Blair v. Consolidated Enfield Corp.

Blair v. Consolidated Enfield Corp.
Collection
Supreme Court Judgments
Date
1995-10-19
Report
[1995] 4 SCR 5
Case number
23887
Judges
La Forest, Gérard V.; Sopinka, John; Gonthier, Charles Doherty; Cory, Peter deCarteret; McLachlin, Beverley; Iacobucci, Frank; Major, John C.
On appeal from
Ontario
Subjects
Commercial law
Notes
SCC Case Information: 23887
Decision Content
Blair v. Consolidated Enfield Corp., [1995] 4 S.C.R. 5
Consolidated Enfield Corporation Appellant
v.
Michael F. Blair Respondent
Indexed as: Blair v. Consolidated Enfield Corp.
File No.: 23887.
Hearing and judgment: March 21, 1995.
Reasons delivered: October 19, 1995.
Present: La Forest, Sopinka, Gonthier, Cory, McLachlin, Iacobucci and Major JJ.
on appeal from the court of appeal for ontario
Company law ‑‑ Corporations ‑‑ Directors and officers ‑‑ Indemnity ‑‑ Election of directors ‑‑ Validity of proxies ‑‑ President of corporation chairing annual shareholders' meeting ‑‑ President ruling that certain proxies could be used to vote only in favour of management slate of directors ‑‑ Court overturning ruling and awarding costs against president and corporation ‑‑ Whether president entitled to be indemnified by corporation for costs ‑‑ Ontario Business Corporations Act, R.S.O. 1990, c. B.16, s. 136(1).
The respondent was the president and a director of the appellant corporation, which was plagued with infighting between him and another shareholder ("Canadian Express"). The respondent, as president of the corporation, was obliged under the by‑laws to act as chairman of the annual shareholders' meeting, at which the new board of directors was to be elected. A management information circular had been issued in which 11 candidates were proposed for the 11 director positions. The respondent was part of this slate, which divided 6‑5 in favour of his "camp" over Canadian Express's group. Although the Board had agreed on these candidates, at the shareholders' meeting Canadian Express nominated a surprise 12th candidate from the floor, thereby requiring a more formal election. The surprise candidate was elected, replacing the respondent. The night before the meeting, however, the respondent had been advised by corporate counsel that the proxies of Canadian Express and its supporters which had been deposited that day could be used to vote only in favour of the management slate since no specifications had been made thereon to indicate otherwise. After the voting had taken place, the respondent once again solicited corporate counsel's advice on what he should do with the proxy votes. Following counsel's advice that the proxy votes in favour of the surprise candidate were invalid, the respondent declared that that candidate had received no votes and that the 11 candidates in the management circular had been elected. He refused to entertain any discussion of the decision. The respondent then convened another shareholders' meeting, for the purpose of settling the outstanding voting issues. The provincial Supreme Court found that the respondent's ruling with respect to the proxies was wrong in law and that he was in breach of his fiduciary duties. This decision was upheld on appeal. The respondent's application for an order that he be indemnified by the corporation for the legal costs incurred in defending his corporate acts was dismissed on the ground that his conduct had not been in the best interests of the company and was therefore outside the scope of the right to indemnification provided for in s. 136(1) of the Ontario Business Corporations Act. The Court of Appeal set aside this decision and permitted the respondent to be indemnified for all proceedings, except the appeal of the decision regarding the validity of the impugned proxies.
Held: The appeal should be dismissed.
Section 136(1) and the corporation's by‑law which closely resembles it specify three conditions that the director or officer must fulfil in order to receive indemnification for the costs of defending litigation: (1) the person must have been made a party to the litigation by reason of being a director or an officer of the corporation; (2) the costs must have been reasonably incurred; and (3) the person must have acted honestly and in good faith with a view to promoting the best interests of the corporation. There is no reason to disturb the findings of the Court of Appeal that the expenses were reasonably incurred: (a) corporate counsel were retained in the annual meeting litigation to act for both the corporation and the respondent, in his capacity as chairman of the meeting; (b) the corporation's board reviewed the issue of whether it should have separate counsel from the respondent and determined that there were no grounds for taking such action; (c) the respondent added nothing to the costs of the litigation arising out of the shareholders' annual meeting; and (d) the respondent's conduct following the shareholders' meeting, in requisitioning another shareholders' meeting for the purpose of electing directors, was consistent with his protestations throughout that he had no interest in leading the company if voted out by a majority of informed shareholders. The respondent is involved in this litigation in his capacity as director/chairman of the corporation, not in his personal capacity. Canadian Express's application directly involved the corporation's reputation and the integrity of its voting procedures; moreover, the respondent's participation in the impugned proceedings flows entirely from his role as chairman of the meeting, not from his status as a shareholder.
