any approval if the creditors have not elected an inspector.

Alterations

Some components of Bill C-55 are designed to make the bankruptcy and insolvency scheme more efficient. For example, the new legislation ensures that collective agreements will not be susceptible to unilateral termination by debtors, except on motion to a court where it is clear that a voluntary arrangement cannot be negotiated despite good faith efforts. The legislation will allow a court to grant an employer the right to serve a Notice to Bargain only if the current agreement between the parties is truly not viable and if the employer would otherwise suffer irreparable harm. While it appears that the new legislation could have the effect of forcing labour renegotiations, Bill C-55 will grant unions an unsecured claim for the value of their concessions in the restructuring, if they are able to achieve a voluntary agreement.

Another important alteration is an expansion of the trustee’s right to attack dispositions that appear to be preference payments to non-arm’s-length parties or that appear to be transfers at undervalue. Other alterations include: receivers and monitors will have to be licensed trustees; and there will be a lessening of the role of interim receivers, by removing a provision that they may “take such other action as the court considers advisable” and by making the authority of interim receivers specifically time-limited.

Conclusion

Hopefully, it will take time for Bill C-55 to return to the Senate’s Standing Committee on Banking, Trade and Commerce. This would provide provides an excellent opportunity to identify and consider the changes that the bill may create for secured creditors, unsecured creditors and other stakeholders, and the implications that those changes may have on creditors, debtors and other stakeholders. It’s time to start getting those new priorities in order, so that your clients can benefit from the most up-to-date information and advice possible.

Stanley Kershman is a certified specialist in bankruptcy and insolvency law with the law firm of Perley-Robertson, Hill and McDougall LLP in Ottawa. He is the author of Credit Solutions: Kershman on Advising Secured and Unsecured Creditors (Carswell). He is the former Co-Chair of the National Legislation Committee for the Credit Institute of Canada.

A leading authority on solving – and avoiding – financial disasters, Kershman has been helping people get out of debt for more than 25 years. His down-to-earth book, Put Your Debt on a Diet: A Step-by-Step Guide to Financial Fitness, can be found at www.debtonadiet.com and at www.amazon.com.

One of the hot topics in trademark law in Canada is whether famous trademarks should be protected under the Trademarks Act. The Supreme Court of Canada is expected to deliver an answer to this question shortly when it releases it decision in Veuve Clicquot Ponsardin v. Les Boutiques Cliquot Ltée (2003), 28 C.P.R. (4th) 520 (F.C.T.D.); aff’d (2004), 35 C.P.R. (4th) 1 (F.C.A.) and Mattel Inc. v. 3894207 Canada (2002), 23 C.P.R. (4 th) 395 (T.M.O.B.); aff’d (2004), 30 C.P.R. (4th) 456 (F.C.); aff’d (2005), 38 C.P.R. (4th) 214 (F.C.A.).

The current state of trademark law protects marks used in association with a set of specific goods and services. But what about unrelated goods and services? Can an enterprising entrepreneur use the same “famous” trademark, but with different goods and services?

In Canada, the answer has been an emphatic “yes” – the courts have said that there is no protection for famous trademarks per se. Prior to the Clicquot and Mattel cases, the Federal Court of Appeal, in the Lexus case (Toyota Jidosha Kabushiki Kaisha v. Lexus Foods Inc. (2000), 9 C.P.R. (4th)), stated that “while the notoriety of a mark may well be a significant factor to consider…famousness alone does not protect a trademark absolutely. It is merely a factor that must be weighed…If the fame of a name could prevent any other use of it, the fundamental concept of a trademark being granted in relation to certain wares would be rendered meaningless.” Trademark protection has been inseparable from the very goods and services with which the mark has gained its reputation and become distinctive.

What qualifies as a famous mark, and what limitations should there be on famous marks?

In the Clicquot case, the plaintiff sold its “famous” champagne under a variety of trademarks incorporating the word CLICQUOT. The defendant operated a chain of women’s retail clothing stores that carried on business under the names LES BOUTIQUES CLIQUOT and CLIQUOT. The trial judge dismissed the plaintiff’s action, citing no risk of confusion between the respective goods and services and no association between the marks at issue.

In the Mattel case, the plaintiff used its mark with its “famous” BARBIE dolls, while the defendant attempted to register a design mark BARBIE’S (allegedly a short form for barbeques) for use with restaurant services. In allowing the mark to be registered, the court stated that there was no likelihood of confusion between Mattel’s doll and the defendant’s restaurants.

