Unique Broadband Systems Inc., Re, 2014 ONCA 538

• Judge: Sharpe, Gillese and Hourigan, JJ.A.
• Court: Court of Appeal (Ontario)
• Case Date: June 17, 2014
• Jurisdiction: Ontario
• Citations: 2014 ONCA 538;(2014), 322 O.A.C. 122 (CA)

Unique Broadband Systems Inc., Re (2014), 322 O.A.C. 122 (CA)

MLB headnote and full text

Temp. Cite: [2014] O.A.C. TBEd. JL.023

In The Matter Of the Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36, as amended

In The Matter Of a Plan of Compromise or Arrangement of Unique Broadband Systems, Inc.

(C57884; 2014 ONCA 538)

Indexed As: Unique Broadband Systems Inc., Re

Ontario Court of Appeal

Sharpe, Gillese and Hourigan, JJ.A.

July 10, 2014.

Summary:

McGoey was a director of Unique Broadband Systems Inc. (UBS). The UBS board of directors took certain steps that met with shareholder resistance. At a special shareholders meeting, the board was removed and not re-elected. McGoey resigned, taking the position that he was terminated without cause. He claimed against UBS for payment of enhanced severance of $9.5 million under his employment contract and management services agreement. UBS was granted Companies' Creditors Arrangement Act protection. McGoey filed a proof of claim, which was denied. A trial was ordered.

The Ontario Superior Court, in a decision reported at [2013] O.T.C. Uned. 2953, held that UBS was obligated to pay McGoey the enhanced severance, but had no obligation to indemnify McGoey for his legal fees because he had breached his fiduciary duties to UBS. As there was divided success, the court made no costs order. UBS appealed the order regarding the enhanced severance. McGoey cross-appealed the dismissal of his claims for payment of two other award and for indemnification for legal and other fees.

The Ontario Court of Appeal allowed the appeal. The finding that McGoey was entitled to enhanced severance could not stand. The court dismissed the cross appeal. UBS was entitled to costs of the trial and of the appeal.

Company Law - Topic 2170.1

Shareholders - Shareholders' rights - Oppressive acts - Remedies - McGoey was a director of Unique Broadband Systems Inc. (UBS) - The UBS board of directors took certain steps that met with shareholder resistance - At a special shareholders meeting, the board was removed and not re-elected - McGoey resigned, taking the position that he was terminated without cause - He claimed against UBS for payment of enhanced severance of $9.5 million under his employment contract and management services agreement - UBS was granted Companies' Creditors Arrangement Act protection - McGoey filed a proof of claim, which was denied - A trial was ordered - The trial judge, having found, inter alia, that McGoey was entitled to receive enhanced severance, refused to consider the oppression remedy advanced by UBS - The Ontario Court of Appeal, in obiter, noted that the trial judge, having concluded that McGoey was entitled to enhanced severance, was obligated to consider the oppression argument - The oppression remedy was a flexible, equitable remedy that afforded the court broad powers to rectify corporate malfeasance - It was an important remedy for shareholders and other corporate stakeholders - Here, it might have provided a remedy to protect the interests of the shareholders - It was an error in law not to consider the oppression remedy in these circumstances - See paragraphs 106 to 108.

Company Law - Topic 4132

Directors - Compensation - Indemnity - Bars to - McGoey was a director of Unique Broadband Systems Inc. (UBS) - The UBS board of directors took certain steps that met with shareholder resistance - At a special shareholders meeting, the board was removed and not re-elected - McGoey resigned, taking the position that he was terminated without cause - He claimed against UBS for payment of enhanced severance of $9.5 million under his employment contract - UBS was granted Companies' Creditors Arrangement Act protection - McGoey filed a proof of claim, which was denied - A trial was ordered - The trial judge, having found, inter alia, that McGoey had breached his fiduciary duties to UBS, also held that the statutory and contractual provisions that required UBS to indemnify McGoey for legal fees were not operative - The Ontario Court of Appeal agreed - The purpose of statutory and contractual indemnity provisions was to ensure that officers and directors who were acting in good faith and in the best interests of a corporation were not exposed to legal costs - Offering this protection was commercially sensible and good public policy - The rationale for offering the protection was eliminated, however, where the officer or director had not acted in good faith and in the best interests of the corporation - See paragraphs 74 to 79.

