



COURT OF APPEAL
    FOR ONTARIO

CITATION: Cytrynbaum v. Look Communications
    Inc., 2013 ONCA 455

DATE: 20130704

DOCKET: C56147, C56149, C56154,
    C56177 & C56182

MacPherson, Sharpe and Lauwers JJ.A.

BETWEEN

Michael Cytrynbaum
,
First Fiscal
    Management Ltd.
,
Stuart Smith
,

Scott Colbran and
Jason Redman

Applicants (
Appellants
)

and

Look Communications Inc.

Respondent
    (Respondent)

AND BETWEEN

Jolian
    Investments Limited and Gerald McGoey

Applicants (Appellants)

and

Look Communications Inc.

Respondent
    (Respondent)

AND BETWEEN

Alex
    Dolgonos and
DOL Technologies Inc.

Applicants (
Appellant
)

and

Look Communications Inc.

Respondent (Respondent)

Peter H. Griffin, Matthew Sammon and Rory Gillis, for
    the appellants Michael Cytrynbaum and First Fiscal Management Ltd.

Joseph Groia, for the appellants Jolian Investments
    Limited and Gerald McGoey

Edward Babin and Cynthia Spry, for the appellant Stuart
    Smith

Andrew Lewis, for the appellant Jason Redman

Peter Roy and Sean Grayson, for the appellant DOL
    Technologies Inc.

Benjamin Zarnett, David Conklin and Peter Kolla, for the
    respondent

Heard: May 27-28, 2013

On appeal from the judgments of Justice Laurence A.
    Pattillo of the Superior Court of Justice, dated September 28, 2012, with
    reasons reported at 2012 ONSC 4578, 7 B.L.R. (5th) 286.

Sharpe
    J.A.:

[1]

This appeal principally concerns claims by former corporate directors
    and officers of Look Communications Inc. (Look) for advance funding of their
    legal costs to defend an action brought against them by Look. Look alleges they
    improperly conferred upon themselves substantial monetary benefits. The
    appellants assert the right to advance funding based on Looks by-laws and
    various indemnification agreements. The claims for advance funding are resisted
    by Look, pursuant to s. 124(4) of the
Canada Business Corporations Act
,
    R.S.C. 1985, c. C-44 (CBCA), on the ground that advance funding should be
    refused if the appellants did not act honestly and in good faith. The
    application judge agreed with Look and found that as Look had established a
    strong
prima facie
case of bad faith, advance funding should be
    refused.

[2]

The appellants submit that s. 124(4) applies only to derivative actions
    and that to allow Look to raise the issue of bad faith at this preliminary
    stage of the proceedings would effectively eviscerate the right to advance
    funding that is conferred by the by-laws and agreements. They further contend
    that advance funding cannot be denied on the basis of an interim and
    inconclusive finding of bad faith, a finding they say, in any event, is not
    supported by the evidence.

[3]

For the reasons that follow, I would dismiss the appeal. In summary, I
    conclude that s. 124(4) does apply to claims for advancement in suits brought
    by the corporation. The statute imposes a judicial filter on advance funding
    and the strong
prima facie
test for determining whether advancement should
    be denied is apt. That test comports with the statutory requirement for court
    approval but also is sufficiently stringent to ensure that advance funding is
    ordinarily available to those claiming it unless there is strong evidence of
    bad faith. In my view, there was ample evidence to support the application
    judges finding that Looks evidence overcame the presumption of good faith and
    that Look was likely to succeed at trial.

FACTS

1.

The
    Parties

[4]

Look is a CBCA company engaged in the wireless, internet and cable
    services business.

[5]

Michael Cytrynbaum was a director and executive chair of Looks Board of
    Directors. He was also a member of the Boards Compensation and Human Resources
    Committee as well as its Audit and Governance Committee.

[6]

Gerald McGoey and Stuart Smith are also former directors of Look. McGoey
    was Looks Chief Executive Officer, vice chairman of the Board and a member of
    the Compensation and Human Resources Committee. Smith was a non-executive
    director and served as the chair of the Boards Compensation and Human
    Resources Committee.

[7]

Redman was Looks Chief Financial Officer, but did not serve on the
    Board.

[8]

Alex Dolgonos provided technology-related services to Look but was
    neither a director nor officer of the corporation.

[9]

First Fiscal Management Ltd. (First Fiscal), Jolian Investments
    Limited (Jolian) and DOL Technologies Inc. (DOL) are management service
    companies owned by Cytrynbaum, McGoey and Dolgonos respectively.

[10]

Scott
    Colbran
was also a non-executive director of Look and a member of
    the Audit and Corporate Governance Committee. He did not take part in the
    argument before the application judge and he is not an appellant before this
    court.

[11]

Although he is not a party, I note here that Louis Mitrovich was also a
    non-executive director. He settled with Look prior to Looks action and filed
    an affidavit in this proceeding on behalf of Look.

2.

Looks
    Share Appreciation Rights and Options Plans

[12]

Look
    adopted a Share Appreciation Rights Plan (SARs Plan) as an incentive to its
    directors, officers, employees and consultants. The SARs Plan allowed Look to
    award its directors, officers and consultants share appreciation rights, based
    upon the market value of Looks shares. The SARs could be exercised,
inter
    alia
, if Look sold all or substantially all of its assets and entitled the
    holder to be paid the difference between the market price of the shares on that
    date and the price on the date the SARs were granted. Cytrynbaum, McGoey and
    Dolgonos were all granted SARs and they, in turn, assigned the SARs to their
    companies. Those parties and Smith were also granted options in Look shares.

3.

The Sale
    of Looks Assets

[13]

Looks
    business was in serious decline from 2005 to 2008. The Board was unable to sell
    the company or to obtain the capital required to compete successfully. By late
    2008, Looks Board decided to attempt to sell Looks assets pursuant to a CBCA
    plan of arrangement under the supervision of a monitor. A sale was achieved in
    the period from January to May 2009 whereby Look sold its key assets for $80
    million to a partnership formed by Rogers and Bell, Inukshuk Wireless
    Partnership, less $16 million to be paid to Bell to settle certain outstanding
    litigation. The sale was approved by shareholders and by the court.