Central to the courts' reasons in those two cases was the issue of confusion. In each case, the court held that there was no connection between the goods and services of the trademark owner and the defendants’ goods and services, and, as such, there was no risk of confusion with consumers. In both cases, the court reasoned that no matter how famous the mark, the trademark owner could not establish a connection that did not exist.

However, in both the Veuve Clicquot and Mattel appeals to the Supreme Court, trademark owners have argued that famous trademarks comprise a select class of trademarks deserving of special protection. The argument is that when it comes to famous marks, no connection or link is required between the goods and services of the respective parties. As a matter of statutory interpretation, the Trademarks Act requires no such connection. Moreover, if a link is required, then such a connection exists, because a famous mark is so well known, with such powerful consumer associations, that the mark transcends any specific goods or services. When a consumer first sees the mark with the unrelated good or service, the consumer’s first impression is to associate the new good or service with the old source.

Mattel also emphasized the vast amount of royalties that resulted from the licensing of the BARBIE mark. Third parties are willing to pay a licensing fee to use the famous mark in order to garner the “instant public recognition and acceptance” that the mark can provide. Mattel argued that the owners of the restaurant had no credible reason for choosing the BARBIE’S mark for its restaurants, implying that it was only the “commercial magnetism” of the mark that led to its adoption by the respondent.

In the recent Lego v. Mega Bloks (Kirkbi AG v. Ritvik Holdings Inc., [2005] 3 S.C.R. 302) trademarks case, the Supreme Court of Canada explicitly recognized that trademarks “have huge economic value and rights” that “may have immense importance to their holders. The operation of the market relies extensively on brands. The goodwill associated with them is considered to be a most valuable form of property.” The fact that the Supreme Court has heard two high-profile trademark cases in a very short period of time is an indication that the court views the development of the law on trademarks as being of significant importance. However, the challenge in the Veuve Clicquot and Mattel cases will likely not be restricted to deciding whether famous marks can be protected, but to providing guidance as to how to protect these types of marks.

If the Supreme Court decides on extending trademark protection to famous marks, that will likely be a challenging step. However, it will be even more challenging to set standards and a workable test on what qualifies as a famous mark, and what limitations there ought to be on famous marks. The experience of protection of famous trademarks by way of a “dilution” cause of action in the U.S. appears to be mixed. The 1996 Federal Trademark Dilution Act (Subsection 43(c) of the Lanham Act), which established the dilution cause of action, will likely be undergoing some change in the near future as a draft bill is being contemplated by the U.S. Congress. Some of the thorny issues that have been raised in the U.S. context include whether there must be actual dilution or a likelihood of dilution of a famous mark, and whether the mark in question must be inherently distinctive.

Finally, the existence of protection for famous marks does not necessarily guarantee success. In the U.S., Mattel sued MCA Records Inc. over the song “Barbie Girl” by a Danish music group, Aqua. In that case, Mattel claimed that the use of the BARBIE mark and the airing of the song during cartoon time slots amounted to infringement and dilution of its famous BARBIE mark. However, the 9th U.S. Circuit Court of Appeals rejected Mattel’s argument, setting out that the song was protected by the U.S. First Amendment rights to free speech. The U.S. Supreme Court refused to hear the appeal.

Henry Lue is a partner and Ahmed Bulbulia is an associate at Dimock Stratton LLP in Toronto, a leading Canadian intellectual property firm.

The current "flavour of the month" in competition law circles is "convergence," the notion that the interests of both government authorities and private parties are best served by having common enforcement principles and procedures applied consistently across jurisdictions.

"Cartels are a silent extortion that …steal billions of dollars both here and abroad from business, from taxpayers, and ultimately from you and me as consumers in higher prices." – Graeme Samuel, chair of the Australian Competition and Consumer Commission.

There’s still a long way to go before this goal is achieved, assuming that it can be accomplished at all. However, one area in which convergence is becoming more of a reality is with respect to anti-cartel enforcement. There is a wide and ever-growing consensus among competition law authorities about the harm caused by cartels and about the best ways to detect and prosecute them.

