Law Times

Law Times • may 11/18, 2009 FOCUS Bennett is welcome news for corporate officers and directors BY JULIUS MELNITZER For Law Times T he Ontario Court of Appeal's March decision in Bennett v. Bennett Environmental Inc. is welcome news for corporate officers and directors seeking corporate indem- nity for the financial consequences of regulatory offences. "The decision tells us that there will be a heavy onus on a company seeking to avoid indemnifying an individual to show that the individual knew he or she was acting unlawfully," says Linda Plumpton, a partner at Torys LLP's To- ronto office, who with Torys associate Andrew Gray, represented Ben- nett Environmental. The case turned on s. 124(3) of the Canada Business Corporations Act, which prohibits indemnification where a director or officer has failed to meet two re- quirements, both of which must be satisfied. More specifically, a corporation may choose not to indem- nify an individual un- less the individual "acted honestly and in good faith with a view to the best interests of the corporation"; and in cases involving criminal or ad- ministrative proceedings enforced by monetary penalty, the individual "had reasonable grounds for believing" that the impugned conduct was lawful. BEI is a federally incorporated compa- Bennett and the OSC settled. In the settle- ment, Bennett admitted that the existence of the contract dispute constituted a ma- terial change that had not been disclosed. Bennett also acknowledged his "serious misconduct." Still, the settlement agreement express- Linda Plumpton ly acknowledged that Bennett had had an honest but mistaken belief that, despite the dispute, the contract was enforceable and that the issue would ultimately be re- solved in the company's favour. The OSC ordered Bennett to pay $300,000 in fines and costs. Bennett sought indemnification from BEI, who refused to pay. The company also sought repayment of monies it had ad- vanced to indemnify Bennett with regard to the U.S. proceedings. Bennett sued for a declaration that he was entitled to indemnifica- tion for all the proceed- ings. Ontario Superior Court Justice Colin Campbell found in Bennett's favour. On appeal, BEI chal- lenged Campbell's in- terpretation of s. 124(3) and argued that indem- nification in this case was inconsistent with the policy rationale be- ny whose business included the thermal remediation of contaminated soil. John Bennett, who founded BEI's predecessor company, was BEI's CEO and a member of its two-person disclosure committee. Bennett resigned from both positions in February 2004, and was no longer involved in the details of management. However, he continued as chairman of BEI's board until August 2004, and there- after as a consultant to the company. Soon after BEI announced in 2003 that it had been awarded the largest soil remediation contract in its history, the company learned that a competitor was protesting the award of the con- tract, which was being rebid for a much smaller volume of soil. BEI continued to list the original con- tract as inventory even after it executed a second, much smaller, contract in June 2004. At that point, the party with whom BEI contracted took the position that the original contract was at an end. In July 2004, BEI issued a press re- lease disclosing that further shipments under the original contract were "high- ly unlikely" and that the contract had been in dispute since August 2003. The company also disclosed the second con- tract. The price of BEI shares fell 50 per cent within 10 days. Class actions against BEI and its di- rectors ensued in the U.S. As well, the U.S. Securities and Exchange Commis- sion brought proceedings against BEI, Bennett, and other directors. Both the class actions and the SEC proceedings were settled by 2006. For its part, the Ontario Securities Commission alleged that BEI and its di- rectors had violated the disclosure require- ments under the Securities Act. In 2006, hind the provision. But Justice Susan Lang, writing for a unanimous court composed also of jus- tices Russell Juriansz and Gloria Epstein, upheld Campbell's ruling. It was the "competing objectives of encouraging director entrepreneurism on the one hand, and discouraging di- rector misconduct on the other" that in- formed the interpretation of s. 124(3), Lang noted. But the Supreme Court's 1995 ruling in Blair v. Consolidated Enfield Corp. had confirmed that the corporation bore the burden of showing that the director did not act "honestly and in good faith," as required by the first branch of s. 124(3). Blair, however, had not considered the second branch, which required reasonable grounds for belief in lawful conduct. "Nonetheless, in my view, for reasons analogous to the observation in Blair re- garding honest and good faith conduct, the corporation also bears the burden of showing that the director did not have rea- sonable grounds for his or her belief that the conduct was lawful," Lang concluded. There was no indication in the word- ing of the legislation that suggested a different burden for the second branch as opposed to the first. "The imposition of the burden on the corporation best balances the promo- tion of strong director decision-making, on the one hand, while discouraging irresponsible behaviour on the other," Lang wrote. "Finally, as a practical mat- ter, this placement of the burden makes sense because the corporation, and not the individual director, will most likely have the advantage of unrestricted access to corporate documents relevant to the indemnification proceeding." Under this interpretation, the com- pany had failed to prove either that Ben- nett had acted in bad faith or that Ben- nett did not have reasonable grounds to believe his conduct was lawful. This was not a case where Bennett See Indemnity, page 15 www.lawtimesnews.com Teranet_LT_May11/18_09.indd 2 5/6/09 2:44:48 PM PAGE 11 WRITS OF EXECUTION OWL® Report Requested By: MB, Reference Number: DOE Date of Search: March 01, 2009 Total Cost(including GST): $52.45 Name Searched: DOE, JOHN The following writs of execution were retrieved: ENFORCEMENT OFFICE: WRIT NUMBER: 06-0002045 06-0003692 ENFORCEMENT OFFICE: WRIT NUMBER: 03-0000638 ENFORCEMENT OFFICE: WRIT NUMBER: 95-0003348 ENFORCEMENT OFFICE: WRIT NUMBER: 05-0000399 92-0000155 ENFORCEMENT OFFICE: WRIT NUMBER: 95-0000346 95-0000632 96-0000200 ENFORCEMENT OFFICE: GODERICH PARRY SOUND LINDSAY KITCHENER WELLAND NEWMARKET Go to www.bar-ex.com or call 1-877-462-2739. 3868.BX LawTimes 04/09

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