[14]

On
    June 16, 2009, Looks Board accepted McGoey and Redmans recommendation to set
    aside $11 million for severance, retention and bonus payments. The Board also
    accepted managements proposal to authorize payments to terminate the SARs and
    cancel all options on the basis of a share valuation of $0.40 per share,
    contrary to the terms of both the SARs and Option Plans that specified that
    market value was to be used. At the time, the market price of the shares was
    approximately $0.20.

[15]

The
    sale to Inukshuk closed on September 11, 2009. Following the closing, Look paid
    $20,008,709, or 32 per cent of the net sale proceeds, to its officers,
    directors, employees and consultants by way of bonuses and equity cancellation
    payments. The payments to Cytrynbaum, McGoey and Dolgonos were made to First
    Fiscal, Jolian, and DOL respectively.

[16]

The
    payments are set out in chart form at para. 25 of the application judges
    reasons:




Name

Bonus

Equity Cancellation Payment

Total

% of Net Sales Proceeds




First Fiscal/Cytrynbaum

$2,400,000

$1,746,104

$4,146,104

6.6%



Jolian/McGoey

$2,400,000

$3,165,698

$5,565,698

9.0%



DOL/Dolgonos

$2,400,000

$1,550,737

$3,950,737

6.3%



Redman

$1,107,000

$393,000

$1,500,000

2.4%



Smith

─

$195,367

$195,367

0.3%



Colbran

─

$195,367

$195,367

0.3%



TOTALS
          FOR APPLICANTS

$8,307,000

$7,246,273

$15,553,273

24.9%



Mitrovich

─

$195,367

$195,367

0.3%



Others

$2,776,397

$1,483,672

$4,260,069

6.9%



Total Payments

$11,083,397

$8,925,312

$20,008,709

32.1%



[17]

Those
    payments were not disclosed to the shareholders until January 2010 when a
    management information circular was issued. Once disclosed, the payments
    immediately attracted strong shareholder criticism. The appellants anticipated
    that they would be sued and, at a Board meeting in June 2010, decided to
    authorize Look to pay $1,550,000 as retainers to three law firms acting for
    them personally. Immediately after those retainers were paid, the individual
    appellants resigned as directors and officers of Look.

4.

Looks
    Claim

[18]

Looks
    new management and Board of Directors commenced an action in July 2011 alleging
    breach of fiduciary duty, breach of statutory duty, negligence and unjust
    enrichment and claiming repayment of the bonuses and equity cancellation
    payments. A subsequent motion sought repayment of the bonuses and equity
    cancellation payments pursuant to s. 192 of the CBCA.

5.

The
    Appellants Claims

[19]

The
    appellants commenced the applications that are the subject of these appeals
    when Look refused indemnity and advance funding for their legal costs. They
    seek declaratory and other relief to require Look to indemnify them for their
    legal costs in defending Looks claim and directing Look to advance to them all
    expenses incurred in defending the claim.

6.

By-Laws
    and Indemnity Agreements

[20]

Looks
    by-laws provide for indemnity and advance funding in the following terms:

3.12
Indemnity of
    Directors and Officers.
Subject to the provisions of the Act, the
    Corporation shall indemnify a director or officer of the Corporation, a former
    director or officer of the Corporation or another individual who acts or acted
    at the Corporations request as a director or officer, or an individual acting
    in a similar capacity, of another entity, against all costs, charges and
    expenses, including an amount paid to settle an action or satisfy a judgment,
    reasonably incurred by the individual in respect of any civil, criminal, administrative,
    investigative or other proceeding in which the individual is involved because
    of that association with the Corporation or other entity; and the Corporation
    shall with the approval of a court, indemnify such individual or advance moneys
    under this section 3.12 in respect of an action by or on behalf of the
    Corporation or other entity to procure a judgment in its favour, to which such
    individual is made a party because of such individuals association with the
    Corporation or other entity as described above against all costs, charges and
    expenses reasonably incurred by such individual in connection with such action,
    if in each case such individual:

(a) acted honestly and in good
    faith with a view to the best interests of the Corporation, or, as the
    case may be, to the best interests of the other entity for which the individual
    acted as director or officer or in a similar capacity at the Corporations
    request; and

(b) in the case of a criminal
    or administrative action or proceeding that is enforced by a monetary penalty,
    the individual had reasonable grounds for believing that his or her conduct was
    lawful.

The Corporation shall advance moneys to
    an individual referred to hereinabove for the costs, charges and expenses of a
    proceeding referred to hereinabove. Such individual shall repay the moneys if
    the individual does not fulfil the conditions set out in paragraphs (a) and (b)
    above.

[21]

In addition to the by-laws, both the individual and corporate
    appellants (except DOL) rely on indemnification agreements they entered with
    Look which provide indemnity and advancement in broader and more generous
    terms.

With respect to DOL, Look signed an
    indemnification agreement with AD Enterprise which in turn assigned the
    agreement to DOL.
The agreements provide for indemnification in
    proceedings brought by third parties or [b]y or in the [r]ight of the
    Corporation in cases in which the party claiming indemnity acted honestly and
    in good faith and with a view to the best interests of the Corporation. The
    indemnification agreements also deal with advancement of expenses. Section 2(a)
    provides:

Advancement of Expenses.
The Corporation shall advance all expenses incurred by Indemnitee in
    connection with the investigation, defence, settlement or appeal of any civil
    or criminal action or proceeding referenced in Section 1(a) or (b) hereof.
    Indemnitee hereby undertakes to repay such amounts advanced only if, and to the
    extent that, it shall ultimately be determined by a court of competent
    jurisdiction from which no further right of appeal exists that Indemnitee is
    not entitled to be indemnified by the Corporation as authorized hereby. The
    advances to be made hereunder shall be paid by the Corporation to Indemnitee
    (or, if requested by the Indemnitee, shall pay the expenses directly) within 10
    days following delivery of a written request therefor (accompanied by written
    evidence of the expense claimed) by Indemnitee to the Corporation.

