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So you’re faced with a class action, now what?

Jul 6, 2016

An organization’s initial reaction to the threat of a potential class action can dramatically shape its outcome and impact. From avoiding reputational damage to ensuring document preservation, it’s crucial for a business to have comprehensive and tested crisis response protocols and class action defense strategies in place to respond effectively to the threat of a class action without disrupting normal operations.

As part of our Brief the Board series, Craig Lockwood, a partner in Osler’s Litigation Practice Group, and Melissa Krishna, Deputy General Counsel at Pacific Exploration & Production, took a look at the significant stages of a class action and have developed a number of resources to help ensure counsel are prepared in the event of a class action. In particular, these tools provide guidance on developing a class action plan that includes

  • assessing the scope and size of the action
  • understanding the business and legal implications of the various stages of a class proceeding
  • mitigating the impact, including crisis response (i.e., public relations and dealing with stakeholders such as customers and suppliers)

Consider these resources for tangible takeaways to help your company weather the storm an impending class action creates:


The essentials

  • Develop a document retention policy
  • Establish a pre-approved range of settlement with the board
  • Budget for insurance costs – these could increase after a class action

Access the PDF of TakeawaysReview the slide deck



Video transcript

ERIC MORGAN: Good afternoon, and welcome to Osler's webinar series Brief The Board. Apologies for the short delay. I'm Eric Morgan. I'm an associate in Osler's litigation department in Toronto. This is the first in a series of webinars that Osler is presenting on how counsel can brief their board members and senior management across a variety of litigation topics.

In today's webinar, we will be discussing class actions. I'm joined today by Craig Lockwood, a litigation partner here at Osler with extensive experience and class proceedings, and Melissa Krishna, deputy general counsel for special projects at Pacific Exploration and Production. If you have any questions during the webinar, please email us or type them into the area provided on your screen, and we'll respond to them as time permits. With that, I'm going to turn it over to Craig and Melissa.

CRAIG LOCKWOOD: Great, thanks, Eric. So today we're going to give you an overview of effectively how to manage a class action. We won't be getting into the details of the class proceedings themselves but rather the sort of business implications when you're confronted with a class proceeding on how to manage your operations through the sort of treacherous waters. At the outset of a claim, first and foremost, you have to assess the scope of the claim. And what that means is not only the nature and extent of the sort of liability but also the impact on the company, its operations, and also third parties.

And so from that perspective, with respect to the scope of the claim, the first question you have to determine is whether the issue, the underlying claim, is grounded in a historical event or whether it's an ongoing issue. And the reason that's fundamental is because if it's an ongoing issue, it may require active participation or intervention by the company over and above the day to day operations. For example, if it involves a product that's on the market, there may be a product recall required. You may have to appoint, for example, a special committee to deal with changes to ongoing business operations, and you may have issues with respect to a regulator if you work in a regulated industry.

And the other thing to concern yourself with is if there are multiple claims out there, and that's often the case, there will typically be multiple plaintiffs firms that commence a claim, you want to assess the scope of each claim to see if they're parallel. And just by way of example in the [INAUDIBLE] class proceedings, there were three or four claims at the outset, and they were essentially the same, but they had somewhat different class perspective and also some of the claims were more nuanced. And that was with a view of sort of getting an upper hand in the ultimate carriage battle that took place. But it was important at the outset to sort figure out exactly how all of the claims broke down and whether they, in fact, were parallel or whether had some, as I say, nuanced differences.

Related to that, of course, is the size of the claim. And most importantly in that regard is whether the claim itself is going to trigger reporting obligations either to insurers, to regulators, or to shareholders more generally. By their very nature, class actions sort of rise above a de minimis level. And so you'll almost certainly have some form of reporting obligations to either, as I say, the regulator or to the markets. And for reporting issuers and arguably others, the nature and the scope of the public disclosure needs to be assessed right at the outset.

MELISSA KRISHNA: And Craig, one of the ways that we use to assess the size of a potential claim would be to look at our market cap if it's a public company. For example, PetroMagdalena Energy, which is a company that we acquired, there was an issue where potential production had been disclosed in our financial statements as actual production.

And as a result, when we announced the correction, there was a resulting decline in the market cap of about 40%, which could be attributed to the incorrect disclosure to the market. So you kind of get a sense of that could potentially be the class size of if there are shareholders who purchased at the time that you announced the production and then shareholders as a result of that announcement lost out, so that kind of gives you an idea of the size of the claim that could potentially arise.

