DATE: 20120928

DOCKETS: CV-11-9386-00CL CV-12-9693-00CL CV-12-9688-00CL

ONTARIO

SUPERIOR COURT OF JUSTICE

COMMERCIAL LIST

BETWEEN

MICHAEL CYTRYNBAUM, FIRST FISCAL MANAGEMENT LTD., STUART SMITH, SCOTT COLBRAN, JASON REDMAN

Applicants

– and –

LOOK COMMUNICATIONS INC.

Respondent

AND BETWEEN:

JOLIAN INVESTMENTS LIMITED and GERALD MCGOEY

Applicants

• and -

Matthew P. Sammon and Rory Gillis, for the Applicants, Michael Cytrynbaum and First Fiscal Management Ltd.

Edward Babin and Cynthia Spray, for the Applicant, Stuart Smith

Andrew Lewis, for the Applicant, Jason Redman

David Conklin and Peter Kolla, for the Respondent, Look Communications Inc.

Joseph Groia and Gavin Smyth, for the Applicants, Jolian Investments and Gerald McGoey

Peter L. Roy and Alexandra Carr, for Alex Dolgonos and Dol Technologies Inc.

LOOK COMMUNICATIONS INC.

Respondent

AND BETWEEN:

ALEX DOLGONOS AND DOL TECHNOLOGIES INC.

Applicants

• and -

LOOK COMMUNICATIONS INC.

HEARD: August 2 and 3, 2012

Respondent

L. A. PATTILLO J.:

REASONS FOR JUDGMENT

Introduction

[1] These proceedings concern the entitlement of former directors, officers, employees and consultants of the Respondent Look Communications Inc. (“Look”) to interim advancement of their legal fees and expenses from Look in order to defend themselves against legal proceedings commenced by Look.

[2] The Applicants/Moving Parties have commenced three separate but parallel Applications as well as three motions within one of the Applications seeking, among other things, declarations that Look is obliged, pursuant to both Look’s by laws and indemnification agreements entered into with each of the Applicants, to advance all costs and expenses incurred or to be incurred by them in defending legal proceedings brought against them by Look arising out of various actions taken by them in 2009 in their capacity as directors, officers, employees and consultants of Look surrounding the sale by Look of its key assets.

[3] At issue in this case is whether the Court’s supervisory power set out in s. 124(4) of the Canada Business Corporations Act, R.S.C. 1985, c. C44, as amended (“CBCA”) applies to these proceedings and if so, the way in which the Applicants’ entitlement to advancement should be determined.

Background

[4] The following facts provide an overview of the events in issue and do not appear to be in dispute between the parties.

(a) The Applicants

[5] The individual Applicants, Michael Cytrynbaum (“Cytrynbaum”), Stuart Smith (“Smith”), Scott Colbran (“Colbran”), Jason Redmond (“Redmond”) and Gerald McGoey (“McGoey”) are all former directors and/or officers of Look. Alex Dolgonos (“Dolgonos”) was an employee of Look and also provided consulting services to it. The three corporate Applicants, First Fiscal Management Ltd. (“First Fiscal”), Jolian Investments Limited (“Jolian”) and DOL Technologies Inc. (“DOL”) are corporations controlled by Cytrynbaum, McGoey and Dolgonos respectively.

[6] At all material times, Cytrynbaum was a director and the Executive Chairman of Look’s board of directors (the “Board”). He was a member of the Board’s Compensation and Human Resources Committee and its Audit and Governance Committee. Cytrynbaum also provided management consulting services to Look on behalf of First Fiscal, which had a Management Services Agreement with Look. Cytrynbaum received $60,000 a year from Look as Executive Chairman and $180,000 through First Fiscal for management services.

[7] McGoey was the CEO of Look, a director and Vice-Chairman of the Board and was also a member of its Compensation and Human Resources Committee. McGoey’s services as both CEO and Vice Chairman were provided to Look pursuant to a Management Services Agreement (the “MSA”) between Look and Unique Broadband Systems Inc. (“UBS”). UBS was Look’s principle shareholder at the time and McGoey was the CEO of UBS and a member of its board of directors. Look paid UBS $2,400,000 annually for McGoey’s services pursuant to the UBS MSA. Jolian is McGoey’s management services company. Jolian had a management services agreement with UBS for McGoey’s services to UBS but had no such agreement with Look.

[8] Smith was a non-executive director of Look and served as the chair of the Board’s Compensation Committee. Smith was paid directors’ fees of $22,000 annually by Look.

[9] Colbran was also a non-executive director of Look. He was a member of the Audit and Corporate Governance Committee and was also paid directors’ fees of $22,000 annually. Colbran filed no affidavit in the proceedings and took no part in the argument.

[10] Look’s remaining director during the relevant period was Louis Mitrovich (“Mitrovich”) who was also a non-executive director. Mitrovich settled with Look prior to the Action and CBCA Motion being commenced and has filed an affidavit in these proceedings on behalf of Look.

[11] Redman was Look’s Chief Financial Officer. In 2009, he received a salary of $175,000. He was not a director of Look.

[12] Dolgonos, who was an employee/consultant of UBS, provided technology related services to Look as a consultant pursuant to the UBS MSA. In March 2005, Dolgonos became an employee of Look in order to become a member of its employee benefit plan and was paid a salary of $60,000 a year by Look. DOS had a management services agreement with UBS in respect of Dolgonos’ services to UBS but had no such agreement with Look.

(b) The Respondent

[13] Look is a CBCA company and was listed on the TSX Venture Exchange from 2004 until November 2011. Prior to the winding down of its business in late 2009, Look carried on the business of distributing wireless, internet and cable services to subscribers in Ontario and Quebec through licensed spectrum which it owned.

(c) Look’s Option and Share Appreciation Rights Plans

[14] In order to attract and incent its directors, officers and consultants, Look put in place a share option plan (“Option Plan”) in 2002 and a share appreciation rights plan (the “SAR Plan”) in 2005. Both Plans were tied to the market value of Look’s shares.

[15] The Option Plan provided that the exercise price was to be set by the Board at the time of grant and could not be less than the market price of Look’s shares on the day preceding the grant. Section 8.2.1 specifically provided that, in the event of certain actions by Look including liquidation, dissolution or winding up, Look had the right, on notice, to permit the exercise of all options within a 20-day period.

[16] The SAR Plan provided that share appreciation rights (“SARs”) could be awarded by the Board to directors, employees and consultants based on the market value of Look’s shares at the time. When exercised, Look would pay the difference between their value on the date they were awarded and the date when exercised. The SAR Plan provided that SARs benefits would arise, among other things, if Look sold all or substantially all of its assets. In such an event and subject to the Board’s authority and determination that Look had adequate liquidity, SARs benefits would be paid based on the difference between the market price of its shares on that date and the grant price. Further, if the SAR Plan was terminated by the Board, the Board had the discretion to allow payment of benefits, again based on the market value.

[17] As directors and officers of Look, each of the individual Applicants was granted both options and SARs. By 2009, of the 6,984,149 options Look had granted, 4,441,997 (approximately 64%) were held by its directors and senior management. By the same time, Look had granted 36,945,347 SARs, of which Cytrynbaum, McGoey, Dolgonos and Redman had received 30,437,843 or 82%. In the case of Cytrynbaum, McGoey and Dolgonos, they had each assigned their SARs rights to their respective Applicant companies.

(d) The Events Surrounding the Sale of Look’s Key Assets in 2009

[18] Prior to 2009, Look’s business had been in serious decline. Its gross revenue and subscriber numbers had declined each year from 2005 to 2008. Extensive efforts by the Board to either sell the company or obtain the necessary capital to allow it to compete were unsuccessful. By late 2008, Look’s future was in serious doubt. In December 2008, the Board concluded the best course was to sell some or all of Look’s assets under supervision of a court-appointed monitor pursuant to a CBCA plan of arrangement (“POA”).