The views expressed in a recent speech by Graeme Samuel, chairman of the Australian Competition and Consumer Commission, reflect the received wisdom on the pernicious effects of cartel behaviour:

"Cartels are a silent extortion that …steal billions of dollars both here and abroad from business, from taxpayers, and ultimately from you and me as consumers in higher prices. By controlling markets and restricting goods and services, cartels can put honest and well-run companies out of business while protecting their own inefficient members and stifling innovation."

Key Trends

Three aspects of the global effort against cartels are particularly noteworthy as ongoing trends:

Tougher Penalties

The exposure to penalties for cartel participants continues to escalate, as authorities attempt to ensure that the risks of anti-competitive conduct outweigh any potential rewards. Record fines are being imposed, laws requiring stricter sanctions are being enacted or proposed, and punitive measures increasingly are being used to target individuals, whether through financial penalties, imprisonment (especially in the U.S.) or enforcement steps such as "border watches" and extradition.

Leniency/Amnesty/Immunity Programs

The name used to describe these programs may differ from jurisdiction to jurisdiction, but the objective is the same: to induce cartel participants to "blow the whistle" on each other by holding out the prospect of complete immunity from prosecution for the first party to come forward to the authorities. These programs are now viewed as an essential aspect of effective anti-cartel enforcement, and the number of jurisdictions utilizing them continues to increase. In the last year alone, competition authorities have adopted leniency programs – or announced the intention to adopt one – in Japan, Spain, Denmark, Austria, Mexico and Greece. In addition, existing programs have been updated in jurisdictions such as Australia, the European Union, Germany and the United Kingdom.

International co-operation

At one time, international cooperation in competition law enforcement was regarded with suspicion, as simply another way for the U.S. to extend the "long arm" of its antitrust statutes extraterritorially. Now, however, cross-border co-ordination is being embraced as an irreplaceable aspect of the war against cartels, which often operate on a multi-jurisdictional basis. This co-operation takes place through both formal agreements and informal coordination amongst authorities. It also involves the exchange of practical know-how between officials in organizations such as the International Competition Network, which provides a forum for competition authorities to address issues of common concern (the ICN's motto: "all competition, all the time").

Canada plays its part

Canada has been a leading and enthusiastic participant in the anti-cartel wave. (In fact, as we Canadians like to remind everyone, our criminal prohibition against cartels actually predates the American law by one year.)

The Canadian Competition Bureau has made it clear that combating domestic and international cartels (usually called "conspiracies" in Canada) is a top enforcement priority. As a reflection of this commitment, there have been more than 70 convictions for cartel-related offences in the last decade, involving aggregate fines of over $230 million. Just recently, record fines for a domestic cartel were imposed on the participants in a conspiracy relating to the distribution of carbonless sheets.

There are also an increasing number of cases in which individuals have been penalized, not just corporate offenders. Individual penalties still largely involve the imposition of fines rather than jail sentences. However, the Bureau is obviously aware of the experiences in other jurisdictions, and it will not come as a surprise if, at some point, the Bureau seeks to imprison an individual defendant as well.

As with other competition authorities, the Bureau points to its own "Immunity Program" as an important element of its success in obtaining cartel convictions. The Bureau's program is loosely modelled on the American version, and is also broadly similar to the programs in place in other jurisdictions – the key aspect being an offer of immunity to the first (but only the first) party to provide evidence of an offence. The Bureau has just launched a consultation process in an effort to further revise and improve this program.

Canada is also a party to several state-to-state treaties and inter-agency agreements designed to promote and facilitate cooperation in cartel investigations (among other things). It also has developed effective informal ties with authorities in other jurisdictions. A recent and well-publicized example of the type of cooperation this generates took place in February 2006, when the Canadian Competition Bureau, Korea's Fair Trade Commission, the European Commission, and the Antitrust Division of the U.S. Department of Justice conducted co-ordinated investigations into the cargo operations of certain airlines.

In short, it is a risky proposition to engage in cartel conduct in Canada (or affecting Canada). And the stakes will only get higher if the Bureau has its way. Recently, the Bureau sought to increase the fines for engaging in unlawful conspiracies from $10 million to $25 million per count, and it has proposed transforming the conspiracy offence into a "per se" offence, eliminating the need to prove a negative ("undue") impact on competition. Although these specific measures are controversial in Canada and have yet to be adopted, it is clear that enhancing its ability to tackle cartels remains high on the Bureau's enforcement agenda.

Mark Katz is a partner in the Toronto office of Davies Ward Phillips & Vineberg LLP, where he is a member of the firm's competition and international trade law group. 

