



COURT OF APPEAL FOR ONTARIO

CITATION: Unique Broadband Systems, Inc. (Re) 2014 ONCA 538

DATE: 20140710

DOCKET: C57884

Sharpe, Gillese and Hourigan JJ.A.

BETWEEN

In the
    Matter of the Companies Creditors Arrangement Act,

R.S.C.
    1985, c. C-36, as amended

And in the Matter of a Plan of Compromise or
    Arrangement of Unique Broadband Systems, Inc.

Clifford I. Cole and Benjamin Na, for the appellant,
    Unique Broadband Systems, Inc.

Joseph Groia and Tatsiana Okun, for the respondents,
    Jolian Investments Limited and Gerald McGoey

Heard:  June 17, 2014

On appeal from the order of Justice Ruth E. Mesbur of the
    Superior Court of Justice, dated May 21, 2013, with reasons reported at 2013
    ONSC 2953.

Hourigan J.A.:

[1]

Unique Broadband Systems Inc. (UBS) appeals the judgment of Justice
    Mesbur, dated May 21, 2013, rendered in connection with a claim made by Gerald
    McGoey and his personal company, Jolian Investments Limited (Jolian),
    pursuant to s. 20 of the
Companies Creditors Arrangement Act
, R.S.C.
    1985, c. C-36 (the 
CCAA
).

[2]

The trial judge ordered UBS to pay Jolian and Mr. McGoeys claim for an
    enhanced severance payment that was the equivalent to 300% of Mr. McGoeys
    compensation (the Enhanced Severance). That order is the subject of UBS
    appeal.

[3]

The trial judge dismissed Mr. McGoey and Jolians claims for payment of
    a SAR Cancellation Award, a Bonus Award, and indemnification for legal and
    other professional Services expenses.
[1]
That order is the subject of a cross-appeal by Mr. McGoey and Jolian.

[4]

For the reasons that follow, I would grant the appeal and dismiss the
    cross-appeal.

FACTS

[5]

UBS is a public company listed on the TSX Venture Exchange. It is incorporated
    under the Ontario
Business Corporations Act
, R.S.O. 1990, c. B.16 (the
    
OBCA
).

[6]

In 2002, Mr. McGoey was appointed a director and acting CEO of the
    corporation. Eventually, Mr. McGoey took on the role of CEO on a permanent
    basis. His employment relationship with UBS was first governed by a personal employment
    contract and later by a management services agreement between UBS and Jolian dated
    May 3, 2006 (the Jolian Management Services Agreement). Both the personal employment
    contract and the Jolian Management Services Agreement contained a golden
    parachute provision which granted Mr. McGoey enhanced termination benefits in
    certain situations.

[7]

Since November 2006, UBS had in place an incentive-driven share
    appreciation rights plan (SAR Plan) for its directors and senior management.
    Upon certain triggering events, a SAR unit holder would be paid an amount equal
    to the difference between the market trading price of a UBS share and a strike
    price specified in the SAR Plan.

[8]

In 2003, UBS acquired a controlling 51.8% equity interest in Look
    Communications Inc. (Look), a telecommunications company. Mr. McGoey also
    served as a director and CEO of Look. UBS and Look were parties to a services
    agreement pursuant to which Mr. McGoey performed management services for Look.
    Other than those services, UBS was essentially a holding company and did not
    engage in any active business.

[9]

Looks primary asset was a band of telecommunications spectrum. In early
    2009, Look engaged in a process to sell the spectrum through a court-supervised
    plan of arrangement. Ultimately the spectrum was sold for $80 million on May 4,
    2009 to Inukshuk Wireless Partnership (Inukshuk), a consortium of Rogers
    Communications Inc. (Rogers) and Bell Canada (the Spectrum Sale). Mr.
    McGoey expected that the sale would generate a significantly higher sale price
    and was very disappointed with the figure offered by Inukshuk.

[10]

The
    board of directors of UBS (the UBS Board) resolved to treat the Spectrum Sale
    as a triggering event pursuant to the SAR Plan. Prior to the announcement of
    the Spectrum Sale, UBSs shares were trading at approximately $0.15 per share. The
    UBS shares were anticipated to appreciate as a consequence of the Spectrum Sales
    announcement. However, the anticipated share price increase did not materialize
    and the shares continued to trade at the $0.15 range after the announcement.

[11]

After court approval of the Spectrum Sale on May 14, 2009, Mr.
    McGoey engaged in negotiations with Rogers for a potential purchase of the
    balance of Looks assets, including roughly $300 million in tax losses and
    similar assets, subscribers, and real estate. Rogers withdrew from the negotiations
    on July 20, 2009 and the transaction never came to fruition.

[12]

Also
    after the Spectrum Sale, the UBS Boards compensation committee, which
    consisted of Mr. McGoey and two other UBS Board members, began reviewing the
    SAR Plan. Each member of the compensation committee had a considerable number
    of SAR units.

[13]

Executive
    compensation was on the agenda for the UBS Board meeting of June 17, 2009. In
    anticipation of that meeting, Mr. McGoey sought the advice of UBS outside
    legal counsel, David McCarthy, regarding board approval of executive bonuses. Mr.
    McCarthy advised that, while s. 3.15 of National Policy 58-201 (which deals
    with the Corporate Governance Guidelines) says that a board should appoint a
    compensation committee entirely of independent directors, this was a guideline
    only and was not a requirement either pursuant to securities law or TSX
    Rules.