The respondent has also satisfied the good faith requirement contained in s. 136(1). Persons are assumed to act in good faith unless proven otherwise. The best interests of the corporation in this appeal centre solely on the maintenance of the integrity and propriety of the voting procedure. The duty of a chairman is one of honesty and fairness to all individual interests and is directed generally toward the best interests of the company. The fact that a chairman has an interest in the outcome of a decision does not impugn the integrity of the process because of the mere appearance of bias. It is the corporation's shareholders who concluded that it is to be the president of the company (who is allowed to be a director) ‑‑ a person who invariably is interested in every matter discussed at the shareholders' meetings ‑‑ who is to act as chairman. In this respect, there is no unacceptable appearance of bias because it was never contemplated that the chairman was to be someone who would appear to be totally disinterested in the first place. Although a chairman has an obligation to promote administrative fairness, this is necessarily tempered with the need to control and organize a meeting so as to ensure that it proceeds effectively. In closing debate on the proxy issue, the respondent was, based on corporate counsel's instructions, fulfilling his responsibility as chairman to see that the shareholders' instructions as set out in the proxies were followed. Further, allowing the meeting to devolve into a shouting match between two rival camps debating a complex and unsettled area of corporations law could hardly be seen as enhancing the validity and integrity of the corporation's voting procedure. The fact that the respondent made the impugned ruling with the bona fide intent that the corporation have a lawfully elected board of directors constitutes evidence that he acted honestly and in good faith and with a view to the best interests of the corporation for the purposes of s. 136(1).
While mere de facto reliance on legal advice will not guarantee indemnification, reliance that is reasonable and in good faith will establish that a director or officer acted honestly and in good faith with a view to the best interests of the corporation. The respondent's reliance on corporate counsel's advice in this case was both reasonable and in good faith. In deciding not to reject the advice of counsel, the respondent in fact fulfilled his fiduciary duty. The advice given would, to a layperson in the respondent's circumstances (and with his business experience), have been ostensibly credible.
By following the instructions on the proxies and then requisitioning a new shareholders' meeting, the respondent gave all shareholders an opportunity to make a fully informed decision regarding the election of the directors, thereby promoting the integrity of the corporation's voting procedures. Canadian Express suffered no prejudice in respect of its voting rights in that it had the opportunity to nominate and support its surprise candidate at the new meeting or pursue legal action against the corporation. Instead of waiting for the newly requisitioned meeting (at which it could have ensured that its proxies were filled out in accordance with corporate counsel's instructions), Canadian Express took the far more circuitous route of obtaining its candidate's election through the court system, with the hope of transferring the costs thereof onto the respondent.
Permitting the respondent to be indemnified is consonant with the broad policy goals underlying indemnity provisions; these allow for reimbursement for reasonable good faith behaviour, thereby discouraging the hindsight application of perfection. Indemnification is geared to encourage responsible behaviour yet still permit enough leeway to attract strong candidates to directorships and consequently foster entrepreneurism. It is for this reason that indemnification should only be denied in cases of mala fides.
