Unique Broadband Systems, Inc. (Re), 2014 ONCA 538
In Unique Broadband Systems Inc. (Re), the Ontario Court of Appeal affirmed a judgment finding that McGoey, a former director, had breached his fiduciary duties to Unique Broadband Systems, Inc. ("UBS"). Mr. McGoey had caused UBS to confer certain benefits to himself under a Share Appreciation Rights ("SAR") plan as if shares had been trading at $0.40 per share, when in fact they were trading at $0.15 per share.
In considering McGoey's cross-appeal, the Court of Appeal provided valuable guidance on the business judgment rule that protects officers and directors from judicial review of business decisions made while running a company. Justice Hourigan explained:
It must be remembered that the business judgment rule is really just a rebuttable presumption that directors or officers act on an informed basis, in good faith, and in the best interests of the corporation. Courts will defer to business decisions honestly made, but they will not sit idly by when it is clear that a board is engaged in conduct that has no legitimate business purpose and that is in breach of its fiduciary duties. (para. 72)
The business judgment rule therefore only applies in the event that an officer or director has satisfied the "rule's preconditions of honesty, prudence, good faith, and a reasonable belief that his actions were in the best interests of the company".
The Court of Appeal also reversed the trial judge and found that a management services agreement did not allow McGoey to benefit from a "golden parachute" pay-out because of McGoey's fiduciary breach. In construing the agreement, Justice Hourigan stated that McGoey could not "eviscerate" his fiduciary duty under the OBCA by contracting for compensation that accrued even in the event that he breached that fiduciary duty.
This approach is not unlike that taken in Cytrynbaum v. Look Communications Inc., 2013 ONCA 455, which related to the same facts. In that case, the Court of Appeal found that the OBCA prohibited advance funding for legal expenses under a broadly worded indemnification agreement to Mr. McGoey, among other people, to defend the same Board decision in respect of the SAR plan because the company had made out a prima facie case of bad faith.
The full text of the decision is available here.
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