Present: La Forest, Sopinka, Gonthier, Cory, McLachlin, Iacobucci and Major JJ.
on appeal from the court of appeal for ontario
Company law ‑‑ Corporations ‑‑ Directors and officers ‑‑ Indemnity ‑‑ Election of directors ‑‑ Validity of proxies ‑‑ President of corporation chairing annual shareholders' meeting ‑‑ President ruling that certain proxies could be used to vote only in favour of management slate of directors ‑‑ Court overturning ruling and awarding costs against president and corporation ‑‑ Whether president entitled to be indemnified by corporation for costs ‑‑ Ontario Business Corporations Act, R.S.O. 1990, c. B.16, s. 136(1).
The respondent was the president and a director of the appellant corporation, which was plagued with infighting between him and another shareholder ("Canadian Express"). The respondent, as president of the corporation, was obliged under the by‑laws to act as chairman of the annual shareholders' meeting, at which the new board of directors was to be elected. A management information circular had been issued in which 11 candidates were proposed for the 11 director positions. The respondent was part of this slate, which divided 6‑5 in favour of his "camp" over Canadian Express's group. Although the Board had agreed on these candidates, at the shareholders' meeting Canadian Express nominated a surprise 12th candidate from the floor, thereby requiring a more formal election. The surprise candidate was elected, replacing the respondent. The night before the meeting, however, the respondent had been advised by corporate counsel that the proxies of Canadian Express and its supporters which had been deposited that day could be used to vote only in favour of the management slate since no specifications had been made thereon to indicate otherwise. After the voting had taken place, the respondent once again solicited corporate counsel's advice on what he should do with the proxy votes. Following counsel's advice that the proxy votes in favour of the surprise candidate were invalid, the respondent declared that that candidate had received no votes and that the 11 candidates in the management circular had been elected. He refused to entertain any discussion of the decision. The respondent then convened another shareholders' meeting, for the purpose of settling the outstanding voting issues. The provincial Supreme Court found that the respondent's ruling with respect to the proxies was wrong in law and that he was in breach of his fiduciary duties. This decision was upheld on appeal. The respondent's application for an order that he be indemnified by the corporation for the legal costs incurred in defending his corporate acts was dismissed on the ground that his conduct had not been in the best interests of the company and was therefore outside the scope of the right to indemnification provided for in s. 136(1) of the Ontario Business Corporations Act. The Court of Appeal set aside this decision and permitted the respondent to be indemnified for all proceedings, except the appeal of the decision regarding the validity of the impugned proxies.
Held: The appeal should be dismissed.
Section 136(1) and the corporation's by‑law which closely resembles it specify three conditions that the director or officer must fulfil in order to receive indemnification for the costs of defending litigation: (1) the person must have been made a party to the litigation by reason of being a director or an officer of the corporation; (2) the costs must have been reasonably incurred; and (3) the person must have acted honestly and in good faith with a view to promoting the best interests of the corporation. There is no reason to disturb the findings of the Court of Appeal that the expenses were reasonably incurred: (a) corporate counsel were retained in the annual meeting litigation to act for both the corporation and the respondent, in his capacity as chairman of the meeting; (b) the corporation's board reviewed the issue of whether it should have separate counsel from the respondent and determined that there were no grounds for taking such action; (c) the respondent added nothing to the costs of the litigation arising out of the shareholders' annual meeting; and (d) the respondent's conduct following the shareholders' meeting, in requisitioning another shareholders' meeting for the purpose of electing directors, was consistent with his protestations throughout that he had no interest in leading the company if voted out by a majority of informed shareholders. The respondent is involved in this litigation in his capacity as director/chairman of the corporation, not in his personal capacity. Canadian Express's application directly involved the corporation's reputation and the integrity of its voting procedures; moreover, the respondent's participation in the impugned proceedings flows entirely from his role as chairman of the meeting, not from his status as a shareholder.
The respondent has also satisfied the good faith requirement contained in s. 136(1). Persons are assumed to act in good faith unless proven otherwise. The best interests of the corporation in this appeal centre solely on the maintenance of the integrity and propriety of the voting procedure. The duty of a chairman is one of honesty and fairness to all individual interests and is directed generally toward the best interests of the company. The fact that a chairman has an interest in the outcome of a decision does not impugn the integrity of the process because of the mere appearance of bias. It is the corporation's shareholders who concluded that it is to be the president of the company (who is allowed to be a director) ‑‑ a person who invariably is interested in every matter discussed at the shareholders' meetings ‑‑ who is to act as chairman. In this respect, there is no unacceptable appearance of bias because it was never contemplated that the chairman was to be someone who would appear to be totally disinterested in the first place. Although a chairman has an obligation to promote administrative fairness, this is necessarily tempered with the need to control and organize a meeting so as to ensure that it proceeds effectively. In closing debate on the proxy issue, the respondent was, based on corporate counsel's instructions, fulfilling his responsibility as chairman to see that the shareholders' instructions as set out in the proxies were followed. Further, allowing the meeting to devolve into a shouting match between two rival camps debating a complex and unsettled area of corporations law could hardly be seen as enhancing the validity and integrity of the corporation's voting procedure. The fact that the respondent made the impugned ruling with the bona fide intent that the corporation have a lawfully elected board of directors constitutes evidence that he acted honestly and in good faith and with a view to the best interests of the corporation for the purposes of s. 136(1).
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. The respondent's reliance on corporate counsel's advice in this case was both reasonable and in good faith. In deciding not to reject the advice of counsel, the respondent in fact fulfilled his fiduciary duty. The advice given would, to a layperson in the respondent's circumstances (and with his business experience), have been ostensibly credible.
By following the instructions on the proxies and then requisitioning a new shareholders' meeting, the respondent gave all shareholders an opportunity to make a fully informed decision regarding the election of the directors, thereby promoting the integrity of the corporation's voting procedures. Canadian Express suffered no prejudice in respect of its voting rights in that it had the opportunity to nominate and support its surprise candidate at the new meeting or pursue legal action against the corporation. Instead of waiting for the newly requisitioned meeting (at which it could have ensured that its proxies were filled out in accordance with corporate counsel's instructions), Canadian Express took the far more circuitous route of obtaining its candidate's election through the court system, with the hope of transferring the costs thereof onto the respondent.
Permitting the respondent to be indemnified is consonant with the broad policy goals underlying indemnity provisions; these allow for reimbursement for reasonable good faith behaviour, thereby discouraging the hindsight application of perfection. Indemnification is geared to encourage responsible behaviour yet still permit enough leeway to attract strong candidates to directorships and consequently foster entrepreneurism. It is for this reason that indemnification should only be denied in cases of mala fides.
