Court File and Parties

COURT FILE NO.: CV-17-11687-00CL DATE: 20170720 ONTARIO SUPERIOR COURT OF JUSTICE (Commercial List)

B E T W E E N:

DOUGLAS DUNSMUIR and RONALD J. GOEGAN Plaintiffs – and – ROYAL GROUP, INC. Defendant

Counsel: Brian H. Greenspan, Richard P. Quance, Jorge Pineda, Michelle M. Biddulph, and Rand Salih, counsel for the plaintiff Ronald J. Goegan Nigel Campbell, Kent E. Thomson, Doug McLeod, and Steven G. Frankel counsel for the defendant

HEARD: June 12 - 16, 19 - 21, 23, 26 and 28, 2017

F.L. Myers J.

The Claim and Outcome

[1] The plaintiff Ronald J. Goegan claims damages of approximately $6.6 million for wrongful dismissal. He also claims aggravated and punitive damages.

[2] The plaintiff Douglas Dunsmuir settled his claims with the defendant before trial.

[3] At the time it terminated Mr. Goegan’s employment, Royal Group Technologies Limited was a public company. Its common shares were listed and traded on the TSX. The defendant Royal Group, Inc. is the successor to Royal Group.

[4] Royal Group and its predecessor Royal Plastics Limited employed Mr. Goegan from 1990 until 2004. On November 26, 2004, Royal Group terminated Mr. Goegan’s employment purportedly for cause. Royal Group gave no notice to Mr. Goegan prior to terminating his employment. It made no payment to Mr. Goegan in lieu of notice. It did not pay him any statutory notice pay or severance pay.

[5] At the time of the termination of his employment Mr. Goegan held the positions of Senior Vice-President and Chief Financial Officer of Royal Group. He was also a member of the board of directors of the company. Mr. Goegan claims that under the implied terms of his oral contract of employment, Royal Group was required to give him 30 months’ notice of termination or to pay him the equivalent of what he would have earned had he remained employed by the corporation for the 30 month reasonable notice period.

[6] For the reasons that follow, I find that Royal Group had cause to terminate Mr. Goegan’s employment summarily due to his role in the Vaughan West land flip discussed below. After it terminated Mr. Goegan’s employment, Royal Group learned additional facts concerning Mr. Goegan’s role as one of the senior officers who misappropriated a $4 million corporate asset referred to as the Premdor warrant that is also discussed below. He also participated with the other senior officers involved in a scheme to obtain more favourable income tax treatment for the proceeds of the Premdor warrant. The discovery of Mr. Goegan’s serious misconduct by the independent members of the board of directors irreparably severed the relationship of trust and confidence underpinning Mr. Goegan’s employment relationship. Therefore, Royal Group was not required to give Mr. Goegan any notice of termination or to pay him notice pay, severance pay, or any amount in lieu of notice. The action is therefore dismissed.

[7] For completeness only, I assess the damages to which Mr. Goegan would have been entitled had Royal Group not had cause to terminate his employment summarily at the amount of $1.61 million. Mr. Goegan would have earned that amount had he been provided with reasonable notice of 21 months to which he would have been entitled in the absence of cause for his dismissal. Prejudgment interest would have been added to the damages in an amount fixed after receipt of submissions from counsel for the parties. I would not have found the defendant liable for aggravated or punitive damages.

Ronald J. Goegan

[8] Mr. Goegan is 56 years old. He obtained his professional Chartered Accountant qualification in 1985. He started his career practicing public accounting for approximately six years. In 1990 Royal Plastics hired Mr. Goegan as Director of Corporate Accounting. In 1994, upon Royal Platics going public, Mr. Goegan’s title was changed to Vice-President of Corporate Finance. In 2001, he was promoted to Chief Financial Officer of the company. Later, he also became Senior Vice-President. At the time Royal Group terminated his employment in November, 2004, Mr. Goegan was 43 years old.

Royal Group

[9] Prior to 1994, Royal Plastics was a private company owned principally by Mr. Vic De Zen. It had experienced tremendous growth and was quickly becoming a leading manufacturer or extruder of plastic-based products for use in the construction industry.

[10] By all accounts, Mr. De Zen was a brilliant, charismatic, and autocratic owner of the private company. Under his visionary, entrepreneurial leadership, Royal Group grew substantially and quickly to become a major player in its industry.

[11] In 1994, Mr. De Zen took the company public. The initial public offering raised $185 million from public shareholders. Although the public shareholders’ investments represented a substantial proportion of the equity of the corporation, Mr. De Zen held multiple voting shares that gave him over 90% of the votes attached to voting shares.

[12] The public shareholders bought into a corporate structure that was designed to be under the control of Mr. De Zen. The board of directors was to be comprised of a majority of inside directors – directors who were employees of the company. Initially the public offering provided for only two independent or outside directors. Their compliment was later increased to four independent directors. But, at all material times, there were five inside directors cementing Mr. De Zen’s control of the board of directors.

[13] The corporate structure was disclosed to public investors in the offering documents. In effect, the public was invited to invest in and share the successes of Mr. De Zen and his team and to share the risk that they might not succeed. There was no doubt that Mr. De Zen was to be in full control of the enterprise as Chair, CEO, and the shareholder with a dominating majority of voting shares.

[14] Internally, there were few controls instituted at Royal Group to oversee management’s activities. Despite the wisdom of the adage that “absolute power corrupts absolutely” there were few checks and balances established to protect the $185 million invested by the public from the risks associated with Mr. De Zen’s unchecked power. The efficacy of institutional, systemic checks and balances, like the corporate by-laws, the audit committee, the board of directors, and the auditors, all depended on management’s willingness to forthrightly disclose truthful and complete facts to the independent overseers. The background law, including the statutory and common law duties owed by directors, officers, and senior managers, looms large in this case as perhaps the only real limits on the risk of abuse of power by Mr. De Zen and those associated with him. If people like Mr. Goegan, who were charged with putting the corporation’s interests ahead of their own, failed to fulfil their responsibilities, there was no practical limit on Mr. De Zen’s power, including his ability to misappropriated corporate opportunities and assets for himself and his colleagues. And that is what came to pass.

Findings on Credibility

[15] Although many of the basic chronological facts are agreed between the parties and are well documented, it is necessary to assess credibility to deal with Mr. Goegan’s efforts to deflect responsibility away from himself. In his testimony Mr. Goegan consistently underplayed his authority as a very senior employee within the Royal Group. While he did not become the CFO until December 2001, from the date of the IPO in 1994, he was the Vice-President of Corporate Finance. There were many people who held titles as Vice-Presidents spread throughout the multitude of operating subsidiaries in the corporate structure below Royal Plastics. But Mr. Goegan worked in the head office at the apex of the corporate pyramid. While he was initially not part of “Executive Management” for bonus purposes, he was a professional who reported directly to the CFO on financial accounting matters and to Mr. De Zen on real estate acquisitions. While only Mr. De Zen had final decision-making authority on major matters, Mr. Goegan’s office was literally located in the hallways of power. That is, he and a very few other senior officers’ offices were located on the same hallway as the offices of Mr. De Zen, the CFO Gary Brown, and the General Counsel Douglas Dunsmuir. Mr. Goegan was not a nameless member of the hordes of vice-presidents managing discrete operating subsidiaries in disparate locales. He was an important part of the select group at the very top. He had regular, unfettered access and input to the most senior officers including Mr. De Zen himself on matters within Mr. Goegan’s sphere of influence.

[16] Mr. Goegan became quite evasive under questioning several times when confronted with indications of the seniority of his position. Mr. Goegan’s evasiveness (that is, his effort to avoid answering direct questions) was particularly noticeable when he was examined on his access to the most senior executives at head office, when he tried to downplay his corporate finance role liaising with the underwriters for the initial public offering, and when he tried to show that others could have discovered the details of the Vaughan West transaction which is discussed below. He also tried to evade and avoid admitting an inconvenient fact involving the recording of the Premdor warrant in the financial records as an asset of Royal Group.

[17] Rather than admitting inconvenient facts, especially when they were as clear as the recording of an asset in a ledger book, Mr. Goegan retreated to word games or evasive deflection. For example, he suggested that conflicts of interest did not raise concerns because they were just “potential conflicts.” That was a distinction without a difference. Whether potential or actual, the transactions at issue were tinged with conflict that required investigation and resolution. It is the degree of Mr. Goegan’s participation and investigation (or lack thereof) that is in issue. Classifying the transactions as merely “potential” conflicts of interest was sophistry. He also suggested at one point that his reference to “Royal” in a memo was an informal reference to both Royal and Mr. De Zen when the whole purpose of the memo was to differentiate between the two so as to show that only De Zen and not Royal Group had bought the Vaughan West land. Mr. Goegan is an intelligent man who skillfully and carefully used language to try to advance his position. A significant degree of evasion was apparent in those efforts and negatively affected my view of the credibility of his evidence.

[18] Mr. Goegan also recalled extra facts when he perceived them as helpful. For example, he denied knowing that Mr. Blakely was a senior real estate professional at Royal LePage because he had only dealt with Mr. Blakely once. But then when pushed to support his evidence that the market place knew that Mr. De Zen was a major land owner in Vaughan, he testified that Mr. Blakely knew that Mr. Goegan and Mr. De Zen were continuously soliciting the market place looking for land deals in Vaughan. How could he know that if he only dealt with Mr. Blakely once? Similarly, Mr. Goegan testified in his affidavit that when Mr. Blakely approached him to discuss the possible sale of the Vaughan West land to Royal Group, it was Mr. Goegan who first suggested that Mr. De Zen might want to buy the land in his personal capacity. Mr. Goegan changed his story at trial. When Mr. Goegan testified in chief he added the fact that when Mr. Blakely called Mr. Goegan, Mr. Blakeley offered the land to both Royal Group and to Mr. De Zen. Mr. Blakely denied this squarely and his testimony was not undermined in cross-examination on the point. Mr. Goegan, by contrast, was successfully impeached on this important new fact that changed his prior sworn evidence.

[19] Mr. Goegan’s testimony changed and he was impeached on the content of his conversation with Mr. Brown in which Mr. Brown allegedly told Mr. Goegan to ensure that Mr. De Zen obtained an appraisal in relation to his flip of the Vaughan West land to Royal Group. Mr. Goegan purported to recall facts from a 20 year old, undocumented conversation that he did not recall on being examined for discovery three years ago. Mr. Goegan was impeached successfully on his purported recovered memory.

[20] Mr. Goegan’s evidence concerning basic ethical concepts also affects my assessment of his credibility. Mr. Goegan testified that he did not know that it was improper to back-date documents to make it appear that transactions occurred at an earlier time so as to obtain preferential income tax treatment. His evidence concerning back-dating documents was inherently incredible coming from an intelligent, experienced, senior Chartered Accountant who was the Chief Financial Officer of a significant public corporation. A Chartered Accountant and CFO of a public corporation who says that he does not know that it is improper to back-date documents to avoid tax is either engaged in deception or his basic ethical gyroscope is so far off its axis as to undermine the credibility and reliability of his observational and analytical abilities. [1]

[21] By contrast, Messrs. Ronald Slaght, Gregory Sorbara, and Trevor Blakely gave evidence for the defendant. They each gave their evidence in a straightforward manner. They admitted frailties of memory appropriately. They admitted mistakes. Both Mr. Slaght and Mr. Sorbara volunteered forthrightly that they could have done more as independent members of the board of directors to oversee management. Any impeachments were minor and did not, in my view, disclose important changes in their sworn testimony. Mr. Slaght became indignant when confronted with questions that suggested that unethical conduct was acceptable at Royal Group. I viewed his indignation as holding a strict ethical line rather than defensiveness or belligerence. In my view, in the circumstances (especially responding to a suggestion in cross-examination that management was free to take money from the public corporation as long as they took less than the $60 million management approval limit) Mr Slaght’s indignation and incredulousness were entirely appropriate.