LEGISLATION

[22]

The claims for advance funding are governed by s. 124 of the CBCA, the
    relevant portions of which are as follows:

Indemnification

124
.
(1) A
    corporation may indemnify a director or officer of the corporation, a former
    director or officer of the corporation or another individual who acts or acted
    at the corporations request as a director or officer, or an individual acting
    in a similar capacity, of another entity, against all costs, charges and
    expenses, including an amount paid to settle an action or satisfy a judgment,
    reasonably incurred by the individual in respect of any civil, criminal,
    administrative, investigative or other proceeding in which the individual is
    involved because of that association with the corporation or other entity.

Advance of costs

(2) A corporation may advance
    moneys to a director, officer or other individual for the costs, charges and
    expenses of a proceeding referred to in subsection (1). The individual shall
    repay the moneys if the individual does not fulfil the conditions of subsection
    (3).

Limitation

(3) A corporation may not
    indemnify an individual under subsection (1) unless the individual

(a) acted honestly and in good
    faith with a view to the best interests of the corporation, or, as the case may
    be, to the best interests of the other entity for which the individual acted as
    director or officer or in a similar capacity at the corporations request; and

(b) in the case of a criminal
    or administrative action or proceeding that is enforced by a monetary penalty,
    the individual had reasonable grounds for believing that the individuals
    conduct was lawful.

Indemnification in
    derivative actions

(4) A corporation may with the
    approval of a court, indemnify an individual referred to in subsection (1), or
    advance moneys under subsection (2), in respect of an action by or on behalf of
    the corporation or other entity to procure a judgment in its favour, to which
    the individual is made a party because of the individuals association with the
    corporation or other entity as described in subsection (1) against all costs,
    charges and expenses reasonably incurred by the individual in connection with
    such action, if the individual fulfils the conditions set out in subsection
    (3).

Right to indemnity

(5) Despite subsection (1), an
    individual referred to in that subsection is entitled to indemnity from the
    corporation in respect of all costs, charges and expenses reasonably incurred
    by the individual in connection with the defence of any civil, criminal,
    administrative, investigative or other proceeding to which the individual is
    subject because of the individuals association with the corporation or other
    entity as described in subsection (1), if the individual seeking indemnity

(a) was not judged by the court
    or other competent authority to have committed any fault or omitted to do
    anything that the individual ought to have done; and

(b) fulfils the conditions set
    out in subsection (3).

REASONS OF THE APPLICATION JUDGE

[23]

The
    application judge gave detailed and comprehensive reasons for dismissing the
    appellants claims for advance funding.

[24]

He
    considered and rejected the appellants contention that s. 124(4) applies only
    to derivative actions. He found that the words by or on behalf of the
    corporation clearly and unambiguously include both actions brought by the
    corporation itself and actions brought on behalf of the corporation. He also
    found that interpreting s. 124(4) to embrace actions brought by the corporation
    was consistent with the overall scheme established by s. 124 as a whole and
    that the supervisory jurisdiction contemplated by s. 124(4) was properly
    invoked to balance and reconcile the competing interests that arise when a
    corporation sues former directors and officers for breach of fiduciary duty. As
    he put it at para. 60: Actions which have no merit should not delay
    advancement. On the other hand, directors or officers who have engaged in
    misconduct towards the corporation ought not to be allowed to use corporate
    funds to defend themselves.

[25]

The
    application judge rejected the contention that the marginal note to s. 124(4) 
    Indemnification in derivative actions  was sufficient to restrict the
    unambiguous wording of the provision to derivative actions. He considered and
    declined to follow
Jolian Investments Ltd. v. Unique Broadband Systems Inc
.,
    2011 ONSC 3241, 90 B.L.R. (4th) 188, which held that the virtually identically
    worded s. 136(4.1) of
Ontarios
Business Corporations Act
, R.S.O. 1990, c. B.16 (OBCA") applied only
    to derivative actions because of a similar marginal note.

[26]

The
    application judge noted that s. 124 is a complete code as to indemnity and
    advancement, citing to this courts decision in
R. v. Bata Industries Ltd.
(1995), 25 O.R. (3d) 321 (C.A.) in which the court held that s. 136 of the OBCA
    provides a comprehensive code in indemnification and advancement claims. He
    declined to follow Delaware authority to the effect that advancement can be
    provided without any pre-trial court approval or good faith inquiry as there is
    no statutory equivalent to s. 124(4) of the CBCA in Delaware law.

[27]

The
    application judge held that the appellant officers and directors were entitled
    to the benefit of the presumption of good faith established in
Blair

v.
    Consolidated Enfield Corp
., [1995] 4 S.C.R. 5 and that it was for Look to
    lead evidence to rebut that presumption. He concluded, at para. 87, that the
    appropriate test was as follows: Look must establish a strong
prima facie
case that the [a]pplicants acted
mala fides
towards the corporation.
    That is, [Look] must establish on the evidence that it is likely to succeed at
    trial.

[28]

The
    application judge then carefully considered the evidence alleging bad faith. He
    focussed on two incidents, namely, the approval of the equity cancellation
    payments in 2009 and the payment of the retainers in 2010.

[29]

The
    application judge found that Look had made out a strong
prima facie
case that the appellants had acted in bad faith by using a share value of $0.40
    to fix the equity cancellation payments because the market value of Looks
    shares in the period when the proposed sale of Looks assets was announced and
    approved ranged from $0.16 to $0.23. He found that the $0.40 value bore no
    relation to the market value and was contrary to the terms of the SARs and
    Options Plans, that it was determined without any consultation with a
    compensation or valuation expert, and that it resulted in conferring personal
    benefits of approximately $9 million largely on the appellants at the expense of
    the corporation. The application judge rejected the contention that the legal
    advice the Board had received provided the appellants with a defence because
    the advice extended only to the Boards general authority to make compensation
    awards and not to the decision to use the $0.40 per share valuation.