[19] Look’s shareholders approved the POA sales process at a meeting on January 14, 2009. On January 21, 2009, Look obtained a Court Order authorizing the POA sale process and appointing Grant Thornton as the monitor. When the bidding for the sale closed on February 16, 2009, the only bid received for Look’s key assets was a bid for $80 million from Inukshuk Wireless Partnership (“Inukshuk”), a partnership of Rogers and Bell.

[20] On May 4, 2009, following lengthy negotiations with Inukshuk, the Board approved the sale of Look’s spectrum and broadcast license to Inukshuk for $80 million, conditional on, among other things, Bell being paid $16 million to settle outstanding litigation. At the same meeting, the Board authorized Look to vest all unvested options to permit option holders to exercise their options in the market and also to compensate all SARs holders using the market price on the date prior to the date Look obtained Court approval for the sale.

[21] On May 14, 2009, Look obtained Court approval for the sale to Inukshuk.

[22] On June 16, 2009, the Board decided, on the recommendations of McGoey and Redman, to unconditionally set aside $11 million for a severance, retention and bonuses pool effective May 31, 2009. The Board also accepted management’s proposal to conditionally authorize management to cancel all options and SARs and to use a value of $0.40 per share to value the options and shares.

[23] On August 25, 2009, the Board’s Compensation Committee (which was composed of the entire Board) approved McGoey’s recommendations to pay bonuses to members of management including himself, Cytrynbaum and Redman as well as Dolgonos.

[24] The Inukshuk sale closed on September 11, 2009. Following the closing, Look paid out $20,008,709 or 32% of the net sale proceeds to its officers, directors, employees and consultants by way of bonuses and equity cancellation payments. The equity cancellation payments, which included both the options and the SAR’s were based on the value of $0.40 a share. The payments to Cytrynbaum, McGoey and Dolgonos on account of both the bonuses and the equity cancellation payments were made to First Fiscal, Jolian and DOL pursuant to invoices for fees received from each of those companies. The Applicants received $15,553,273 of these payments which amounts to 24.9% of the net sale process.

[25] The following table sets out the amount of bonuses and/or equity cancellation payments the Applicants received from Look shown also as a percentage of Look’s net sale proceeds:

Name	Bonus	Equity Cancellation Payment	Total	% of Net Sales Proceeds
First Fiscal/Cytrynbaum	$2,400,000	$1,746,104	$4,146,104	6.6%
Jolian/McGoey	$2,400,000	$3,165,698	$5,565,698	9.0%
DOL/Dolgonos	$2,400,000	$1,550,737	$3,950,737	6.3%
Redman	$1,107,000	$393,000	$1,500,000	2.4%
Smith		$195,367	$195,367	0.3%
Colbran		$195,367	$195,367	0.3%
TOTALS FOR APPLICANTS	$8,307,000	$7,246,273	$15,553,273	24.9%
Mitrovich		$195,367	$195,367	0.3%
Others	$2,776,397	$1,483,672	$4,260,069	6.9%
Total Payments	$11,083,397	$8,925,312	$20,008,709	32.1%[1]

[26] Prior to receiving the equity cancellation payments, the Applicants each entered into, among other things, a release directed to Look releasing it from all actions and demands for damages and indemnity “in any way relating to my entitlements under the Company’s Share Appreciation Rights Plan and the 2002 Stock Option Plan” (the “Release”).

[27] On January 19, 2010, Look issued its 2009 Management Information Circular (“MIC”). The MIC contained the first disclosures to the market of the specific payments that were made to the Applicants following the sale to Inukshuk. The payments were referred to in the MIC as contingent restructuring awards (“CRAs”).

[28] Strong shareholder criticism arose concerning the payments which Look made to the directors and senior management out of the Inukshuk sale proceeds. Following a meeting of the Board on June 16, 2010, where the issue of indemnity was discussed, Look paid $1,550,000 for retainers to three law firms acting for the Applicants. On July 21, 2012, immediately after these monies were paid, the individual Applicants resigned as directors and officers of Look.

(e) Indemnification of Directors and Officers of a CBCA Company

[29] Section 124 of the CBCA provides a “comprehensive code of general application” regulating the indemnification of present and former directors and officers of corporations. See: R. v. Bata Industries Ltd. (1995), 1995 CanLII 395 (ON CA), 25 O.R. (3d) 321 (C.A.) at para. 25, referencing s. 136 of the Ontario Business Corporations Act, R.S.O. 1990, c. B-16 (“OBCA”) which is similar in wording to s. 124 of the OBCA.

[30] Section 124(1) permits a corporation to indemnify a director or officer, a former director or officer or another individual who acts or acted at the corporation’s request “against all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment, reasonably incurred by the individual” in respect of any civil, criminal, administrative, investigative or other proceeding in which the individual is involved because of his or her association with the corporation.

[31] Section 124(2) provides that the corporation may advance moneys to a director, officer or other individual for costs and expenses of a proceeding mentioned in subsection (1) subject to repayment if the individual does not fulfill the conditions of subsection (3).

[32] Section 124(3) provides that a corporation may not indemnify an individual under subsection (1) in respect of any action or claim unless the individual acted “honestly and in good faith with a view to the best interests of the corporation” and, in respect of a criminal or administrative action or a proceeding that is enforced by a monetary penalty, the individual had reasonable grounds for believing that his or her conduct was lawful.

[33] Section 124(4) provides as follows:

(4) A corporation may with the approval of a court, indemnify an individual referred to in subsection (1), or advance moneys under subsection (2), in respect of an action by or on behalf of the corporation or other entity to procure a judgment in its favour, to which the individual is made a party because of the individual’s association with the corporation or other entity as described in subsection (1) against all costs, charges and expenses reasonably incurred by the individual in connection with such action, if the individual fulfils the conditions set out in subsection (3).

(f) Indemnification of Look’s Directors and Officers

[34] Section 3.12 of Look’s by-laws (the “By-Law”) makes mandatory what s. 124 of the CBCA permits. It provides:

3.12 Indemnity of Directors and Officers. Subject to the provisions of the Act, the Corporation shall indemnify a director or officer of the Corporation, a former director or officer of the Corporation or another individual who acts or acted at the Corporation’s request as a director or officer, or an individual acting in a similar capacity, of another entity, against all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment, reasonably incurred by the individual in respect of any civil, criminal, administrative, investigative or other proceeding in which the individual is involved because of that association with the Corporation or other entity; and the Corporation shall with the approval of a court, indemnify such individual or advance moneys under this section 3.12 in respect of an action by or on behalf of the Corporation or other entity to procure a judgment in its favour, to which such individual is made a party because of such individual’s association with the Corporation or other entity as described above against all costs, charges and expenses reasonably incurred by such individual in connection with such action, if in each case such individual:

(a) acted honestly and in good faith with a view to the best interests of the Corporation, or, as the case may be, to the best interests of the other entity for which the individual acted as director or officer or in a similar capacity at the Corporation’s request; and

(b) in the case of a criminal or administrative action or proceeding that is enforced by a monetary penalty, the individual had reasonable grounds for believing that his or her conduct was lawful.

The Corporation shall advance moneys to an individual referred to hereinabove for the costs, charges and expenses of a proceeding referred to hereinabove. Such individual shall repay the moneys if the individual does not fulfil the conditions set out in paragraphs (a) and (b) above.