Cases Cited
Not followed: Re Bomac Batten Ltd. and Pozhke (1983), 43 O.R. (2d) 344; referred to: General Motors of Canada Ltd. v. Brunet, [1977] 2 S.C.R. 537; Alcyon Shipping Co. v. O'Krane, [1961] S.C.R. 299; Walters v. Essex County Board of Education, [1974] S.C.R. 481; Gray v. Yellowknife Gold Mines Ltd., [1946] O.W.N. 938; Johnson v. Hall (1957), 10 D.L.R. (2d) 243; Re United Canso Oil & Gas Ltd. (1980), 12 B.L.R. 130; Byng v. London Life Association Ltd. (1988), 42 B.L.R. 280; National Dwellings Society v. Sykes, [1894] 3 Ch. 159; Cohen‑Herrendorf v. Army & Navy Department Store Holdings Ltd. (1986), 55 Sask. R. 134; Central Trust Co. v. Rafuse, [1986] 2 S.C.R. 147; Exco Corp. v. Nova Scotia Savings & Loan Co. (1987), 35 B.L.R. 149; Bathgate v. National Hockey League Pension Society (1994), 16 O.R. (3d) 761, leave to appeal refused, [1994] 2 S.C.R. viii; Canadian Merchant Service Guild v. Gagnon, [1984] 1 S.C.R. 509; Re City Equitable Fire Insurance Co., [1925] 1 Ch. 407, aff'd [1925] Ch. 500 (C.A.).
Statutes and Regulations Cited
Business Corporations Act, R.S.O. 1990, c. B.16, ss. 107, 134(1), 135(4), 136(1).
Business Corporations Act, R.S.S. 1978, c. B‑10, s. 119.
Business Corporations Act, S.A. 1981, c. B‑15, s. 119.
Canada Business Corporations Act, R.S.C., 1985, c. C‑44, s. 124 .
Company Act, R.S.B.C. 1979, c. 59, s. 152.
Corporations Act, R.S.M. 1987, c. C225, s. 119.
Corporations Act, R.S.N. 1990, c. C‑36, s. 205.
Rules of the Supreme Court of Canada, SOR/83-74, r. 5, 51.
Securities Act, R.S.O. 1980, c. 466.
Authors Cited
Daniels, Ronald J., and Susan M. Hutton. "The Capricious Cushion: The Implications of the Directors' and Officers' Insurance Liability Crisis on Canadian Corporate Governance" (1993), 22 Can. Bus. L.J. 182.
Ziegel, Jacob S., et al. Cases and Materials on Partnerships and Canadian Business Corporations, vol. 1, 3rd ed. Toronto: Carswell, 1994.
APPEAL from a judgment of the Ontario Court of Appeal (1993), 15 O.R. (3d) 783, 106 D.L.R. (4th) 193, 66 O.A.C. 121, 12 B.L.R. (2d) 303, reversing a decision of Carruthers J., [1992] O.J. No. 2291 (QL), dismissing the respondent's application for indemnification. Appeal dismissed.
Dennis R. O'Connor, Q.C., and Ronald Foerster, for the appellant.
Patricia A. Virc, for the respondent.
//Iacobucci J.//
The judgment of the Court was delivered by
I. Iacobucci J. -- This appeal was dismissed from the bench on March 21, 1995, with reasons to follow. These are those reasons.
II. This appeal requires us to determine who should bear the costs of legally contesting a disputed directors' election: the corporation, or the chairman in his personal capacity as the individual making the impugned ruling?
I. Background
III. The respondent Blair was, from 1984 to 1989, the President and a Director of the appellant Consolidated Enfield Corporation ("Enfield"). In 1989, Enfield was plagued with fairly serious corporate infighting between Blair and another shareholder, Canadian Express Limited ("Canadian Express"), which had, in 1988, elected some of its officers (Willard L'Heureux and Manfred Walt) to Enfield's Board of Directors.
IV. The dispute came to a head on July 20, 1989 when Enfield's annual shareholders' meeting was scheduled to take place. Blair, as President of the company, was obliged under the by-laws to act as chairman. One of the matters on the agenda was the election of the new Board of Directors. A management information circular had been previously issued in which 11 candidates were proposed for the 11 director positions. Blair was part of this slate, which divided 6-5 in favour of Blair's "camp" over the Canadian Express group.
V. Although the Board had agreed on these candidates, on the day of the shareholders' meeting, Canadian Express nominated a surprise 12th candidate from the floor, Timothy Price, thereby requiring a more formal election. According to Canadian Express, although it had originally intended to vote for the management slate of directors, including Blair, Blair's actions in the months before the election (during which Canadian Express alleges that it and Blair had signed an "accord" to work together in the best interests of Enfield) purportedly indicated that he had no intention of co-operating with the Canadian Express camp.
