Bennett v. Bennett Environmental Inc.
94 O.R. (3d) 481
Court of Appeal for Ontario,
Lang, Juriansz and Epstein JJ.A.
March 5, 2009
Corporations -- Officers and directors -- Indemnification -- Director admitting in settlement of proceedings before Ontario Securities Commission that existence of dispute over contract awarded to company constituted "material change" and that company failed to disclose that change -- Director claiming that he firmly and reasonably believed that contract was lawful and that dispute was cosmetic -- Company failing to establish that director did not act honestly and in good faith or that he did not have reasonable grounds for believing that he was acting lawfully -- Director fulfilling requirements of s. 124(3)(a) and (b) of Canada Business Corporations Act -- Company required to indemnify director -- Canada Business Corporations Act, R.S.C. 1985, c. C-44, s. 124(3).
The applicant was a director of BEI. In June 2003, BEI announced that it had been awarded the largest soil remediation contract in its history (the "Contract") by a company which acted as subcontractor for the U.S. Army Corp of Engineers. After that announcement, BEI was notified that a competitor was protesting the award of the contract to BEI. In August and September 2003, BEI was notified that the Corps was rebidding a contract (the "Second Contract") for a much smaller volume of soil. In intervening press releases, BEI continued to list the Contract as part of its inventory of projects. BEI ultimately executed the Second Contract. When it announced that it had been awarded the smaller Second Contract, the price of its shares fell almost 50 per cent within ten days. The Ontario Securities Commission alleged that BEI, the applicant and other directors had violated the disclosure requirements under the Securities Act, R.S.O. 1990, c. S.5. In a settlement agreement, the applicant admitted that the existence of the dispute about the Contract constituted a "material change" within the meaning of the Securities Act and that BEI failed to disclose that change. He acknowledged "serious misconduct". However, the settlement agreement expressly acknowledged that the applicant had had an honest but mistaken belief that the Contract was enforceable and that the dispute would ultimately be resolved in favour of BEI. The applicant was ordered to pay a fine and costs. He sought indemnification from BEI. BEI refused to indemnify him, relying on s. 124(3) of the Canada Business Corporations Act. The applicant applied successfully for an order requiring BEI to indemnify him. BEI appealed.
Held, the appeal should be dismissed.
Under s. 124(3) of the CBCA, the onus is on the corporation to show that the director did not act honestly and in good faith with a view to the best interests of the corporation and that the director did not have reasonable grounds for believing that his conduct was lawful. In this case, the applicant's acknowledgement to the OSC that the Contract dispute was a material change that BEI was obliged to disclose did not, in itself, preclude the applicant's indemnification. While the obligation to disclose a material change is absolute, it is not always clear at the time that an event or series of events constitutes a material change. The applicant gave reasons why he did not take the developing information seriously at the time. His belief was an informed one, and the honesty of his belief was supported by the absence of any motive to withhold disclosure. BEI failed to establish that the applicant's stated belief was either opportunistic or amounted to a reckless disregard of his obligations. It was open to the application judge to find that BEI had not satisfied the burden on it under s. 124(3)(a) of the CBCA to establish that [page482] the applicant acted in bad faith. While the application judge's reasons were couched in terms of the applicant's belief in the continued validity of the Contract rather than in terms of his belief that he did not have disclosure obligations, in the circumstances of this case the two beliefs were synonymous. If the applicant honestly and reasonably believed the Contract was not in jeopardy, there was no basis upon which he ought to have believed that he was obliged to make disclosure of a material change. It was open to the application judge to find that BEI did not meet the onus on it under s. 124(3)(b) of the CBCA to establish that the applicant did not have reasonable grounds to believe his conduct was lawful.