[22] It follows that where the evidence of Mr. Goegan conflicts with the evidence of Messrs. Slaght, Sorbara, or Blakely, I prefer the evidence of the other three over that of Mr. Goegan.

[23] Mr. James Sardo also gave evidence for the defendant. He had very little independent recollection of events from 2004 when he became involved. Nothing turns on his evidence.

[24] Finally, Douglas Dunsmuir gave evidence largely supporting Mr. Goegan’s case. Mr. Dunsmuir testified that as the General Counsel of Royal Group, he delegated to external counsel to the exclusion of himself his duties to ensure that Royal Group complied with the law. There was no documentary support for that position. No law firm was shown to have undertaken the mandate of General Counsel to ensure internal compliance at Royal Group. There was no public disclosure of this supposed shedding of responsibility by the corporation’s senior legal officer.

[25] Mr. Dunsmuir testified that as long as a related party transaction fell within management’s $60 million approval limit and the corporation’s auditor did not classify it as material for financial reporting purposes, then he did not believe that there had to be disclosure or approval of the transaction sought from the board of directors despite the provisions of the corporate by-laws, the Canada Business Corporations Act, and the common law. He put the lie to his own testimony when his discussed his response to Mr. De Zen upon being told of the Vaughan West land flip. He testified that he told Mr. De Zen that the transaction should not be carried out with senior officers of Royal Group making a profit and that it was a material transaction that needed board approval even though it fell within management’s $60 million approval limit. He then did nothing to ensure that the transaction was properly disclosed and approved by the board of directors. Instead he purportedly accepted CFO Brown’s assurance that the auditors found the transaction immaterial and allowed this to supplant his legal advice that disclosure and board approval of the transaction were required.

[26] Mr. Dunsmuir and Mr. Brown both took secret profits on the Vaughan West land flip of about $200,000 each at the expense of Royal Group. Mr. Dunsmuir was in a conflict of interest. He knew the legal duties that applied to him and his colleagues and he violated them for personal profit. He ignored the rights of the corporation and through it, the shareholders and stakeholders – the ultimate beneficiaries whom he was duty-bound to protect selflessly. He did the same with the Premdor warrant discussed below on which he made a profit of almost $510,000 at the expense of the corporation. Moreover, on that transaction he also participated in the tax back-dating scheme mentioned above. Mr. Dunsmuir’s infidelity personally and as a lawyer undermines his credibility as a witness. I reject Mr. Dunsmuir’s evidence as self-serving and untrustworthy generally and specifically when it conflicts with the testimony of Messrs. Slaght, Sorbara, or Blakely.

Board Approval of Related Party Transactions

[27] Prior to the 1994 initial public offering Mr. De Zen held substantial amounts of land for future development purposes. The land was held in Royal Group or, more often, in separate corporate entities owned by Mr. De Zen and several of his colleagues (some of whom were also senior officers of Royal Group).

[28] With the input of the underwriters, Mr. De Zen decided that his inventory of raw, undeveloped land that did not produce a positive cash flow would be excluded from the IPO. Mr. Goegan was involved in moving raw land or the corporations in which it was held out of Royal Group to ready it for the IPO. After the IPO, Mr. De Zen and his colleagues continued to invest in the development of their land independent of their positions with Royal Group. For a monthly fee, Royal Group staff did administrative and accounting work for Mr. De Zen’s private investments and the corporate vehicles through which they were owned.

[29] Mr. Goegan testified that after the IPO it was expected that there would be transactions between Mr. De Zen in his personal capacity and the public corporation.

[30] By-law No. 1 was adopted by the Royal Group as part of the implementation of its IPO. Section 4.18 of By-law No. 1 provides:

CONFLICT OF INTEREST – A director or officer who is a party to, or who is a director or officer of, or has a material interest in any person who is a party to, a material contract or proposed material contract with the Corporation shall disclose the nature and extent of his or her interest at the time and in the manner provided by the [Canada Business Corporations Act]. Any such contract or proposed contract shall be referred to the board or shareholders for approval even if such contract is one that in the ordinary course of the Corporation’s business would not require approval by the board or the shareholders. Such a director shall not vote on any resolution to approve the same except as provided by the Act. [Emphasis added.]

[31] If Mr. De Zen proposed to do business with Royal Group, under s. 4.18 he was required to disclose his interests to the board of directors and obtain its approval.

[32] Section 6.12 of the by-law requires officers to disclose their interests as well under section 4.18. Section 6.01 of the by-law defines officers to include vice-presidents of the corporation.

[33] It was understood within Royal Group that management had general authority to enter into contracts with a value of less than $60 million without board of directors’ approval. Moreover, for the purposes of financial statement presentation, contracts of less than $60 million and perhaps more, were considered immaterial by the auditors. However, section 4.18 requires board or shareholder approval of material contracts in which a director or officer has an interest even where the contract would not otherwise require board approval. The use of the word “material” in s. 4.18 is unfortunate because it carries a number of different meanings in different contexts. In just this paragraph the word “material” or, conversely, “immaterial” could have three different meanings. Management referred to contracts that fell under its approval limit of $60 million as “immaterial.” The auditors and accountants referred to transactions that were small enough to ignore for financial statement disclosure purposes as “immaterial.” Finally, section 4.18 refers to “material contracts” that need board of directors or shareholder approval even if not otherwise required.

[34] There is no reason for the word “material” in s. 4.18 to mean the same thing as management’s colloquial use of the word as a synonym for its approval limit. Nor need it mean the same thing as a term of art used in the accounting profession. Were it otherwise the section would be superfluous. If “material” in s. 4.18 exempts from disclosure contracts that are immaterial because management does not need approval to enter into them or because the auditors do not need to disclose them, then the words emphasized in s. 4.18 above, that require board approval even where it is not otherwise required, would be meaningless. That is, if a contract is not material under s. 4.18 just because it is under management’s $60 million approval limit or because the auditors do not require it to be disclosed in financial statements, then section 4.18 would not require approval of that contract for the very reason that the approval was not otherwise required. That is the opposite of what it says.

[35] The by-law refers to and incorporates s. 120 of the Canada Business Corporations Act that was then in force that also applies to “material contracts.” The by-law should be interpreted to fit with the statute in accordance with modern, remedial, purposive approach to interpretation. The interpretation of the statute is discussed in Welling, Corporate Law in Canada: The Governing Principles, 2d ed. (Vancouver: Butterworths, 1991) at p. 452-453:

In the context of conflict of interest contracts, the meaning of "material contract" and "material interest" is conditioned by the purpose behind the section. The purpose is to identify those negotiations in which a corporate manager's ability to bargain effectively on behalf of the corporation may be inhibited by some interest he has in the other side…..Whether to participate in a proposed contract is a corporate decision and the corporation is entitled to full disclosure from its fiduciaries of all facts that might affect that decision.

[36] The statute, as it stood at the time, provided a mechanism for a corporation to approve contracts with interested directors and officers. The first step in the process is the mandatory disclosure to the board of directors of the conflicting interests of the fiduciaries involved:

120. (1) A director or officer of a corporation who (a) is a party to a material contract or proposed material contract with the corporation, or (b) is a director or an officer of or has a material interest in any person who is a party to a material contract or proposed material contract with the corporation, shall disclose in writing to the corporation or request to have entered in the minutes of meetings of directors the nature and extent of his interest. R.S.C. 1985, c. C-44.

[37] The section requires directors and officers to make formal, written disclosure to the board of directors of their personal interests in material contracts. The section is intended to apply to contracts in which the interests of the corporation are in need of protection from the risk of compromise by the competing personal interest of an officer or director who, as a fiduciary, is required to be protecting selflessly the interests of the corporation. In my view, adopting a purposive reading leads readily to the conclusion that, at minimum, a contract is material for the purposes of s. 4.18 of the by-law and s. 120 of the statute where an officer or director who is involved in the approval of the contract on behalf of the corporation has a non-trivial personal interest in its subject matter. Exide Canada Inc. v. Hilts, 2005 CarswellOnt 5916, [2005] O.J. No. 4685, at paras. 11 and 12 (ON SC).

[38] While the word “material” can refer to a measure of relative value or a measure of relative importance in a context, at the very least, where a director or officer is charged with considering a contract selflessly on behalf of a corporation, the fact that she has a personal interest in the contract will always be material to the board of directors and investors. Regardless of whether the director or officer is believed to be an entrepreneurial genius or a person who is beyond ethical reproach, even the appearance of conflict of interest calls out for protection by disclosure and independent approval. The common law and common sense recognize that conflict of interest is an insidious force that can deprive even the best of us of balanced, independent judgment. Peoples’ capacity to be convinced of the righteousness of their own conduct by the lure of lucre has no known limits. The facts of this case demonstrate the wisdom and prudence of strict rules for independent oversight and review of decisions taken in conflict of interest.

[39] Moreover, the fact that management’s approval limit of $60 million was not intended to guide the legal determination of when interested director and officer contracts required board approval was confirmed in Royal Group’s public disclosure documents. For example, in the Management Proxy Circular for its 1996 annual general meeting, the company wrote:

In addition to those matters which must by law be approved by the Board, Management is also required to seek Board approval for any disposition or expenditure in excess of $60,000,000. Management is also required to consult with the Board before entering into any venture which is outside of the Corporation’s existing businesses. [Emphases added]

[40] Of course management’s disclosure does not determine the law. This disclosure plays no part in my interpretation of the by-law and the statute. But, it does confirm that the legal interpretation is consistent with what management understood to be the case. In contrast to Mr. Dunsmuir’s purported retroactive abdication of his legal responsibilities and Mr. Goegan’s efforts now to take refuge behind management’s $60 million approval limit, management understood at the time that the issue of conflict of interest was separate and distinct from its monetary approval limit. In fact and in law therefore, management’s approval limit cannot be conflated with other legal requirements to seek board approval for related party transactions under s. 4.18 of the by-law, s. 120 of the Canada Business Corporations Act, or when management proposed to act outside of the ordinary course of business.

[41] Although the requirements for board of directors’ approval of interested director and officer contracts existed, they were not followed at Royal Group during the time frame involved in this action. That does not make undisclosed transactions lawful. However, it is relevant to the issue of whether Mr. Goegan’s conduct was consistent with the standards applied to employees’ duties by the board of directors and management at Royal Group generally at the relevant time. This will be part of the contextual assessment of whether Mr. Goegan’s conduct amounted to cause for his summary dismissal.

The Vaughan West Land Flip

[42] In November, 1997, Mr. Goegan received a telephone call from Trevor Blakely, a senior real estate salesman at Royal LePage. Mr. Blakely told Mr. Goegan that H&R Developments owned and wanted to sell 142 acres of land at the southwest corner of Highways 7 and 27 in Woodbridge in the City of Vaughan. H&R’s land was located directly across the street from Royal Group’s head office. Mr. Blakely told Mr. Goegan that H&R was a motivated seller that preferred to engage in a private transaction rather than listing the property publicly for sale. He asked if Royal Group might be interested.

[43] Mr. Goegan knew that Mr. De Zen and his colleagues were major land owners in Vaughan. They owned substantial land north of Highway 7 that was already under development. He told Mr. Blakely that while Royal Group was likely not interested in a parcel of that size, it might be of interest to Mr. De Zen.

[44] At the time, Royal Group was expanding internationally but its expansion plans did not include major development in Vaughan. Nevertheless, Mr. Goegan believed that the opportunity to buy the Vaughan West land might well be a good opportunity for Royal Group especially because the land may be available at a good price. Mr. Goegan approached Mr. De Zen and advised him of the approach made by Mr. Blakeley. Mr. De Zen initially responded that Royal Group was not interested.