[35] In addition, in January of 2007, both the corporate and individual Applicants entered into a written indemnification agreement with Look (the “Indemnification Agreement”). The indemnity provided by the Indemnification Agreement is broader than the By-Law.

[36] Paragraph 1(a) of the Indemnification Agreement applies to third party proceedings threatened or brought against the indemnitee by reason of the fact that the indemnitee is or was a “director, officer, employee, consultant or agent of the Corporation or any subsidiary”. It provides for indemnification for expenses (including legal fees), judgments, fines and amounts paid in settlement actually and reasonably incurred “if the Indemnitee acted honestly and in good faith and with a view to the best interests of the Corporation”.

[37] Paragraph 1(b) provides a similar indemnity in respect of “any threatened, pending or completed action or proceeding by or in right of the Corporation ...” Paragraph 1(b) provides an indemnity to an Indemnitee who was or is a party or threatened to be a party to any action or proceeding, whether threatened, pending or completed, brought by or in the right of the Corporation. It indemnifies against expenses (including legal fees) and, to the fullest extent permitted by law, amounts paid in settlement.

[38] Paragraph 1(c) provides that if the Indemnitee is required by law to pay any tax because receipt of any amount under the Agreement, Look shall increase the amount payable to cover the tax liability.

[39] Paragraph 2(a) of the Indemnification Agreement deals with advancement of expenses. It provides:

2(a) Advancement of Expenses. The Corporation shall advance all expenses incurred by the Indemnitee in connection with the investigation, defence, settlement or appeal of any civil or criminal action or proceeding referenced in Section 1(a) or (b) hereof. Indemnitee hereby undertakes to repay such amounts advanced only if, and to the extent that, it shall ultimately be determined by a court of competent jurisdiction from which no further right of appeal exists that Indemnitee is not entitled to be indemnified by the Corporation as authorized hereby. The advances to be made hereunder shall be paid by the Corporation to Indemnitee (or, if requested by the Indemnitee, shall pay the expenses directly) within 10 days following delivery of a written request therefor (accompanied by written evidence of the expense claimed) by Indemnitee to the Corporation.

(g) Proceedings before the Court

[40] In July 2011, following an investigation by Look’s new management and board of directors into the conduct of the Applicants when they were directors or officers of Look, particularly concerning payment of the bonuses and equity cancellation payments, Look commenced action No. CV-11-9291-00-CL against the Applicants (the “Action”).

[41] The Action alleges that the individual Applicants breached their fiduciary duties to Look and claims, among other things, repayment of the bonuses and equity cancellation payments received by the Applicants. It also seeks to have the indemnity agreements entered into between Look and the Applicants declared ultra vires and invalid. In addition, in August 2011, Look commenced a motion against the Applicants under s. 192 of the CBCA, seeking an order requiring the Applicants to repay the bonuses and equity cancellation payments (the “CBCA Motion”).

[42] After Look commenced the Action, the Applicants demanded Look comply with its obligations under the By-Law and the Indemnity Agreement to advance legal expenses in respect of both the Action and the CBCA Motion. When Look refused, the Applicants commenced the present Applications.

[43] Cytrynbaum, First Fiscal, Smith, Colbran and Redmond commenced Application CV-11-9386-00CL on August 5, 2011, amended November 25, 2011, for, among other things, a declaration that Look is obliged, pursuant to the Indemnification Agreement as well as the By-Law, to advance all expenses incurred by the Applicants in defending the Action and the CBCA Motion (the “Cytrynbaum Application”).

[44] Subsequently, Cytrynbaum and First Fiscal, as well as Smith and Redman each commenced motions in the Cytrynbaum Application seeking, among other things, an order directing Look to advance all expenses incurred or to be incurred in respect of the Action and the CBCA Motion on an interim basis and adjourning the remainder of the Cytrynbaum Application to the judge hearing the Action.

[45] On April 16, 2012, Dolgonos and DOL commenced Application CV-12-9688-00CL seeking, among other things, a declaration that Look has an obligation to advance all expenses incurred in defence of the Action pursuant to the Indemnification Agreement (the “Dolgonos Application”). Dolgonos and DOL further requested an order that any order or finding made on the Dolgonos Application be without prejudice to any finding or order the trial judge in the Action may make in respect of the Applicants’ entitlement to indemnity from Look. In the alternative, Dolgonos and DOL sought an order directing a trial of an issue in relation to the matters raised in the Dolgonos Application and leave of the Court to permit Dolgonos and DOL to bring an interim motion for advances for expenses.

[46] On April 17, 2012, McGoey and Jolian commenced Application CV-12-9693-00CL. They seek, among other things, a determination as a question of law whether they are entitled to advancement of their legal expenses pursuant to the By-Law and the Indemnification Agreement (without prejudice to Look’s right to seek to prove at trial that the Applicants have no entitlement to indemnification) and an order requiring Look to make such advances. They seek, in the alternative, if the Court determines that it has an approval function in respect of advancement, an order requiring the issues raised proceed to trial (the “McGoey Application”).

[47] In response to the Cytrynbaum Application, in August 2011, Look delivered an eight volume record of approximately 4,000 pages containing affidavits from seven different affiants (some providing more than one affidavit) including an expert in executive compensation. Following the delivery of reply materials by Cytrynbaum and First Fiscal in early June 2012, Look delivered two further supplementary affidavits. In addition, Look has cross-examined five witnesses.

[48] The Cytrynbaum Application and Motions, the Dolgonos Application and the McGoey Application are collectively referred to hereafter as the “Proceedings”.

Position of the Parties

[49] The Applicants submit that pursuant to the By-Law and/or the Indemnification Agreement they each entered into with Look, Look is required to provide them with interim advancement of their legal fees and expenses to enable them to defend themselves against the Action and the CBCA Motion without any consideration of their entitlement to indemnity at this stage of the Proceedings.

[50] Given, as set out by the Supreme Court in Blair v. Consolidated Enfield Corp., 1995 CanLII 76 (SCC), [1995] 4 S.C.R. 5 (S.C.C.), that all persons are presumed to act in good faith unless proven otherwise, the Applicants submit the ultimate issue of whether they are entitled to an indemnity in respect to the Action and the CBCA Motion cannot be determined in a summary way in these proceedings and must be dealt with at a trial. In the event it is finally determined that they are not entitled to an indemnity, the Applicants will be required to pay Look back for any monies advanced and they have all undertaken to do so.

[51] Look acknowledges that the issue of whether the Applicants are entitled to indemnity in respect of expenses arising from the Action and the CBCA Motion cannot be determined in a summary manner in these Proceedings. It submits, however, that pursuant to s. 124(4) of the CBCA, the court has a supervisory role in determining whether a corporation should advance monies to former officers and directors in circumstances where the corporation has commenced an action against them for breach of fiduciary duty. In that regard, Look submits that the individual Applicants have acted mala fides and not in its best interests. In support of this position, Look relies upon not only the allegations in the Action and CBCA Motion but also on the significant amount of evidence it has tendered regarding the actions of the Applicants in their capacity of directors and/or officers of Look both before and after the sale to Inukshuk, culminating with their resignations in July 2010.

[52] Look submits that s. 124(4) of the CBCA applies to the Proceedings and Look may only advance indemnification amounts where the court approves the advance upon being satisfied that the individual Applicants have met the good faith conditions prescribed by s. 124(3).

[53] Look further submits that the Release entered into by each of the Applicants in advance of the payment to them of the bonuses and equity cancellation payments operates as a complete release of their claims for indemnity against Look.

[54] The Applicants submit in response that s. 124(4) applies only to derivative actions and is accordingly not applicable. Dolgonos and the three Applicant companies further submit that s. 124 is not applicable to them. The individual Applicants deny that they acted mala fides and contrary to the best interests of Look in respect of the authorization and payment of bonuses and equity cancellation payments and repeat, in any event, that issue can only be determined at a trial. They further deny that the Release applies to the indemnities or their claim for advancement.