Summary

Directors’ and officers’ exposure to personal liability has increased significantly thanks to recent legislative changes, judicial decisions and the advent of class action litigation. Any vestiges of the “prestige value” associated with board appointments today are significantly moderated by the prevalence of actions against corporations, which also target the board and officers.

Recent corporate governance requirements in securities legislation have increased the personal liability exposure of directors and officers with respect to financial disclosure, including liability for misrepresentation. Now that the disclosure of corporate governance practices has been made mandatory, and various stakeholders are more informed of the corporate governance practices of public companies, it may accentuate the potential for claims involving directors’ and officers’ liability.

Institutional activism and regulatory and prosecutorial practice are combining to produce more administrative actions and claims against directors and officers.

Institutional activism and regulatory and prosecutorial practice are combining to produce more administrative actions and claims against directors and officers. Legislative penalties for non-compliance have also increased in a number of areas. Media interest in high-profile company problems and directors' and officers' issues generally can result in significant reputational damage, regardless of the actual results of any legal proceeding. The high cost of litigation, particularly class-action litigation, and other variables in a litigation environment, including concerns about the availability and extent of directors and officers insurance coverage, tends to create a bias towards settlement, which itself may encourage more class action claims.

Corporate governance requirements also provide guidance to directors and officers as steps that may be taken to better manage such risks. To some extent, good governance practices, whether required or recommended, also have the indirect, although perhaps unintentional, effect of limiting liability for directors and officers.

Although these comments refer to directors, the same considerations apply equally, if not more so, to corporate officers. Generally, the officers are those people responsible for the day-to-day management of the corporation. The definition of officers in the Alberta Business Corporations Act, for example, is quite broad, and generally covers executives with various titles appointed by the board.

Directors are precluded from delegating certain authority to officers. Directors may also be officers, such as the CEO and chairman. Officers are generally judged by the same standards of conduct as directors. Individual officers clearly face additional challenges because of their reporting relationships and responsibilities. The absence of civil protection for whistleblowers in Canada, other than the provisions of the Criminal Code, and creates additional concerns for officers who may wish to distance themselves from the inappropriate conduct of others.

A great deal of time and attention, not to mention corporate funds that could have been used elsewhere, has been expended on corporate governance-related requirements in recent years. For many public companies, with operations in multiple jurisdictions, the commitment in effort and scarce resources has been extreme. It’s difficult for many to believe that this investment will achieve all its intended policy objectives, let alone benefit shareholders.

However intangible the return on this investment for the corporation in the short term, directors and officers should remember that corporate governance requirements provide opportunities for better managing risks that threaten the profitability, if not the continued existence, of the corporation. These potential benefits accrue to any corporation that effectively implements these requirements or best practice recommendations, regardless of ownership.

Court decisions on directors' and officers' liability offer behavioural guidance. But they should not be allowed to create a false sense of security, because they often reflect a historical context and not the increasing expectations of various stakeholders. Regulators must address not only current public sentiment, but also the continuing needs of the broader international market economy; regulators are perhaps less concerned about the costs and benefits of these requirements for corporations.

In reality, many corporate governance requirements directed at creating and protecting shareholder value and broader market behaviour issues also have the benefit of protecting directors and officers from personal liability. Directors and officers are encouraged to adopt these practices out of enlightened self-interest, if performance of their statutory duties, the greater public good, or regulatory necessity is not enough.

This article is a summary of the full version of Kerry C. Day’s article on avoiding liability, originally delivered as part of a continuing legal education program presented by the Legal Education Society of Alberta (LESA). Reprinted with permission of the author and LESA. The full version is available in PDF format.

In the absence of a contractual provision to the contrary, an employee can be terminated for just cause or, in the absence of just cause, upon being provided with reasonable notice or pay in lieu of reasonable notice at common law. Although determining the period of reasonable notice is said to be more art than science, from the earliest times our courts have tried to provide some guidance on the factors that should be taken into consideration in making this determination. The most often-cited case in this area is Bardal v. Globe & Mail Ltd., where McCruer C.J.H.C., stated:

"There can be no catalogue laid down as to what is reasonable notice in particular classes of cases. The reasonableness of the notice must be decided with reference to each particular case, having regard to the character of the employment, the length of service of the servant, the age of the servant and the availability of similar employment, having regard to the experience, training and qualifications of the servant."