VI. The Canadian Express camp, with Walt being the proxyholder for these shares, combined with Ravelston Corporation Limited (another shareholding group whose proxyholder was John Boultbee) and together pooled their voting shares. Their coalition represented 43 percent of the total shares and a majority of the shares actually voted at the meeting. The one candidate they did not vote for was Blair. For his part, Blair, through his own holdings (14 percent of Enfield), plus substantial management proxy support, culled together 41 percent of the total shares. The effect of the election was that Blair was out and Price was in as the 11th director. This reflected a total change in control of the Board in favour of the nominees of Canadian Express.
VII. There was, however, one major complication. On July 19, 1989, the night before the shareholders' meeting, the respondent had met with a representative of the scrutineer, Montreal Trust Company, and Enfield's corporate counsel, Osler, Hoskin & Harcourt ("Osler"), who had advised him that the Canadian Express and Ravelston proxies which had been deposited that day could be used to vote only in favour of the management slate since the instructions in the proxies (specifically Note 3 thereof) restricted the proxyholders to voting for the management slate because no specifications had been made thereon by the shareholders to indicate voting otherwise. Osler also noted that the Securities Act, R.S.O. 1980, c. 466, provided that votes cast pursuant to proxies could not be counted in favour of a candidate not named in the circular. Osler also delivered to Enfield several written memoranda dealing with procedural matters, the role of the chair, and the principles relating to the validity of the proxies.
VIII. The next day, after the voting had taken place on the surprise candidacy of Price, Blair once again solicited Osler's advice on what he should do with the proxy votes. He turned towards corporate counsel and queried: "You know the law, I will take my direction from you. What should I do?". There were six senior corporate lawyers from Osler present at this ad hoc meeting and, before they reached their decision, they deliberated for over one and one half hours in part with the scrutineers while remaining in constant contact with solicitors in their head office. Following Osler's advice that the proxy votes in favour of Price were invalid, Blair, reading verbatim from a statement prepared by Osler, declared that Price had received no votes and that the 11 candidates in the management circular had been elected. When L'Heureux vigorously objected to this decision, Blair refused to entertain any discussion thereon, telling L'Heureux to take the matter up with Enfield's counsel.
IX. Instead, the Canadian Express representatives immediately filed an application in the Ontario Supreme Court to the effect that Blair's ruling was wrong in law and that Price, not Blair, should have been elected as the 11th director. Both Blair and Enfield were named as co-respondents. Mention was made of the fact that Blair allegedly breached his quasi-judicial duties as chairman by not ceding the chair when the issue he was to rule upon so directly involved his own interests, as well as by foreclosing debate on the ruling and by not giving notice to Canadian Express as to the limitations of their proxy-holding power. On September 25, 1989, J. Holland J. found that Blair's ruling was wrong in law and that Blair was in breach of his fiduciary duties. He thus allowed the application, concluding that the ballots were legally cast for Price, in accordance with the proxies, and, consequently, that the respondent had not been elected a director. Costs were issued against Blair and Enfield.
X. Blair sought to appeal the substantive findings of J. Holland J. to Ontario Divisional Court. This appeal was unsuccessful.
XI. Since Canadian Express was then in control of Enfield, it sought to recover its costs from Blair alone. Blair then applied to Enfield to be indemnified for these costs, which indemnification was refused.
XII. Blair then filed an application under s. 4.02 of Enfield By-law No. 3, which essentially incorporates the terms of the statutory right to indemnification found in s. 136(1) of the Ontario Business Corporations Act, R.S.O. 1990, c. B.16, and in the business corporations statutes of most of the provinces as well as the federal business corporations statute, for an order that he be indemnified by Enfield for the legal costs incurred in defending his corporate acts.
XIII. On October 28, 1992, Carruthers J. dismissed the respondent's application, concluding that the respondent's conduct was not in the best interests of Enfield and thereby outside the scope of s. 136(1): [1992] O.J. No. 2291 (QL). Blair's appeal to the Court of Appeal for Ontario was allowed on October 6, 1993: (1993), 15 O.R. (3d) 783, 106 D.L.R. (4th) 193, 66 O.A.C. 121, 12 B.L.R. (2d) 303. Enfield, now controlled by Canadian Express, appeals to this Court.