Cases Cited
Not followed: Re Bomac Batten Ltd. and Pozhke (1983), 43 O.R. (2d) 344; referred to: General Motors of Canada Ltd. v. Brunet, [1977] 2 S.C.R. 537; Alcyon Shipping Co. v. O'Krane, [1961] S.C.R. 299; Walters v. Essex County Board of Education, [1974] S.C.R. 481; Gray v. Yellowknife Gold Mines Ltd., [1946] O.W.N. 938; Johnson v. Hall (1957), 10 D.L.R. (2d) 243; Re United Canso Oil & Gas Ltd. (1980), 12 B.L.R. 130; Byng v. London Life Association Ltd. (1988), 42 B.L.R. 280; National Dwellings Society v. Sykes, [1894] 3 Ch. 159; Cohen‑Herrendorf v. Army & Navy Department Store Holdings Ltd. (1986), 55 Sask. R. 134; Central Trust Co. v. Rafuse, [1986] 2 S.C.R. 147; Exco Corp. v. Nova Scotia Savings & Loan Co. (1987), 35 B.L.R. 149; Bathgate v. National Hockey League Pension Society (1994), 16 O.R. (3d) 761, leave to appeal refused, [1994] 2 S.C.R. viii; Canadian Merchant Service Guild v. Gagnon, [1984] 1 S.C.R. 509; Re City Equitable Fire Insurance Co., [1925] 1 Ch. 407, aff'd [1925] Ch. 500 (C.A.).
Statutes and Regulations Cited
Business Corporations Act, R.S.O. 1990, c. B.16, ss. 107, 134(1), 135(4), 136(1).
Business Corporations Act, R.S.S. 1978, c. B‑10, s. 119.
Business Corporations Act, S.A. 1981, c. B‑15, s. 119.
Canada Business Corporations Act , R.S.C., 1985, c. C‑44 , s. 124 .
Company Act, R.S.B.C. 1979, c. 59, s. 152.
Corporations Act, R.S.M. 1987, c. C225, s. 119.
Corporations Act, R.S.N. 1990, c. C‑36, s. 205.
Rules of the Supreme Court of Canada, SOR/83-74, r. 5, 51.
Securities Act, R.S.O. 1980, c. 466.
Authors Cited
Daniels, Ronald J., and Susan M. Hutton. "The Capricious Cushion: The Implications of the Directors' and Officers' Insurance Liability Crisis on Canadian Corporate Governance" (1993), 22 Can. Bus. L.J. 182.
Ziegel, Jacob S., et al. Cases and Materials on Partnerships and Canadian Business Corporations, vol. 1, 3rd ed. Toronto: Carswell, 1994.
APPEAL from a judgment of the Ontario Court of Appeal (1993), 15 O.R. (3d) 783, 106 D.L.R. (4th) 193, 66 O.A.C. 121, 12 B.L.R. (2d) 303, reversing a decision of Carruthers J., [1992] O.J. No. 2291 (QL), dismissing the respondent's application for indemnification. Appeal dismissed.
Dennis R. O'Connor, Q.C., and Ronald Foerster, for the appellant.
Patricia A. Virc, for the respondent.
//Iacobucci J.//
The judgment of the Court was delivered by
I. Iacobucci J. -- This appeal was dismissed from the bench on March 21, 1995, with reasons to follow. These are those reasons.
II. This appeal requires us to determine who should bear the costs of legally contesting a disputed directors' election: the corporation, or the chairman in his personal capacity as the individual making the impugned ruling?
I. Background
III. The respondent Blair was, from 1984 to 1989, the President and a Director of the appellant Consolidated Enfield Corporation ("Enfield"). In 1989, Enfield was plagued with fairly serious corporate infighting between Blair and another shareholder, Canadian Express Limited ("Canadian Express"), which had, in 1988, elected some of its officers (Willard L'Heureux and Manfred Walt) to Enfield's Board of Directors.
IV. The dispute came to a head on July 20, 1989 when Enfield's annual shareholders' meeting was scheduled to take place. Blair, as President of the company, was obliged under the by-laws to act as chairman. One of the matters on the agenda was the election of the new Board of Directors. A management information circular had been previously issued in which 11 candidates were proposed for the 11 director positions. Blair was part of this slate, which divided 6-5 in favour of Blair's "camp" over the Canadian Express group.
V. Although the Board had agreed on these candidates, on the day of the shareholders' meeting, Canadian Express nominated a surprise 12th candidate from the floor, Timothy Price, thereby requiring a more formal election. According to Canadian Express, although it had originally intended to vote for the management slate of directors, including Blair, Blair's actions in the months before the election (during which Canadian Express alleges that it and Blair had signed an "accord" to work together in the best interests of Enfield) purportedly indicated that he had no intention of co-operating with the Canadian Express camp.
VI. The Canadian Express camp, with Walt being the proxyholder for these shares, combined with Ravelston Corporation Limited (another shareholding group whose proxyholder was John Boultbee) and together pooled their voting shares. Their coalition represented 43 percent of the total shares and a majority of the shares actually voted at the meeting. The one candidate they did not vote for was Blair. For his part, Blair, through his own holdings (14 percent of Enfield), plus substantial management proxy support, culled together 41 percent of the total shares. The effect of the election was that Blair was out and Price was in as the 11th director. This reflected a total change in control of the Board in favour of the nominees of Canadian Express.
VII. There was, however, one major complication. On July 19, 1989, the night before the shareholders' meeting, the respondent had met with a representative of the scrutineer, Montreal Trust Company, and Enfield's corporate counsel, Osler, Hoskin & Harcourt ("Osler"), who had advised him that the Canadian Express and Ravelston proxies which had been deposited that day could be used to vote only in favour of the management slate since the instructions in the proxies (specifically Note 3 thereof) restricted the proxyholders to voting for the management slate because no specifications had been made thereon by the shareholders to indicate voting otherwise. Osler also noted that the Securities Act, R.S.O. 1980, c. 466, provided that votes cast pursuant to proxies could not be counted in favour of a candidate not named in the circular. Osler also delivered to Enfield several written memoranda dealing with procedural matters, the role of the chair, and the principles relating to the validity of the proxies.
VIII. The next day, after the voting had taken place on the surprise candidacy of Price, Blair once again solicited Osler's advice on what he should do with the proxy votes. He turned towards corporate counsel and queried: "You know the law, I will take my direction from you. What should I do?". There were six senior corporate lawyers from Osler present at this ad hoc meeting and, before they reached their decision, they deliberated for over one and one half hours in part with the scrutineers while remaining in constant contact with solicitors in their head office. Following Osler's advice that the proxy votes in favour of Price were invalid, Blair, reading verbatim from a statement prepared by Osler, declared that Price had received no votes and that the 11 candidates in the management circular had been elected. When L'Heureux vigorously objected to this decision, Blair refused to entertain any discussion thereon, telling L'Heureux to take the matter up with Enfield's counsel.
IX. Instead, the Canadian Express representatives immediately filed an application in the Ontario Supreme Court to the effect that Blair's ruling was wrong in law and that Price, not Blair, should have been elected as the 11th director. Both Blair and Enfield were named as co-respondents. Mention was made of the fact that Blair allegedly breached his quasi-judicial duties as chairman by not ceding the chair when the issue he was to rule upon so directly involved his own interests, as well as by foreclosing debate on the ruling and by not giving notice to Canadian Express as to the limitations of their proxy-holding power. On September 25, 1989, J. Holland J. found that Blair's ruling was wrong in law and that Blair was in breach of his fiduciary duties. He thus allowed the application, concluding that the ballots were legally cast for Price, in accordance with the proxies, and, consequently, that the respondent had not been elected a director. Costs were issued against Blair and Enfield.
X. Blair sought to appeal the substantive findings of J. Holland J. to Ontario Divisional Court. This appeal was unsuccessful.
