Directors and Officers Liability – a look at the current trends, claims and defenses or D & O coverage Don Smith and Julie Lamb, Guild Yule LLP 1

Basic terms: Corporation: legal person, creature of statute, circumscribed by memorandum and articles of incorporation, owned by shareholders who have no liability for corporate action Directors: appointed as per articles or elected by shareholders; manage or delegate management of the company Officers: president and secretary 2

Duties owed by directors to the corporation (from business corporations statutes) to act honestly and in good faith in best interest of the company (fiduciary duty) exercise the care, diligence and skill of a reasonably prudent person (negligence duty) 3

Types of claims (not all covered) derivative action: brought by individual shareholder in the name of the company for breach of duty owed to the company action seeking oppression remedy: claim by shareholder that company is acting in a way that is unfair or directors are exercising power in a way that is oppressive to the shareholder - court regulates conduct but does not award damages 4

Duties owed to others from common law (tort) Types of claims (not all covered) negligent misrepresentation inducing breach of contract, interference with contractual and economic relations, fraud, conspiracy 5

Duties owed to others from common law (tort) continued Statutory duties (not all covered) environmental legislation Employment Standards tax legislation 6

Corporate indemnification company may indemnify D & O's in accordance with corporate regulation statutes for costs, charges, expenses and any settlement or damages awarded Eg. Canadian Business Corporations Act, R.S. 1985, c-44. S. 124 may not indemnify unless the d or o acted honestly and in good faith with view to best interest of the corporation or with criminal or administrative proceeding enforced by monetary penalty, the d or o had reasonable grounds for believing that the individual's conduct was lawful 7

Corporate indemnification Continued indemnity available if the individual seeking indemnity was not judged to have committed any fault or omitted to do anything that the individual ought to have done d &o can be indemnified for costs, charges and expenses if added as party to action started by the corporation but no indemnity for damages awarded to company against D & O's 8

Key features of D & O Insurance Claims-made policy “Claim” is more than an action claiming damages: during policy period, must give notice of circumstances which may reasonably be expected to give rise to a Claim against an insured “Insured” typically includes past, present and future D's & O's Indemnity for settlement or award, defence costs, but not punitive or exemplary damages, penalties or fines Insured controls defence Eroding limits May have predetermined allocation for defence costs for covered and uncovered claims (eg. Onex) with allocation of settlement or judgment on “relative legal exposure” basis Retention applies to coverage for corporate indemnity May include extended reporting period Severability of exclusions amongst D’s & O’s 9

Application application usually becomes part of the policy (see Lloyds Syndicate 1221 v Coventree 2012 ONCA 341) nature of business, whether company is public company, financial status, financial forecasts, loss history, shareholdings, disclosed plans for acquisiton or merger or public offerings company by-laws indemnifying D’s & O's Latest annual report 10

Prior Knowledge Warranty: “No person proposed for coverage is aware of any facts or circumstances which he or she has reason to suppose might give rise to a future claim that would fall within the scope of the proposed coverage“ (Chubb) failure to ask all who may be covered could result in insurer seeking to void coverage ab initio if a claim later results and one of those who were proposed for coverage had prior knowledge of facts or circumstances 11

The Policy Declarations: limits and deductibles may differ according to type of coverage 2 typical insuring agreements: Side A (indemnifies D & O where not indemnified by company) and Side B (reimburses company for indemnity to D & O) 12

Optional: Insuring Agreement C: side C coverage or entity coverage: protect company against allegations of its own wrongdoing - avoids disputes that arise when D & O's sued but not company - restricted to certain types of claims (eg. Securities claims or employment practice claims). - with not-for-profit, usually one Insuring Agreement to cover employees and volunteers of the entity - scope of coverage usually not restricted to certain type of claim, but often restricted to tortious conduct and claims related to business obligations of the entity 13

Coverage A: EXECUTIVE LIABILITY INSURANCE This policy shall pay the Loss of any Insured Person arising from a Claim (including, but not limited to, an Employment Practices Claim, an Oppressive Conduct Claim, a Canadian pollution Claim and a Statutory Claim) made against such Insured Person for any Wrongful Act of such Insured Person, except when and to the extent that an Organization has indemnified such Insured Person. Coverage A shall not apply to Loss arising from a Claim made against an Outside Entity Executive. (Onex) 14

