As evidenced by the ongoing struggle between Microsoft and various antitrust authorities around the world, one of the elusive questions in competition law is when and how to curtail the business conduct of dominant players in an industry. While it’s generally accepted that limits may have to be placed on dominant parties in order to protect competition, the challenge is to protect the competitive process without placing a "chill" on pro-competitive behaviour.

As of the writing of this article, antitrust authorities in the U.S. are conducting hearings to help develop policies for dealing with this issue. Competition authorities in Europe are also grappling with the question – in late 2005, they released a discussion paper on the application of the relevant provision of their law with the intention of ultimately issuing enforcement guidelines.

To encourage sales of their products, Canada Pipe offered customers quarterly and annual rebates, as well as significant point-of-purchase discounts.

In Canada, a major case on "abuse of dominance" is now winding its way through the judicial system, giving Canadian courts their first opportunity to consider the Competition Act provision governing the conduct of dominant firms. This provision authorizes the Competition Tribunal to issue an order against a firm that substantially or completely "controls" a "class or species of business" and then engages in a practice of "anticompetitive acts" that has had, is having, or is likely to have the effect of "preventing or lessening competition substantially" in a market. It is important to emphasize that the provision does not prohibit a firm from becoming or being "dominant" – what’s not allowed is "abusing" that dominance to exclude competitors, thereby producing the requisite negative effect in the market.

The abuse of dominance case now occupying centre stage in Canada involves Canada Pipe Company Ltd. and a form of "loyalty rebate" it offers to customers. Canada Pipe manufactures cast iron drain, waste and vent (DWV) products. To encourage sales of these products, Canada Pipe offers customers quarterly and annual rebates, as well as significant point-of-purchase discounts, should they purchase all of their cast iron DWV requirements from Canada Pipe.

The Canadian commissioner of competition took exception to Canada Pipe's program (known as the Stocking Distributor Program, or SDP) and applied to the Competition Tribunal in 2002 for an order requiring that it be discontinued.

Following a lengthy hearing, the Tribunal dismissed the commissioner's application in February 2005. Although the Tribunal concluded that Canada Pipe was indeed the dominant supplier in cast-iron DWV markets across Canada, it held that the SDP did not constitute an "anticompetitive act" and had not resulted in an actual or likely "substantial lessening or prevention of competition."

Among other things, the Tribunal found that the SDP had not prevented other manufacturers from entering the market and competing successfully against Canada Pipe. In fact, since the implementation of the SDP in 1998, imports of cast-iron DWV products into Canada had increased, and the first new domestic manufacturer of these products in 30 years had been established. There was also significant evidence of competitive pricing. The Tribunal also accepted that the SDP was necessary for Canada Pipe to maintain a full line of inventory, including smaller, less profitable items that were nonetheless important for its customers' businesses.

The commissioner appealed the Tribunal's decision to the Federal Court of Appeal (FCA), arguing that the Tribunal had erred in law by applying the wrong tests to determine whether the SDP constituted an "anticompetitive act" and resulted in a "substantial lessening or prevention of competition."

In a decision released on June 23, 2006, the FCA upheld the commissioner's appeal and ordered the matter back to the Tribunal for re-determination based on the new legal standards articulated in its decision.

With respect to the "anticompetitive act" element, the FCA held that the Tribunal had erred by assessing whether the SDP had a negative impact on the general state of competition in the market by considering if there had been a detrimental effect on pricing or competitive entry. Instead, the FCA stated that the focus of the "anticompetitive" requirement should be exclusively on whether there is an intended negative effect on competitors; the impact on competition is properly addressed only at the final stage of the analysis, when determining whether there has been a substantial prevention or lessening of competition.

As to that latter element, the FCA held that the correct test for identifying a "substantial prevention or lessening of competition" is whether "the relevant markets – in the past, present or future – [would] be substantially more competitive but for the impugned practice of anti-competitive acts" (emphasis added). The FCA stated that the Tribunal had erred by focusing on the fact of successful entry by competitors without asking whether there would have been "significantly more" competitive entry "but for" the establishment of the SDP.

Implications

The Canada Pipe case is a perfect illustration of the key issue raised by "abuse of dominance." No-one argues that there is something wrong in and of itself about a company trying to persuade customers to buy more of its products. The question is, are there circumstances in which a dominant party should not be allowed to engage in what would otherwise be perfectly legal behaviour?