[30]

The
    application judge further found that the retainer payments were made more or
    less contemporaneously with the appellants resignation in the face of a
    mounting wave of shareholder complaints, and without the support of proper
    legal advice despite the caution sounded by a lawyer retained by the Board who
    was then excluded from the meeting held to consider the payments.

[31]

The
    application judge concluded that all the individual applicants, except
    Dolgonos, should be denied advance funding. He found that there was
    insufficient evidence to conclude that Dolgonos was an officer of Look at the
    relevant time or that he was involved with the impugned decisions. Dolgonos was
    therefore not subject to s. 124(4) and instead entitled to advance funding
    under the terms of his indemnity agreement.

[32]

The
    claims for advance funding by First Fiscal, Jolian and DOL turned solely on the
    interpretation of the indemnification agreements as s. 124 applies only to
    directors and officers. The application judge held that these corporate
    claimants were effectively asking for a mandatory injunction and failed to meet
    that test for several reasons. First, the indemnification agreements apply when
    the claimant was a director, officer, employee, consultant or agent. The
    application judge found that neither Jolian nor DOL fell within that class. Second,
    none of the corporate appellants led any evidence of irreparable harm. Finally,
    given the circumstances behind the payments made to the corporate appellants,
    the balance of convenience favoured Look. The findings made against Cytrynbaum
    and McGoey made advance funding in favour of the corporations they controlled,
    First Fiscal and Jolian, inappropriate.

ISSUES

[33]

The
    issues raised by the appellants fall under five headings:

1.

Did the application judge err in refusing to restrict the application of
    s. 124(4) to derivative actions?

2.

Did the application judge err in refusing advance funding on the basis
    of the strong
prima facie
case standard?

3.

Were the appellants denied the opportunity to respond to Looks
    allegations of bad faith?

4.

Did the application judge err in finding that Look had made out a strong
prima facie
case of bad faith?

5.

Did the application judge err in refusing to approve advance funding for
    Smith, Redman, First Fiscal, Jolian and DOL?

ANALYSIS

Issue 1.
Did the
    application judge err in refusing to restrict the application of s. 124(4) to
    derivative actions?


[34]

The appellants submit that s. 124(4) applies only to derivative actions
    and therefore does not apply to their claims. That argument, essentially based
    on the marginal note that appears beside s. 124(4)  Indemnification in
    derivative actions  was accepted in
Jolian Investments Ltd
. For the following reasons, I conclude that the application judge
    correctly rejected the argument and that he properly interpreted s. 124(4) to
    apply to actions brought by the corporation as well as derivative actions.

[35]

The preferred approach to any exercise of statutory interpretation is
    that the words of an Act are to be read in their entire context and in their
    grammatical and ordinary sense harmoniously with the scheme of the Act, the
    object of the Act, and the intention of Parliament:
Bell Express Vu
    Limited Partnership v. Rex
, 2002 SCC 42, [2002] 2 S.C.R.
    559, at para. 26, citing Elmer A. Driedger,
Construction of Statutes
, 2d ed. (Toronto: Butterworths, 1983), at p. 87.

[36]

In my view, the words by or on behalf of the corporation, when read
    in the manner mandated by
Bell Express Vu
, unambiguously
    cover both derivative actions, which are brought on behalf of the corporation,
    and actions that are brought by the corporation, such as to one at issue on
    this appeal.

[37]

I look first to the words of the Act in their grammatical and ordinary
    sense. On its face, s. 124(4) appears to apply to two types of actions: (1) actions
    brought by the corporation, that is, actions brought by the corporation
    itself;
and

(2) actions brought on behalf of the
    corporation, that is, derivative actions. This interpretation is fortified by
    reference to the language used to deal with derivative actions in the CBCA. A
    derivative action is one brought 
in the name
and
on behalf of
    a corporation under s. 239(1) in circumstances in which the directors refuse
    to commence proceedings and the court determines that it is in the best
    interests of the corporation that an action be brought (emphasis added).
The use of the disjunctive or in s. 124(4), distinguishing between
    actions brought by and actions brought on behalf of the corporation, may be
    contrasted with the conjunctive and in s. 239 dealing with derivative
    actions.
By using the words
by
or
on behalf of the corporation in s. 124(4), Parliament adopted
    language that includes both derivative actions brought on behalf of the
    corporation and actions brought by the corporation itself.

[38]

The appellants argue that the application judge erred by refusing to
    follow
Jolian Investments Ltd.,
a case involving
    some of the parties to this proceeding arising from circumstances related to
    those at issue here.
Jolian Investments Inc.
dealt with s. 136(4.1) of the OBCA. Marrocco J. held that s. 136(4.1) applied
    only to derivative actions and that consequently, court approval was not
    required for advance funding for the legal costs of former officers and
    directors when the action was brought by the corporation itself. He reached that
    conclusion essentially for two reasons. First, he found that the heading
    accompanying s. 136(4.1)  Derivative actions  could be used as an
    interpretive aid. Second, he held that it made sense for the legislature to
    give the court supervisory jurisdiction over the payment of legal costs in
    derivative actions as the court already exercises a supervisory role in
    derivative actions. While Marrocco J. did decide the point, I note that in the
    circumstances before him it had little practical import. As he pointed out at
    para. 138, even if s. 136(4.1) did apply to the individual director (Gerald
    McGoey, one of the appellants in the case at bar), it would not have had any
    appreciable effect on the corporations exposure to pay advance costs as
    McGoeys costs would be the same as those of his company Jolian which was not
    subject to s. 136(4.1) in any event.

[39]

I agree with the application judge that
Jolian Investments Ltd.
should not be followed for the following reasons.