[14]


Mr.
    McGoey also requested that Mr. McCarthy provide the UBS Board with a letter outlining
    its authority, duties, and obligations in making payments to officers and
    employees. Mr. McCarthy provided such a letter, dated June 17, 2009. In that
    letter, he specifically advised the UBS Board that, in exercising its power to compensate
    officers and employees, the directors were obliged to meet their fiduciary
    obligations to the corporation.

[15]

At
    the June 17, 2009 UBS Board meeting, the directors considered the issue of the
    SAR Plan. Mr. McCarthys letter was before the UBS Board and Mr. McCarthy
    was present for a portion of the meeting. Mr. McCarthy was not asked to opine
    on the UBS Boards decision at the meeting. He also did not provide the UBS
    Board with advice regarding the UBS Boards process or about the quantum of the
    benefits being considered.

[16]

At
    the meeting, each director disclosed his conflict of interest regarding their SAR
    unit holdings. The directors then unanimously resolved to cancel the SAR units
    and establish a SAR cancellation payment pool of $2,310,000, based on a fixed
    unit price of $0.40 per share. Under this new arrangement, Mr. McGoey, along
    with three other directors and one member of management, would receive a SAR
    cancellation award (the SAR Cancellation Awards) based upon the $0.40 per unit
    figure.

[17]

The
    payment was contingent on: Look receiving the full compensation of $80 million from
    the Spectrum Sale; UBS receiving adequate cash resources; Mr. McGoey and
    the other SAR Plan unit holders relinquishing all rights to the SAR units
    awarded to them as of May 31, 2009; and the SAR Plan unit holders executing
    releases with respect to the SAR Plan and a stock option plan established in
    2002.

[18]

The
    UBS Board met on July 8 and 9, 2009. At that meeting, the directors considered
    the issue of awarding bonuses for certain personnel. Mr. McGoey proposed the
    establishment of a bonus pool of $7 million. That plan was not approved.
    However, the UBS Board did approve the establishment of a bonus pool in the
    amount of $3.4 million (the Bonus Pool).

[19]

The
    SAR Cancellation Awards and the Bonus Pool were allocated to the recipients in August
    2009. Under the SAR Cancellation Awards, Mr. McGoey was allocated to receive
    $600,000 and, under the Bonus Pool, he was allocated to receive $1,200,000.

[20]

In
    addition to the SAR Cancellation Awards and the Bonus Pool, Mr. McGoey and
    the other directors of Look also established a SAR cancellation payment pool
    and a bonus pool for that company. The total amount funded directly by UBS or
    indirectly, through its 51.8% equity interest in Look, in the new compensation
    plans of the two companies was $14,637,025, or approximately 97.6% of the
    market capitalization of UBS.

[21]

The
    disclosure of the SAR Cancellation Awards and the Bonus Pool was met with resistance
    by UBS shareholders. Faced with this resistance, Mr. McGoey caused UBS to
    advance to him $200,000 for the payment of anticipated legal fees.

[22]

A
    special shareholders meeting was held pursuant to s. 122 of the
OBCA
on
    July 5, 2010. At that meeting, Mr. McGoey and the other directors were removed
    and not re-elected as directors of UBS. Mr. McGoey then resigned as CEO of UBS
    and took the position that he was terminated without cause because he was not
    re-elected to the UBS Board.

[23]

Mr.
    McGoey commenced an action against UBS seeking,
inter alia
, payment of
    Enhanced Severance in the amount of $9,500,000. He successfully moved for partial
    summary judgment before Marrocco J. on the issue of the payment of legal fees.
    However, Marrocco J.s decision was subject to any finding of misfeasance that
    the court might make against Mr. McGoey.

[24]

On
    July 5, 2011, UBS was granted
CCAA
protection. It was ordered that Mr.
    McGoeys lawsuit be determined pursuant to the claims process under s. 20(1) of
    the
CCAA
. Mr. McGoey filed a proof of claim in the amount of
    $10,112,648, which the monitor disallowed in its entirety. Mr. McGoey sought to
    reverse that denial and a trial was ordered on the issue. That trial is the
    subject of this appeal and cross-appeal.

DECISION OF THE TRIAL JUDGE

[25]

After
    thoroughly reviewing the underlying facts, the trial judge considered the law
    with respect to the business judgment rule. She concluded that the business
    judgment rule would only be of assistance to Mr. McGoey if he acted honestly
    and in good faith, with a view towards the best interests of the corporation.

[26]

The
    trial judge then examined Mr. McGoeys actions to determine whether they would
    be protected by the business judgment rule or whether they constituted a breach
    of his fiduciary duty. She noted that, since Mr. McGoey was the only UBS
    director who testified, she had no independent evidence of what the
    compensation committee or the UBS Board discussed and considered when deciding
    on the SAR Cancellation Awards and the Bonus Pool. In particular, she had no
    evidence as to how or if the UBS Board followed Mr. McCarthys advice that the
    directors were obliged to meet their fiduciary duties to the corporation when
    setting executive compensation.

[27]

The
    trial judge accepted the evidence of Michael Thompson, a partner at Mercer, who
    was qualified as an expert regarding executive compensation and best practices for
    establishing executive compensation. She noted that Mr. Thompson opined that Mr.
    McGoeys compensation package did not pass any test of reasonableness and that she
    had heard no other independent evidence to refute Mr. Thompsons opinion. The
    trial judge found that Mr. Thompsons evidence gave her a helpful context to
    consider the UBS Boards decision-making process as part of her fiduciary duty
    analysis.

[28]

The
    trial judge focused on the decision of the UBS Board to cancel the SAR Plan and
    set a price of $0.40 per unit at a time when the board knew, or ought to have
    known, that the market had not reacted to the Inukshuk sale as they had hoped:
    at para. 140.