CRAIG LOCKWOOD: That's right. Thanks, Melissa. Related to that, of course, is also the jurisdictional bounding of the claim both nationally and internationally. Very, very commonly, Canadian class proceedings will, of course, be grounded on parallel US proceedings. And that's helpful insofar as that may give you some sort of indication as to where a proceeding is headed. Oftentimes the US litigation is far more advanced than the Canadian proceedings. They oftentimes can be contemporaneous, but if we get a little bit of lead time, you'll get a sense of how the courts are responding to the claims and where the strengths and weaknesses of the plaintiff's allegations are. So that will give you some guidance as to where you can expect the Canadian proceedings to go.

But more sort of domestically, the issue is are you dealing with a national class? Are you dealing with a provincial class? Or are you dealing with some sort of hybrid where it crosses provincial boundaries but doesn't reach the level of a national class? And oftentimes the other issue is, are you dealing with spillover? For example, if it's a product, do you know at the outset where the products ended up? Oftentimes, for example, they'll cross US borders. And that's important because you're dealing not only with parallel class proceedings. You're also going to then have to deal with multiple regulators. So at the outset, you're going to want, to the extent possible, identify what jurisdictions are involved and what the scope of your exposure is on that front.

And lastly, in terms of sort of your initial assessment of the claim, you want to figure out exactly what parties are involved. And that's not just the parties to the litigation. That's sort of the easiest thing to determine, because they're set out for you. But the question is, are there third parties implicated by these proceedings who are not party to the actual proceedings, that are not named?

And similarly, are there co-defendants that have a relationship with your company? And what's the nature of that relationship? Are there foreign affiliates who are implicated? For example, oftentimes Canadian proceedings will name foreign US parents or foreign parents as named parties. And then you have to get into the consideration of whether that foreign affiliate is going to attorn to the Canadian jurisdiction. And that's the decision you're going to want to make at the outset, because before you can take any steps, you'll need to decide whether the foreign affiliate will attorn.

Similarly, regulators will often be involved if you're in a regulated industry, obviously. There's going to be an ongoing dialogue with your regulator, both with respect to the proceedings but also with respect to the underlying issue. And you're going to need to determine whether there's an adversity of interest. And what I mean by that is, is there a potential, as is often the case, that the regulator may actually be a third party to your proceeding? For example, Health Canada is not infrequently named as a third party where products are involved.

And the question is, are you going to create an adversity of interest with the regulator? And there are obviously strategic upsides and downsides to doing so. You want to consider whether there are any indemnities or other third party agreements that are at play. And if so, are there notice provisions? For example, if you have an indemnity at play, oftentimes there's a time period by which you have to notify the third party of a claim under the indemnity. And you're going to want to do that at the outset to make sure that there are no sort of implications going forward.

And lastly, and I don't do this in order of importance at all, but there's also the question of insurers. And you have to consider the extent to which the company is going to dialogue not only with the insurer but also dialogue with counsel and whether that's going to be controlled by the insurer or whether that will be controlled directly by the company itself. And Melissa, you've had some experience on that front. I think.

MELISSA KRISHNA: Yeah, absolutely. So I think, from the general counsel perspective, your two most important relationships during the process of a class action are probably going to be with your legal counsel and your insurer. So most companies I think will go through an insurance broker. They're going to be technically your saving grace once you start, because start getting into settlement negotiations and that.

And essentially, at the outset, what you want to ensure when you're actually purchasing a policy, there are two different types of policies. There's the insurers duty to defend, which means that the insurer will get to choose counsel and centrally manage the litigation. This is usually the kind of policy that private companies or smaller companies would purchase. Generally public companies tend to have insureds duty to defense. So that means that the company would take charge of managing the litigation. Essentially, you would have your choice of counsel and it has to be approved by the insurer. But you generally get to control the litigation with required consent from the insurer.

So from a public company perspective, it's extremely useful to have a bit more control over the litigation, your choice of counsel, and what have you. We'll discuss this a little bit further later in the presentation. But at the outset, good to know.

CRAIG LOCKWOOD: Thanks, Melissa. So sort of having assessed the claim itself sort of in terms of its implications for the business operations, the question we most often get is, what do you need to do as soon as you're confronted with the statement of claim? What are your first steps? And although this may sound like self interest, your first step should be to retain counsel. The sooner that they're integrated into sort of the chain of communications, the better, because they're going to be more effective as your counsel if they're sort of integrated into the company and they know not only the legal implications of the claim but also sort of the considerations you're dealing with on a day to day basis.

And then of course, the next step is to sort of get your head around the underlying allegations. You need to assess pretty quickly the nature and extent of your exposure and whether there is, in fact, a valid issue here that needs to be resolved. That may involve, for example, an internal investigation. As I mentioned, you may need to strike a special committee. You may need to dialogue with regulators.