The Issues

[55] The following are the issues raised by the parties in these Proceedings:

1. Does s. 124(4) of the CBCA apply to these Proceedings?

2. If so, what effect does s. 124 have upon the right to advancement set out in the By-Law and Indemnification Agreement?

3. If s. 124(4) applies, can the question of entitlement to interim advancement be determined in these Proceedings?

4. In the event that the Applicants are entitled to interim advancement pursuant to the By-Law, the Indemnification Agreement or both, does the Release operate to prevent such advancements?

Law and Analysis

I. Section 124(4) of the CBCA

[56] The determination of whether s. 124(4) applies to these Proceedings involves a question of statutory interpretation. It is now commonly accepted that the preferred approach to statutory interpretation is encapsulated by Driedger’s modern principle: “Today there is only one principle or approach, namely, the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament.” See Bell ExpressVu Limited Partnership v. Rex, 2002 SCC 42, [2002] 2 SCR 5 at para. 26. Subsidiary principles of statutory interpretation are only applicable when the contextual approach reveals an ambiguity as to the meaning of the provision: Bell ExpressVu at para. 28. In my view, there is no ambiguity here.

[57] In Blair, at para. 74, Iacobucci J., on behalf of the Court, noted that the objective underlying the indemnity provisions for directors and officers is to maintain a balance between, on the one hand, encouraging responsible behaviour by directors and officers and, on the other hand, permitting enough leeway to attract strong candidates to foster entrepreneurism. See too Bennett v. Bennett Environmental Inc. (2009), 2009 ONCA 198, 94 O.R. (3d) 481 (C.A.) at pars. 23 to 25.

[58] With that objective in mind, I turn to the wording of s. 124(4). In my view it is clear and unambiguous concerning its application. It applies to actions “by or on behalf of the corporation.” That includes in my view both actions by the corporation itself and actions brought on behalf of the corporation. While the latter encompasses derivative actions, the former has no such limitation. In that regard, the wording in s. 124(4) is broader than the wording in s. 239(1) of the CBCA which specifically concerns derivative actions and describes them as being “in the name and on behalf of a corporation”.

[59] In addition, the interpretation of s. 124(4) to include actions by the corporation as well as derivative actions is consistent with the scheme of s. 124 generally. Section 124(1) deals with third party claims against made against directors and officers. On the other hand, s. 124(4) refers to actions by or on behalf of the corporation. The latter are subject to the supervisory function of the court because the very nature of these actions leaves both parties vulnerable to abuse from the other side.

[60] Nor do I think there is a principled basis for limiting the supervisory function of the court in s. 124(4) to derivative actions only. The court has an important role to play in circumstances where the corporation is suing its former directors and officers for breach of fiduciary duty and indemnity and advancement is in issue. Such issues are difficult for both sides. The review by the court in such circumstances operates to protect both sides. Actions which have no merit should not delay advancement. On the other hand, directors or officers who have engaged in misconduct towards the corporation ought not to be allowed to use corporate funds to defend themselves.

[61] Further, s. 124(4) must be read in conjunction with s. 118(2)(d) of the CBCA which imposes personal liability on directors that vote for or authorize the payment of an indemnity contrary to s. 124(4). Given such liability, it makes sense for the court to have a supervisory function in circumstances where the corporation is suing its former directors or officers for breach of fiduciary duty.

[62] I am also of the view that interpreting s. 124(4) to encompass both actions by corporations directly and derivative actions against former directors and officers is consistent with and effectively balances the above noted objectives of s. 124 generally.

[63] In my view, requiring the court to scrutinize indemnification and advances in circumstances where a corporation has sued its former directors and officers ensures corporations cannot arbitrarily avoid indemnity or advancement obligations to former directors and officers who have acted in good faith and in the best interests of the corporation, while at the same time ensuring that directors and officers who have not so acted cannot further harm the corporation. Directors and/or officers that have acted mala fides to harm the corporation ought not to be able to further draw upon the corporation to defend themselves. Such oversight, in my view, will not impede the recruitment of qualified directors and officers or impact upon their entrepreneurial spirit.

[64] The Applicants rely on the heading of s. 124(4) which provides “Indemnification in derivative actions” to restrict the application of the subsection to derivative actions only. While headings are to be considered part of the legislation and can be taken into account in the interpretation, they are not determinative: Skapinker v. Law Society of Upper Canada, 1984 CanLII 3 (SCC), [1984] 1 S.C.R. 357 (S.C.C.) at pars. 26-27. In my view, given the clear and unambiguous wording of the statutory text, the heading cannot operate to restrict the application of s. 124(4) to derivative actions only.

[65] The Applicants further rely on the legislative history of s.124 to support their argument that s. 124(4) is intended to apply only to derivative actions. They refer to the report commissioned by the Government of Canada to consider revisions to the CBCA that was released in 1971, called Proposals for a New Business Corporations Law for Canada, Volume 1: Commentary and Volume 2: Draft Canada Business Corporations Act (commonly referred to as the “Dickerson Report”). The Dickerson Report recognizes that a director or officer who is sued in a derivative action “had probably not been acting in the interests of the corporation and therefore his conduct should be more closely scrutinized.” In my view, the same rationale for scrutiny applies where the corporation is suing its former director or officer directly for breach of fiduciary duty.

[66] In my view, interpreting s.124(4) in a manner that does not limit its applicability to derivative actions is supported by the decisions in Med-Chem Health Care Ltd. v. Misir (2010), 2010 ONCA 380, 103 O.R. (3d) 769 (C.A.) and Catalyst Fund General Partner I Inc. v. Hollinger Inc. (2006), 2006 CanLII 23918 (ON SC), 20 B.L.R. (4th) 249 (Ont. S.C.).

[67] Med-Chem involved, among other things, motions by the defendants, former directors of Med-Chem, for advancement of legal expenses incurred and to be incurred in an action against them by Med-Chem. The defendants relied upon a by-law of Med-Chem’s that provided for indemnification. The motion judge (at para. 41 of her reasons reported 2009 CarswellOnt 9101 framed the issue before her as whether the court should approve the advance of moneys to the former directors under s. 136(4.1) of the OBCA, or under Med-Chem’s by law, pending disposition of the action on the merits. The motion judge reviewed the evidence before her and concluded there was no evidence of mala fides on the part of the defendants. The motion judge ordered Med-Chem to pay advances to its former directors.

[68] In dismissing the appeal from the motion judge’s decision, Goudge J.A., on behalf of the panel hearing the appeal, stated as follows in respect of the exercise of discretion by the motion judge under s. 136(4.1) of the OBCA at paras. 25 and 26:

[25] Section 136(3) provides that an individual who does not act honestly in good faith is disqualified from being indemnified. Blair says that the policy objective behind indemnification requires that individuals be assumed to act in good faith unless proven otherwise. The motion judge found that, on the evidence before her, the mala fides of the former directors had not been established. She went further and concluded that, given their conduct as described in the appellant's own material, and the court's previous approval of indemnification for them in the action brought by Dr. Alvi personally, the former directors have sufficiently established the bona fides of their conduct. There was ample evidence before the motion judge to sustain both these conclusions and there is no basis for this court to interfere with them.

[26] In deciding to exercise her discretion under s. 136(4.1) to approve these advances, the motion judge considered a number of factors, all of which are relevant and reasonable in my view.