As to the specific fate of the SDP, Canada Pipe has announced that it will be seeking leave to appeal the FCA's decision to the Supreme Court of Canada. The court is not expected to rule on this application until 2007, whereupon the matter will either proceed to appeal or be sent back to the Tribunal for re-determination in accordance with the FCA's decision.

Mark Katz and Charles Tingley are partners in the Competition and International Trade Law Group of the Toronto office of Davies Ward Phillips & Vineberg LLP. Davies is representing Canada Pipe in the proceedings discussed in this article.

Introduction

In their administration of a pension plan or pension fund, administrators and trustees in Canada are governed by applicable pension legislation, general standards of fiduciary duty, and provisions of a pension plan and trust agreement. Statutory law requires pension plans to be registered under either federal or provincial jurisdiction, each jurisdiction having its own pension legislation. The particular requirements flow from the legislation applicable to the jurisdiction of registration.

This article focuses on the standards required of pension plan and pension fund administrators and trustees from the perspective of Ontario law. Consequently, our review of pension legislation will deal only with the Pension Benefits Act (Ontario) (PBA). The general principles of law and equity that apply to trustees also impose requirements on plan and fund administrators and trustees. The standards of conduct that pension plans and trust agreements impose on trustees will not be discussed, since these documents are unique to each particular arrangement.

A person with a background in professional investing may be held to a higher or different standard under the legislation than a person who has no relevant investment experience.

Statutory standard of care

The PBA establishes the fundamental regulatory regime for all private sector pension plans in Ontario. Under the PBA, a pension plan administrator “shall exercise the care, diligence and skill in the administration and investment of the pension fund that a person of ordinary prudence would apply in dealing with the property of another person.” This is a classic “fiduciary” standard.

In addition, the pension plan administrator (or the member of a board or committee that acts as administrator) “shall use all relevant skill and knowledge in administering the pension plan and fund and in investing the pension fund that the administrator possesses, or by reason of its business, calling or profession, ought to possess.”

Thus, although the board is a collective body responsible as a whole for its decisions, the PBA recognizes that individuals on the board are independently responsible and may be independently liable for the performance of their duties. So the standards to which an administrator or a trustee may be held vary according to the individual’s knowledge and skill, including the knowledge and skill that each is presumed to have by virtue of a profession. Consequently, a person with a background in professional investing may be held to a higher or different standard under the legislation than a person who has no relevant investment experience.

The PBA also permits administrators and trustees to delegate certain responsibilities where reasonable and prudent. And in certain cases, trustees may be under a duty to delegate if they lack the knowledge and expertise to perform the services themselves. The PBA provides that a pension plan administrator may employ an agent to carry out administrative functions in respect of the pension plan or fund or any investment functions in respect of the fund.

If the administrator delegates responsibility, the PBA requires that he or she must personally select the agent and be satisfied with the agent’s suitability to perform the assigned tasks, and must supervise the agent to a reasonable and prudent extent.

Again, the standard imposed by the PBA is a classic fiduciary standard. An employee or agent of the administrator is subject to the same standard of care applicable to the administrator and to the same restrictions regarding conflict of interest.

Furthermore, although the plan administrator or trustee can delegate to agents the responsibility to complete a particular task, she cannot delegate her ultimate responsibility to the plan and its members vis-à-vis the performance of a specific task. As a result, the failure to ensure that the agent is properly qualified may lead to the administrator or trustee being liable.

Finally, the PBA expressly imposes contribution-monitoring obligations on the plan administrator and on the agent responsible for receiving contributions under the pension plan, and they must ensure that all contributions are paid when due. If a contribution is not paid when it falls due, the administrator or agent must notify the regulator. The administrator must give the trustees of the pension fund a summary of the contributions required to be made in respect of the pension plan. In addition, a person who is entitled to receive a summary must notify the regulator if he or she does not receive the summary or if a contribution is not paid when due.

The general fiduciary standard of care

Centuries of case law have established general fiduciary standards. In particular, these standards require that a trustee take the same care in administering the trust as an ordinary prudent person of business would take in managing similar affairs of his or her own (William M. Mercer Limited, The Mercer Pension Manual, Toronto: Carswell, 2005 at 14-5).

