Law Times

Law Times • augusT 10/17, 2009 NEW An online resource tool 1.800.263.3269 Bestcase earlug.indd 1 3/26/08 11:52:01 AM Focus On CORPORATE/COMMERCIAL LAW Two cases have lawyers talking terparts highlight the need to pay close attention to confidentiality agreements, lawyers say. "The bottom line is confidentiality agreements will be more carefully drafted and perhaps more actively and attentively negotiated," says Neill May, a partner with Goodmans LLP in Toronto. At issue are two cases that have had lawyers involved in mergers and ac- quisitions talking since judges handed down their rulings earlier this year. In Gold Reserve Inc. v. Rusoro Mining Ltd., Justice Peter Cumming granted an in- junction in February against the bidder, Rusoro, over allegations it had access to Gold Reserve's confidential information through its relationship with the target's financial adviser, Endeavour Financial International Corp. Meanwhile, in Certicom Corp. v. Re- search In Motion Limited, Justice Alexan- dra Hoy sided with Certicom's view that the existence of a confidentiality agree- ment between the two parties prohibited the BlackBerry maker from using infor- mation it gained through its relationship with Certicom to launch a hostile bid. That was the conclusion despite the fact that a standstill agreement barring such a takeover had already expired. Gold Reserve, lawyers say, was most striking for its presumption that a party with access to confidential information would necessarily use it during an un- friendly bid. In that case, Endeavour was acting as financial adviser for Gold Re- serve and Rusoro, both mining compa- nies, according to the judgment. That was the case in December, when Rusoro made its play for Gold Reserve. At the same time, Endeavour was a creditor to and shareholder in Rusoro, and one of its key Pay close attention to confidentiality agreements T BY GLENN KAUTH Law Times wo recent court rulings against companies attempting to launch hostile takeovers of their coun- former employees had links to the mining company, Hoy noted. But within minutes of Rusoro's bid, Endeavour ended its rela- tionship with Gold Reserve. As the judgment points out, Endeavour over the years had access to significant in- formation about Gold Reserve's business, including financial, technical, geological, and operational details related to a major gold and copper project in Venezuela. In exchange, it had signed a confidentiality agreement acknowledging that it "shall not knowingly act against the interests of Gold Reserve in a material way." Hoy noted as well that just prior to the December bid, Endeavour made a presentation to Rusoro about the advan- tages of a bid for Gold Reserve that in- cluded discussion about the promise of additional exploration potential at one of its projects. But in turn, the finan- cial adviser argued it used only publicly available information in its dealings with Rusoro, a notion Hoy rejected. "The defendants' argument that their officers and employees can compartmentalize their minds so as to segregate and not use confidential information given to them in the past lacks reality," she wrote. "Absent special measures such as insti- tutionalized ethical walls, the reasonable presumption is that confidential informa- tion will be taken into account and used, whether intentionally or inadvertently, to the disadvantage of the provider of the confidential information." Noting Rusoro was fully aware of Endeavour's relationship with Gold Re- serve, Hoy added that the bidder allowed itself to unfairly benefit from its financial adviser's position. "Rusoro cannot be in a better position than Endeavour itself," she ruled. For Allyson Whyte Nowak, a partner at Ogilvy Renault LLP, the case puts an added emphasis on bidding companies to take steps to avoid litigation over their ac- cess to confidential information. "You're going to get a presumption of misuse of 'You're going to get a presumption of mis- use of confidential information if a party doesn't show they have instiutionalized measures,' says Allyson Whyte Nowak. confidential information if a party doesn't show they have institutionalized mea- sures," she says. "That's what's particularly striking about this case," she adds. Measures to reduce the risk include ethical walls, physical and electronic pro- tection, and what Whyte Nowak calls clean design rooms. In that last example, parties would emulate a practice used in intellectual property scenarios where a company is trying to build a similar prod- uct to a competitor's. In that situation, a product specification sees the original product, but the design team doesn't. The first group then hands down a general re- quest for what it's looking for to the de- sign group that carries it out in an isolated room. As a result, the company can claim it came up with its own product untaint- ed by the original design. A mergers and acquisition scenario could work the