A Cautionary Tale for Corporate Counsel from The Saskatchewan Court of Appeal

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In the Saskatchewan Court of Appeal’s recent decision in CPC Networks Corp. v McDougall Gauley LLP, 2021 SKCA 127, the SKCA considered two issues of particular interest to corporate counsel and shareholders in closely held corporations. The first related to confidentiality and privilege of a corporate client’s file and the client’s entitlement to said file following a change of control. And the second pertained to the application of The Limitations Act, SS 2004, c L-16.1. to derivative actions brought under Saskatchewan’s Business Corporations Act, RSS 1978, c B-10 (BCA). By way of background, CPC was a closely held corporation and the developer, owner, and operator of a fiber-optic network in Saskatoon prior to a breakdown in the working relationship between several of its shareholders. Two minority shareholders, Adams and Ayers subsequently became majority shareholders and directors in 2016 following CPC’s liquidation. At the same time, the previous majority shareholders resigned from the Board. Adams and Ayers, on behalf of CPC, demanded McDougall Gauley LLP (“McDougall”), lawyers for CPC retained by the previous majority shareholders, deliver all files related to CPC to them as CPC’s new directors. Adams and Ayers also applied for leave to bring a derivative action against McDougall under the BCA for assisting/acting for the former majority shareholders/directors in ways that breached McDougall’s fiduciary duties to CPC. Both the leave application and an application for production of the CPC client files held by McDougall were considered by a judge of the Saskatchewan Court of Queen’s Bench in Chambers and both were denied in a decision handed down in 2019 (2019 SKQB 251), which led to this appeal before the SKCA.

In relation to Adams and Ayers demand for the production of CPC’s files from McDougall, the Chambers judge had refused Adams and Ayers request on two grounds. The first was the alleged effect of the earlier Liquidation Order, and the second was solicitor-client privilege. The SKCA disagreed with the Chambers judge’s conclusions with respect to both. The Court interpreted the Liquidation Order and found that it did not interfere with CPC’s right to claim or collect this part of CPC’s property. (1) In relation to the claim of privilege over the files, the SKCA’s conclusion appears to have been motivated by McDougall’s insistence that it had only acted on CPC’s behalf and had never taken instructions from any individual director or shareholder in their personal capacity in relation to any of the matters complained of by Adams and Avery. For if that were true, then it would be elementary that the privilege in question belongs to CPC alone, and that privilege could not provide any basis to withhold the files from CPC itself. (2) This meant that CPC and its agents had the right to demand all documents from McDougall, regardless of the fact that different natural persons now represented CPC as its duly appointed directors. This is a timely reminder that when counsel work for corporate clients, counsel must keep in mind the difference between the interests of the corporation and its directors and shareholders, and to remember whose interests counsel is actually responsible for.

With regard to leave to bring the derivative action, the Chambers judge had refused the application on the basis that four years had elapsed since the initial discovery of the wrongs in

question by Adams and Ayers and that The Limitations Act in Saskatchewan provided for a limitation period of only two years from the date of discovery. (3) The SKCA overturned this aspect of the Chambers judge’s decision because in its view the knowledge of Adams and Ayers as minority shareholders could not have triggered the start of the limitation period. Instead, because the claim belonged to CPC, the limitation period could only have begun to run once those connected with the alleged wrongdoing were no longer in control of CPC. And this only occurred in 2016 when the previous majority shareholders in CPC resigned from the Board, and Adams and Ayers assumed control of CPC, and thus control of any claim that CPC could bring. This meant that the limitation period had not expired by the time that leave had been sought, and the SKCA granted leave accordingly. This aspect of the decision may be particularly helpful for lawyers in Manitoba because the new Limitations Act, SM 2021, c 44 has introduced discoverability as requirement for limitation periods to start. And this case is highly persuasive authority for the proposition that for a limitation period to commence, the person discovering the claim must also control it.

(1) CPC Networks Corp. v McDougall, 2021 SKCA 127 at para 51-52 [CPC].

(2) Ibid at para 57.

(3) The Limitations Act, S.S. 2004, c. L-16.1, s 5; CPC, supra note 1 at para 64.

By Xiyuan Feng – Supervised by Professor Maharaj


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