Coverage B: INDEMNIFICATION COVERAGE The Company shall pay on behalf of the Insured Organization all Loss for which the Insured Organization grants indemnification to each Insured Person, as permitted or required by law, which the Insured Person has become legally obligated to pay on account of any Claim first made against him, individually or otherwise, during the Policy Period or, if exercised, during the Extended Policy Period, for a Wrongful Act committed, attempted, or allegedly committed or attempted by such Insured Person before or during the Policy Period. (Chubb) 15

Definitions (c) “Claim” means: (1) a written demand for monetary, non-monetary or injunctive relief, (2) a civil, criminal, administrative, regulatory or arbitration proceeding for monetary, non-monetary or injunctive relief which is commenced by: (i) service of a Writ of Summons, Statement of Claim or similar originating legal document; (ii) return of a summons, information, indictment or similar document (in the case of a criminal proceeding); or (iii) receipt or filing of a notice of charges; or (3) a civil, criminal, administrative or regulatory investigation of an Insured Person: (i) once such Insured Person is identified in writing by such investigating authority as a person against whom a proceeding described in Definition (c)(2) may be commenced; or (ii) in the case of an investigation by any PSC or similar foreign securities authority, after the service of a subpoena upon such Insured Person. The term “Claim” shall include any Securities Claim, Employment Practices Claim, Oppressive Conduct Claim, Canadian Pollution Claim and Statutory Claim. (Onex) 16

Definitions Continued “Loss” means damages (including aggravated damages), settlements, judgments (including pre/post-judgment Interest on a covered judgment), Defence Costs and Crisis Loss; however, “Loss” (other than Defence Costs) shall not include: (1) civil or criminal fines or penalties; (2) taxes; (3) punitive or exemplary damages; (4) multiplied portion of multiplied damages; (5) any amounts for which an Insured is not financially liable or which are without legal recourse to an Insured; and (6) matters which may be deemed uninsurable under the provincial or state law pursuant to which this policy shall be construed. (Onex) 17

Definitions Continued “Defence Costs” means reasonable and necessary fees, costs and expenses consented to by the Insurer (including premiums for any appeal bond, attachment bond or similar bond arising out of a covered judgment, but without any obligation to apply for or furnish any such bond) resulting solely from the investigation, adjustment, defence and/or appeal of a Claim against an Insured, but excluding any compensation of any Insured Person or any Employee of an Organization. (Onex) 18

Definitions Continued “Wrongful Act” means: (1) any actual or alleged breach of duty, neglect, error, misstatement, misleading statement, omission or act or any actual or alleged Employment Practices Violation: (i) with respect to any Executive of an Organization, by such Executive in his or her capacity as such or any matter claimed against such Executive solely by reason of his or her status as such; (ii) with respect to any Employee of an Organization, by such Employee in his or her capacity as such, but solely in regard to any: (a) Securities Claim; or (b) other Claim so long as such other Claim is also made and continuously maintained against an Executive of an Organization; or 19

Definitions Continued (iii) with respect to any Outside Entity Executive, by such Outside Entity Executive in his or her capacity as such or any matter claimed against such Outside Entity Executive solely by reason of his or her status as such; or (2) with respect to an Organization, any actual or alleged breach of duty, neglect, error, misstatement, mis-leading statement, omission or act by such Organization, but solely in regard to: (a) any Securities Claim or Oppressive Conduct Claim; or (b) a Canadian Pollution Claim so long as such Canadian Pollution Claim is also made and continuously maintained against an Executive of an Organization. (Onex) 20

Exclusions Prior acts Losses covered under other policies (eg. CGL, Pollution Liability policy, Employment Practices Liability Claims (subject to entity coverage for Employment Practices Claims)) “moral hazard exclusions”: where D & O receives personal gain to which insured person not legally entitled, where D & O receives illegal remuneration or fraud or deliberately dishonest conduct [exclusion may only apply if allegations proven in court] “Insured vs Insured”: concern re collusion between Insureds (may not apply where company insolvent) Bodily injury [Perrault and CMPA v. Encon, 2011 ONSC 4108] 21