APPEAL by the company from the order of C.L. Campbell J., [2008] O.J. No. 4926 requiring it to indemnify the director. [page483]
Cases referred to Blair v. Consolidated Enfield Corp., [1995] 4 S.C.R. 5, [1995] S.C.J. No. 29, 128 D.L.R. (4th) 73, 187 N.R. 241, 24 B.L.R. (2d) 161, 58 A.C.W.S. (3d) 230; Catalyst Fund General Partner I Inc. v. Holllinger Inc. (2006), 79 O.R. (3d) 288, [2006] O.J. No. 944, 266 D.L.R. (4th) 228, 208 O.A.C. 55, 15 B.L.R. (4th) 171 (C.A.); Enterprises Sibeca Inc. v. Frelighsburg (Municipality), [2004] 3 S.C.R. 304, [2004] S.C.J. No. 57, 2004 SCC 61, 325 N.R. 345, J.E. 2004-1863, 4 M.P.L.R. (4th) 1, 27 R.P.R. (4th) 1, 133 A.C.W.S. (3d) 1065, consd Other cases referred to Finney v. Barreau du Québec, [2004] 2 S.C.R. 17, [2004] S.C.J. No. 31, 2004 SCC 36, 240 D.L.R. (4th) 410, 321 N.R. 361, J.E. 2004-1254, 16 Admin. L.R. (4th) 165, 24 C.C.L.T. (3d) 1, 131 A.C.W.S. (3d) 543, REJB 2004-65746; General Motors of Canada Ltd. v. Brunet, [1977] 2 S.C.R. 537, [1976] S.C.J. No. 84, 13 N.R. 233, 77 CLLC Â14,067 at 55; Kerr v. Danier Leather Inc., [2007] 3 S.C.R. 331, [2007] S.C.J. No. 44, 2007 SCC 44, 286 D.L.R. (4th) 601, 368 N.R. 204, 231 O.A.C. 348, 36 B.L.R. (4th) 95, 48 C.P.C. (6th) 205, 160 A.C.W.S. (3d) 910, J.E. 2007-1969, EYB 2007-124711; Peoples Department Stores Inc. (Trustee of) v. Wise, [2004] 3 S.C.R. 461, [2004] S.C.J. No. 64, 2004 SCC 68, 244 D.L.R. (4th) 564, 326 N.R. 267, J.E. 2004-2016, 49 B.L.R. (3d) 165, 4 C.B.R. (5th) 215, REJB 2004-72160, 134 A.C.W.S. (3d) 548 Statutes referred to Business Corporations Act, R.S.A. 2000, c. B-9, s. 124 [as am.] Business Corporations Act, R.S.S. 1978, c. B-10, s. 119 [as am.] Business Corporations Act, R.S.O. 1990, c. B.16, s. 136 [as am.] Business Corporations Act, S.B.C. 2002, c. 57, s. 163 Business Corporations Act, S.N.B. 1981, c. B-9.1, s. 81 Canada Business Corporations Act, R.S.C. 1985, c. C-44, s. 124(1) [as am.], (3) [as am.] Companies Act, R.S.N.S. 1989, c. 81, ss. 204, 205 Companies Act, R.S.P.E.I. 1988, c. C-14, s. 64 Companies Act, R.S.Q. c. C-38, ss. 90, 184 Corporations Act, C.C.S.M. c. C225, s. 119 Corporations Act, R.S.N.L. 1990, c. C-36, s. 205 Securities Act, R.S.O. 1990, c. S.5, ss. 75 [as am.], 122(1)(b) [as am.], 122(3) [as am.] Authorities referred to Ziegel, Jacob S., et al., Cases and Materials on Partnerships and Canadian Business Corporations, 3rd ed., vol. 1 (Scarborough, Ont.: Carswell, 1994)
Linda M. Plumpton and Andrew D. Gray, for appellant. Nigel Campbell and Bruce O'Toole, for respondent.
[Editor's note: A correction was released by the Court June 10, 2009; the corrections have been made to the text and the correction is appended to this document.]
The judgment of the court was delivered by
1LANG J.A.: -- This appeal concerns the interpretation and application of a statutory provision that, in certain circumstances, prohibits corporations from indemnifying officers and directors for the financial consequences of their regulatory offences. It arises in an appeal by Bennett Environmental Inc. ("BEI") from a March 4, 2008 order. In that order, notwithstanding s. 124(3) of the Canada Business Corporations Act, R.S.C. 1985, c. C-44 (the "CBCA"), the application judge required BEI to indemnify its former corporate director, John Anthony Bennett, for all costs, charges and expenses arising from certain civil and administrative proceedings, including proceedings under the Securities Act, R.S.O. 1990, c. S.5.
Background
2BEI, a company publicly traded on both the Toronto and American Stock Exchanges, is a federally incorporated company. It carries on a business that includes the thermal remediation of contaminated soil. Bennett, the founder of BEI's predecessor company, was BEI's chief executive officer and a member of its two-person Disclosure Committee. After Bennett resigned from both positions in February 2004, he was no longer involved in the details of management. However, he served as chair of BEI's Board of Directors until August 2004 and thereafter continued as a consultant to BEI.
3In June 2003, BEI announced it had been awarded the largest soil remediation contract in its history, called the Phase III Contract (the "Contract"). The Contract was executed with Sevenson Environmental Services Inc. ("Sevenson"), which acted as subcontractor for the United States Army Corps of Engineers (the "Corps"). BEI had previously entered into and fulfilled similar contracts in the first two phases of the same soil remediation project.