[45] The offer of the Vaughan West lands was a corporate opportunity of Royal Group. Mr. Goegan confirmed that he was the public face of Royal Group in real estate matters. Mr. Blakely brought the transaction to Mr. Goegan for Royal Group (as attested to by Mr Blakely and by Mr. Goegan initially in his affidavit). Mr. Goegan’s affidavit is also clear that Mr. De Zen told him that “Royal Group was not interested in the lands.”

[46] Mr. Blakely followed up with Mr. Goegan in early December. Mr. Goegan approached Mr. De Zen again during a break in a board of director’s meeting on December 3, 1997. Mr. Brehn, an independent director, was near enough to hear or to be part of the conversation. Mr. Goegan reminded Mr. De Zen of the opportunity. Mr. De Zen upbraided Mr. Goegan in front of Mr. Brehn, reminding him that undeveloped land that did not have positive cash flow had been excluded from the IPO and was not of interest to Royal Group. However, Mr. Goegan continued to believe that the land was or ought to have been of interest to Royal Group. Mr. Goegan persisted. He made the point to Mr. De Zen that the land might not be available later should Royal subsequently want it. He says that Mr. De Zen then mused to Mr. Brehn that perhaps he might buy it himself so it would be available to Royal Group later if needed.

[47] Mr. Goegan advised Mr. Blakely that Mr. De Zen might be interested in the land. Mr. Goegan stayed in contact with Mr. Blakely through December and into January 1998.

[48] On January 12, 1998, Ernest Racco of RenTex Realty contacted Mr. Goegan. Mr. Racco was known to Mr. Goegan as a real estate advisor who had acted for Mr. De Zen and his colleagues on land transactions previously. Mr. Racco advised Mr. Goegan that Mr. Bordin, one of Mr. De Zen’s colleagues, had instructed him to prepare an offer to purchase the Vaughan West land. Mr. De Zen was behind the purchase. Mr. De Zen asked Mr. Goegan to share with Mr. Racco his discussions with Mr. Blakeley and to assist Mr. Racco with the negotiation of the purchase price. Mr. Goegan spoke to Mr. Racco and then took part in the ongoing negotiations with the vendor to buy the land for Mr. De Zen and his colleagues.

[49] By agreement of purchase and sale dated January 22, 1998, Mr. Bordin in trust agreed to buy the Vaughan West land from an H&R affiliate for approximately $20.5 million.

[50] Mr. Goegan confirmed that Mr. De Zen would have others like Mr. Bordin sign such agreements so as to disguise his involvement. Mr. De Zen feared that vendors might seek a higher price if they knew that he was involved in light of his major landholdings in the vicinity.

[51] Mr. Goegan remained involved in the transaction as it moved toward closing. He was copied on the environmental report on the land. He put in motion the accounting for the transaction and advised his tax colleague Lu Galasso of the amounts that Mr. De Zen and his colleagues would be required to pay on the closing of the transaction on March 31, 1998.

[52] In late March, Royal LePage sued Royal Group, Mr. Goegan, and others claiming that it was entitled to commission on the deal it brought to Royal Group. Royal Group retained Ronald Slaght of the Lenczner Slaght law firm to act for it and its employees. Mr. Slaght was also an independent member of the board of directors of Royal Group. He had held that position since the IPO in 1994.

[53] Mr. Goegan prepared a memo for Mr. Slaght that formed the basis of a draft affidavit that Mr. Slaght prepared. The essence of the story advanced in Mr Goegan’s memo, that Mr. Slaght carried into the draft affidavit, was that the purchaser of the property was not Royal Group but a corporation in which Mr. De Zen held less than 50% of the shares and therefore was not an affiliate of Royal Group. Royal Group had no interest in the transaction that could make it liable for any tort or for the broker’s commission.

[54] The draft affidavit prepared by Mr. Slaght stated that Royal Group had no interest in the land and played no part in the transaction. By that time however, Mr. Goegan had learned that there was internal discussion under way at Royal Group of the possibility of the land being purchased by Royal Group from Mr. De Zen and his colleagues. He says that he mentioned this to Mr. Slaght in their one and only telephone call to discuss the draft affidavit. Mr. Slaght denied knowing that Royal Group was at all involved with this transaction as it is contrary to the defence being put forward in the memo and the draft affidavit. I accept Mr. Slaght’s evidence rather than Mr. Goegan’s evidence on this point.

[55] Mr. Goegan says that he did not then know the price proposed for the sale to Royal Group. He was just concerned as to the manner of disclosure of the proposed possibility of a sale to Royal Group in his draft affidavit. He suggested adding the word “possible” so as to have him say in the affidavit that Royal Group had no involvement in the “possible sale” to Mr. Bordin. While the addition of that word might make the sale to Mr. Bordin in trust seem a bit less certain, it did nothing to suggest that there was any sale contemplated to Royal Group. Mr. Goegan says he remained concerned that the draft did not properly disclose the possibility of a sale to Royal Group. Yet he never called Mr. Slaght back to ensure that this disclosure was made in the affidavit. Neither did he call Mr. Slaght back when he learned the price and terms proposed or ever.

[56] The affidavit was never finalized as the litigation was quickly settled by other parties. Mr. Slaght spent only a few hours over a few days on the entire retainer. While it certainly shows that he knew that Mr. De Zen had real estate interests outside of Royal Group and that he was buying the land at that time, nothing in the Royal LePage litigation shows any knowledge by Mr. Slaght of the flip that ensued.

[57] It turns out that a few days prior to closing, Mr. De Zen advised Mr. Goegan that Messrs. Brown and Dunsmuir were part of the group participating with him in the purchase of the Vaughan West land. This did not surprise Mr. Goegan as he understood that the CFO and General Counsel frequently held 3% each in Mr. De Zen’s private investments.

[58] Mr. Goegan learned that upon Mr. De Zen’s recent return from a trip to Italy, Mr. De Zen decided that instead of Royal Group building manufacturing facilities abroad, it would buy the Vaughan West land and build a major manufacturing and warehousing hub across the street from head office. Mr. Dunsmuir testified that he thought that this was a not a good idea. It exposed the company to higher transportation costs, higher labour costs, and foreign currency risk. However, Mr. De Zen made up his mind and his word carried the day. He also advised that his colleagues in the investment did not want to give the land to Royal Group. Mr. De Zen apparently claimed that he had to stay neutral as between Royal Group and his partners. He decided that on the closing of their purchase, he and his colleagues would flip the Vaughan West land to a subsidiary of Royal Group for approximately $27 million. There was no negotiation of the price and no one independent of Mr. De Zen and his selling group acting on the Royal Group side of that transaction.

[59] The initial purchase transaction and the flip to Royal Group were both scheduled to close on the same day. The corporate vehicle used by Mr. De Zen and his colleagues (including Messrs. Brown and Dunsmuir) would buy the land from H&R for about $20.5 million and then Royal Group would buy the shares of the purchaser company from Mr. De Zen and his colleagues that day for about $27 million. [2]

[60] Mr. De Zen made a personal profit of around $3 million on the flip. Messrs. Brown and Dunsmuir each cleared a profit of approximately $200,000 on the flip.

[61] Mr. Goegan objected to the characterization of the transactions as a flip. In a lengthy soliloquy he provided much hearsay as to his understanding of why the land gained $6.5 million or about one-third in value in the two months between the date of the initial agreement of purchase and sale in January, 1998 and the date of closing at the end of March, 1998. He opined that advances made in zoning and in learning that there were no significant environmental defects with the site accounted for the tremendous growth in value over those two months. There was no admissible evidence presented of any change in the zoning status of the land over the two month period. The land was already zoned for industrial use in the Official Plan so that only minor zoning amendments were required in any event. Mr. Dunsmuir was not aware of any zoning changes that occurred in the period. Mr. Blakely testified that the land was raw farm land. As it had not previously been used for industrial purposes, no significant environmental concerns were expected. If it had some minor damage (as it did in fact) that could only impair the price. He gave common sense evidence that while environmental damage might decrease the price, the absence of damage to raw land would not be expected to increase the price. When investigating the transaction later, Kroll did not seek an independent appraisal of the land as at March 31, 1998 because it was content that the price agreed upon by H&R Developments and Mr. De Zen and his colleagues in January of that year provided a real, arm’s length market test that evidenced the fair market value of the site.

[62] While prices were certainly on the rise generally in Vaughan during that timeframe, the plaintiff called no independent evidence to establish the fairness of the price charged to Royal Group for the land by Mr. De Zen and his colleagues. I infer that he would have done so if he could have and that the land was worth only what Mr. De Zen and his colleagues paid for it or a trifle more at the time that they flipped it to the public corporation for a $6.5 million profit.

[63] Mr. Goegan’s essential justification for the transaction was his view that as long as a sale from corporate officers to the corporation is priced at fair market value and occurs in the ordinary course of business, then it is only a potential conflict rather than being an actual conflict of interest. As I discussed above, this is not a correct view of the requirements for the approval of related party transactions. Neither is it correct in law as discussed below. In any event, Mr. Goegan says that he was instructed by Mr. Brown to advise Mr. De Zen that he needed to obtain an appraisal to support the value of the purchase price paid by Royal Group. Mr. Goegan says he told this to Mr. De Zen. Mr. Brown also said that he was going to get a second appraisal from Mr. Racco.

[64] Mr. Goegan claims that Mr. De Zen told him that he had an appraisal at $165,000 per acre that exceeded the price paid by Royal Group. He says that Mr. Brown told him that he had spoken to the company’s auditors and they confirmed that the transaction was immaterial and did not have to be disclosed. And that was fine with Mr. Goegan. He oversaw the arrangements for payments and accounting for the various transactions.

[65] As the most senior manager of the company engaged in negotiating and closing the transactions who was not profiting personally on the flip, Mr Goegan did no due diligence to confirm that the property was sold at fair market value or in the ordinary course as he believed to be required. He did not see any appraisal. In fact, years later Lu Galasso produced a letter from a real estate firm that gave a one-line statement of value that purported to support the price of the flip. Interestingly, in 2000 Mr. Galasso had been asked to provide evidence to support the price and he advised that Mr. Racco had opined that the price was fair. He did not mention the letter that he produced at a later date.

[66] Actually Mr. Galasso produced two versions of the same letter setting out the same value for the land. The first one was dated in June, 1997, some five months before Mr. Blakely first offered the property to Mr Goegan. It purports to value the land as at March 31, 1998, some nine months into the future. The second version was dated at the correct March 31, 1998 date. It is obvious that the first draft was a back-dated document that was back-dated too far and exposed on its face the illegitimacy of the purported retroactive papering of a valuation effort. The letter did not purport to be an appraisal or to contain any rationale for the value that the author ascribed to the land. In relying on the letter, Mr. Goegan denied knowing the difference between an appraisal and a one-line letter stating a value. This was yet another obvious understatement that was inconsistent with his experience, knowledge, and insight both as a CA and as a person engaged in significant real estate transactions. There were no comparables disclosed in the letter nor is any valuation methodology discussed. Subsequent efforts to locate the author of the letter failed. The letter is neither credible nor admissible as a valuation.

[67] Mr. Goegan also confirmed that the purchase of this real estate was by far the largest land purchase ever made by Royal Group. It was as much as three times larger than the next biggest purchase made by the company to that time. Mr. Goegan had been upbraided by Mr. De Zen in December for having had the temerity to even suggest that Royal Group might be interested in buying raw, undeveloped land that did not generate positive cash flow. To his knowledge then, this transaction was not carried out in the ordinary course of Royal Group’s business.

[68] In all, despite Mr. Goegan saying that related party transactions were not conflicts of interest if priced at fair market value and conducted in the ordinary course of business, he saw no evidence of either condition being met. Neither did he look for any. Nor did he tell anyone who might have had oversight responsibility over Mr. De Zen of the absence of evidence needed to clear the conflicts under his test. He also did nothing to ensure compliance with By-law No.1 or the Canada Business Corporations Act or to bring the flip and secret profit to the attention of someone who could do so.

