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
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
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
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
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
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
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