ONSC Dismisses Application for Advance on Former Directors' Legal Costs

In its decision in Cytrynbaum et al. v. Look et al., the Ontario Superior Court of Justice dismissed the applications and motions made by certain of Look Communications Inc.'s (Look) former officers and directors and certain of their personal service companies, for interim advances on indemnification to fund the costs of defending claims made against them by Look. The Court permitted the claim of a former employee to interim advances.

On July 6, 2011, Look issued a Statement of Claim against the applicants in connection with the payment of approximately $15.7 million of “restructuring awards” paid to the applicants in 2009. These “restructuring awards” were paid from the net proceeds of approximately $64 million realized by Look on the sale of its central asset — a spectrum and broadcast license. Prior to resigning from Look in 2010 and in the face of growing shareholder opposition to the “restructuring awards”, the individual applicants caused Look to pay $1.55 million dollars to law firms acting for the applicants.

After being served with Look's action, the applicants brought three applications to require Look to advance them further legal costs to defend against the action pursuant to Look's by-laws and indemnification agreements. Look took the position that section 124(4) of the Canada Business Corporations Act, R.S.C. 1985, c. C-44 (CBCA) required the Court to review the conduct of the applicants seeking indemnification, and that the Court could deny advances if there was compelling evidence the applicants had acted in bad faith. Look filed affidavit evidence on the applicants' conduct in opposing the advances on indemnity. The applicants took the position that s. 124(4) of the CBCA did not apply and that the Court should not consider Look's affidavit evidence.

In his decision, Justice Laurence Pattillo denied the advances sought by the applicants, with the exception of one applicant who is entitled to interim advances for his defence of the claims Look made against him. The Court held that if a corporation has indemnification agreements in place with its officers and directors that requires advances to fund the costs of defending claims made by the company, the company is required to pay advances unless it offers evidence that establishes a strong prima facie case that the former director and/or officers acted mala fides in bad faith. That high standard is required to be met to overcome the presumption that directors and/or officers act honestly, in good faith and with a view to the best interest of the company they serve. Justice Pattillo's reasons state in part:

“[B]ased on the evidence presented, Look has established a strong prima facie case that the individual applicants, excluding one applicant, acted mala fides, in their own self interests and not with a view to the interests of Look in respect of the board's approval of the equity cancellation payments based on a value of $0.40 a share and in relation to the payment of retainers by Look to lawyers acting for the applicants personally. Accordingly, Look has met its onus. I am not prepared to approve interim advancement to the individual applicants (except the one applicant) of their legal fees and expenses in respect of the action or the CBCA Motion pursuant to s. 124(4) of the CBCA.”

Advances are required to be paid to the applicant, Dolgonos, who was an employee of Look, because there was no evidence that he acted with mala fides or in bad faith.

The remaining applicants maintain that they acted honestly and in good faith with a view to the best interests of the corporation, and have appealed the decision to the Ontario Court of Appeal. No defences on the merits have yet been filed, and none of the allegations by Look have been proven in court.

Goodmans LLP represented the respondent, Look, with a team that included David Conklin, Brendan O'Neill and Peter Kolla.

Lenczner Slaght Royce Smith Griffin LLP represented the applicants, Michael Cytrynbaum and First Fiscal Management Ltd., with a team that included Matthew 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.

Groia & Company Professional Corporation represented the applicants, Jolian Investments and Gerald McGoey, with a team that included Joseph Groia and Gavin Smyth.

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