The Ontario Court of Appeal released its decision on July 10, 2014, in Unique Broadband Systems, Inc. (Re) (“UBS”), in which UBS successfully appealed an order for it to pay an enhanced severance payment equivalent to 300% of a director’s income. The court also upheld the decision not to award the director any additional compensation or indemnify him for legal fees where the director had not acted honestly or in the best interests of the corporation.
UBS was a for-profit corporation and the Court reviewed a series of compensation arrangements concerning a director and the CEO of the corporation. Although UBS was a for-profit business, the conclusion reached by the Court that the compensation arrangements performed by the board were in breach of the board’s fiduciary duty would generally have application to directors of charities and not-for-profits. The Court stated that the fiduciary duty of a board of directors requires the board to act in good faith and in the best interest of the corporation, including a duty to avoid conflicts of interest, and to refrain from abuse of the position for personal gain. A particular issue, which the court identified, was the fact that the board did not seek any third-party reassurance that the compensation arrangements enacted by the board was reasonable.
This decision is particularly relevant to boards of charities and not-for profits as it sets a precedent that would reasonably apply to both compensation and indemnification of directors and management, since their fiduciary obligations are analogous to those of for-profit corporations. Although directors of charities in Ontario may not often consider this issue, as they are prohibited at common law from receiving any direct or indirect benefit, executive personnel employed by charities and directors of not-for-profits need to take note of this decision that their compensation schemes must be reasonable. Given recent federal and provincial legislative initiatives concerning executive compensation in the not-for-profit sector, it will also be important for directors and officers in the not-for-profit sector to monitor case developments in the for-profit realm in this regard.
The decisions can be found online here.
Ryan Prendergast, B.A., LL.B. - Called to the Ontario Bar in 2010, Mr. Prendergast joined Carters with a practice focus of providing corporate and tax advice to charities and non-profit organizations concerning incorporation, ongoing corporate compliance, registration of charities, audits and internal appeals with Canada Revenue Agency, as well as the amalgamation and merger of charities. Ryan is a regular speaker and author on the topic of directors’ and officers’ liability for not-for-profit corporations, and has co-authored papers for Law Society of Upper Canada. In addition, Ryan has contributed to several Charity Law Bulletins and other publications on www.charitylaw.ca, and is a regular presenter at the annual Church and Charity Law seminar
