When to Conduct an Internal Investigation

The purpose of an internal investigation is to determine the validity of any allegations and recommend a course of action to fix the problem. This means applying established investigative protocols to find facts, analyze if the facts constitute a violation of company policy or applicable law and then suggest appropriate remedial measures. When faced with allegations, a corporation must act to protect the reputation of the corporation, its directors, officers and employees.

First, the corporation should determine if a mandatory internal investigation is required by statute – which is remarkably rare in Canada. In most cases, the decision to commence an internal investigation is discretionary and made at the direction of the board of directors, chief executive officer and in-house counsel.

Second, the corporation should conduct an initial evaluation of the potential risks and adverse consequences of the alleged misconduct. For example, if the allegations are found to have merit, what would be the corporation’s disclosure obligations (market, self-disclosure to regulators, statutory remediation, etc.) and what civil liability and insurance considerations may arise?

Typically, the following circumstances can trigger an internal investigation:

• Whistleblower allegations of misconduct by senior management or agents of the corporation
• Shareholder requests that an actual or threatened derivative action against directors and officers be initiated
• Allegations of misconduct raised by independent or internal audits or compliance departments
• Board level suspicion of misconduct by officers, employees, or agents of the corporation
• Government or regulatory agency notice identifying unlawful or suspicious activity by the corporation or the industry in which it participates
• Allegations of misconduct made publicly on social media, by watchdog groups, academics, or media

While this list is not exhaustive, it can help businesses identify situations that may warrant internal investigations.

Parallel Investigation and Shareholder Litigation

The existence (or likelihood) of a parallel regulatory investigation or shareholder lawsuit must be considered and may determine if or how an internal investigation is conducted. For example, depending on the nature of the allegations, the Public Prosecution Service of Canada, a provincial securities commission and regulatory agencies dealing with environmental, food and drugs and workplace safety legislation may also conduct investigations.

Cooperation with Government and Regulatory Authority Investigators

Eventual cooperation with government and regulatory authority investigators should also be considered at an early stage. Since the issuance of the Yates Memo in the U.S. and similar trends in Canada, the potential “credit” for cooperating with prosecutors, should be reviewed and considered by the corporation retaining legal counsel.

Prompt self-disclosure is one of the factors listed by public authorities to evaluate a company's cooperation. Early and accurate disclosure may help the company mitigate any regulatory action and avoid “cover up” allegations.

Competition Act offences: The Competition Bureau and the Public Prosecution Service of Canada often jointly administer immunity and leniency programs for parties to offences under the Competition Act that wish to self-report. Specialized competition law counsel should be retained if the allegations involve price fixing or other offences under the Competition Act.

Civil Lawsuits

Civil lawsuits are virtually inevitable when someone has suffered a loss. If the individual loss is small, but spread over many people, a class action is likely. Moving forward with an investigation and timely public disclosures with authorities can mitigate some consequences of the wrongdoing and claims of punitive damages.

Solicitor-Client and Litigation Privilege

The importance of establishing and maintaining solicitor-client privilege during an internal investigation cannot be overstated. The corporation’s ability to be fully informed on a confidential and privileged basis by counsel is critical to its risk assessment and decision-making.

Solicitor-client privilege is a complex issue. The fact that a lawyer is investigating does not necessarily make the investigation privileged. Generally speaking, communication will be subjected to and protected by solicitor-client privilege when it is between a lawyer and a client, intended to be confidential and for the purpose of obtaining legal advice. It also extends to communications between employer representatives on legal advice received (see British Columbia (A.G.) v. Lee 2017 BCCA 219).

However, in affirming the United States Supreme Court decision in Upjohn Co. v. United States 449 U.S. 383 1981) (S.C.), the Manitoba Court of Appeal in Gower v. Tolko Manitoba Inc. 2001 MBCA 11 stated:

[…] legal advice is not confined to merely telling the client the state of the law. It includes advice as to what should be done in the relevant legal context. It must, as a necessity, include ascertaining or investigating the facts upon which the advice will be rendered. Courts have consistently recognized that investigation may be an important part of a lawyer's legal services to a client so long as they are connected to the provision of those legal services. As the United States Supreme Court acknowledged:

The first step in the resolution of any legal problem is ascertaining the factual background and sifting through the facts with an eye to the legally relevant.

