Court File and Parties
COURT FILE NO.: CV-11-9291-00CL DATE: 20170601 ONTARIO SUPERIOR COURT OF JUSTICE COMMERCIAL LIST
BETWEEN: LOOK COMMUNICATIONS INC. Plaintiff – and – MICHAEL CYTRYNBAUM, FIRST FISCAL MANAGEMENT LTD., GERALD MCGOEY, JOLIAN INVESTMENTS LIMITED, STUART SMITH, SCOTT COLBRAN, JASON REDMAN, ALEX DOLGONOS, DOL TECHNOLOGIES INC. Defendants – and – STIKEMAN ELLIOT LLP and DAVID MCCARTHY Third Parties
COUNSEL: Rahool Agarwal, Jacob Wilson and Andrew McCoomb, for the Plaintiff Gerald McGoey, self-represented, and for the corporate defendant Jolian Investments Limited
HEARD: April 10-13, 18-21, 24-28, May 2, 8-10, 12, 16-17, 19 and 23, 2017
Reasons for Judgment
Conway J.
1Look Communications Inc. (“Look”) was a distributor of wireless, internet and cable services to subscribers in Ontario and Quebec. In May 2009, Look agreed to sell its primary asset – approximately 92 MHz of licensed telecommunications spectrum covering 18 million people in Ontario and Quebec – together with its CRTC broadcast license, to Inukshuk Wireless Partnership (“Inukshuk”), a partnership of Rogers Communications Inc. (“Rogers”) and Bell Canada (“Bell”). The purchase price for the assets was $80 million. Look agreed to pay $16 million to settle outstanding litigation with Bell, leaving Look with net proceeds of $64 million.
2In connection with the Inukshuk transaction, the Look board of directors approved the payment of $20 million in “Contingent Restructuring Awards” to Look’s directors, officers and employees. The directors and officers collectively received $17 million of those awards. Look’s shareholders complained immediately when they discovered those payments.
3In July 2011, Look brought a claim against the defendants alleging, among other things, breach of fiduciary duty in paying $17 million of the awards to themselves. The awards consisted of equity cancellation payments and executive compensation payments. Look alleged that both components of the awards paid to the directors and officers were excessive, were not in Look’s best interests, and preferred the interests of the directors and officers over those of the corporation.
4The defendants asserted third party claims against Look’s legal counsel, Stikeman Elliot LLP (“Stikeman”) and senior partner David McCarthy. Pursuant to a Pierringer Agreement dated October 6, 2015, Look’s claim against the defendants has settled, except for Look’s claim against Gerald McGoey and his holding company Jolian Investments Limited (“Jolian”), and the third party claims have been dismissed. [1]
5This trial proceeded only with respect to Look’s claim against Mr. McGoey and Jolian.
Background
6Look was a publicly-traded telecommunications company incorporated under the Canada Business Corporations Act, R.S.C. 1985, c. C-44 (the “CBCA”). Unique Broadband Systems, Inc. (“UBS”), a holding company that was also publicly-traded, owned just over 50% of the Look shares.
7Look had a five member board of directors. Three of those directors were independent – Stuart Smith, Scott Colbran and Louis Mitrovich. [2] The other two directors were senior officers of Look. Mr. McGoey was Vice Chairman and Chief Executive Officer of the company. Michael Cytrynbaum was Executive Chairman and provided management services through First Fiscal Management Ltd. The other senior officers at the time were Jason Redman (Chief Financial Officer) and Alex Dolgonos (Chief Technology Officer). All of the former directors and senior officers of Look testified at trial, except for Mr. Dolgonos.
8Mr. McGoey’s compensation for his services as Look’s CEO was paid through an arrangement between Look and UBS. Pursuant to a management services agreement between Look and UBS, Look paid UBS $2.4 million per year for management services that included Mr. McGoey’s services. Pursuant to a management services agreement between UBS and Jolian, UBS paid Jolian USD$360,000 per year, plus performance incentives.
9While Look did not pay Mr. McGoey a salary or bonus directly, it granted him options (“Options”) and share appreciation rights units (“SARs”) under Look’s incentive plans.
10Both of these incentive plans aligned the interests of the holder with those of Look’s shareholders, as the value of the Options and SARs was tied to the market price of the Look shares. The Option plan entitled the holder to exercise Options at a strike price and acquire shares from the company, which the holder could then sell in the market.
11The SARs plan was a cash-based incentive plan. On a “Satisfaction Date” (which included the date that the company sold all or substantially all of its assets), the SARs holder was entitled to receive a cash payment equal to the difference between the grant price of the SARs unit and the average trading price of Look’s shares on the day before the Satisfaction Date.
12By 2009, Mr. McGoey held 335,213 Options (approximately 5% of Look’s total outstanding Options) with a strike price ranging from $0.12 to $0.50. Mr. McGoey also held 14,768,921 SARs (approximately 40% of Look’s outstanding SARs) with a grant price of $0.19.
Sale of Look’s Assets to Inukshuk
13By 2008, Look was experiencing financial difficulty. It had been running annual deficits, its subscriber base was decreasing, it was engaged in litigation with Bell (the supplier of its operating network), and it was facing a possible restructuring under the Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36. Over the previous few years, the company had been looking for strategic alternatives to raise capital and enhance shareholder value, and had retained an investment banking firm to assist the company, but without success.
14In late 2008, Look decided to proceed by way of Plan of Arrangement (the “POA”) under s. 192 of the CBCA. The POA consisted of a court supervised auction for the sale of all or substantially all of Look’s assets. The board felt that this would provide a controlled and transparent bidding process for potential purchasers in a highly competitive industry. The board also expected that the auction would recognize the value of the company’s spectrum assets and maximize value for shareholders. [3]
15Grant Thornton LLP agreed to act as the Monitor. The company retained Thornton Grout Finnigan LLP to prepare the court materials for the POA. On January 14, 2009, the shareholders of Look approved the POA and on January 21, 2009, court approval was obtained.
16The auction was conducted and four bids were received by the close of the sales process on February 16, 2009. However, the only bid of any substance was from Inukshuk, which offered to buy Look’s spectrum and broadcast licenses for $80 million. Mr. McGoey and the board were disappointed with the auction results and, in particular, the fact that only one offer of substance had been made. Nonetheless, given the lack of alternatives, Look decided to proceed with the Inukshuk offer.