II. Relevant Statutory Provisions and Corporate By-Laws
Ontario Business Corporations Act, R.S.O. 1990, c. B.16 (OBCA)
134.--(1) Every director and officer of a corporation in exercising his or her powers and discharging his or her duties shall,
(a)act honestly and in good faith with a view to the best interests of the corporation; and
(b)exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.
135. ...
(4) A director is not liable under section 130 or 134 if the director relies in good faith upon,
...
(b)a report of a lawyer, accountant, engineer, appraiser or other person whose profession lends credibility to a statement made by any such person.
136.--(1) A corporation may indemnify a director or officer of the corporation...against all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment, reasonably incurred by him or her in respect of any civil, criminal or administrative action or proceeding to which he or she is made a party by reason of being or having been a director or officer of such corporation or body corporate, if,
(a)he or she acted honestly and in good faith with a view to the best interests of the corporation;...
Enfield By-law No. 3
4.02 Indemnity of Directors and Officers. Subject to the limitations contained in the [OBCA], every director or officer of the Corporation...shall, from time to time, be indemnified and saved harmless...from and against all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment, reasonably incurred by him in respect of any civil, criminal or administrative action or proceeding to which he is made a party by reason of being or having been a director or officer of such corporation...if (a) he acted honestly and in good faith with a view to the best interests of the Corporation....
III. Judgments Below
A.Ontario Supreme Court (1989), 46 B.L.R. 92, per J. Holland J.(sub nom. Canadian Express Ltd. v. Blair)
XIV. It is important to emphasize that it is not J. Holland J.'s decision that is appealed to this Court. The application before J. Holland J. was launched by Canadian Express to overrule, on the merits, Blair's decision to void the proxy votes tabulated in favour of Price. J. Holland J. found in favour of Canadian Express and named Price, not Blair, as the 11th director of Enfield. Blair appealed J. Holland J.'s decision; his application was summarily dismissed. However, a review of J. Holland J.'s decision is warranted since it (1) provides a factual background to the s. 136(1) issue involved in the present appeal, and (2) constitutes the first tier of the proceedings for which Blair is presently seeking indemnification. The matter before J. Holland J. is thus the underlying "litigation" for which Blair wishes his reasonable expenses defrayed by Enfield.
XV. I note that the proceedings before J. Holland J. were commenced by Canadian Express even though Blair had convened another shareholders' meeting on July 24, 1989, ostensibly for the purpose of settling the outstanding voting issues. Blair was added to these proceedings in his capacity and status as a director of Enfield and as chairman of the shareholders' meeting of July 20, 1989.
XVI. J. Holland J. concluded (at p. 94) that "the true construction of the disputed proxies is that they conferred general discretion" on the proxyholders. He found that the proxies "were effectively converted to unsolicited shareholder proxies once the names of the proposed management proxyholders were deleted and the names of the shareholder designees were inserted". They were thus valid.
XVII. J. Holland J. noted "the importance of enabling shareholders to freely exercise their voting rights in accordance with their intentions" and underscored that "shareholder designees who hold blank proxies ... are recognized as having full discretion to vote as they see fit, just as the shareholders in person at the meeting could vote" (p. 94). He stated that the disputed proxies should be construed "in light of surrounding circumstances and, where possible, in a manner consistent with business common sense" (p. 95). With these considerations in mind, J. Holland J. held (at p. 95) that:
I accept that [the proxyholders] were entitled to vote a total of 19,038,296 shares, which was more than 50 per cent of the shares represented at the meeting. There is no doubt on the evidence that the proxyholders intended to, and did, cast their votes for Price and not for Blair. [Emphasis in original.]
XVIII. J. Holland J. found that the respondent "failed to meet the quasi‑judicial standard of conduct demanded of a chairman" (p. 95). He stated that, based on the evidence, it could be reasonably inferred that the respondent was alerted to the fact that the election of directors would be contentious and that he was likely to be in a position of conflict. He noted that the respondent, when he reconvened the meeting to announce the results of the balloting, read from a statement prepared by his solicitors, stating that Price had received no votes and that he had been elected. He found that this was in accordance with the plan conceived by the respondent to protect his personal interests and that it was no excuse for Blair to say that he relied upon legal advice. J. Holland J. then concluded (at p. 96) that:
From the tally, it was clear that all the votes cast by [the proxyholders] for Price had, by reason of the chairman's decision, been counted as votes resulting in his own election. He did not permit discussion at the meeting as to this decision. At the very least, he had an obligation to allow those affected by his ruling on the disputed ballots an opportunity to be heard. He chose to act as Judge in his own cause and it is properly inferred from the evidence that he had determined to act in this way, at least at the time of the July 19 meeting and until the announcement of the voting results. In view of Blair's conduct alone and quite apart from the true construction of the proxies, his ruling cannot stand.