[29]

The
    trial judge noted that the UBS compensation committee did not have any independent
    members, as all of the directors on that committee held SAR units.

[30]

The
    trial judge made the following findings with respect to the SAR Cancellation
    Awards and the Bonus Pool, at paras. 145-147:

The decision to cancel the SAR plan really came out of the
    blue, and only when it was apparent to the board members, who were the majority
    of the SAR unit holders that their SARs units would have little or no value on
    the triggering date.


Absent
    any evidence to the contrary (and there is really none), I am led to the
    inescapable conclusion the decision to cancel [the] SARs and replace them with
    a fixed amount must have been driven by the boards own self interest, and not
    the interests of the corporation. There was nothing in it for UBS shareholders.


As
    for Mr. McGoeys bonus, there was no business rationale for it. UBS was a
    holding company. It had no real employees, other than bookkeeping and
    secretarial staff. I fail to see how it was in UBS interests to pay such a
    staggering amount of money to Mr. McGoey in order to incentivize him to
    remain with UBS. The situation at Look might be viewed differently; that issue,
    however, is not for me to decide.

[31]

The
    trial judge went on to find that the $0.40 unit value was not determined by any
    objective means, did not reflect the actual market price for the shares, and
    represented more of a hope for share value based in large part on a Rogers
    sale transaction that was fraught with difficulty, and nowhere near a firm
    transaction: at para. 154. She stated that any valuation based on the possible
    Rogers transaction should have been discounted for the real possibility the
    transaction might not close, or the purchase price might be significantly
    reduced: at para. 155.

[32]

With
    respect to the Bonus Pool, the trial judge found that it was not based on any
    objective criteria. She noted that, previously, Mr. McGoeys bonuses had been
    in the range of $400,000 to $440,000 and stated that she had heard no evidence
    to support any reasonable rationale for a bonus at the level of $1.2 million:
    at para. 157.

[33]

The
    trial judge rejected the argument advanced by Mr. McGoey that the UBS Boards
    actions were done on the advice of Mr. McCarthy, finding that he was not asked
    to opine on the reasonableness of the changes to the SAR and bonus plans: at
    para.159.

[34]

The
    trial judge concluded that the UBS Board breached its fiduciary duties to UBS
    in establishing the SAR Cancellation Awards and the Bonus Pool. She set aside
    the allocations to Mr. McGoey and Jolian pursuant to the SAR Cancellation
    Awards and the Bonus Pool.

[35]

The
    next issue was whether Mr. McGoey and Jolian triggered the default provisions
    in the Jolian Management Services Agreement, such that they were disentitled to
    the golden parachute benefits under the agreement. Specifically, Mr. McGoey and
    Jolian are disentitled to golden parachute benefits if Mr. McGoey and Jolian
    are in default as that term is defined in the agreement. The trial judge concluded
    that a breach of fiduciary duty did not qualify as a default under the Jolian
    Management Services Agreement and, therefore, UBS was obliged to pay the
    amounts due under the golden parachute provisions of the agreement.

[36]

UBS
    relied upon the oppression remedy provisions in the
OBCA
. However, the
    trial judge found, at para. 180, as follows:

Since I have determined the enhanced benefits represented a
    breach of the boards fiduciary duties and have set those benefits aside, it
    seems to me the potentially oppressive acts have been cured and I need not deal
    with whether the boards actions might also constitute oppressive conduct.

[37]

The
    trial judge concluded that UBS had no obligation to indemnify Mr. McGoey for
    his legal fees because he had breached his fiduciary duties to the corporation.

[38]

In
    her costs decision, the trial judge found that there was divided success at
    trial and ordered that there be no costs.

ISSUES

[39]

The
    appeal and cross-appeal raise the following issues:

(i) Did the trial judge err in
    finding that Mr. McGoey breached his fiduciary duties to UBS?

(ii) Did the trial judge err
    in finding that Mr. McGoey is not entitled to indemnification from UBS?

(iii) Did the trial judge err
    in finding that Mr. McGoey is entitled to Enhanced Severance under the Jolian
    Management Services Agreement? and

(iv) Did the trial judge err
    in failing to consider the oppression remedy argument advanced by UBS?

POSITIONS OF THE PARTIES

[40]

UBS
    submits that the trial judge did not err in finding that Mr. McGoey had breached
    his fiduciary duties to UBS by virtue of his involvement in establishing the SAR
    Cancellation Awards and the Bonus Pool. Nor did the trial judge err in finding
    that, as a consequence of the breach, Mr. McGoey was not entitled to indemnification
    from UBS. However, UBS submits that the trial judge erred in finding that Mr.
    McGoeys conduct did not amount to Cause or a Jolian Default under the Jolian
    Management Services Agreement and that Mr. McGoey was entitled to Enhanced Severance.
    Specifically, UBS argues that the trial judges interpretation of the Jolian
    Management Services Agreement is inconsistent with s. 134(3) of the
OBCA
and leads to a commercially absurd result. In addition, UBS submits that the trial
    judge, having rejected UBSs interpretation of the Jolian Management Services
    Agreement, was obliged to consider the oppression remedy argument it had
    advanced.

[41]

In
    his cross-appeal, Mr. McGoey submits that the trial judge erred in finding a
    breach of fiduciary duty. His position is that the actions taken regarding the SAR
    Cancellation Awards and the Bonus Pool were within a range of commercially reasonable
    decisions and are, therefore, protected by the business judgment rule. He also
    submits that the trial judge erred in finding that he was not entitled to
    indemnification from UBS under the terms of the Jolian Management Services
    Agreement. Mr. McGoey argues that the trial judge otherwise correctly
    interpreted the Jolian Management Services Agreement and that, because the
    oppression remedy does not apply, the trial judge was under no obligation to
    consider that argument.