[69] To summarize my findings on Mr. Goegan’s involvement in the Vaughan West land flip:

a. He received the opportunity on behalf of Royal Group as the public face of Royal Group in real estate acquisitions; b. He suggested that the opportunity be directed to Mr. De Zen and senior management; c. He shared with Mr. Racco on behalf of Mr. De Zen and his colleagues commercial insight and information that he had gleaned in relation to Royal Group’s opportunity; d. He participated in the final negotiation to buy the land from H&R on behalf of Mr. De Zen and his colleagues; e. He learned that on the closing of the purchase, Mr. De Zen and his colleagues were flipping the land to Royal Group for an undisclosed personal profit of approximately $6.5 million at Royal Group’s expense; f. He was the senior-most person at Royal Group with significant involvement in the transaction who was not profiting personally on it; g. He believed that the transaction was only a potential conflict of interest and that the conflict could be cured if the land was sold to Royal Group for fair market value in the ordinary course of business; h. He took the word of officers whom he knew to be making substantial personal profits on the transaction that an appraisal had been obtained and the auditors had said that the transaction was immaterial. He did no due diligence and did nothing as a careful accountant to paper the file; i. He knew that the transaction was not in the ordinary course of Royal Group’s business and therefore did not meet even his own test for a “potential” conflict as opposed to a real conflict of interest; j. He helped the junior in-house counsel close the deals. He oversaw the banking, the movements of money, and the financial reporting; k. He had been in touch with Mr. Slaght, an independent director, just days before closing to deal with the Royal LePage litigation and he knew how to get in touch with Mr. Slaght. He did not tell Mr. Slaght that the land was being sold by the insiders to Royal Group on the day of closing of the initial purchase for a $6.5 million profit; and l. He did not take any step to even try to ensure that the transaction was approved by the board of directors as required by the by-laws and the Canada Business Corporations Act. He told no one with independent oversight responsibilities, like the auditors or an independent director, and he did nothing to ensure that the deal was properly disclosed and approved by anyone on behalf of the corporation who was not making a secret, personal profit.

[70] Mr. Goegan notes that the financial details of both transactions were set out clearly in the books and records of Royal Group and Mr. De Zen’s company that flipped the land. That is true. Although someone looking just at Royal Group’s books who did not have access to the books of Mr. De Zen’s company would not see the price paid to H&R for the land and so would not see the profit being made. Once retained to investigate related party transactions, Kroll was able to piece together the story quite readily. It was not hidden in the sense that information was available in the books and records of the various companies if one went to look for it. In any event, as I will discuss below in dealing with the law, the fact that a trail of breadcrumbs was left is irrelevant. The duty of disclosure is a positive one and an exacting one. It is not enough to say that the auditors could have found it. Mr. Montesanti gave evidence that the Royal Group side of the transaction was provided to the auditors. Yet management’s representation letter to the auditors for the relevant year contains management’s positive representation that there were no related party transactions. Despite Mr. Greenspan’s suggestion in cross-examination that the auditors took the lead in drafting management representation letters, the representations in the letter are those of management. In this case, management’s representation was untrue. It can hardly be said to be disclosure to the auditors to put them on notice to go look at the transaction to discover the flip.

[71] Similarly, Mr. Goegan argues that when the board was later told that land had been bought (with no disclosure of the details) and when Mr. Slaght later saw buildings being built across the street, he ought to have remembered that during the few days of litigation with Royal LePage he had been told that De Zen was buying the land and not Royal Group. Mr. Slaght should have pieced together that the land bought by De Zen must have been transferred to Royal Group and he could have asked to see if there was anything untoward in the related party transaction.

[72] Mr. Slaght testified that it did not click with him that the land that was the subject of the litigation on which he spent only a few hours was the same land as was bought and being built on by Royal Group. He was cross-examined on this topic with no indents made in his testimony. Once again, the argument is ultimately irrelevant. The duty to disclose is not met by hoping that an independent director pieces together clues.

[73] There is no doubt that in 1998 Royal Group did not have a proper internal control system in place for reporting on and assessing related party transactions. No one reported related party transactions to the board of directors at Royal Group until Mr. Goegan instituted reporting processes after he became CFO. Thirteen transactions were later identified and studied by Kroll when a special committee of the board was appointed to look at related party transactions. Twelve of the 13 were found to have been transfers at fair market value. Whether Mr. De Zen or other insiders made a profit on those transactions that should have been disgorged is not in evidence. The Vaughan West land flip is the one related party land deal that was carried out far in excess of fair market value where it can be readily found that Royal Group suffered prejudice at the hands of its senior officers on the transaction. While the law may not differentiate between breaches of duty that cause actual loss and those that do not in this context, it is nonetheless a fact that the Vaughan West land was flipped to the company by Mr. De Zen and his colleagues for some $6.5 million more than they had paid for it that day.

[74] The company’s lack of internal controls is relied upon by Mr. Goegan as part of the contextual background that he says prevents any breaches of his duties from severing his employment relationship and amounting to cause for dismissal.

[75] Mr. Goegan also notes that in 2004 when Royal Group came under investigation by the Ontario Securities Commission and the RCMP, the former listed the “Woodbridge expansion” as an example of a related party transaction in which it was interested. That is, the OSC apparently knew that Mr. De Zen had sold the Vaughan West land (referred to by the OSC as Woodbridge) to Royal Group. Moreover, independent market analysts have subsequently advised that they knew or believed that to be the case too. Mr. Goegan argues that the board must have known that the land was sold by Mr. De Zen to Royal Group. Mr. Slaght and Mr. Sorbara say that they did not know. Certainly no one told them. Even had they pieced it together (which they did not) they were not told that Mr. De Zen and his colleagues, including the CFO and General Counsel of the corporation, took a $6.5 million secret profit on the way through. The irrelevancy of this finger pointing and deflection of responsibility will become clear in dealing with the law on the duty of disclosure below. It is no defence to a mandatory disclosure obligation to say that the people to whom a duty to disclose is owed ought to have figured it out for themselves. That just negates the duty itself.

The Premdor Warrant

[76] At the time of the IPO, Royal Group approved a bonus plan for senior executives. The plan was linked to corporate performance. The goal was to incent Mr. De Zen and his team to continue their entrepreneurship by giving them substantial stakes in the outcome. Accordingly the bonus plan provided for senior managers to share in 2% of corporate EBITDA. In addition, a full further 2% of EBITDA was allocable to Executive Management, i.e. the company’s most senior managers. Mr. Goegan qualified for inclusion in the manager’s 2% throughout. He only qualified for inclusion in the additional 2% allocated to Executive Management once he became CFO in December, 2001.

[77] Section 6 of the bonus plan provided that the maximum bonus that may be paid to management was 4% of EBITDA. Section 11 of the bonus plan provided that any amendment of the bonus plan required shareholder approval. Accordingly, neither the board of directors nor Mr. De Zen had any authority to deviate from the 2 + 2 formula in granting management bonuses.

[78] Over time bonuses were determined by Mr. De Zen. He decided which employees fit into each pool of 2% of EBITDA and the amounts each employee received. At times the 2% limits were exceeded. In the first several years, the aggregate 4% limit was never or only rarely exceeded however. The board learned of the bonus allocation to Executive Management in the approval process for annual Management Proxy Circulars. Messrs. Sorbara and Slaght did not do the 2% EBITDA calculations themselves to double check management.

[79] In late 1999 and early 2000, Mr. De Zen negotiated a joint venture agreement between Royal Group and a public company called Premdor. The deal was structured as a sale of a Royal Group subsidiary to Premdor under an agreement of purchase and sale. A separate cooperation agreement was entered into to describe the joint venture.

[80] Mr. Goegan was not involved in either the negotiation or finalization of the agreements.

[81] The hearsay evidence presented at trial is that Mr. De Zen told Premdor that since Royal Group’s employees who will work on the joint venture would be entitled to options from Royal Group under the terms of their employment, Premdor too should offer options to those employees.

[82] Premdor had legal advice that they could not offer their securities to joint venture employees without issuing a prospectus and it was not willing to do so.

[83] Premdor and Royal Group did agree that, in addition to the cash and shares that Premdor offered to pay for Royal Group’s subsidiary, Premdor would include in the agreement of purchase and sale, as part of the purchase price that it was paying, a share warrant that entitled Royal Group to purchase 200,000 more Premdor shares from treasury at a strike price of $13.25.

[84] At the time, the share price of Premdor shares on the stock exchange was less than the $13.25 strike price in the warrant. The warrant was therefore “out of the money.” It only represented a possible future source of value if the price of Premdor shares climbed and exceeded $13.25.

[85] Messrs. Dunsmuir and Goegan say that it was always understood that the warrant was not really part of the purchase price paid for Royal Group’s subsidiary. Cash and shares of Premdor were paid by Premdor for the Royal Group subsidiary in the agreement of purchase and sale. They say that the warrant was always intended by Premdor and Royal Group to be held in trust for senior executives involved in the joint venture in lieu of a Premdor contribution to an employee stock option plan.

[86] This story lacks credibility. There is no indication of why or how a warrant was to be used as a substitution for stock options. The agreement of purchase and sale makes no distinction between the warrant and the other forms of consideration paid by Premdor for the Royal Group subsidiary. It simply sets out the cash, the shares, and the warrant as the listed elements making up the purchase price to be paid by Premdor to Royal Group.

[87] The books and records of Royal Group disclose the warrant as a Royal Group asset with no indication of it being held in trust for employees. There was no disclosure of any such trust to the board of directors of Royal Group. Moreover, there is no indication of why Premdor would engage in a structural subterfuge that violated securities law by indirectly issuing securities to people who did not qualify for a prospectus exemption.

[88] The warrant itself provided that it was not transferable. That undermines directly the story that it was always understood that the warrant was to be owned and transferred to employees of Royal Group.

[89] I find as a fact that the Premdor warrant was and always remained the property of Royal Group as part of the consideration paid to it for the sale of its subsidiary. The whole trust tale was a creation of Messrs. Galasso and Goegan for their tax scheme as discussed below.

[90] Despite the terms of the corporate bonus plan to the contrary, Mr. Goegan says that Mr. De Zen had the unilateral authority to direct bonuses to employees apart from participation in the EBITDA pools. As such, Mr. De Zen directed that 3% of the warrant would be held for Mr. Brown and a further 3% for Mr. Dunsmuir. Mr. Goegan argued that the warrant was held in trust by Mr. De Zen rather than Royal Group so as to enable Mr. De Zen to make that decision. The warrant was legally registered to Royal Group so that Mr. Goegan’s effort to paint Mr. De Zen as the “trustee” must fail. However, it is consistent with Mr. De Zen’s near absolute authority, that if the warrant was actually held in trust by Royal Group, that he would exercise Royal Group’s duties and powers in that regard.

[91] Fast forward 18 months to August, 2001. The Premdor warrant remained under water. Mr. Brown apparently announced that he would be retiring from Royal Group upon completion of the fiscal year reporting the following December. Mr. Goegan testified that Mr. De Zen told him that he was being promoted to the position of CFO to replace Mr. Brown although some of Mr. Brown’s former duties would be spread to other senior officers. Mr. Goegan says that he asked Mr. De Zen what his new compensation package would be. He says that Mr. De Zen told him that he would get a raise in salary and that in lieu of bonus, he was re-allocating Mr. Brown’s 3% interest in the Premdor warrant to be shared by Mr. Goegan and two others, Lu Galasso and Mr. Brocklehurst.

[92] The defendant points out since the Premdor warrant remained under water, it had no value at that time. Its value depended on whether the price of shares of Premdor on the stock market ever rose above $13.25. The warrant could hardly be thought of as valuable and certainly not as a fair replacement for the substantial bonuses paid to Royal Group’s senior officers under Royal Group’s bonus plan. If it was valuable asset with a portion already being held in trust for Mr. Brown, how could it be taken from him?