Company Law - Topic 4194

Directors - Liability of directors - Indemnity clauses - Scope of - [See Company Law - Topic 4132 ].

Company Law -Topic 4262

Directors - Duties - General principles - Fiduciary duty - McGoey was a director of Unique Broadband Systems Inc. (UBS) - The UBS board of directors took certain steps that met with shareholder resistance - At a special shareholders meeting, the board was removed and not re-elected - McGoey resigned, taking the position that he was terminated without cause - He claimed against UBS for payment of enhanced severance of $9.5 million under his employment contract - UBS was granted Companies' Creditors Arrangement Act protection - McGoey filed a proof of claim, which was denied - A trial was ordered - The trial judge found, inter alia, that McGoey had breached his fiduciary duties to UBS - The Ontario Court of Appeal found no error in the trial judge's conclusion that McGoey's actions were driven by self-interest, were unsupported by any reasonable or objective criteria and were contrary to UBS' best interests - The court reviewed the general principles of the law of fiduciary duties and discussed the trial judge's analysis of the actions taken by the UBS board - The court agreed that the board's implementation of a scheme regarding UBS' share appreciation rights plan was driven by self-interest and was of no benefit to UBS - Further, McGoey's establishment of a "bonus pool" and the allocation of part of that to him breached his fiduciary duties to UBS - See paragraphs 42 to 62.

Company Law -Topic 4262

Directors - Duties - General principles - Fiduciary duty - McGoey was a director of Unique Broadband Systems Inc. (UBS) - The UBS board of directors took certain steps that met with shareholder resistance - At a special shareholders meeting, the board was removed and not re-elected - McGoey resigned, taking the position that he was terminated without cause - He claimed against UBS for payment of enhanced severance of $9.5 million under his employment contract - UBS was granted Companies' Creditors Arrangement Act protection - McGoey filed a proof of claim, which was denied - A trial was ordered - The trial judge found, inter alia, that McGoey had breached his fiduciary duties to UBS - The Ontario Court of Appeal agreed - The court rejected McGoey's "rather novel argument" that there could be no finding of a breach of fiduciary duty because, before he could be paid certain amounts owing following on the board's actions, he was removed from office by the shareholders - That submission was not correct in law - Further, "[i]t would be a remarkable result if a fiduciary could be allowed to act in a manner contrary to his duty with impunity, on the basis that he was prevented by the beneficiary's vigilance from receiving a personal benefit." - See paragraphs 63 to 66.

Company Law - Topic 4266

Directors - Duties - Breach of fiduciary duty - What constitutes - [See both Company Law -Topic 4262 ].

Company Law - Topic 4276

Directors - Duties - General principles - Business judgment rule - McGoey was a director of Unique Broadband Systems Inc. (UBS) - The UBS board of directors took certain steps that met with shareholder resistance - At a special shareholders meeting, the board was removed and not re-elected - McGoey resigned, taking the position that he was terminated without cause - He claimed against UBS for payment of enhanced severance of $9.5 million under his employment contract - UBS was granted Companies' Creditors Arrangement Act protection - McGoey filed a proof of claim, which was denied - A trial was ordered - The trial judge, having found, inter alia, that McGoey had breached his fiduciary duties to UBS, rejected his assertion that his actions were protected by the "business judgment rule" - The Ontario Court of Appeal found that the trial judge had properly concluded that the business judgment rule was of no assistance to McGoey because he did not satisfy the rule's preconditions of honesty, prudence, good faith and a reasonable belief that his actions were in UBS' best interests - The business judgment rule was really just a rebuttable presumption that directors or officers acted on an informed basis, in good faith and in the corporation's best interests - Courts deferred to business decisions honestly made, but did not sit idly by when a board was clearly engaged in conduct that had no legitimate business purpose and was in breach of its fiduciary duties - Here, there was ample evidence on which the trial judge could base her conclusion that the presumption had been rebutted - See paragraphs 70 to 73.