In addition, a fiduciary must not permit personal interests to conflict with the performance of his or her duties, nor may a fiduciary earn unauthorized profits from these duties. Finally, fiduciary responsibility can be delegated only in limited circumstances.

These standards apply to all trustees and fiduciaries, including pension plan trustees (Cowan v. Scargill, [1984] 2 All E.R. 750 (Ch. D)). However, jurisprudence has extended the concept of fiduciary to encompass an increasing array of persons. The Supreme Court of Canada has held that where “one party has an obligation to act for the benefit of another and that obligation carries with it a discretionary power, the party thus empowered becomes a fiduciary. Equity will then supervise the relationship by holding him to the fiduciary’s strict standard of conduct” (Guerin v. The Queen, [1984] 2 S.C.R. 335 at 384 (Dickson J.))

Interestingly, the PBA does not explicitly describe the administrator’s role as that of either a trustee or a fiduciary. Nonetheless, the legislation imposes a standard of care that is similar to that applied generally to a trustee or fiduciary.

Accordingly, despite the lack of specific reference in the legislation, the plan administrator is generally considered to be a fiduciary. A trust company that acts as a pension fund trustee under a trust agreement is clearly a fiduciary under general law. Furthermore, even though an insurance company or a bank might not be operating under a trust agreement, it may nevertheless have fiduciary responsibilities (N. Chaplick, “Retirement Plan Disclosure Obligations: Some Hidden Issues for Financial Institutions” (1999) 19 Estates, Trusts and Pensions Journal 51 at 62).

Some writers have suggested that depending on the situation, the scope of fiduciary responsibility can be different and thus liability limited. For example, when a financial institution acts as a trustee, sometimes its only responsibilities are to hold the plan assets. It may be required to take investment direction from an investment adviser and to take instructions from the employer regarding the payment of benefits.

In this case, it is arguable that the trustee’s fiduciary responsibility applies only to the functions entrusted to it. If the trustee has no responsibility for the selection of investments or the calculation of benefits, it is reasonable to expect that it would not be subject to fiduciary responsibility for the investments chosen or benefits paid. However, the decision in Froese v. Montreal Trust Co. of Canada ((1996), 137 D.L.R. (4th) 725, [1996] (B.C.C.A.)) forced the re-evaluation of this conclusion.

In Froese, the British Columbia Court of Appeal held that there was “an overarching obligation upon a custodial or administrative trustee to pay attention to the interests of the beneficiaries additional to its contractual duties provided in the trust indenture. This obligation is not unlimited: it arises only within the function assigned to or assumed by the trustee.”

The court found that there was an “obligation to recognize reasonably apparent danger signals” and to function as a “watchdog” to protect the beneficiaries’ interests. Neither the limited role of administrative custodian played by the defendant trust company nor the provisions of the trust agreement were sufficient to protect the custodian from this liability.

The Manitoba Court of Appeal considered the scope of a custodial trustee’s fiduciary responsibility under a registered pension plan and narrowed the interpretation of Froese in Bohemier v. Centra Gas Manitoba Inc. ((1999), 170 D.L.R. (4th) 310 (Man. C.A.)).

This case concerned an action that retired members of a pension plan commenced against the pension plan sponsor, Centra Gas Manitoba Inc., the custodial trustee, Canada Trust, and the union representing the active plan members. The retired members brought the action on this basis of their exclusion from an agreement between the union and Centra for distribution of surplus pension funds. Canada Trust was included in the action as the trustee of the pension plan that distributed surplus assets pursuant to the agreement.

The lower court dismissed the claim against Canada Trust on a motion for summary judgment because Canada Trust was merely a stakeholder for the pension funds. It had no authority to make any payment out of the fund unless authorized by the proper party; it was obligated to pay out funds in accordance with company’s direction. On appeal, the Manitoba Court of Appeal upheld the decision and noted that Canada Trust’s usual fiduciary responsibilities had been specifically circumscribed by the terms of the trust agreement. On that basis, it held that Canada Trust should be considered a “stakeholder” that had no responsibilities or control over the matters in the case.

The Froese decision makes trustees potentially liable outside the “four corners of the trust agreement” and a trustee, custodial or classic, must act as a “watchdog” in obvious cases of concern. However, where a prudent and reasonable trustee would not suspect a problem in the situation, there should be no obligation to investigate the directions received.