And then there are more sort of abstract concepts. For example, do you need to go out and retain experts to go and do product testing with the product? Do you need to engage PR firms? Because obviously any class action is going to be the subject of press coverage, and it's going to have implications for the company's goodwill and the business reputation. And Melissa, maybe you can speak to the sort of PR issues that you folks faced.

MELISSA KRISHNA: Absolutely. And actually, going back to your point about retaining counsel, I would say it's wise from internal counsel's perspective to have with your board already identified a slate of litigation counsel that's acceptable to the board in these scenarios. And it's just another preparedness tip, I guess you could say, where you would have a preapproved slate of litigation counsel. And to that counsel, you would provide also-- every insurer has litigation guidelines. So you would provide that to each litigation counsel to make sure that they can comply with those guidelines.

As an example, we were using a law firm out of Colombia, South America, and they were billing us on a flat rate fee, which was not acceptable to our insurer. So they prefer hourly billing so that they can track exactly the number of hours spent and what have you. So it's important if you already have that lined up, because you're going to have to react quickly when you're hit with a class action. So if you know you have a slate of litigation counsel who are preapproved by your board as well as acceptable to your insurer, you can just rely on that list.

And then in terms of getting back to the point with PR firms and investor relations issues, so if you're in a position where when you're hit with a class action your stock price definitely will take a beating and you have to manage the reputational image of the company. So PR firm can be really handy in doing that. In our case, we had our PR firm analyze our press release announcing that we'd been hit with a class action. And how you want to frame the messaging, that becomes pretty important.

If your company has an investor relations department, then they will probably manage all of the calls from shareholders and et cetera. But if you don't, which in our case, we didn't have, then those calls are going to come to the GC's office and you're going to have to learn how to manage that. We'll talk a little bit more a little later about potential training that PR firms offer to handle these kinds of issues.

CRAIG LOCKWOOD: Great, thanks, Melissa. And I guess the third step, although it doesn't really lie along a continuum but it's more contemporaneous with the fact finding, is the issue of documents. Because obviously any litigation is going to turn on the documentary records, and you want to make sure that the appropriate mechanisms are in place.

The litigation hold letters go out, the custodians are identified and flagged, and that you have a robust document collection and protection sort of structure in place so that you can ensure that if at a later date there's any allegation as to records retention, et cetera, you can defensively tell the court that you took the necessary steps. And related to that, of course, is the existence of sort of an ongoing document retention policy outside the context of litigation. And Melissa, I know you've had some experience in that front.

MELISSA KRISHNA: Yeah, so I mean, generally it's a good idea. It's a good corporate governance practice to have a document retention policy in place. I know in creating ours, which is currently still in draft, there is a lot of research that goes into creating a document retention policy, because various acts, whether it's the Income Tax Act or depending on who your regulator is, will have certain periods of time for which you have to retain records. So that's your general document retention policy.

But then to put yourself in a defensible position, like Craig was saying, what's important to do is the minute you're hit with a class action is to send out a company wide notice to all employees advising them that they're not to delete any emails or discard any documentation from that point going forward. So that's a pretty key step that you're going to have to take to ensure that there's no issues later on in the process.

CRAIG LOCKWOOD: Great, thanks. Now, obviously the nature and extent of exposure turns on sort of the legal claim itself. So it's going to be important early on to work with your counsel, external and internal, to assess the merits of the claim, as it were. And related to that is whether there are any procedural or other motions or mechanisms you want to invoke with a view to sort of either limiting your exposure or removing yourself from the jurisdiction or removing the claim for the jurisdiction.

So at the outset, obviously you're going to want to assess good facts, bad facts, the extent of any defenses that may be available to you. But also are there any preliminary challenges that you might have available to you? For example, [INAUDIBLE] motion, you could bring arguing that Canada is not the right jurisdiction, or for example, Ontario is not the right jurisdiction and rather it should be in another provincial court or a foreign court.

Similarly, are there other procedural challenges related to, for example, service? Are there pleadings deficiencies? All of those things need to be assessed up front. And that's another reason why you want to have your counsel in place, because those will have sort of a affect as they sort of filter down to the other considerations that you're playing with as these things play out.

Part of the assessment of the claim, of course, is you want to assess the plaintiff's position. And it comes as no surprise to anyone, I'm sure, in this presentation that oftentimes class actions are driven by counsel. And one of the things you want to assess is what's the strength of the underlying claim and how far are the plaintiffs or plaintiff's counsel, as the case may be, willing to push a particular claim?