17Over the next few months, Look and Inukshuk, with counsel, negotiated a purchase agreement. The negotiations were difficult and complicated because, in addition to the sale of the spectrum and broadcast licenses, the transaction involved the resolution of two pieces of outstanding litigation, one between Look and Bell and one between UBS and Rogers.
18The Look board held a meeting to consider the Inukshuk transaction on April 21, 2009 (continued on April 28th). Messrs. McGoey and Redman made a presentation to the board in which they analyzed the impact of the Inukshuk transaction on the Options and SARs units in the event the share price rose to $0.30, $0.40 or $0.50. According to Mr. Mitrovich, he understood that management was anticipating a rise in the Look share price once the Inukshuk transaction was announced. At the meeting, Mr. McGoey recommended that all Options be vested immediately, that the exercise date for Options be extended to one year and that the date for paying out the SARs be fixed at the date of court approval for the Inukshuk transaction. The board did not make any decisions on Options or SARs at that meeting.
19The Inukshuk purchase agreement was signed on May 4, 2009 (the “Purchase Agreement”). The key terms were as follows:
- The $80 million purchase price was payable in three installments: (i) a $30 million non-refundable payment the day after court approval of the transaction; (ii) $20 million on or before December 31, 2009; and (iii) the final $30 million on closing, but no later than three years after the date of court approval. There was no interest payable on the second and third instalments and no penalty if Inukshuk walked away from the deal;
- Look was required to keep its Industry Canada and CRTC licenses in good standing until the transaction closed;
- The closing of the transaction was conditional on receiving regulatory approval to the transfer of the licenses from Look to Inukshuk;
- As part of the settlement with Bell, Look was required to wind down its operations within 90 days, such that Look would no longer be receiving services from Bell.
20On May 4, 2009, the board authorized the company to enter into the Purchase Agreement (the “May 4th meeting”). The directors also passed two additional resolutions with respect to the Options and SARs, as previously recommended by management.
21The first resolution was to immediately vest all outstanding Options and extend the option exercise period from 30 days to one year. That way, Option holders could benefit from any increase in the Look share price over the next year as a result of the Inukshuk transaction.
22The second resolution was for the SARs units. The board resolved that the date of court approval for the Inukshuk transaction would be the “Satisfaction Date”. The cash payment for a SARs unit would therefore be equal to the difference between the grant price of the SARs unit and the average trading value of the Look shares on the day immediately before the Satisfaction Date.
23Mr. McCarthy, Look’s counsel, was present for the May 4th meeting and acted as secretary of the meeting. He testified that he prepared and circulated minutes that reflected the resolutions passed by the board and understood the minutes were in final form by May 13, 2009. In July 2009, Mr. McGoey added the following language to the May 4, 2009 minutes: “Management will bring back to the Board a recommendation on the settlement of the [Option/SAR] entitlements as part of the overall restructuring plan.” In my view, this language makes it appear that the May 4th resolutions were not final and that the board was waiting for something more from management to address at the board’s next meeting. Mr. McCarthy testified that this added wording was not passed by the board and that this change was not brought to his attention when he signed the minutes several months later.
24Look announced the Inukshuk transaction on May 5, 2009. The share price closed at $0.135 that day.
25The court approved the transaction on May 14, 2009 and Inukshuk paid the first instalment of $30 million on that date, less $16 million for the Bell settlement.
26The closing price of the shares on May 13, 2009 was $0.20. At that price, Mr. McGoey’s cash entitlement for his SARs units would have been $147,689. Further, at $0.20 per share, approximately 40% of Mr. McGoey’s Options were under water.
Discussions Begin on Project Tempo
27On May 20, 2009, Look and Rogers started discussing a potential sale of the Look shares to Rogers (“Project Tempo”). Look had tax losses of over $300 million that Rogers was interested in acquiring through a share transaction.
28On June 12, 2009, Look and Rogers agreed in principle that if a transaction was to go forward, it would be at a share price of $0.40. This was an agreement in principle with respect to price only. It was not binding. It provided a basis for negotiating a deal. According to Ben Colabrese, who was negotiating for Rogers, any transaction was subject to Rogers’ completing due diligence on the company and obtaining executive and board approval. There was no term sheet or any documentation signed at that point. Rogers started its due diligence and both parties instructed legal counsel to start drafting the necessary agreements. By early July 2009, counsel were working on draft agreements and had prepared a checklist for the steps leading up to closing.
Discussions with Stikeman re Human Resources Strategy
29On June 3, 2009, Messrs. McGoey and Redman met with Mr. McCarthy to discuss Look’s human resource strategy in light of the Inukshuk transaction, the requirement to wind down Look’s operations within 90 days and the need to reduce the work force from 80 to approximately six employees required to maintain the licenses in good standing until closing. Mr. Redman had already been working with one of Mr. McCarthy’s labour colleagues to calculate the company’s severance obligations for each non-management employee. They told Mr. McCarthy that the proposed severance, bonuses and retention payments for the Look employees would total $5 million. They told him that 2009 bonuses would be in line with those of the previous year.
30They also told him that they were proposing to supersede the resolutions passed at the May 4th meeting and instead conditionally “pay and cancel” the outstanding Options and SARs on receipt of the next instalment from Inukshuk. The amount to “pay and cancel” would be in the range of $10 million. They told him that in total the “restructuring expenses” for the company would be approximately $20 million. They did not explain how that amount would be allocated as between management and salaried employees or provide any individual allocations.
31Mr. McCarthy testified that he told them that the “pay and cancel” approach was uncommon. However, they told him the company would be doing a normal course issuer bid to buy back shares as the market price did not reflect the value of the company’s assets. They assured him that the proposal would be based on the value of Look’s shares to shareholders. Mr. McCarthy testified that they made a compelling argument that the proposal to “pay and cancel” would be fair to shareholders.
