Liability, Indemnities and Insurance Issues

NI 81-107 provides that an investment fund and/or the manager can indemnify the members of the IRC in certain circumstances. The wording in the Instrument mirrors the provisions in the Canada Business Corporations Act and other corporate statutes permitting or requiring a corporation to indemnify directors and officers.

The investment fund and manager may indemnify a member of an IRC against all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment, reasonably incurred by the person in respect of any civil, criminal, administrative, investigative or other proceeding in which the member is involved because of being or having been a member of an IRC. The investment fund and manager may also advance moneys to a member of an IRC for the costs, charges and expenses of defending any such proceeding.

For these purposes, the term “member” includes a former member of an IRC, and the heirs, executors, administrators or other legal representatives of the estate of such person.

The investment fund must indemnify a member of an IRC who has been sued and has successfully defended the action provided that:

a) the IRC member must have acted in a manner consistent with his or her fiduciary duty (i.e., so long as they act honestly and in good faith, with a view to the best interest of the investment fund) with respect to the action or matter for which the IRC member is seeking the indemnification; and
b) the IRC member must have had reasonable grounds for believing that his or her conduct was lawful.

If member of an IRC does not defend an action successfully, the investment fund and manager may still indemnify the member, provided that the two conditions set out in sub-paragraphs a) and b) above are both met.

It is open to members of an IRC to negotiate contractual indemnities with the manager and the investment fund provided the extent of the protection is permissible under the Instrument.

The investment fund and the manager can also purchase and maintain insurance coverage for the members of the IRC (on reasonable commercial terms) against any liability incurred by the member in his or her capacity as a member of the IRC.

The CSA have published a letter of advice from Davies Ward Phillips & Vineberg LLP to the Ontario Securities Commission on the liability to which a member of an IRC may be exposed under the Instrument. This letter states:

“We have concluded that an IRC Member’s exposure to liability in connection with the responsibilities mandated in the [Instrument] is limited, when compared with the exposure to liability of a Corporate Director. In addition, the protection available to an IRC Member under the [Instrument] with respect to his or her discharge of those responsibilities is no less than that available to a Corporate Director…………

The liability to which Corporate Directors are subject results in part from the fact that they have overall responsibility for the management of the business and affairs of the corporation. The same is, of course, not true of IRC Members. It is the Manager that is responsible for the management of the Fund. The IRC has responsibility to review and provide either a recommendation or approval on certain very specific matters. The IRC is in no way the “directing mind” of the Fund, as a board of directors is of a corporation. Accordingly, there is a much more restricted range of matters for which the IRC Members could be held to be accountable solely as a result of performing their responsibilities as IRC Members as prescribed in the [Instrument]. Of course, if the IRC agrees with [the] Manager to accept additional responsibilities, the members of the IRC may be exposed to additional liabilities arising from those responsibilities…..”

The Instrument thus limits the potential liability of IRC members by clearly defining and limiting the role of an IRC and each member’s standard of care.  The role of the members of the IRC is similar to corporate directors, though with a much more limited mandate, and any defences available to corporate directors should also be available to IRC members. Since IRCs have duties and responsibilities that are far less onerous than that of corporate boards, their exposure to litigation risk should be lower.

However, the members of an IRC should consider obtaining standalone insurance coverage. Such coverage would operate where an indemnity from the fund/manager is not available, either temporarily (e.g., the fund’s assets have been frozen by the regulators or the courts) or permanently (e.g., the fund/manager is insolvent).  Standalone coverage will have separate aggregate limits from the limits in the manager’s D&O policies (which the IRC members will share with the manager’s directors and officers) and can also apply even where the manager’s insurance policy has been cancelled or voided.

Members of an IRC should also note that an IRC is designated as a market participant in Ontario, which makes the IRC members subject to the review and sanction powers of the OSC.

Independent Review Inc. seeks standalone insurance cover for the members of its committees.

In addition, Independent Review Inc. also requires the Fund and the Manager to contractually indemnify the individual members of the Fund's IRC against any and all losses, claims, damages, liabilities, judgements, fines, amounts paid in settlement and reasonable expenses (collectively "Indemnified Liabilities") which may arise out of or in connection with the operation of, and acts or omissions of, the IRC, except any Indemnified Liabilities resulting from the willful misconduct or fraud on the part of the committee member.

We also ask the Manager to add the IRC members as "named insured" on any D&O policy that it (or the Fund) already hold.

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