One of the things that's very instructive in that regard is whether there's a presence of a third party funding body in the background. And they're becoming more prolific now. And I can tell you we've spoken with them, and they do a lot of up front work before they agree to fund plaintiff's counsel. And they will do a very rigorous assessment of the merits. And so one thing that you want to be mindful of is if a plaintiff is in receipt of third party funding by a third party funding entity, you can be fairly assured that the claim itself at least has ostensible merits. And you're going to want to at least take that into consideration when you're briefing the board.

The other thing to consider really is who you're dealing with on the other side. Is it a single plaintiff's firm? Are there multiple firms in different jurisdictions? Is there a consortium? That's very common these days, you'll often see plaintiffs firms grouping together to bring a singular claim, either at the outset or oftentimes they'll start multiple competing claims and sort of agree to pursue the claims together.

But related to that, is there going to be a carriage motion? And what that is is effectively a motion before the courts to determine which of the plaintiff's firms should be granted carriage of the class action going forward. Because obviously, the court wants to limit the specter of competing claims and the expenditure of needless judicial resources. So the very fact of a carriage motion is important, because it's going to obviously have a bearing upon the direction of litigation as it goes forward and who's going to be sort of at the helm.

And related to that, of course, is you want to consider the nature of the relationship with plaintiff's counsel. I mean, it's a fairly small bar in Canada. And for the most part, plaintiff's firms and large class action firms on the defense side, they know each other, and oftentimes you can leverage a relationship not so much with respect to the merits of the claim or the ultimate disposition of the claim but rather with review to sort of agreeing at the outset what a reasonable schedule is going to be, how the procedures are going to be managed, and if there's sort of a dialogue between defense counsel and plaintiff's counsel at the outset, oftentimes that can take some of the stress off the company of the unknown.

And of course, part of your sort of overall assessment of the claim, as we mentioned, relates to public disclosure obligations. And maybe Melissa you can give us your thoughts on that aspect of the assessment.

MELISSA KRISHNA: Sure. So as a public company, there are obviously disclosure reporting obligations. And generally you're required to disclose any material information. And materiality is at the discretion of the company. However, most class actions just due to their potential size will generally meet the materiality threshold for a public company. And therefore, it would be material information requiring disclosure under the securities legislation.

But the one thing that, like I mentioned before, that you could-- because it will be very important how you convey the message. And so an important role player in that would be your PR firm. Or if you're able to get some consulting to that effect, that really is helpful in delivering the message and trying to put not too much of a negative spin on it.

CRAIG LOCKWOOD: Thanks, Melissa. And then related to that, of course, is whether if you're in a regulated industry, you have additional reporting obligations to regulators. So this is not public disclosure reporting obligations. But rather, for example, if you are dealing with a product or a health product, Health Canada has requirements in terms of adverse event reporting and the sorts of things. The CFIA, the Canadian Food Inspection Agency, may be involved. Similarly, financial regulators may be involved. So you have to consider not only sort of your public disclosures to the market at large but also whether there's an ongoing dialogue or reporting obligations under the governing regulatory regime.

So sort of having assessed the claim from a business perspective and also from a legal perspective, the question then comes, what sort of strategic litigation steps do you need to take at the outset? And oftentimes some of these early decisions will have implications later on down the line. So you're going to want to assess these as early as possible. And the landscape can change, obviously. But for example, if there are co-defendants involved, are you going to want to enter into a joint defense agreement?

And obviously, each case stands on its merits, and there may be good reasons for doing so and good reasons for not doing so in each case. But it's at least something you want to consider, because oftentimes it doesn't pay to fight a war on multiple fronts. And if you're engaged in cross claiming against one another, it can sort of detract from your joint defense of the underlying claim.

Likewise, and perhaps more importantly, are there third parties who are not presently at the table that you need to bring to the table? Are there suppliers, for example, or people who you have indemnification rights in respect of that you want a third party and bring into the action? Because if so, you want to do that at an early stage and get them at the table as soon as possible.

Another question that often comes up is the timing of defenses. Historically, the traditional model has been that you don't file a substantive defense to a claim until after certification. In recent years, a couple of decisions from Justice [? Parell ?] for example, have sort of pushed against the grain in that regard. And now I wouldn't say it's necessarily the unwritten rule anymore, but it's still a strategic consideration you want to sort of assess at the outset, which is do you want to defend and put your position on the record at an early stage or do you want to wait until after the certification decision, if that's an option, and deal with it at that stage?