It was Blair's decision and not that of the scrutineers to determine the ballots in this way. It is no excuse for Blair to say that in doing so he was relying upon legal advice. It was his responsibility to conduct himself quasi‑judicially throughout the proceedings.
XIX. J. Holland J. stated that, in exercising his discretion as to costs, he did so on the basis of the relationship of the respondent and Enfield in the sense that the respondent breached his fiduciary duty following legal advice given by Enfield's solicitors. J. Holland J. concluded that Canadian Express was entitled to costs against both Blair as well as Enfield. These were assessed (after an assessment appeal) at $165,432.67.
XX. Blair appealed J. Holland J.'s order as to the proxy votes. This appeal was dismissed. He then commenced an application in the Ontario Court (General Division) for a declaration that Enfield was to indemnify him for all costs, charges and expenses incurred by him in respect of the proceedings before J. Holland J. It is to this issue that I now turn.
B. Ontario Court (General Division)
XXI. Carruthers J. denied Blair's claim for indemnification.
XXII. Carruthers J. stated that the onus was on the respondent, pursuant to s. 136(1) OBCA, to demonstrate, on a balance of probabilities, that he "acted honestly and in good faith with a view to the best interests" of Enfield throughout the litigation. However, Carruthers J. stated that, "following my opportunity to reflect on the merits of this application on the basis of the material filed with the court to this point, I have been able to reach my conclusion without having to determine the issue of good faith on the part of Blair". In the end, Carruthers J. simply found that, since Blair's involvement in the Canadian Express application had not been undertaken with a view to Enfield's best interests, he was not entitled to indemnification.
XXIII. Carruthers J. stated that the respondent's honesty and good faith were relevant for the purposes of the trial judge, who was not concerned with whether the respondent acted "with a view to the best interests of" Enfield in defending the litigation. Carruthers J. then stated that he had to be concerned with this last issue as it related to the respondent's conduct or involvement in the litigation. He concluded that:
The applicable provisions of the Act or by‑law require that his involvement in that litigation be in the best interests of Enfield quite apart from whether it can also be described as honest and in good faith. Thus, whether Blair was in fact acting honestly and in good faith during the course of his disputing or defending the claims of Canadian Express raised in the litigation, he is not entitled to succeed in this present application unless, as well, what he did can be said to have been in the best interests of Enfield.
XXIV. Carruthers J. was of the view that the dispute was about the control of Enfield and "involved efforts by both sides to either preserve or promote their respective desires and interests in this respect". He found that the respondent, on the advice of Enfield's solicitors, reached the decision that he had been elected. The question at this point was whether the respondent had done this "in order to promote the best interests of Enfield." Carruthers J. concluded that:
... Blair's conduct at the meeting, including his decision, was not something that can be said to have been in the best interests of Enfield. Accordingly, because the sole purpose of disputing the claims raised on behalf of Canadian Express in the litigation was to uphold Blair's conduct, again including his decision, Blair cannot fit himself into either the provisions of s. 136(1) of the OBCA or of s. 4.02 of the Enfield By-Law No. 3.
Both Blair and Enfield were properly named as parties to the litigation; Blair chaired and ran the meeting and made the decision, and Enfield to be bound by the result....[a]s that matter was one personal to him, and as well to the other shareholders who supported him, Enfield is not liable to indemnify Blair for the costs, charges and expense which he has incurred by reason of defending the litigation.
C. Ontario Court of Appeal (1993), 15 O.R. (3d) 783
XXV. The Court of Appeal set aside Carruthers J.'s decision and permitted Blair to be indemnified under s. 136 for all proceedings (i.e. before J. Holland J., Carruthers J. and the Court of Appeal), with the exception of the appeal of J. Holland J.'s decision regarding the validity of the impugned proxies, and the expenses related thereto, which Carthy J.A. found not to have been reasonably incurred.
