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Civil Litigation

Ruling affirms that senior execs are held to higher standards of conduct

Ontario's top court has found a senior executive was dismissed for cause after failing to protect his employer from millions of dollars' overpayment on the purchase of a parcel of land because he owed a fiduciary duty to his company, Toronto civil litigator Nida Sohani tells

“This has a great deal to do with the role that he had. As senior vice-president and chief financial officer, he is held to a higher standard of conduct than an average employee,” Sohani, an associate with Gaertner Baron Professional Corporation.

His conduct was grounds for the termination of employment, and she believes the Court of Appeal ruled correctly in upholding his for cause termination.

“It was important for the company to take the steps it did and for the appellate court to have upheld his wrongful dismissal. You have to hone in on the role he played and the importance of it, particularly in a public company,” says Sohani, who was not involved in the case and comments generally.

According to the decision, the first incident involved a land flip whereby the controlling shareholder of the company, together with senior officers, bought property through a third party and immediately after closing, sold it to the company for $6.5 million more than they had paid, thereby profiting personally.

"Leading up to this transaction, the appellant, who at the time was the senior officer of the respondent responsible for real estate acquisitions, had been approached by the vendor’s agent to inquire whether the respondent was interested in purchasing the property. After consulting with the controlling shareholder of the respondent, he indicated that the corporation was not interested in the property," Justice Frederick L. Myers wrote.

Sohani says the second incident of misconduct involved the sale of a company subsidiary.

Court documents show that the purchase price included a share warrant that entitled the executive to purchase an additional 200,000 shares of the subsidiary at a strike price of $13.25.

"After the share price rose, the warrants were redeemed for the benefit of the respondent’s senior management — including the appellant — for a total profit of approximately $2 million," the judge wrote.

When senior executives’ bonuses were revealed, shareholders disputed the profit from the sale of shares, Sohani says.

"The appellant then allowed a different story to be told to the independent directors that covered up the reason for which senior management’s bonuses were greater than what the approved bonus plan provided," the judge wrote.

This led to the third incident: a tax scheme whereby the Canada Revenue Agency was misled about the exercise of the warrants in order to reduce senior management’s tax liability, according to the decision.

Sohani says even without further incidents, the first act of misconduct may have been clear grounds for employment termination.

“The act in isolation would have been enough, but when you combine them together, they justified the actions of the company,” she says, adding she found it surprising that the employee’s counsel suggested to the Court of Appeal that the trial judge erred in failing to properly consider that his actions had been condoned.

“Not only did this employee engage in severe misconduct but he tried to justify it by the principle of condonation,” Sohani says.

Counsel for the appellate also suggested the trial judge failed to follow the test in a landmark decision that would require the judge to analyze the corporate culture in a workplace, she says. In this case, counsel suggested it was dominated by an autocratic controlling shareholder, Sohani says.

“I agree with the Court of Appeal that there is no corporate culture in a public company that could reasonably support the conduct of the appellate and his role as a fiduciary,” she says.

“In this case, the misconduct does strike at the heart of the employment relationship. His role as CFO and VP was to manage the company’s finances,” Sohani says.

It’s important to note the perception of the company deteriorated in the public eye as a result of the employee’s actions, she says.

“This decision will likely be referenced in cases involving senior executives and their duty to an employer. It is an important case going forward,” Sohani says.

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