32On June 8, 2009, Mr. Redman asked Mr. McCarthy to prepare a letter to be addressed to the board outlining the legal duties and obligations of the board in making payments to the directors, officers and employees of the company as a result of the Inukshuk transaction and the winding down of the remaining business. Mr. McCarthy prepared an opinion dated June 15, 2009 (the “June 15th letter”) that explained, in general terms, the board’s power to make such payments where the directors “act honestly and in good faith with a view to the best interest of the corporation” and “exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.” He also explained the protection afforded to the board by the “business judgment rule”, which applies so long as a decision falls within a range of reasonable alternatives. The June 15th letter did not address the valuation to be used for the Look shares for the equity cancellation payments or the quantum of any compensation payments to be made to the officers.
Look Board Meeting on June 16, 2009
33A board meeting was held on June 16, 2009 (the “June 16th meeting”) to address the restructuring of the company in light of the pending Inukshuk transaction. Messrs. Redman and McGoey made a presentation at that meeting.
34They canvassed the challenges to the company of terminating approximately 75 employees, while retaining key employees until the final closing of the Inukshuk transaction (that could be up to 36 months away). They advised the board that all severance issues had been reviewed by Stikeman. They proposed that a pool of $5 million be set aside for severance, annual bonuses and retention payments and that releases be obtained from all employees to protect against future litigation.
35Messrs. Redman and McGoey further proposed that Look cancel all outstanding Options and SARs and make an “equity cancellation payment” based on a price of $0.40 per share. They advised the board that the $0.40 figure reflected the net asset value of the company, after deduction of all restructuring expenses, and was consistent with the share price that had been agreed to in principle with Rogers for Project Tempo. [4] Messrs. Colbran, Smith and Cytrynbaum testified that they understood that the $0.40 price came from the negotiations with Rogers.
36In their presentation, Messrs. Redman and McGoey told the board that their proposal would benefit the company and its stakeholders for several reasons, including the fact that in exchange for the CRA payment, employees would sign releases, cleansing the company of all liabilities to employees. In addition, it would avoid the downward pressure on the Look stock price that could be caused by employees exercising their Options and selling their shares on the market, ensure that sufficient key staff were retained to close the Inukshuk transaction, and enable management to focus on monetizing the value of the company’s remaining assets.
37Messrs. Redman and McGoey advised the board that the human resource proposal was “entirely within the ‘range of reasonable alternatives’ and was in accordance with the Board’s ‘business judgement’ mandate.” I note that while Mr. McCarthy had discussed the concept of a “range of reasonable alternatives” in describing the business judgment rule in his June 15th letter, he had not given any opinion that the cancellation of Options and SARs at the $0.40 price or the quantum of the proposed compensation payments fell within the range of reasonable alternatives. This was management’s statement to the board.
38Mr. McCarthy was at the meeting during management’s presentation. He walked the board through his June 15th letter and outlined the authority of the board to make special payments to employees, directors and officers during the course of a restructuring, as well as the fiduciary duties of the board in doing so. There was a discussion afterwards in which Mr. McCarthy raised the issue of the board retaining outside compensation and valuation experts if it considered it appropriate, but the board concluded that it did not need to hire an outside expert. Mr. McCarthy expressed no opinion about the $0.40 share price or the amount of any compensation payments to the company’s officers and employees.
39Both Messrs. McCarthy and Redman left the meeting after the presentation.
40The board accepted management’s recommendations and passed the following resolutions:
- Unconditionally award severance, 2009 bonuses and retention incentive payments as of May 31, 2009, with payment in July and October 2009;
- Request each Option and SARs holder to relinquish all rights to their units as of May 31, 2009;
- Award the “equity cancellation contingent payments” at $0.40 per Option and SARs unit as of May 31, 2009, with payment contingent on receiving the second instalment from Inukshuk;
- Approve an “HR Restructuring Compensation Pool” of approximately $11 million for allocation at a later date. (I note that the $11 million figure approved by the board was greater than the $5 million set out in the management presentation.)
41The equity cancellation payments and compensation pool, as proposed by management and approved by the board, were subsequently named the “Contingent Restructuring Awards” (the “CRAs”). The CRAs had two components – an equity cancellation payment for Options and SARs based on an assumed price of $0.40 per share, and a compensation pool of $11 million to be allocated at a later date.
Activity in July, August and September
42The activity on Project Tempo continued into July. On July 15, 2009, Look provided Rogers with a summary of the company’s liabilities. The summary showed that the directors and officers were to receive $17 million in equity cancellation and compensation payments. [5] The remainder of the $20 million was to be paid to other employees and consultants.
43On July 20, 2009, Rogers advised Look that it was not proceeding any further with Project Tempo. Rogers did not provide any reasons for terminating the negotiations.
44Look continued to work on closing the Inukshuk transaction. On July 16, 2009, Industry Canada provided its approval for the transaction in principle, subject only to written confirmation that the Monitor and the company agreed to Industry Canada’s conditions. Rogers was continuing to enlist Look’s help in obtaining the CRTC’s consent to transfer the broadcast license. The parties were working towards a closing by the end of August or September.
45Look’s board had a meeting on July 21, 2009, at which it approved the company’s third quarter financial statements for the period ending May 31, 2009. Those statements were released the next day. [6]
46Although Project Tempo was dead, the board did not change the $0.40 equity cancellation price at the July 21st meeting or at any subsequent meeting. Mr. McGoey’s evidence is that there was no need to do so – while the Rogers deal was no longer proceeding, management’s analysis of the company’s value, as presented to the directors on June 16th, was still sound. Mr. Mitrovich, one of the independent directors, also testified that he considered $0.40 to be a good valuation for the company’s shares.
47It was suggested to Mr. McGoey and the board on more than one occasion that the board should consider retaining an outside expert on valuation and/or compensation when appropriate. Mr. McCarthy’s evidence is that he had advised the board in November 2008 that it should consider whether it would be appropriate to obtain advice from outside experts when making compensation decisions. At the June 16th board meeting, there was also a discussion in which the possible use of outside experts was raised but the board did not think it was necessary to engage an outside consultant. [7]
48Mr. Mitrovich sat on both the Look and UBS boards. He testified that in June and July he had encouraged Mr. McGoey (who also sat on the UBS board) to retain a compensation consultant. Mr. Mitrovich was concerned with the size of the proposed payments to the directors and officers from both UBS and Look. He testified that Mr. McGoey strenuously objected to the suggestion and they had had a heated argument that lasted for hours. Mr. Mitrovich testified that he could not get any further with Mr. McGoey and understood that the Look board would not be permitted to engage an executive compensation consultant. Mr. McGoey denies that these conversations took place. I prefer the evidence of Mr. Mitrovich. It is consistent with Mr. McGoey’s conduct with respect to the allocation of the $11 million in compensation payments.