XXVI. Carthy J.A. stated that the issue before the court was the proper application to the facts of the By‑law which granted rights of indemnity in the terms authorized by s. 136(1) OBCA. He also stated that "reliance upon legal advice cannot be excluded as a factor in determining whether a director acted `honestly and in good faith with a view to the best interests of the corporation' as set forth in s. 136" (p. 787). He then held (at pp. 789-90) that:
...I read s. 136(1)(a) and the language "acted...with a view to the best interests of the corporation" as referring back to, in this case, the conduct of the vote for directors ‑- not to the conduct of the litigation. The litigation that is contemplated by s. 136(1)(a) is against the director personally and the indemnity is against personal liability. There is no purpose in a requirement that personal litigation be conducted in the best interests of the corporation. The costs of litigation are dealt with separately in s. 136(1) and must be "reasonably incurred".
XXVII. Carthy J.A. emphasized that the issue was Blair's ruling on the overall balloting, and "to conclude that his ruling was male fide because the result favoured him is to conclude that he was compelled to rule the other way, or give up the chair, no matter what advice he received" (p. 798). He then stated that, aside from the question of giving up the chair, "the real test should be whether the ruling was made with the bona fide intent that the company have a lawfully elected board of directors" (p. 798).
XXVIII. Carthy J.A. found that the authorities generally described the chairman's duty as quasi‑judicial "without defining what that means in this context" (p. 799). He stated that it was confusing "to use, and seek to define, the word judicial or quasi‑judicial in this context because an adjudicator or judge can never have a personal interest in the issue". He then concluded (at p. 799):
A chairperson who is more than a nominal shareholder of a public company, on the other hand, always has a personal interest in everything that affects the company, which includes all of the rulings of the chair. If that distinction is not recognized the reflex reaction is to assume that a decision which benefits the chair personally is non‑judicial and thus not bona fide. In my view, it is preferable to describe the duty as one of honesty and fairness to all individual interests, and directed generally toward the best interests of the company.
XXIX. Carthy J.A. found that the events leading up to the election created an "aggressively competitive atmosphere". He also found that Blair "felt very strongly that the shareholders as a whole should be fully informed of a change in control" and that Blair "undoubtedly resented the surprise nomination of Price". In the end, this made the respondent "a protagonist in the duel for control". Carthy J.A. stated that, based on the sequence of events, Blair did not have a choice when he made the impugned ruling (at pp. 799-801):
Given the necessity of determining who the legal directors of the company were, so that business could be carried on in a regular fashion, some decision had to be made. Even if a disinterested chairperson could have been found in the room, he or she would, in these circumstances, have had to look to the corporation's solicitors for an answer to this purely legal issue of interpretation....
No matter what debate might have ensued on July 20 and no matter who the chairperson might have been, there was no obvious error or oversight which would enable the chairperson to turn away from the advice of the company's solicitors.
...I am satisfied that Blair was acting honestly and in good faith and in the best interests of the corporation in accepting and implementing that advice.
...I am satisfied that the evidence shows that he properly performed his duty as chairman of the meeting.
XXX. Carthy J.A. considered whether Blair acted reasonably in his defence of the litigation and concluded that there was nothing unreasonable in Blair's involvement in the initial application as well as in the other proceedings.
IV. Issue on Appeal
Did the Ontario Court of Appeal err in concluding that the respondent Blair was entitled to be indemnified by the appellant Enfield regarding the costs of the Canadian Express application (and appeals on the costs issue emanating therefrom) pursuant to s. 4.02 of Enfield By-Law No. 3, modeled upon s. 136(1) OBCA?
V. Analysis
A.An Overview of the Legislation: Burden of Proof and the Scope of the Conduct that is Caught
XXXI. For purposes of convenience, I reproduce s. 136(1) OBCA (relevant portions underscored):
136.--(1) A corporation may indemnify a director or officer of the corporation...against all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment, reasonably incurred by him or her in respect of any civil, criminal or administrative action or proceeding to which he or she is made a party by reason of being or having been a director of such corporation or body corporate, if,
(a)he or she acted honestly and in good faith with a view to the best interests of the corporation; [Emphasis added.]
