A group of former directors and officers with Look Communications Inc., locked in a court battle with the company over $15.5-million the group received in extra payments, do not deserve to have the company cover their legal bills up front, the Ontario Court of Appeal has ruled.
A group of former directors and officers with Look Communications Inc., locked in a court battle with the company over $15.5-million the group received in extra payments, do not deserve to have the company cover their legal bills up front, the Ontario Court of Appeal has ruled.
The case was being watched closely by some on Bay Street who warned it could have implications for directors at public companies across Canada, most of whom expect most legal costs arising from their seats on the board to be covered up in advance.
On Thursday, the province's top court upheld a lower-court decision that ruled the group must cover their own legal costs. The Court of Appeal agreed with the finding of an Ontario Superior Court judge last fall that Look had presented what appeared to be a strong case to support its allegations that the former directors and officers acted in "bad faith" – although no allegations have been proven, and the case itself has yet to go to trial.
A seat on a corporate board usually comes with a guarantee that the company will cover any legal fees that arise. The issue at stake in this case was whether a company that is suing its former directors for allegedly acting against the company's interests should still be forced to cover those ex-directors' legal expenses in advance.
Look's lawyers argued that the company and its shareholders should not have to pay the legal bills of the people they were suing for allegedly breaching their fiduciary duty to the company.
But Joe Groia, a lawyer for Gerald McGoey, a former chief executive officer and board vice-chairman for Look, argued that the lower-court ruling would discourage qualified people from serving as directors, as some would fear they could face massive legal bills afterward even if they had done nothing wrong.
Writing for the unanimous three-judge appeal panel in Thursday's ruling, Justice Robert Sharpe says the lower-court judge, Justice Laurence Pattillo, took that issue into account: "He recognized that the issues of indemnity and advance funding required a balance to be struck between providing adequate protections and incentives to attract strong candidates who foster entrepreneurialism and to encourage responsible behaviour."
The former directors of Look – once an upstart wireless TV and Internet service provider – deny the allegations against them. They argue that the payments, which include cheques for consultants and others, and totalled about $20-million, were reasonable, coming after the hollowed-out company arranged to sell its wireless spectrum for $80-million to a partnership of Bell and Rogers in 2009.
Neither the lower court ruling, nor the appeal decision, marks a final ruling on the allegations. If the directors and officers were to win the case at trial, the company would be obligated to pay their legal costs after the fact.
Jeff Gray