4After its announcement, BEI was notified in June 2003 that a competitor was protesting the award of the Contract to BEI. In August and September 2003, BEI was notified that the Corps asserted a withdrawal of its consent to the award of the Contract to BEI and that the Corps was rebidding a contract (the "Second Contract") through Sevenson for a much smaller volume of soil. Nonetheless, in intervening press releases, BEI continued to list the Contract, including its large volume of soil remediation, as [page484] part of its inventory of projects. In June 2004, BEI executed the Second Contract. That month and the next, the Corps definitively took the position that the Contract was at an end and that the Second Contract was the only outstanding contract.
5In July 2004, BEI issued a press release disclosing that further shipments under the Contract were "highly unlikely" and that it had been awarded the smaller Second Contract. In the same press release, BEI disclosed that the status of the Contract had been in dispute since August 2003. The price of BEI shares fell almost 50 per cent within ten days.
6After the dramatic loss in share value, class actions were brought in the United States against BEI and BEI directors. As well, the U.S. Securities and Exchange Commission (the "SEC") brought proceedings against BEI, Bennett and other BEI directors. The class actions and SEC proceedings were ultimately settled in 2005 and 2006.
The Ontario Securities Commission proceedings
7In addition to the proceedings brought in the U.S., the staff of the Ontario Securities Commission (the "OSC") also made allegations against BEI, Bennett and other BEI directors, which included alleged violations of the disclosure requirements under the Securities Act. The OSC later abandoned an allegation that Bennett had provided misleading evidence during its investigation. There was no allegation of insider trading against Bennett, although his successor at BEI admitted to that offence.
8In 2006, the OSC approved a settlement agreement between its staff and Bennett. In that agreement, Bennett admitted that, at the time it arose, the existence of the dispute about the Contract constituted a "material change" within the meaning of the Securities Act and that BEI had failed to disclose that change, contrary to s. 75 of the Securities Act and the public interest. In view of that admission, Bennett acknowledged "serious misconduct" in the violation of s. 122(1)(b) and s. 122(3) of the Securities Act. At the same time, the settlement agreement expressly acknowledged that Bennett had had an honest but mistaken belief that, despite the dispute, the Contract was enforceable and the dispute would ultimately be resolved in favour of BEI.
9In accordance with the terms of the settlement agreement, the OSC prohibited Bennett from acting as an officer or director for a period of ten years, issued a reprimand and ordered him to pay an administrative fine of $250,000, as well as $50,000 toward the cost of the OSC investigation. BEI was not ordered to pay any penalty. [page485]
The indemnification proceedings
10In December 2006, Bennett sought indemnification from BEI for both the fine and the costs he had incurred in the OSC proceedings. However, BEI not only refused Bennett's request for OSC-related indemnification, but it also sought repayment of moneys it had already advanced to indemnify Bennett in relation to the U.S. class action and the costs of the SEC proceedings. The minutes of BEI's Board meeting reflect this decision and refer to the prohibition against indemnification contained in its by-law as well as "limited cash resources" from which to indemnify Bennett. In response, Bennett brought an application for a declaration that he was entitled to indemnification in relation to all the proceedings.
11Section 124(1) of the CBCA permits indemnification of a director or officer by the corporation for all costs, charges or expenses incurred "in respect of any civil, criminal, administrative, investigative or other proceeding in which the individual is involved because of that association with the corporation". BEI's General By-law No. 1, on the other hand, mandates indemnification.
12However, s. 124(3) of the CBCA and BEI's by-law, which echoes the wording of s. 124(3), prohibit indemnification where the director or officer has not complied with certain requirements. The non-indemnification provisions of s. 124(3) (a) and (b) of the CBCA contain two components, which are sometimes referred to as the "good faith and lawful conduct requirements":
A corporation may not indemnify an individual under subsection (1) unless the individual (a) acted honestly and in good faith with a view to the best interests of the corporation, or, as the case may be, to the best interests of the other entity for which the individual acted as director or officer or in a similar capacity at the corporation's request; and (b) in the case of a criminal or administrative action or proceeding that is enforced by a monetary penalty, the individual had reasonable grounds for believing that the individual's conduct was lawful. (Emphasis added)
13In his affidavits in support of his application for indemnification, and in his cross-examination on those affidavits, Bennett attested that he did not consider the Contract to be in jeopardy. He also attested that he did not take seriously the Corps' notification in the summer and fall of 2003 that it was withdrawing its consent to the Contract. In Bennett's view, the Corps was only stating this position to placate the competitor who had protested the award of the Contract to BEI. [page486]
14Bennett held this view because he considered such protests were standard and to be expected in the industry. Bennett was certain that the Contract remained extant because, from his extensive experience in the industry, he knew that BEI was the only company that could fulfill the Contract, BEI had been the successful bidder for Phases I and II of the project, and both BEI's U.S. representative and Sevenson's representative had assured BEI and Bennett that the Contract remained binding. Even when the Corps spoke of tendering a Second Contract, which Bennett believed would be for soil additional to the outstanding Contract, Bennett believed that this again was only done to placate the competitor. BEI and Bennett turned out to be wrong.