XI. Since Canadian Express was then in control of Enfield, it sought to recover its costs from Blair alone. Blair then applied to Enfield to be indemnified for these costs, which indemnification was refused.
XII. Blair then filed an application under s. 4.02 of Enfield By-law No. 3, which essentially incorporates the terms of the statutory right to indemnification found in s. 136(1) of the Ontario Business Corporations Act, R.S.O. 1990, c. B.16, and in the business corporations statutes of most of the provinces as well as the federal business corporations statute, for an order that he be indemnified by Enfield for the legal costs incurred in defending his corporate acts.
XIII. On October 28, 1992, Carruthers J. dismissed the respondent's application, concluding that the respondent's conduct was not in the best interests of Enfield and thereby outside the scope of s. 136(1): [1992] O.J. No. 2291 (QL). Blair's appeal to the Court of Appeal for Ontario was allowed on October 6, 1993: (1993), 15 O.R. (3d) 783, 106 D.L.R. (4th) 193, 66 O.A.C. 121, 12 B.L.R. (2d) 303. Enfield, now controlled by Canadian Express, appeals to this Court.
II. Relevant Statutory Provisions and Corporate By-Laws
Ontario Business Corporations Act, R.S.O. 1990, c. B.16 (OBCA)
134.--(1) Every director and officer of a corporation in exercising his or her powers and discharging his or her duties shall,
(a)act honestly and in good faith with a view to the best interests of the corporation; and
(b)exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.
135. ...
(4) A director is not liable under section 130 or 134 if the director relies in good faith upon,
...
(b)a report of a lawyer, accountant, engineer, appraiser or other person whose profession lends credibility to a statement made by any such person.
136.--(1) A corporation may indemnify a director or officer of the corporation...against all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment, reasonably incurred by him or her in respect of any civil, criminal or administrative action or proceeding to which he or she is made a party by reason of being or having been a director or officer of such corporation or body corporate, if,
(a)he or she acted honestly and in good faith with a view to the best interests of the corporation;...
Enfield By-law No. 3
4.02 Indemnity of Directors and Officers. Subject to the limitations contained in the [OBCA], every director or officer of the Corporation...shall, from time to time, be indemnified and saved harmless...from and against all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment, reasonably incurred by him in respect of any civil, criminal or administrative action or proceeding to which he is made a party by reason of being or having been a director or officer of such corporation...if (a) he acted honestly and in good faith with a view to the best interests of the Corporation....
III. Judgments Below
A.Ontario Supreme Court (1989), 46 B.L.R. 92, per J. Holland J.(sub nom. Canadian Express Ltd. v. Blair)
XIV. It is important to emphasize that it is not J. Holland J.'s decision that is appealed to this Court. The application before J. Holland J. was launched by Canadian Express to overrule, on the merits, Blair's decision to void the proxy votes tabulated in favour of Price. J. Holland J. found in favour of Canadian Express and named Price, not Blair, as the 11th director of Enfield. Blair appealed J. Holland J.'s decision; his application was summarily dismissed. However, a review of J. Holland J.'s decision is warranted since it (1) provides a factual background to the s. 136(1) issue involved in the present appeal, and (2) constitutes the first tier of the proceedings for which Blair is presently seeking indemnification. The matter before J. Holland J. is thus the underlying "litigation" for which Blair wishes his reasonable expenses defrayed by Enfield.
XV. I note that the proceedings before J. Holland J. were commenced by Canadian Express even though Blair had convened another shareholders' meeting on July 24, 1989, ostensibly for the purpose of settling the outstanding voting issues. Blair was added to these proceedings in his capacity and status as a director of Enfield and as chairman of the shareholders' meeting of July 20, 1989.
XVI. J. Holland J. concluded (at p. 94) that "the true construction of the disputed proxies is that they conferred general discretion" on the proxyholders. He found that the proxies "were effectively converted to unsolicited shareholder proxies once the names of the proposed management proxyholders were deleted and the names of the shareholder designees were inserted". They were thus valid.
XVII. J. Holland J. noted "the importance of enabling shareholders to freely exercise their voting rights in accordance with their intentions" and underscored that "shareholder designees who hold blank proxies ... are recognized as having full discretion to vote as they see fit, just as the shareholders in person at the meeting could vote" (p. 94). He stated that the disputed proxies should be construed "in light of surrounding circumstances and, where possible, in a manner consistent with business common sense" (p. 95). With these considerations in mind, J. Holland J. held (at p. 95) that:
I accept that [the proxyholders] were entitled to vote a total of 19,038,296 shares, which was more than 50 per cent of the shares represented at the meeting. There is no doubt on the evidence that the proxyholders intended to, and did, cast their votes for Price and not for Blair. [Emphasis in original.]
XVIII. J. Holland J. found that the respondent "failed to meet the quasi‑judicial standard of conduct demanded of a chairman" (p. 95). He stated that, based on the evidence, it could be reasonably inferred that the respondent was alerted to the fact that the election of directors would be contentious and that he was likely to be in a position of conflict. He noted that the respondent, when he reconvened the meeting to announce the results of the balloting, read from a statement prepared by his solicitors, stating that Price had received no votes and that he had been elected. He found that this was in accordance with the plan conceived by the respondent to protect his personal interests and that it was no excuse for Blair to say that he relied upon legal advice. J. Holland J. then concluded (at p. 96) that:
From the tally, it was clear that all the votes cast by [the proxyholders] for Price had, by reason of the chairman's decision, been counted as votes resulting in his own election. He did not permit discussion at the meeting as to this decision. At the very least, he had an obligation to allow those affected by his ruling on the disputed ballots an opportunity to be heard. He chose to act as Judge in his own cause and it is properly inferred from the evidence that he had determined to act in this way, at least at the time of the July 19 meeting and until the announcement of the voting results. In view of Blair's conduct alone and quite apart from the true construction of the proxies, his ruling cannot stand.
It was Blair's decision and not that of the scrutineers to determine the ballots in this way. It is no excuse for Blair to say that in doing so he was relying upon legal advice. It was his responsibility to conduct himself quasi‑judicially throughout the proceedings.
XIX. J. Holland J. stated that, in exercising his discretion as to costs, he did so on the basis of the relationship of the respondent and Enfield in the sense that the respondent breached his fiduciary duty following legal advice given by Enfield's solicitors. J. Holland J. concluded that Canadian Express was entitled to costs against both Blair as well as Enfield. These were assessed (after an assessment appeal) at $165,432.67.
XX. Blair appealed J. Holland J.'s order as to the proxy votes. This appeal was dismissed. He then commenced an application in the Ontario Court (General Division) for a declaration that Enfield was to indemnify him for all costs, charges and expenses incurred by him in respect of the proceedings before J. Holland J. It is to this issue that I now turn.
B. Ontario Court (General Division)
XXI. Carruthers J. denied Blair's claim for indemnification.
XXII. Carruthers J. stated that the onus was on the respondent, pursuant to s. 136(1) OBCA, to demonstrate, on a balance of probabilities, that he "acted honestly and in good faith with a view to the best interests" of Enfield throughout the litigation. However, Carruthers J. stated that, "following my opportunity to reflect on the merits of this application on the basis of the material filed with the court to this point, I have been able to reach my conclusion without having to determine the issue of good faith on the part of Blair". In the end, Carruthers J. simply found that, since Blair's involvement in the Canadian Express application had not been undertaken with a view to Enfield's best interests, he was not entitled to indemnification.