[93] Mr. Goegan advised that he was sufficiently focused on his compensation so that before the ink was dry on his promotion, one of the first conversations he had with Mr. De Zen, in August, 2001, four months before Mr. Brown even retired, was to ask about the salary implications of the proposed promotion. Yet, despite his mercenary approach, he apparently accepted without question an asset with no value and only some unknown, potential, future value in lieu of what otherwise promised to be very significant bonus entitlement of his new senior position.

[94] The defendant denies that the Premdor warrant was ever held in trust by Royal Group or by Mr. De Zen at all. Therefore no one raised the issue of what kind of trust allows the trustee to name the beneficiaries, grant them an allotment of the trust property, and then change both the identities of beneficiaries and the quantum of their interests at will over time. The certainty of objects required for a valid trust would seem to be in question. Absent argument on the relationship between powers of appointment and trust certainty, I make no findings on this issue. It simply occurs to me that what is suggested by Mr. Goegan is a very unusual and complex structure that has no support in the evidence beyond the incredible testimony of Mr. Goegan and Mr. Dunsmuir.

[95] Mr. Goegan needs a basis to try to argue that he obtained an interest in the warrant as early as August, 2001 to fit with the tax filings that he made. The foregoing was his story although it makes little business or common sense.

[96] It fell to Lu Galasso to follow the market price of the Premdor warrant. On October 26, 2001, the market price of Premdor shares reached the strike price. Up to that time, had it been transferable, the warrant could have been traded with no gain being incurred. The price increased thereafter to the point that Mr. Galasso began discussing the exercise of the warrant.

[97] The warrant was exercised by Royal Group on February 26, 2002. On that day, Royal Group wrote to Premdor (then re-named to Masonite) and asked for the shares to be delivered in return for payment of the strike price of $2.65 million (200,000 times $13.25) by Royal Group. Masonite issued the share certificate to Royal Group within a few days.

[98] In preparation for the share issuance, Mr. Goegan had accounts opened at a brokerage house to receive the 200,000 shares for Royal Group. Mr. Dunsmuir had corporate documents prepared for himself and Mr. De Zen to sign that purported to authorize Mr. De Zen to transfer the shares obtained under the Premdor warrant from Royal Group to the senior management group. The documents misrepresented to the broker that Mr. De Zen was complying with the by-laws of the corporation in authorizing the broker to transfer Royal Group’s 200,000 Masonite shares to the individuals. Mr. Goegan already had accounts at that brokerage. He arranged for accounts to be opened for each of the other employees and he told each of them how much they had to pay to reimburse Royal Group for their respective shares of the exercise price that it had paid to Premdor. He oversaw the movements of funds generally.

[99] This all happened within a few days. Mr. Goegan sold his shares in two tranches on March 8 and 14, 2002. On March 18, 2002, the broker’s trade confirmation slips showing the sales by Mr. Goegan were cancelled and replaced by confirmations showing the sales having been made by Mr. Goegan as trustee for his children.

[100] In all, the employees sold the Masonite shares for a total value of over $4 million. The total profit realized after deducting the strike price was approximately $2.03 million. Mr. Goegan’s personal profit was almost $200,000. Mr. Dunsmuir’s profit was almost $510,000. Mr. De Zen’s profit was just under $710,000.

[101] The employees’ receipt of their shares of the profit of the Premdor warrant was characterized as bonus in the books and records of Royal Group. The management bonus numbers were disclosed to the auditors.

[102] Although the auditors knew of the existence of the Premdor warrant and they knew the amounts of managements’ bonuses for 2002, nothing in evidence suggests that anyone told the auditors that the bonuses had not been paid under the bonus plan but that the corporation had exercised its rights under the Premdor warrant and divvied up the resultant shares among senior management.

[103] The amounts received by senior management were included in the bonus numbers set out in the Management Proxy Circular for that fiscal year. What was not disclosed however, was that the bonus numbers were not regular bonus paid under the bonus plan in the ordinary course. Although there had been no approval by the shareholders of any change in the bonus plan as required under the plan, the senior officers buried in their regular bonus disclosure their appropriation of the corporate asset once it had become valuable.

[104] Mr. Goegan points out that he changed the wording of the Management Proxy Circular that year to disclose “very clearly” the Premdor warrant realization. Instead of the circular saying that senior management received bonus of 2% of EBITDA under the bonus plan as it always had in past, Mr. Goegan revised the wording to say,

The compensation consists of…a semi-annual bonus (which includes an EBITDA based bonus) and stock options.”

[105] The parenthetical comment was Mr. Goegan’s addition. Closely parsed, the wording suggests that since the bonus “includes” an EBITDA-based bonus, it must also be made up of something else. On the next page of the circular, the bonus plan is properly described in relation to EBITDA only. The something else that is hinted at in the parenthetical comment is never mentioned. If the wording added by Mr. Goegan was intended be transparent disclosure of the Premdor warrant it was rather opaque. It certainly was neither clear nor very clear. It was not disclosure of the Premdor warrant at all.

[106] Mr. Slaght and Mr. Sorbara were not provided with a blackline of the prior year’s circular so as to have their attention brought to the parenthetical comment inserted by Mr. Goegan. Quite simply, they did not catch the subtlety of his change. Nor ought they to have been expected to do so. I take judicial notice that the word “includes” would not typically be expected to mean “This is disclosure that the senior officers of the corporation misappropriated a $4 million corporate asset”. And that probably was the point of the change. Mr. Goegan used wording that he could later point to in order to suggest that he had made disclosure while confident in the knowledge that no reasonable person reading a dense corporate disclosure document would be likely to realize from his parenthetical comment that management had decided to take a $4 million asset and call it bonus without seeking shareholder or board of directors approval.

[107] The evidence concerning the back-dating scheme that ensued illuminates the actual process and the lack of credibility of Mr. Goegan’s testimony.

[108] By email dated January 24, 2002, Mr. Galasso wrote to Mr. Goegan to propose what Mr. Galasso called a “concept” for the warrants. As the share price by then was climbing to the point that senior management realized that they might consider exercising the warrant, Mr. Galasso had turned his mind to taxation. He was concerned that the profit that had accrued since the market price exceeded the strike price under the warrant in late October, 2001, could be taxed as income from employment. He preferred to have the profit taxed as capital gains to reduce the amount of tax that he and his colleagues would have to pay on their respective shares of the profit. He was asking for Mr. Goegan’s input into a chronology that supported capital gains treatment.

[109] Mr. Galasso’s “concept” starts with the idea that the warrants were assigned by Royal Group to Mr. De Zen and management when it was first received in 2000. Mr. Galasso asked Mr. Goegan whether this ought to be phrased as a trust or a right issued by Royal Group to allow the senior management employees to acquire the shares once the warrant was exercised. It is apparent in this question that the alleged trust or right did not yet exist but were options being floated by Mr. Galasso.

[110] Mr. Galasso’s “concept” document then proposed that the exercise of the warrant be said to have been conditional on the completion of certain product development milestones being reached by the joint venture. This was simply not the case. There were no exercise conditions contained in the warrant. Mr. Galasso advised Mr. Goegan that this proposal was designed to reduce the implicit value of the warrant. He then proposed stating that the milestones were completed in October, 2001 so Mr. De Zen exercised the warrant and requested the shares at that time. Mr. Galasso made specific reference to the date of October 26, 2001 as the date when the strike price was reached. There would be no capital gain incurred by an exercise of the warrant right at the strike price. Mr. Galasso advised:

The exercise should be documented with a form letter to Royal [with checks [sic] attached].

[111] Royal Group actually exercised the warrant in writing and delivered its cheque to pay for the issuance of the shares provided under the warrant on February 26, 2002. It was not exercised nor were the shares requested in October. This was just a fictional construct being developed by Mr. Galasso with Mr. Goegan’s assistance to reduce taxes.

[112] Mr. Galasso sent a further iteration of his “concept” to Mr. Goegan on January 31, 2017. This version says that the warrant (actually he incorrectly refers to “warrants”) were assigned on the day received to Mr. De Zen in trust for “the management team who worked on the Premdor deal.” It then suggests that in August, 2001, subsequent to Gary Brown’s retirement announcement, the warrants were “allotted to the management group. Presumably by Mr. De Zen.” It continues that on October 26, 2001, Mr. De Zen exercised the warrants by sending a form letter to Royal Group requesting that the warrants be exercised and the shares requested at the strike price of $13.25.

[113] Mr. Galasso needed to explain why the shares were not issued until February if Mr. De Zen had exercised the warrant the prior October. He proposed the “concept” that while Royal Group acknowledged the exercise request, it indicated that “a time delay will most probably be experienced due to the recent merger of Premdor and Masonite and the name change.” He continued, that “after several delays the Masonite shares were received.” This was pure fiction. When Royal Group exercised the warrant on February 26, 2002, Premdor (then Masonite) delivered the requisite shares forthwith as required. There was no request for the exercise of the warrant in October; no indication that the merger of Premdor and Masonite might cause a delay; and no actual delay in the delivery of the shares.

[114] Mr. Goegan commented on this iteration of the tax “concept” that evening. Mr. Goegan changed the language proposing that Mr. De Zen had obtained the warrant in trust for the employees who had worked on the Premdor deal. Mr. Goegan had not worked on the deal and would not have qualified on that basis. He suggested instead the “concept” that Royal Group’s right to receive the warrants was assigned to “Vic De Zen in trust for the management team who finalized the commitment satisfaction on the Premdor deal.” It is not at all clear what the “commitment satisfaction” refers to or how Mr. Goegan or the others whom Mr. De Zen allowed to share in the warrant might have been part of that team.

[115] Mr. Goegan accepted the “concept” of the October 26, 2001 exercise date and proposed in addition that on that day “certain members assigned their rights under the warrant to other parties at the strike price of $13.25.” He was setting up a story to let him claim to have gifted his shares to his children at the strike price so he could claim that he engaged in income splitting transactions before incurring any gain in his own name.

[116] Mr. Goegan was cross-examined extensively on these and related documents. At its highest, he was left to claim that when Mr. De Zen told him in August, 2001 that he would share in Gary Brown’s 3%, this amounted to a valid assignment of the unassignable warrant to him. He then claimed that he heard some talk in Royal Group about the exercise of the warrant in October. That became support for an argument that Royal Group had in fact exercised the warrant as claimed in the “concept” despite the letter exercising the warrant being dated and sent on February 26, 2002. Mr. Goegan said that he had a telephone call with Lu Galasso in October, 2001 during which Mr. Galasso first raised the tax issues. Mr. Galasso apparently told Mr. Goegan that the shares could be put into family trusts to achieve an income split. That conversation became Mr. Goegan’s evidence that he had actually transferred his interest in the shares to his children in trust that day despite the broker’s documentation showing that the shares were put into Mr. Goegan’s name and sold in his name until that was changed later retroactively.

[117] In fact, management did purport to sign a number of documents to support the story set out in the “concept.” In February, 2002, back-dated letters were prepared for Mr. De Zen purporting to document the transfer of the warrant in October, 2001 and claiming delay. In July, 2002, back-dated assignments of shares from management to their families were drafted showing dates in October, 2001 to support claims for income splitting rollovers.

