Ex-CEO Ordered to Repay $1.2 million in Severance and Disgorge Profits: Imperial Parking Canada Corporation v. Anderson, 2015 BCSC 2221
Previously printed in the LexisNexis Labour Notes Newsletter.
The British Columbia Supreme Court recently ordered a former Imperial Parking Canada Corporation (“Impark”) CEO to repay over $1.2 million in severance and to disgorge fees earned from and profits earned by his new company as a result of a breach of his fiduciary duties. The judgment provides a cautionary tale to those who would ignore their fiduciary obligations.
Herbert Anderson was CEO of Impark from 2005 until the Board of Directors terminated the relationship. Anderson and Impark negotiated a Severance Agreement including the following terms:
- over $1.2 million in severance;
- Anderson’s agreement not to compete following termination was reduced from 24 to 18 months;
- Anderson’s agreement that he continued to owe Impark a fiduciary duty following his dismissal from employment; and
- any breach of Anderson’s confidentiality obligation or his ongoing fiduciary duty would result in a complete failure of consideration.
Michael Menzies, described by Justice Emily Burke of the B.C. Supreme Court as a “close friend” of Anderson, entered into a consulting agreement with Impark which expired August 31, 2012 and contained a non-competition provision preventing him from working for a competitor until August 31, 2014.
On June 9, 2010, just months before his departure, Anderson entered into an agreement with Menzies on behalf of Impark which cancelled the final year of Menzies’ consulting agreement and eliminated two years of his non-competition provision.
Anderson claimed that he had entered into the Letter Agreement not for personal gain but rather to save Impark money by eliminating a $180,000-a-year consulting contract. Justice Burke found that while the Letter Agreement did in fact save Impark consulting fees, it gave away significant non-competition protection for no consideration. Such a decision should have involved someone else from Impark, not just Anderson, who had a close relationship with Menzies and a personal interest in the outcome of the Letter Agreement.
Justice Burke concluded that the Letter Agreement was made contrary to the best interests of Impark and for the benefit of Anderson and Menzies as it enabled them to compete with Impark through their new company, GoPark. Justice Burke also found that Anderson and Menzies intentionally concealed the Letter Agreement from Impark.
Breach of Fiduciary Duty
As CEO, Anderson owed a fiduciary duty of utmost good faith and loyalty to Impark, which required him to: (a) act in the best interests of the corporation; (b) avoid conflicts of interest; (c) keep confidences; and (d) fully disclose to the corporation all material information that might affect the corporation’s decisions.
Justice Burke found that Anderson had a fiduciary duty to disclose the Letter Agreement when negotiating his Severance Agreement. In failing to disclose this material information, Anderson breached his fiduciary duty.
The Court also concluded that Impark was induced to enter the Severance Agreement by Anderson’s failure to disclose material information contained in the Letter Agreement. Had Impark known of the Letter Agreement, it would have instead dismissed Anderson for just cause.
Justice Burke also determined that Menzies knowingly assisted Anderson’s breach of fiduciary duty by concealing the existence of the Letter Agreement and relying on it to compete against Impark. Menzies was jointly and severally liable for Anderson’s breach of fiduciary duty.
Justice Burke made an order rescinding the Severance Agreement and the Letter Agreement. Anderson was required to disgorge the $1.2 million severance payment and Menzies’ non-competition obligations remained in effect until August 31, 2014.
Justice Burke found a “common sense causal link” between the breach of fiduciary duty and the profits earned by GoPark – “as a direct result of the breach of his fiduciary duty to Impark, Anderson permitted Menzies to take unlawful advantage of Impark and, in doing so, gave himself and his new company a competitive advantage in the parking market”. GoPark, Anderson and Menzies were ordered to disgorge their profits and fees earned in the GoPark venture for the duration of Menzies’ non-competition period.
The decision is a clear warning to fiduciaries (and their friends) about the serious consequences of breaching or assisting in a breach of fiduciary duties. It is also a useful reminder to employers of the broad remedies available in the event of a breach.