15As evidence of the sincerity of his belief at the time in the binding nature of the Contract, Bennett pointed out that he had received his October 2003 bonus in the form of stock options instead of cash. In addition, against the advice of his financial adviser, he had refused to sell any BEI stock during the relevant period. This conduct, he argued, belied any director misconduct on his part.
16BEI, on the other hand, asserted that Bennett had not held his belief honestly and, even if he had, that such a belief was unreasonable. Moreover, BEI took the position that Bennett could not have acted in good faith, or have had reasonable grounds for his belief, when he did not consult with legal counsel. Accordingly, BEI argued that it was prohibited by both its by-law and s. 124(3) of the CBCA from indemnifying Bennett.
The application judge's reasons
17The application judge noted Bennett's position and BEI's argument that Bennett had not fulfilled either requirement of s. 124(3). He also recognized BEI's view that a person in Bennett's position, who considered all the available information, would or should have known that BEI was required to disclose the Contract dispute, and that Bennett's position to the contrary was "untenable".
18The application judge described the proceeding as raising the issue of whether the director seeking indemnification or the company opposing indemnification bears the onus of establishing the presence or absence of the director's "honesty, good faith and belief in lawful conduct". He quoted both prongs of the s. 124(3) requirement for indemnification. He determined that the onus fell on BEI to demonstrate that Bennett did not satisfy the requirements of s. 124(3) and that the correct test is reflected by [page487] asking the following question: "what would have been done by a reasonable person in the circumstances by a person acting as a director who possessed the skill, training and experience of the individual in question?" The application judge also recognized that a reasonable director is "not entitled to rely on an unreasonable subjective belief".
19Since BEI had failed to establish that Bennett had acted "in bad faith or unlawfully", or that his belief in the lawfulness of his conduct was "unfounded or totally unreasonable", and since there was "no conclusive objective evidence" on which "to conclude that Bennett should not be believed on his version of the events", the application judge ordered BEI to indemnify Bennett.
Issues
20BEI challenges both the application judge's interpretation and application of the appropriate tests required by s. 124(3) as well as his factual findings. BEI also argues that indemnification in the circumstances of this case is inconsistent with the policy rationale underlying s. 124.
21For the reasons that follow, I would dismiss the appeal.
Analysis
Standard of review
22Counsel agree that questions of law are to be reviewed on the standard of correctness, questions of fact and factual inference on the standard of palpable and overriding error, and questions of mixed fact and law, generally speaking, on a spectrum between the other two standards, dependent on whether the alleged error is closer to an error of law or one of fact.
The policy rationale
23In interpreting the relevant provisions, I begin with the legislative rationale for permitting indemnification generally, while prohibiting it in specified circumstances. The primary purpose of indemnification is to provide assurance to those prepared to become corporate directors that they will be recompensed for any adverse consequences arising from well- intentioned entrepreneurism undertaken on the corporation's behalf. This assurance serves to attract and to protect competent directors who will advance the interests of the corporation.
24However, to encourage appropriate conduct, Parliament and the provincial legislatures also provide deterrents against misconduct. Arguably, the most effective deterrent is the consequence, including the stigma, of director prosecution and [page488] conviction. Another deterrent is the legislative prohibition against corporate indemnification for director misconduct. [See Note 1 below]
25This tension between the competing objectives of encouraging director entrepreneurism on the one hand, and discouraging director misconduct on the other, informs the interpretation of s. 124(3).
The onus and the test
26From the perspective of these competing objectives, I turn to the wording of s. 124(3) of the CBCA. Section 124(3) requires a consideration of the particular context in which the individual acted. Subsection 124(3)(a) sets out, as a pre- condition to indemnification, that the individual must have acted honestly and in good faith in the best interests of the corporation. Section 124(3)(b) adds an additional prerequisite regarding indemnification arising from criminal or regulatory penalties: the individual must also have had reasonable grounds for believing his or her conduct was lawful.
