Earlier this year, the Ontario Court of Appeal decided
Unique Broadband Systems, Inc. (Re), in which it
overturned the trial judge's decision to award the former CEO
of Unique Broadband Systems ("Unique") severance and
upheld the lower court's decision not to award the former CEO
certain additional compensation and indemnify him for his legal
fees. The Court of Appeal decision is relevant to charitable and
non-profit corporations because of what it says about compensation
decisions and about director indemnification.
The CEO of Unique had a contract that entitled him to
indemnification for legal fees incurred in defending himself
against Unique-related claims in certain circumstances. He was also
entitled to compensation related to the price of Unique's
When a transaction to sell an indirect asset of Unique did not
result in the increase to Unique's share price that the CEO and
other directors expected, the board decided to cancel the
compensation plan and pay each director roughly the amount that
each of them would have received had the hoped-for share price
occurred. The directors each declared a conflict of interest and
then voted for the change. The total of all compensation to be paid
to directors and officers under this and other associated payments
was 97.6% of the market capitalization of Unique.
The shareholders of Unique did not accept the compensation
changes and held a special meeting at which they removed all
directors. The CEO treated his removal from the board as
termination without cause, triggering a termination payment
obligation. He then sued Unique for $9,500,000.
The Court of Appeal considered the compensation changes and
concluded they were in breach of the board's fiduciary duty.
The fiduciary duty of a board of directors requires the board to
act in good faith and in the best interest of the corporation, to
avoid conflicts of interest and to refrain from abuse of the
position for personal gain. The Court concluded that these elements
of the board's fiduciary duty had not been met. In particular,
the Court pointed to the absence of any advice from compensation
consultants on the reasonableness of the changes. While
Unique's lawyer had been asked some general questions about
compensation, he was not aware of quantum and had never opined on
The fiduciary standards applicable to non-profit corporations
would generally be similar to those applicable to Unique. While
non-profit (but not charity) directors can be compensated,
compensation must be reasonable. Particularly where there are no
disinterested directors, compensation should be set with the advice
of outside experts.
The fiduciary standards applicable to most incorporated
charities in common law provinces are higher than those for Unique.
Generally speaking, a charity director in common law Canada should
not be paid for serving as a director, or in any other context,
absent an approving court order. Any compensation paid by a charity
must be reasonable and expert advice is recommended if there is any
question about reasonableness.
The Court of Appeal refused to indemnify the CEO for legal fees
in this dispute because he had breached his fiduciary duty to
Unique. While most charity and non-profit by-laws contain indemnity
provisions and many charity and non-profit organizations purchase
director and officer liability insurance, directors should not
expect to rely on these if they breach their fiduciary duty.
Regardless of what a corporation's by-laws state, indemnity is
likely not available in the absence of the director having acted
honestly and in good faith with a view to the best interests of the
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.
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Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
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