[69] Hollinger involved an application to set aside a consent order which provided for certain resignations of directors in return for severance payments and releases. In turn, the directors involved sought indemnity for their legal expenses in accordance with indemnification agreements entered into with Hollinger. In dismissing the directors’ motion, Campbell J. interpreted the indemnification agreements in a manner consistent with s. 124(4) and held the agreements did not authorize advances in a case where the company brought its own claim against the former directors alleging bad faith. The learned judge stated at para. 55:

It would be contrary to common sense to require the Corporation to indemnify directors against whom the allegation is made by the Corporation of ‘lack of good faith without a view to the best interests of the Corporation’. At this stage, there is simply an allegation. If the directors are successful, they will be entitled to be reimbursed for the legal fees they have incurred.

[70] The Applicants rely on Jolian Investments Ltd. v. Unique Broadband Systems Inc., 2011 ONSC 3241, 90 B.L.R. (4th) 188 in support of their submission that they are entitled to advancement pursuant to the By-Law and the Indemnity Agreement and s. 124(4) does not apply. Jolian involved motions for summary judgment by Jolian, McGoey, Delgonos and DOL seeking declarations that they were entitled to indemnity including the obligation of advancement in respect of a counterclaim commenced by UBS in response to actions brought by them against it. Among other things, the moving parties relied on indemnity agreements entered into with UBS that were substantially similar in wording to the Indemnity Agreements in issue in these Applications. UBS is an Ontario corporation.

[71] In ordering UBS to provide advances of indemnity to the moving parties, Marrocco J. considered the application of s.136 of the OBCA. In particular, Marrocco J. held that s. 136(4.1) of the OBCA, which is identical in wording to s. 124(4) of the CBCA, applied only to derivative actions and therefore was not applicable in respect of UBS’ counterclaim. In reaching this conclusion, the learned judge relied on the heading of the subsection: “Derivative actions”, the minimal impact the section would have on the proceedings given that two of the parties are corporations and not subject to s. 136(4.1) and the supervisory function of the court over derivative actions.

[72] As I have already noted, in the absence of ambiguity, the heading of the subsection is not determinative in interpreting the wording in the subsection. Nor in my view does the impact the subsection’s application on other parties have any bearing on the interpretation of the subsection. Finally, and as I’ve already noted, the supervisory function of the court need not be limited to just derivative actions.

[73] I note as well that although the learned judge relied on Med-Chem for the proposition that it would impair the objectives of indemnification if funds were only made available to individual directors after the conclusion of litigation, he did not consider this general comment from Med-Chem’s in light of the balancing objectives behind s. 124(4) of the CBCA already discussed. Furthermore, he did not consider the Hollinger decision in reaching the conclusion he did.

[74] With respect therefore, I am unable to agree with Marrocco J.’s interpretation of s. 136(4.1) of the OBCA. In my view, for the reasons stated, s. 124(4) of the CBCA is not limited to just derivative actions. It applies to both actions by the corporation and actions on behalf of the corporation.

[75] The Applicants refer to the decisions of the Delaware Chancery and Supreme Courts in the State of Delaware in support of their position that determination of advancement does not involve litigation of the merits of entitlement to indemnification. Delaware law concerning officer and director entitlement to advancement pursuant to a by-law or an indemnification agreement is based on article 145 of the Delaware Code. That article contains no statutorily imposed conduct requirement as is contained in s. 124(4) of the CBCA.

[76] While Delaware law is not binding on this court, it is never the less well regarded in the area of corporate law. Given, however, the above noted distinction, in my view Delaware law is of no assistance in considering the applicability of s. 124(4).

II. Section 124(4) and the By-Law and Indemnification Agreement

[77] As noted, the By-Law provides an indemnity to directors and officers and former directors and officers. It begins with the words: “Subject to the provisions of the Act…” It then incorporates the wording of s. 124(4) in the first full paragraph and provides that, with the approval of a court, Look shall indemnify or advance moneys pursuant to the indemnity “in respect of an action by or on behalf of the Corporation.” While it further states in the last paragraph that the corporation “shall” advance moneys to a director or officer or former director or officer for the costs, charges and expenses of a proceeding referred to, in my view, given opening words of the provision, the latter wording does not operate to override or eliminate the provisions of s. 124(4).

[78] The Indemnification Agreement contains no reference to the provisions of s. 124(4) and the requirement for court approval in respect of advances of indemnification amounts. As noted, s. 2(a) provides for mandatory advancement for both third party actions and actions by or in the right of the corporation with no provision for court approval in respect of the latter.

[79] In my view, parties to an indemnification agreement cannot exclude advancement from being subject to court approval as set out under s. 124(4). As noted by Osborne J.A. in Bata at paragraph 24, s. 136 of the OBCA, which is identical to s. 124 of the CBCA, establishes the circumstances under which a corporation may, with or without court approval, indemnify an officer or director and, by implication, when a corporation cannot indemnify an officer or director. Just as a corporation cannot indemnify an officer or director in the absence of the requirement that they act “honestly and in good faith with a view to the best interests of the corporation”, neither in my view can they contract to exclude the court’s discretion to approve advancement under s. 124(4). Section 124 provides a complete statutory code that details when and how a company can and cannot indemnify and provide indemnification advances to present and former directors and officers.

[80] For the above reasons, therefore, it is my view that s. 124(4) applies to these Proceedings and the court is accordingly required to approve the advance of monies sought by the Applicants.

III. Can the Issue of Entitlement to Interim Advancement be Determined in these Proceedings?

[81] Advancement, by its very nature, is separate and distinct from indemnification. It occurs well before the final determination of indemnification. Even though the Applicants have proceeded by way of Applications, given the motions seeking interim advancement and the request for interim advancement in the Applications, the Proceedings are in essence interlocutory as opposed to final.

[82] A final determination of whether a director or officer is entitled to indemnification may or may not require a trial depending on the nature of the evidence put forward by the parties. In this case, entitlement to indemnification is an issue in the Action and accordingly will be dealt with at the trial.

[83] What then is the proper procedure that the court should follow under s. 124(4) to approve whether a corporation should advance monies on an interim basis prior to a final determination of entitlement to indemnification?

[84] The Applicants submit that the determination of their right to advancement is analogous to the determination of an insurer’s duty to defend and whether ultimately the insurer is required to pay out on the insurance policy.

[85] In my view, duty to defend cases are not applicable to the determination by the Court of advancement pursuant to s. 124(4) of the CBCA. Duty to defend is determined on a preliminary basis utilizing the pleadings filed against the insured. If the pleadings allege facts which, if true, may require the insurer to indemnify the claim under the policy, the insurer is obliged to provide a defence: Moneco Ltd. v. Commonwealth Insurance Co., 2001 SCC 49, [2001] 2 S.C.R. 699 (S.C.C.) at para. 28.

[86] Section 124(4) provides for “approval” by the Court and imposes a conduct requirement. By implication, the process requires the consideration of evidence. Further, the use of the “pleadings rule” to determine advancement would not be in the interests of the directors and officers who are seeking advancement generally or the Applicants particularly. In almost all cases, the corporation will allege breach of fiduciary duty and mala fides in its pleading as Look has done in the Action. Accepting those allegations as true, the Applicants would not be entitled to advancement pursuant to either the By-Law or the Indemnification Agreement.

[87] Look submits that the court can deny advancement if it is satisfied, based on the evidence before it, that it cannot conclude the Applicants have acted in good faith with a view to Look’s best interests. Look’s test, in my view, ignores the presumption of good faith that applies to the Applicant directors and officers. Having regard to both the interim nature of the proceedings and the presumption in favour of the Applicant directors and officers set out in Blair, it is my view that, in order for the court to deny advancement in the face of the By-Law and the Indemnity Agreement permitting the same, Look must establish a strong prima facie case that the Applicants acted mala fides towards the corporation. That is, it must establish on the evidence that it is likely to succeed at trial.