XXIII. Carruthers J. stated that the respondent's honesty and good faith were relevant for the purposes of the trial judge, who was not concerned with whether the respondent acted "with a view to the best interests of" Enfield in defending the litigation. Carruthers J. then stated that he had to be concerned with this last issue as it related to the respondent's conduct or involvement in the litigation. He concluded that:
The applicable provisions of the Act or by‑law require that his involvement in that litigation be in the best interests of Enfield quite apart from whether it can also be described as honest and in good faith. Thus, whether Blair was in fact acting honestly and in good faith during the course of his disputing or defending the claims of Canadian Express raised in the litigation, he is not entitled to succeed in this present application unless, as well, what he did can be said to have been in the best interests of Enfield.
XXIV. Carruthers J. was of the view that the dispute was about the control of Enfield and "involved efforts by both sides to either preserve or promote their respective desires and interests in this respect". He found that the respondent, on the advice of Enfield's solicitors, reached the decision that he had been elected. The question at this point was whether the respondent had done this "in order to promote the best interests of Enfield." Carruthers J. concluded that:
... Blair's conduct at the meeting, including his decision, was not something that can be said to have been in the best interests of Enfield. Accordingly, because the sole purpose of disputing the claims raised on behalf of Canadian Express in the litigation was to uphold Blair's conduct, again including his decision, Blair cannot fit himself into either the provisions of s. 136(1) of the OBCA or of s. 4.02 of the Enfield By-Law No. 3.
Both Blair and Enfield were properly named as parties to the litigation; Blair chaired and ran the meeting and made the decision, and Enfield to be bound by the result....[a]s that matter was one personal to him, and as well to the other shareholders who supported him, Enfield is not liable to indemnify Blair for the costs, charges and expense which he has incurred by reason of defending the litigation.
C. Ontario Court of Appeal (1993), 15 O.R. (3d) 783
XXV. The Court of Appeal set aside Carruthers J.'s decision and permitted Blair to be indemnified under s. 136 for all proceedings (i.e. before J. Holland J., Carruthers J. and the Court of Appeal), with the exception of the appeal of J. Holland J.'s decision regarding the validity of the impugned proxies, and the expenses related thereto, which Carthy J.A. found not to have been reasonably incurred.
XXVI. Carthy J.A. stated that the issue before the court was the proper application to the facts of the By‑law which granted rights of indemnity in the terms authorized by s. 136(1) OBCA. He also stated that "reliance upon legal advice cannot be excluded as a factor in determining whether a director acted `honestly and in good faith with a view to the best interests of the corporation' as set forth in s. 136" (p. 787). He then held (at pp. 789-90) that:
...I read s. 136(1)(a) and the language "acted...with a view to the best interests of the corporation" as referring back to, in this case, the conduct of the vote for directors ‑- not to the conduct of the litigation. The litigation that is contemplated by s. 136(1)(a) is against the director personally and the indemnity is against personal liability. There is no purpose in a requirement that personal litigation be conducted in the best interests of the corporation. The costs of litigation are dealt with separately in s. 136(1) and must be "reasonably incurred".
XXVII. Carthy J.A. emphasized that the issue was Blair's ruling on the overall balloting, and "to conclude that his ruling was male fide because the result favoured him is to conclude that he was compelled to rule the other way, or give up the chair, no matter what advice he received" (p. 798). He then stated that, aside from the question of giving up the chair, "the real test should be whether the ruling was made with the bona fide intent that the company have a lawfully elected board of directors" (p. 798).
XXVIII. Carthy J.A. found that the authorities generally described the chairman's duty as quasi‑judicial "without defining what that means in this context" (p. 799). He stated that it was confusing "to use, and seek to define, the word judicial or quasi‑judicial in this context because an adjudicator or judge can never have a personal interest in the issue". He then concluded (at p. 799):
A chairperson who is more than a nominal shareholder of a public company, on the other hand, always has a personal interest in everything that affects the company, which includes all of the rulings of the chair. If that distinction is not recognized the reflex reaction is to assume that a decision which benefits the chair personally is non‑judicial and thus not bona fide. In my view, it is preferable to describe the duty as one of honesty and fairness to all individual interests, and directed generally toward the best interests of the company.
XXIX. Carthy J.A. found that the events leading up to the election created an "aggressively competitive atmosphere". He also found that Blair "felt very strongly that the shareholders as a whole should be fully informed of a change in control" and that Blair "undoubtedly resented the surprise nomination of Price". In the end, this made the respondent "a protagonist in the duel for control". Carthy J.A. stated that, based on the sequence of events, Blair did not have a choice when he made the impugned ruling (at pp. 799-801):
Given the necessity of determining who the legal directors of the company were, so that business could be carried on in a regular fashion, some decision had to be made. Even if a disinterested chairperson could have been found in the room, he or she would, in these circumstances, have had to look to the corporation's solicitors for an answer to this purely legal issue of interpretation....
No matter what debate might have ensued on July 20 and no matter who the chairperson might have been, there was no obvious error or oversight which would enable the chairperson to turn away from the advice of the company's solicitors.
...I am satisfied that Blair was acting honestly and in good faith and in the best interests of the corporation in accepting and implementing that advice.
...I am satisfied that the evidence shows that he properly performed his duty as chairman of the meeting.
XXX. Carthy J.A. considered whether Blair acted reasonably in his defence of the litigation and concluded that there was nothing unreasonable in Blair's involvement in the initial application as well as in the other proceedings.
IV. Issue on Appeal
Did the Ontario Court of Appeal err in concluding that the respondent Blair was entitled to be indemnified by the appellant Enfield regarding the costs of the Canadian Express application (and appeals on the costs issue emanating therefrom) pursuant to s. 4.02 of Enfield By-Law No. 3, modeled upon s. 136(1) OBCA?
V. Analysis
A.An Overview of the Legislation: Burden of Proof and the Scope of the Conduct that is Caught
XXXI. For purposes of convenience, I reproduce s. 136(1) OBCA (relevant portions underscored):
136.--(1) A corporation may indemnify a director or officer of the corporation...against all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment, reasonably incurred by him or her in respect of any civil, criminal or administrative action or proceeding to which he or she is made a party by reason of being or having been a director of such corporation or body corporate, if,
(a)he or she acted honestly and in good faith with a view to the best interests of the corporation; [Emphasis added.]
XXXII. The effect of s. 4.02 of Enfield By-law No. 3 essentially duplicates that of s. 136(1), although the wording does vary:
4.02 Indemnity of Directors and Officers. Subject to the limitations contained in the [OBCA], every director or officer of the Corporation...shall, from time to time, be indemnified and saved harmless...from and against all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment, reasonably incurred by him in respect of any civil, criminal or administrative action or proceeding to which he is made a party by reason of being or having been a director or officer of such corporation...if (a) he acted honestly and in good faith with a view to the best interests of the Corporation.... [Emphasis added.]