Conclusion

Duties of care, prudence and loyalty arise from the PBA, general principles of fiduciary law and the individual pension plan and trust agreement. The PBA itself refers not only to plan administrators but also to their agents and delegatees when assigning responsibility. Thus, in most circumstances, the standards from all three sources will be imposed on any party to a pension arrangement who has discretionary power.

Mitch Frazer is a senior associate in the Pension and Employment Group at Torys LLP. His practice focuses on all aspects of pension and benefits matters. Stacey Parker-Yull, student-at-law, provided substantial assistance in the researching and writing of this article.

If you can recall the classic 1968 horror film Night of Living Dead, you will have an appreciation for s. 178(1) of the Bankruptcy and Insolvency Act (BIA). It is, in fact, the section of the living debt – the debts that just won’t die, potentially terrorizing already-released bankrupts for years.

Section 178(1) creates an entire class of debts that are not released by an order of discharge, including:

• court-imposed fines or restitution orders;
• damages in civil proceedings for bodily harm intentionally inflicted, sexual assault, or wrongful death therefrom;
• debts for alimony;
• debts for support and maintenance;
• debts arising out of fraud, embezzlement, misappropriation, or defalcation while acting in a fiduciary capacity;
• debts for obtaining property by false pretences or by fraudulent misrepresentation;
• liability to a creditor for a dividend where the bankrupt failed to identify the creditor to the trustee in bankruptcy;
• debts for student loans in certain cases; and
• any debt for interest owed in relation to the previous eight classes.

However, while these debts can be menacing, they can be defeated, either by paying the creditors or by convincing the court that the claimant is deserving of relief, given the nature of his or her conduct. The standard of proof for s. 178(1) applications is the ordinary civil balance of probabilities test.

Section 178(1)(a) - Court-imposed fines or restitution orders

Section 178(1)(a) provides that an order of discharge does not release a bankrupt from fines, penalties, restitution orders, or other orders that are similar in nature. This specifically applies to criminal and quasi-criminal context, so lawyers should consider the blameworthiness of their clients’ actions.

Other debts included in this section include compensation orders given at a criminal sentencing R. v. Devgan (1999), 44 O.R. (3d) 161 (C.A.); leave to appeal to S.C.C. dismissed) restitution orders (B. (S.M.A.) v. H. (J.N.), (1993), 23 C.B.R. (3d) 81, aff’d (1994), 31 C.B.R. (3d) 302 (C.A.) , and fines imposed by a criminal court for failing to remit employees’ tax deductions (R. v. Henneberry (2002), 34 C.B.R. (4th) 94 (N.S. Prov. Ct.)).

Section 178(1)(a.1) - Court-awarded damages in a civil proceeding for bodily harm intentionally inflicted, or sexual assault, or wrongful death resulting therefrom

Section 178(1)(a.1) applies to all civil proceedings commenced after Sept. 30, 1997 that deal with bodily harm intentionally inflicted, sexual assault, or wrongful death resulting therefrom. The court must consider the claimant involved as well as the conduct of the bankrupt that gave rise to the award of damages. Moreover, the bankrupt must also have both caused bodily injury and intended to do so – it is not enough that a malfeasance caused an injury (Kawaauhau v. Geiger (1998), 118 S. Ct. 974).

Sections 178(1)(b) and 178(1)(c) - Debts for alimony, support or maintenance

Sections 178(1)(b) and (c) provide that an order of discharge does not release a bankrupt from debts incurred on account of an order or agreement of support, maintenance, or other establishing affiliation (Dudgeon v. Dudgeon (1980), 34 C.B.R. (N.S.) 308; see also: Houlden and Morawetz at 6-124.2). Generally, the court is faced with a question of fact: is there an outstanding liability for support or maintenance (Re Moore (1988), 67 O.R. (2d) 29 (S.C.))?

It should be noted that an equalization payment made by court order or separation agreement will not be protected pursuant to s. 178(1) (Re Matthews (1993), 17 C.B.R. (3d) 103 (Ont. Gen. Div.)), and that only costs specifically attributed to the obtaining of a maintenance or support order will survive (Manolescu v. Manolescu (2003), 47 C.B.R. (4th) 77 (B.C.S.C.)).