ANALYSIS

(i) Breach of Fiduciary Duty

[42]

As
    mentioned above, Mr. McGoey asserts that the trial judge erred in finding that
    he had breached his fiduciary duties. At the heart of Mr. McGoeys submission
    is that the decisions he made with respect to the SAR Cancellation Awards and
    the Bonus Award were done with the advice of experienced legal counsel and are
    protected by the business judgment rule.

[43]

In
    my view, the trial judges finding that Mr. McGoeys breached his fiduciary
    duties to UBS was well supported in the evidence before her and by the lack of
    any clear explanation from Mr. McGoey as to how the UBS Board decided to
    establish the SAR Cancellation Awards and the Bonus Pool. For the reasons set
    forth below, I see no error in the trial judges reasoning and in her
    conclusion that Mr. McGoeys actions were driven by self-interest, unsupported
    by any reasonable or objective criteria, and contrary to the best interests of
    UBS.

[44]

Below
    I consider the general principles of the law of fiduciary duties, an analysis of
    the trial judges decision regarding the SAR Cancellation Awards and Bonus
    Pool, and the defences raised by Mr. McGoey.

General Principles

[45]

It
    is undisputed that, Mr. McGoey, as a director and CEO of UBS, owed the company
    fiduciary duties. The imposition of fiduciary duties on directors and officers
    of a corporation is consistent with the origins of the doctrine in trust law. A
    director or senior officer of a corporation is in a position of trust. He or
    she is charged with managing the assets of a corporation honestly and in a
    manner that is consistent with the objects of the corporation. Courts will be
    loath to interfere with the legitimate exercise of corporate duties, but they
    will intervene where a fiduciary breaches the trust reposed in him or her.

[46]

Mr.
    McGoeys fiduciary duties included an obligation to act in good faith and in
    the best interests of the corporation. He had a specific obligation to
    scrupulously avoid conflicts of interest with the corporation and not to abuse
    his position for personal gain:
Peoples Department Stores Inc. (Trustee of)
    v. Wise
,
2004 SCC 68, [2004] 3 S.C.R. 461, at paras. 35 and 42; and
BCE Inc. v. 1976 Debentureholders
, 2008 SCC 69, [2008] 3 S.C.R. 560,
    at paras. 39 and 89.

[47]

As
    Granger J. stated in
Moffatt v. Wetstein
(1996), 29 O.R. (3d) 371, at p.
    390 (Gen. Div.):


Subsumed in the fiduciarys duties of good faith and loyalty is
    the duty to avoid a conflict of interest. The fiduciary must not only avoid a
    direct conflict of interest but must also avoid the appearance of a possible or
    potential conflict. The fiduciary is barred from dividing loyalties between
    competing interests, including self-interest.

[48]

Disclosure
    of a directors interest in a transaction is just the first step. Disclosure
    does not relieve a director of his or her obligation to act honestly and in the
    best interests of the corporation:
UPM-Kymmene Corp. v. UPM-Kymmene
    Miramichi Inc.
(2002), 214 D.L.R. (4th) 496 (Ont. S.C.), affd (2004), 183
    O.A.C. 310 (C.A.).

[49]

It
    is against these standards that the trial judge was obliged to consider the
    actions of Mr. McGoey.

SAR Cancellation Awards

[50]

With
    respect to the SAR Cancellation Awards, the trial judge concluded that there
    was no evidence as to how the UBS Board arrived at the non-market price of
    $0.40 per unit and how it determined that it was in the best interests of the
    corporation. The UBS Board provided no credible analysis to justify why they
    considered that these payments, which represented a significant percentage of
    UBS market capitalization, were fair and reasonable in the circumstances.

[51]

In
    considering the reasonableness of the UBS Boards actions in this regard, I
    find that the following facts are germane.

[52]

As
    of May 4, 2009, when the UBS Board resolved to treat the Spectrum Sale as a
    triggering event pursuant to the SAR Plan, it anticipated that the trading
    price of UBS shares would rise from $0.15 to a range of $0.30 to $0.50 per
    share.

[53]

On
    June 17, 2009, the shares of UBS were still trading at $0.15 per share. Thus,
    the anticipated gains between the strike price and the trading price had not
    materialized. It was in these circumstances that the UBS Board decided to
    implement the SAR Cancellation Awards without the benefit of any independent or
    third party advice that could speak to the reasonableness of their decision.

[54]

As
    found by the trial judge, the potential Rogers share transaction never went
    beyond the negotiation stage and was completely off the table by July 20, 2009
    and could not serve as a justification for the $0.40 unit price.

[55]

Mr.
    McGoeys SAR Cancellation Award was allocated to him on August 28, 2009,
    pursuant to which he was entitled to receive a payment from UBS of $600,000,
    whereas, under the SAR Plan, he would have been entitled to a payment of $75,000.

[56]

Given
    these facts, and in the absence of any credible evidence regarding the
bona
    fides
of the SAR Cancellation Awards or the process by which they were created,
    the trial judge reached the reasonable conclusion that the decision to
    implement the new scheme was driven by UBS Boards self-interest. I see no
    error in that conclusion.