27In keeping with the contextual perspective, Parliament determined that entitlement to indemnification must be decided on the basis of the circumstances that existed at the time of the director's (a) conduct and (b) belief. This is clear not only from the wording of s. 124(3), but also from the leading case of Blair v. Consolidated Enfield Corp., [1995] 4 S.C.R. 5, [1995] S.C.J. No. 29, where Iacobucci J. observed, at para. 74, that the similar non-indemnification provision in the Business Corporations Act, R.S.O. 1990, c. B.16 allows "for reimbursement for reasonable good faith behaviour, thereby discouraging the hindsight application of perfection". [page489]
28In addressing the required degree of misconduct, Iacobucci J. instructed, at para. 74, that indemnification will only be prohibited if the director acted with mala fides. At para. 35, he cited General Motors of Canada Ltd. v. Brunet, [1977] 2 S.C.R. 537, [1976] S.C.J. No. 84, at p. 548 S.C.R., for the proposition that "persons are assumed to act in good faith unless proven otherwise" and placed the onus of proving mala fides on the corporation opposing indemnification.
29Noting that this interpretation of s. 124(3)(a) is in keeping with academic commentary, Iacobucci J. quoted, at para. 74, from Jacob S. Ziegel et al., Cases and Materials on Partnerships and Canadian Business Corporations, 3rd ed., vol. 1 (Scarborough, Ont.: Carswell, 1994), at p. 523. There, the authors acknowledge the appropriateness of denying indemnification for "fraud or misappropriation", but recognize that a director should not be denied indemnification if the "conduct . . . was not coloured by any opportunistic behaviour". Opportunistic or self-seeking behaviour may be encompassed within the term mala fides because such behaviour exhibits a type of dishonesty that should not be countenanced by an award for indemnification.
30The scope of the bad faith described in Blair was clarified in Enterprises Sibeca Inc. v. Frelighsburg (Municipality), 2004 SCC 61, [2004] 3 S.C.R. 304, [2004] S.C.J. No. 57. At para. 25, Deschamps J., writing for the court and citing Finney v. Barreau du Québec, 2004 SCC 36, [2004] 2 S.C.R. 17, [2004] S.C.J. No. 31, at para. 39, accepted that bad faith can encompass recklessness in the sense that the conduct at issue is so inexplicable that it suggests an absence of good faith. Deschamps J. also noted, at para. 26, that this clarification means "no more than the admission in evidence of facts that amount to circumstantial evidence of bad faith where a victim is unable to present direct evidence of it". Thus, inexplicable, apparently reckless, conduct may lead to the inference that the conduct was deliberate, intentional and undertaken in bad faith.
31Since the dispute in Blair involved a director's indemnification for a civil proxy dispute, it did not expressly consider the second branch of the CBCA's non-indemnification test under s. 124(3)(b), which requires reasonable grounds for belief in lawful conduct.
32Nonetheless, in my view, for reasons analogous to the observation in Blair regarding honest and good faith conduct, the corporation also bears the burden of showing that the director did not have reasonable grounds for his or her belief that the conduct was lawful. Placing the burden on the corporation is consistent with the principle affirmed in Blair regarding s. 124(3)(a) that persons are assumed to act in good faith. In my view, under [page490] s. 124(3)(b), persons should also be assumed to believe they are acting lawfully and to have reasonable grounds for that belief, unless the contrary is proven. There is no indication in the wording of the legislation that suggests a different burden should be imposed for (b) than for (a). The imposition of the burden on the corporation best balances the promotion of strong director decision-making on the one hand, while discouraging irresponsible behaviour on the other. Finally, as a practical matter, this placement of the burden makes sense because the corporation, and not the individual director, will most likely have the advantage of unrestricted access to corporate documents relevant to the indemnification proceeding.
33Relying on Catalyst Fund General Partner I Inc. v. Hollinger Inc. (2006), 79 O.R. (3d) 288, [2006] O.J. No. 944 (C.A.), BEI submits that an objective test must be applied in determining whether Bennett satisfied s. 124(3)(a) and that the application judge erred in applying a subjective standard.
34In Catalyst, Cronk J.A., writing for the panel, determined, at para. 105, that a director was not entitled to indemnification under s. 124(3) because the significance of the changed circumstances "would have been apparent to even the most untrained observer". Thus, she concluded, at para. 106, the director "cannot make out a claim for indemnification by relying on an unreasonable subjective belief".
35In my view, Catalyst rightly concluded that a director cannot ground a claim for indemnification on an unreasonable belief where that belief would have been obviously erroneous to even the most untrained observer. Such a belief would be analogous to the reasoning in Enterprises that observed that a director cannot rely on recklessness to defend otherwise indefensible conduct. Thus, the conclusion in Catalyst reflects the finding that the director's evidence regarding his good faith was not credible in the circumstances of that case. Accordingly, I do not accept the appellant's submission that Catalyst changed the test from that set out in Blair, as clarified in Enterprises.
