Publication: Financial Post
On the surface, Gerald McGoey had a lucrative deal. The chief executive of Unique Broadband Systems Inc. was protected by a golden-parachute provision that provided enhanced termination benefits in certain circumstances and a share appreciation rights plan (SAR) with another payout based on the price of the company's shares. But as is often the case, overreaching consumed it all.
In 2003, Unique Broadband bought a majority interest in Look Communications. Look owned a telecommunications spectrum that it sold for a disappointing $80-million to a consortium made up of Rogers and Bell.
After the sale, shares of Unique Broadband languished at around $0.15, instead of jumping to the $0.40 or so expected. Disappointed, the board — all of whom had SAR units — cancelled the existing plan and established a SAR cancellation payment based on a price of $0.40 a share.
It also established a bonus pool of $3.4-million (rejecting McGoey's proposal of $7-million). McGoey would receive $600,000 as his SAR cancellation award and a $1.2-million bonus. In addition, McGoey and the board of directors established a SAR cancellation payment and bonus pool for Look. Bringing the total funded in these new compensation plans to about $15-million — an astounding 97.6% of Unique Broadband's total market capitalization.
When the shareholders resisted, McGoey had the company advance him an additional $200,000, his expected legal fees to defend these entitlements. At a special shareholders' meeting , McGoey and the other directors were removed, prompting McGoey to resign as CEO, taking the position he had been terminated because he was not re-elected to the board. This triggered an enhanced severance of $9.5-million, which he sued to enforce.
The Ontario Court of Appeal noted that McGoey, as a director and CEO, owed Unique Broadband fiduciary duties. "Any director or senior officer is in a position of trust. He or she is charged with managing the assets of a corporation honestly in a manner that is consistent with the objects of the corporation ... [McGoey] had a specific obligation to scrupulously avoid conflicts of interest to the corporation, not to abuse his position for personal gain."
In implementing the SAR cancellation awards and bonus, the board had no independent advice that could speak to the reasonableness of the amounts. Nothing had occurred to increase the value of the company, let alone to $0.40. Under the original SAR plan, McGoey would have been entitled to $75,000, not the $600,000 the new plan afforded.
The Court of Appeal noted, "The decision to implement this new scheme was driven by the board's self-interest." As such, the Court set aside the plan and, for the same reasons, the bonus. Similarly, his breach of fiduciary duties disentitled him to any severance.
Notably, the fact that the board of directors affirmed his actions was no defence. Breaches of fiduciary duty violate the interests of the corporation and cannot be condoned by superiors or contracted out of.
The court also rescinded the legal fees McGoey advanced to himself. Although indemnity provisions protect officers and directors from lawsuits flowing from the good faith performance of their duties, "the rationale for offering the protection is eliminated where the officer or director is not acting in good faith and in the best interests of the corporation," it said.
Canadian law has a "business judgment rule" whereby the courts will defer to business decisions honestly made. However, the court here noted that "it would not sit idly by when it is clear a board has engaged in conduct that has no legitimate business purposes and that is in breach of its fiduciary duties" and the rule will not protect decisions made without an honest belief they were in the best interests of the company.
Citing the trial judgment, the court held that "we will decide whether business judgment is what was exercised here, or whether it was self-help, or worse, breach of fiduciary duty, dressed in business judgment's clothes."
I am seeing an increasing abundance of executives using corporate assets as their personal piggy bank. Increasingly, the courts are asking, "when an executive makes a decision that advantages herself, was she acting in the company's interest, or largely her own?"
If it is the latter, it is not only cause for discharge but cause for a lawsuit against that employee to recoup those assets.
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