ONCA dismisses claims for advancement of legal costs for former officers and directors

The Ontario Court of Appeal upheld the decision of the Ontario Superior Court of Justice in Cytrynbaum et al. v. Look et al. released September 28, 2012, dismissing applications and motions made by certain of Look Communications Inc.'s (Look) former directors and officers and certain of their personal service companies, for interim advances on indemnification to fund the costs of defending claims made against them by Look.

Look had issued a Statement of Claim on July 6, 2011, seeking recovery of approximately $20 million of “restructuring awards” paid by Look's former directors to themselves and also to Look's officers and employees. Almost $15.7 million was paid to the defendants named in Look's action, including $7.2 million that was assessed using a non-market value of $0.40 per share at a time when Look's share price ranged between $0.16 and $0.23.

The disclosure of the “restructuring awards” in January 2010 incited growing shareholder opposition. In July 2010, Look's directors caused Look to advance approximately $1.65 million dollars to law firms who would act for them in the event they were sued. Shortly after, Look's directors and officers resigned from their positions.

After being served with Look's action, the Look defendants brought three separate applications to require Look to advance them further legal costs for defending against the action.

Justice Laurence Pattillo denied the defendants' advances, with the exception of one defendant (Dolgonos) who was entitled to interim advances. He held that s.124(4) of the Canada Business Corporations Act

(CBCA) required the court to authorise the payment of advances when a company sues its present or former directors and officers. The Court could deny advances when a company established a strong prima facie case that the former director and/or officers acted in bad faith.

The defendants other than Dolgonos appealed the decision denying them advances. The appeal was heard on May 28 and 29, 2013 by Justices Sharpe, MacPherson and Lauwers.

The appellants argued that s. 124(4) of the CBCA did not apply as it was limited to derivative actions, but the Court of Appeal rejected this interpretation stating instead that the section applies to both claims by the corporation and derivative claims.

The Court of Appeal believed that the strong prima facie case standard applied by Justice Pattillo struck “an appropriate balance” between “providing adequate protections and incentives to attract candidates who foster entrepreneurialism and to encourage responsible behaviour.”

The Court of Appeal accepted that Justice Pattillo had “carefully considered the evidence alleging bad faith” and did not make “palpable and overriding errors” in his findings on the evidence that Look had made out strong prima facie case of mala fides.

Goodmans LLP represented the respondent, Look, with a team that included Benjamin Zarnett, David Conklin, and Peter Kolla.

Lenczner Slaght Royce Smith Griffin LLP represented the applicants, Michael Cytrynbaum and First Fiscal Management Ltd., with a team that included Peter Griffin, Mat-thew Sammon and Rory Gillis.

Babin Barristers LLP represented the applicant, Stuart Smith, with a team that included Edward Babin and Cynthia Spry.

Andrew Lewis of Paliare Roland Rosenberg Rothstein LLP represented the applicant, Jason Redman.

Joseph Groia and Tatsiana Okun of Groia & Company Professional Corporation represented the applicants, Jolian Investments and Gerald McGoey.

Roy Elliott O'Connor LLP represented Alex Dolgonos and Dol Technologies Inc. with a team of Peter Roy and Sean Grayson.