And then lastly, the issue of expert retention often comes into play. And this comes up in sort of multiple fronts. First, just the very fact of retaining an expert who's going to assess the merits of the claim and help you navigate the claim is often important. But on a more strategic level, oftentimes especially when you're dealing with a discrete industry or a discrete product, for example, there's a limited number of experts who are available to opine on certain issues. And it will be important to tie those experts up or to at least retain them early on in the process so that you don't get conflicted out.

And I know that we've had a number of instances where plaintiff's firm in advance of filing a claim will have gone out and actually retained experts with a view to conflicting them out of the defendant's sort of pocket. So you're going to want to assess very early on. Do you need expert assistance? And if so, from whom? And you want to reach out to them as soon as possible to make sure that you can get the expert you want and the expert you need in a particular context.

MELISSA KRISHNA: Yeah, and to Craig's point, I couldn't agree more on the expert retention. Because even if you do get certified and if you end up at a point where you're having settlement negotiations, experts can play a role then as well. Because your insurer will want to retain an expert to assess the size of the settlement or what the potential-- what you can tie to the wrongful disclosure or what have you. How much of the size of the claim can be tied to that wrongful disclosure? And there you'd get experts to come and weigh in. So if you've retained experts early on, then you're covered throughout the settlement process as well.

CRAIG LOCKWOOD: That's a great point. Thanks, Melissa. I mean, this is by way of recap, but effectively, you've got two contemporaneous streams of action or analysis ongoing. On the one hand, you want to assess the claim itself and its implications for the business, the nature and extent of your exposure. And on the other hand, you want to work with your counsel to sort of make the strategic litigation decisions that are at play.

And the one thing I should have mentioned, of course, is you want to always be mindful of limitation periods, particularly for example, with respect to third party claims. And that's another reason why you want to get out ahead of this as soon as possible, because the last thing you want to do is find out that rights you may have had against the third party have expired due to the expiry of a limitation period and that you're left holding the bag.

So we don't propose to get into the details of a certification hearing and what's entailed. But it is important to know that at the outset, the certification motion is sort of a huge hurdle in the sort of continuum of proceedings. And it really can be dispositive of the litigation even though there's no actual assessment of the merits.

And the reason for that is if a class is not certified, oftentimes that's the end of the story, because it doesn't financially make sense for plaintiffs to pursue it on an individual basis. Likewise, if a class is certified, it's oftentimes when cases will settle, because the degree and magnitude of exposure is crystallized now and defendants are often sort of in a settlement mindset rather than proceeding to the merits.

But from a briefing the board perspective, the first thing you want to do is sort of explain to the board what a certification motion is and why it is significant. Because it's obviously not going to be intuitive to non-lawyers and, frankly, even some lawyers who haven't had experience in the class actions context won't be familiar with sort of the details of a certification motion and why it really matters.

Again, without going into the details of how they play out, really there are sort of three outcomes of a certification motion. And the most obvious one is the class gets certified. And what that means is effectively either some version of the class or the class itself as initially articulated is now certified as a class proceeding to go forward. And as mentioned, that's going to have huge settlement implications one way or the other.

Alternatively, certification can be dismissed. And as I said, that's oftentimes the end of the story, because plaintiff's counsel oftentimes will be doing this on a contingency fee basis. And if they lose the ability to aggregate claims, they similarly lose the economic incentives to pursue a claim.

And lastly, you could get a modified class certified, which is the plaintiffs will articulate a particular class in their pleading, but ultimately the court decides that a smaller or different class should be certified. Interestingly, that can be hugely impactful. And if you look at some of the recent securities class actions, that's really where it's played out.

For example, recently the Ontario courts have taken the view that they will only certify classes of securities were the purchase is bought on a Canadian exchange. So for example, the TMX. But they won't certify classes of purchasers who bought on a foreign exchange. And there have been a couple of class actions recently where they tried to certify a class of all purchasers of a particular security and the class was modified to a much, much smaller class of just the TMX purchasers. And the result was effectively an abandonment of the claim, because again, the economic incentives are lost once a class gets decimated down to 5% of what initially it was articulated at.

And then the sort of asterisk to all of this is you may ultimately face a certification but in a different form. And what this means is you could have a situation where a court declines to certify a class action but does so on the basis that a more appropriate forum is where the litigation should play out. So oftentimes you'll see competing claims in various provincial jurisdictions, and a court will either stay a claim or decline to certify on the basis that the other provincial jurisdiction or another national class and another jurisdiction is the more appropriate forum.

And just from a sort of more pragmatic perspective, the certification motion, it's a bit of a misnomer to call it a motion given its significance, although that's technically what it is. But the reason it's important from a business operations perspective is it is going to be the subject of significant media scrutiny. It is going to be sort of the lightning rod for everything going forward. It's a huge turning point in the lifespan of a piece of class action litigation.

