Vicarious Director Liability?

Summary:

The Ontario Superior Court of Justice recently released its summary judgment motion decision in Allen v. Aspen Group Resources Corporation.1 This decision has opened the door to legal partnerships being found vicariously liable for the acts of a partner in his or her capacity as an outside director or officer.

Facts:

Aspen Group Resources Corporation completed the take-over of Endeavour Resources Inc. pursuant to an offer and take-over bid circular ("Circular") dated November 23, 2001. Wayne Egan, a partner at WeirFoulds LLP, acted as counsel for Aspen in the preparation of the Circular. Mr. Egan was also one of Aspen's directors.

Endeavour's security holders alleged that Aspen made misrepresentations or failed to disclose material facts in the Circular and that they were entitled to a statutory remedy for misrepresentation pursuant to section 131 of the Ontario Securities Act against the directors of Aspen. On December 4, 2009, the Endeavour security holders were certified as a class action.

The plaintiff also claimed that WeirFoulds was negligent in the preparation of the Circular and failed to ensure that it disclosed material facts. In addition, the plaintiff alleged that WeirFoulds LLP was liable for Mr. Egan's negligence and breach of s. 131 of the Securities Act.

One of the issues raised in the summary judgment motion was whether WeirFoulds LLP was vicariously liable for Mr. Egan's liability, if any, under the Securities Act.

The Decision:

The motion for summary judgment on the common law negligence issue was dismissed. Justice Strathy concluded that determining whether a duty of care existed is a complex, nuanced and important question. He held that he was unable to obtain a full appreciation of the evidence or fairly resolve this issue without a trial.

In reviewing the motion for summary judgment on the statutory remedy issue, Justice Strathy reviewed the purpose behind s. 131 of the Securities Act. This section provides the security holder of an offeree with a cause of action for misrepresentation against an offeror's director where a take-over bid circular is sent to its security holders. Justice Strathy, in his review of the history of s. 131 of the Securities Act, noted that its purpose was to protect the interests of shareholders of the offeree by ensuring that they received adequate time, adequate information and equal treatment from any bidder. To ensure that directors of the offeror exercise reasonable diligence in...