Supreme Court Of Canada Refuses Leave In Look Communications Inc. Case On Advancement Of Defence Costs

The Supreme Court of Canada recently refused leave to appeal the latest Canadian decision of significance on the advancement of defence costs to directors and officers.

In Cytrynbaum et al v. Look Communications Inc., 2013 ONCA 455 (CanLII) the Ontario Court of Appeal refused a request of certain directors and officers who had been sued for what was alleged to have been improper conduct on the part of the directors and officers that put them into receipt of substantial monetary benefits.

Look Communications Inc. ("Look") had been incorporated pursuant to the Canadian Business Corporations Act and was engaged in the wireless, internet and cable services industry. As an incentive to its directors, officers, employees and consultants, Look adopted a Share Appreciation Rights Plan ("SARs Plan") allowing share appreciation rights based upon the market value of Look's shares. The SARs could be exercised if Look sold all or substantially all of its assets, whereupon the holder of the SARs would be entitled to be paid the difference between the market price of the shares on that date and the price of the shares on the dates the SARs were granted.

From 2005 to 2008, Look's business began to decline and by late 2008, the board was seeking to sell Look's assets pursuant to a plan of arrangement under the supervision of a monitor. Ultimately, the sale was achieved in early 2009 when the company's key assets were sold for $80 million, less $16 million to be paid to settle certain outstanding litigation. Ultimately, the sale was approved both by the shareholders and by the court.

The board also approved a recommendation to set aside $11 million for severance, retention and bonus payments while also agreeing to terminate the SARs and cancel all share options on the basis of a share valuation of $0.40 per share. This was contrary to both the terms of the SARs and the option plans which specified that market value was to be used. At the time, the true market value of the shares was $0.20 rather than $0.40.

Of the more than $20 million generated as net sale proceeds of Look's assets, the directors, officers, employees and consultants received 32% by way of bonuses and equity cancellation payments.

Naturally, this attracted a great deal of shareholder interest and concern and ultimately, in anticipation they would be sued, the directors and officers authorized Look to pay $1.55 million as retainers to three law firms who would act for them personally in any...