[40]

In my respectful view, Marrocco J. placed undue weight on the marginal
    note to narrow the meaning of the clear words of the enactment. Headings are a
    valid indicator of legislative meaning and may be taken into account in
    interpretation: Ruth Sullivan,
Sullivan on the Construction of
    Statutes
, 5th ed. (Markham: LexisNexis, 2008), at p. 394.
    But headings are not of controlling importance and they will not have a
    confining effect to a narrow class suggested by the heading when the
    unambiguous words of the section have a broader reach: see
Law
    Society of Upper Canada v. Skapinker,
[1984] 1 S.C.R. 357,
    at p. 377
;
R. v. Stevenson
(1980), 57 C.C.C. (2d) 526 (Ont.
    C.A.), at pp. 529-30.

[41]

Moreover, here, we are dealing not with a heading but with a marginal
    note that appears in the margin beside each subsection in the printed version
    and above in the electronic version. As Sullivan

explains, at p. 397, marginal notes are primarily finders aids
    designed to offer the reader a quick overview and to permit users with
    particular questions to skim through [the statute] rapidly in search of
    relevant sections: Ruth Sullivan,
Sullivan on the Construction of
    Statutes
, 5th ed. (Markham: LexisNexis, 2008). The
Interpretation
    Act
, R.S.C. 1985, c. I-21, s. 14 provides that marginal
    notes
form no part of the enactment, but are inserted for convenience
    of reference only
. In
Imperial Oil Ltd. v. Canada
, 2006 SCC 46, [2006] 2 S.C.R. 447, at para. 57, LeBel J. observed:
    Although marginal notes are not entirely devoid of usefulness, their value is
    limited for a court that must address a serious problem of statutory
    interpretation. In my view, the marginal note 
Indemnification in
    derivative actions cannot cut down or limit the meaning of the
unambiguous wording of the text of s. 124(4) which extends its reach to actions
    by or on behalf of the corporation.

[42]

I also find it difficult to see any principled rationale for applying
    one regime for advance costs in derivative actions and another for actions
    brought by the corporation itself. As the application judge pointed out at para.
57
: the objective underlying the indemnity provisions for
    directors and officers is to maintain a balance between, on the one hand,
    encouraging responsible behaviour by directors and officers and, on the other
    hand, permitting enough leeway to attract strong candidates to foster
    entrepreneurism (citing
Blair
, at para. 74;
Bennett
    v. Bennett Environmental Inc.
, 2009 ONCA 198
, 94 O.R. (3d) 481, at paras.
    23-25). The purpose of achieving an appropriate balance between encouraging
    responsible behaviour and attracting strong entrepreneurial candidates applies
    whether the directors and officers are faced with a derivative action or an
    action by the corporation itself. Both kinds of action flow from
    dissatisfaction with the conduct of the officers or directors; both expose the
    directors or officers to scrutiny for their conduct; and both reflect
    situations in which the officers and directors have lost control over litigation
    affecting or relating to the affairs of the corporation.

[43]

I note as well that while the point does not appear to have been
    argued, in
Med-Chem Health Care Ltd. v. Misir
,
    2010 ONCA 380, 103 O.R. (3d) 769 and
Catalyst Fund General Partner I
    Inc. v. Hollinger Inc
. (2006), 15 B.L.R. (4th) 48 (Ont.
    S.C.), this court and the Superior Court proceeded on the basis that court
    approval was required for a claim for advance funding in suits brought by the
    corporation governed by s. 124(4) of the CBCA or s. 136 or the OBCA.

[44]

The appellants urge us to restrict the meaning of s. 124(4) to avoid
    imposing a merits-based threshold on advancement of legal costs that would
    undermine the right to indemnity conferred by the by-laws and reinforced by the
    indemnity agreements. In the present case, Look filed a substantial record,
    cross-examinations were conducted and a two-day contested hearing followed. The
    appellants complain that requiring them to litigate the issues underlying the
    action without funding effectively deprives them of their right to indemnity.

[45]

The appellants place considerable reliance on the law of Delaware where
    advance costs are awarded without any scrutiny of the conduct of the director
    or officer in part on the theory that the corporation should not be permitted to
    withdraw the promise of indemnity because of a subsequent harsh judgment of the
    director or officers conduct: see e.g.,
Reddy v. Electronic Data
    Systems Corp
., 2002 WL 1358761 (Del. Ch. June 18, 2002),
    affd 820 A.2d 371 (Del. 2003); Stephen A. Radin, Sinners Who Find Religion:
    Advancement of Litigation Expenses to Corporate Officials Accused of
    Wrongdoing (2006) 25 Rev. Litig. 251.

[46]

In my view, apart from demonstrating that it is motivated by a very
    different underlying policy than that adopted by Parliament in s. 124(4),
    Delaware law does not assist us in resolving the issue on this
appeal.
Unlike
    the CBCA, the Delaware General Corporation Law does not require court approval
    of the advancement of legal expenses: Del. Code Ann. tit. 8,
§ 145 (West
    2011)
.

By enacting s.
    124(4), Parliament has determined that whatever corporate by-laws or agreements
    promise, by statute, advancement of legal costs requires court approval and
    court approval should be withheld if the officer or director has not acted in
    good faith and in the best interests of the corporation. That represents a
    fundamentally different policy choice than that prevailing in Delaware, a
    policy choice that this court must respect.

[47]

The appellants also cite
Med-Chem Health Care Ltd.
, at para. 20, in which this court observed that the legislature had
    made advancement a part of the statutory indemnification scheme, recognizing
    the reality that requiring an individual to fund his or her legal costs of
    litigation until its conclusion before being provided with indemnification
    would seriously impair the objective of indemnification itself. But that
    statement describes only one side of the balance struck by the legislature,
    namely, allowing corporations to extend appropriate protections to corporate
    officers and directors. By imposing a pre-trial good conduct filter on the
    right to advancement, both Ontario and federal legislation also foster another
    purpose, namely, the discouragement of bad behaviour by corporate officers and
    directors. As the legislation we must interpret embraces both purposes, we
    cannot accept the appellants contention that full weight be given to one
    purpose and the other ignored. Rather, the courts task is to achieve an
    appropriate balance or reconciliation between the two.