36Indeed, the Blair reasonableness test achieves the same result by asking whether the director acted reasonably when the director's conduct or belief is considered in the context of the perspective of a director in comparable circumstances at the time. Looking at comparable circumstances involves looking at the issue from the perspective of the knowledge and skill set of the individual director and the information and advice upon which the director's conduct or belief was based.
37The wording employed by Parliament in both s. 124(3)(a) and (b) supports this interpretation of the reasonableness test. [page491] That wording instructs that the question is whether "the individual" exhibited good faith conduct and had reasonable grounds for believing that his or her conduct was lawful. The answer must include consideration of the context in which the director decided on the conduct or formed the belief at issue. It is implicit in the wording that the conduct or belief at issue must have been reasonable when considered in context.
38I turn to the application of the test to the circumstances of this case, an issue that I approach mindful of the factual findings made by the application judge.
Application of the test
39By admitting to breaches of s. 122(1)(b) and s. 122(3) of the Securities Act, Bennett acknowledged to the OSC that, at the time, the Contract dispute was a material change that BEI was obliged to disclose. However, BEI acknowledges that this admission does not, in itself, preclude Bennett's indemnification. Otherwise, there would be no point in the CBCA's provision of director indemnification for such administrative penalties. Moreover, the onus and test regarding an offence under the Securities Act differ from the onus and test mandated by the non-indemnification provisions of the CBCA. Thus, while Bennett's admissions to the OSC may reflect on the credibility of his evidence before the application judge, the OSC findings do not predetermine the result of the indemnification application.
40Both before the OSC and on his application, Bennett attested that, in the light of all the circumstances, he mistakenly believed the Contract dispute would be resolved in BEI's favour and so he did not consider the ongoing developments to be a change in the binding nature of the Contract, let alone a material one. For this reason, he did not identify any obligation to disclose. Thus, he argues, he acted honestly in BEI's interests and that he believed his conduct was lawful. Further, he asserts there is no basis on which to conclude his belief or conduct was reckless or that his view would have been obviously erroneous to even the most untrained observer at the time.
Section 124(3)(a)
41Under s. 124(3)(a), the issue for the application judge was whether BEI had established that Bennett was not credible in his evidence that he had [at para. 4] "acted honestly and in good faith with a view to the best interests of the corporation".
42While the application judge was alive to BEI's position that Bennett was lying about his good faith conduct (or that he [page492] acted unreasonably), he concluded that BEI had failed to satisfy its onus to disprove Bennett's evidence. BEI argues that the application judge erred in so concluding. I do not agree.
43While undoubtedly the obligation to disclose a material change is absolute, it is not always clear at the time that an event, or even a series of events, constitutes a material change. Such a determination may turn on an assessment of the reliability of the available information. In this case, Bennett gave reasons why he did not take the developing information seriously at the time. Those reasons included the assurances about the Contract Bennett received from BEI's own U.S. representative and from Sevenson's representative. Bennett also had regular discussions about the Contract with another director who was a lawyer. In addition, Bennett had discussions with his fellow director on the Disclosure Committee, albeit those discussions were not couched in terms of any disclosure obligations since he did not consider the developments to constitute a material change. Bennett's evidence was further supported by his open discussions with other officers and directors at BEI and the candid discussions with the Board about the dispute. In other words, Bennett's belief was an informed one.
44Furthermore, the honesty of Bennett's belief was supported by the absence of any motive to withhold disclosure. Indeed, Bennett pressed the BEI Board to proceed with the development of a new plant that would only have been required to honour the Contract. Bennett would not likely have done so if he believed the Contract was in jeopardy. Moreover, unlike others involved in BEI, Bennett did not stand to gain personally from the non-disclosure. This is also evident from Bennett's election to take his bonus in options and from his decision not to sell any BEI stock.
45Based on this evidence, the application judge concluded that he was not able to reject Bennett's position. From reading the application judge's reasons as a whole, it is clear that BEI failed to establish that Bennett's stated belief was either opportunistic or amounted to a reckless disregard of his obligations. The application judge specifically observed [at para. 36] the absence of "conclusive objective evidence on which to make such a finding". He considered and applied Iacobucci J.'s reasoning at para. 76 of Blair at para. [40]:
It is insufficient to say retrospectively that Blair 'should have' acted differently or that he did not handle things perfectly in order to deny indemnification under s. 136(1). Actual mala fides must be shown such that the director did not act with a view to the best interests of the corporation. [page493]
Similarly, it is not enough in this case to say, with the benefit of hindsight, that Bennett should have done more. The application judge accordingly was entitled to conclude that BEI had not satisfied the burden of establishing that Bennett acted in bad faith.