[118] Upon the special committee of the board of directors discovering the details of the Premdor warrant transactions after Mr. Goegan’s employment had already been terminated, Mr. Goegan and the other employees involved retained tax counsel to make voluntary disclosure to the CRA so as to have their capital gains blessed despite the back-dating of documents. I need not assess in detail Mr. Goegan’s participation in the voluntary disclosure effort after he was already gone from Royal Group. While their counsel gave a transparent hint to the CRA that documents supporting the deal had been back-dated, the senior managers had their tax counsel tell the CRA the fictional events developed in the “concept” rather than making full, plain, or truthful disclosure of the facts. Nothing in that process shines any positive light on Mr. Goegan or his credibility. [3]

[119] There is another element of the story that was covered in testimony that deals with a public outcry from institutional shareholders upon the disclosure of management’s bonuses in fiscal 2002. The public shareholders knew nothing of the Premdor warrant situation. They reacted just to the magnitude of management bonuses at a time when corporate performance was waning. Mark Badger, the management employee responsible for shareholder relations, prepared draft backgrounders for the independent board members who had to answer to the public shareholders for the size of management’s bonuses. Mr. Goegan was copied on these communications. The story prepared for the independent directors did not mention the Premdor warrant at all. Rather, management claimed that Mr. De Zen had declared increased bonuses that made up for EBITDA-based bonuses forgone the prior year. That was not the basis on which Mr. De Zen’s or the others’ bonuses had increased. The bonuses increased dollar-for-dollar with the allocation among the senior managers of the Premdor warrant proceeds due to the happenstance that the warrant came into the money during that fiscal year and its proceeds were secretly taken by senior management.

[120] This was just one of several opportunities that Mr. Goegan had to make disclosure of the fact that he had been granted a $200,000 share of the Premdor warrant by Mr. De Zen. Instead he allowed a different story to be told to the independent directors that covered up the misappropriation of the Premdor warrant by Mr. De Zen, Mr. Goegan, Mr. Dunsmuir, and the others. He later participated in the tax scheme that told yet a different untrue story to the CRA.

Mr. Goegan’s Position

[121] Mr. Goegan argues that on November 26, 2004, Royal Group articulated three reasons for the termination of his employment:

(a) He facilitated the Vaughan West land flip by writing the cheques to participants; (b) He failed to disclose the Vaughan West land flip to the board of directors or at least Mr. Slaght; and (c) He hid the Vaughan West land flip until Kroll discovered it in its 2004 investigation for the special committee of the board of directors.

[122] He says that each of these reasons is false factually. He did not sign the Vaughan West transaction cheques. He did prepare one or more cheque requisitions which was of no real consequence in the overall transaction. He says he disclosed to Mr. Slaght that Mr. De Zen was buying the Vaughan West land and that there was discussion of him selling it to Royal Group. Mr. Goegan also says that Kroll did not discover the Vaughan West flip in 2004. Rather, it was referenced by the OSC in the investigation that led to Kroll being retained. Mr. Goegan provided all of the relevant documents to Kroll and pointed them to all of the relevant financial entries that were readily discernable in the books and records of Royal Group.

[123] Mr. Goegan argues that had he been given a fair hearing by the special committee of the board of directors of Royal Group, they would have understood that their conclusions about him were wrong. He says that Kroll reported only interim, incomplete findings that did not amount to a full and fair investigation. Rather, the board, through its special committee of independent directors, was in need of scapegoats to respond to the pressure for action being applied by the OSC, the RCMP, and public shareholders. The special committee decided to make a dramatic gesture by firing the three most senior officers of the company. He was the person inhabiting the CFO role at the time and was unfairly made to suffer for the sins of Mr. De Zen and the prior CFO Mr. Brown.

[124] Mr. Goegan argues that the decision as to whether his conduct amounts to cause for summary dismissal is a contextual one. The decision must be made with reference to the entire context of the facts that existed at the time. He says that in the context of Royal Group from 1997 to 2004, he did nothing to sever his employment relationship with the company. It was Vic De Zen’s company. The board of directors was wholly complacent as was common at that time. Mr. De Zen had unparalleled and unchallenged authority. His acts were the authorized acts of the company with the board’s tacit, if not explicit, approval. At worst, even if Mr. Goegan’s acts were offside a formalistic assessment of the applicable law, they were well within his employment duties as they were directed by and supported by Mr. De Zen.

Royal Group’s Position

[125] The defendant argues that as an officer of the corporation, Mr. Goegan owed fiduciary duties to Royal Group. He was a fiduciary due to his status. In addition, as a member of senior management and the face of the company in real estate matters, he exercised the type of power and authority to render the company vulnerable to unilateral exercises of his discretionary authority and as such, he was a fiduciary in the particular circumstances of this case.

[126] In any event, if he was not properly classified as a fiduciary at law, he owed and breached a duty of fidelity that applies to all employees. He also assisted the Executive Management in breaches of their undoubted fiduciary duties. The seminal decision of Chief Justice Estey (as he then was) on this last point in Alberts et al. v. Mountjoy et al., 1977 ON SC 1026, [1977] O.J. No. 2334, (Ont HCJ) at para. 27, remains good law. All of these breaches of duty were severe and are the type that are recognized as amounting to cause for dismissal even in the context of a corporation whose leader engages in the same misconduct.

Analysis of Fiduciary Duties and Cause for Termination

[127] A fiduciary employee owes the employer duties of loyalty, honesty, candour, and scrupulous avoidance of actual and potential conflicts of interest. Canadian Aero Service Ltd. v. O’Malley, 1973 SCC 23, [1973] S.C.J. No. 97 at para. 24. Moreover, a fiduciary is prohibited from usurping corporate opportunities presented to the employer. Canaero at para. 25. This is generally a strict area of the law. As discussed by the Supreme Court of Canada in Canaero, there is some controversy in the case law as to whether a fiduciary can ever be entitled to take up an opportunity offered to the corporation. None of this is new.

[128] The issue is certainly contextual. But I know of no case where senior management has been held to be entitled to usurp for themselves an opportunity that the corporation had the ability to pursue and then flip the opportunity to the corporation for a substantial secret profit with no disclosure of the full facts to and approval of the board of directors. This case is not a close call. There was no pretense of compliance with s. 120 of the Canada Business Corporations Act or s. 4.18 of the By-law No. 1 or with Canaero. Misappropriation of corporate assets is a breach of duty of a most serious nature. Serious breaches of statutory or fiduciary duties generally sever the employment relationship and meet the common law definition of cause for dismissal. Unique Broadband Systems, Inc. (Re), 2014 ONCA 538, at para. 125.

[129] A person who owes fiduciary duties to a corporation is not entitled to just do as he or she is told by the dominant shareholder. The duties are owed to the corporation and not the majority or any shareholder. The fiduciary’s duty to the corporation includes the duty to tell the dominant shareholder that what he proposes is wrongful and to disclose misconduct committed even by the undoubted leader. It may well be that the corporate life of person who crosses the dominant shareholder will be “neither happy nor long” as Farley J. famously wrote. But doing what is right is the standard required of corporate fiduciaries in Ontario. 820099 Ontario Inc. v. Harold E. Ballard Ltd. 1991 CarswellOnt 142 (ON SC).

[130] The court enforces fiduciary duties strictly to ensure that there is no incentive for fiduciaries to violate their high ethical and legal duties. McLachlin J. (as she then was) stated the principle this way in Soulos v. Korkontzilas, 1997 SCC 346, [1997] S.C.J. No.52, at para. 50,

I agree with the Court of Appeal that a constructive trust is required in cases such as this to ensure that agents and others in positions of trust remain faithful to duty of loyalty: see Hodgkinson v. Simms, supra, per La Forest J. If real estate agents are permitted to retain properties which they acquire for themselves in breach of a duty of loyalty to their clients provided they pay market value, the trust and confidence which underpins the institution of real estate brokerage will be undermined. The message will be clear: real estate agents may breach their duties to their clients and the courts will do nothing about it, unless the client can show that the real estate agent made a profit. This will not do. Courts of equity have always been concerned to keep the person who acts on behalf of others to his ethical mark; this Court should continue in the same path. [Emphasis added.]

[131] I find that Mr. Goegan was a fiduciary vis-à-vis Royal Group at all material times. He was the CFO at the time that Royal Group exercised the Premdor warrant and he and other senior management took the proceeds. As the face of the company responsible for real estate acquisition reporting directly to Mr. De Zen, Mr. Goegan’s position, even in 1997, was among the most senior and most sensitive in the company. He received confidential market contacts for Royal Group. The corporation was vulnerable to the discretion that he exercised such as where he chose to direct those contacts. He was not just a junior clerical worker as he sought to portray himself. He stood up to Mr. De Zen to make his pitch that Royal Group should be interested in the Vaughan West land. He was the type of top manager exercising the type of extraordinary and sensitive authority within the corporate enterprise upon whom the law imposes fiduciary duties. He was also a Chartered Accountant with professional fiduciary duties to his client throughout.

The Non-fiduciary Employee’s Duty of Fidelity

[132] Even if Mr. Goegan was not a fiduciary at any relevant time, like all employees, he owed a duty of fidelity to Royal Group. Breaches of this duty also generally justify summary dismissal. Misappropriation of assets and taking a secret profit are the types of infidelity that sever the employment relationship for non-fiduciary and fiduciary employees alike. So too does participating in a dishonest scheme even under the direction of a superior. As Goudge JA wrote in Spendlove v Thorne Ernst & Whinney, 1999 ONCA 3814, at para. 22:

Ms. Spendlove was an active and dishonest participant in this illegal scheme which she carried on in the context of her work for her employer. It does not avail her that she did not benefit personally, nor that her actions were not directed against her employer. Her conduct was fundamentally inconsistent with the nature of her employer’s business. It violated the implied term of fidelity by which she was bound and constituted just cause for her dismissal.

[133] These words apply with equal force to Mr. Goegan in respect of both the Vaughan West land flip and the Premdor warrant. On the Vaughan West land flip he facilitated the usurpation of a corporate opportunity by senior managers. Then, at the expense of the company, he helped them make a secret profit by flipping to Royal Group the asset that was the subject of the corporation’s opportunity. On Premdor he took corporate funds personally without proper corporate authority. He participated in hiding what he and the others had done. One need not look deeply into corporate law or employment law to understand the infidelity of these acts.

The Duty to Disclose

[134] A fiduciary who knows about wrongdoing committed against the beneficiary has a duty to tell the beneficiary. In Canson Enterprises Ltd. v. Boughton & Co., 1991 SCC 52, 1991 SCJ 91, the Supreme Court of Canada held that a lawyer breached his duty to his client who was the buyer of land. The land had been subject to a wrongful flip by an intermediate buyer in breach of its duties to the final buyer. The lawyer had acted on the intermediate flip. It is significant that in that case, the lawyer had not been a principal participating in the flip. Rather, he knew about it and as a fiduciary to the ultimate buyer, the lawyer had a duty to disclose to his client the breaches of duty committed against it. Similarly, the fact that Mr. Goegan did not make a personal profit on the Vaughan West land flip is no answer in law to the claim that his knowledge and silence were breaches of his fiduciary duty to disclose the Vaughan West land flip. His common law duties of loyalty, fidelity, and candour required him to disclose to the corporation the conflicts of interest and the misappropriation of corporate opportunities and assets of which he had knowledge from his participation in the transactions. See also EM Plastic & Electric Product Ltd. v. Hobza, [1992] O.J. No. 4173 (Gen. Div), at paras. 235 and 236, affirmed, [1993] O.J. No 5078 (CA), leave to appeal refused, [2007] SCCA No. 92.

Whether the Vaughan West Land was flipped at FMV is Irrelevant

[135] Moreover, Mr. Goegan’s proposed justification, that the Vaughan West land was purchased by Royal Group at fair market value, is no defence at all. First, it is contrary to the facts as I have found them above. But even if I had found that the sale at $6.5 million above the purchase price 60 days earlier was at fair market value, the Court of Appeal has prohibited that argument. Charles Baker Limited v. Baker, [1954] O.J. No. 543 (CA) at paras. 13 and 16. Even if the value of the land increased after it was first offered to Royal Group, that value ought to have already belonged to Royal Group. The senior managers of the corporation had no right to usurp the opportunity that was Royal’s opportunity. The must account for any profit that they made regardless of whether Royal Group suffered actual loss. The actual value on the date of the flip is irrelevant under the corporate opportunity doctrine.