Section 178(1)(d) - Debt or liability arising out of fraud, embezzlement, misappropriation or defalcation while acting in a fiduciary capacity

The threshold question to this section is whether the bankrupt was in a fiduciary position, and whether the debt arose from fraud, embezzlement, misappropriation, or defalcation. If the answer to both questions is “yes,” the debt will survive bankruptcy. The finding of a fiduciary relationship itself is not enough: there must also be an element of wrongful conduct (Simone v. Daley (1999) 43 O.R. (3d) 511 (C.A.)).

Section 178(1)(e) - Debts for obtaining property by false pretences or fraudulent misrepresentation

Section 178(1)(e) protects creditors where there was fraudulent misrepresentation, according to this test:

(i) there was a representation;

(ii) the representation was false;

(iii) the representation was made knowingly, without belief in its truth, or it was made with reckless indifference as to whether it was true; and

(iv) the creditor relied upon the representation in turning over the property to the debtor (Re Horwitz, 52 C.B.R. (N.S.) 102, aff’d (1985), 53 C.B.R. (N.S.) 275 (Ont. C.A.)).

A common defence that may work to protect a good-faith bankrupt is that is that the bankrupt’s conduct was not actually fraudulent, because he or shehad an honest belief that the false representation(s) were really true.

Section 178(1)(f) - Failure to disclose the name of a creditor

Failing to disclose the name of a creditor to a trustee in bankruptcy is caught by s. 178(1)(f), but the failure to disclose must have been intentional. Where it was unintentional, the bankrupt will not be prevented from obtaining his/her discharge (Beals v. Saldanha (2001), 54 O.R. (3d) 641 (C.A.)).

The living debt zombies can be particularly nasty to discharged bankrupts, but counsel can defeat them with a proper understanding of the scope and purpose of the paragraphs composing s. 178(1).

Section 178(1)(g) - Student loan debts

Student loan debts can also be hard-to-kill zombies if they were granted under the Canada Student Loan Act, the Canada Student Financial Assistance Act or similar provincial schemes, such as by the Ontario Ministry of Training, Universities and College Act (R.S.O. 1990, c.-19) or a body incorporated by provincial legislation to provide for the financial welfare of graduate students (Re Flynn (2002), 35 C.B.R. (4th) 105 (Alta. Q.B.)). Private bank loans and other loans, however, are not subject to s. 178(1)(g) (Re Ledoux (2005), 8 C.B.R. (5th) 225 (Sask. Q.B.)).

Bankrupts can apply to a court to quash the debt 10 years after they cease to be a student, however, if the bankrupts:

(i) have acted in good faith in terms of their liabilities under the loan; and

(ii) will continue to experience great financial difficulty in connection with payment of their loan liabilities.

It should be noted that Bill C-55 (unproclaimed) proposes to reduce the period in s. 178(1)(g)(ii) from 10 years to seven and the period in s. 178(1.1) from 10 years to five.

Conclusion

The living debt zombies can be particularly nasty to discharged bankrupts, but counsel can defeat them with a proper understanding of the scope and purpose of the paragraphs composing s. 178(1). Socially unacceptable behaviour will not be protected by a bankruptcy discharge; however, if you can characterize your client’s situation and his or her efforts in an appropriate way, you will be able to alleviate some of the burden. If a debtor can show good faith and remain honest, they will have a fighting chance when they discover “They’re coming to get you!”

Stanley Kershman is a certified specialist in bankruptcy and insolvency law with the law firm of Perley-Robertson, Hill and McDougall LLP in Ottawa. He is the author of Credit Solutions: Kershman on Advising Secured and Unsecured Creditors (Carswell). He is the former co-chair of the National Legislation Committee for the Credit Institute of Canada.

A leading authority on solving – and avoiding – financial disasters, Kershman has been helping people get out of debt for more than 25 years. His down-to-earth book, Put Your Debt on a Diet: A Step-by-Step Guide to Financial Fitness, can be found at www.debtonadiet.com and at www.amazon.com.

This article is an abridged version of an article by the same name which was presented at the Second Annual Pan-Canadian Insolvency and Restructuring Conference in Gatineau, Que. on Sept. 8, 2006.