[48]

This
    court held in
Bata Industries Ltd.,
at p. 329, that s. 136 of the
    OBCA, the Ontario equivalent to s. 124 of the CBCA, is 
a
    comprehensive code of general application by which the indemnification of
    officers and directors, and former officers and directors, is regulated. Like
    s. 136 of the OBCA, s. 124 establishes the circumstances under which a
    corporation
may
, with and without court approval,
    indemnify an officer or director, and when a corporation
must
indemnify an officer or director and, [b]y implication  the
    circumstances under which a corporation
cannot
indemnify an officer or director. It follows that the by-laws and
    indemnity agreements cannot oust s. 124(4). Section 124(4), when read with the
    other subsections of s. 124, provides that court approval is required for
    advance funding and that approval can only be granted
if the officer or
    director claiming advancement acted honestly and in good faith with a view to
    the best interests of the corporation. The application judge correctly held
    that the provision applied in this case to the directors and officers claims
    for advance funding.

Issue 2. Did the application
    judge err in refusing advance funding on the basis of the strong
prima facie
case standard?

[49]

The
    application judge held, at para. 87, that while the appellant directors and
    officers were entitled to the benefit of the presumption of good faith
    established in
Blair
, it was open to Look to lead evidence to rebut
    that presumption by establishing a strong
prima facie
case that the [a]pplicants
    acted
mala fides
towards the corporation. In the application judges
    view, if Look could demonstrate that it was likely to succeed at trial in
    proving
mala fides
, court approval for advance funding should be
    refused under s. 124(4). According to the application judge, Look had met this
    burden.

[50]

In
    his very capable submission, Mr. Griffin argues that the application judge
    erred in adopting the strong
prima facie
case test and that court
    approval for advance funding should be denied only when the evidence rises to such
    a level that a court is able to make a final determination of
mala fides
.
    He based that submission on: (1) the wording of the indemnity agreements; (2)
    the fact that the appellants proceeded by way of application rather than
    interlocutory motion; (3) the contention that to deny advance funding is to
    eviscerate the right to indemnity; and (4) the decision in
Blair
to
    the effect that corporate officers and directors are presumed to act in good
    faith.

[51]

I
    turn first to the wording of the indemnity agreements.
I agree
    with the appellants that if the matter fell to be determined solely on the
    wording of the indemnity agreements, advance funding could only be denied on
    the basis of a final and conclusive judicial determination of
mala
    fides
and that an interlocutory finding of a strong
prima
    facie
case would not be sufficient. However, the issue must
    be decided on the basis of the overriding language of s. 124(4). Court approval
    for advance funding may only be given when the claimant satisfies
the
    conditions set out in subsection (3), namely, that he or she acted honestly
    and in good faith with a view to the best interests of the corporation.
I do not see how it is possible to avoid the conclusion that s. 124(4)
    contemplates that the right to advance funding is subject to court approval before
    trial and that a final determination of the issue of bad faith and indemnity
    must await trial.

[52]

The second argument is procedural. The appellants request for advance
    funding was advanced by way of an originating application rather than as a
    motion in Looks action. The appellants argue that as they proceeded by way of
    application which led to a final determination of their claims, the application
    judge erred by adopting a test applicable to interlocutory proceedings.

[53]

I do not accept the submission that the procedural vehicle chosen by
    the appellants to advance their claims determines the test to be applied. The
    applications did lead to a final determination of the appellants claims for
    advance funding, but that does not determine the test to be applied. By its
    very nature, a request for advance funding invites a preliminary assessment of
    the merits of the case but one that is not final and that does not bind the
    parties for the purposes of the Look action.

[54]

It is widely accepted that this type of preliminary merits-based
    assessment is distinct from a final determination of the dispute. When
    preliminary or interlocutory orders require some assessment of the merits
    (including, for example, motions for interlocutory injunctions, motions for
    leave to proceed after the expiry of procedural time periods or motions for a
    stay pending appeal), the court is cautioned against attempting to make
    anything approaching a final determination of the issue. The court typically
    looks to see if the case is arguable, raises a serious issue to be tried or
    is not frivolous and vexatious. If a preliminary or interlocutory order will
    have drastic consequences (including, for example, an interlocutory mandatory
    injunction or a
Mareva
or
Anton Piller
order), the bar is raised to the level of strong
prima
    facie
case.

[55]

Third, I do not agree that the strong
prima facie
test eviscerates the right to advance funding. In my view, the
    application judge was correct in finding that s. 124(4) requires some
    assessment of the merits of the corporations allegations of bad faith as a
    condition for advance funding. He correctly acknowledged that the appellants
    were entitled to the presumption of good faith as officers and directors, but
    also that the corporation could lead evidence to rebut that presumption. He
    recognized that the issues of indemnity and advance funding required a balance
    to be struck between providing adequate protections and incentives to attract strong
    candidates who foster entrepreneurialism and to encourage responsible
    behaviour.

[56]

In my view, the strong
prima facie
case
    test strikes an appropriate balance between those competing considerations. It
    is a stringent test that gives significant weight to the protection of officers
    and directors. It ensures that they will ordinarily receive advance funding but
    leaves open the possibility that advancement will be denied when there is
    strong evidence of bad faith.

[57]

Indeed, it seems to me that to accept the argument that advance funding
    should only be refused when the court is able to make a final determination of
mala
    fides
would be inconsistent with the very policy argument upon
    which the appellants rely, namely, that corporate officers and directors should
    not be forced to litigate the issue of
mala fides
without advance funding. The appellants cannot escape the fact that s. 124(4) legislatively
    imposes the requirement of court approval for advance funding. To set the
    standard for approval as the equivalent of a final determination would allow
    the corporation to force officers and directors to defend the entire case on a
    preliminary motion or application without advance funding.

[58]

Finally, I do not agree that the application judge erred in his
    application of the presumption of good faith mandated by
Blair
. He gave the appellants the benefit of the presumption of good faith,
    as required by
Blair
, but held that Look had
    overcome that presumption by adducing evidence that made out a strong
prima
    facie
case of bad faith.
Blair
does not establish an irrebuttable presumption of good faith. Nor do I
    agree that by stating in
Blair
, at para. 35, that
    persons are assumed to act in good faith unless proven otherwise, the Supreme
    Court should be taken to have precluded a court from making a finding of a
    strong
prima facie
case of bad faith when it
    would be inappropriate for the court to make a definitive finding.