[57]

I
    also agree with the trial judges conclusion that the $0.40 unit value was
    unjustified and unrealistic. It was notionally based on a transaction with Rogers
    that was far from certain and which had been terminated at the time when the
    SAR Cancellation Awards were allocated. What the SAR Cancellation Awards really
    achieved was the removal of the uncertainty that was part of the SAR Plan.
    Under this new scheme, the recipients awards were not dependant on an increase
    in the share price, the awards would be granted regardless of the trading price
    of the shares.  This removal of the uncertainty was to the benefit of the
    recipients and was of no benefit to the corporation.

Bonus Pool

[58]

The
    trial judge rejected the position of Mr. McGoey that there was a reasonable
    rationale for the establishment of the Bonus Pool and his allocation of $1.2
    million. This finding was well supported by the evidence at trial, including
    the following.

[59]

The
    UBS Board did not seek or receive any expert advice on an appropriate bonus
    structure. Nor did they have any comparable or other data regarding executive
    compensation in the marketplace.

[60]

There
    was no documentation that stipulated the performance factors or criteria by
    which Mr. McGoeys performance would be evaluated. The trial judge rejected Mr.
    McGoeys evidence that the services he provided for Look qualified as the
    criteria under which he could be awarded a bonus by UBS.  She concluded that,
    when the UBS bonus was awarded, there were, in fact, no criteria.

[61]

Similarly,
    there was no documentation that showed how the Bonus Pool was quantified. The
    best evidence we have is that Mr. McGoey went to a UBS Board meeting seeking to
    establish a $7 million bonus pool but the UBS Board found that amount too
    high and established a $3.4 million bonus pool instead.

[62]

In
    my view, on these facts, the trial judge was correct to conclude that Mr. McGoeys
    establishment of the Bonus Pool and the allocation of a part of the Bonus Pool
    to him breached his fiduciary duties to UBS.

Defences

[63]

I
    do not accept Mr. McGoeys rather novel argument that there can be no finding
    of a breach of fiduciary duty because, before he could be paid under the SAR
    Cancellation Awards or the Bonus Pool, he was removed from office by the
    shareholders of UBS. Counsel for Mr. McGoey suggests that the breach is incomplete
    because no damages have been suffered.

[64]

This
    submission is not correct at law. As stated by Mark Ellis in his text,
Fiduciary
    Duties in Canada
,
[2]
in the context of a discussing conflicts of interest:

Entering into a
potential

conflict of interest
    is a breach whether or not the conflict is operative; once such a conflict
    becomes operative to jeopardize the beneficiary or his property, the fiduciary
    breach would then give rise to the remedies available in law. The point is
    important: to wait until damage or prejudice actually occurs is to prejudice
    the beneficiarys right to utmost loyalty and avoidance of conflict. If such a
    schism in theory is allowed, the law would be encouraging a finding that the
    duty piggy-backs the damage caused rather than premising damage on the basis
    of duty. [Emphasis in original.]

[65]

Similarly,
    in
Canson Enterprises Ltd. v. Boughton & Co
.
, [1991] 3 S.C.R.
    534, at p. 553, McLachlin J. (as she then was) stated that [a] breach of
    fiduciary duty is a wrong in itself, regardless of whether a loss can be
    foreseen.

[66]

It
    would be a remarkable result if a fiduciary could be allowed to act in a manner
    contrary to his duty with impunity, on the basis that he was prevented by the beneficiarys
    vigilance from receiving a personal benefit.

[67]

Mr.
    McGoeys counsel also argued that the trial judge erred in simply comparing the
    payments under the SAR Plan and the SAR Cancellation Awards, without
    considering that the SAR Cancellation Awards also required the recipients to
    execute releases and were contingent upon Look receiving the full payment of
    funds from the Spectrum Sale and UBS having sufficient resources.

[68]

I
    do not find this argument persuasive. The last payment under the Spectrum Sale
    was received on September 11, 2009. Mr. McGoeys release was executed four days
    later. It is true that the funds from the Spectrum Sale had not been paid over
    to UBS; however, it was hardly a doubtful proposition that the money would have
    found its way to UBS, given Mr. McGoey and his associates control over Looks
    board.

[69]

The
    trial judge also rejected Mr. McGoeys argument that his actions were
    undertaken with the assistance of independent legal advice from Mr. McCarthy
    and, therefore, could not constitute a breach of his fiduciary duties. I agree
    with the trial judges conclusion on this issue. The UBS Board never sought an
    opinion from Mr. McCarthy regarding the reasonableness of the changes to the
    SAR Plan and the bonuses. Indeed, the evidence is clear that Mr. McCarthy did
    not have any information during the relevant time regarding the quantity of the
    Bonus Award or the SAR Cancellation Awards allocated to Mr. McGoey or to any
    other director or officer of UBS.

[70]

Finally,
    the trial judge carefully considered Mr. McGoeys argument that his actions
    were protected by the business judgment rule. She reviewed the law and
    identified the critical issue at para. 122 of her reasons:

I must now examine the boards and Mr. McGoeys actions and
    decide whether business judgment is what was exercised here, or whether it was
    self help, or worse, breach of fiduciary duty, dressed in business judgments
    clothes.

[71]

The
    trial judge properly concluded that the business judgment rule was of no assistance
    to Mr. McGoey because he did not satisfy the rules preconditions of honesty,
    prudence, good faith, and a reasonable belief that his actions were in the best
    interests of the company
:
Corporacion Americana de Equipamientos Urbanos
    S.L. v. Olifas Marketing Group Inc
.
, (2003), 66 O.R. (3d) 352, at
    paras. 13 and 14 (S.C.).

