I received messages from board members asking about the opt-in representation and its effectiveness. The following are my thoughts on these questions. I hope these will help clarify the answers to the questions raise.

Much has been said on this board about the opt-in option, the opt-ins rights and obligations and whether it was a good choice to opt-in. Not all that has been said is right, correct or helpful.  As usual, the reason for this is misunderstanding, misinterpretation, guesswork, lack of knowledge or a combination of these. I think it is important to correct this for all of us to be better prepared to deal with the future.

Before I get to review the situation, it is important to be clear about the opt-in option and its use. The best way for me to explain this is through a hypothetical case: a shareholder (the lead shareholder) decides to file a derivative legal action against the Board of Directors for not discharging properly their duties and, thereby, causing loses to the company and the shareholders. In the suit, the lead shareholder claims to represent all the company’s shareholders, who are assumed to be “similarly situated”, and asks the court to approve the suit as a class action where all the shareholders join the class unless they opt out by written request within a certain time period. The lead shareholder’s lawyers know that the opt-out classes are generally much larger than opt-in classes and have the important feature of maintaining a strong and effective class mechanism. Put another way: there is strength in numbers when the class is a cohesive force.

The Company’s lawyers object to the opt-out approach because it assumes that all shareholders agree with the derivative suit and/or are “similarly situated”, which is unwarranted. This, they say, results in an unnecessary burden on the shareholders that do not agree with the suit and makes the class certification more difficult and expensive, which is a burden on the court, the opt-out shareholders and the company. Hence, the company’s lawyers strongly suggest to the court to agree to an opt-in approach instead, since it does not have the disadvantages of the opt-out approach. The court wholeheartedly agrees with the need to pursue judiciary economy and avoid an unnecessary burden on the court, the company and bystander shareholders.            

Going back to the nagging opt-in questions, first off, what was the origin of and the reasons for the opt-in option? Reading through the related motions and the court orders, we can learn the following:

1.- The Shareholders’ Committed lawyers (Gowling) asked Justice Neubould to approve the creation of the committee as representative of all company’s shareholders, excluding those that chose not to be part of the “class” by opting-out,
2.- The company and the DIP Lender opposed the opt-out approach for the usual reasons and argued in favor of the opt-in approach.
3.- Justice Neubould sided with the company and the DIP lender and approved the opt-in approach.

Here is important to acknowledged that:

a.       A) Justice Neubould agreed with the need for the shareholders to have legal representation by other than the company / Board of Directors. Otherwise, he would have rejected the opt-in approach too, and

b.    B) The effectiveness of the committee’s efforts to advance the shareholders’ interests was predicated on the size of the “class”. As indicated above, there is strength in numbers and a cohesive class.

Another question that has haunted some of the opt-in shareholders for years now is Gowling’s legal representation. What it real or a sham? This much was clear to me from the beginning:

Gowling made it clear from the start that they were representing the Shareholders’ Committee. People on this board commented on several occasions that they had been told by the lawyer coordinating the opt-in process (a lady whose name I forgot) that Gowling was not representing them but the Committee. That was always the case.

In the class action example above, the lawyers filing the suit on behalf on the lead shareholder / plaintiff are hired by him/her, not the entire class. The opt-in shareholders join after the legal representation agreement was signed and do so on the “coattails” of that agreement. Buy doing so, the “class” agrees to share the costs and the benefits of the action.

The reasons for this approach are simple: first, the class does not form spontaneously. In other words, someone needs to i) file the suit first and ii) then convince the court that a class action is warranted, and iii) get it to certify the class. Second, legal counsel cannot properly represent and canvass hundreds of clients in a single case, who most certainly can have different opinions on the need for and approach to a given action. There must be lead plaintiff that is both cohesive and manageable in terms of numbers.

Going back to the question “was Gowling’s representation of the opt-in shareholders real or a sham? The representation was real, but indirect, since the agreement between Gowling and the Shareholders’ Committee bound them only. As indicated above, the opt-ins joined the legal efforts on the coattails of the Shareholders Committee to protect the shareholder’s rights as a stronger class. Put more simply: the opt-ins joined the Shareholders’ Committed legal efforts to protect the shareholders’ rights, not Gowling’s representation agreement with the Committee.   

There is a big difference between the representation being real vs. being effective. That it was not effective does not mean that it was not real. We all know the outcome of the shareholders oppression suit at the Ontario Court of Appeals, whose main conclusion was that the suit was too little, too late, because, the ONCA argued, the shareholders had sat on their hands for too long before pursuing remedies. I, for one, believe this was a self-serving judiciary decision geared to avoid rocking the flat bottom boat called “CCAA”, which was designed to navigate shallow calm waters, steered by self-interested insiders and their chosen creditors, and allowed to leave the builders (i.e. shareholders) stranded on the shore, like beached whales.