On Nov. 23, 2005, the Department of Finance announced its proposal to reduce income tax rates on “eligible dividends” in an effort to level the playing field between corporations and income trusts. The proposed enhanced gross-up and dividend tax credit mechanism for eligible dividends is intended to theoretically – and finally – attain tax integration, regardless of whether an investor earns income indirectly via a corporate structure or directly as an income trust unitholder. The decision to increase the dividend tax credit and to not tax income trust distributions was welcomed enthusiastically on Bay Street, as the income trust sector and dividend-paying companies surged ahead.

The federal government's intent is to ensure that the overall tax burden should be the same whether a corporation earns the income and distributes the after-tax amount as dividends to the Canadian shareholder, or whether the shareholder earns the income directly as a unitholder of an income trust.

On June 29, 2006, the Department of Finance released the draft legislation to implement these changes to the dividend tax rate. The draft legislation contains 66 pages of technical changes, accompanied by complex and lengthy explanatory notes.

Points of interest

1. The draft legislation introduces two new tax pools, a general rate income pool (GRIP) and a low rate income pool (LRIP).

2. GRIP, generally, is the pool balance from which eligible dividends can be paid by a Canadian-controlled private corporation (CCPC) without incurring further tax consequences. The proposed calculation of GRIP is complex and will require careful tracking by tax practitioners into the future.

3. LRIP applies to public corporations and to non-CCPCs. Generally, an LRIP balance is an accumulation of tax-paid retained earnings that were accumulated by such corporations paying tax at a lower rate than what they would have paid had such preferential rates not applied.

4. Public corporations and non-CCPCs must pay taxable dividends first from their LRIP balance, and then eligible dividends can be paid in order to avoid further tax consequences. For CCPCs, no ordering rules apply.

5. In order for a corporation to pay an eligible dividend, such designation must be made in writing, and the corporation must notify all intended recipients.

6. To the extent that an eligible dividend is paid and such designation is in excess of the GRIP balance (or, for public corporations, such eligible dividend was designated at a time when a LRIP balance existed) a new penalty tax will apply. In most cases, the penalty tax will be paid by the corporation at a rate of 20 per cent of the excess amount designated. However, to the extent that a certain anti-avoidance rule applies, the penalty tax could be payable at a rate of 30 per cent of the total eligible dividend designated.

7. The draft legislation contains proposals that will require all corporations to file an extra tax return in addition to their normal T2 filings, in order to determine whether or not the penalty tax referred to above will apply.

Remuneration strategies

Now that the draft legislation has been released, the provinces are starting to respond. Such provincial responses are necessary in order to get an accurate read of what the combined federal-provincial tax rates will be on eligible dividends.

CCPCs' remuneration strategies may be greatly affected by the new eligible dividend rules. Traditionally, active business income earned by a CCPC in excess of the small business limit (currently $300,000 federally, increasing to $400,000 for 2007) is bonused out to the active shareholder(s) so that the excess is not double-taxed on distribution to the shareholders as dividends.

The old rules of thumb with respect to remuneration planning for shareholders of private corporations may now be out of date. In fact, a review of the draft legislation strongly suggests that careful planning will need to be done on a year-to-year basis in order to decide what the most tax-effective methods to remunerate shareholders of these private corporations will be.

While some of the old rules of thumb will still be applicable, such as the desire to tax active business income at the small business limit on the first $300,000-$400,000 of profits, the need to receive salary in order to contribute to an RRSP in future years, the need to pay dividends to reduce certain negative-tax accounts (such as the cumulative net investment loss account), and other common planning strategies such as bonusing-down to the small-business limit may no longer be appropriate.

Attaining tax integration without declaring and paying a bonus alleviates significant tax concerns. If a bonus is found to be unreasonable and a deduction is denied under s. 67 of the Act, while the bonus is taxed in the recipient's hands, double taxation ensues. CRA administrative guidelines have developed over the years to deal, inter alia, with the changing decisions on the reasonableness of bonuses paid from a CCPC's income, as set out most recently in Income Tax Technical News no. 22 (Jan. 11, 2002).

Those guidelines include requirements that the shareholder-manager who receives the bonus be a shareholder of a CCPC, a Canadian resident, and actively involved in the CCPC's day-to-day operations; thus, uncertainty may arise at several points. Furthermore, the courts are not bound by the CRA guidelines, and a bonus may be impugned under s. 67 even if the guidelines are adhered to. The CRA may also argue that the bonus was not incurred for the purpose of earning business income, and deny a deduction under paragraph 18(1)(a) of the Act. The full-integration theory of the new eligible dividend rules may eliminate the need for the CCPC bonus-down strategy.

