On February 10, 2009, the Ontario Superior Court of Justice issued an interlocutory injunction restraining Rusoro Mining Ltd. from proceeding with its hostile bid for Gold Reserve Inc. As a result of the injunction, Rusoro has withdrawn the bid.

The dispute between the parties focused on Rusoro’s financial advisor, Endeavour Financial International Corporation. Endeavour had acted as an advisor to Gold Reserve for more than four years until shortly after the launch of Rusoro’s bid. In the course of its engagement by Gold Reserve, Endeavour had access to Gold Reserve’s confidential information and was contractually bound by confidentiality obligations, a negative covenant to not knowingly act against the interests of Gold Reserve in a material way, and an obligation to inform Gold Reserve of conflicts of interest arising out of the representation of other clients.

Endeavour is also a creditor, shareholder and financial advisor of Rusoro. The same group of individuals at Endeavour participated in advising both Rusoro and Gold Reserve.

Since this injunction was issued on an interlocutory motion, the Court was not required to make a final determination on the merits of the dispute. The Court found there was a serious issue for trial that Endeavour breached the express contractual terms of its agreement with Gold Reserve and its implicit duties of loyalty and maintaining confidence as a professional advisor to Gold Reserve by acting as expert financial advisor to Rusoro’s hostile bid for Gold Reserve. Further, Gold Reserve had established a prima facie case that Endeavour was in breach of its covenant not to knowingly act against the interests of Gold Reserve.

The record before the Court indicated that Rusoro knew of Endeavour’s relationship as an advisor to Gold Reserve, access to confidential information of Gold Reserve, and obligation of confidentiality to Gold Reserve. Accordingly, the Court held that Rusoro could not be in a better position than Endeavour itself and should properly be bound to respect, and not benefit from a breach of, Endeavour’s obligations to Gold Reserve.

The recent injunction issued in connection with Research In Motion’s bid for Certicom Corp. demonstrated the potential for commercial confidentiality and non-disclosure agreements to be used as a defensive tactic in a hostile bid. The Gold Reserve decision highlights the importance of considering the obligations of third parties involved in a bid to ensure that there are no conflicting obligations that could later become obstacles to the bid.

Investment banks should consider the effect of confidentiality provisions in their advisory engagement agreements and, where appropriate, attempt to prevent contamination of client teams though careful control of confidential information and ethical walls.