same way, according to Whyte Nowak. One group of employees would have access to the confidential in- formation to carry out the business set out in the agreement while another team in the clean room could argue it had no knowledge of what the parties shared. It's that second group that would carry out the hostile takeover, Whyte Nowak notes. At the same time, setting up walls like computer passwords that allow only certain employees to see the confidential information can help minimize the risk of litigation over non-disclosure agree- ments, she adds. In Certicom, meanwhile, the issue came in part down to what RIM could legally do under the terms of the confi- dentiality agreements it had signed with its counterpart, a supplier of security products for its businesses. It had signed two such documents in 2007 and 2008, the earlier of which contained the stand- still provision forbidding RIM from launching an unfriendly takeover. By the time the company went forward with a hostile bid last December, that part of the agreement had expired, but Cum- ming nevertheless ruled that language in the non-disclosure documents prevented its actions. That's because while the 2007 agreement allowed RIM to use the infor- mation disclosed by Certicom for pur- poses including "some form of business combination between the parties," Cum- ming decided that the word "between" excluded the notion of hostile bid. "As noted, when the 2007 [non-disclo- sure agreement] was negotiated, the par- ties contemplated a friendly bid for Cer- ticom," he wrote. "This is the context in which the word must be interpreted." For its part, RIM argued a ruling against it would amount to extending the expired standstill provisions, some- thing it said would be inconsistent with the rationale for having such agreements in the first place. But in Cumming's See 'You, page 13 oil and gas properties in Colom- bia for an uncertain final price. The transaction, which Few taking up idea of including contingent value rights I BY GLENN KAUTH Law Times n July 2008, Calgary-based Suroco Energy Inc. an- nounced a deal to buy three closed this past spring, allowed it to take over one oil-producing block called Suroriente along with two exploration areas called Alea and Arjona. The deal pro- vides the seller, Alentar Hold- ings Inc., with 8.7 million shares in Suroco valued at $1 each. But it also contained what are called contingent value rights, which means it might not receive full value of the transaction for up to 10 years. Suroco will only have to pay out those contingent rights if one of the properties it bought produces results. So, follow- ing what's called a declaration of commerciality on the Alea block, Alentar will be able to re- ceive 1 million contingent value rights. It can exercise up to 4 million such rights depending on what exploration activities turn up. As of yet, Mark Trachuk of Osler Hoskin & Harcourt LLP says few Canadian companies are taking up the idea of includ- ing contingent value rights in transactions. But, he argues, in an uncertain economy where values of companies are in flux, they might be a good solu- tion for allowing mergers and acquisitions to happen. "As we're running into companies, we start looking at alternative ways to structure the consider- ation," says the chair of Osler's corporate practice group. In other cases, the buyer contingent value it promised. The practice also comes into play in some bankruptcy cases, Trachuk notes. When former retailer Eaton's went under, for example, equity holders re- ceived so-called hope certificates They're particularly useful in transactions where you've got some asset that might be worth a lot or might not be worth anything. might hinge the final price on realizing a tax loss the seller is claiming. Yet other deals will depend on the outcome of litigation the target com- pany is involved in. If it wins a lawsuit, for example, the purchaser will pay out the www.lawtimesnews.com related to the shell company that remained following the store's sale to Sears. Those certificates essentially amounted to a con- tingent value right that would provide the holders with money earned from tax losses the long- suffering company was claiming. PAGE 9 "It's quite a useful tool to extract the very last pennies of insolvent companies," says Trachuk. "They're particularly useful in transactions where you've got some asset that might be worth a lot or might not be worth any- thing," he adds. The practice is also common with small companies. In those cases, the buyer might keep the former owner on staff for some time after the purchase with the promise of an additional pay- ment should the company meet a certain target. In that way, the contingent value right acts as an incentive for the seller to help the company do well through the transition. With larger com- panies, it's less common for the See Options, page 13

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