It's also going to generate a lot of public attention in the sense that if it's certified, there's going to be notices to the class. There's going to be opto periods. There's a lot of public communication around a certification hearing. So even though there is ironically no assessment of the merits, it's going to be the one time where, frankly, most of the discussion about the merits and about the nature of the litigation sort of arises.

Now, the question that then arises is if a class is certified, what next? And as mentioned, settlement is often what's next, because just the order of magnitude is such that oftentimes defendants are minded to structure some sort of settlement. But it doesn't always happen immediately. In fact, it rarely happens immediately. And that the lifespan of a class action proceeding is extremely long, and companies need to be mindful of that. It may be that you're living in the shadow of a class action for many years before it gets resolved.

And it's also important to remember that, frankly, in the common law jurisdiction, there's only been a handful of class actions that have ever gone to a trial on the merits. And this is what I mean when I say that settlement is usually the outcome in the post certification world. But that can happen at any point. That can happen either immediately following certification but more commonly, for example, during the discovery phase in the context of preliminary motions or even after exchanges of expert reports. There's a continuum.

And as you get closer and closer to the trial on the merits, the party's positions become more crystallized, and therefore settlement becomes more of a tangible goal for the parties. And oftentimes, again, going back to the point I made earlier, these class proceedings are typically counsel driven. And so the prospects of settlement and the likely outcome of a settlement are going to be driven by counsel. But we have to remember that all settlements are subject to court approval once the class is certified under the Class Proceedings Act. And so it's not going to be simply a matter of negotiating with the plaintiff's counsel. But you'll also need ultimate court approval. And Melissa, you had some experience on that front as well. So maybe you could just comment on that briefly.

MELISSA KRISHNA: Yeah, absolutely. I couldn't agree with you more that once the class is certified, it definitely changes the focus to settlement. And it's definitely in the company's interest to try to get to the class action settled. In our case, for example, the class action arose in 2011, and we didn't get the settlement agreement approved by the court until December 2013. So it's definitely a very long period of time you have.

And this is because of the multitude of parties involved. You've got, obviously, the counsel from both sides. You've got your several-- so in our case, we had several layers of insurance. And you've got each of those insurers being represented and their counsel. And then you've got your broker. So it's a number of parties that need to get together to have these settlement discussions. Calendars, working out all of these different people's calendars can also set the time back. And then you've got, in our case, we had experts come in to determine the scope of the settlement, and like I said, how much of the loss in market cap could be tied to essentially the inaccurate disclosure. So there are a number of parties that get involved. And so the matter does drag on for an extended period of time.

One of the ways that I think GCs can help move things along is as soon as the class is certified, you can essentially approach your board. Because at this time, you should have a handle on the potential size of the claim. So you can approach your board and ask for a pre-approved range of settlement amount, something that the board can live with, so that during settlement negotiations, you're not having to go back to the board to seek approval each time.

So in preparing for a class action before it happens, what can you as GC do? So this is even before you're hit with a class action. How can you make sure that you're putting your company in the best position to face that challenge? So obviously what's going to be relied on in the settlement is going to be your insurance, your directors and officers insurance. So one of the one things you have to look at and one of the things that the board will rely on you to provide advice on is at the limits of the coverage. How much coverage should the board be seeking?

So again, one of the ways would be to look at your market cap and potentially how much movement there might be in the market cap as a result of any sort of inaccurate disclosure. Going back to the PetroMagdalena example from before, if your market cap is 100 million and your market cap moves by 40% as a result of your inaccurate disclosure, based on general settlement ranges, like we settled at about 20% of the 40 million. So it was 8 million. And then you add to that your defense costs. Let's say it's 4 and 1/2 million. So you're looking at a limit of about 12 and 1/2 million.

Again, to look at what defense costs are, generally there are insurer stats available. So you can look at those statistics. For example, from 2002 to 2012, Chubb Insurance was involved in 26 of 30 Canadian securities claims. So that's a pretty significant number. So you can rely on them. They incurred 36 million in defense costs with an average of 4 and 1/2 million of defense costs and 8 and 1/2 million in settlement amounts per suit. So that's a good sort of-- that gives you a general idea of what you might be looking at for limits of coverage.

