Corporate Indemnification and Directors’ and Officers’ Liability in Canada
There is not a lot of Canadian precedent regarding corporate indemnification of directors and officers, and therefore, I would like to bring your attention to Jolian Investments Limited v. Unique Broadband Systems Inc., 2011ONSC3241, here.
Some may consider this a win for directors and officers, because Marrocco, J., held that the corporation is responsible for legal expenses of the directors and officers in their claims against the corporation, (regarding management services, termination benefits, bonuses and indemnification agreements), as well as the defence costs incurred by the directors and officers in the corporation’s counter claim against the directors and officers, (for the return of previously paid legal retainers and other funds paid based on “unjust enrichment.”) There were additional defence costs incurred by certain directors and officers of USB based on claims brought by a dissident shareholder group of a company in which USB held a minority interest and the director/CEO of USB held a director and CEO position in the minority interest company (aka the “outside entity”).
The primary basis for the court’s decision was the wording of the contractual indemnity agreements, the indemnification provisions of the Ontario Business Corporation Act, and the Corporate Bylaws. The Corporation argued unsuccessfully “that the various indemnities did not contemplate UBS paying for a suit brought against itself.” To this the court held there was no limiting language and “the Corporation should specify with precision the limits it proposes on its commitment to indemnify.”
The corporation was also unsuccessful with it argument that the conduct of the individuals did not meet the duties of honesty, good faith and loyalty, and therefore indemnity should be blocked.
When interpretation of regulation and contractual agreements regarding indemnification have very little precedent, then the decision of a court can go any which way. This court interpreted the indemnities very broadly, but they did not apply this decision to a case involving a “derivative” claim brought on behalf of the corporation. Therefore, if dissident shareholders of either UBS or the minority investment company attempted to block indemnification or sue on behalf of the corporation for unjust enrichment, perhaps the indemnity would have failed.
My suggestion is that this case should provide very little comfort to directors, because ultimately UBS filed for creditor protection largely because of this court’s decision to provide such extensive indemnification. This will likely mean the successful directors and officers will be lining up with other creditors to collect their award. In the mean time they have other defence cost to pay, in addition to statutory obligations.
More concerning about this case is paragraph 47 of the decision which states “There is no suggestion that the matters referred to in the claim or counterclaim are covered by D&O insurance”. I certainly see that a D&O insurer might rely on an “Insured vs Insured” exclusion, regarding the counter claim, or suggest that the costs incurred by a director or officer to sue its corporation are outside of the coverage and don’t trigger the policy. However, there is an underlying claim from the dissident shareholders of the “outside entity” that would be contemplated by a D&O policy, or even an Outside Directorship Liability policy (ODL). So perhaps there was no D&O coverage purchased by the Outside Entity, or no ODL policy coverage purchased by UBS.
My final warning about this decision is that when courts interpret indemnification provisions and/or insurance coverage very broadly for the key managing directors, the pot of money otherwise available to other directors, offers and independent directors can be quickly depleted or even exhausted prior to their individual personal liability ending.
It is tough to offer my typical Risk Management Spin on this case because of it hinges so much on a lower court decision. I would like to say that it is also unique and therefore not worthy of your review. However, since the underlying circumstances involve, change in slate of directors, departure of founding or key management, disputed “restructuring awards” resulting in a substantial and personal benefit to key management, shareholders allegations of non-disclosure, and court interpretation of contracts, this case is not unique and should be a very important case study for all directors and officers.
I also stand by my previous blogs suggesting individual contractual indemnities are good things for directors, but they should be very careful with the construction of open-ended indemnifies for key management.
The Insurance Spin:
- Make sure your limit of liability contemplates significant legal costs in addition to protracted defence of multiple claims from shareholders, creditors, pension beneficiaries, and statutory liabilities,
- The D&O policy does not need to have entity coverage for securities claim to provide protection to individual directors,
- Determine how your policy responds to “Insured vs Insured” claims, and what your priorities are for coverage, because there is no correct answer for everyone. In this case, if there were D&O policy response, the IvI exclusion might help preserve coverage for independent directors for statutory and bankruptcy based claims. But that exclusion would be a detriment to the managing directors,
- Consider Outside Directorship Liability coverage, but this is best done by way of separate dedicated limits to the loss does not erode the D&O policy,
Thank you to WardleDaleyBernstein LLP, here, for their April circular featuring the Jolian v UBS case.
Greg Shields is a D&O, Professional Liability, Employment Practices Liability, Fiduciary Liability and Crime insurance specialist and a Partner at the University and Dundas (Toronto) branch of Mitchell Sandham Insurance Services. He can be reached at firstname.lastname@example.org, 416-862-5626, or Skype at risk.first.
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