[59]

In my view, the application judge correctly refused to advance funding
    on the basis of the strong
prima facie
case
    standard.

Issue 3. Were the appellants
    denied the opportunity to respond to Looks allegations of bad faith?

[60]

I do not accept the submission that the appellants were denied the
    opportunity to respond to the case advanced by Look. As applicants, they filed
    the evidence they thought they needed to support their claims. They were then
    faced with Looks record responding to their claims. They brought a motion to
    strike Looks evidence on the basis that the issue of bad faith was not
    properly before the court. That motion was dismissed by Newbould J. who
    expressed doubt as to the correctness of
Jolian Investments Ltd.
, and held that the issue should be left for the application judge to
    decide. He stated: It is up to the applicants to decide whether to respond to
    these affidavits and that it is for them to decide whether to file responding
    materials or not. The appellants appear to have made a tactical decision to
    respond to Looks defence to their claims for advancement primarily on the
    ground that the court was not entitled to consider the merits of Looks
    contention that they had acted in bad faith. Only Cytrynbaums affidavit
    responded to Looks evidence of bad faith. To the extent the appellants limited
    their response, it is apparent that they did so as a tactical choice. Having
    made that choice, they must bear the consequences.

Issue 4. Did the application
    judge err in finding that Look had made out a strong
prima facie
case of bad faith?

[61]

The
    application judges conclusion that Look had established a strong
prima
    facie
case of bad faith rested on two findings. First, he found that the
    $0.40 share valuation to fix the equity cancellation payments bore no relation
    to the market value of the shares and that it resulted in substantial benefits
    being paid to the appellants at the expense of the corporation. Second, he
    found that the appellants had authorized without proper legal advice retainer
    payments of $1.55 million for their lawyers immediately before they resigned in
    the face of a growing shareholder discontent. Both findings relate to the sale
    of Looks assets through the CBCA plan of arrangement process that realized a
    value that disappointed Looks shareholders and from which the appellants paid
    themselves one quarter of the proceeds in compensation awards.

[62]

The
    appellants attack the first finding on the ground that the application judge
    erred by failing to give appropriate weight to their reliance on legal advice.
    In my view, this submission is without merit. The application judge recognized,
    at para. 106, that following legal advice can provide a defence to allegations
    of bad faith. He concluded, however, that the evidence of legal advice received
    by the Board only addressed the general authority of the Board to make special
    compensation awards and that there was no evidence  that the decision to
    value Looks shares at $0.40 a share for the equity cancellation payments was
    based on legal advice.

[63]

I
    see no basis for interference with that finding. The solicitors opinion letter
    to the Board is a carefully worded document that expresses no view as to the
    valuation of the shares. The solicitor, a partner of a major Toronto law firm,
    advised the Board in very general terms of its duty to act honestly and in the
    best interests of the corporation. He referred to the business judgment rule which
    gives deference to the decisions of the directors provided those decisions fall
    within a range of reasonable alternatives. He indicated that on restructuring
    or winding down, it is common for a Board of Directors to authorize special
    incentive payments to retain key individuals provided that doing so is in the
    best interests of the corporation. There is nothing, however, in the letter as
    to the valuation of the Look shares. Indeed, it is not clear to me that the
    actual valuation, as distinct from the process the Board had to follow, was a
    matter for legal opinion. There is conflicting evidence from the solicitor and
    Cytrynbaum as to whether the solicitor knew the valuation the Board proposed to
    use. If he did know, he studiously avoided expressing any opinion on it and
    there is no indication that he was asked to do so. At best, the evidence
    indicates that the Boards legal advisor advised that the valuation of the
    shares was a matter of business judgment to be exercised in the best interests
    of the corporation, and that he said nothing to dissuade the Board from
    adopting the $0.40 valuation.

[64]

In
    my view, the application judge made no palpable and overriding error of fact
    and no error of law in concluding that silence by a corporate solicitor on a
    matter that falls outside the realm of legal expertise and for which his advice
    was not sought by the Board does not amount to a defence to an allegation of
    bad faith.

[65]

Cytrynbaums
    evidence was that the $0.40 per share valuation was based upon a proposed sale
    to Rogers. He described this as a confidential offer in principle from Rogers
    that was qualified by Rogers desire for a clean company with no outstanding
    liabilities. Rogers did not proceed with the share purchase although, as we
    have seen, Rogers was ultimately involved in the asset sale. In my view, on
    this record, it was open to the application judge to conclude, at para. 100,
    that the Board had received no oral or written offer for the shares and that
    Cytrynbaums evidence regarding discussions of a possible sale to Rogers did
    not support the $0.40 per share valuation.

[66]

The
    appellants rely on another letter written by the solicitor several months
after
the Board decided to make the payments and in preparation for Looks general
    annual meeting. In that letter, the solicitor again reviews the business
    judgment rule and concludes that he believe[s] that the decisions of the Board  have
    been made honestly and in the best interests of the Corporation based on his
    understanding of the deliberations of the Board, the use of outside advisors
    when the Board deemed such assistance to be advisable and the application of
    the Business Judgment Rule. I do not agree that this letter materially
    advances the case for the appellants. It expresses no opinion as to the $0.40
    valuation. It is cast in general language as to the nature of the business
    judgment rule. Moreover, at the highest, the letter reflects the solicitors
ex
    post
assessment of the decision the Board had already made and does not
    reflect the advice the Board received before the crucial Board meeting.

[67]

In
    my view, the application judge made no palpable and overriding error in finding
    that the Boards valuation of Looks shares had no relationship to the actual
    market value and was not based on legal advice. This finding supported his
    conclusion that Look had made out a strong
prima facie
case of bad
    faith.