The other thing you can look at is look at peer group benchmarking. So just see what other companies in your industry are doing. For example, Jones Brown, who's our insurance broker, they have a number of public company clients. And so they looked at a number of public company clients across various industries and identified a general trend for us, which is essentially for every $20 million in assets, clients tend to carry approximately $1 million in D&O coverage for each 20 million in assets. So there are a number of ways to determine the limits of coverage. And again, ultimately it's going to be your board that's going to decide how much coverage they're comfortable with having. But when they rely on you for advice on that, there are a number of guidelines available.

The other thing to consider is when you're picking your insurance policy or you're identifying which insurer you're going to work with, it's very prudent to look at their claims response process. So again, like I mentioned before, you would understand who has the duty to defend. So it's always better if the company can you choose counsel and manage the litigation. So that's advantageous for you.

Then you would look at where the claims authority resides. So by this I actually mean locally. Is the claims authority resident in Canada, easily accessible, or there are certain insurers where they've got their claims authority residing in New York or London. This just logistically poses challenges. So if you are able to access the claims authority locally, it will just help move processes along a lot quicker.

Finally, you want to have met the claims team and understood their approach to claims management. So there are a variety of-- again, this is where your insurance broker will have a role to play in bringing you together and liaising with your insurers so that you do have a good handle on how they manage claims processes.

Another consideration would be to look at the scope of coverage. This becomes quite key, because the trend has been that D&O coverage has become extremely broad and generally will cover past, present, and future directors and officers, the corporate entity itself, employees as co-defendants, subsidiaries and sometimes outside entities. So it's possible that your entire limited available for D&Os could be completely eroded by, let's say, a securities claim against the corporate entity itself.

So how do you advise your board in terms of how individual directors and officers should be protected? There is a product out there called excess Side A DIC coverage. DIC stands for Difference In Conditions. So this type of insurance essentially kicks in if for some reason the indemnity agreements provided to the directors and officers is not able to be put in put into effect. Basically, if directors and officers are not able to enforce their indemnity agreements, let's say because the company has claimed bankruptcy or there are other legal reasons why the company is not able to indemnify directors and officers, this type of insurance would then kick in.

And the benefit of having this type of insurance and the difference in conditions is that your primary D&O policy generally has a lot of exclusions. For example, for pollution cleanup costs. That would be an exclusion under a primary policy. Where a good excess Side A DIC policy would have very few exclusions.

So for example, in the North Star case where the Ministry of Environment held the directors personally liable for cleanup costs due to pollution, the company had filed for bankruptcy protection and it did not have environmental insurance. So at the time of this case, excess Side A DIC coverage was not a widely offered product and they didn't have it. But again, this is where your insurance broker can play a key role where they would advise you on the trends in the insurance industry, make sure that you are keeping your D&O program updated and make sure that the appropriate coverage has been added.

OK. So now we'll move to what you can do as GC for when you are actually hit with a class action. So you would immediately debrief the board. Basically get in front of them, explain to them the scope, the potential size, and the liability faced by the business. You would understand the limits. Basically with preapproved counsel and settlements, you can easily move forward with discussions with your counsel and insurance brokers.

Another good idea is to introduce external counsel to your board so that they get comfortable. External counsel will be best positioned in explaining to them the class action proceedings, as Craig has clearly demonstrated. So it's best if you can introduce your external counsel to your board and get them comfortable.

And then frequent and consistent communication with your board will be key, because obviously it puts everyone in a nervous and an uncomfortable position. So we did biweekly updates to the board just to let them know how things were going along. If you're not able to get the board together for a meeting, you can certainly do so by email.

The last point was we had touched on PR training. So there will be a lot of tension within the organization. So it's important to appoint spokespersons within the company who are responsible for delivering messages to anybody outside the corporation. If your company attracts a lot of media attention, this will become very key. And so you want to get a couple of people trained by PR companies on how to respond to media inquiries.

Finally, just ensure that your employees also know that for, in our case, we sent out a notice to employees pretty much simultaneously with the press release going out letting them know that they are not to discuss anything about the class action with anybody outside of the company. They should direct whoever approaches them to the appointed spokesperson. So that just ensures that you keep a tight lid on how the class action gets framed in the media.

CRAIG LOCKWOOD: That's great. Thanks, Melissa. So lastly, and we're mindful of the time, but we just want to briefly touch on sort of the practical implications of managing a business that sort of lives in the shadow of a class action. As mentioned, the time horizon on these proceedings can be extremely extensive. And so you may have to sort of continue on with your daily operations under the cloud of a class action in the background for a number of years.

The first thing, obviously, you want to do is internally you want to assess your financial reporting obligations. Do you need to take a reserve, for example? As Melissa mentioned, you're going to want to make sure that you have a process in place for internal communications with employees both informing them as to sort of the status of the litigation as it unfolds but also ensuring that their dealings with third parties and the public are properly controlled. For multinational entities, you're going to want to give some consideration to implications for foreign affiliates, for example.