[88] I would note here that there is nothing unusual about an interlocutory judge engaging in some limited weighing of the evidence at hand. Indeed, this is often necessary for a number of different types of interlocutory proceedings. Furthermore, in my view, there is nothing in Med-Chem or any other authority that suggests the presumption from Blair cannot be rebutted at a preliminary stage. Indeed, as discussed above, this is exactly the approach the motions judge adopted in Med-Chem when she framed the issue before her as whether the court should approve the advance of moneys to the former directors under s. 136(4.1) of the OBCA

[89] On any application to determine the question of indemnity or advancement, former officers and directors have the presumption of good faith in their favour as set out in Blair. The onus is therefore clearly on the corporation to establish that the directors and/or officers acted mala fides, contrary to the best interests of the corporation.

[90] Mala fides or bad faith includes fraud or misappropriation against a corporation. It may also include conduct coloured by opportunistic or self-seeking behavior which exhibits a type of dishonesty that should not be countenanced by an award of indemnity: Bennett v. Bennett Environmental Inc. (2009), 2009 ONCA 198, 94 O.R. (3d) 481 (C.A.) at para. 29. It can also encompass recklessness, described as conduct that is so inexplicable it leads to the inference of an absence of good faith: Enterprises Sibeca Inc. v. Frelighsburg (Municipality), 2004 SCC 61, [2004] 3 S.C.R. 304. (S.C.C.) at para. 25.

[91] Given the presumption of good faith, therefore, it is my view that it is not sufficient for the corporation to simply raise an allegation of bad faith in the pleadings or make bald unsubstantiated allegations to that effect in an affidavit. A higher evidentiary standard is required. In my view, the corporation must establish on the evidence that it has a strong prima facie case that the director or officer seeking interim advancement acted mala fides to permit the court, at an interim stage, not to approve interim advancement pursuant to s. 124(4) of the CBCA where such advancement is permitted by the corporation’s by-laws or an indemnification agreement or both.

Look’s Case Against the Applicants

[92] Look submits that the individual Applicants, in their position as Board members, officers or employees, acted mala fides and not in Look’s best interests in a number of ways. In particular, it submits:

1. The individual Applicants focused their own interests in obtaining the Indemnity Agreements, not only for themselves but, in the case of Cytrynbaum, McGoey and Dolgonos, for their company’s who in the later two cases had no relationship with Look;

2. They abandoned the terms of the Option Plan and the SAR’s Plan and, contrary to the assurances given to shareholders, implemented an approach that greatly benefited their interests contrary to the interests of Look and its shareholders;

3. They improperly allocated bonuses, particularly to Cytrynbaum, McGoey, Dolgonos and Redman;

4. They failed to disclose either the approvals or the payments to the Court Monitor, the Court and the shareholders;

5. On the eve of their resignations, they caused Look to advance $1.55 million to their personal counsel on account of retainers in respect of anticipated legal proceedings against them by Look and the shareholders.

[93] Although Look relies on a number of incidents in support of its position that the individual Applicants acted mala fides and not in the best interests of Look, for reasons that will become apparent, I need only focus on two: the approval and payment of the equity cancellation payments to the Applicants in June and September 2009 and the payment by Look of $1.55 million in retainers in July 2010.

The Equity Cancellation Payments

[94] On May 4, 2009, when the Board approved the sale to Inukshuk and agreed to vest all options and extend them for a year and assess the benefits to be paid to SARs holders and the company’s liability for such benefits as of the date on the day before the Final Approval Order for the sale, Look’s share price was $0.16.

[95] On May 5, 2009, Look issued a news release announcing the proposed sale. On May 11, 2009, Look’s shares opened at $0.19.

[96] On May 13, 2012, the day before the date when Look received the Final Approval Order for the sale, Look’s shares closed at $0.20. On May 14, the closing price for Look’s shares that day was $0.23.

[97] In my view, Look’s evidence indicates a strong prima facie case that the decision of the Board on June 16, 2009, to authorize management to cancel all options and SARs using a value of $0.40 a share was not in the best interests of Look for a number of reasons.

[98] First, the Board’s decision was contrary to the terms of both the Option and the SAR Plans. It was also contrary to the Board’s own resolution on May 4, 2009 respecting the use of market value (which was consistent with both Plans).

[99] Further, the value of $0.40 a share had no relationship to the market value of Look’s shares over the period. Except for a short period in January and February of 2009, Look’s shares very seldom ever closed above $0.30 during 2009. Often the price was less than $0.20. For the period from May 4, 2009 to June 16, 2009, the daily closing price on the TSX Venture Exchange for Look’s shares fluctuated between $0.13.5 at the low and $0.27 at the high. From June 16th to the end of September 2009, by which time the payments had been made, the share price never went above $0.30.

[100] The evidence indicates that the Board determined the value of $0.40 a share based on the recommendation of McGoey and Redman without any assistance from compensation or valuation experts. The value of $0.40 was based on a proposed sale of the shares of Look at that price. At the time, however, while McGoey and Redman had met with a representative of an interested party to discuss a possible sale, no offer for the shares, either oral or written, had been received. When the interested party subsequently decided not to proceed, no effort was made by the Board to revisit the question of the $0.40 share value.

[101] Further, by selecting a value of $0.40 a share, each of the directors and Redman benefited personally at Look’s expense. The grant price for Cytrynbaum and McGoey’s SARs was $0.19 a share. If the cancellation price was the market value of Look’s shares on May 13, 2009, as the Board had initially determined on May 4, 2009 ($0.20), Look would have had to pay Cytrynbaum $73,384 and McGoey $147,768. Instead with a value of $0.40 a share, Look was required to pay them more than 10 times that amount. Similarly, as a result of the $0.40 share value, each of the directors also received a significant increase in the monies paid to them by Look on account of cancellation of their SARs.

[102] The same analysis applies in respect of the options. While the Board cannot be faulted for wanting to prevent a run of the market arising from the exercise of options, by setting a value far in excess of the market, the Board created a significant liability for Look while at the same time receiving a significant personal benefit.

[103] In total, Look was required to pay equity cancellation payments for both options and SARs of approximately $9 million, which was far in excess of the amount it would have had to pay if the value had been based on Look’s market price at the time. Further, it was the Applicants who received the vast majority of that money.

[104] In approving the value of $0.40 in the circumstances in which they did, coupled with the resulting significant benefit to themselves, the evidence strongly indicates the directors pursued their own interests ahead of Look’s. Each of the directors received equity cancellation payments either directly or through their companies in an amount far greater than they would have been entitled to.

[105] Cytrynbaum submits that in reaching the decisions it did in June 2009 concerning the equity cancellation payments, the Board relied on legal advice received from Look’s corporate counsel at the time. Based on Blair, it is further submitted that such reliance affords a complete defence to Look’s allegations of mala fides.

[106] There is no question that legal advice can provide a defence to an allegation of mala fides. There has been much evidence presented concerning the legal advice provided at the time and the information it was based on. In my view, while the defence of legal advice is an arguable defence, it does not overcome Look’s strong evidence of mala fides. Based on my review of the legal advice provided to the Board, both in advance of and at the June 16, 2009 meeting, it addressed the general authority of Look’s directors to make special compensation awards in recognition of their role in significant transactions or events. There is no evidence, however, that the decision to value Look’s shares at $0.40 a share for the equity cancellation payments was based on legal advice.

[107] In my view, Look’s evidence is more than sufficient to establish a strong prima facie case that by recommending and approving the equity cancellation payments at a value of $0.40 a share, McGoey and Redman in their capacity as officers and Cytrynbaum, McGoey, Smith and Colbran in their capacity as directors, acted mala fides, in their own self interests and not in the best interests of Look.