XXXIII. Given that the effect of s. 4.02 of By-law No. 3 is essentially the same as that of s. 136, any interpretation given to the By-law by this Court will affect the application of the Act. Furthermore, s. 136(1) is reproduced in turn in the corporations law of many provinces, as well as federally: Canada Business Corporations Act , R.S.C., 1985, c. C-44, s. 124 ; Newfoundland Corporations Act, R.S.N. 1990, c. C-36, s. 205; Manitoba Corporations Act, R.S.M. 1987, c. C225, s. 119; Saskatchewan Business Corporations Act, R.S.S. 1978, c. B-10, s. 119; Alberta Business Corporations Act, S.A. 1981, c. B-15, s. 119; British Columbia Company Act, R.S.B.C. 1979, c. 59, s. 152.
XXXIV. The largest difference between s. 136(1) and s. 4.02 of By-law No. 3 is that, whereas under s. 136(1) the director may be indemnified, under the By-law the director shall be indemnified. Is this of any importance? The respondent submits that this difference is relevant to the issue of the burden of proof. Since under the By-law indemnification is mandatory, the onus should lie on the corporation to demonstrate that the director acted with mala fides. I do not find this argument terribly persuasive.
XXXV. What I do find more persuasive is the proposition that persons are assumed to act in good faith unless proven otherwise: General Motors of Canada Ltd. v. Brunet, [1977] 2 S.C.R. 537, at p. 548. In this respect, contrary to the appellant's submissions before this Court, I believe that a proper construction of the statute and law related to good faith issues reveals that Blair is not required to prove his good faith, although he may certainly call evidence in this regard to counter whatever evidence of bad faith may be adduced against him. To a large extent, it is the corporation that must establish, to the satisfaction of the court, exactly what Blair did that was inimical to its best interests.
XXXVI. Section 136(1) and the Enfield By-law specify three conditions that the director or officer must fulfil in order to receive indemnification for the costs of defending in litigation:
(1) the person must have been made a party to the litigation by reason of being a director or an officer of the corporation;
(2) the costs must have been reasonably incurred; and
(3) the person must have acted honestly and in good faith with a view to promoting the best interests of the corporation.
XXXVII. As I will now discuss, Blair has fulfilled all three conditions entitling him to indemnification.
XXXVIII. In terms of applying this law to the facts, I see no reason to disturb the findings of the court below that the expenses were reasonably incurred. The court grounded its assessment in the following factors:
(a)Osler was retained in the annual meeting litigation to act for both Enfield and Blair, in his capacity as chairman of the meeting;
(b)The Enfield board reviewed the issue of whether it should have separate counsel from Blair and determined that there were no grounds for Enfield taking such action;
(c)Blair added nothing to the costs of the litigation arising out of the shareholders' annual meeting;
(d)Blair's conduct following the shareholders' meeting, in requisitioning another shareholders' meeting for the purpose of electing directors, was consistent with his protestations throughout that he had no interest in leading the company if voted out by a majority of informed shareholders.
XXXIX. Thus, this appeal, when properly focused, involves only the "good faith" requirement contained within s. 136(1). In this connection, I now direct my attention to the respondent's conduct during the July 20, 1989 shareholders' meeting, bearing in mind that this conduct must be placed within the context of the longstanding corporate feud arising between the respondent and Canadian Express. However, before a determination can be made whether this conduct was undertaken in good faith and with a view to promoting the best interests of the corporation, I must respond to the appellant's contention that Blair is involved in this litigation in his personal capacity as opposed to his capacity as a director, thereby prima facie precluding him from the benefit of s. 136(1).
B.Is Blair Involved in this Litigation in his Capacity as Director/Chairman of Enfield or in his Personal Capacity?
XL. The appellant submits that the Canadian Express application (and appeals related thereto) is essentially a dispute between two shareholders (Blair and Canadian Express) concerning the 11th position on Enfield's Board. As such, the logical inference to be drawn is that Enfield ought not to reimburse the losing shareholder, in this case Blair.
XLI. I disagree with this characterization of the Canadian Express application. It directly involved the reputation of Enfield and the integrity of its voting procedures; moreover, Blair's participation in the impugned proceedings flows entirely from his role as chairman of the meeting, not from his status as a shareholder. In fact, he was named as a respondent to the Canadian Express application in his capacity as "chairman of the meeting". The fact that, pending the outcome of that application, an interim order was adopted by McRae J. precluding Blair from acting as an Enfield director demonstrates the extent to which Blair was involved qua director, not qua shareholder or individual. Further, both Enfield and Blair were represented by the corporate counsel Osler. In a letter from Osler to counsel for Canadian Express dated July 25, 1989, Osler states:
In your letter dated July 24, 1989, you asked us to clarify who we are representing in these proceedings. In these proceedings we are counsel to Enfield and to Mr. Blair in his capacity as Chairman of the Annual Meeting. We are not acting for Mr. Blair in his personal capacity. [Emphasis added.]
XLII. In short, the impugned acts in this case were corporate acts insofar as they were made within the authority accruing to the chairman of Enfield meetings. I now turn to the content of the chairman's responsibilities for the purposes of s. 136(1) and the question whether Blair's conduct on July 20, 1989 disentitled him from indemnification.
C.Factors Relevant in "Acting Honestly and in Good Faith with a View to the Best Interests of the Corporation"
(i)What are the "best interests of the corporation" in the context of this case?
XLIII. The question is not who is the better director, or whether the corporation's best interests would be furthered by having one rather than the other as the 11th director. Rather, as Carthy J.A. held, the best interests of the corporation in the instant appeal centre solely on the maintenance of the integrity and propriety of the voting procedure.
(ii)The quasi-judicial role of a chairman
XLIV. If chairmen at shareholders' meetings are under a quasi-judicial duty and if Blair is found to have breached that duty, such a finding could constitute evidence in favour of denying him indemnification under s. 136(1).
XLV. At the outset, I would like to express my agreement with Carthy J.A. that the term "quasi-judicial" is, in a certain sense, inappropriate to describe the duty of a chairman when that chairman is also (as will often be the case in the corporate world) interested in the affairs that are being deliberated before him or her. A judge, adjudicator or arbitrator, on the other hand, will ideally never have any interest in the outcome of the proceedings before him or her. Consequently, chairmen of shareholders' meetings cannot labour under "quasi-judicial" duties in the strict sense because that term imports the idea of a wholly disinterested person.
XLVI. In any event, Carthy J.A. correctly observed that it is one thing to state that a chairman is under a quasi-judicial duty, it is quite another to define the content of the responsibilities engendered by such a duty. Clearly, the chairman of any meeting, especially one mandated by and procedurally governed by statute, operates under certain duties of administrative fairness. The key question is to what extent a chairman will be permitted to be interested in the matters before him or her before a conflict of interest arises and he or she should be expected to cede the chair.
XLVII. I would affirm Carthy J.A.'s standard; namely that the duty under which chairmen labour is "one of honesty and fairness to all individual interests, and directed generally toward the best interests of the company" (p. 799). However, when one turns to the application of this standard, a contextual approach is necessary. In this respect, it is very important to focus on the actual conduct of the chairman instead of perfunctorily finding bad faith simply because that person stands in a potential conflict and does not step down. As shall become evident, I do not find that Blair's conduct was such that he improperly used his position as chairman to further his own agenda. It was not his doing that the proxies were temporarily disqualified. We were not pointed to any evidence of a "design" or "plan" for the proxies to be invalidated.