49The next Look board meeting was on August 25, 2009. At that meeting (which Mr. McCarthy did not attend), the board allocated the $11 million bonus pool. Mr. McGoey had previously asked Mr. Redman to do an initial allocation, which Mr. Redman had done based on his perception of each person’s contribution to the Inukshuk sale. [8] Mr. McGoey revised Mr. Redman’s allocations and decided on his own – $2.4 million to each of Messrs. McGoey, Cytrynbaum and Dolgonos (despite their different levels of contribution to the deal), $1,107,000 to Mr. Redman, and approximately $870,000 to two other officers.
50At the meeting, Mr. McGoey presented and justified his proposed allocations to the board. The board accepted his recommendations with little analysis. Mr. Colbran testified that the board just took management’s recommendations. According to Mr. Mitrovich, he and the other board members found the allocations “a big number to swallow, and difficult to justify in light of the disappointing results of the Sales Process. However, McGoey was adamant that the payments had to be made.” They decided to give in to management’s demands and approved the bonus awards in order to move forward.
51The closing of the Inukshuk deal occurred on September 11, 2009, much earlier than had originally been anticipated. While the spectrum license was transferred on closing, Inukshuk paid the entire balance of the purchase price ($50 million) to Look at that time. Inukshuk waived the condition with respect to the broadcast license and ultimately abandoned that license in June 2010.
52Once the Inukshuk transaction closed, Look sent the CRA letters to the directors and officers on September 11, 2009, which they signed and returned within a week. The first instalment of their CRAs was paid on October 2, 2009 and the second instalment was paid on November 13, 2009.
53Of the $11 million in compensation payments, the senior officers collectively received just over $9 million and the other employees received approximately $1.9 million. Of the $9 million in equity cancellation payments, the directors and officers received just over $8 million and the other employees and consultants received just under $900,000. In total, the directors and officers received approximately $17 million out of the $20 million in CRAs.
54Mr. McGoey’s CRA was $5,565,698 and was paid to Jolian. It was the highest of the CRAs paid to the directors and senior officers. [9] It consisted of an equity cancellation payment of $3,165,698 and a compensation payment of $2.4 million. The amount of his CRA represented just under 9% of the net $64 million received by the company in the Inukshuk transaction.
October 22, 2009 Stikeman Letter
55In October 2009, Mr. Cytrynbaum asked Mr. McCarthy to prepare a further opinion with respect to the board’s discharge of its legal duties in making the CRAs. Mr. Cytrynbaum told him that the independent directors wanted the letter for the February 2010 shareholders’ meeting where they anticipated shareholder protest over the CRAs. He also required it for Look’s auditors (KPMG) who wanted confirmation that the board had the power to authorize the CRAs and had complied with their legal obligations. Mr. Cytrynbaum asked Mr. McCarthy to include a paragraph stating that the board had exercised appropriate business judgment in making the CRAs.
56Mr. McCarthy prepared a legal opinion dated October 22, 2009 in which he reviewed the business judgment rule and the process followed by the board in making the CRAs. He was not prepared to include the paragraph that Mr. Cytrynbaum had requested but stated that he was satisfied that the board had and continued to have a good understanding of their duties and “that the Board is comfortable seeking the advice of outside advisors when it deems such advise [sic] is appropriate.” He concluded that based on his understanding of the board’s deliberations and the use of outside advisors when the board deemed such assistance to be advisable and the application of the business judgment rule, he believed that the decisions of the board had been made honestly and in the best interests of the corporation. Mr. McCarthy testified that based on the information he had at the time, he believed the statement to be true.
57Michael Kavanagh, the partner in charge of the audit at KPMG, had numerous questions relating to the legal authority of the board to award the CRAs and the process followed by the board. He met with Mr. McCarthy and was satisfied that all legal requirements had been met. KPMG delivered an unmodified audit opinion of Look for the year ending August 31, 2009.
Shareholders Complain
58On December 4, 2009, Look released its Management’s Discussion and Analysis for the August 31, 2009 financial year end. It disclosed the $5.5 million payment to Mr. McGoey/Jolian and the fact that over $17 million had been paid to the company’s directors and officers. This was the first time that the payments to the board and management had been disclosed to the public. The shareholders complained immediately.
59The shareholder complaints were brought to the attention of the securities regulators in Ontario and Quebec. Look received questions from those securities regulators and prepared several responses to those questions. The responses referred to the board’s reliance on Stikeman’s legal advice in awarding the CRAs. The securities regulators ultimately closed their files.
Second Plan of Arrangement
60In April 2010, the board initiated a second plan of arrangement to distribute the Inukshuk sale proceeds to shareholders. One of the requirements for a shareholder to receive cash was to sign a release in favour of the company and its directors and officers. According to management’s presentation, Look would be “cleansed” and “the ability of Look’s shareholders or creditors to successfully bring a claim against Look’s or UBS’ directors or officers is significantly diminished.”
61On May 3, 2010, UBS received a requisition to replace its board with a dissident slate. According to Mr. Mitrovich, the Look board realized that it would not be able to secure enough votes to pass the second plan of arrangement and decided not to proceed with it.
Indemnification Payments and Resignation of the Board
62In June 2010, Look’s directors and officers sought advice on whether they could advance company funds to law firms to represent them in defending claims related to the CRAs. Messrs. McGoey and Redman consulted with Look’s litigation counsel Jeffrey Kramer. They wanted to establish an indemnity trust that would be funded by Look to cover the legal fees of Look’s directors and officers, as well as any damages that might be payable by them to the company.
63Mr. Kramer testified that he had been invited to a board meeting scheduled for June 16, 2010 to present his advice. As that date approached, Mr. Kramer became increasingly uncomfortable with the indemnity trust arrangement. He met with Messrs. Redman and McGoey and described Mr. McGoey as very aggressive on the issue. At one point Mr. Kramer raised the possibility of considering a straightforward retainer agreement as an alternative to the indemnity trust. That option was not discussed further. Mr. Kramer testified that he told Mr. Redman that he was planning to tell the board that he did not think an indemnity trust was in the best interests of the company. On the morning of June 16th, Mr. Redman told Mr. Kramer that he was cancelling the board meeting for that afternoon and to do no further work on the matter.
