I was astonished in recent days to learn that David Einhorn and his Canadian counsel, the distinguished R. Paul Steep, have been tripped up by what may be the most basic, and the best-known, principle of evidence in the common-law world: the exclusion of hearsay.
But there it was in black and white: Justice Katherine Swinton in a lecturing mode. Ontarioâ€™s corporate law is somewhat different from that of the state of Delaware, so phrases such as “oppression application” may sound odd on the sunnier side of Niagara Falls. Nonetheless, the rules of evidence are very much the same in Canada as in the United States, and for that matter in the mother country we share.
Hearsay is â€śan out of court statement offered for the truth of the matter asserted.â€ť As such it isnâ€™t admissible unless there is a good reason why it should be, and there are certain narrowly-defined good reasons, or exceptions, to the general rule of exclusion.
Greenlight sought to establish that as reasonable stockholders they would have expected that the role of one of their portfolio companies in one of its portfolio companies was to be relatively passive. Why was this expectation reasonable? Apparently because two representatives of the issuer, MID, had told a Greenlight figure, Venit Sethi, exactly that.
What if Sethi had prepared an affidavit saying, â€śThey told me they werenâ€™t going to bet on the horsesâ€ť? Would that affidavit itself have constituted hearsay? No. It would have been the repetition of an out-of-court statement, but that statement would not have been offered for the truth of the matter asserted. It would have been offered in order to show something about the reasonableness of Mr. Sethiâ€™s subsequent expectations, i.e. that he reasonably believed they thereafter werenâ€™t going to bet on horses. That sort of thing is not hearsay, and when reasonableness is an issue in dispute, it is admissible.
The crucial point though is that Mr. Sethi didnâ€™t sign any affidavit. According to the two judicial opinions now available: Mr. Einhorn signed an affidavit. This document said, in effect, â€śMr. Sethi told me that they told him that they werenâ€™t going to bet on the horses.â€ť This was in fact offered for the truth of the matter asserted. Messrs Einhorn and Steep presumably wanted the court to infer that MID honchos had in fact told Mr. Sethi this. By definition, then, it was hearsay.
Mr. Steep, by the way, isnâ€™t some straight-out-of-law-school greenhorn. Heâ€™s been a member of the Ontario bar for a quarter of a century. He recently spent four years as the chair of his law firmâ€™s litigation group. Iâ€™m certain he knows the hearsay rule, which is precisely why I repeatedly sought to speak to him while working on a story on the case. Unfortunately, that conversation didnâ€™t happen.
I have to suspect, in lieu of any other more plausible inference, that Mr. Steep was engaged in client management when he submitted Mr. Einhornâ€™s affidavit. He may have known he had a losing case on his hands, but wanting to seem to be earning his fee, he went through the motions anyway â€“ and this hopelessly hearsay affidavit was a result.
Iâ€™m a big admirer of activist investors â€“ both as a hedge fund strategy and, for that matter, more generally. Activism, even when it comes to the point of litigation, is an affirmation of the plain and vital truth that it is the shareholders who own the company, and that the managers work for them: all of them, of however large or small a stake.
Still, litigants in such a cause must expect to abide by the rules, especially rules that go back centuries. I wish the position into which Messrs Einhorn and Steep have worked themselves didnâ€™t seem as untenable as it does. But it does.