On May 27, 2009, the Québec Superior Court released its decision in Le Groupe Vidéotron Ltée and Quebecor Media Inc. v. Claude Chagnon. This decision provides important guidance with respect to allegations of insider trading, highlights the potential danger of "on and off" discussions about potential transactions, and clarifies the insider trading rules applicable to corporate officers. In particular, the decision provides that:

1. the meaning of "privileged" or inside information pursuant to the Québec Securities Act (the "QSA") must be considered in its entire context and according to the perspective of a third party "reasonable investor";

2. mens rea is not required to establish an insider trading infraction pursuant to section 187 of the QSA, or to recover the damages suffered as a result of the transaction pursuant to section 226 of the QSA, however, mens rea must be proven in order to trigger the civil remedy of section 228 of the QSA, which requires a party to repay all profits derived from the use of inside information; and

3. a contextual approach should be followed when determining whether an officer has a duty to disclose information to a Board of Directors.

The Action - Vidéotron vs. Chagnon

On September 18, 2002, Vidéotron and Quebecor Media began legal proceedings in Superior Court against Claude Chagnon (the former CEO of Vidéotron).

Vidéotron alleged that Claude Chagnon engaged in insider trading by accepting the 1,223,033 stock options while he was aware that Rogers was preparing to make an offer to purchase Vidéotron’s shares. In particular, it alleged that Claude Chagnon traded in securities while in possession of "privileged information" contrary to section 187 QSA, and that it was accordingly entitled to damages under section 226 and section 228 QSA. Vidéotron also alleged that Claude Chagnon breached his duty of loyalty as director and officer under articles 322 and 323 of the Civil Code of Québec (“CCQ”) and his pre-contractual duty to inform under the “good faith” doctrine (articles 6, 7 and 1375 CCQ). Concurrently, Quebecor Media alleged that Claude Chagnon committed extra-contractual faults because he knew, or should have known, that his acts and omissions with respect to Vidéotron would result in direct harm to Quebecor Media as the eventual owner.

The Facts

In April 1999, André Chagnon (the CEO of Le Groupe Vidéotron Ltée) and Ted Rogers (the CEO of Rogers Communications Inc.) discussed the possibility of combining the two companies. On April 30, 1999, Rogers made a non-binding proposal to acquire the issued and outstanding shares of Vidéotron. Chagnon immediately rejected the proposal without discussing it with Vidéotron's Board of Directors.

Throughout the summer and fall of 1999, the companies' investment banks had informal discussions concerning the possibility of Rogers acquiring Vidéotron. On November 18, 1999, André Chagnon informed Vidéotron's Corporate Governance Committee of his intention to retire as CEO. He would be replaced by his son, Claude Chagnon. On December 15, 1999, the Board of Directors was officially notified of André Chagnon's departure effective January 19, 2000. A few days later, Claude Chagnon concluded negotiations in respect of his compensation package, which included options to purchase 1,223,033 shares of Vidéotron. The vesting of these options was largely based on the performance of the Vidéotron's share price.

In mid-January 2000, executives from both Rogers and Vidéotron, including Ted Rogers and Claude Chagnon, attended a telecommunications conference in Palm Springs, California. On January 10, 2000, a financial analyst from Salomon Smith Barney, who provided investment services for both Rogers and Vidéotron, had a conversation with Ted Rogers. During this discussion, Mr. Rogers indicated his willingness to consider a proposal in which Rogers would acquire Vidéotron's issued and outstanding shares at a 50% premium. The analyst relayed this information back to Claude Chagnon.

Claude Chagnon, in consultation with his CFO, decided not to inform Vidéotron's Board of Directors of the proposal. They reached this decision on the basis that the information was not material considering that it came to them indirectly and in light of André Chagnon's prior refusal of Rogers' proposal.

On January 14, 2000, Salomon Smith Barney, on its own initiative, made a presentation to Claude Chagnon and his CFO about a potential transaction with Rogers and on Sunday, January 16, Salomon Smith Barney contacted Vidéotron's Chief Legal Officer about the potential transaction. Vidéotron's Chief Legal Officer subsequently contacted Vidéotron's outside legal counsel. On Tuesday January 17, Vidéotron's Chief Legal Officer met with external counsel and informed them that a transaction between Rogers and Vidéotron might be imminent. That same day, the Corporate Governance Committee adopted the necessary resolutions to grant the options to Claude Chagnon.

On January 19, 2000, Claude Chagnon became the CEO of Vidéotron. The Board of Directors agreed to the compensation agreement that had been negotiated on December 15, 1999 including the stock options exercisable at $26.