Oftentimes this comes up in the context of settlement, because if a proceeding is settled in one jurisdiction, it's very frequent that you'll see a copycat proceeding start up in a fresh jurisdiction against a foreign affiliate on the same basic facts. And so oftentimes when entering into a potential settlement, one of the concerns that comes up is what is this going to mean for the global industry? Are we going to see a series of claims following on the heels of this because we've effectively paid the plaintiffs in this jurisdiction?

And then lastly, there's the issue of insurance costs. And maybe Melissa you can just briefly speak to that.

MELISSA KRISHNA: Yeah, just basically if you're hit with a class action and then you're looking to renew your insurance policy, it's more than likely that it will cost you more to renew your insurance. So just a note to say you want to budget for that and note to your finance team that there might be an increase in that cost.

CRAIG LOCKWOOD: And then finally, you're also going to want to, obviously, consider your external relations as the class action unfolds. One of the complicating factors is oftentimes class members may, in fact, be sort of a counterparty to agreements. For example, in the franchise context, the class members themselves or people with whom you're dealing on a daily basis, and that can be very complicated. And there are a number of decisions out there that sort of attempt to sort of delineate the nature and extent of permissible communications about the litigation in the context of ongoing business operations.

Similarly, if you've got shareholders, you're going to have to consider communications with shareholders about the proceedings as they unfold. And similarly, clients, customers, third party suppliers, all of these sort of constituents are going to need to take into consideration. Obviously the biggest concern for the company, or typically the biggest concern, is going to be the impact on the goodwill of the company as it goes forward, reputational impact of the proceedings. And that will need to be tightly managed, again, as Melissa mentioned, that's why PR firms are often engaged in this context.

And then as we've also mentioned, sort of the ongoing relationship with the regulator, Health Canada, financial regulators, et cetera. You're obviously going to want to maintain a good relationship to the extent possible. And so you'll need to manage that almost on a daily basis sometimes as these class proceedings unfold. So subject to any questions, that's pretty much what we wanted to cover today.

ERIC MORGAN: Thanks very much, Craig, Melissa. So I think we've got a couple of follow up questions. I'm mindful of the time, though. One of them was, how do you find out if a claim is being funded by a third party and who are the big funders?

CRAIG LOCKWOOD: That's a great question. So ever since 2011 I guess, the Dugal and Manulife case was the first to sort of actually acknowledge that third party funders were not champertous and therefore were permissible sort of within the Canadian landscape. And then there was the Kinross decision by [? Parell ?] thereafter.

The funding issues have been sort of regulated in the sense that there's now an obligation on the part of plaintiffs to disclose the nature of the third party funding relationship. And they actually need to seek court approval. So it will be a public process in the sense that it's not something theoretically that can happen behind the scenes. They actually have to actively disclose to the court and seek court approval. And the court will scrutinize them fairly rigorously.

In terms of who the third party funders, there are a number of them out there. Oftentimes they're international and will still fund within Canada. But Bentham Canada is one that is sort of-- it's an international entity, but it has recently made inroads in Canada. And you're seeing them come up quite frequently. So again, the importance of all of this is, as I say, is really that if they're involved, you can be fairly assured that some heavy degree of assessment of the merits has taken place, because obviously they're in it as a financial investment and they tend not to invest in what they deem to be frivolous lawsuits.

ERIC MORGAN: Thanks, Craig. Melissa, I'm just wondering if you can talk briefly about your experience about how long the process lasts, which may be a question that board members and senior management might have.

MELISSA KRISHNA: Yeah. So based on my experience, I mean like I said, ours lasted over two years. So there are ways to shorten up the process and tighten it up. And it's all of the tips that we've provided you in terms of how to be prepared and just have preapproved litigation counsel, preapproved settlement amounts. So this kind of thing can shorten that time frame. But as Craig mentioned, I mean, they can drag on for years. So you can give them a general idea, but I think it's difficult to predict. But if it goes over a couple of years, I don't think that's unlikely.

ERIC MORGAN: Great. Thanks very much. So on behalf of Melissa and Craig, thank you for joining us for this webinar. We hope it's given you some useful insights. A copy of the slides as well as a one page of takeaways will be sent to you as a PDF after this. You can also find more information and commentary on class actions and risk management on Osler's blogs. A copy of Osler's white paper on class actions is available from We hope you'll join us for the next webinar, which will focus on arbitration. Thank you again for attending this webinar, and have a good day.