Onex Case Onex Corporation v. American Home Assurance Company, 2013 ONCA 117 BACKGROUND Main Issue: Is Onex Corporation entitled to reimbursement for defence and settlement costs under various D & O liability Insurance Policies Onex Corporation – Canadian Private Equity Investment and Asset Management Company. In 1999, Onex incorporated a company in the U.S. called Magnatrax. Between May, 1999 and March, 2000, Magnatrax/Subsidiaries purchased several American and Canadian companies connected to the manufacture of metal buildings and other construction products. Onex had a primary D & O Policy with American Home Insurance for the period November, 2002 to November, 2003 – limits of US$15M. In addition, 3 excess policies with 3 different insurers each again with a limit of US$15M. 22

Onex Case Continued January, 2003: Onex considers a sale of Magnatrax – Magnatrax Directors and Officers covered under the Onex policy as long as Magnatrax remained a subsidiary of Onex. Onex then purchases a run-off policy covering Magnatrax D & O’s for wrongful acts committed by them prior to Magnatrax ceasing to be an Onex subsidiary, but in respect of claims brought after the sale. Sale does not proceed and in May, 2003, Magnatrax files for reorganization under U.S bankruptcy laws. In 2005, Onex and four of its Directors and Officers were sued in the State of Georgia by the Trustee of the Magnatrax Litigation Trust. The Georgia action arose of U.S bankruptcy proceedings involving Magnatrax Corporation, a former subsidiary of Onex. The Magnatrax Litigation Trust was established during the U.S bankruptcy proceedings to pursue claims on behalf of the unsecured creditors of Magnatrax and its subsidiaries. The Trustee alleged that Onex and the personal defendants used their control of Magnatrax to enrich themselves at the expense of Magnatrax resulting in insolvency. 23

Onex Case Continued The Georgia action settled for US$9.25 M – the defence of Onex and the personal defendants was US$35M. ASSERTIONS The Onex action is commenced in Onex asserts entitlement to reimbursement for defence costs in the Georgia action under a 2004/2005 American Home D & O Policy (US$15M) and the various excess policies for the 2004/2005 year. In the alternative, Onex asserts entitlement to reimbursement under the 2002/2003 American Home Policy. American Home had already paid out the full US$15M under the Magnatrax run-off policy. THE INSURERS POSITION The Insurers asserted that Onex learned of the Georgia action in August, 2003 and gave notice pursuant to the “Notice of Circumstance” clause. D & O policies were claims made and reported policies. 24

Onex Case Continued Notice of Circumstance clause permitted the Insureds to report circumstances arising during the policy period which may give rise to a claim in the future thereby obtaining coverage under the Policy for any such claims which ultimately do materialize even if the claim is asserted after the policy period. Asserted that if Onex is entitled to coverage for defence costs for the Georgia action, it could only be under the Onex 2002/2003 Policy and not the Onex 2004/2005 Policy or the 2004/2005 excess policies. American Home also took the position that coverage under the 2002/2003 Policy was excluded by Endorsement 14 – “Specific Entity/Subsidiary Exclusion”. THE LOWER COURT Accepted Insurers’ argument that Onex gave Notice of Circumstance under the 2002/2003 Policy and therefore Onex et al were not entitled to reimbursement for defence costs in connection with the Georgia action pursuant to either the 2004/2005 Policy or the excess policies. 25

Onex Case Continued The Lower Court rejected American Home’s argument that Endorsement 14 excluded Onex’s claim for reimbursement of defence costs in connection with the Georgia action concluding that the Endorsement does not exclude “any claim by a Third Party against Onex’s directors and Officers in their capacity as such for their wrongful acts in relation to Magnatrax”. American Home was therefore ordered to pay Onex a further US$15M on behalf of the personal defendants for defence costs under the Onex 2002/2003 Policy. NOTICE OF CIRCUMSTANCE CLAUSE August, 2003 letter to Magnatrax counsel by counsel for the Magnatrax Creditors Committee asserting Magnatrax has claims against Onex and D & O’s of both Onex and Magnatrax – allegations of possible claims of breach of fiduciary duty, unjust enrichment and other to be identified causes of actions which ought to be brought against Onex and Magnatrax D & O’s. 26

