The retention of directors and officers is often a key concern for corporations. Directors and officers face increasing personal financial exposure, generally in return for modest directorrs fees. It is therefore reasonable for corporations to provide written indemnities, to the extent permitted by law, to its directors, officers and other representatives.
Effective August 1, 2007, Ontario amended the Business Corporations Act (the OBCAA) regarding the extent to which an OBCA corporation may indemnify its directors, officers and other persons who have agreed to represent the interests of the corporation in certain circumstances. Prior to August 1, 2007, the power of an OBCA corporation to indemnify its directors and officers was restricted when compared, for example, to the powers conferred on corporations incorporated under by the Canada Business Corporations Act.
Specific Changes to Indemnification Provisions in the OBCA
The amended OBCA indemnification powers now allow for the following:
First, indemnification is no longer limited to civil, criminal, and administrative proceedings, but can apply to costs incurred in investigative and other proceedings (such as securities commission investigations).
Second, the class of individuals eligible for indemnification is not restricted to directors and officers of the corporation or other corporation, but can now include persons acting in a similar capacity on the corporationns behalf in non-share capital corporations, partnerships, joint ventures, limited liability corporations, trusts and other unincorporated entities (each a related entityy). The indemnifying OBCA corporation no longer has to have a financial interest in the related entity. As a result, the board of directors of each OBCA should be able to review those circumstances where the corporation has appointed a representative or member to a related entity to determine whether it would be appropriate for the corporation to provide an indemnity.
Third, the scope of indemnification has been broadened. Where a claim is issued against a person indemnified by an OBCA corporation, and his/her indemnity so provides, he/she may be entitled to the benefit of the indemnity prior to final judgment. Such persons are only disqualified from the benefit of indemnification if a court determines that the indemnified person failed to act honestly and in good faith with a view to the best interests of the corporation/related entity. Prior to the August 1, 2007 OBCA amendments, the onus was reversed, that is, the indemnified person was forced to pursue recovery from the corporation by a court proceeding in which he/she was substantially successful.. By reversing the onus, a huge financial burden has been lifted from indemnified parties and unnecessary litigation may be avoided. Where the matter involves a criminal or administrative action or proceeding, there is the added requirement that the person indemnified had, at the time of payment, reasonable grounds for believing that his/her conduct was lawful.
Fourth, OBCA corporations are now able to advance monies to indemnified individuals on a pay-as-you-go basis to fund the cost of their defence against third-party claims. This is a significant improvement since the carrying cost of litigation can often be prohibitive. Previously, the indemnified officer or director would have had to fund his/her own costs until the end of the action, and then seek to have those costs reimbursed by the corporation. Finally, an OBCA corporation is free to purchase whatever liability insurance coverage is available notwithstanding that the corporation would, under the circumstances (e.g., the beneficiary of the policy had not, in fact, acted honestly and in good faith in the best interests of the corporation), not have had the power to indemnify the person.
These amendments to the OBCA only address the capacity of OBCA corporations to grant indemnities. There are a number of steps that must be taken by the corporation to give effect to the changes.
First, any existing indemnity agreements should not be terminated but should remain in effect notwithstanding that claims under existing indemnities may not be as broadly stated as now permitted by the OBCA. There is something to be said for an indemnity agreement that is seasonedd, that is, a sufficient period of time has passed since the agreement was entered into, to avoid the presumption of fraud under the reviewable period provisions of Canadian insolvency legislation.
Second, the powers of any corporation are as set out in its incorporating statute (in this case, the OBCA), in its articles of the corporation and in its by-laws. It would be unusual for the articles of an OBCA corporation to include specific reference to the corporationns power to indemnify persons. However, it is likely that the general by-law of each existing OBCA corporation will provide for the right of the corporation to grant indemnities in favour of its officers and directors, and the description of the extent to which the corporation is so authorized will likely conform to the pre-August 1, 2007 language of the OBCA. An indemnity that goes beyond that permitted by the general by-law of the indemnifying corporation may not be enforceable, even if it is otherwise permitted by the OBCA. There is a very high likelihood that each OBCA corporation that provides indemnities to its directors, officers and its other representatives will have to amend its general by-law to eliminate restrictions that now exceed those required by the amended OBCA.
Third, if the board of directors determines that new indemnities should be granted to directors, officers and other representatives, appropriate agreements should be prepared, authorized, executed and delivered by the corporation. Obviously, the new agreements should not exceed the new limits set out in the amended OBCA.
Fourth, as you appreciate, whenever a matter comes before the board of directors in which any director has a personal interest, the director in question must refrain from attending the meeting where the matter is considered and, obviously, not vote on the matter. Corporate indemnities in favour of a director are an exception to this rule. The director in question must still disclose his/her interest in the matter in the minutes of the meeting when the matter is first considered by the directors, and the granting of the indemnity must be approved by the shareholders of the corporation. As a result, the above procedure should be followed, that is, the notice of a special meeting of the shareholders should seek approval of each of (a) the amendment to the general by-law, (b) the granting of indemnities (as fixed by the board) and (c) the entering into the indemnities as contracts in which the affected directors and officers have a personal (and therefore, conflicting) interest. Finally, the corporationns directorss and officerss insurance policy should be carefully reviewed. It may be appropriate to amend coverage.
Only after these steps have been completed will an OBCA corporation be able to extend the broader benefits allowed by the recent OBCA amendments to its directors, officers and related entity representatives.