Condonation Requires Full Disclosure - The Contextual Analysis

[136] The defendant argues that the management of Royal Group, Mr. De Zen, Mr. Brown, and Mr. Dunsmuir condoned any wrongdoing that he is found to have committed. Mr. De Zen was the undoubted autocratic leader of the company. He had full knowledge of the affairs at issue and plainly approved of Mr. Goegan’s involvement.

[137] In Paglioroli v Rite-Pak Produce Co., 2010 ONSC 3729 Grace J. applied the law as set out by the Court of Appeal in McIntyre v Hockin (1889), 16 OAR 498 (Ont CA) that an employer who retains an employee for a considerable period of time after discovering that the employee committed misconduct will be found to have condoned the wrongdoing and will be prohibited from dismissing the employee thereafter absent further, new misconduct. The Court of Appeal was clear however that a finding of condonation requires that the employer be fully informed about the wrongdoing alleged so that its decision to act or to refrain from acting can be said to have been an informed decision.

[138] In Paglioroli, Grace J. found that the court should conduct a hierarchical analysis of the inner-workings of the employer to discern the identities of the people with “the ability to terminate or trigger a review and influence the continuation of the employer-employee relationship.” For the defence to apply, it is those people who have “to either have knowledge of the conduct in question or choose, for whatever reason, to ignore it or approve it.”

[139] In Paglioroli, the employer was a private company. The employee was importing wine for the company illegally. Neither he, nor his superiors, were making profit at the expense of the company. Rather, management seized on the unlawful conduct of which they had been aware for a long time in order to justify taking steps that an arbitrator found had amounted to a constructive dismissal of the employee. There was no issue in that case as to whether management who participated in or benefited personally from the wrongdoing could be found to have condoned it on behalf of the employer.

[140] In the case at bar, all of the senior managers upon whom Mr. Goegan relies were themselves participants in the unlawful conduct. To his knowledge, they were imbued with conflicts of interest that prevents them from making or being seen to be authorized to make independent decisions on behalf of the corporation. He cannot have purported to rely on their approvals in good faith as he knew they were in conflict of interest and in breach of duty themselves. In fact, they all actively hid their misconduct from the independent directors who were, in the context and circumstances of this case, the only people who could have made an independent, informed decision on behalf of the corporation under s. 4.18 of By-law No. 1 and s. 120 of the Canada Business Corporations Act. The law cannot allow a faithless fiduciary to approve his own misconduct.

[141] Baranowski v. Binks Manufacturing Co., 2000 ON SC 22614 involved a publicly traded multinational corporation. The plaintiff was an employee of the organization for 29 years. His most recent posting was as President of the Canadian subsidiary. He was closely allied with Mr. Roche who was the President and Chairman of the Board of the US parent. Like Mr. De Zen, Mr. Roche was “the unquestioned ruler within the Binks pantheon.” He had run the empire for decades. Maloney J. found that the company “was his fiefdom, and he ran it as he saw fit.”

[142] Much like the current case, Maloney J. found that the company was under Mr. Roche’s total and autocratic control to a degree that “was not compatible with the modern corporate organization.” At para. 112 of the decision, Maloney J. found that the arguments of breach of fiduciary duty against the plaintiff and Mr. Roche could not succeed in that case given the board’s complacency and its ongoing willingness to do whatever Mr. Roche directed. Maloney J. wrote:

112. While the defendant’s have raised issues of breach of fiduciary duties in respect of the plaintiff and Roche failing to properly disclose or report their activities to their respective Boards, it was patently clear to me, after hearing the evidence, and with the benefit that only the trier of fact can have of seeing the witnesses as they present their evidence, that the Directors of Binks Canada were, for the most part, straw-men who admitted to being nothing more than a rubber-stamp brigade for whatever Roche decided to put before them; or who continued on in accepting willful ignorance if he decided not to put things before them.
113. For example, when Binks Canada entered into the Magna deal, which was the largest single transaction entered into by the Binks organization globally, the Board of Directors was not consulted, nor were the contracts the new President of Binks U.S., the Board of Directors of Binks Canada was not consulted, and had no input into the decision at all.
114. This being the case, I consider Binks’ complaints that the plaintiff is at fault for failing to provide the Directors with proper notice, or to seek a vote or resolution ratifying the transaction or contract, to be a rather opportunistic cry of injury. Practically speaking, nothing would have turned out differently if the Directors had been informed, because, as the decades of custom and practice clearly showed, they would simply have acquiesced to whatever Roche put before them anyway.

[143] The plaintiff argues that this same reasoning applies in this case. Had Mr. De Zen or Mr. Goegan made full disclosure of either the Vaughan West land flip or the Premdor warrant to the board of directors, the board would have done as Mr. De Zen wished. It did nothing to scrutinize thirteen related party transactions between Mr. De Zen and Royal Group some of which were plainly known to them. In Baranowski, Mr. Roche authorized loan forgiveness in favour of the plaintiff in a scheme that involved tax avoidance. The forgiveness was not recorded in the financial statements although it was referred to in a footnote. The issue was whether the plaintiff had breached his duties by authorizing the issuance of misleading financial statements. The court found that the process was designed by the company’s auditor. However, the issue was disclosed to the board of directors expressly. The footnote was read aloud to the board of directors at the meeting at which the board adopted and approved the financial statements. The board knew about the accounting scheme and did not take any issue with it.

[144] It seems to me that this is a crucial distinction between the facts of Baranowski and this case. While the plaintiff casts much aspersion on the lack of effort of the board to conduct due diligence and to ferret out details that were not forthrightly offered to it by management, in Baranowski the wrongdoing was actually disclosed to the board. It sat idly by despite that disclosure.

[145] There is another problem with reliance upon the Baranowski case and claiming that the board’s failure to scrutinize related party transactions more closely means that it would have approved of the Vaughan West land flip and the Premdor warrant matter if they had been disclosed. A board of directors is entitled to expect management to comply with their disclosure duties. Its role is not to play detective. The court cannot guess what the board might have done had management disclosed its wrongdoing.

[146] In UPM-Kymmene Corp. v. UPM-Kymmene Miramichi Inc, 2002 ON SC 49507 at para. 118, Lax J wrote:

It is no answer to the duty to disclose to say the directors could have discovered this for themselves. The duty to disclose is an absolute one, because, without full disclosure, any investigation into whether the beneficiary would have acted in the same manner is impossible.

[147] An even more pointed statement of the strictness of the duty of full disclosure of conflicts of interest by fiduciaries was made by Arnup JA for the Court of Appeal in Advanced Realty Funding Corp. v. Bannink, 1979 ONCA 1681 at paras. 17 and 18:

So strict is the duty of disclosure that it has been said it is not enough to give notice to the principal that there is another commission, leaving the principal to inquire what it is and how much: Fullwood v. Hurley, [1928] 1 K.B. 498, per Scrutton, L.J., at pp. 503-4. There must be the "fullest disclosure" and an informed consent by the principal: Anglo-African Merchants Ltd. et al. v. Bayley et al., [1970] 1 Q.B. 311 at p. 322.

Applying these principles to the present case, I am of the view that the plaintiff has not satisfied the onus upon it of showing full and complete disclosure to the defendant of the fact that it was going to be paid a finder's fee and how much that fee was. The plaintiff is, therefore, disentitled from receiving any remuneration from acting in the transaction of finding the defendant an acceptable mortgage. On the authorities, the Court does not engage in speculation as to what the principal might have done if disclosure had been made, nor is it an essential part of the relevant principle that there must have been detriment to the principal as a result of the non-disclosure. [Emphasis added.]

[148] I respectfully question therefore whether it was open to Maloney J. to make the finding in para. 114 of his decision above in light of the Court of Appeal’s statement of the principle in Advanced Realty. As a matter of law, I cannot inquire into what the board of directors might have done had Mr. Goegan disclosed senior management’s usurpation of the Vaughan West corporate opportunity, the secret profits made by management on the Vaughan West land flip, or the appropriation by senior management of the Premdor warrant.

[149] Moreover, even if it were correct in law and possible to try to assess what the board might have done as part of addressing contextual factors to determine whether cause for dismissal exists as Mr. Goegan submits, I do not believe that it would be correct factually to find that the board would likely have done nothing in this case. On disclosure of senior management’s misappropriations of corporate opportunities and funds, the independent directors would have formed a majority of the voting members of the board. The inside directors included conflicted senior managers who would not have been entitled to take part in any voting under the terms of the By-law No. 1 and the Canada Business Corporations Act. While Messrs. Sorbara, Slaght, and Sardo certainly accepted the basic notion that Mr. De Zen was intended to be in charge and to have his entrepreneurial way, as men of integrity they would not have been inclined to, nor able to look the other way upon being advised of such serious misconduct. Unlike the inside directors whose fortunes rose or fell with Mr. De Zen’s moods, the outside directors had day jobs. They had no incentive to risk their good names, their professional and community standing, or their integrity to assist management engage in personal enrichment at the expense of the corporation. In any event, the Court of Appeal provides that this is not a proper inquiry and I say no more about it.

[150] Counsel for Mr. Goegan asks why senior management would have risked the goose that laid the golden eggs represented by their very substantial shareholdings in Royal Group just for a few paltry millions of dollars. In light of the fact that they did just that, I suppose the question is best asked to them. Perhaps it depends on whether one can ever classify even a few million dollars of cash in hand as paltry.

[151] A case with similar facts to this one was decided by Metzger J. in Kirby v Amalgamated Income Limited Partnership, 2009 BCSC 1044. The employer in that case was a limited partnership whose units were publicly traded. Mr. Kirby was the charismatic and autocratic leader who was ultimately fired after the OSC raised questions about some of the transactions in which he had engaged. The partnership fired Mr. Kirby for cause for non-disclosure, breach of fiduciary duty, and other, similar allegations. At para. 170 Metzger J. discussed the contextual issue arising from the board of director’s failure to supervise Mr. Kirby:

[170]…The evidence establishes that the board remained indifferent to a number of issues, including the exact terms of Mr. Kirby’s remuneration. [171] Although an employer’s failure to supervise an employee is not a defence for Mr. Kirby’s deficiencies, this is an important contextual factor. I am satisfied that the board bears some responsibility for consistently accepting and, at times, commending annual reports and other documents authored by Mr. Kirby. [172] A third contextual factor speaks to why there was so little oversight of Mr. Kirby and Amalgamated. The directors acted more like a group of investors watching over their investments than a professional board governing a business operation. Mr. Kirby’s primary role, even as an employee of the company, was to increase each director’s individual wealth. The board granted him a high degree of autonomy to carry out this goal. Thus, many of Mr. Kirby’s “unilateral” actions in the administration of the company’s affairs must be tempered by the directors’ expectation that Mr Kirby would run Amalgamated single-handedly and inexpensively to maximize their personal profit.

[152] However, as highlighted in Canaero, each case is ultimately decided on its own facts and in its own context. Metzger J. provided his key findings of fact on the breaches of fiduciary duty proven against Mr. Kirby starting at para. 207 as follows:

[207] A central contextual factor in assessing this alleged misconduct is the business culture and purpose of Amalgamated. In this circumstance, the directors acted more like investors than members of a professional board. From the perspective of the board, the purpose of Amalgamated was to increase each director’s individual wealth, including that of Mr. Kirby. I am satisfied that this specific activity was condoned by the board. [208] On this basis, I am satisfied that Mr. Kirby was behaving reasonably in the circumstances. [209] Even if there were no approval or condonation, I am satisfied that Mr. Kirby’s actions should, at most, be characterized as an error in judgment. He did not breach clear rules of fidelity: Sheehan, at para. 164. Nor was there intentional “deceitful and deceptive conduct”: Christensen v. McDougall, 2001 ON SC 28309, [2001] O.T.C. 697, at para. 69, 14 C.C.E.L. (3d) 44 (Ont. S.C.J.). [210] In summary:

1. Mr. Kirby personally profited;
2. Mr. Kirby listed Ms. Parker’s trades but not his own;
3. Mr. Kirby had many opportunities to inform the board of his over-the-counter trades;
4. Mr. Kirby was the company’s most senior employee and the board relied on him completely to conduct his and the company’s affairs in an appropriate manner;
5. The company profited from Mr. Kirby’s over-the-counter trades;
6. The board never stopped or commented on Ms. Parker’s over-the-counter trades;
7. Article 66 of the general partner’s Articles of Incorporation (479660) authorized directors to acquire target LPs; and
8. The board’s oversight of the company’s affairs was cavalier at best. Weighing these factors together, I am satisfied that there was no breakdown of the employment relationship on this particular ground of breach of fiduciary duty. I believe that had this been the sole misconduct at issue, the board would not have terminated Mr. Kirby’s employment.

