Canada: The Second Opinion: "Look" Out – Corporate Directors Denied Advance Indemnity Payments For Bad Faith

In a judgment released yesterday, the Ontario Court of Appeal has held that directors and officers who are sued by their ex-corporation should be denied advance funding of their legal costs under the indemnity provisions of the Canada Business Corporations Act ("CBCA") if there is a strong prima facie case that they acted in bad faith. The decision in Cytrynbaum v. Look Communications Inc., 2013 ONCA 455 imposes a significant new limit upon the availability of advance indemnification, and makes clear that this limit cannot be evaded through by-laws or indemnity agreements. In addition, Look narrows the circumstances in which directors and officers may establish good faith through reliance on legal advice, and holds that outside directors will not be exonerated from a finding of bad faith merely by virtue of their non-executive position.

Legislative Background

Section 124(2) of the CBCA provides that a corporation may advance funds to its current or former directors and officers to cover the costs of proceedings in which they become involved because of their association with the corporation. While this provision does not obligate the corporation to pay the advance funds, many corporations – including the one in Look – undertake such an obligation in their by-laws or in indemnity agreements with directors and officers.

Like s. 124(2), s. 124(4) of the CBCA also provides that a corporation may advance funds to its directors and officers to cover the costs, charges and expenses of proceedings. However, s. 124(4) is concerned with proceedings that are brought "by or on behalf of the corporation". For such proceedings, s. 124(4) - in contrast to s. 124(2) – requires court approval before the corporation may pay the advance funds, including that the court satisfy itself the director or officer "acted honestly and in good faith with a view to the best interests of the corporation".

Because the marginal note to s. 124(4) in the CBCA is entitled "Indemnification in derivative actions", it has traditionally been thought that the requirement for court approval in this provision only extended to derivative actions against the officer or director (i.e., actions brought on behalf of the corporation by a shareholder, director or officer under s. 239 of the CBCA), and not to actions against the officer or director by the corporation itself. This understanding of s. 124(4) was affirmed in Jolian Investments Ltd. v. Unique Broadband Systems Inc., 2011 ONSC 3241.

The Facts in Look

The Look appeal arose from an application for advance funding by the former directors and officers of Look, including the appellants, against the corporate respondent. The application was made in response to a claim which Look had brought against the appellants for their conduct relating to a 2009 sale of Look's key assets. When the sale closed, the Look Board authorized the payment of approximately $20 million to its directors, officers and others. Much of this amount was based upon the appellants' exercise of share appreciation rights pursuant to an inflated valuation of $0.40 per Look share recommended by management, which was substantially in excess of the market value of $0.20 per share. While the Board had received a legal opinion prior to authorizing the payments, it spoke in general terms about the Board's fiduciary duties and the business judgment rule, and did not specifically address the valuation of Look's shares.

The $20 million payments were not disclosed to shareholders for four months, and immediately attracted strong shareholder criticism. The appellants then authorized Look to pay approximately $1.5 million to three law firms acting for them personally, and resigned.

Look's new management and Board commenced an action against the appellants in July, 2011, and the appellants brought an application for advance funding based on the Look by-laws and their indemnity agreements with it. The application was denied by Pattillo J. on September 28, 2012. Relying on s. 124(4) of the CBCA, Patillo J. found that court approval was required before Look could be compelled to pay advance funds in an action brought by it, even though the Look action was brought by the corporation itself and not in a derivative capacity. Further, Pattillo J. found there was a strong prima facie case the appellants had acted in bad faith, so as to disentitle them to advance funding under the CBCA.

The Decision

The Ontario Court of Appeal unanimously upheld Pattillo J.'s judgment. Sharpe J.A., writing for the court, held that Jolian Investments should not be followed to the extent it held that judicial approval under s. 124(4) of the CBCA is required only where advance funds are sought in the context of derivative actions on behalf the corporation. Rather, pursuant to s. 124(4), advance funding should be denied in any case involving an action by or on behalf of the corporation, if the court is satisfied there is a strong prima facie case that the director or officer acted in bad faith.

