Monday, December 15, 2008
Managing the economic meltdown
Canadian lawyers face new challenges
By Christopher Guly
December 19 2008
As Canadian lawyers watch their American colleagues lose clients — or their jobs — in the current economic meltdown south of the border, Ontario’s Dimitri Lascaris is acting on the litigation fallout from the U.S. financial crisis.
Last month, the partner in the class action department of Siskinds LLP in London, Ont. filed a proposed $550-million class action in the Ontario Superior Court against one of the world’s largest insurance companies, American International Group (AIG) Inc., its U.K.-based subsidiary, AIG Financial Products Corp. (AIGFP) and current and former directors and officers of both corporate entities, claiming that Canadian investors in AIG suffered massive losses.
The application is the first to use a provision of Part 23.1 of the Ontario Securities Act, which allows investors to sue companies that have a “real and substantial connection” to Ontario even if they are not “reporting issuers” in the province.
The class action arises out of a type of derivative AIGFP was trading, known as credit default swaps, and the resulting crash in AIG’s stock price when it became known that the credit default swaps exposed the company to “crippling liabilities,” placing AIG on the verge of collapse, said Laskaris in an interview.
“Public statements by the management of AIG to investors about the risks associated with credit default swaps and the way the company was valuing them are at issue in our lawsuit on behalf of Canadians who purchased shares of AIG during the period [Nov. 10, 2006 to Sept. 16, 2008] when AIG was making alleged misstatements about its credit default swap business,” Laskaris said.
He explained that thousands of Canadians could be involved in the class action against AIG, which is now effectively owned by U.S. taxpayers following a $150-billion US government bailout loan.
The Siskinds-led action will seek certification of a national class.
Expect more of these types of suits in the future, said Lascaris, who told The Lawyers Weekly that his firm is considering a number of class-action cases against financial institutions — most of them Canadian.
To avoid the current type of financial mess and credit crunch in the future, Lascaris said there needs to be radical reform, beginning with executive compensation gone “wildly out of control, not only in terms of the amount of money people get paid to operate unprofitable companies, but also in the incentive schemes to generate unsustainable but extraordinary short-term profits for executives that expose a corporation to considerable risk and leave shareholders to pick up the bill while they go off into the sunset as multimillionaires.”
He would like to see governments prohibit executive compensation that awards lucrative bonuses based on a company’s short-term performance — or, at an extreme, to impose a cap on executive compensation entirely.
But Lascaris added the latter might not be necessary if shareholders in public companies were able to exercise “meaningful control” over executive salaries and compensation.
However, University of Ottawa law professor Vern Krishna said corporate directors are elected to determine executive compensation, and giving shareholders such power is both “idealistic” and “unworkable” since not all investors have any understanding of management issues, as an example. As well, Krishna pointed out that in a free-market system, governments cannot oversee compensation in private companies unless there’s a plan to transfer their ownership to the state.
“People always say why doesn’t the government regulate as if it’s the cure-all for every ailment that occurs. It isn’t. Government has to walk a fine line between completely hands-off and being overly intrusive,” said Krishna, who also serves as tax counsel in the Ottawa office of Borden Ladner Gervais LLP.
He explained that one of the causes of the current financial crisis in the U.S. was the Clinton administration’s repeal in 1999 of the 1933 Glass-Steagall Act — legislation that separated commercial banks from those involved in investments.
“The political impetus for sub-prime mortgages stemmed from President Clinton’s desire and policy initiatives to help low-income families,” Krishna said.
The “perfect storm” created by the current economic downturn could generate considerable legal action in several practice areas, such as international trade and investment as well as litigation resulting from a potential escalation of cross-border trade disputes, according to McCarthy Tétrault’s John Boscariol, who heads the firm’s international trade and investment law group and is a partner in the litigation group in Toronto.
“When there are slowdowns, particularly in the context of a crisis, governments tend to erect trade barriers in an effort to protect employees and manufacturing in their country — measures that could violate obligations under trade agreements,” said Boscariol, who chairs the Ontario Bar Association’s international law section and serves as co-chair of the Canada committee for the American Bar Association (ABA)’s international law section.
Already, there are concerns that incoming U.S. President Barack Obama and his Democrat colleagues in Congress could spark one of the largest protectionist initiatives in recent memory. That in turn could lead to other actions on this side of the border.
“When markets slow down, companies bring forward more trade remedy cases, more countervail cases and more anti-dumping cases,” said Boscariol. “When companies start to suffer, they tend to blame imports.”
He adds that with massive government subsidization underway in the U.S., there could be legal challenges in Canada over whether such subsidies run afoul of U.S. trade obligations. So far, the European Union “has fired a warning shot over the bow,” indicating that it would be prepared to take the U.S. to the World Trade Organization if the U.S. government proceeds with a financial bailout of its auto industry and it’s found to have violated international trade law.
With all of these possible disputes on the horizon, some lawyers could be flooded with work.
But there will be slowdowns too, such as in the area of mergers and acquisitions where activity on the private equity side has “slowed to a trickle,” according to Paul Crampton, a partner in the competition and antitrust law group in the Toronto office of Osler, Hoskin & Harcourt LLP and a member of the steering group of the ABA’s international antitrust committee.
He said that some strategic buyers are also finding it difficult to access financing from financial institutions to lend them money. “The other problem is that with the equity markets bouncing around, a target’s market cap is moving all over the place. And if the buyer wants to use his own stock as part of the condition for the deal, that stock is also moving around,” said Crampton, whose practice focuses largely on international mergers and federal legislation on investments as related to the acquisition of Canadian businesses. “In the current economic uncertainty, trying to project future cash flow and earnings is difficult because it’s not quite clear how severe the recession is going to be in the U.S. and how bad a cold or cough Canada will get from it.”
And then there’s the human capital aspect of the current economic crisis, which Toronto immigration lawyer Sergio Karas is witnessing.
With the price of crude oil spiralling downward, Shell, BP and other major oil and gas exploration companies are either scaling back, slowing down or cancelling projects in Alberta’s tar sands. As a result, they will need fewer foreign skilled workers, who happen to be Karas’ clientele.
“Experts say it costs anywhere from $38 to $80 per barrel to make heavy crude from the oil sands economically viable, and only certain refineries have the capacity to handle that heavy crude,” said Karas, who is certified by the Law Society of Upper Canada as a specialist in Canadian citizenship and immigration law, and serves as chair of the Ontario Bar Association’s citizenship and immigration section and co-chair of the International Bar Association’s immigration and nationality committee.
“It costs the Saudis under $10 U.S. to get oil out of the ground and they produce light sweet crude, which is easy to refine. If there’s less market demand for crude, why would companies invest billions of dollars in the oil sands?”
He explained that employment-related immigration would also suffer as the crisis facing Canada’s automobile industry worsens and auto-parts makers, which rely on foreign labour, will freeze hiring.
Karas predicts that overall the country’s entire immigration system will face tremendous pressure