Tax practitioners may now also need to consider whether the sale of shares of a private corporation so as to realize a capital gain is still the preferred strategy, from a tax perspective, as opposed to the sale of the corporation's assets and a subsequent distribution of the retained earnings to the shareholder as a dividend. In fact, if the corporate sale of assets involves the sale of goodwill, it probably now makes more sense to have a sale of assets and pay an eligible dividend as opposed to selling shares.

As tax practitioners continue to sift through this complex legislation, the old saying “back to the drawing board” has never been more true.

As in-house counsel, you can lead or influence change in your organization. Here’s a quick looks at some of the ways you can do so.

Are you demonstrating the change you want to see?

Think strategically

Leading or influencing change requires you to think differently than your legal training might dictate. Corporations must take risks. Your organization expects you to focus on what senior management thinks are the “real” risks and to provide pragmatic and creative advice on how to deal with them.

In-house counsel are well-positioned to advise our organizations on which risks are consistent with their mandates and risk tolerances. We’re aware of both legal and business risks because we understand senior management’s strategic thinking. We weigh outside counsel’s advice and provide senior management with appropriate action plans. These skills enable us to effectively lead or influence change.

To think strategically, add creative and constructive thinking to your critical and tactical thinking. Critical thinking spots the weaknesses in a plan or the flaws in an argument. Creative thinking requires quiet time and comes from exposure to new ideas, new people, and different ways of thinking. Constructive thinking builds on ideas that are currently on the table.

For creative inspiration, we need to network in both the legal and business worlds, and read widely – in law, in business, and in management.

Inspire confidence

The confidence you inspire is a reflection of your demeanour. The most successful in-house counsel is an oasis of calm in a crisis. In a change initiative, there are many moments when all around you will lose their heads. It‘s difficult to successfully plan, implement, and monitor change.

It’s inevitable that some employees will experience a rollercoaster of emotions in reaction to a change process, and many of those emotions will be negative and destructive ones. However, at the end of the process comes adjustment and re-alignment. You need be prepared for these reactions.

Be a leader

Waiting for someone else in the organization to introduce a change you would like to see happen is not leadership. You can identify gaps and risks in business processes and plan to address these gaps and risks.

Stay focused for the long haul

If your organization’s change involves its compliance, ethics, or corporate social responsibility, you need to understand how to change the organization’s culture. This runs deep. Whether it knows it or not, every organization has a corporate culture. A strong and healthy corporate culture is deliberately established and nurtured through words and actions to match.

The key to real and lasting change is to influence culture. In-house counsel are well-placed to observe the prevailing organizational culture and decide whether the culture is aligned with strategic objectives. Use your connections throughout and across your organization to bring the culture into alignment with strategic objectives.

Understand the key ingredients for successful change management

Whether your role is leader, facilitator, problem solver, or troubleshooter (or some combination of these roles), you need to understand the key ingredients for successful change:

• Focus. How does the change initiative relate to your organization’s strategic plan? What problem are you trying to solve? Are work priorities aligned to enable the change?
• Model the vision. Are you demonstrating the change you want to see?
• Communicate. Are you communicating up, down, and sideways in regular and timely ways? Do you have a plan identifying key communications points and what to do about saboteurs?
• Measure. What will you measure to judge whether you’ve solved the original problem or achieved the original vision? Do data sources exist, or do you have to create them? Are you accountable?
• Meaningful input. Will you meaningfully involve affected employees and stakeholders?
• Resources. Without adequate resources, you will fail. Put good energy into advocating for and utilizing adequate resources.
• Performance management. Are performance expectations for senior management and employees aligned with the change initiative? Will you publicly acknowledge achievements and leaders?

Organizational change and solicitor-client privilege

Don’t forget that your work influencing or leading change may not be privileged. If the change process you’re working on doesn’t affect legal systems or regulatory compliance, and you’re not providing legal advice, privilege will not attach to your work product. Be careful to manage and document your involvement so you can maximize the privilege protection for your organization.

Conclusion

You can lead or influence change successfully as in-house counsel. Learn about the nature of change processes. Expand your horizons to develop new and different skills. You’re a natural!