New criteria have since crept into mix, while others have fallen out of favour. In fact, one author outlines 105 different factors that have been considered by the courts in determining the notional period of reasonable notice. In the end, all things being equal, the object of the damage assessment is compensatory; that is, to restore the employee to the financial position he or she would have been in had the employer provided the appropriate notice.

Should courts calculate the period of reasonable notice to which an employee is entitled if dismissed without cause by using the rule of thumb that one year's service equals one month's notice?

In the 1999 case of Minott v. O’Shanter Development Co. (1999 CanLII 3686 (ON C.A.)), the Ontario Court of Appeal, in reviewing the trial judge’s determination regarding reasonable notice, held that no two cases are identical. Most cases yield a range of reasonableness. In each case, trial judges must “weigh and balance a catalogue of relevant factors,” and “there is no one ‘right’ figure for reasonable notice.” This being the case, a court of appeal should only intervene where the trial judge’s assessment falls outside of the “acceptable range, or unless, in arriving at the figure, the trial judge erred in principle or made an unreasonable finding of fact.”

From time to time, litigants try to argue for “scientific” or a “rules-based approach” to notice determination. Our courts have not been quick to embrace such an approach, as demonstrated by a couple of recent decisions.

Is there a “Rule of Thumb”?

On occasion, employers and employees looking for some formulaic basis for determining the period of reasonable notice, raise the “month-per-year-of-service” rule. They ask whether it’s true that an employee is entitled to one month of notice of termination per year of service. The issue has been considered by the courts, which have, with some exceptions, generally rejected this approach to notice determination. This should not be surprising since, as mentioned previously, “no two cases are identical” and, further, determining the period of reasonable notice is more “art than science.”

But “certainty” and “predictability” are not easy to shake off, and, the “rule of thumb” continues to be discussed from time to time. While there are cases where a month (or more) per year of service represents the appropriate period of reasonable notice of termination, the courts have clearly said that this determination is to be made with regard to the particular circumstances of each case, and that rules of general application are, by their very nature, contrary to the concept of reasonable notice.

The Ontario Court of Appeal, for example, squarely considered the following issue in Minott:

… Should courts calculate the period of reasonable notice to which an employee is entitled if dismissed without cause by using the rule of thumb that one year's service equals one month's notice?

The court held that the “rule of thumb” approach is deficient and inappropriate, and is contrary to, for example, the more fluid and flexible approach first enunciated in Bardal. In fact, the court held that the trial judge erred by using the month per year of service “rule” as a starting point for determining the appropriate period of reasonable notice.

The vast majority of common-law courts have rejected this "rule," preferring assessments based on the traditional Bardal criteria. This has been reinforced by empirical studies that revealed junior employees tended to receive in excess of one month per year of service, and senior employees tended to receive less than one month per year of service. That being the case, the practice of providing one month per year of service was in fact accurate only for mid-service employees.

As the court stated in Minott, the “rule of thumb” is defective, because it puts unwarranted emphasis on one of the Bardal factors (“length of service”) at the expense of all of the others, while introducing a measure of rigidity into an exercise that should be fluid and flexible having regard to the particular circumstances. Although it might be argued (with some merit) that this undermines the goals of predictability, certainty, and consistency, it can also be argued that the very nature of the period of reasonable notice requires an approach that is neither predictable, certain, or consistent.

Is there a reasonable notice cap in Ontario?

On occasion, particularly when terminating the longer service employee, questions are raised about whether there is a reasonable notice “cap” or “upper limit.” The Ontario Court of Appeal recently discussed this issue at some length in the Lowndes v. Summit Ford Sales Ltd. This case involved the termination of a 59-year-old general manager of a car dealership with some 28 years' service. The trial judge determined that the appropriate period of reasonable notice of termination was 30 months. The employer appealed, arguing that the trial judge’s determination of the period of reasonable notice was excessive and ought to be overturned.

The Court of Appeal agreed with the employer. Although the Court of Appeal found that the trial judge had identified the correct legal principles for determining the period of reasonable notice (including that it was an "art, not a science"), the court disagreed with the judge’s application of those principles to the facts. The Court of Appeal reduced the notice period, noting that:

Although it is true that reasonable notice of employment termination must be determined on a case-specific basis and there is no absolute upper limit or "cap" on what constitutes reasonable notice, generally only exceptional circumstances will support a base notice period in excess of 24 months: see  Baranowski v. Binks Manufacturing Co., [2000] O.J. No. 49 (S.C.J.) at para. 277 and Rienzo v. Washington Mills Electro Minerals Corp., [2005] O.J. No. 5126 (C.A.).

