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Corporations - Directors and Officers

. Lee v. Lalu Canada Inc.

In (Ont CA, 2020) the Court of Appeal set out the legal standard for advance litigation funding offered by corporations to indemnify their directors and officers:
II. LEGAL FRAMEWORK

[4] Lee’s application for advance funding was based on the provisions of Lalu’s Unanimous Shareholders’ Agreement (dated December 15, 2015 and amended and restated in June 2017) and s. 124 of the Canada Business Corporations Act, R.S.C. 1985, c. C-44 (the “CBCA”).

[5] The relevant provision of the Unanimous Shareholders’ Agreement reads as follows:
To the fullest extent permitted by law, the Corporation will indemnify and save harmless each director and officer and former director or officer of the Corporation … against all costs, charges and expenses … reasonably incurred by the director or officer in respect of any civil, criminal, administrative, investigative proceeding to which the director or officer is made a party by reason of being or having been a director or officer of the Corporation[.]
[6] Section 124 of the CBCA provides for the indemnification of individuals, including former directors and officers of a corporation, for their reasonable costs incurred in defending an action in which they are involved because of their association with the corporation. Advance funding of costs is available, without court approval under s. 124(2) or with court approval under s. 124(4), subject to the individual fulfilling the conditions of s. 124(3), one of which is that the individual “acted honestly and in good faith with a view to the best interests of the corporation”. Subsection 124(7) provides that an individual, entity or corporation can apply to the court for an order approving indemnity.

[7] The test on an application under s. 124 for advance funding is set out in this court’s decision in Cytrynbaum v. Look Communications Inc., 2013 ONCA 455, 116 O.R. (3d) 241, leave to appeal refused, [2013] S.C.C.A. No. 379, [2013] S.C.C.A. No. 377. Advance funding should be denied only where the court is persuaded, on a preliminary assessment of the merits, that the corporation has made out a strong prima facie case of bad faith on the part of the applicant for funding. In Cytrynbaum, Sharpe J.A. noted that the strong prima facie case test “is a stringent test that gives significant weight to the protection of officers and directors. It ensures that they will ordinarily receive advance funding but leaves open the possibility that advancement will be denied when there is strong evidence of bad faith”: at para. 56.



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