The Retainer Payments

[108] By the spring of 2010, shareholder opposition was mounting to the bonus and equity cancellation payments made by Look to the Applicants. Look had received letters from shareholders complaining about the payments. A dissident group of UBS shareholders had requisitioned a shareholder meeting for July 5, 2010, with the purpose of replacing its board of directors. Because UBS was Look’s largest shareholder, the individual Applicants expected that the Board and senior management would be replaced with the ultimate goal of recovering the payments made to the Board and management, including the Applicants.

[109] In late May, early June 2010, Look’s management sought legal advice as to whether Look could establish an indemnity trust to fund the Applicants’ indemnity claims for, among other things, legal fees and expenses arising out of any legal proceedings that they anticipated would be commenced against them in connection with the monies they had received from Look.

[110] When Look’s regular corporate counsel, David McCarthy at Stikemans, declined to act on the issue given the potential conflict if legal proceedings arose, Look’s management retained Jeffrey Kramer, a senior litigation lawyer who had acted for Look in the past. Mr. Kramer initially met with McGoey and Redman on May 26, 2010, to obtain the background. Over the next few weeks he met or spoke mainly with Redman. He also met with and spoke with Hillary Clarke, a lawyer with McMillians who had been retained by the Applicants to act for them personally. He was advised by Redman that the Board was going to meet on June 16, 2010 and he was asked to attend.

[111] As Mr. Kramer became more involved in the issue and the facts, he became concerned with the scope of his retainer given the time frames involved. Mr. Kramer also had concerns that an indemnity trust would not be in the best interests of Look. On June 15, 2010, Mr. Kramer advised Redman and Ms. Clarke that he had no choice but to advise the Board at its meeting the next day that in his opinion an indemnity trust did not appear to be in the best interests of Look; that proceeding with it was questionable from a legal point of view and that it appeared to be a bad strategic move. He also raised concerns about a serious conflict of interest arising from the fact that the directors and officers who were instructing Ms. Clarke were also instructing him on behalf of Look.

[112] Mr. Kramer did not attend the Board meeting on June 16, 2010. He was told by Redmond early that morning that the meeting had been cancelled. Ms. Clarke, on the other hand, was present at the meeting. So too was Mr. McCarthy.

[113] At the outset of the Board meeting, Mr. McCarthy advised the Board that his role would be limited to a review of the applicable indemnity provisions and he would provide no litigation advice. Mr. McCarthy then provided a detailed review of the indemnity provisions of the By-Law, the Indemnity Agreement and the relevant provisions of the CBCA, following which he left the meeting. Ms. Clarke remained. Mr. Kramer’s advice to Look’s management concerning the issues surrounding an indemnity trust and the conflict of interest was not provided to the Board, notwithstanding that McGoey, Redman and Ms. Clarke were present.

[114] The minutes of the meeting reflect Mr. McCarthy’s presentation and the fact that Look had received a letter signed by all the directors, Redman and on behalf of First Fiscal and Jolian requesting indemnity pursuant to the Indemnity Agreement in respect of anticipated litigation against them. There is no indication in the minutes that the Board made any decision concerning the payment of indemnity.

[115] As noted, in July 2010, on the eve of the individual Applicants’ resignations from Look’s Board and employment, Look paid $1,550,000 on account of retainers to three law firms acting for the Applicants.

[116] Mr. Kramer filed an affidavit in the proceedings outlining his involvement from May 26 to June 16, 2010. He was not cross-examined and no evidence was presented contradicting his evidence.

[117] In my view, Look’s evidence establishes a strong prima facie case that the individual Applicants, in authorizing Look to pay the retainers, acted mala fides, in their own self interest and not in Look’s best interests.

[118] In failing to advise the Board of the legal opinion Look had received from Mr. Kramer prior to the June 16, 2010 Board meeting, McGoey and Redman, as officers of Look, acted in their own self interest and not in the best interests of Look. While McGoey was not involved in every meeting with Mr. Kramer and particularly the June 15th meeting where he gave the advice which resulted in his exclusion from the June 16th meeting, I have no doubt given his involvement in the issue that McGoey was well aware of Mr. Kramer’s advice. Significant retainers were subsequently paid by Look to lawyers retained by both McGoey and Redmond personally.

[119] The evidence also establishes that Look has a strong prima facie case that in authorizing and paying the retainer amounts, the individual Applicants, except Dolgonos (as will be discussed below), acted mala fides, in their own personal self interest and not in Look’s best interests. Although the Board received advice on the indemnity provisions applicable from Mr. McCarthy, it received no advice directed to the appropriateness of the proposed payments in question given the circumstances. Mitrovich testified that no explanation was provided to the Board as to how such payments were in Look’s best interests. Mr. McCarthy left the meeting after his presentation and the only lawyer who remained was Ms. Clarke who was acting for the directors and management personally. This was a significant conflict of interest. Of the monies paid as a retainer, Ms. Clarke’s firm received $1,200,000.

[120] I am further of the view, given the strong opposition which had arisen from Look’s shareholders to the payments which had been made to the Board and senior management from the proceeds of the Inukshuk sale, that payment of further significant amounts on account of retainers for the Applicants, was not in Look’s best interests.

Cytrynbaum, McGoey, Smith, Colbran and Redman

[121] For the above reasons, therefore, I am of the view that, based on the evidence presented, Look has established a strong prima facie case that the individual Applicants, excluding Dolgonos, acted mala fides, in their own self interests and not with a view to the interests of Look in respect of the Board’s approval of the equity cancellation payments based on a value of $0.40 a share and in relation to the payment of retainers by Look to lawyers acting for the Applicants personally. Accordingly, Look has met its onus. I am not prepared to approve interim advancement to the individual Applicants (except Dolgonos) of their legal fees and expenses in respect of the Action or the CBCA Motion pursuant to s. 124(4) of the CBCA.

Dolgonos

[122] There is a dispute between Look and Dolgonos as to his employment status with Look. Dolgonos submits that he was simply an employee of Look during the relevant period and never an officer. He submits that he performed technology consulting services for Look at the request of UBS pursuant to the UBS MSA and an agreement between UBS and DOL. As an employee, he received $60,000 a year from Look. As a result, Dolgonos submits his entitlement to advances is not subject to court approval under s. 124(4) of the CBCA and arises from the Indemnity Agreement.

[123] Look submits that Dolgonos was an officer of the corporation during the relevant period. It points to a new hire form created in March, 2005 which describes Dolgonos as being Look’s Chief Technology Officer. Look submits that given his duties at the company, he should be considered a member of Look’s management and accordingly subject to the provisions of s. 124(4) of the CBCA.

[124] The evidence of what Dolgonos’s role was at Look and the duties he performed is far from clear. Section 2(1) of the CBCA defines an “officer” as an individual appointed as an officer under s. 121, the chairperson of the board of directors, the president, a vice-president, the secretary, the treasurer, the comptroller, the general counsel, the general manager, a managing director of a corporation or “any other individual who performs functions for a corporation similar to those normally performed by an individual occupying any of those offices.”

[125] While it may be that Dolgonos did carry out a management role, at this junction, based on the record before me, I am not prepared to conclude Dolgonos was an officer within the meaning of the CBCA at the relevant times.

[126] In addition, and even if the evidence establishes that Dolgonos was an officer of Look at the material times, there is no evidence in these proceedings that he was involved in any of the impugned decisions that Look relies on to establish mala fides. In particular, there is no evidence he had any involvement in establishing the $0.40 share price or payment of the retainers. Look points to the large sums of money he received on account of bonus and equity cancellation payments having regard to his role with the company. In my view, those payments are more an issue for management and the Board who recommended and approved them rather than Dolgonos who received them.