64However, the board meeting did take place on June 16, 2010. At the meeting, the board decided to advance indemnification payments of $1.55 million to three law firms that were providing advice to the directors and officers in their individual capacities (the “Advances”). Approximately $200,000 of the Advances were made to Mr. McGoey/Jolian’s counsel, Groia & Co.
65On July 5, 2010, at a special meeting of shareholders, the UBS board was removed and replaced. Given that UBS was a significant shareholder of Look, the Look board and officers voluntarily resigned on July 21, 2010.
Mr. McGoey’s Evidence
66Mr. McGoey testified that the board considered the best interests of the corporation and all of its stakeholders in designing and implementing the CRAs. He testified that the company, a small player in a highly regulated industry dominated by Rogers, Bell and Telus, had been struggling. Despite extensive efforts, it was unable to raise the capital necessary to maximize value for shareholders. By 2008, the company was seeking a solution during one of the biggest financial meltdowns in history.
67Mr. McGoey testified that the board, which consisted of experienced executives, steered the company through these troubled times. He testified that the board sought to obtain value for shareholders through the POA, which resulted in a sale of Look’s primary assets to Inukshuk for $80 million. However, the closing of the Inukshuk deal was not a certainty, nor was its timing. [10]
68Mr. McGoey testified that the board, with the help of management, navigated the wind-down of the company and restructured operations in a way that minimized litigation against the company and preserved future growth for shareholders. He testified that the CRAs were a creative solution that balanced all the competing interests at stake and were designed with the best interests of the corporation in mind. He noted that the directors approved these decisions unanimously.
69Mr. McGoey testified that as a result of the CRAs, Look received releases and was cleansed of future obligations and liabilities to dismissed employees. The company retained key employees required to close the Inukshuk transaction. He testified that the CRAs were accounted for as a single item in the financial statements to avoid having to negotiate individual components with employees, which might lead to litigation. He testified that the equity cancellation payment of $0.40 per share was supported by management’s calculation of net asset value and was consistent with Rogers’ agreed price of $0.40 per share in the Project Tempo transaction. He testified that the board and management led by example in giving up their own Options and SARs as part of the CRAs, all for the company’s benefit.
70Mr. McGoey testified that the board relied on Mr. McCarthy to guide them every step of the way through this difficult process and to ensure that they were complying with their legal obligations and fiduciary duties at all times.
Expert Evidence
71The only expert evidence at trial came from Michael Thompson, an expert on executive compensation. He testified with respect to both the equity cancellation and compensation elements of the CRAs.
72He testified that it was not clear to him at all why the board needed to cancel the Options and SARs instead of administering them under the existing plans. He noted the significant discrepancy between the $0.40 per share used for the equity cancellation payments and the market price of the Look shares. His opinion was that the decision to cancel the Options and SARs at this price benefited management and the board at the expense of shareholders.
73Mr. Thompson’s opinion was that no amount should have been paid to Mr. McGoey as a performance or retention bonus. His evidence is that the $2.4 million payment was excessive and inappropriate since (i) it was determined after the Inukshuk sale (so there was no incentive element to it); (ii) Mr. McGoey was already compensated pursuant to the Management Services Agreement between UBS and Jolian and had a golden parachute under that agreement; (iii) the Inukshuk transaction fell below management’s expectations; and (iv) Mr. McGoey’s total CRA was significantly above competitive practice.
74Mr. Thompson also commented on the failure of the company to comply with the prevailing best practices for corporate governance. Specifically, he noted that the company did not have an independent Compensation Committee because the entire board (including the Chair and CEO) sat as the Compensation Committee. Further, he was critical of the fact that, among other things, the Compensation Committee made extraordinary awards after the sale of its principal assets, did not seek the advice of an outside advisor, and did not validate the awards with reference to appropriate market data or benchmarking.
75Mr. McGoey submits that Mr. Thompson’s evidence is not reliable or realistic in any respect. Mr. McGoey provided no contradictory expert evidence and did not undermine Mr. Thompson’s evidence in cross-examination. I found Mr. Thompson’s evidence on executive compensation to be reliable and useful.
Breach of Fiduciary Duty
76The plaintiff claims that Mr. McGoey breached his fiduciary duty to Look as a director of the company in making the decision to pay the CRAs at the quantum approved by the board and to pay the Advances for the directors’ and officers’ legal fees.
Legal Principles on Fiduciary Duty of Directors
77The applicable legal principles on the fiduciary duty of a director are as follows:
- Corporate directors owe a fiduciary duty to the company. They are required to act honestly and in good faith with a view to the best interests of the company. They also owe a duty of care, which requires them to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. These obligations are codified in s. 122(1) (a) and (b) of the CBCA.
- Whether a decision is in the company’s best interests is viewed objectively: Unique Broadband Systems Inc. (Re), 2013 ONSC 2953 at para. 119, rev’d on other grounds 2014 ONCA 538.
- Directors may look to the interests of the various stakeholders in determining what is in the best interests of the corporation: BCE Inc. v. 1976 Debentureholders, 2008 SCC 69 at para. 40.
- However, the director must always place the interests of the corporation ahead of his own: Canadian Aero Service Ltd. v. O'Malley, [1974] S.C.R. 592 at pp. 609-10.
- Directors can rely in good faith on legal advice as a defence to allegations of breach of fiduciary duty where there is no reason to doubt the lawyer’s competence; the lawyer has been apprised of all the relevant facts; and the director has acted in full accordance with the advice that was given: Blair v. Consolidated Enfield Corp., [1995] 4 S.C.R. 5 at para. 68.
- In determining what is in the corporation’s best interests, directors are entitled to deference in business decision-making pursuant to the “business judgment” rule. That rule will afford protection to the directors for a business decision, so long as the decision “lies within a range of reasonable alternatives”: BCE at para. 40.
Analysis on Breach of Fiduciary Duty
78In its claim for breach of fiduciary duty, the plaintiff is not taking issue with the decision of the board to award the CRAs in principle. The plaintiff acknowledges that perhaps there may have been some business objectives underlying the creation of the CRAs as described by Mr. McGoey.
