Shareholders urged to get independent legal advice
Shareholders of privately held corporations who don’t seek independent legal advice during the drafting of agreements are failing to protect their interests, Toronto business lawyer Anton Katz tells AdvocateDaily.com.
“My sense is that shareholders often feel that they don’t need independent legal advice, so they dispense with it. But they do so at their peril, in my view,” says Katz, principal of Anton M. Katz Barrister & Solicitor.
“I would be so bold as to say it’s always a good idea to get independent legal advice.”
Shareholder agreements deal with voluntary and involuntary events, rights and obligations, and restrictive covenants, such as confidentiality, non-competition and non-solicitation clauses, he says.
The corporate lawyer drafting a shareholder agreement will hold a meeting and discuss the concepts “somewhat neutrally and almost theoretically. Independent legal advice would be beneficial for particular shareholders when those factors may not be neutral,” Katz says.
“The independent lawyer can really dig deeper and ask more penetrating questions of a client in the comfort of a separate office, where they can talk very candidly,” he says.
“I would be very careful to state at the outset of the meeting with shareholders that my client is actually none of them but is instead the corporation. I would say to them that my duty is to the corporation and that they are encouraged, perhaps urged, to get their own independent legal advice.”
Katz says a corporation’s lawyer is not required by law in Ontario to suggest that shareholders seek independent legal advice, “but it is a best practice. A failure to recommend it could invite scrutiny from LawPRO (Lawyers’ Professional Indemnity Company).
“It could be argued that the lawyer acted in a conflict of interest and that he or she had divided loyalties, and it could give rise to professional liability considerations.”
Shareholders can also face consequences if they don’t retain independent legal advice, he says.
“The ramifications can be that you’re then subject to a bad agreement that really doesn’t protect your interests. Perhaps it’s protective of the majority shareholders’ interests or even the minority shareholders’ interests.
“If you end up with a bad agreement, you may be compromising your rights or you may be in line for an unfavourable outcome down the road,” Katz says.
“The benefit of independent legal advice is that it really allows you to properly understand and to think through and to weigh the pros and cons.” As a lawyer acting for a corporation, Katz says, he would expect to be contacted by an independent lawyer after the shareholder agreement has been reviewed, but that
rarely happens.
“I don’t have any data, but my experience is that I’m not typically the recipient of communications from independent lawyers and perhaps that advice needs to be taken advantage of more often,” he says.