[68]

The
    appellants also attack the second ground for the application judges finding of
    bad faith, namely, the Boards decision to authorize payments for legal
    retainers in excess of $1.5 million. They argue that the application judges
    reasoning is circular as it assumes the very conclusion required to make the
    finding in the first place, that is, that the appellants were not entitled to
    authorize the retainers. The appellants also submit that the application judge
    misapprehended certain evidence as to the nature of the legal advice the Board
    received.

[69]

I
    disagree. I do not read the application judges reasons as reflecting circular
    reasoning. In my view, his finding of bad faith with respect to these payments
    rested in large part on the timing and circumstances in which the payments were
    made. The appellants caused the Board to authorize these payments literally as
    they went out the door. They knew that the shareholders were very dissatisfied
    with the equity cancellation payments and bonuses and the appellants failure
    to disclose those payments in a timely manner. The appellants almost certainly knew
    they were about to be removed from office and sued. An independent solicitor
    had been retained to consider the advisability of an indemnity trust to fund
    the appellants indemnity claims. Although the solicitor did not dismiss the
    possibility of a straightforward retainer agreement, he advised that the
    establishment of a trust could not be justified as being in the best interests
    of the corporation and indicated to Redman that he would advise the Board
    accordingly at an upcoming meeting. On the morning of that meeting, Redman told
    the solicitor that the meeting was cancelled. However, the Board meeting did
    take place as scheduled and the decision to advance the retainers was made
    without the benefit of the solicitors legal advice. As the solicitor was prevented
    from advising the Board, I fail to see how the fact that he did not rule out
    advance funding in any form can assist the appellants.

[70]

In
    my view, it was open to the application judge to conclude that when all the
    circumstances are taken into account, the retainer payments were part of a
    pattern of self-interested behaviour that supported the finding of a strong
prima
    facie
case of bad faith.

Issue 5. Did the application
    judge err in refusing to approve advance funding for Smith, Redman, First
    Fiscal, Jolian and DOL?

[71]

The
    foregoing discussion disposes of the claims of Cytrynbaum and McGoey. I now
    turn to specific arguments made by Smith, Redman, First Fiscal, Jolian and DOL
    that pertain to their claims for advance funding.

(i)

Smith

[72]

Smith
    argues that the application judge failed to consider his position as an outside
    director who was not directly involved with legal counsel or the decisions
    alleged to amount to bad faith.

[73]

I
    disagree. Smith personally benefited from the impugned decisions. His argument
    flies in the face of the role he was meant to play as an outside director and
    ignores his position as the chair of Looks Compensation and Human Resources Committee.
    Smith was on the Board for a reason: he was expected to exercise independent
    judgment, engage himself in the Boards decisions and ensure that management
    was acting not it its own self-interest but in the interest of Look.

(ii)

Redman

[74]

Redman
    was not a member of Looks Board of Directors but rather served at the relevant
    time as Looks Chief Financial Officer. He argues that he acted honestly, in
    good faith and under the direction of the Board. The application judge found
    that as Looks Chief Financial Officer, Redman was closely involved with McGoey
    in the equity cancellation proposal to the Board and in the manner in which
    legal retainers were paid. Redman received a substantial payment bonus and
    equity cancellation payments and he benefited from the retainers that were
    paid. I am far from persuaded that the application judge erred by finding a
    strong
prima facie
case of bad faith against Redman.

(iii)

First Fiscal, Jolian and DOL

[75]

The
    corporate appellants submit that the application judge erred by analyzing their
    claims for advance funding as a request for an interlocutory mandatory
    injunction and requiring them to make out a case of irreparable harm. They also
    submit that they had independent contractual rights to advance funding, and
    that the application judge erred by denying them advancement on the basis of
    their close ties with their principals.

[76]

I
    agree with the appellants that the application judge erred in applying the test
    for an interlocutory mandatory injunction. As I have already observed, the
    applications sought and resulted in a final determination of the claim for
    advance funding, albeit on a standard more frequently encountered in relation
    to interlocutory relief. In my view, a claim for advance funding does not
    require proof of irreparable harm nor does it turn on the balance of
    convenience. However, at the end of the day, nothing turns on the application
    judges characterization of the claims for advance funding as a request for an
    interlocutory mandatory injunction, as he provided ample reasons for refusing
    the applications on other grounds.

[77]

The
    application judge found that neither Jolian nor DOL qualify for indemnity as
    they were never an officer, director, consultant, employee or agent of the
    corporation as required by the Indemnification Agreement. In my view, he did
    not err is so finding. Jolian and DOL provided the services of their principals,
    McGoey and Dolgonos, through an intermediary, Unique Broadband Systems Inc. The
    two companies did not
enter any service agreement with Look and
    neither had any direct contractual relationship with Look with respect to the
    services provided by their principals. Jolian had an indemnification agreement
    with Look but DOL did not. DOLs claim was based on an indemnification
    agreement with Look assigned to it by another corporate entity. The
    indemnification agreements, by their terms, only apply to the extent Jolian or
    DOL were
an officer, director, consultant, employee or agent of the
    corporation.  With respect to DOL, I also observe that as Dolgonos is entitled
    to advance funding and because his defence costs will replicate those of DOL,
    denial of DOLs claim would appear to have little practical significance.

[78]

Finally, while First Fiscal had a direct agreement with Look in respect
    of Cytrynbaums consulting services, the application judge nevertheless found
    that First Fiscal was not entitled to advance funding under the relevant
    indemnity agreement. I agree with the application judge that as both First
    Fiscal and Jolian were corporate entities owned and controlled by Cytrynbaum
    and McGoey and used to channel the proceeds of the impugned payments, they
    cannot serve to circumvent the finding of a strong
prima facie
case of bad faith against their principals.

DISPOSITION

[79]

For
    these reasons I would dismiss the appeals. If the parties are unable to agree
    as to costs, we will receive written submissions.

Robert J. Sharpe
    J.A.

I agree J.C.
    MacPherson J.A.

I agree P. Lauwers
    J.A.

Released: July 4, 2013


