A recent Ontario Court of Appeal decision serves as an important reminder that when the board of directors makes decisions on executive compensation matters, their conclusions must be evidence-based and properly documented in order to discharge their fiduciary duties.
In Unique Broadband Systems, Inc. (Re), 2014 ONCA 538, the Court of Appeal affirmed the nature of directors' and officers' fiduciary duties and clarified the application of the business judgment rule in the context of a dispute regarding executive compensation. The case is significant from a corporate governance perspective for several reasons, including because of the following findings:
1. Expert evidence and market data can support a board's decision. The Court of Appeal specifically noted that "The UBS Board did not seek or receive any expert advice on an appropriate bonus structure. Nor did they have any comparable or other data regarding executive compensation in the marketplace."
2. The 'Business Judgment Rule' is only a rebuttable presumption. The courts will defer to the business judgment rule only where there is evidence that a decision was made on an informed basis, in good faith, and in the best interests of the corporation.
When making executive compensation decisions, directors and officers would be well-advised to ensure their process, evidence and underlying rationale are well-documented in order to create a contemporaneous record that they've fulfilled their fiduciary duties.
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