[127] Accordingly, the issue of advancement in respect of Dolgonos falls to be determined on the wording of the Indemnity Agreement. In that regard, the wording of the Indemnity Agreement is clear. Dolgonos as a consultant and/or employee of Look is entitled to receive interim payment of expenses pursuant to s. 2(a) of the Indemnification Agreement unless and until it is finally determined “by a court of competent jurisdiction” that he is not entitled to be indemnified pursuant to the Agreement. In that case, he will be required to pay back the monies advanced on his behalf.

[128] Look submits that the issue of whether the Indemnity Agreement is valid or applies is an issue to be determined in the Action. At this stage, the failure of Look to advance expenses pursuant to the Indemnity Agreement is an alleged breach of contract. The relief Dolgonos is seeking in his Application is in effect a mandatory injunction ordering Look to pay advances prior to a determination of the issue of entitlement in the Action. In that regard, Look submits that Dolgonos has failed to meet the test required to obtain a mandatory injunction: he has not established a strong prima facie case; he has failed to establish any irreparable harm if the relief is not granted or that the balance of convenience favours the granting of such an injunction. See Barton-Reid Canada Ltd, v. Alfresh Beverages Canada Corp., 2002 CanLII 34862 (ON SC), [2002] O.T.C. 799 (S.C.) at para. 9.

[129] In my view, Look’s submission has no merit in respect of Dolgonos. The record is clear that he was an employee of Look. As such, he is entitled to advancement in accordance with the provisions of the Indemnification Agreement. If it turns out at the conclusion of the Action he is not entitled to indemnity he will have to repay the amounts advanced by Look. To hold otherwise would effectively render the indemnity meaningless. It would permit a corporation, in the face of an indemnity agreement, to simply refuse to honour the agreement requiring the employee to pay all his or her legal costs pending final determination of the corporation’s action. Given the policy goals behind indemnity (and advancement), it is not appropriate to apply the test for a mandatory injunction in respect of employees who have been given an indemnity agreement.

IV. The Release

[130] In light of my decision to not approve advancement in respect of any of the Applicants except Dolgonos, the issue of the whether the Release operates to prevent advancement is only applicable in respect of Dolgonos.

[131] In my view, at this stage, I am not prepared to find that Look has established that the Release operates to prevent Dolgonos from receiving advances pursuant to the Indemnification Agreement. The Release was provided in exchange for Dolgonos giving up all rights surrounding the cancellation of the SAR Plan and the Option Plan. It is not a general release. The wording of the Release specifically limits it to any and all actions etc. “in any way relating to my entitlements under the Company’s Share Appreciation Rights Plan and the 2002 Stock Option Plan.” In my view, therefore, the wording of the Release does not extend to any claim by Dolgonos under the Indemnification Agreement.

First Fiscal, Jolian and DOL

[132] Section 124 of the CBCA has no application to First Fiscal, Jolian and DOL, the management services companies of Cytrynbaum, McGoey and Dolgonos respectively. Nor are they entitled to the presumption of good faith discussed in Blair. That presumption applies to persons not corporations.

[133] First Fiscal provided consulting services to Look through Cytrynbaum. Neither Jolian nor DOL had any employment, consulting or agency relationship with Look. Their claim for indemnity and for interim advancement is based solely on the Indemnification Agreement.

[134] The Indemnity Agreement clearly provides in Sections 1(a) and (b) and elsewhere that it applies where the “Indemnitee” was a “director, officer, employee, consultant or agent” of Look. Further, section 8 of the Indemnity Agreement provides;

8. Effectiveness of Agreement. This Agreement shall be effective as of the date set forth on the first page and shall apply to acts or omissions of Indemnitee which occurred prior to such date if Indemnitee was an officer, director, consultant, employee or other agent of the Corporation, or was serving at the request of the Corporation as a director, officer, employee, consultant or agent of another corporation, partnership, joint venture, trust or other enterprise, at the time such act or omission occurred.

[135] The Indemnification Agreement is a contract between arms length parties. None of the policy concerns behind director, officer or employee indemnities or advances prior to a final determination of entitlement apply. I am therefore in agreement with Look that in respect of the three companies, in order for them to receive advancement of expenses pursuant to the Indemnity Agreement, the onus is on each of them to establish the previously referred to test for a mandatory injunction: strong prima facie case; irreparable harm and balance of convenience.

[136] In my view, on the evidence, none of the three companies have established the requirements. On the clear wording of the Indemnity Agreement, it does not apply to Jolian or DOL. Neither of those companies were ever an officer, director, consultant, employee or other agent of the Corporation. The same, however, cannot be said about First Fiscal which had an agreement with Look in respect of Cytrynbaum’s consulting services. Further, there is no evidence from any of the companies of irreparable harm. Finally, in my view, given the circumstances behind the payments to the companies, the balance of convenience clearly favours Look.

[137] I am also not prepared to permit interim advancement of legal expenses for First Fiscal and Jolian even if the Indemnity Agreement applies. Simply put, because I have found that Look has established a strong prima facie case that Cytrynbaum and McGoey are not entitled to interim advances for expenses because of their conduct as directors and officers of Look, it follows in my view that their management services corporations which they control ought not to be held in any different position.

Conclusions

[138] The motions in the Cytrynbaum Application by Cytrynbaum and First Fiscal, Smith and Redman for interim advancement of expenses relating to the Action and the CBCA Motion are therefore dismissed.

[139] The Application by McGoey and Jolian for interim advancement in the McGoey Application is also dismissed.

[140] The Dolgonos Application for interim advancement is allowed in respect of Dolgonos but dismissed in respect of DOL. Dolgonos is entitled to interim advancement of his legal fees and expenses in respect of the Action and CBCA Motion in accordance with the provisions of the Indemnity Agreement.

[141] The issue raised in each of the Applications concerning each of the Applicants’ entitlement to indemnity pursuant to Look’s By-Law and the Indemnification Agreement is directed to be determined by way of trial of an issue, to be tried together with or immediately after the trial in the Action, as the trial judge may determine. In that regard, the affidavits and cross-examinations thereon, as well as any witness examinations and the documents filed in these Proceedings shall constitute discovery and production concerning the indemnity issue.

[142] Finally, I wish to make it clear that the findings I have made in these Proceedings concerning entitlement to interim advances on account of indemnification have been made in the context of interlocutory proceedings and are therefore in no way binding on the trial judge in his or her determination of the ultimate issue of whether the Applicants are entitled to indemnification from Look. Nor should the fact that I have not dealt with all of Look’s allegations be taken as an indication that they are without merit. It was simply not necessary given my view of the evidence concerning the two incidents I relied on.

[143] In light of the issues raised by the parties and argued by counsel, none of the counsel provided cost outlines at the conclusion of the argument nor were any requested by me. In the normal course, at this stage I would ask counsel for their cost outlines and submissions.

[144] In light of my conclusions in respect of interim advancement and because the issue of indemnification remains to be decided, I am inclined to the view that the costs of the motions before me should be awarded in the cause based on the determination of the indemnity issue. That order would also apply to Dolgonos although in the interim he is entitled to receive his costs of the Dolgonos Application by way of advancement under the Indemnity Agreement.

[145] Because, however, no submissions as to costs have been made, if the parties wish to make cost submissions to the contrary, they should be provided in writing within 20 days and any reply submissions, if necessary, should be provided within 10 days following. In the absence of receipt of such submissions, costs of the Applications and motions shall be in the cause concerning entitlement to indemnity.

L. A. Pattillo J.

Released: September 28th, 2012