The Ontario Court of Appeal's recent decision in
Bennett v. Bennett Environmental Inc. has
clarified the entitlement of a director to indemnification from a
corporation under the Canada Business Corporations Act
Bennett Environmental Inc. (BEI) is a publicly traded company
that provides high temperature treatment services for the treatment
of contaminated soil. John Bennett served on the board of directors
of BEI and was a member of its disclosure committee.
In June 2003, BEI announced that it had entered into a contract
for a significant soil remediation project. In August 2003, the
validity of that contract became questionable as a result of
protests by a competitor of BEI. In June 2004,BEI entered into a
second contract with respect to that same project but for much
smaller volumes. In July 2004, BEI announced that shipments under
the first contract were "highly unlikely," and that it
had entered into the much smaller second contract.
In 2006, Bennett was reprimanded by the Ontario Securities
Commission (OSC) for violating the disclosure requirements of
applicable securities laws. Bennett admitted in a settlement
agreement with the OSC that the existence of the dispute about the
first contract in August 2003 constituted a material change and
that BEI had failed to disclose that change in accordance with
applicable securities laws. He was fined $250,000 and ordered to
pay $50,000 in costs.
In December 2006, Bennett sought indemnification from BEI for
the fine and the costs he had incurred in the OSC proceedings. BEI
refused to indemnify Bennett, claiming he had not complied with the
good faith and lawful conduct requirements contained in paragraphs
124(3)(a) and 124(3)(b) of the CBCA. Those provisions
prohibit a corporation from indemnifying a director unless (a) the
director acted honestly and in good faith with a view to the best
interests of the corporation, and (b) in the case of a criminal or
administrative action or proceeding that is enforced by a monetary
penalty, the director had reasonable grounds for believing the
director's conduct was lawful.
The court held that the corporation had the onus to show that
Bennett did not act honestly or in good faith with a view to the
best interests of the corporation, and that Bennett did not have
reasonable grounds for believing his conduct was lawful. This onus
made sense, the court held, because the corporation "will most
likely have the advantage of unrestricted access to corporate
documents relevant to the indemnification proceeding." The
court also affirmed that the good faith test under paragraph
124(3)(a) is a subjective one.
The court agreed with the conclusion of the lower court that BEI
had failed to establish that Bennett was not credible in showing he
had acted honestly and in good faith with a view to the best
interests of the corporation. The surrounding circumstances
indicated that Bennett's belief in his good faith conduct was
informed and the honesty of his belief was supported by the absence
of any motive to withhold disclosure.
The court also concluded that BEI did not meet its onus to
establish that Bennett did not have reasonable grounds to believe
his conduct was lawful. Bennett honestly and reasonably believed
that the first contract signed in June 2003 was not in jeopardy, so
there was no basis for him to have believed he had a disclosure
obligation under applicable securities laws.
The Bennett decision provides comfort to a corporate
director that the corporation will not be prohibited from
indemnifying him or her in advancing the interests of the
corporation unless the corporation can establish that the director
acted in bad faith or that the director did not have reasonable
grounds for believing he or she was acting lawfully.
McCarthy Tétrault Notes:
One interesting point raised in the judgment was whether a
director had to have legal advice regarding the lawfulness of his
or her conduct to be entitled to indemnification. The court stated
that reasonable legal or professional advice is not a prerequisite
to indemnification, but that having obtained such advice will
establish reasonable grounds for belief that the director's
conduct was lawful.
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