This article is adapted from a paper presented to the 2006 Spring Conference of the Canadian Corporate Counsel Association.

Lawyers often face the need to retain an independent business valuation or damages quantification expert to provide specialized evidence during the course of a particular litigation. The involvement of an expert can include the drafting of discovery questions, the issuance of an expert opinion report and, potentially, testifying at trial. So, how should legal counsel identify and retain an “effective” expert?

While qualities such as direct trial experience, multiple professional designations and a lengthy list of publications are undoubtedly important, they are certainly not the most important attributes that distinguish effective experts from less-effective ones. Qualities such as objectivity, communication skills, and common sense are equally – or perhaps even more – important.

How should legal counsel identify and retain an “effective” expert?

Objectivity

Unlike fact witnesses, experts are allowed to provide their opinion as to value or the quantum of damages. However, an expert opinion does not have intrinsic value, but derives its value from the expert’s due diligence, ability, and credibility.

Given the expert’s ultimate responsibility to the court, independence and objectivity are indispensable qualities in an expert witness. Independence can be demonstrated in many ways, including:

• not simply advocating the position proposed by legal counsel;
• conducting adequate due diligence and research to be able to support a particular position;
• not relying on unreasonable assumptions or hypotheses;
• demonstrating a balanced thought process; and
• not appearing argumentative, defensive, or overly in favour of a particular position in written reports and when testifying in court.

Jonathan Lisus, a partner with McCarthy Tetrault’s Litigation Group in Toronto, has a broad-based business disputes practice. Lisus points out that objectivity is the expert witness’ main strength and, consequently, “the quickest way for an expert to compromise the integrity and ability of his or her opinion and, therefore, compromise the client’s case, is to not be objective.”

“Common sense and sense of commercial reality”

Courts have long commented on expert opinions that are technically sound but defy logic, such as determining a value of zero for an investment structure when facts indicate that arm’s-length parties did indeed choose to invest in the structure and therefore perceived “value” in the structure.

Similarly, determining a quantum of damages that is unreasonably high, given all available facts, is usually a result of failing to apply sober second thought. What differentiates truly effective experts from others is their ability to take a step back from the technical realm and the fine details, place themselves in the shoes of a reasonable business person, and re-examine their conclusions to see if they actually make business sense.

This view is echoed by Judge Donald Bowman, who, as the chief justice of the Tax Court of Canada and a Tax Court judge for over 15 years, has critically reviewed a large number of expert reports. He notes that “a valuation operates within the real world, within the context of commercial reality and has to conform to commercial reality. If it’s too far off from commercial reality then it casts doubt on the conclusion.”

Communication skills

The most technically qualified expert will be ineffective if he or she cannot succinctly and clearly communicate conclusions and rationale to others. Oral skills are important in court, but given that the majority of disputes settle before reaching the trial stage, written communication skills are also essential.

Paul Scargall, a partner at Reuter Scargall Bennett in Toronto, points out that with respect to communication skills, “it’s not just being able to present orally; experts have to be able to get their opinions on paper in a compelling and clear manner, assuming the reader has no history in the particular business. The analysis must lead the reader along a simple and logical progression that inescapably reaches their rational conclusion.”

Effective communication also includes not overstating a particular view or being overly dramatic in written reports or at trial. Says Oslers LLP tax litigator Al Meghji, “if I were to find the single biggest mistake that experts make... it’s that they tend to overstate, which really hurts their case.” Overstating a particular opinion is not particularly convincing for a reader or judge, and leads to adverse inferences as to objectivity and independence.

Conclusion

There's a broad spectrum of qualities that are essential for experts to possess, reaching beyond the “scorecard” approach of number of trials, number of designations, number of publications, and so forth. While these are important and play a not inconsiderable part in establishing credibility, qualities such as objectivity, communication skills and common sense are equally, or perhaps, even more important.

Choosing an expert is a multi-faceted decision process that needs to be carried out with careful consideration and adequate research in order for counsel to derive maximum value and effectiveness on behalf of their client.

Prem M. Lobo, CA CBV CPA, is a senior associate at Rosen & Associates Ltd. and specializes in business valuations, damages quantification, and expert testimony. A version of this article originally appeared in the Aug. 11, 2006 issue of The Lawyers Weekly, published by LexisNexis Canada Inc.

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