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Summary

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Legislation – Interpretation – Commercial law – Corporations – Fiduciary duties – Directors – Former directors, officers, employees and consultants of respondent seeking entitlement to interim advancement of their legal fees and expenses to defend themselves in proceedings brought against them by respondent – Is. 124(4) of the Canada Business Corporations Act, R.S.C. 1985, c. C44 (“CBCA”) restricted only to derivative actions or does it apply to all actions by a corporation against its directors and officers – If court approval is required for the corporation to provide advancement of costs to directors and officers, in what circumstances are directors and officers entitled to advance funding of their legal costs and what is the import and effect of the corporation’s by-laws and indemnification agreements specifically providing that eligible parties are entitled to interim indemnification and/or advance funding of defence costs.

The individual applicant was a former director and officer of the respondent and Jolian Investments Limited is a management services company owned by him. The respondent commenced an action against the applicants and others, alleging breach of fiduciary and statutory duties, negligence, unjust enrichment, and claiming repayment of bonuses and equity cancellation payments made to them. The latter payments, authorized by the board of directors, were consideration for cancelling share appreciation rights and options which would otherwise have been exercisable due to the respondent’s sale of its key assets. While entitlement under the rights and options plans was tied to the market price of the respondent’s shares, the cancellation payments were based on a price per share which was twice as much as the relevant market price of the shares. The payments made to the individual applicant were paid by him to the corporate applicant.

The applicants brought pre-trial motions and applications seeking, inter alia, declarations that the respondent was obliged under indemnity agreements and a corporate by-law to indemnify them for legal costs and make advances toward their legal expenses in defending an action brought against them by the respondent. The Ontario Superior Court of Justice held that the respondent had made out a strong prima facie case that the applicants had acted in bad faith. Based upon s. 124(4) of the CBCA, the court dismissed the applications and motions in respect of the applicants, determining that their entitlement to indemnity would be determined at trial. The Court of Appeal for Ontario dismissed the appeal.

Lower Court Rulings