Individuals agreeing to act as the Directors or Officers of an Alberta corporation not only take on the responsibilities inherent in those positions, but also take on the risk of facing civil, administrative or even criminal investigations or proceedings arising in connection with the operations of the company itself.

In most, if not all cases, a Director or Officer subject to such proceedings will need to retain qualified legal counsel to defend them against these claims, or to advise and guide them through a regulatory investigation or other similar proceeding. 

Critically, in the absence of an express agreement with the company they serve, Directors and Officers in Alberta do not have a legal right to have the costs of such counsel paid for prior to the successful resolution of the underlying issue, claim or investigation, exposing them to personal responsibility for the upfront costs of hiring and paying for legal counsel until after the conclusion of the dispute or process.

As the legal fees of complex civil cases (including class actions) and criminal or regulatory proceedings can rise into the millions and even the tens of millions of dollars, Directors and Officers should ensure that they understand their rights and potential protections before accepting or continuing in such a role.

Indemnity + Advancement: Related but Distinct

Indemnity

Directors and Officers in Alberta are legally entitled to be indemnified by the company they serve when they are sued, prosecuted or investigated for their actions in those roles, but this right is only available to them after the conclusion of the proceedings or investigations in issue.

Section 124(3) of the Alberta Business Corporations Act, RSA 2000 (the “Act”) provides that a Director or Officer is entitled to be compensated for reasonable costs and expenses incurred in defending themselves from such claims.  This entitlement only arises  where they acted in good faith, in the best interests of the corporation, and are not judged by a court or other competent authority to have been at fault at the conclusion of the relevant proceedings.

Where these conditions are met, Directors or Officers who have successfully defended themselves at their own expense are entitled under the Act to apply to the Court for a ruling entitling them to the reimbursement of those costs and fees, which the company would then be obliged to pay, possibly years after they first began to incur them.

Advancement

Advancement refers to the payment by the company of a Director’s or Officer’s legal fees as they are incurred, and throughout the underlying proceedings.  Importantly, while the Act permits a company to provide the advancement of such funds should it choose to do so in its own discretion, in the absence of an enforceable agreement, such advancement will not be compelled by the Court, leaving a Director or Officer personally responsible for funding their own defence through to its conclusion.

While a company may elect, in its discretion, to provide such advancements, it is also open to Directors and Officers to obtain an enforceable contractual right to such payments that will be enforced by the Court if properly constructed.

Agreements to Provide Advancement Are Enforceable

While a company’s decision to provide advancement to its Directors and Officers is permissive, where a company agrees to provide such protections, the Courts can enforce the terms of that commitment and will direct the payment of such advancements, even where the company later wishes to avoid or escape those obligations.

In Obsidian Energy Ltd., 2019 ABQB 848, affirmed by the Alberta Court of Appeal in 2020 ABCA 452, Justice Kirker enforced the terms of the written indemnity agreements in place between the company and two of its senior executives, who had been subjected to an ongoing investigation and prosecution by the U.S. Securities and Exchange Commission because of the company’s prior decision to restate its financial statements. 

The company reached a settlement with the SEC, while the Officers continued to defend themselves.  By 2019, the two Officers had incurred legal expenses in defending the SEC’s prosecution of over $18,600,000 USD, and the company itself – facing further claims for advancement - sought a ruling that it was entitled to discontinue its funding.

Justice Kirker found that while the advancements were permissive under the Act, the company had agreed under the terms of the indemnity agreements between it and its Officers to pay all costs and charges incurred by the Officers unless and until it was “ultimately determined” that the Officers were unsuccessful in defending the claims against them.  Justice Kirker found that with the SEC proceedings still ongoing, the right to advancement endured, and the company lacked the right to challenge or withdraw from that obligation.

Takeaways + Protecting Yourself

The source of a company’s agreement to provide advancements to its Officers and Directors can derive from multiple sources, such as a  contract of employment, a standalone indemnification and advancement agreement, or in certain circumstances even the bylaws of the company itself or a unanimous shareholders' agreement. 

Regardless of the source, Directors and Officers can and should take adequate steps to ensure that they understand their rights to indemnity and advancement, and where possible, to obtain an express commitment from the company they serve that advancements will be available to them should they face a claim, investigation or other such proceeding.

If you are a current or potential Director or Officer looking to better understand, protect, or enforce your right to advancement or indemnity, please contact Matt Vernon in Calgary, Geoffrey Hope in Edmonton or any member of Field Law’s Labour + Employment Group for advice.