Company Law - Topic 4311

Directors - Duties to company and shareholders - Duty to act in the best interest of the corporation - [See first Company Law -Topic 4262 ].

Company Law - Topic 4334

Directors - Rights of directors - Oppression remedy - [See Company Law - Topic 2170.1 ].

Company Law - Topic 9781

Actions against corporations and directors - Action for oppressive conduct - When available (incl. time for) - [See Company Law - Topic 2170.1 ].

Contracts - Topic 7401

Interpretation - General principles - Intention of parties (incl. reasonable expectations) - McGoey was a director of Unique Broadband Systems Inc. (UBS) - The UBS board of directors took certain steps that met with shareholder resistance - At a special shareholders meeting, the board was removed and not re-elected - McGoey resigned, taking the position that he was terminated without cause - He claimed against UBS for payment of enhanced severance of $9.5 million under his employment contract and management services agreement - UBS was granted Companies' Creditors Arrangement Act protection - McGoey filed a proof of claim, which was denied - A trial was ordered - The trial judge, having found, inter alia, that McGoey had breached his fiduciary duties to UBS, also held that, under the terms of McGoey's management services agreement with UBS, a breach of fiduciary duty did not constitute "cause" or a "joint default" as defined in the agreement and, consequently, McGoey was entitled to receive enhanced severance - The Ontario Court of Appeal held that the trial judge had erred in law in her interpretation of the management services agreement - First, the trial judge's interpretation ignored s. 134(3) of the Ontario Business Corporations Act (OBCA), under which a director of an OBCA corporation was required to act honestly and in good faith with a view to the corporation's best interests - Second, the interpretation led to a commercially absurd result - Third, the interpretation ignored the phrase "or other act which constitutes 'Cause' at common law" in the agreement - When the contract was read as a whole, it was clear that the parties intended that a default would be limited to serious misconduct that was materially injurious to UBS - A serious breach of fiduciary duty logically met this definition as it constituted a breach of McGoey's statutory and common law duties to the corporation and amounted to cause at common law - Interpreting default to include a serious breach of fiduciary duty that was materially injurious to UBS gave effect to the entirety of the words used in the definition of the term in their context - It was also commercially sensible and did not result in an interpretation that was inconsistent with the OBCA - The finding that McGoey was entitled to enhanced severance could not stand - See paragraphs 80 to 105.

Contracts - Topic 7407

Interpretation - General principles - Whole contract to be considered - [See Contracts - Topic 7401 ].

Contracts - Topic 7416

Interpretation - General principles - Most commercially reasonable interpretation - [See Contracts - Topic 7401 ].

Equity - Topic 3646

Fiduciary or confidential relationships - Breach of fiduciary relationship - By director or officer of company - [See both Company Law -Topic 4262 ].

Guarantee and Indemnity - Topic 7083

Indemnity - Extent of - Legal fees - [See Company Law - Topic 4132 ].

Master and Servant - Topic 7550

Dismissal or discipline of employees - Grounds - Cause or just cause defined - [See Contracts - Topic 7401 ].

Cases Noticed:

Peoples Department Stores Inc. (Bankrupt) v. Wise, [2004] 3 S.C.R. 461; 326 N.R. 267; 2004 SCC 68, refd to. [para. 47].

BCE Inc. v. 1976 Debentureholders - see Aegon Capital Management Inc. et al. v. BCE Inc. et al.

Aegon Capital Management Inc. et al. v. BCE Inc. et al., [2008] 3 S.C.R. 560; 383 N.R. 119; 2008 SCC 69, refd to. [para. 47].

Moffat v. Wetstein (1996), 4 O.T.C. 364; 29 O.R.(3d) 371 (Gen. Div.), refd to. [para. 47].