According to Sharpe J.A., the position taken in Jolian placed undue reliance upon the reference to "derivative actions" in the CBCA marginal note, and was inconsistent with the language actually used in the provision, which spoke of actions brought not only "on behalf of" but also "by" the corporation. Further, Sharpe J.A. found there was no "principled rationale for applying one regime for advance costs in derivative actions and another for actions brought by the corporation itself". Sharpe J.A. also dismissed the appellants' attempt to rely upon Delaware case law, which holds that advance funding should be awarded without any scrutiny of the conduct of the director or officer, since the Delaware General Corporation Law does not require court approval of advance indemnification. He then observed that, while there were policy arguments in favour of advance funding, there was also an important reason for "imposing a pre-trial good conduct filter on the right to advancement", i.e., "the discouragement of bad behaviour by corporate officers and directors".

In an important development, Sharpe J.A. rejected the appellants' attempt to circumvent this new requirement for court approval under s. 124(4) based on their indemnity agreement with Look, which obligated Look to pay them advance costs without any requirement for judicial screening:

This court held in Bata Industries Ltd., at p. 329, that s. 136 of the OBCA, the Ontario equivalent to s. 124 of the CBCA, is "a comprehensive code of general application by which the indemnification of officers and directors, and former officers and directors, is regulated." Like s. 136 of the OBCA, s. 124 "establishes the circumstances under which a corporation may, with and without court approval, indemnify an officer or director, and when a corporation must indemnify an officer or director" and, "[b]y implication ... the circumstances under which a corporation cannot indemnify an officer or director." It follows that the by-laws and indemnity agreements cannot oust s. 124(4). Section 124(4), when read with the other subsections of s. 124, provides that court approval is required for advance funding and that approval can only be granted if the officer or director claiming advancement "acted honestly and in good faith with a view to the best interests of the corporation". The application judge correctly held that the provision applied in this case to the directors' and officers' claims for advance funding. (para. 48)

As for test to be applied in s. 124(4) approval hearings, Sharpe J.A. agreed it only required the corporation to establish a "strong prima facie case" of bad faith, not a "final determination" of it:

In my view, the strong prima facie case test strikes an appropriate balance between those competing considerations. It is a stringent test that gives significant weight to the protection of officers and directors. It ensures that they will ordinarily receive advance funding but leaves open the possibility that advancement will be denied when there is strong evidence of bad faith. (para. 56)

While Sharpe J.A. described this test as a "stringent" one, he nonetheless proceeded to hold that it was met on the facts before the court. Of particular interest was his conclusion that the appellants were unable to avoid a finding of bad faith in valuing the Look shares at $0.40, simply through their reliance on a generally-worded legal opinion:

The solicitor's opinion letter to the Board is a carefully worded document that expresses no view as to the valuation of the shares. The solicitor, a partner of a major Toronto law firm, advised the Board in very general terms of its duty to act honestly and in the best interests of the corporation. He referred to the business judgment rule which gives deference to the decisions of the directors provided those decisions fall within a range of reasonable alternatives. He indicated that on restructuring or winding down, it is common for a Board of Directors to authorize special incentive payments to retain key individuals provided that doing so is in the best interests of the corporation. There is nothing, however, in the letter as to the valuation of the Look shares. Indeed, it is not clear to me that the actual valuation, as distinct from the process the Board had to follow, was a matter for legal opinion. There is conflicting evidence from the solicitor and Cytrynbaum as to whether the solicitor knew the valuation the Board proposed to use. If he did know, he studiously avoided expressing any opinion on it and there is no indication that he was asked to do so. At best, the evidence indicates that the Board's legal advisor advised that the valuation of the shares was a matter of business judgment to be exercised in the best interests of the corporation, and that he said nothing to dissuade the Board from adopting the $0.40 valuation.

