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It has taken almost seven years but finally shareholders will see some reward for the work done by a group of dissidents at Unique Broadband Systems and its 50 per cent plus owned subsidiary, Look Communications.
Thanks to a recent ruling on an action brought by Look, Justice Barbara Conway of Ontario’s Superior Court of Justice has ordered Gerald McGoey, the company’s former chief, to repay $5.57 million. She also ordered McGoey to repay $200,000 used to cover part of his legal bills. McGoey, who defended himself, has 30 days to file an appeal.
“It is a rare and important case for Canadian jurisprudence. We don’t have many cases of shareholder driven litigation that goes to a complete trial,” noted one lawyer.
Justice Conway declared: “Mr. McGoey did not act honestly and in good faith with a view to the company’s best interests when he, as a director of Look, caused the company to make contingent restructuring awards,” also known as CRAs. In all, about $20 million in CRAs were made to Look’s directors, officers and employees, following the May 2009 sale of Look’s spectrum — a transaction that generated $64 million in net proceeds.
When news of those awards was conveyed to shareholders months later, a group of UBS shareholders led by Grant McCutcheon, Henry Eaton and Robert Ulicki, canvassed enough rank and file support to oust the board. Once they controlled UBS they also controlled Look.
They then launched a series of actions at both the UBS and Look level, largely focused on the payments made to the executives at both companies and the methods by which those payments were determined.
Justice Conway also issued a tracing order, which allows a successful claimant “who proves a breach of fiduciary duty leading to a constructive trust to locate the funds or property impressed with the constructive trust.” She ordered McGoey and his company, Jolian Investments, to “make available all necessary records go facilitate a tracing of the CRAs paid to them or to companies they own or control.”
In her 20-page judgment, Justice Conway didn’t have any sympathy for the approach taken to value the CRA payments. In effect the payments were based on $0.40 a share — the price that reflected net asset value. It also was the price Rogers Communications had agreed to buy Look’s shares. (That deal didn’t proceed.) But it was much higher than the trading price. Justice Conway criticized the board for failing “to adjust the $0.40 share price for the CRAs after the Rogers negotiations terminated.”
Justice Conway placed emphasis on the views of Michael Thompson, an expert in executive compensation who appeared as a witness. “I find Mr. Thompson’s evidence on executive compensation to be reliable and useful,” she wrote.” In his evidence Thompson noted the difference between the price that was used ($0.40) for the CRAs and the market price and said that decision “benefited management and the board at the expense of shareholders.”
Justice Conway said Look “was under no obligation to pay Mr. McGoey any bonus,” adding the board’s decision “was not in the best interests of the company, preferred his interests over those of the corporation and was not within the range of reasonable alternatives.”
Justice Conway also “rejected” the defence of fiduciary duty advanced by McGoey that the board relied on legal advice. “Mr. McGoey breached his fiduciary duty as a director of Look in approving the CRAs and the advances,” the latter being the $1.55 million paid to the law firms.
Much of the heavy lifting was done by Goodmans LLP. Norton Rose Fulbright was added for the recent trial.
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