UPM-Kymmene Corp. v. UPM-Kymmene Miramichi Inc. - see UPM-Kymmene Corp. v. Repap Enterprises Inc. et al.

UPM-Kymmene Corp. v. Repap Enterprises Inc. et al., [2002] O.T.C. 798; 214 D.L.R.(4th) 496 (Sup. Ct.), affd. (2004), 183 O.A.C. 310 (C.A.), refd to. [para. 48].

Canson Enterprises Ltd. v. Boughton & Co., [1991] 3 S.C.R. 534; 131 N.R. 321; 6 B.C.A.C. 1; 13 W.A.C. 1, refd to. [para. 65].

Corporacion Americana de Equipamientos Urbanos S.L. v. Olifas Marketing Group Inc. et al., [2003] O.T.C. 761; 66 O.R.(3d) 352 (Sup. Ct.), refd to. [para. 71].

Cytrynbaum et al. v. Look Communications Inc. (2013), 307 O.A.C. 152; 2013 ONCA 455, leave to appeal refused [2013] S.C.C.A. No. 377, refd to. [para. 78].

Manulife Bank of Canada v. Conlin et al., [1996] 3 S.C.R. 415; 203 N.R. 81; 94 O.A.C. 161, refd to. [para. 84].

Eli Lilly & Co. et al. v. Novopharm Ltd. et al., [1998] 2 S.C.R. 129; 227 N.R. 201, refd to. [para. 85].

Dumbrell v. Regional Group of Companies Inc. et al. (2007), 220 O.A.C. 64; 85 O.R.(3d) 616; 2007 ONCA 59, refd to. [para. 87].

Ventas Inc. et al. v. Sunrise Senior Living Real Estate Investment Trust et al. (2007), 222 O.A.C. 102; 85 O.R.(3d) 254; 2007 ONCA 205, refd to. [para. 87].

Cantor Art Services Ltd. v. Kenneth Bieber Photography Ltd., [1969] 1 W.L.R. 1226 (C.A.), refd to. [para. 87].

Consolidated-Bathurst Export Ltd. v. Mutual Boiler and Machinery Insurance Co., [1980] 1 S.C.R. 888; 32 N.R. 488, refd to. [para. 88].

Mannai Investment Co. v. Eagle Star Life Assurance Co., [1997] 2 W.L.R. 945; 215 N.R. 321 (H.L.), refd to. [para. 89].

Plan Group et al. v. Bell Canada (2009), 252 O.A.C. 71; 96 O.R.(3d) 81; 2009 ONCA 548, refd to. [para. 90].

Clergue v. Vivian (H.H.) & Co. (1909), 41 S.C.R. 607, refd to. [para. 99].

Boy Scouts of Canada, Provincial Council of Newfoundland v. Doyle et al. (1997), 151 Nfld. & P.E.I.R. 91; 471 A.P.R. 91; 149 D.L.R.(4th) 22 (Nfld. C.A.), refd to. [para. 99].

Statutes Noticed:

Business Corporations Act, R.S.O. 1990, c. B-16, sect. 134(3) [para. 94].

Authors and Works Noticed:

Ellis, Mark, Fiduciary Duties in Canada (2014) (Looseleaf), p. 5 [para. 65, footnote 2].

McCamus, John D., The Law of Contracts (2005), p. 729 [para. 87].

McCamus, John D., The Law of Contracts (2012), p. 773 [para. 87, footnote 3].

Sullivan, Ruth, Driedger on the Construction of Statutes (3d Ed. 1994), p. 131 [para. 84].

Counsel:

Clifford I. Cole and Benjamin Na, for the appellant, Unique Broadband Systems, Inc.;

Joseph Groia and Tatsiana Okun, for the respondents, Jolian Investments Limited and Gerald McGoey.

This appeal and cross-appeal were heard on June 17, 2014, by Sharpe, Gillese and Hourigan, JJ.A., of the Ontario Court of Appeal. On July 10, 2014, Hourigan, J.A., delivered the following judgment for the court.