On January 24, 2000, Rogers met with André and Claude Chagnon to make a formal offer to purchase all of the Vidéotron shares. Media speculation over the offer followed and Vidéotron's Board of Directors was officially informed about the offer on February 4, 2000. At this time, Vidéotron released a statement confirming that Rogers had made a formal offer to acquire the company.

On February 6, 2000, Vidéotron and Rogers executed an arrangement whereby Rogers would acquire 100% of Vidéotron’s outstanding shares on a ratio of one-to-one.

On March 24, 2000, Quebecor Media Inc. submitted a competing offer. A bidding war ensued, which culminated in October 2000 when Quebecor Media acquired Vidéotron for a price of $42 per share.

On May 24, 2000, Claude Chagnon signed the stock option agreement, which listed an effective date of January 19, 2000.

On September 19, 2001, nearly a year later, the Québec Securities Commission issued a subpoena requiring a timeline of events and the conditions of Claude Chagnon’s stock options agreement. On September 18, 2002, Vidéotron and Quebecor Media instituted legal proceedings in Superior Court against Claude Chagnon.

Insider Trading and Inside Information

The potential civil liability for a breach of section 187 QSA is two-fold: under section 226 QSA, there is an obligation to repair the prejudice suffered by the other party in the trade while under section 228 QSA there is also an obligation to repay all profits derived from the use of the information. The Court held that while liability could be established under section 187 QSA without demonstrating culpable intent or mens rea, civil liability pursuant to section 228 QSA is tied to the "exploitation" (use) of the inside information and, therefore, liability under this section requires some level of bad faith or culpable intent (e.g., trading with the full knowledge that the transactions are prohibited). As such, Justice Riordan concluded that it is possible to be liable under section 226 QSA without being liable under section 228 QSA.

The Court further concluded that the Plaintiffs failed to prove their allegation that the information Claude Chagnon received amounted to “privileged information”, or information capable of having an influence on market decisions. The Court took into account all of the facts and circumstances surrounding the longstanding communications between Rogers, Vidéotron and third parties. This included André Chagnon’s rejection of Ted Rogers’ initial overtures and Claude Chagnon's belief that the Palm Springs conversation was irrelevant given that Ted Rogers had not spoken directly with him.

Moreover, the Court held that Claude Chagnon’s options package, while formally adopted on January 19, 2000, had been officially agreed upon by the end of December 1999, weeks before the discussion at Palm Springs or the Rogers takeover rumours. Claude Chagnon effectively had no control over when the compensation package would be adopted, and thus the timing – so close to the formal offer from Rogers – was coincidental. The fact that Claude Chagnon actually signed the stock options agreement in May 2000 was further evidence of the fact that the actual "trade" had taken place when the package had been negotiated in 1999.

The Court also accepted Claude Chagnon’s defence that the one-year limitation period applicable to civil actions under section 235 QSA had passed by the time the Plaintiffs initiated their action. The Plaintiffs instituted their proceedings on September 18, 2002 – despite being fully aware of media reports of Claude Chagnon’s compensation package in late February 2000.

Duty of Loyalty and Duty to Inform

In terms of Claude Chagnon’s duty of loyalty and his pre-contractual duty to inform, the Court faced conflicting expert testimony regarding the necessity to disclose to the Board what had transpired in Palm Springs. Justice Riordan again found in favour of the defendant on the basis that the Plaintiffs bore the greater burden of proof.

Quebecor Media's claims were all rejected on a similar basis.

The Perils of Protracted Discussions

The Vidéotron judgment sheds light on the perils of "on and off" discussions and the difficulties inherent in situations that evolve rapidly. It also illustrates the importance of proper and full communication with the Chief Legal Officer. Vidéotron, if upheld, will stand for the proposal that a mens rea requirement – or a true intention to pursue prohibited transactions – must be established to ground liability for using inside information under section 228 of the QSA. In defining inside information, specific pieces of information should not be considered in isolation, but in their entire context. The burden of proving which information should be disclosed rests with the plaintiff.

If you would like additional information, please contact Maryse Bertrand, Ad. E. (514.841.6460), Louis-Martin O'Neill (514.841.6547) or Marc-André Boutin (514.841.6527) in our Montréal office or Luis Sarabia (416.367.6961) or Kent Thomson (416.863.5566) in our Toronto office.

Davies Ward Phillips & Vineberg LLP, with over 250 lawyers, practises nationally and internationally from offices in Toronto, Montréal, New York and an affiliate in Paris and is consistently at the heart of the largest and most complex commercial and financial matters on behalf of its North American and overseas clients.

The information and comments herein are for the general information of the reader and are not intended as advice or opinions to be relied upon in relation to any particular circumstance. For particular applications of the law to specific situations, the reader should seek professional advice.