The trial judge did not consider whether such "exceptional circumstances" were present, and that was a reversible error. The court reduced the notice period from 30 months to 24 months.

To draw a sports analogy, there doesn't seem to be a "hard cap,” but rather a “soft cap,” on reasonable notice. The Lowndes case emphasizes what Canadian courts have generally accepted as a governing principle – that the maximum notice period that should normally be awarded in wrongful dismissal cases is 24 months.

Conclusion

Our courts have preferred a fluid, rather than formulaic or rigid, approach to determining the period of reasonable notice. In reality, though sometimes frustrating due to a lack of certainty and precision, this is really the preferred approach and one that is consistent with the individualized nature of the determination of the period of reasonable notice. It seems unlikely, given recent judicial pronouncements, that the courts will embrace a “reasonable notice by rote” approach any time soon.

Michael Fitzgibbon is a partner at the national law firm of Borden Ladner Gervais LLP, where he practices management-side labour and employment law. He runs the labour law blog Thoughts from a Management Lawyer.

Mergers and acquisitions are back! If 2005’s strong resurgence of M&A activity in Canada continues, 2006 M&A activity is likely to be brisk. This is a list of the top trends that emerged last year.

1. Hostile bids

In the last seven years, about 70 hostile bids were made in Canada. Yet in the last four months of 2005 alone, nine hostile bids were launched. Although low interest rates, available cash from private equity firms/hedge funds, and a worldwide increase in demand for resources have fuelled the M&A surge generally, these factors alone do not appear to explain the explosion in hostile bids. Other possible factors fuelling this activity:

• a favourable regulatory environment
• bids forcing a target into play
• personality clashes

Hostile bids are still risky. Although most hostile bids result in some form of transaction, there is no guarantee the hostile bidder will succeed, nor that the target will be forced into play and a white knight will emerge.

2. Private equity and hedge fund participation

In recent years, private equity and hedge funds have raised large amounts of capital and, with substantial amounts to invest, are looking for acquisitions. Generally, funds also have a lower cost of capital than strategic buyers and are experienced dealmakers. And in many cases, they are in a better position to obtain quick competition approval because they have no existing assets in the target industry. These factors can make them formidable adversaries in an auction and, in recent years, funds have tended to outperform strategic buyers in some sectors.

3. Income funds

Income funds have become attractive targets, both to other income funds and to corporate and other acquirors. Existing income fund structures are sufficiently flexible to permit significant mergers and acquisitions.

4. Break fees

Break fees have become a standard feature of negotiated (friendly) takeover transactions. Break fees are intended to compensate the bidder for the risks it faces in putting an offer on the table and possibly triggering an auction for the target. If an auction has already been conducted, a seller’s board can more easily justify a break fee because the seller has already canvassed the market.

5. Reverse break fees and auction strategies

A reverse break fee involves the bidder paying a fee to the target. With the active participation of private equity/hedge funds in M&A transactions and the tendency to use an auction, strategic buyers may increasingly be forced to address regulatory risk to remain competitive, using reverse break fees and other strategies — for example, agreeing to a “hell or high water” clause, under which the bidder agrees to assume any regulatory risk or obtaining regulatory approval in advance.

6. Key court decision signalling greater deference to board

The 2005 Delaware Court decision in In re Toys “R” Us, Inc. Shareholder Litigation signals that the pendulum in the U.S. is swinging back to a more deferential view of board decisions (as it is in Canada). The board had used experienced external advisers, had reviewed the logical options for the company, had come to reasonable conclusions regarding the best alternative to pursue, and had implemented a process that demonstrated due care. The process followed in this case made it relatively easy for the court not to interfere with the business judgment of the board.

7. Continued focus on conflicts: stapled financing, special committees and financial advisory fees

Despite the greater deference to boards signalled by Toys “R” Us, we continue to see investors, courts, and regulators scrutinizing transactions closely for evidence of conflicts.

Stapled Financing

The Toys “R” Us case creates no prohibition against stapled financing, but companies and their bankers must demonstrate a reasonable need for such financing and ensure that adequate precautions (such as firewalls) have been taken to protect against conflicts. With appropriate attention to the inherent conflicts, a board can be justified in offering all potential buyers stapled financing at the commencement of an auction.