79However, the plaintiff argues that the decision to make the equity cancellation payments using an assumed price of $0.40 per share and to award $9 million in executive compensation payments to the officers ($2.4 million of which was paid to Mr. McGoey/Jolian) was not in the best interests of the corporation and preferred the interests of the directors and officers over those of the company.
80I agree. Viewed objectively, there is no basis on which to conclude that those decisions were in the best interests of the company, that they did not prefer the interests of the directors and officers over those of the corporation, or that they fell within a range of reasonable alternatives so as to be protected under the business judgment rule.
81With respect to the equity cancellation payment for Options and SARs at the assumed price of $0.40 per share:
- The $0.40 per share price was significantly higher than the market price of the Look shares. Between June 16, 2009 (the date the CRAs were approved) and November 13, 2009 (the date the last instalment was paid to the directors and officers), the Look share price fluctuated mostly within the $0.235 to $0.26 range. It never went above $0.30. [11] The Options and SARs plans were premised on aligning the interests of the directors and officers with those of the shareholders. By using an assumed $0.40 price for the Options and SARs, the directors and officers obtained a distinct advantage over the shareholders, who could only realize the market price for their shares.
- The $0.40 price could not have been justified on the basis of an agreement in principle with Rogers. There was no commitment or agreement in place with Rogers. The shareholders had no assurance that they would receive $0.40 for their shares from Rogers (or from any third party). In approving the CRAs on the basis of an agreement in principle with Rogers on price – which was not binding and subject to due diligence and further negotiation – the directors were ensuring that they received a price of $0.40 for their own shares, while the shareholders had no such corresponding protection.
- Even if the Rogers agreement in principle provided a justification for using the $0.40 price for the equity cancellation payments, it ceased to have any effect on July 20, 2009 when the Rogers negotiations terminated. Despite the failed negotiations, the board did not adjust the $0.40 share price. There were no other negotiations or pending transactions for the Look shares. After July 20th, the CRAs were based solely on management’s assessment of Look’s net asset value and its view that the market price did not properly reflect the company’s value. By awarding the CRAs at an assumed price of $0.40, the directors and officers were monetizing that assessed value for themselves, while the shareholders were unable to do so.
- There was no need to use a $0.40 share price in order to achieve any of the business objectives of the CRAs described by Mr. McGoey. As Mr. McGoey acknowledged on cross-examination, achieving those objectives was not tied to that specific share price.
82I find that the board’s decision to use a $0.40 share price for the equity cancellation payments was not in the best interests of the company, preferred the interests of the directors and officers over those of the corporation, and was not within a range of reasonable alternatives. I note that under the May 4th resolutions, the company would have paid Mr. McGoey $147,689 for his SARs and nothing for his Options. Instead, at a cancellation price of $0.40 per share, Mr. McGoey received $3,165,696 for his Options and SARs.
83With respect to the $2.4 million compensation payment to Mr. McGoey:
- Look was under no obligation to pay Mr. McGoey any bonus. Look was already paying UBS $2.4 million under the Management Services Agreement for management services that included Mr. McGoey’s services. Mr. McGoey was being compensated through Jolian’s Management Services Agreement with UBS. Mr. McGoey had never received a bonus from Look. There was no reason for Look to have paid Mr. McGoey any bonus directly.
- Mr. McGoey had already received management incentives, which had been established well in advance of the sales process through the grant of Options and SARs. There was no need to grant him any additional incentives.
- There was a limited retention value to Mr. McGoey’s bonus. By the time the $2.4 million was allocated to him on August 25, 2009, the closing of the Inukshuk transaction for the spectrum was imminent and the company was being wound down. There is no evidence to support the need for a significant retention bonus for Mr. McGoey’s post-closing services.
- To the extent that the payment was intended to reward Mr. McGoey for the Inukshuk transaction (on an after the fact basis), I note that while he was successful in finding a purchaser for Look’s spectrum, he and the board were disappointed with the result. Mr. McGoey was still attempting to monetize Look’s tax losses and had been unable to do so. I cannot see how it was reasonable for him to receive a bonus of $2.4 million under those circumstances.
84I find that the board’s decision to make a compensation payment of $2.4 million to Mr. McGoey was not in the best interests of the company, preferred his interests over those of the corporation and was not within a range of reasonable alternatives.
85With respect to the decision to make the Advances for legal fees (including $200,000 for Mr. McGoey’s legal fees), that decision was made at a time when the shareholders were complaining about the payments to the directors and officers from the proceeds of the Inukshuk sale. It was made in the face of Mr. Kramer’s legal advice against an indemnification trust payment and his surreptitious exclusion from the board meeting on June 16, 2010. Under those circumstances, I find that it was not in the company’s best interests to use more of its limited resources to defend Mr. McGoey and the other directors and officers against their impugned actions.
86The plaintiff submits that the actions of the board in paying the CRAs were not made in good faith. They point to numerous indicia of bad faith, including the excessive quantum of the CRAs, the board’s change in course to develop the CRAs when it became clear that the market was not responding to the announcement of the Inukshuk transaction, the board’s failure to reconsider the $0.40 price when the Rogers negotiations ended, the board’s failure to obtain independent advice for the CRAs despite the directors’ conflict of interest, and the board’s failure to properly disclose the payment of the CRAs to the public and to Look’s professional advisors.
87In my view, three of these indicia are sufficient to establish that the board’s decisions were not made in good faith. First, the board must have known that the amount of the CRAs paid to the directors and officers was excessive and not in the best interests of the corporation – they received $17 million out of $20 million, representing over 25% of the net sale proceeds, from a company that had been struggling for years.
88Second, the board failed to adjust the $0.40 share price for the CRAs after the Rogers negotiations terminated, when the board knew that the market price was significantly lower.
89Third, the board failed to make it clear to shareholders in the May 31, 2009 financial statements that most of the $20 million reserved for “restructuring charges” was being paid to the directors and officers. This information was only disclosed to shareholders in December 2009, after the CRAs had been paid. Mr. McGoey testified that the company evaluated the CRAs as a single item in order to avoid negotiating individual items with each employee, director and officer and to avoid litigation with those individuals. [12] In my view, that explanation does not justify the failure to disclose to shareholders the fact that approximately 85% of the total amount of the CRAs was going to the directors and officers.