XLVIII. In a sense, the argument of the appellant is rather simplistic: Blair was the chairman and because the proxies were deemed invalid and because no debate was fostered on the issue, Blair must have acted in bad faith. In response, I would affirm the following observations made by the Ontario Court of Appeal (at pp. 798 and 794):
...to conclude that [Blair's] ruling was male fide because the result favoured him is to conclude that he was compelled to rule the other way, or give up the chair, no matter what advice he received....
It can also be assumed that he received the [legal] opinion agreeably and was not unhappy that he could make a ruling to thwart any attempt to alter the slate of directors. That falls short of a plan to deviously sidestep the entitlement of shareholders.
XLIX. I also take issue with the appellant's statement that the fact that a chairman has an interest in the outcome of a decision impugns the integrity of the process because of the mere appearance of bias. With respect, it is the Enfield shareholders who concluded that it is to be the President of the company (who is allowed to be a director) -- a person who invariably is interested in every matter discussed at the shareholders' meetings -- who is to act as chairman (Enfield By-law No. 3, s. 5.05). In this respect, there is no unacceptable appearance of bias because it was never contemplated that the chairman was to be someone who would appear to be totally disinterested in the first place. The fact that a decision-maker has an interest in the outcome of his decision does not disqualify him or her from making decisions if the authority from which he or she obtains the status as decision-maker contemplates that he or she may act as judge in his or her own cause: Alcyon Shipping Co. v. O'Krane, [1961] S.C.R. 299, at p. 305; Walters v. Essex County Board of Education, [1974] S.C.R. 481, at pp. 487-88.
L. The detailed organization of a corporation is essentially a private contractual matter. If the shareholders decide to designate the President as chairman, so be it. If the shareholders are concerned about the maintenance of prima facie impartiality, they can specify through the by-laws or otherwise that the corporate meetings are to be chaired by a neutral third party. It is helpful to note that the drafters of the OBCA considered these issues and in fact established as a default principle that interested parties should operate as chairmen of shareholders' meetings. Section 97(c) of this statute provides:
97. Subject to this Act or the articles or by-laws of a corporation or a unanimous shareholder agreement,
. . .
(c)the president or, in his or her absence, a vice-president who is a director shall preside as chair at a meeting of shareholders....
LI. On a broader note, I find that there are valid policy reasons militating against blindly precluding anyone holding more than a nominal share in a public company from acting as a chairman. This is not practical for many closely held corporations and, moreover, might pave the way for much litigation regarding the definition of "nominal holdings", instead of properly focusing on the actual conduct that is impugned. There are many chairmen who have large holdings in a company yet conduct themselves on a most professional basis in terms of chairing meetings; there may be persons who own just one share who conduct themselves improperly. The focus should thus not be on the size of the holdings, but on the nature of the conduct. This is not to say, however, that there might not be situations in which the nomination of a wholly disinterested chairman is advisable as has apparently been the case in a number of situations that have arisen recently or where the court has appointed such a person pursuant to specific statutory provisions. However, such an exceptional situation is not found in the facts of the present appeal.
LII. I now turn to the jurisprudence cited by the appellant in favour of the proposition that a chairman has a duty to act quasi-judicially: Re Bomac Batten Ltd. and Pozhke (1983), 43 O.R. (2d) 344 (H.C.); Gray v. Yellowknife Gold Mines Ltd., [1946] O.W.N. 938 (H.C.); Johnson v. Hall (1957), 10 D.L.R. (2d) 243 (B.C.S.C.); Re United Canso Oil & Gas Ltd. (1980), 12 B.L.R. 130 (N.S.S.C.); Byng v. London Life Association Ltd. (1988), 42 B.L.R. 280 (Eng. C.A.). I do not find that this jurisprudence supports the appellant's position. Quite the contrary: many of these cases demonstrate the extent to which courts, through hindsight, are reluctant to find chairmen to be in dereliction of their responsibilities barring proof of bad faith. Those remaining cases that offer some assistance to the appellant can readily be distinguished on the facts. To the extent that Re Bomac Batten Ltd. and Pozhke is not distinguishable, I would overrule it.
LIII. On another note, although a chairman has an obligation to promote administrative fairness, this is necessarily tempered with the need to control and organize a meeting so as to ensure that it proceeds effectively. As noted by Chitty J. in National Dwellings Society v. Sykes, [1894] 3 Ch. 159, at p. 162:
A question of some importance has been mooted in this case, with regard to the powers of the chairman over a meeting. Unquestionably it is the duty of the chairman, and his function, to preserve order, and to take care that the proceedings are conducted in a proper manner....
LIV. In closing debate on the proxy issue, Blair was, based on Osler's instructions, fulfilling his responsibility as chairman to see that the shareholders' instructions as set out in the proxies were followed. Further, allowing the meeting to devolve into a shouting match between two rival camps debating a complex and unsettled area of corporations law could hardly be seen as enhancing the validity and integrity of Enfield's voting procedure. The function of a chairman is to oversee, not participate in a partisan sense. It may be sensible to refer briefly to the reason why the chairman is so ruling, but again courts should not attempt to hamstring in advance chairmen of meetings in contested settings. Although it is clearly proper for a shareholder to raise any relevant matter in the manner the Canadian Express representatives did, I cannot find anything improper in Blair's answer to the points raised, especially given his thorough consultation with Enfield's independent legal counsel.
LV. In fact, s. 107 OBCA specifically contemplates that, in an imbroglio such as that presented in this appeal, recourse is to be had to the courts, not to the chairman. The rationale behind this provision is to avoid the spectacle that can result from continual challenges made during the corporate meeting to decisions made by the chair. Section 107 reads as follows:
107.--(1) A corporation, shareholder or director may apply to the court to determine any controversy with respect to an election or appointment of a director or auditor of the corporation.
Blair properly instructed the Canadian Express representatives to take up their grievance with corporate counsel on the basis that the issue involved was a legal one. Despite the fact that corporate counsel were present at the meeting, the Canadian Express representative did not communicate with them.
LVI. On a final note, the duty of a chairman is to give effect to the proxy and ensure that the instructions it contains are followed. In this appeal, many of the beneficial owners of the shares for which proxies had been issued were not present at the meeting. The appellant submits that it was self-evident that these proxy-"givers" wanted to vote for Price. I find this untenable. First, there is no evidence that they had ever turned their minds to Price's candidacy. Second, and more importantly, the chairman has no duty to inquire into the minds of the beneficial owners of shares represented at a meeting: Cohen-Herrendorf v. Army & Navy Department Store Holdings Ltd. (1986), 55 Sask. R. 134 (Q.B.), at p. 148 (at paras. 80 and 81 citing Ontario and U.K. authority). There is no obligation to look behind the proxies. The chairman is simply required to give effect to their instructions. This is precisely what Blair did, believing Osler's interpretation of the instructions and thereby acting with a view to Enfield's best interests. Absentees from the meeting have the right to expect that proxy rules will be followed, and that their proxies will be applied pursuant to the instructions they place upon them.
LVII. In sum, the fact that Blair made the impugned ruling with the bona fide intent that Enfield have a lawfully elected board of directors constitutes evidence that he acted honestly and in good faith and with a view to the best interests of Enfield for the purposes of s. 136(1). Although his decision to disallow the proxies turned out, under judicial scrutiny, to be wrong, it did not evidence any mala fides. I am further buttressed in this conclusion by the fact that Blair entirely relied upon objective legal advice from corporate counsel in arriving at this decision. It is to this factor that I now turn.