XXXII. The effect of s. 4.02 of Enfield By-law No. 3 essentially duplicates that of s. 136(1), although the wording does vary:
4.02 Indemnity of Directors and Officers. Subject to the limitations contained in the [OBCA], every director or officer of the Corporation...shall, from time to time, be indemnified and saved harmless...from and against all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment, reasonably incurred by him in respect of any civil, criminal or administrative action or proceeding to which he is made a party by reason of being or having been a director or officer of such corporation...if (a) he acted honestly and in good faith with a view to the best interests of the Corporation.... [Emphasis added.]
XXXIII. Given that the effect of s. 4.02 of By-law No. 3 is essentially the same as that of s. 136, any interpretation given to the By-law by this Court will affect the application of the Act. Furthermore, s. 136(1) is reproduced in turn in the corporations law of many provinces, as well as federally: Canada Business Corporations Act, R.S.C., 1985, c. C-44, s. 124 ; Newfoundland Corporations Act, R.S.N. 1990, c. C-36, s. 205; Manitoba Corporations Act, R.S.M. 1987, c. C225, s. 119; Saskatchewan Business Corporations Act, R.S.S. 1978, c. B-10, s. 119; Alberta Business Corporations Act, S.A. 1981, c. B-15, s. 119; British Columbia Company Act, R.S.B.C. 1979, c. 59, s. 152.
XXXIV. The largest difference between s. 136(1) and s. 4.02 of By-law No. 3 is that, whereas under s. 136(1) the director may be indemnified, under the By-law the director shall be indemnified. Is this of any importance? The respondent submits that this difference is relevant to the issue of the burden of proof. Since under the By-law indemnification is mandatory, the onus should lie on the corporation to demonstrate that the director acted with mala fides. I do not find this argument terribly persuasive.
XXXV. What I do find more persuasive is the proposition that persons are assumed to act in good faith unless proven otherwise: General Motors of Canada Ltd. v. Brunet, [1977] 2 S.C.R. 537, at p. 548. In this respect, contrary to the appellant's submissions before this Court, I believe that a proper construction of the statute and law related to good faith issues reveals that Blair is not required to prove his good faith, although he may certainly call evidence in this regard to counter whatever evidence of bad faith may be adduced against him. To a large extent, it is the corporation that must establish, to the satisfaction of the court, exactly what Blair did that was inimical to its best interests.
XXXVI. Section 136(1) and the Enfield By-law specify three conditions that the director or officer must fulfil in order to receive indemnification for the costs of defending in litigation:
(1) the person must have been made a party to the litigation by reason of being a director or an officer of the corporation;
(2) the costs must have been reasonably incurred; and
(3) the person must have acted honestly and in good faith with a view to promoting the best interests of the corporation.
XXXVII. As I will now discuss, Blair has fulfilled all three conditions entitling him to indemnification.
XXXVIII. In terms of applying this law to the facts, I see no reason to disturb the findings of the court below that the expenses were reasonably incurred. The court grounded its assessment in the following factors:
(a)Osler was retained in the annual meeting litigation to act for both Enfield and Blair, in his capacity as chairman of the meeting;
(b)The Enfield board reviewed the issue of whether it should have separate counsel from Blair and determined that there were no grounds for Enfield taking such action;
(c)Blair added nothing to the costs of the litigation arising out of the shareholders' annual meeting;
(d)Blair's conduct following the shareholders' meeting, in requisitioning another shareholders' meeting for the purpose of electing directors, was consistent with his protestations throughout that he had no interest in leading the company if voted out by a majority of informed shareholders.
XXXIX. Thus, this appeal, when properly focused, involves only the "good faith" requirement contained within s. 136(1). In this connection, I now direct my attention to the respondent's conduct during the July 20, 1989 shareholders' meeting, bearing in mind that this conduct must be placed within the context of the longstanding corporate feud arising between the respondent and Canadian Express. However, before a determination can be made whether this conduct was undertaken in good faith and with a view to promoting the best interests of the corporation, I must respond to the appellant's contention that Blair is involved in this litigation in his personal capacity as opposed to his capacity as a director, thereby prima facie precluding him from the benefit of s. 136(1).
B.Is Blair Involved in this Litigation in his Capacity as Director/Chairman of Enfield or in his Personal Capacity?
XL. The appellant submit