Section 124(3)(b)
46The trial judge did not expressly separate his consideration of the s. 124(3)(b) requirement that Bennett had reasonable grounds to believe that non-disclosure was lawful from his s. 124(3)(a) analysis. The two requirements are distinct: see Peoples Department Stores Inc. (Trustee of) v. Wise, 2004 SCC 68, [2004] 3 S.C.R. 461, [2004] S.C.J. No. 64, at para. 33, where Major and Deschamps JJ. discuss this distinction in the context of the different duties of directors under s. 122(1) of the CBCA.
47Nonetheless, the application judge's reasons demonstrate that he was alive to the distinction between s. 124(3)(a) and (b). On more than one occasion, he referred to "belief in lawful conduct" as a requirement that was in addition to the requirement of honesty and good faith. Moreover, in the particular circumstances of this case, it is apparent that the facts and the evidence underpinning both branches of the test, to a certain extent, are intertwined, as are the arguments advanced by the appellant.
48One of BEI's arguments, which applies to both branches of the test, is that Bennett could not possibly have had reasonable grounds to believe that his conduct was lawful (or that he was acting in good faith) when he did not consult legal counsel.
49This issue arose in Blair where, unlike in this case, the director seeking indemnification relied on the fact that he had consulted counsel before proceeding with the impugned conduct as evidence that he had acted in good faith. In upholding an order for indemnification, Iacobucci J. explained, at paras. 58 and 65, that, while a director's de facto reliance on legal advice does not guarantee indemnification, reliance on counsel's advice "will strongly militate against a finding of mala fides or fiduciary breach" (emphasis in original). The court in Blair relied on several additional considerations in ultimately concluding that the director was entitled to indemnification.
50In my view, while reliance on reasonable legal or professional advice will substantially assist a director seeking indemnification in establishing reasonable grounds for belief that his or her conduct is lawful, such consultation is not a prerequisite to indemnification. Rather, the variety of additional considerations that may come into play in a particular case makes it both undesirable and unnecessary to promulgate an inflexible rule mandating legal advice as a prerequisite to indemnification under either branch of s. 124(3). [page494]
51That said, however, a failure to obtain professional advice may raise questions in a particular case about a director's conduct or belief. In such a case, it may be necessary to assess the surrounding circumstances and conduct of the director at the relevant time to look for other evidence of the reasonableness of the relied-upon belief.
52In this case, Bennett testified that he did not turn his mind to the issue of disclosure or seek legal advice because it simply did not occur to him to do so, in part, because he was an engineer and not a lawyer. Standing on its own, this explanation cannot constitute reasonable grounds under s. 124(3)(b). A director serving on a Disclosure Committee, lawyer or not, is expected to have at least a basic familiarity with disclosure obligations.
53However, this was not a case where Bennett recognized and wilfully ignored an evident disclosure obligation or failed to make reasonable inquiries. To the contrary, as detailed above, the evidence shows that Bennett sought information from BEI's U.S. representative and from Sevenson's representative. He also had discussions with other directors and officers in the company. While Bennett was subsequently proven wrong in his decision not to make earlier disclosure, BEI failed to demonstrate that, from the perspective of someone in Bennett's position at the time, Bennett did not have reasonable grounds for believing he was acting lawfully.
54While the application judge's reasons are couched in terms of Bennett's belief in the continued validity of the Contract, rather than in terms of his belief that he did not have disclosure obligations, in the circumstances of this case, the two beliefs are synonymous. If Bennett honestly and reasonably believed the Contract was not in jeopardy, and that it accordingly remained a binding contract, there was no basis upon which he ought to have believed that he was obliged to make disclosure of a material change. I see no error of law in the application judge's reasons and therefore no basis to interfere with his conclusions in this regard.
55Accordingly, I conclude that it was open to the application judge to determine that BEI did not meet the onus on it to establish that Bennett did not have reasonable grounds to believe his conduct was lawful.
56Finally, I note that this is not a case that invokes the business judgment rule discussed in Kerr v. Danier Leather Inc., 2007 SCC 44, [2007] 3 S.C.R. 331, [2007] S.C.J. No. 44. In Kerr, Binnie J. instructed, at para. 54, that the business judgment rule "is a concept well-developed in the context of business decisions but should not be [page495] used to qualify or undermine the duty of disclosure" under the Securities Act (emphasis in original). Accordingly, the test to be met in this case is that set out in s. 124(3) of the CBCA.