[72]

It
    must be remembered that the business judgment rule is really just a rebuttable
    presumption that directors or officers act on an informed basis, in good faith,
    and in the best interests of the corporation. Courts will defer to business
    decisions honestly made, but they will not sit idly by when it is clear that a
    board is engaged in conduct that has no legitimate business purpose and that is
    in breach of its fiduciary duties. In the present case, there was ample
    evidence upon which the trial judge could base her conclusion that the
    presumption had been rebutted.

[73]

In
    summary, I conclude that the trial judge did not err in finding that Mr. McGoey
    breached his fiduciary duties to UBS.

(ii) Eligibility for Indemnification

[74]

The
    trial judge noted that UBS indemnity obligations arise under various sources
    and documents: the Jolian Management Services Agreement; Article 7 of the UBS
    by-laws; specific indemnity agreements between Mr. McGoey and UBS; and s.
    134(4.1) of the
OBCA
.

[75]

The
    trial judge also referred to Marrocco J.s finding that the indemnification
    provisions under the UBS by-laws are only available if the director or officer
    acted honestly and in good faith with a view to the best interests of the
    Corporation: at para. 183.

[76]

The
    trial judge concluded that, given her finding of a breach of fiduciary duty, the
    indemnity obligations were not operative.

[77]

I
    see no error in this finding. The purpose of statutory and contractual
    indemnity provisions is to ensure that officers and directors who are acting in
    good faith and in the best interests of a corporation are not exposed to legal
    costs. It is commercially sensible and good public policy to offer this
    protection. The rationale for offering the protection is eliminated, however,
    where the officer or director has not acted in good faith and in the best
    interests of the corporation.

[78]

In
    a related case, this court upheld an application judges decision to refuse advanced
    funding for the legal costs of Looks directors and officers because the
    corporation had established a strong
prima
facie
case of bad
    faith on the part of the parties seeking the funding:
Cytrynbaum v. Look
    Communications Inc.
, 2013 ONCA 455, 116 O.R. (3d) 241, leave to appeal
    refused, [2013] S.C.C.A. No. 377.

[79]

In
    the present case, while the trial judge did not specifically state that Mr.
    McGoey acted in bad faith, she did conclude that he was ineligible to receive
    indemnification because he had not met the standard of acting honestly and in
    good faith. This decision was open to the trial judge to make on the evidence
    before her and there is no basis for appellate interference.

(iii) Interpretation of the Jolian Management Services
    Agreement

[80]

The
    trial judge held that, pursuant to the terms of the Jolian Management Services
    Agreement, a breach of fiduciary duty did not constitute Cause or a Jolian
    Default as defined in the agreement, and, consequently, Mr. McGoey was
    entitled to receive Enhanced Severance. However, this payment was to be
    calculated on the basis of what the entitlement would have been prior to the
    SAR Plan cancellation and the establishment of the Bonus Pool.

[81]

Mr.
    McGoey and Jolian were directed to file a revised proof of claim within 30 days
    to reflect the trial judges finding. The revised claim filed pursuant to this
    direction was in excess of $4 million.

[82]

For
    the reasons that follow, I am of the view that the trial judge erred in law in
    her interpretation of the Jolian Management Services Agreement and in her
    finding that Mr. McGoey was entitled to Enhanced Severance under the contract.
    Set forth below, I consider some general principles of contractual
    interpretation, the specific terms of the Jolian Management Services Agreement,
    and the trial judges analysis of the agreement.

General Principles

[83]

The
    following principles of contractual interpretation are relevant in considering
    the trial judges analysis of the Jolian Management Services Agreement.

[84]

In
Manulife Bank of Canada v. Conlin
, [1996] 3 S.C.R. 415, at pp. 439-40,
    quoting Ruth Sullivan,
Driedger on the Construction of Statutes
, 3d.
    ed. (Toronto: Butterworths, 1994), at p. 131, LHeureux-Dubé J., dissenting, described
    the interpretation of statutes in the following way that applies equally to
    contractual interpretation:

There is only one rule in modern interpretation, namely, courts
    are obliged to determine the meaning of [that which is to be judicially
    interpreted] in its
total context
, having regard to [its] purpose , the
consequences of proposed interpretations,
the
presumptions and special rules of interpretation,
as well as
admissible external aids.
In other words, the
courts must consider and
    take into account all relevant and admissible indicators of [] meaning. After
    taking these into account, the court must then adopt an interpretation that is
    appropriate
.
An appropriate interpretation is one that can be
    justified in terms of (a) its plausibility, that is, its compliance with the
    [] text; (b) its efficacy, that is, its promotion of the [] purpose; and (c)
    its acceptability, that is, the outcome is reasonable and just.

[Emphasis added by LHeureux-Dubé J.]

[85]

The
    subjective intent of one party to a contract has no independent place in interpreting
    contractual provisions:
Eli Lilly & Co. v. Novopharm Ltd
.,
[1998] 2 S.C.R. 129, at para. 54.

[86]

While
    the plain meaning of the words used by the contracting parties is important, the
    contract must be read as a whole and in the context of the circumstances as
    they existed when the contract was created:
Dumbrell v. The Regional Group
    of Companies Inc.
, 2007 ONCA 59, 85 O.R. (3d) 616, at para. 52.

[87]

Courts
    will avoid a contractual interpretation which results in rendering the
    agreement unlawful. As Blair J.A. discussed in
Ventas, Inc. v. Sunrise
    Senior Living Real Estate Investment Trust
, 2007 ONCA 205, 85 O.R. (3d)
    254, at para. 57, quoting John D. McCamus,
The Law of Contracts

(Toronto:
    Irwin Law, 2005), at p. 729,
[3]
where an agreement admits of two possible constructions, one of which renders
    the agreement lawful and the other of which renders it unlawful, courts will
    give preference to the former interpretation; see also
Cantor Art Services
    Ltd. v. Kenneth Bieber Photography Ltd
.
, [1969] 1 W.L.R. 1226
    (C.A.).