90Mr. McGoey defends the breach of fiduciary duty allegations on the basis that the board relied on Mr. McCarthy’s legal advice in approving the CRAs. I reject this defence.
91In his June 15th letter, Mr. McCarthy provided general legal advice on the board’s authority to make special payments, the directors’ fiduciary duties and obligations, and the protection afforded by the business judgment rule. The directors could only have relied on this advice to support their authority to make the CRA payments and to inform themselves as to their duties in doing so. Mr. McCarthy gave no advice on the valuation of the shares for the equity cancellation payments, the quantum of the compensation payments, or the allocation of those compensation payments. These were business matters and would not have been the subject of legal opinion or advice. The board could not have relied on, and did not rely on, Mr. McCarthy’s advice with respect to such matters.
92With respect to Mr. McCarthy’s October 22, 2009 letter, the decision to grant the CRAs had been made months before, on June 16, 2009. By the time Mr. McCarthy wrote the October 22nd letter, the first instalment of the CRAs had already been paid. The board could not have relied on, and did not rely on, that letter in deciding to grant the CRAs. [13]
93Considering all of the above evidence, and the applicable legal principles, I have concluded that Mr. McGoey breached his fiduciary duty as a director of Look in approving the CRAs and the Advances. Given my conclusion on breach of fiduciary duty, there is no need for me to consider the plaintiff’s alternative causes of action for unjust enrichment and oppression.
Proportionate and Several Liability and Reduction of Damages
94Pursuant to the Pierringer Agreement and the plaintiff’s amended statement of claim against Mr. McGoey/Jolian, the plaintiff agreed to limit its claim for damages against Mr. McGoey/Jolian to their proportionate and several liability for $5,565,696 received from the company and for the $200,000 in Advances paid on their behalf. [14] In my view, the effect of the Pierringer Agreement and the amended pleading is that Mr. McGoey/Jolian will have no liability for any amounts above the $5,565,969 and $200,000 paid to them or for their benefit. There is no restriction, however, on the plaintiff claiming full repayment of those amounts. I reject Mr. McGoey’s submission that, as one of five directors, he should only be responsible for one fifth of the $17 million in CRAs paid to the directors and officers.
95In the Pierringer Agreement, Mr. McGoey/Jolian’s third party claim against Stikeman and Mr. McCarthy was dismissed. However, the plaintiff agreed that any damage award it might obtain against Mr. McGoey/Jolian would be reduced by any amount the court determined they should recover from Stikeman and Mr. McCarthy for professional negligence and negligent misrepresentation (the causes of action asserted in the now-dismissed third party claim).
96There is no basis on which to reduce a damage award. First, Stikeman and Mr. McCarthy acted as corporate counsel for the company, not for Mr. McGoey in his personal capacity. Second, even if Stikeman did act for him, Mr. McGoey has not tendered any expert evidence to define the standard of care that would support a claim for professional negligence. As stated by the Court of Appeal in Krawchuk v. Scherbak et. al., 2011 ONCA 352, at para. 130, “in general, it is inappropriate for a trial court to determine the standard of care in a professional negligence case in the absence of expert evidence.” Without any such expert evidence, Mr. McGoey’s claim for negligence against Stikeman and Mr. McCarthy must fail.
97Third, the basis of liability in this case is the quantum of the CRAs awarded to the directors and officers. In light of my finding that the board did not rely on Mr. McCarthy’s advice in determining the quantum of the CRAs, any claim against Stikeman and Mr. McCarthy must likewise fail.
Remedies
98The plaintiff seeks restitution of the money paid to or on behalf of Mr. McGoey. In a case of breach of fiduciary duty, the defendant may be required to account for and disgorge the gains received from the breach. As Professor McCamus explains in The Law of Restitution, “in so exploiting the position of trust and confidence, the fiduciary has clearly gained at the plaintiff’s expense and cannot, in good conscience, be permitted to retain an enrichment derived by such means.” [15]
99Restitution is an appropriate remedy in this case. Mr. McGoey/Jolian received the CRA payment of $5,565,696, and the $200,000 Advance as a direct result of the breach of his fiduciary duty. Those amounts must be repaid to the company.
100The plaintiff further seeks the remedy of a constructive trust over the $5,565,696 in CRAs paid to Mr. McGoey/Jolian. A constructive trust is a discretionary remedy that “may be imposed where good conscience so requires”: Soulos v. Korkontzilas, [1997] 2 S.C.R. 217 at para. 34. A constructive trust may be imposed where property is obtained by a wrongful act, such as breach of fiduciary duty: Soulos at para. 36.
101I am satisfied that the conditions for a constructive trust, as set out in para. 45 of Soulos, are met in this case. Mr. McGoey had an equitable obligation as a director of Look not to approve payments in breach of his fiduciary duties. Mr. McGoey, as a board member, authorized and directed the payment of the CRAs in breach of these duties. There is a legitimate reason for the remedy – to ensure that other directors remain faithful to their fiduciary duties. There is no reason why imposition of a constructive trust in this case would be unjust.
102I therefore exercise my discretion to impose a constructive trust over the $5,565,696 paid to Mr. McGoey/Jolian. The plaintiff concedes that Groia & Co. may be a purchaser for value without notice with respect to the $200,000 Advance and does not seek a constructive trust over those funds.
103The plaintiff further seeks a tracing order. A tracing order enables a successful claimant who proves (i) a breach of fiduciary duty leading to (ii) a constructive trust, to locate the funds or property impressed with the constructive trust. [16] Given that Mr. McGoey/Jolian received funds in 2009 that are now subject to a constructive trust in favour of the plaintiff, I consider it appropriate to grant the tracing order for those funds.
Decision and Orders
104Mr. McGoey breached his fiduciary duties as a director of Look in approving the payment of the CRAs and the Advances.