In my view, the application judge made no palpable and overriding error of fact and no error of law in concluding that silence by a corporate solicitor on a matter that falls outside the realm of legal expertise and for which his advice was not sought by the Board does not amount to a defence to an allegation of bad faith. (paras. 63-64)

Sharpe J.A. also held that a subsequent legal opinion, which was provided to the appellants after they made their valuation decision, was incapable of shielding them from a finding of bad faith, since "at the highest, the letter reflects the solicitor's ex post assessment of the decision the Board had already made and does not reflect the advice the Board received before the crucial Board meeting". (para. 66)

Finally, Sharpe J.A. rejected the contention made by one of the appellants, an outside director who served as Chair of the Look Board's Compensation and Human Resources Committee, that "the application judge failed to consider his position as an outside director who was not directly involved with legal counsel or the decisions alleged to amount to bad faith". According to Sharpe J.A., the appellant could not be exonerated from a finding of bad faith merely because he was an outside director. He "personally benefited from the impugned decisions", and "was expected to exercise independent judgment, engage himself in the Board's decisions and ensure that management was acting not it its own self-interest but in the interest of Look". (para. 73)


The decision in Look is an interesting and important one for Canadian corporate law on a number of different levels.

First, it significantly restricts the entitlement of directors and officers to advance funding of their legal costs when they are the subject of lawsuits by their former corporations. According to Look, such directors and officers will be denied advance funding if the court concludes there is a strong prima facie case that they acted in bad faith. In other words, courts must now "look" to see whether the statutory indemnity requirements – which until now have only been applied to advance funding claims in derivative actions – are satisfied.

It is questionable whether this new regime is truly consistent with the purpose of the indemnity provisions in s. 124 of the CBCA, or represents a rational allocation of risk. In Manitoba Securities Commission v. Crocus Investment Fund, 2007 MBCA 36, a decision not referred to in Look, the Manitoba Court of Appeal said:

Viewed from the corporation's perspective, a decision to advance defence costs is an interim financing decision. Based on the criteria and safeguards applicable here, the corporation is not necessarily at risk. I agree with the following observations of Chancellor Allen of the Delaware Court of Chancery in Advanced Mining Systems, Inc. v. Fricke, 623 A. 2d 82 (1992) which, while in the context of statutory language closer to the present CBCA than the Act, is nevertheless applicable (at p. 84):

... [T]he decision to extend advancement rights should ultimately give rise to no net liability on the corporation's part. The corporation maintains the right to be repaid all sums advanced, if the individual is ultimately shown not to be entitled to indemnification. Thus the advancement decision is essentially simply a decision to advance credit. (para. 52)

Second, Look holds that directors and officers may not "contract out of" s. 124(4) by means of a broadly-worded indemnity agreement. Accordingly, Look means that judicial approval will be required for advance funding in all cases where a corporation sues its directors and officers. At the very least, therefore, directors and officers will have to personally fund the costs of such advance funding hearings up front, before they may receive interim indemnity for those and other legal costs, even if there is no evidence that they acted in bad faith. This is likely to discourage persons from acting as directors and officers, contrary to one of the main purposes of s. 124, i.e., to "permit enough leeway to attract strong candidates to directorships and consequently foster entrepreneurism": Blair v. Consolidated Enfield Corp., [1995] 4 SCR 5.

Third, the court's treatment of the appellants' reliance on legal advice in Look is potentially troubling, regardless of whether that treatment was correct on the facts of Look itself. In Blair, the Supreme Court held that while "mere de facto reliance on legal advice will not guarantee indemnification... reliance that is reasonable and in good faith will establish that a director or officer acted 'honestly and in good faith with a view to the best interests of the corporation'". By holding that the legal advice in Look did not adequately address the alleged bad faith, the court's decision could be taken to require directors and officers to scrutinize the effect of legal opinions even where they have may not have the expertise to do so.

It will be interesting to see whether the appellants in Look seek leave to appeal to the Supreme Court of Canada, and if not, how other courts apply Look in future cases.

To view original article, please click here

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.