Court of Appeal Clarifies Directors’ Fiduciary Responsibilities and also the Business Judgment Rule for Executive Compensation Matters

Court of Appeal Clarifies Directors’ Fiduciary Responsibilities and also the Business Judgment Rule for Executive Compensation Matters

Court of Appeal Clarifies Directors’ Fiduciary Responsibilities and also the Business Judgment Rule for Executive Compensation Matters

Overview

A Legal Court of Appeal for Ontario lately affirmed the character of directors’ and officers’ fiduciary responsibilities and clarified the use of the company judgment rule poor a dispute regarding executive compensation. The choice in Unique Broadband Systems, Corporation. (Re) [1] (“Unique Broadband”) is important in the outlook during corporate governance and shareholders’ legal rights within the following respects:

First, independent or third-party advice might be essential to justify executive compensation.

Second, the company judgment rule doesn’t have application where company directors and officials decide which have no legitimate business purpose and therefore are in breach of the fiduciary responsibilities.

Finally, executive compensation contracts which are sporadic with statutory fiduciary responsibilities won’t be enforced through the courts.

Factual Background

The person respondent (the “Respondent”) was the previous Chief executive officer along with a director of Unique Broadband Systems Corporation. (“UBS”). The relation to an administration services agreement provided him with enhanced termination benefits particularly situations. UBS implemented a share-appreciation legal rights plan (the “SAR Plan”) because of its company directors and people of senior management. Underneath the SAR Plan, unit holders could be compensated in line with the market buying and selling cost of the UBS share after certain specified occasions.

Following the share cost unsuccessful to increase not surprisingly, the company directors of UBS unanimously resolved to cancel the SAR units and set up a SAR cancellation payment program that compensated unit holders, such as the Respondent, with different unit cost of $.40 per share. The marketplace cost was really $.15 per share. The company directors also considered and awarded bonuses for that Respondent along with other personnel.

UBS shareholders known as a unique shareholders’ meeting and removed the Respondent yet others using their positions as company directors of the organization. The Respondent resigned because the Chief executive officer and commenced an undertaking against UBS for, inter alia, the SAR cancellation payments, the power award, that has been enhanced termination benefits.

Independent Suggestions about Executive Compensation

A Legal Court of Appeal figured that the Respondent breached his fiduciary responsibilities with regards to the SAR cancellation payments and also the bonus award. A Legal Court held that company directors and officials must avoid conflicts of great interest using the corporation and never make the most of their position for private gain.[2]

The SAR cancellation payment program was utilized with no independent or third-party advice and it was motivated through the Respondent’s self-interest at the fee for UBS. The power awards were equally problematic. The Respondent and yet another company directors unsuccessful to find or get any suggestions about appropriate bonus awards. They didn’t consider comparable marketplace data regarding executive compensation and didn’t document performance criteria. There is also no evidence to describe the way the bonus awards were quantified.

Business Judgment Rule

A Legal Court of Appeal rejected the Respondent’s argument that his actions were paid by the company judgment rule. The company judgement rule is really a rebuttable presumption that company directors and officials act within an informed manner, in good belief, as well as in the very best interests from the corporation. “Courts will defer to business decisions honestly made, but they’re not going to sit idly by when it’s obvious that the board is involved in conduct which has no legitimate business purpose and that’s in breach of their fiduciary responsibilities.”[3]

Because the Respondent hadn’t acted within the needs from the corporation, the company judgment rule was of no help him.

Outsourcing of Statutory Corporate Obligations

A Legal Court of Appeal overturned the low court’s decision on a possible problem the Respondent been successful on at trial that’s, the interpretation from the management services agreement that provided the Respondent with enhanced termination benefits notwithstanding his corporate malfeasance.

Based on the Court of Appeal, the agreement needed to be construed considering section 134(3) from the Ontario Business Corporations Act[4] (the “OBCA”), which supplies that no term inside a contract “relieves a director or officer in the duty to do something in compliance with this particular Act and also the rules or relieves her or him from liability for any breach thereof.”[5] A Legal Court of Appeal held that the contractual provision that excluded a director’s breach of fiduciary responsibilities like a ground for termination would “eviscerate the prohibition present in s. 134(3).”[6]

While not essential to its decision, a legal court of Appeal noted that the contract which provided a director with enhanced termination benefits that have been unlike their breach of fiduciary responsibilities may constitute oppression pursuant to section 248 from the OBCA.[7]

Comment

A Legal Court of Appeal’s decision in Unique Broadband establishes that company directors and officials won’t be allowed to cover behind the company judgment rule where their conduct serves no legitimate business purpose and it is in breach of fiduciary responsibilities. Company directors and officials cannot contract from their fiduciary responsibilities and private employment contracts or management service contracts is going to be construed in compliance using their statutory obligations.

[1] Unique Broadband Systems, Corporation. (Re), 2014 ONCA 538 [Unique Broadband].

[2] Ibid at para 45.

[3] Ibid at para 72.

[4] Business Corporations Act, RSO 1990, c B.16 [OBCA].

[5] Unique Broadband, supra note 1 at para 95.

[6] Ibid at para 96.

[7] Ibid at para 107.

 

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