On February 10, 2009, Justice Cumming of the Ontario Superior
Court of Justice released the reasons for his decision in Gold
Reserve Inc. v. Rusoro Mining Ltd. and Endeavour Financial
International Corporation. Gold Reserve Inc. ("Gold
Reserve") successfully obtained an interlocutory injunction
preventing Rusoro Mining Ltd. ("Rusoro") from advancing
its hostile bid for Gold Reserve on the basis that Rusoro had
benefited from the misuse of confidential information obtained by
its financial advisor, Endeavour Financial International
Corporation ("Endeavour"), while it was previously
retained as a financial advisor to Gold Reserve. The Court's
order also prevents Endeavour from having any involvement on behalf
of Rusoro, or at all, in a hostile bid for Gold Reserve, and
requires that both Rusoro and Endeavour return to Gold Reserve all
of its confidential information and anything produced from such
confidential information.
Summary
On April 3, 2007, Rusoro engaged Endeavour to act as its financial
advisor. Key Endeavour employees who had worked on a retainer with
Gold Reserve since 2004 also became engaged in the Rusoro retainer.
Between August and October 2008, Rusoro made a number of attempts
to engage in friendly discussions with Gold Reserve with respect to
a potential business combination, but Gold Reserve remained
uninterested. Rusoro subsequently determined to make a hostile
take-over bid for Gold Reserve and to proceed with Endeavour as its
financial advisor, but neither Rusoro nor Endeavour advised Gold
Reserve of Rusoro's intention until three days before the
commencement of the bid.
Endeavour had previously acted as financial advisor to Gold
Reserve for over four years pursuant to an advisory agreement
entered into in 2004, which was subsequently amended and restated
in 2007. The services provided by Endeavour to Gold Reserve
included making presentations to potential lenders and investors,
and advising on potential business transactions and project debt
financing. In connection with its services for Gold Reserve,
Endeavour was provided with confidential information of Gold
Reserve, including financial, technical, geological and operational
records, analyses and data. In response to the unsolicited bid,
Gold Reserve claimed that the bid could not proceed because it was
tainted by Endeavour's possession of Gold Reserve's
confidential information.
The advisory agreements between Endeavour and Gold Reserve both
included confidentiality provisions imposing strict conditions on
Endeavour to protect Gold Reserve's confidential information.
These agreements contained negative covenants restricting Endeavour
from disclosing confidential information of Gold Reserve without
its consent, and from using such information for its own purposes
or to the detriment of Gold Reserve, but included an acknowledgment
by Gold Reserve that Endeavour acts, and will act, as consultant or
financial advisor to other clients in the same business as Gold
Reserve, and that the interests of such clients may come into
conflict with those of Gold Reserve. However, the advisory
agreements also contained a specific negative covenant which,
notwithstanding the Gold Reserve acknowledgment, restricted
Endeavour from acting against the interest of Gold Reserve in a
material way. The agreements also provided that in the event of a
potential material conflict between the interests of Gold Reserve
and those of Endeavour or its other clients, Endeavour would inform
Gold Reserve of the conflict and would either act solely for Gold
Reserve, agree with Gold Reserve on an appropriate resolution to
the matter, or terminate the agreement in accordance with its
terms.
The Court's record indicated, in Justice Cumming's view,
that Endeavour did not inform Gold Reserve of its conflict in
advising Rusoro with respect to the preparation of the hostile bid,
and did not terminate the advisory agreements with Gold Reserve
prior to the making of the bid. As such, Justice Cumming left aside
the question of whether the negative covenants regarding
confidentiality in the advisory agreements would have extended
post-termination of such agreements.
The Court found that, in the particular circumstances of this
case, Endeavour owed Gold Reserve a duty of confidence and a
fiduciary duty of loyalty arising from the confidentiality
provisions of the advisory agreements and from Endeavour's
position as a fiduciary with respect to Gold Reserve's
confidential information. The Court intervened on the basis that
(i) Endeavour may have breached these duties in its dealings with
Rusoro, (ii) Rusoro was liable as a knowing and willing recipient
of services rendered by Endeavour in breach of these duties, and
(iii) by advising Rusoro with respect to a hostile bid, Endeavour
may have knowingly acted against the interest of Gold Reserve in a
material way and therefore breached the negative covenants of the
advisory agreements. Justice Cumming determined that interlocutory
injunctive relief was available to Gold Reserve on the basis that
Endeavour had contractually consented to such relief upon a breach
of its confidentiality obligations, and because the nature of the
harm caused to Gold Reserve could not be quantified
monetarily.
Justice Cumming likened the position of Rusoro in retaining
Endeavour's services to that of a friendly bidder having access
to the data room of a target, but noted that, because it was not
subject to a standstill agreement,1 Rusoro enjoyed an
unfair imbalance of knowledge and had obtained unfair timing and
tactical advantages with respect to other potential bidders. These
advantages prejudiced the interests of the shareholders of Gold
Reserve by allowing Rusoro to opportunistically submit a bid while
privy to non-public knowledge regarding the value of one of Gold
Reserve's mining projects2 and by reducing the time
available to Gold Reserve to determine the best course of action
with respect to the company and maximizing shareholder value.
Also of note is that, while there were indications that
confidential information of Gold Reserve may have been used by
Endeavour in the preparation of the hostile bid, the Court did not
specifically require that Gold Reserve prove that Endeavour or
Rusoro actually used such confidential information in connection
with the bid. Justice Cumming noted that Endeavour did not erect
any institutional ethical walls to protect Gold Reserve's
confidential information, that several key employees of Endeavour
who had gained confidential information of Gold Reserve also acted
for Rusoro in respect of the hostile bid, that Endeavour had
intertwined relationships with principals of Rusoro and an existing
financial stake in Rusoro as both a creditor and a shareholder, and
that arguments by Endeavour that its employees acted only on
publicly available information and did not use any confidential
information obtained from Gold Reserve were lacking in reality and
were tainted by self-interest. Justice Cumming held that, absent
evidence to the contrary, the reasonable inference in such a
situation is that confidential information will be taken into
account and used, even inadvertently, to the detriment of the
provider of such information.
Implications for Bidders and Financial Advisors
The decision confirms that Ontario courts generally tend to give a broad effect to confidentiality provisions restricting the unauthorized use of a party's confidential information in connection with an M&A transaction, even in the absence of a standstill provision. It could have important ramifications on the selection of financial advisors by bidders in M&A transactions, and serves as a cautionary statement that bidders should ensure the independence of their financial advisors, especially where such advisors have previously acted for the target of a proposed take-over bid or have financial interests in the parties involved in an M&A transaction that could taint their independence. Bidders should also satisfy themselves that their financial advisors will not be acting in violation of any pre-existing duties of confidentiality or loyalty in favour of the target.
Financial advisors should consider the impact of this decision
on their existing and prior client relationships. The decision
highlights the importance of clearly specifying in engagement
letters the scope and duration of the confidentiality obligations
undertaken by financial advisors in favour of their clients, and of
implementing effective institutional ethical firewalls in
situations that could lead to an actual or apparent misuse of
confidential information.
Footnotes
1 Justice Cumming stated that a standstill agreement was
not necessary because Endeavour would not reasonably be expected to
be a bidder for Gold Reserve and the negative covenants in the
advisory agreements were intended to restrict Endeavour from
misusing Gold Reserve's confidential information.
2 The market valuation of Gold Reserve at the time of the offer was
particularly depressed due to uncertainty with respect to the
Venezuelan government's position vis-à-vis Gold Reserve
and its project at Las Brisas del Chuyuni in Venezuela.
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