(iii)The reliance on the legal advice of corporate counsel
LVIII. How does reliance on legal advice support a claim for indemnification under s. 136(1)? At the outset, I note my agreement with the position of the Court of Appeal that mere de facto reliance on legal advice will not guarantee indemnification. However, 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". In the instant appeal, Blair's reliance on Osler's advice was both reasonable and in good faith.
LIX. Blair sought Osler's advice in the broadest of terms:
"You know the law, I will take my direction from you. What should I do?"
LX. Implicit in this query was not only concern over whether the proxies should be allowed, but also the question whether Blair should step down as chair, or whether he was in any position at all to make a decision. At no time did Enfield's corporate counsel ever suggest that Blair should relinquish control of the chair. If anything, Osler advised Blair that it was his duty, as chairman, to make a ruling. Osler did not advise Blair that he should hear submissions regarding the ruling; nor did they correct Blair's decision not to allow for such submissions. The ruling made by Blair was entirely prepared by Osler: Blair read verbatim from a script, with the exception of one gratuitous comment directed at Price which, although it probably should not have been made, was, given the tense atmosphere, understandable and, even if it were not excusable, certainly did not demonstrate bad faith or an intention to undermine the best interests of the corporation.
LXI. Osler deliberated over these issues for about an hour and a half. Blair did not participate in the substantive aspects of this discussion. There were six senior corporate lawyers present and they were in constant communication with Osler's head office. Furthermore, the conclusions they reached on July 20, 1989 were in line with the conclusions arrived at the night before as well as the results of the research memoranda prepared for Enfield. The point of the matter is that there was no reason for Blair, acting reasonably, to have believed Osler was making a hasty decision based on sketchy advice. In any event, Osler was Enfield's corporate counsel and it strikes me as odd that it would amount to "bad faith" or a dereliction of a chairman's duty of care not to solicit a second opinion from an independent legal counsel.
LXII. The evidentiary record reveals that Blair believed that, in relying on the advice of Enfield's corporate counsel, he acted in a prudent manner, in good faith and with a view to Enfield's best interests. Blair goes so far as to affirm in discovery:
...having gone through an hour, an hour and a half of deliberation, including a discussion with other counsel in their firm, and gone through a full process, I would have felt compelled to accept their advice and act on it.
LXIII. If anything, I am sympathetic to the respondent's submission that he believed that the rejection of Osler's advice, which is what the appellant appears to suggest Blair should have done, could not be in Enfield's best interest:
(a)Blair was not qualified to interpret and apply the law to the ballots and proxies;
(b)Blair owed a duty to shareholders to see that the instructions contained in their proxies were followed;
(c)The shareholders who had not received notice of the surprise nomination of Price and who were not present at the shareholders' meeting and who held enough votes to change the result had they received notice might have a cause of action if Price were declared elected against the advice of Enfield's counsel;
(d)The shareholders who were represented by management proxies had no opportunity to assess Price or to vote in relation to his candidacy, and they relied on Enfield and its chairman to ensure that their rights at the meeting were protected.
LXIV. In deciding not to reject the advice of counsel, Blair in fact fulfilled his fiduciary duty. Consequently, I would disagree with J. Holland J. to the extent that he held otherwise in a series of obiter comments not necessary to the resolution of the question before him (i.e. whether, upon their true construction, the proxies were validly voted).
LXV. The appellant cites some case law in favour of the proposition that reliance on legal advice in and of itself does not entitle an officer or director to indemnification: Central Trust Co. v. Rafuse, [1986] 2 S.C.R. 147; Exco Corp. v. Nova Scotia Savings & Loan Co. (1987), 35 B.L.R. 149 (N.S.S.C.T.D.). Although this principle is found in the jurisprudence, it is not really relevant to the case at bar, given that the decision to permit Blair to be indemnified is not grounded in and of itself in Blair's reliance on the erroneous advice yet, instead, takes root in several considerations, such as the fact that he did not breach his duties as chairman, and is further coloured by the fact that the reliance on Osler's advice was fully made in good faith. I note that the case law cited by the appellant establishes that reliance on counsel's advice (even if it leads to a deleterious result) will strongly militate against a finding of mala fides or fiduciary breach, such a finding being necessary to disentitle one from indemnification. For example, in Exco at pp. 220-21, Richard J. held:
The presence of ... counsel...do[es] have the result of absolving the directors of any allegation of bad faith with respect to their actions.... Directors have a right, indeed a duty to rely on the opinion of counsel....
Although what the directors did, as a board, may have been unlawful, no liability can attach to the directors personally for what they did, having first received advice from...counsel who held himself out as having experience and expertise in that area of law. [Emphasis added.]
LXVI. And, in Rafuse, supra, at pp. 215-16, Le Dain J. held:
The executive officers of the...Company and the members of the Executive Committee of the Board of Directors did not have a duty of care with respect to the legal aspects of a transaction other than to retain qualified solicitors to perform the necessary legal services.... They might well have been negligent had they relied on their own legal judgment in such a case.... the trust company "took the only course open to it to determine the validity of the mortgage, namely, consulting the solicitors."
LXVII. It was reasonable for Blair to believe, and the evidence shows he did believe, that reliance on the advice of Osler was the only course open to him. Thus, it is clear that Blair fulfilled his duty of care under the Rafuse standard. This militates against a finding that he should not be indemnified for the subsequent litigation initiated by Canadian Express. I also note that such a conclusion is consonant with jurisprudence in other contexts which has held that reliance on actuarial and legal advice obtained from competent sources would militate against a finding of misconduct: Bathgate v. National Hockey League Pension Society (1994), 16 O.R. (3d) 761, leave to appeal to the Supreme Court of Canada refused, [1994] 2 S.C.R. viii (for trustees); Canadian Merchant Service Guild v. Gagnon, [1984] 1 S.C.R. 509, at p. 532 (a union's decision not to take a grievance to arbitration).
LXVIII. Of considerable relevance is the fact that reliance on the work of a lawyer has been recognized within the OBCA itself as comprising part of the director's standard of care. Section 135(4) reads as follows:
135. ...
(4) A director is not liable under section 130 or 134 [describing the fiduciary duties and duties of care governing directors' conduct] if the director relies in good faith upon,
...
(b)a report of a lawyer, accountant, engineer, appraiser or other person whose profession lends credibility to a statement made by any such person. [Emphasis added.]
Blair fits within the scope of s. 135(4)(b) given that there was no reason to doubt Osler's competence. Osler was apprised of all the relevant facts, and Blair acted in full accordance with the advice that was given.
LXIX. I should also mention that s. 135(4) codifies the anterior common law director duties of care, in which a director would be absolved of liability if he or she relied upon the work of an official of the company (in the present appeal, corporate counsel) if such work is properly left to that official and, in the absence of grounds for suspicion, the director is justified in trusting that official to perform the duty: Re City Equitable Fire Insurance Co., [1925] Ch. 407, per Romer J., aff'd [1925] Ch. 500 (C.A.). Consequently, directors will be held liable for the misdeeds of officials of the company only if they have been personally negligent or if they have acted unreasonably in relying on an official whose honesty or competence they have reason to suspect.