Accordingly, it is recognized in Canada that counsel’s investigations may be entitled to solicitor-client privilege protection. However, there is no guarantee that all aspects of an investigation will be privileged.

Solicitor-client privilege is intended to be as absolute as possible and only set aside when absolutely necessary.

Instances where solicitor-client privilege will be lost include:

• when the communication is itself criminal (see Descôteaux v. Mierzwinski, [1982] 1 SCR 860)
• when there is a clear, imminent and serious risk of to public safety (see Smith v. Jones, [1999] 1 SCR 455)
• to prevent a wrongful conviction (see R. v. McClure, 2001 SCC 14 and R v Brown, 2002 SCC 32)
• when a client voluntarily discloses the information to a third party.

Even when solicitor-client privilege is permitted to be broken, it must be as minimal as possible. However, the scope of the privilege will be coincident with the level of investigation necessary to give legal advice. That scope is determined by a judge reviewing an attack on privilege. The corporation must be warned of the limits of this privilege.

There is also “litigation privilege” (also known as “attorney work product” privilege in the U.S.), which covers the work of lawyers and those people working for them (e.g., forensic accountants). This privilege includes investigations for the “substantial” purpose of addressing upcoming litigation and lasts only as long as the litigation for which the lawyers’ work product was produced (see Blank v. Canada (Department of Justice), 2006 SCC 39). As such, the working papers of a criminal investigation may have to be produced in subsequent civil litigation if solicitor-client privilege does not apply.

Waiver of privilege is a key issue when deciding how best to cooperate with enforcement agencies. The work product, findings and advice created during the investigation are typically covered by solicitor-client and litigation privilege.

The first temptation is to be selective about what documents or areas to waive. That may be a risky strategy because most cooperation agreements involving waiver require full, fair and true disclosure - otherwise it will void the cooperation agreement. In addition, selectively waiving privilege may unintentionally result in a wider waiver, typically referred to as a “subject matter” waiver.

On the other hand, full waiver gives a detailed road map of wrongdoing to the regulator and potential plaintiffs in civil proceedings. Accordingly, absent credit for cooperation for waiving privilege, there are generally very good reasons to maintain privilege.

Government authorities typically do not demand non-factual litigation privileged or solicitor-client privileged communications. However, that is not to say that regulators are immune to the allure of receiving privileged information. To encourage waivers of privilege, regulators may agree to enter into confidentiality agreements to support the position that there has been no waiver of privilege by disclosing privileged materials. The efficacy of this agreement to protect information from third-party civil litigation depends on the jurisdiction.

Common Interest Privilege Agreements and Joint Defence Agreements

A Common Interest Privilege Agreement (CIPA) is often entered into by two corporate entities during a government or regulatory authority investigation. A CIPA may also be entered into by the corporation and its employees, where deemed appropriate and necessary. However, the corporation’s counsel must be careful to identify circumstances where statutory reporting obligations and strategies on eventual credit for cooperation may include entering into or circumscribing the limits of a CIPA.

Joint Defence Agreements (JDA) may also be entered into by two corporate entities under investigation or prosecution, or between a corporation and an individual employee. JDAs allow counsel for the companies (or for the company and employee) to mutually disclose information, give evidence and discuss strategy without waiving their solicitor-client privilege. The obvious benefit for an employee is that they will likely have access to more information on the investigative counsel’s findings (and the opportunity to comment on them). The employee will also likely be indemnified for the cost of legal counsel.

The benefits of CIPAs and JDAs should be discussed by the corporation and its legal counsel. CIPAs and JDAs must be crafted for the circumstances of the investigation and potential liability flowing from the allegations that may or may not be substantiated by the internal investigation.