Special Committees

The trend is clearly for boards to establish a special committee of independent directors to consider any change-of-control transaction, and to do so in a majority of transactions even where a conflict is not immediately apparent as a precaution against subsequent criticism. However, it is not always necessary or desirable to establish an independent committee and, even when it is warranted, the committee’s processes need not completely exclude management involvement. But it is important that the committee has opportunities to deliberate without management present.

Financial Advisers’ Fees

Financial advisers’ compensation depends upon the type of transaction ultimately concluded. In some cases, fee structures can be problematic. If an adviser receives an additional fee for concluding a transaction with a particular party, there may be an appearance of bias in favour of that transaction.

In Canada and the U.S., we have seen increasing investor criticism of financial advisory fees in M&A transactions, and we expect continued scrutiny of the role of financial advisers in these deals. Any engagement letter should be carefully structured to ensure that the financial adviser’s incentives are aligned with the company’s and that no financial incentive will taint the process.

8. Shareholder lockups

In Canada, in two high-profile instances, a potential buyer locked up major shareholders without simultaneously making a bid for the entire company. In both cases, the buyer took advantage of the availability of a significant block of shares to push the company into negotiations.

9. MAE conditions

We expect “material adverse effect” (MAE) clauses to receive increased attention when M&A transactions are being negotiated. The question whether a party can exercise an MAE condition in any given circumstance is highly uncertain and fact-dependent. No leading Canadian cases have considered the effect of MAE clauses, but parties can look to U.S. court decisions as some indication of how the concept might be interpreted in Canada.

10. Greater focus on foreign investment review?

The protectionist attitude that has arisen in the U.S. toward foreign acquirors may also arise in Canada in the future. In recent years, foreign investment review in Canada has not posed a significant impediment to M&A deals.

Philip Brown (philbrown@torys.com) practises corporate and commercial law, with an emphasis on mergers and acquisitions and innovative corporate finance transactions with Torys in Toronto. Sharon Geraghty (sgeraghty@torys.com) practises in the areas of mergers and acquisitions, corporate governance, private equity and securities law.

In February, Canadian technology giant Nortel agreed to pay a staggering US$2.4 billion in a tentative settlement with aggrieved shareholders in two securities fraud class action suits. Another Canadian colossus, the Ontario Teachers’ Pension Plan Board (OTPPB), was front and centre in the fight as a court-appointed co-lead plaintiff.

At the time of the settlement — which is still conditional on Nortel’s ability to reach a global settlement on all shareholder class actions suits — OTPPB president Claude Lamoureux fired a warning shot at all the companies in which the fund has invested billions of dollars.

OTPPB, he said, will go to whatever lengths it needs to recover monies lost by shareholders due to management misconduct. “We have a fiduciary duty to the active and retired Ontario teachers for whom we invest to press the companies we invest in to deliver shareholder value,” said Lamoureux. “As this suit illustrates, we are prepared to act when necessary.”

But what’s really interesting about the case isn’t so much the huge sums of money. It’s that this landmark lawsuit between two Canadian behemoths was fought on American soil — primarily because there was no legislation in any Canadian jurisdiction that overcomes common-law stumbling blocks when bringing shareholder class action suits. That is, until now.

On Jan. 1, Ontario proclaimed into law Bill 198, an omnibus bill that included amendments to the Securities Act. Those amendments effectively opened the door to shareholder class action suits for misrepresentations and non-disclosures made in the secondary market, including through press releases and annual or quarterly filings.

Other provinces may soon follow Ontario’s lead — Quebec legislation already allows for shareholder class actions, but numerous conditions set a very high threshold.

Combine that with limited potential for damages and some quintessentially Canadian jurisdictional issues, and a picture emerges of a litigation bar and bench holding their breath to see which how it all pans out, but not expecting an American-style explosion of shareholder class actions in Canada.

The new law’s effects

Bill 198 does provide plaintiff-side lawyers with some new swords for their shareholder class action sheaths. At the same time, the legislation gives defence lawyers a number of shields to protect their clients.

Bill 198 introduces the concept of “fraud on the market” to Canada, by eliminating the need for plaintiffs to show that investors relied on misrepresentations when buying or selling their shares. That has long been a bone of contention in the few shareholder class actions suits that have been brought in Canada. The bill also expands the scope of liability to new players, including investment banks, analysts, and accounting and law firms.