Onex Case Continued Onex argued that the letter did not satisfy the specificity requirements – asserted that requires full particulars of dates, persons and entities involved including description of the commercial transactions which may give rise to a claim (significant degree of specificity as to the nature of the possible claim). Agreed with the Lower Court that the letter “sets out the specific transactions and agreement involved, the dates of the transactions, the claims which are alleged to exist and the entities and individuals involved”. At para. 91 – what is important here is that Onex, through Aon, provided American Home with the specifics of the threatened litigation as those specifics were provided to it. It was not necessary for the Insured to speculate about the names of the individual Directors or Officers who might be named in the threatened litigation…when viewed objectively as a whole, the [letter] contains sufficient particulars of the dates, persons and entities involved to comply with [the Policy]. 27

Onex Case Continued ENDORSEMENT 14 American Home argued the Lower Court erred in finding that Endorsement 14 does not exclude coverage for the personal defendants’ claims for defence costs arising from the Georgia action. They argued the Georgia action is a claim made against Magnatrax or its Executives, brought by Magnatrax and is a claim based on an act or omission of Magnatrax executives. The Lower Court excluded coverage for claims against the defendants acting in their capacity as Magnatrax executives, but did not exclude claims against them acting in their capacity as Onex executives – the thrust of the Georgia action was that the defendants, in capacity as Onex D & O’s, “engineered the demise of Magnatrax and its subsidiaries for their collective benefit”. Endorsement 14 does not exclude any claim by a Third Party against Onex Directors and Officers in their capacity as such for their wrongful acts in relation to Magnatrax. On appeal, American Home argued that this conclusion was wrong and the Georgia action was a derivative action instituted by the litigation trust alleging causes of action that originally belonged to Magnatrax. (at para. 119). 28

Onex Case Continued The term “claim” was scrutinized and both Courts agreed that Endorsement 14 did not explicitly exclude derivative claims. However the Court of Appeal was not prepared to find that the Lower Court’s interpretation of Endorsement 14 “is the only reasonably available interpretation” finding that American Home’s suggested interpretation of Endorsement 14 is also reasonable. Agreed that it was reasonable to interpret the Endorsement as excluding coverage for claimed defence costs because those costs arise from a claim based on acts or omissions of Magnatrax executives. Also reasonable to argue that the Georgia action is a claim, a civil proceeding arising out of acts by Magnatrax executives and thus the defence costs associated with the Georgia action are excluded from coverage by the wording of Endorsement 14. Court determined that plausible arguments can be made on both sides for the reasonableness of either interpretation and accordingly the Court concluded that the wording of Endorsement 14 was ambiguous. 29

Onex Case Continued As the Lower Court had found that it was clear and unambiguous, the Court of Appeal then had to determine if it could resolve the ambiguity. The Lower Court having found that it was clear and unambiguous, the Court of Appeal stated that there were not sufficient findings of fact with respect to the issues the Court of Appeal considered relevant to the resolution of the interpretation exercise. OUTCOME & CONCLUDUNG REMARKS The Onex cross-appeal was dismissed. American Homes’ appeal was allowed and the matter was returned to the Superior Court for disposition. Key for its review of the scope and application of the Notice provision. Critical to fully assess the broader implications of any endorsements added to a Policy. 30

Trending issues Dilution of policy limits: potential that limits will be exhausted when policy responds to claims in order presented Priority of payment clause Excess Side A coverage for D’s & O’s (separate from company’s D & O coverage) Side A DIC policy Coverage of defence costs in criminal proceedings Corporate insolvency: Is D & O policy a corporate asset? What happens to retention when company not able to pay? (see Re Nortel Networks Corporation, 2012 ONSC 5653) 31

Class actions – leave required for claims for oral or written misrepresentation and issuer’s failure to make timely disclosure - securities legislation removes need to establish reliance but plaintiff must show “there is a reasonable possibility that the action will be resolved at trial in favour of the plaintiff” – decisions to date suggest higher threshold in B.C. than Ontario – three year limitation period to obtain leave may be under review 32