LXX. On another note, I cannot accept Enfield's submission that Osler was partial to Blair and acted on behalf of Blair and was hence not independent counsel. At all material times, Osler was Enfield's corporate counsel and represented Blair in that capacity as it was professionally obliged to; in fact, the only reason Osler represented Blair at the Canadian Express application was because Enfield was joined as a co-defendant. There is no evidence whatsoever that Osler's advice to Blair during the meeting was influenced by any partiality. Its conclusion as to the validity of the proxies was reasonable and involved a complicated question of law over which J. Holland J. heard, for eight days, expert testimony before reaching his conclusion. This seems to confirm that this issue would not have been solved by giving Canadian Express representatives a few moments to address the shareholders' meeting. Further, it should be remembered that Blair, a layperson, could not have been expected to be suspicious about advice that, prima facie, appeared legitimate and came from Enfield's own corporate counsel. I would affirm the Court of Appeal's finding that the advice given by Osler and followed by Blair would, to a layperson in Blair's circumstances (and with his business experience), have been "ostensibly credible" (p. 801). He thereby acted in accordance with the duties he owed.
(iv)The interests of the shareholders not present at the meeting
LXXI. Many of the persons issuing proxies were not present at the meeting. Although they may very well have been informed of the tensions between Blair and Canadian Express, they would certainly not have expected there to be a contested election for the position of 11th director. At the time the proxies were given to Ravelston and Canadian Express, it was assumed that the 11 persons listed in the management circular would simply be elected. The evidentiary record does not reveal that anyone's mind was alerted to the possibility that the proxyholders would use the proxies to nominate Price over Blair. No notice whatsoever was given of Price's nomination. In this context, I find some merit to Blair's submission that his decision to follow Osler's advice must be viewed also in light of the interests of the shareholders not present at the meeting.
LXXII. In the end, by following the instructions on the proxies and then requisitioning a new shareholders' meeting on July 24, 1989, Blair gave all shareholders an opportunity to make a fully informed decision regarding the election of the directors, thereby promoting the integrity of Enfield's voting procedures. Shareholders holding fully 16 percent of the shares of Enfield who were not aware that Canadian Express would attempt to take control of the Board were thus placed in a position of being able to make an informed choice as to how to vote (see judgment of the Court of Appeal, at p. 801). The corollary is that Canadian Express suffered no prejudice in respect of its voting rights in that it had the opportunity to nominate and support Price at the new meeting or pursue legal action against Enfield. Instead of waiting for the newly requisitioned meeting (at which it could have ensured that its proxies would be filled out as per Osler's instructions), Canadian Express took the far more circuitous route of obtaining Price's election through the court system, with the hope of transferring the costs thereof upon Blair. A similar observation was made by Carthy J.A. (at pp. 802-3):
Given the opportunity provided by Blair's requisition of the meeting on July 24 the more obvious question is why Canadian Express did not drop the litigation. In a way, it was being offered the opportunity to correct the mistake that had apparently been made on July 19 and 20. It was up to the board of Enfield to set the date for the meeting, and at a meeting on July 27 it was decided, without dissent and without Blair's involvement, to do nothing until the outcome of the court case was known....
Blair added nothing to the costs of the proceedings, his requisition of an annual meeting made it possible for the board to hold one before the litigation reached the courtroom, and his conduct was consistent with his protestations throughout that he had no interest in leading the company if voted out by a majority of informed shareholders. [Emphasis added.]
LXXIII. In my mind, the fact that Blair promptly, and contrary to his personal interests, requisitioned a new meeting constitutes further evidence that his actions were taken with a view to the best interests of Enfield. If anything, Canadian Express's decision to pursue this matter through litigation drives against the well-being of Enfield's shareholders, especially those who have no personal interest in who acts as the 11th director, provided simply that individual discharge his or her duties to the corporation in a competent and trustworthy manner.
(v) Policy concerns
LXXIV. Permitting Blair to be indemnified is consonant with the broad policy goals underlying indemnity provisions; these allow for reimbursement for reasonable good faith behaviour, thereby discouraging the hindsight application of perfection. Indemnification is geared to encourage responsible behaviour yet still permit enough leeway to attract strong candidates to directorships and consequently foster entrepreneurism. It is for this reason that indemnification should only be denied in cases of mala fides. A balance must be maintained. As noted by Ziegel et al. Cases and Materials on Partnerships and Canadian Business Corporations, vol. 1 (3rd ed. 1994), at p. 523:
If an officer or director is compensated for acts of fraud or misappropriation effected against the corporation and its shareholders, then, apart from the negative publicity aspect of an explicit judgment against the director or officer, there will be little deterrent value left in legal controls, and agency costs will be left uncontrolled. In essence, indemnification would be tantamount to an employment contract recognizing that a director owes no duty to various corporate constituencies.
Despite the concerns with unrestrained managerial opportunism, a blanket prohibition against arrangements designed to minimize the impact of civil liability may be overbroad. There may be situations in which directors and officers are held liable for conduct that was not coloured by any opportunistic behavior, and reflects outcomes that are the by-product of legitimate business judgments. [Emphasis added.]
LXXV. Given the circumstances of this appeal, denying Blair indemnification would, in my mind, run afoul of these policy concerns. See also Daniels and Hutton, "The Capricious Cushion: The Implications of the Directors' and Officers' Insurance Liability Crisis on Canadian Corporate Governance" (1993), 22 Can. Bus. L.J. 182, at p. 187:
To temper excessive care and activity level reactions to potential gatekeeper liability, modern corporate law statutes permit a corporation to indemnify a director for any expense reasonably incurred in defending, settling or satisfying a judgment for any action, provided that the director's fiduciary duty to act "honestly and in good faith and with a view to the best interests of the corporation" has been fulfilled.
VI. Conclusion And Disposition
LXXVI. The appeal is dismissed. Blair's ruling was made with the bona fide intent that the corporation have a lawfully elected Board of Directors. It is insufficient to say retrospectively that Blair "should have" acted differently or that he did not handle things perfectly in order to deny indemnification under s. 136(1). Actual mala fides must be shown such that the director did not act with a view to the best interests of the corporation. This has not been demonstrated in this case. Therefore Blair is entitled to indemnification for the costs arising out of the application before J. Holland J. (though not for the costs of appealing J. Holland J.'s decision regarding the validity of the impugned proxies, and the expenses related thereto, which Carthy J.A. found not to have been reasonably incurred).
LXXVII. As pronounced at the hearing of the appeal, the appeal is dismissed with costs to the respondent on a solicitor-client basis. After the judgment was pronounced but before reasons were released, Blair brought a motion under rules 5 and 51 of the Rules of the Supreme Court of Canada, SOR/83-74, for an extension of time and a rehearing, to seek clarification of this Court's order with respect to costs. Upon consideration of the materials filed by Blair and Enfield in connection with the motion, and upon consideration of all the circumstances, Blair is awarded his costs on a solicitor and client scale not only in this Court but also in the proceedings before Carruthers J. and in the Ontario Court of Appeal.
Appeal dismissed with costs.
Solicitors for the appellant: Borden & Elliot, Toronto.
Solicitors for the respondent: Patricia A. Virc, Collingwood, Ont.
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