105I grant the following declaratory relief and orders in favour of the plaintiff:
(a) a declaration that Mr. McGoey did not act honestly and in good faith with a view to the company’s best interests when he, as a director of Look, caused the company to make the CRAs; (b) an order that Mr. McGoey/Jolian pay Look the sum of $5,565,696, being the amount of the CRAs received from Look; (c) a declaration that McGoey did not act honestly and in good faith with a view to the company’s best interests when he, as a director of Look, caused the company to make the Advances; (d) an order that Mr. McGoey/Jolian pay Look $200,000, being the amount of the Advance paid by Look to Groia & Co. for their legal fees; (e) an order that the $5,565,696 in CRA payments to Mr. McGoey/Jolian are subject to a constructive trust, together with a tracing order; (f) an order that Mr. McGoey/Jolian make available all necessary records to facilitate a tracing of the CRAs paid to them or to companies they own or control; and (g) an order that Mr. McGoey/Jolian are not entitled to indemnification for their legal fees and expenses incurred in answering regulatory, shareholder and other criticism for their actions in authorizing the CRAs and Advances.
106If the parties are unable to agree on costs, I will receive brief submissions (no longer than five pages double spaced, exclusive of bill of costs). The plaintiff’s submissions shall be received within 21 days and Mr. McGoey/Jolian’s within 15 days thereafter.
Conway J.
Released: June 1, 2017
COURT FILE NO.: CV-11-9291-00CL DATE: 20170601 ONTARIO SUPERIOR COURT OF JUSTICE COMMERCIAL LIST
LOOK COMMUNICATIONS INC. Plaintiff – and – MICHAEL CYTRYNBAUM, FIRST FISCAL MANAGEMENT LTD., GERALD MCGOEY, JOLIAN INVESTMENTS LIMITED, STUART SMITH, SCOTT COLBRAN, JASON REDMAN, ALEX DOLGONOS, DOL TECHNOLOGIES INC. Defendants – and – STIKEMAN ELLIOT LLP and DAVID MCCARTHY Third Parties
REASONS FOR JUDGMENT
Conway J.
Released: June 1, 2017
Endnotes
1The Pierringer Agreement was approved by Penny J. of this court on March 1, 2016.
2Mr. Mitrovich settled with Look prior to the commencement of this litigation.
3In an analyst and investor presentation dated December 2008, the company analyzed values for its assets ranging from $27 million (at the current market capitalization) up to $500 million.
4This was based on Rogers’ valuation of the company of $96 million, less $20 million in restructuring expenses, for a net asset value of $76 million. Dividing $76 million by approximately 189,000,000 shares (on a fully diluted basis) resulted in a price of $0.40 per share.
5Messrs. McCarthy and Pukier only received this breakdown, at Mr. Pukier’s request, in connection with an issue that had been raised in the Project Tempo transaction. It had not been given to Mr. McCarthy at the June 3rd meeting with Messrs. McGoey and Redman on the Inukshuk transaction or before the board had approved these payments at the June 16th meeting. Mr. McCarthy did not receive any individual allocations of these amounts until December 2009 (after the date of his October 22nd letter described below).
6Mr. McGoey places great weight on note 3 to the financial statements that states that all of the company’s outstanding Options and SARs had been cancelled as of May 31, 2009. Mr. McGoey testified that this cancellation took effect immediately when the board passed its resolution on June 16, 2009. I note that Mr. McGoey’s equity cancellation did not take effect legally until September 2009, when he signed back the letter cancelling his Options and SARs. In any event, none of this timing is relevant to the issue of whether the cancellation of the Options and SARs at $0.40 per share was in the best interests of the corporation.
7On July 29th, Mr. Pukier emailed Mr. McCarthy to say that if Look was still proposing to use the $0.40 price for the equity cancellation payments despite the fact that Project Tempo was off the table, the company should be encouraged to seek an outside valuation opinion to support the payments. Mr. McCarthy emailed back and said that he agreed and would do so. Mr. McCarthy testified that he spoke to Mr. Redman, who said that he would pass the recommendation on to Mr. McGoey but that the board had already decided not to use an outside expert. Mr. Redman denies that this conversation occurred. I prefer Mr. McCarthy’s evidence, in light of the contemporaneous email exchange between him and Mr. Pukier. It is also consistent with the board’s decision not to seek outside advice on June 16, 2009 and Mr. McGoey’s resistance to seeking outside advice in his conversation with Mr. Mitrovich.
8Mr. Redman had allocated $2.7 million to Mr. McGoey, $2.6 million to Mr. Redman, $1.88 million to Mr. Cytrynbaum, $1,285,065 to Mr. Dolgonos and $714,840 to two other officers. In his allocation, Mr. McGoey reduced his payment to $2.4 million, the same amount allocated to Mr. Cytrynbaum and Mr. Dolognos, so there was no differentiation in the amount payable to those three senior officers.
9Mr. Cytrynbaum received $4,146,104. Mr. Dolgonos received $3,950,737. Mr. Redman received $1,500,000. Each of the independent directors held Options only (not SARs) and received $195,367 for their Options. The directors did not receive any compensation payments.
10Mr. McGoey testified that things were further complicated by the fact that in March 2009, while negotiations on the Inukshuk transaction were underway, the CRTC issued a moratorium on new broadcast licenses. As noted below, Inukshuk closed the deal on September 11, 2009 with the spectrum license only and waived the condition with respect to the broadcast license, which it ultimately abandoned.
11Mr. McGoey relies on the fact that the Look shares were thinly traded and, as a result, the share price could be volatile. In my view, that does not justify using a price of $0.40 per share when the shares traded mostly between $0.235 and $0.26 during the period in question.
12This explanation was also provided in the company’s June 3, 2010 response to the Quebec regulator’s questions about the CRAs.
13Mr. Cytrynbaum testified at trial that the October 22, 2009 letter reduced to writing “verbal assurances” that Mr. McCarthy had been giving him all along. There is nothing in the record to support that assertion and I place no weight on that evidence.
14In the amended statement of claim, the plaintiff claimed against Mr. McGoey/Jolian for their proportionate and several liability for the $1.55 million in Advances. The plaintiff clarified at trial that it was only seeking repayment of the $200,000 paid to Groia & Co. on their behalf.
15McCamus, John D. and Maddaugh, Peter D., The Law of Restitution (Toronto: Thompson Reuters, 2004) (looseleaf updated December 2016, release 18) at 27-57. See also Zwicker v. Turnbull Estate, [1953] 2 S.C.R. 438.