Other errors
57BEI also submits that the application judge made factual errors. I reject this ground of appeal. To the extent that BEI argues that the application judge was obliged to refuse indemnification in the light of the factual findings of the OSC, I disagree. I have already given my view that the different burden and test under the Securities Act and the CBCA may result in different outcomes. I also disagree with BEI's characterization of the application judge's reasons as requiring expert or other evidence to refute Bennett's evidence. While this issue is more a question of law than of fact, in my view, the application judge's excerpted reasons do no more than reinforce his already-stated view that the evidence led by BEI was insufficient to meet the requisite onus under either branch of the s. 124(3) test.
58Finally, BEI observes that the OSC specifically declined to impose a penalty on BEI on the basis that such a penalty would ultimately be borne by the shareholders. From this, the appellant argues that granting Bennett indemnification in this application would impose the financial burden on the shareholders, contrary to the OSC's intention.
59In my view, BEI's argument is answered in two ways. First, while the argument is premised on the assumption that Bennett's conduct was sufficiently egregious to deny him indemnification, the application judge concluded that BEI failed to prove such misconduct and, as I have already stated, I see no reason to interfere with his conclusion. Second, BEI chose to protect directors against the imposition of financial penalties by enacting a by-law providing for director indemnification except in the case of misconduct. Again, as found by the application judge, BEI has failed to prove such misconduct.
Result
60In the result, I would dismiss the appeal. I would also award costs to Bennett fixed at $14,000, inclusive of disbursements and GST.
Appeal dismissed.
Correction: Released: June 10, 2009
The following corrections have been made:
- At paragraph 10, in the third sentence, there is a typo. It originally read:
"The minutes of BEIs Board meeting ... against indemnification contained it its by-laws ..."
It has been corrected to read as follows:
"The minutes of BEIs Board meeting ... against indemnification contained in its by-laws ..."
- Paragraph 45 contained a block quote that read as follows:
It is insufficient to say retrospectively that Blair 'should have' acted differently or that he did not handle things perfectly in order to deny indemnification under s. 136(1). Similarly, it is not enough in this case to say, with the benefit of hindsight, that Bennett should have done more. Actual mala fides must be shown such that the director did not act with a view to the best interests of the corporation.
The second sentence in the block quote beginning with "... Similarly, it is not enough ..." is not contained in the original quote and therefore, paragraph 45, beginning with the block quote, now reads as follows:
It is insufficient to say retrospectively that Blair 'should have' acted differently or that he did not handle things perfectly in order to deny indemnification under s. 136(1). Actual mala fides must be shown such that the director did not act with a view to the best interests of the corporation.
Similarly, it is not enough in this case to say, with the benefit of hindsight, that Bennett should have done more. The application judge accordingly was entitled to conclude that BEI had not satisfied the burden of establishing that Bennett acted in bad faith.
- And finally, the last sentence of paragraph 45 originally read:
"He concluded that BEI had not satisfied the burden of establishing that BEI acted in bad faith."
It has been corrected to reflect "Bennett acted in bad faith" and rewritten to read as follows:
"The application judge accordingly was entitled to conclude that BEI had not satisfied the burden of establishing that Bennett acted in bad faith."
Notes
Note 1: The relevant statue in every province permits indemnification generally, and restricts it in specified circumstances. Indeed, most of the provincial indemnification provisions prescribe the identical good faith and lawful conduct requirements set out in the CBCA (New Brunswick, Newfoundland, Ontario, Manitoba, Alberta, Saskatchewan and British Columbia), and others deny indemnification where the charges, expenses, or liability were occasioned by the director's own fault (Quebec), wilful neglect of default (Prince Edward Island) or dishonesty (Nova Scotia): see Companies Act, R.S.P.E.I. 1988, c. C-14, s. 64; Business Corporations Act, S.N.B. 1981, c. B-9.1, s. 81; Companies Act, R.S.N.S. 1989, c. 81, ss. 204 and 205; Corporations Act, R.S.N.L. 1990, c. C-36, s. 205; Companies Act, R.S.Q. c. C-38, ss. 90 and 184; Business Corporations Act, R.S.O. 1990, c. B.16, s. 136; Corporations Act, C.C.S.M. c. C225, s. 119; business Corporations Act, R.S.A. 1000, c. B-9, s. 124; Business Corporations Act, R.S.S. 1978, c. B-10, s. 119; and Business Corporations Act, S.B.C. 2002 c. 57, s. 163.