[153] Mr. Kirby engaged in trades that profited both the company and himself. That seemed to fit well with the board’s view of his role. The corporation did not suffer deprivation for each dollar taken by senior management as did Royal Group. There was no breach of Mr. Kirby’s duty of fidelity. There was no deceit or deception. While the inside directors at Royal Group might have shared the goal of profiting with Mr. De Zen on his private transactions, the same cannot be said for the public shareholders or the outside directors.

[154] If the plaintiff believed that the board of directors would have approved of the Vaughan West land flip and the Premdor warrant, then what would have been the harm of making disclosure to the board? At the very least, it seems to me, that rather than being heard to argue that the board would probably have approved, Mr. Goegan was obliged to give the board a chance to decide for itself. Under Advanced Realty Mr. Goegan cannot be heard to even make the argument when his silence, in face of a positive and strict duty to disclose, disabled the board of directors from exercising its oversight role.

[155] It is apparent from all of the foregoing cases, that even with the strictness of the duties involved and the importance of the policy reasons to enforce corporate fiduciary responsibilities and ethical behaviour, there can be contexts in which it is unfair to hold an employee liable for dismissal for cause for some breaches of duty especially where the corporate culture is particularly lax. I do not see how Mr. Goegan can fit into that narrow band however.

[156] First, he is a Chartered Accountant, a Vice President, and the CFO of a public corporation. His positions are fundamentally fiduciary in character and require a professional who answers to the highest of callings. Second, in this case, corporate assets were misappropriated at the expense of the corporation. The actions were not complimentary or profit-making for the corporation. They were acts of infidelity taken at the expense of the corporation. Third, Mr. Goegan failed make full and fair disclosure of either the Vaughan West land flip or the Premdor warrant to the independent directors who, far from being rubber stamps, were known to be people of integrity. The board of directors likely should have seen that there were related party transactions being conducted that were not being brought to it for approval. But that is a far cry from saying that the independent directors, whom Mr. Goegan understood to be guardians of the public investors’ $185 million investment, created a culture in which Mr. Goegan ought to be relieved of the fundamental duties of his high office. The corporate culture was not lax because the independent directors allowed management to breach their duties. To the contrary, management’s deception and failure to disclose their breaches of their duties was consistent with them understanding that what they were doing was indeed wrongful.

[157] I cannot find anything in the evidence concerning the context of the corporate culture at Royal Group, independent of senior management’s own wrongdoing, to lead to a finding that holding Mr. Goegan to his well-established and well-known legal, professional, ethical, and fiduciary duties is at all inappropriate or unfair in the circumstances. To the contrary, given the structural importance of the fiduciary duties of directors, officers, and senior managers to the proper functioning of business corporations and especially public corporations, holding Mr. Goegan to his legal, professional, ethical, and fiduciary duties is vitally important to the sanctity and security of Canadian capital markets. The message implicit in a decision to the contrary would be as startling as it would be harmful to the market place.

[158] Mr. Goegan had a choice. He could remain silent, curry favour, and perhaps one day be offered a share of the booty as indeed came to pass; or he could have blown the whistle. He chose the money. Wrong choice.

[159] Perhaps James L.J. overstated the point in Parker v. McKenna (1874-75) LR 10 Ch App 96 in finding that “the safety of mankind” turns on the strict enforcement of rules preventing fiduciaries from profiting at the expense of their beneficiaries. But it is an indication of a view, to which I subscribe, that it would be a most unusual case in which the rule should be otherwise. A case involving senior management taking secret profits and committing deception to cover their tracks is not likely to be one of them.

After-acquired Cause

[160] Finally, the court must scrutinize allegations of after-acquired cause with care and even some skepticism. The acceptance of after-acquired cause involves the risk that management has scoured the books and records to try to find justification for an over-zealous termination. The Premdor warrant issue was not discovered and advanced until years after Royal Group fired Mr. Goegan. However, it has long since been accepted that if the employee left evidence of cause for dismissal to be found, the fact that it was successfully hidden until its discovery cannot avail the employee. In any event, this issue too is not a close call. Mr. Goegan took almost $200,000 of the corporation’s money. He actively hid the real transaction and participated in untruthful disclosures to the independent members of the board of directors and then to the CRA. One might consider whether the manner by which employees dealt with their personal taxes was any of the employer’s business. But here Mr. Goegan was the most senior officer of the company with responsibility for its financial integrity including the lawful calculation and payment of its taxes. He was in a position requiring the utmost trustworthiness. A display of a lack of financial and personal integrity by Mr. Goegan in his dealings with the CRA concerning transactions conducted by the company is keenly relevant to his fitness to serve as CFO. The discovery that Mr. Goegan not only took money from the corporation but that he then participated actively in a scheme to create and back-date corporate documents to create a fictional cover story in order to reduce his personal taxes was cause to immediately disqualify him from holding any position of financial responsibility within Royal Group.

The Board’s Investigation

[161] I do not accept Mr. Goegan’s argument that there was unfairness in the investigation undertaken by the board of directors through its special committee and its consultant Kroll that impacted the company’s right to dismiss Mr. Goegan for cause. Mr. Goegan was interviewed three times. Kroll and the board of directors knew that he explained his conduct in the Vaughan West land flip by relying on the advice of his superior Mr. Brown to the effect that the auditors determined that the transaction was immaterial and did not require disclosure. I agree with Messrs. Slaght and Sorbara that the board of directors, then represented by the special committee of outside directors, had sufficient evidence to reach the conclusion that the justification was lacking regardless of whether Mr. Brown supported it.

[162] Mr. Goegan was treated fairly. He was interviewed about the Vaughan West land flip and he was given opportunities to respond to the questions asked. He was invited to respond to questions concerning the Premdor warrant once those transactions were discovered and he declined. That was his right. There was no duty owed to Mr. Goegan requiring Kroll to complete a final report before the board of directors acted on the facts that it had on November 26, 2004.

[163] Nor was the manner of dismissal remarkable. The special committee waited for the end of the day on a Friday when most employees had left for the weekend. Mr. Goegan was told that he was fired and he was escorted from the building in a curt but professional manner. I have no doubt that it was both unpleasant and upsetting for Mr. Goegan. But he established no egregious, gratuitous, callous, or wrongful acts.

[164] Royal Group was required by securities law to publish a press release announcing the terminations of Mr. Goegan and the others who were fired with him. The press release was professionally written and truthful. Mr. Goegan objects to the statement in the press release that Kroll discovered the Vaughan West land flip when it was mentioned in the OSC investigation and Mr. Goegan himself had taken Kroll to the deal documents. Kroll did not discover that the transaction had occurred but that it was a flip in which senior management took a secret profit of $6.5 million at the expense of the company. I do not see the reference to Kroll’s discovery in the press release as significant therefore.

[165] It follows that even if he had succeeded generally, the plaintiff made out no case for punitive or aggravated damages. Mr. Goegan was not set up as a scapegoat. I do not accept that the termination of Mr. Goegan’s employment was conceived or carried out in bad faith or that it involved the commission of any independent actionable wrong by the employer. Neither was the manner of termination especially noteworthy or deserving of condemnation.

[166] The action is therefore dismissed.

Damages

[167] As noted at the outset, I will assess the damages to which Mr. Goegan would have been entitled had he succeeded in his claim for completeness only.

[168] Royal Group employed Mr. Goegan for 14 years. Mr. Goegan was 43 years old when his employment was terminated. He held a very senior position with a very substantial compensation package. He was in the prime of an upward career trajectory. While jobs at his level would not be plentiful, it seems to me that, but for the allegations of cause, Mr. Goegan would have been a very employable and attractive candidate. I accept that the very public allegations of cause prejudiced his prospects.

[169] In my view, Mr Goegan’s age and tenure are not at the high end of the Bardal scale. His salary and seniority are. Taking all of the relevant factors into account, the reasonable notice period would have been in the range of 18 to 21 months. I would set the notice period at the top of the range, 21 months, to recognize that the goal of the notice period is to estimate a reasonable time for Mr. Goegan to find alternate employment and allegations of cause might well have made that a more difficult task for him.

[170] I would have fixed Mr. Goegan’s annual base salary at $550,000, assorted perqs at $15,000, car allowance at $12,000, and benefits at $13,200 as claimed. As to bonus, I find that in the circumstances of this corporation, bonus was a particularly important part of compensation. Lower base salaries and substantial bonus compensation reflected the entrepreneurial spirit that was at the heart of the business model. As such, while discretionary in law, in fact bonus was paid regularly and predictably. Had he remained employed for 21 months absent allegations of cause, I am satisfied that Mr. Goegan would have received his 60% base bonus throughout the period.

[171] Mr. Goegan has not proven his claim for “super bonus” that was paid to the new management whose circumstances cannot be analogized to those of pre-existing management. Similarly, Mr. Goegan did not prove the terms for qualifying for retention payments or that he would have qualified for those payments had he remained employed under a notice of termination for 21 months. Finally, on the evidence led at trial, I am unable to find that Mr. Goegan would have obtained value from any RSUs or stock options that he might have had or received. Mr. Goegan did not claim damages related to stock options in his amended statement of claim. On discovery he said that he was not seeking recovery for options. There is no evidence that any options or RSUs held by Mr. Goegan would have vested during the reasonable notice period. While the company cashed out some others’ RSUs and options sometime in late 2006, I was not provided any real indication of the applicable terms of these forms of securities or how and when the vesting came about. The burden was on Mr. Goegan to prove his entitlement to all of the heads of damages that he claimed. He proved only those referred to in the preceding paragraph.

[172] The total annual loss on the items approved above was $920,000. For 21 months, the amount is $1.61 million. Prejudgment interest was not discussed during the trial. Had I awarded damages I would have called for submissions on the rate and duration of prejudgment interest.

Costs

[173] The defendant may deliver no more than five pages of costs submissions by August 4, 2017. The plaintiff may deliver no more than five pages of costs submissions by August 18, 2017. Both parties shall deliver costs outlines regardless of the positions each adopts. The parties may also deliver copies of any offers to settle on which they rely. Submissions shall be delivered in searchable PDF format as attachments to an email to my assistant. No case law or statutory materials are to be delivered. References to case law or statutory material, if any, shall be made by hyperlink to or another publicly available reference source embedded in the submissions.

F.L. Myers J.

Released: July 20, 2017

COURT FILE NO.: CV-17-11687-00CL ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN: DOULGAS DUNSMUIR and RONALD J. GOEGAN Plaintiffs – and – ROYAL GROUP, INC. Defendant

REASONS FOR JUDGMENT F.L. Myers J. Released: July 20, 2017

[1] I am not ignoring that the Premdor warrant back-dating scheme raised more concerns than back-dating alone. I will deal with the amplification of my concerns about the credibility of the participants in the Premdor warrant transaction below.

[2] For clarity and simplicity, I ignore the fact that the shares were actually bought by a wholly-owned subsidiary of Royal Group. Nothing turns on that fact.

[3] I wish to make clear that there is no basis in the evidence to suggest that the tax lawyer retained by Messrs. Goegan and his colleagues had any knowledge that facts that he conveyed to the CRA were not correct.