On February 4, 2003, the Quebec Superior Court dismissed an action instituted by a group of investors in a limited partnership against two law firms and a trust company. The plaintiffs alleged that it was the responsibility of the defendants to stop the closing and to reimburse the subscription amounts held in trust since certain conditions precedent to the distribution of securities provided for in the prospectus had not been met.
The problem arose as a result of an interest-free loan granted by the Société de développement industriel (SDI) to the owner of a hotel to be purchased by the limited partnership not being transferred in time for the closing. The SDI board of directors were not scheduled to meet until after the closing. The parties decided to close the deal on the basis of a comfort letter signed by SDI’s assistant general, stating that to his knowledge and on the basis of the information provided, there was no reason for the board to refuse the transfer of the loan to the limited partnership. The board later decided not to authorize the transfer of the loan claiming that the promoters of the project were making too large a profit on the sale of the hotel to the limited partnership.
In her ruling, Justice Louise Lemelin examined the role of securities lawyers and trust companies in the context of a closing pertaining to the distribution of securities. The court held that: (1) there was nothing in the prospectus stating that the securities lawyers involved were to issue an opinion at the closing to the effect that the conditions precedent thereto had been met; (2) the investors were not clients of the securities lawyers; (3) although the distribution of securities is generally governed by The Quebec Securities Act and the regulations adopted thereunder, the provisions of which are of public order, the securities lawyers have no duties towards the public in general unless they issue erroneous opinions or participate in the making of false representations contained in the prospectus; (4) the plaintiffs were unable to find any provisions of law including the lawyer’s Code of Ethics, thereby creating a legal duty for securities lawyers to advise the public in similar circumstances; (5) the first duty of a lawyer is towards his or her client. More particularly, securities lawyers must be in a position to advise their clients that the prospectus is in conformity with the requirements of the law and of the Securities Commissions and to provide their clients with all necessary explanations so that they are in a position to understand the issues relevant to the services being provided; (6) the mere fact that a securities lawyer is drafting a prospectus does not mean that he or she is responsible for the execution of the conditions contained in the prospectus; (7) a securities lawyer is not the guarantor of any business decisions taken by his or her client, but is simply a professional mandatory; and (8) a trust company, acting as a mere depositary, has no other legal obligations than to ensure the safekeeping of the funds pending the distribution of the securities under the prospectus until the date set for the closing when the securities are being issued, and that nothing in the prospectus or in the Act and the Regulations adopted thereunder created any additional obligation on the part of the trust.
The court further held that the plaintiffs, the group of investors, were being represented in the context of the closing by the general partner pursuant to a power of attorney contained in the contract of subscription and noted that it was the general partner who made the decision to proceed to the closing. On the basis of the evidence adduced at trial, the court concluded that the general partner had not been negligent in doing so and added that all the participants in the closing and not simply the professionals involved had acted in good faith at the time, in the belief that the approbation of the transfer of the interest-free loan by the board was a mere formality. The internal documentation of SDI showed, in fact, that all the employees of SDI in charge of this particular matter had recommended to the board that the loan be transferred to the limited partnership.
The defendants were represented by J. Vincent O’Donnell, Q.C., and Bernard Larocque of Lavery, de Billy; Hélène Lefebvre of Ogilvy Renault; Jacques LeMay of Flynn, Rivard; and François Beauchamp of DeGrandpré Chait. The trust company was represented by Pierre Grenier and Margaret Weltrowska of Fraser Milner Casgrain LLP. Daniel St-Pierre and Benoit Trotier of Pouliot L’Écuyer acted for the 108 plaintiffs.
The case has been appealed to the Quebec Court of Appeal.