[88]

A commercial contract will be interpreted in a manner that is consistent
    with commercial principles and that avoids a commercial absurdity. In
Consolidated-Bathurst
    Export Ltd. v. Mutual Boiler and Machinery Insurance Co.
, [1980] 1 S.C.R.
    888, at p. 901, Estey J. stated:

[w]here words may bear two constructions, the more reasonable
    one, that which produces a fair result, must certainly be taken as the
    interpretation which would promote the intention of the parties. Similarly, an
    interpretation which defeats the intentions of the parties and their objective
    in entering into the commercial transaction in the first place should be
    discarded in favour of an interpretation of the policy which promotes a
    sensible commercial result.

[89]

As
    stated by the House of Lords in
Mannai Investment Co. Ltd. v. Eagle Star
    Life Assurance Co. Ltd.,
[1997] 2 W.L.R. 945, at p. 964 (H.L.), commercial
    contracts should be interpreted in the way in which a reasonable commercial
    person would construe them. And the standard of the reasonable commercial
    person is hostile to technical interpretations and undue emphasis on niceties
    of language.

[90]

The
    interpretation of a contract is a question of law. Accordingly, the standard of
    review by an appellate court is correctness:
Bell Canada v. The Plan Group
,
    2009 ONCA 548, 96 O.R. (3d) 81.

Jolian Management Services Agreement

[91]

UBS
    and Jolian entered into the Jolian Management Services Agreement in 2006.
    However the terms of the agreement were not disclosed to UBS shareholders until
    May 2010, when it was filed on SEDAR.

[92]

The
    relevant sections of the agreement are as follows:


Cause
 means an act of fraud, embezzlement or
    misappropriation or other act which constitutes Cause at common law, and, in
    each case, which is materially injurious to the Company.


CEO Designee
 means Gerald T. McGoey or such
    other individual designated by the parties in conformity with Section 1.3 of
    this Agreement.


CEO Services
 means the duties typically
    performed by, and responsibilities assumed by the chief executive officer of a
    company, including, without limitation, the overseeing of:

(a)     the preparation and
    administration of the annual      budget;

(b)     the hiring, firing and
    supervising of all senior staff;

(c)     UBS compliance with all
    regulatory requirements   and shareholder communication;

(d)     the monitoring and, where
    appropriate, the    updating of UBS broadcast and information         technology;
    and

(e)     customer service.



Jolian Default
means:

(a)     an act of fraud, theft or misappropriation or
    other act which constitutes Cause at common law committed by the CEO
    designee; and

(b)

the material failure by the CEO Designee to perform
    the CEO Services after having received written notice of such material failure
    and been given reasonable time to correct same;

in each case, which is materially injurious to USB or which has
    not been waived by UBS.

Interpretation by the Trial Judge

[93]

The
    trial judges analysis of the Jolian Management Services Agreement was limited
    to considering the term Jolian Default. After setting out the definition of
    that term found in the agreement, the trial stated, at paras. 172-77:

As I read the definition, both parts must be met before actions
    constitute Jolian Default. I say this because the drafters clearly chose to
    use and between the two paragraphs, thus making them conjunctive.

Here, regardless of whether subsection (a) of the definition
    has been met, there is no question subsection (b) has not. No one provided Mr.
    McGoey with written notice of any material failure to perform the CEO
    services together with a reasonable time to correct any such material failure.


As
    to subsection (a), in my view it has not been met either. It would have been an
    easy matter for the drafters to include breach of fiduciary duty or bad
    faith as enumerated items of cause. They did not.

It also would have been an easy matter for the drafters to
    define cause simply as cause at common law. They did not.

From this I infer that cause at common law in the context of
    this provision means acts of fraud and defalcation of the types enumerated. I
    cannot conclude breach of fiduciary duty falls into this category.

In any event, since both provisions of the section have not
    been met I therefore conclude there has been no Jolian Default under the
    Jolian Management Services Agreement. Thus UBS remains bound to pay the amounts
    due under the golden parachute provisions of the agreement. This is so unless
    there is another reason to find the obligation no longer exists.

[94]

In
    my view, the trial judge erred in law in her interpretation of the agreement
    for the following reasons.

[95]

First,
    the trial judges interpretation of the agreement ignores the provisions of s.
    134(3) of the
OBCA
. That section provides:

Subject to subsection 108(5), no provision in a contract, the
    articles, the by-laws or a resolution relieves a director or officer from the
    duty to act in accordance with this Act and the regulations or relieves him or
    her from liability for a breach thereof.

[96]

Pursuant
    to s. 134(1) of the

act, a director or officer of an
OBCA
corporation is required to act honestly and in good faith with a view to the
    best interests of the corporation. In addition, the director or officer must
    exercise the care, diligence, and skill that a reasonably prudent person would
    exercise in comparable circumstances.

[97]

The
    effect of the trial judges interpretation is to eviscerate the prohibition
    found in s. 134(3). If her interpretation were accepted, Mr. McGoey would be relieved
    of his obligation to act in manner that is consistent with his duties under the
    legislation (
i.e.
he could breach his fiduciary duties to the company). Such
    conduct would not constitute a Jolian Default under the agreement and he
    would be entitled to receive Enhanced Severance.