So far, so good, for the plaintiffs — but the defence has been given an impressive arsenal, too.

For example, to bring a shareholder class action for misrepresentation, plaintiffs must first obtain leave of the court — and, as set out below, that will be challenging. There are also caps on damages, distinctions between misrepresentations in oral statements and documents, and distinctions between “core documents” and non-core documents.

There are also various defences that corporations can wield to defend charges of misrepresentation, including a “reasonable investigation” shield. As well, proportionate liability — as opposed to joint and several liability — limits the extent to which damages will apply to different parties complicit in the wrongdoing.

Skeptical reactions

Accordingly, the plantiffs' bar can perhaps be forgiven for a lack of enthusiasm about Bill 198’s effects. Toronto class-action plaintiffs’ lawyer Joel Rochon of Rochon Genova LLP, whose firm is involved in a Canadian Nortel class action, calls the Ontario reforms a “massive compromise.”

Rochon says Bill 198 was a missed opportunity for the provincial government to “provide access to justice to shareholders and to ensure corporate accountability." In the end, he says, "corporate interests have dominated the legislation, and there is virtually nothing but tokenism left for the average investor.”

British Columbia lawyer Ward Branch, a class action lawyer at Branch MacMaster in Vancouver, agrees that Bill 198 creates “some real hurdles” for plaintiffs. He notes in particular the requirement that a plaintiff obtain the court’s leave before launching a lawsuit for misrepresentation or non-disclosure.

But at least one lawyer expects Bill 198 to spawn more litigation, despite a certain degree of unease over the result. “I am probably at the philosophical other side of most lawyers,” says Alan Lenczner of Lenczner Slaght Royce Smith Griffin LLP in Toronto. “I think [shareholder class actions suits] is a growing area, and I don’t necessarily think this growth is good. I don’t necessarily think it’s doing any social good.”

“Strike suits” are class actions filed against companies shortly after they experience a negative corporate event, such as missing their earnings projections or announcing they will restate their financial figures.

Plaintiffs’ and defendants’ lawyers rarely agree, but few defence litigators think Bill 198 is a plaintiffs’ panacea either. Deborah Glendinning of Osler Hoskin & Harcourt LLP in Toronto says that “leave to bring an action is a very unusual circumstance. Given Bill 198, clearly shareholder class actions are going to be more difficult to certify than any other class action.”

Glendinning also notes that the reforms “contain some due diligence defences and provide a safe-harbour mechanism for forward-looking statements.” They include requirements like a reasonable investigation: if a company can show that before making a misrepresentation or failing to make a timely disclosure, it conducted a reasonable investigation, then it can negate liability.

There’s also an opportunity for defendants to rebut the deemed reliance, so that if a defendant can show a plaintiff acquired or disposed of shares knowing about the misrepresentation or material change, there is no liability. “That is going to be an interesting area of inquiry,” she predicts.

Lenczner adds that “the courts aren’t going to allow lawsuits to go ahead where there’s an error of judgment on the part of management. I think the courts are going to defer to management’s judgment.”

Combine recent reforms with limited potential for damages and some quintessentially Canadian jurisdictional issues, and a picture emerges of a litigation bar and bench holding their breath to see which how it all pans out, but not expecting an American-style explosion of shareholder class actions in Canada.

Glendenning defends the legislation against the attacks of plaintiffs’ lawyers, saying it tries to strike a balance between protecting shareholders and dissuading frivolous litigation. “There’s some really encouraging stuff in Bill 198 that prevents us from being a haven for securities ‘strike suits,’ that we’ve seen across the border.”

Critics say such suits are a form of corporate blackmail, and that many companies simply opt to settle, rather than fight, even when they have a good defence. That’s because they don’t want their corporate image dragged through the litigation machine. Glendenning says Ontario legislators took “note of some of the damage done in the U.S. and are trying to prevent the same thing from happening here.”

So, is Canada on the cusp of a new era in corporate litigation that will put both the plaintiff and defence bars into overdrive? The answer, from most plaintiff and defence litigators interviewed for this article, is: Don’t bank on it.

Jim Middlemiss is a freelance business and legal affairs writer based in Toronto. This is an excerpt from a longer article appearing in this month’s National magazine. Read the full version in the digital version of the June/July issue.