[98]

Second, the trial judges interpretation of the
Jolian
    Management Services Agreement leads to a commercially absurd result. Given her
    finding that subparagraphs (a) and (b) are conjunctive, Mr. McGoey could commit
    theft from the company but such conduct would not constitute a Jolian Default
    under the agreement unless UBS gave Mr. McGoey written notice of the theft and
    provided him with the opportunity to cure the fraud.

[99]

Clearly
    this type of result could not be consistent with the intentions of reasonable
    business people entering into a commercial transaction. While the word and generally
    imports a conjunctive sense, this is not an inexorable cannon of construction.
    In some cases the word and will be interpreted as or, in order to make
    sense and give effect to the contract:
Clergue v. H.H. Vivian and Co.
,
    (1909) 41 S.C.R. 607; and
Boy Scouts of Canada v. Doyle
(1997), 149
    D.L.R. (4th) 22 (Nfld. C.A.). This was one of those cases.

[100]

Third, the trial
    judges interpretation of the agreement has the effect of ignoring the phrase
    or other act which constitutes Cause at common law. If the intention of the
    parties was to limit the prohibited conduct to the enumerated grounds of fraud,
    theft, or misappropriation, this additional phrase would be unnecessary.

[101]

When the
    contract is read as a whole, it is evident that the parties sought to ensure
    that a Jolian Default would be limited to serious misconduct that was
    materially injurious to UBS. The enumerated grounds of fraud, theft and
    misappropriation are examples of the types of conduct which would constitute a
    default.

[102]

A serious breach
    of fiduciary duty would logically meet this definition, as it would constitute
    a breach of Mr. McGoeys statutory and common law duties to the corporation and
    would amount to cause at common law. The conduct of Mr. McGoey, in establishing
    the SAR Cancellation Awards and the Bonus Pool and thereby preferring his own
    interests to the interests of UBS, qualifies as a serious breach of fiduciary
    duty.

[103]

Given the amount
    of money involved in the SAR Cancellation Awards and the Bonus Pool, these
    plans would have been materially injurious to UBS had the payouts been made.
    Again, in my view, the fact that Mr. McGoey was prevented by shareholder
    vigilance from receiving the funds allocated to him cannot serve as a defence.
    It would be commercially absurd to interpret the agreement to mean that UBS
    would be obligated to pay Jolian and Mr. McGoey an amount  equivalent to 300%
    of Mr. McGoeys compensation because he had not succeeded in wrongfully
    diverting funds for his own benefit.

[104]

Interpreting Jolian
    Default to include a serious breach of fiduciary duty that was materially
    injurious to UBS, gives effect to the entirety of the words used in the
    definition of the term in their context. It is also commercially sensible and
    does not result in an interpretation that is inconsistent with the
OBCA
.

[105]

The trial judge
    erred in law in her contractual interpretation, and her finding that Mr. McGoey
    was entitled to Enhanced Severance cannot stand.

(iv) Oppression Remedy

[106]

Given my finding
    regarding the proper interpretation of the Jolian Management Services
    Agreement, it is not necessary to consider UBSs argument that the trial judge
    erred in failing to consider the oppression remedy argument advanced by UBS. I
    only note that the trial judge, having concluded that Mr. McGoey was entitled
    to receive Enhanced Severance, had an obligation to consider the oppression
    argument. Contrary to her conclusion, the setting aside of the SAR Cancellation
    Award and the Bonus Award did not cure Mr. McGoeys wrongful conduct. It
    was still necessary to determine whether the entitlement to Enhanced Severance
    was oppressive.

[107]

The oppression
    remedy is a flexible, equitable remedy that affords the court broad powers to
    rectify corporate malfeasance. It is an important remedy for shareholders and
    other corporate stakeholders. In the circumstances of this case, it may well
    have provided a remedy to protect the interests of the shareholders.

[108]

It was an error
    in law not to consider the oppression remedy in these circumstances.

DISPOSITION

[109]

I would allow
    the appeal and substitute paragraph 2 of the judgment with a finding that Mr.
    McGoeys actions constitute Cause and a Jolian Default under the Jolian
    Management Services Agreement, set aside paragraph 3 of the judgment, and substitute
    paragraph 4 of the judgment with a finding that Jolian/Mr. McGoey are not
    entitled to Enhanced Severance. I would dismiss the cross-appeal.

[110]

On the issue of
    costs of the trial, the trial judges decision that there be no order as to
    costs was premised on her finding that both parties had achieved some measure
    of success at trial. Given my findings, the costs order cannot stand. As the
    successful party, UBS is entitled to costs of the trial. If the parties cannot
    agree on the scale and/or quantum of the costs, they may attend before the
    trial judge to fix the costs.

[111]

The parties
    agreed that, if one party were successful on both the appeal and the cross
    appeal, then that party would be entitled to costs of the appeal in the amount
    of $60,000. Accordingly, I would order that Mr. McGoey and Jolian are jointly
    and severally liable to UBS for the costs of the appeal in the amount of
    $60,000, inclusive of fees, disbursements, and H.S.T.

Released: July 10, 2014 (RJS)

C.W.
    Hourigan J.A.

I
    agree Robert J. Sharpe J.A.

I
    agree E.E. Gillese J.A.





[1]
The capitalized terms are defined below.



[2]
Mark Ellis,
Fiduciary Duties in Canada
, loose-leaf (consulted on 25 June
    2014), (Carswell, Toronto: 2014), ch. 1 at 5.



[3]
See also John D. McCamus,
The Law of Contracts
(Toronto: Irwin Law,
    2012), at p. 773.


