Audit, Compliance and Risk Blog

Super Priority Charge Over Insolvent Corporation’s Assets Despite Existing Insurance Coverage

Posted by Ron Davis on Tue, Mar 01, 2016

The Ontario Superior Court of Justice issued an initial order in an insolvency proceeding under the Companies’ Creditors Arrangement Act (CCAA) providing a $3.1 million director’s charge even though the directors were covered by an existing D&O liability insurance policy and indemnities from the company (Re P.T. Holdco Inc., 2016 ONSC 495). The CCAA proceedings involved various corporate entities involved in the Primus telecommunications service business in Canada and the United States. Primus’ business was failing and it had arranged to sell its business to another company and wished to use the CCAA to finalize the sale and distribute the sale assets while its creditors were stayed from enforcing their claims.

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Tags: Corporate Governance, Insurance, Canadian, directors, directors & officers

Attempt to Make Directors Liable for Alleged Defamation in Newspapers Rejected

Posted by Ron Davis on Mon, Nov 23, 2015

In Kent v. Postmedia Network Inc. (2015 ABQB 461), the Alberta Court of Queen’s Bench granted a summary judgment application by Paul Godfrey and Gordon Fisher, two directors of Postmedia Network Inc., and dismissed the defamation claims against them by the plaintiff, Arthur Kent. Kent claimed he had been defamed in a 2008 article written by Don Martin and published in the Calgary Herald and National Post and continuing to be available on various websites maintained by Postmedia. The article at issue was published while Kent was a candidate in the Alberta provincial election and he claimed it contained false and defamatory statements that were intended to have readers infer that Kent’s career as an international correspondent was insubstantial, he was unworthy of public trust and confidence, his election campaign was incompetent and he lacked support from both his campaign team and political party. In the course of the litigation leading up to the motion for summary judgment, Kent had both Fisher and Godfrey served with a Notice of Intention to bring an Action setting out the basis for his claim of defamation and seeking removal of the article from websites. Neither Fisher nor Godfrey sought the removal of the article from those websites.

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Tags: Corporate Governance, Canadian, directors

Department of Justice Targets Individuals While Investigating Organizations

Posted by Jon Elliott on Tue, Oct 27, 2015

Gavel-1.jpgWhen an organization breaks the law, the actual actions must be taken by individuals associated with the organization–whether it’s a rogue individual or a vast internal conspiracy. So who’s culpable and for what? Laws often provide civil liability for most violations and criminal liability for the most severe, and many include parallel provisions addressed both to organizations and individuals. Most enforcement agencies produce enforcement and prosecutorial guidelines for agency personnel to provide criteria that channel their “prosecutorial discretion.” Variations in such guidelines may tend to keep organizations and their personnel aligned – as when they’re all going to be prosecuted together anyway–or may encourage fissures between them – as when one can reduce its own liability by incriminating another.

The U.S. Department of Justice (DOJ) conducts most criminal prosecutions brought against violators of U.S. federal laws. DOJ’s U.S. Attorneys also provide legal support to many federal agencies in civil cases brought by the agencies for regulatory violations. To regularize these wide-ranging responsibilities, DOJ promulgates enforcement policies and priorities, which are compiled in the “U.S. Attorneys’ Manual.”

How Has DOJ Approached Individual Prosecutions For Organizational Wrongdoing?

DOJ has repeatedly adjusted its policies for prosecuting individuals in organizational wrongdoing cases. In 2003, DOJ issued an enforcement policy seeking to separate organizations from their agents – telling organizational defendants that indemnification of their officers (i.e., paying their defense costs under employment contracts and bylaws) would be interpreted as support for the individuals’ malfeasance, precluding DOJ from applying lenience to the organization for having “cooperate[d] in the investigation of its agents” (the “Thompson memorandum”). This policy was intended to prevent organizations from shielding their personnel, and so to encourage more individual prosecutions. However, this policy was rescinded after a 2006 court decision excoriated DOJ, holding that the policy violated individual defendants’ Constitutional rights by exerting undue pressure on organizations (U.S. v. Stein).

In 2006, DOJ softened the offending policy by reemphasizing that many criteria may apply to charging and prosecutorial decisions, and stating explicitly that an organization’s decision to follow state laws and establish indemnification provisions would not be considered a failure to cooperate sometime later with federal prosecutors (“the McNulty memorandum”; later enshrine in the U.S. Attorneys’ Manual section 9.28). Thus, DOJ policy for nearly a decade has not explicitly attempted to pit organizational defendants against their individual human agents – but also has not provided clear guidance to prosecutors in determining whether to proceed against organizational defendants, individual defendants, or both. During these years, the trend has been toward fewer prosecutions of individuals, even where it seems likely that top managers were integral participants in financial or regulatory violations. This lack of headline-grabbing prosecutions has produced a political backlash and pressure to re-balance prosecutorial policies.

How Does DOJ’s Newest Policy Favor Individual Prosecutions?

In September, Deputy Attorney General Yates issued DOJ’s latest enforcement policy memorandum, addressing “Individual Accountability for Corporate Wrongdoing.” DOJ will apply this latest revision to all criminal prosecutions, and to civil enforcement as appropriate. The memo sets forth 6 basic criteria for U.S. Attorneys to apply and follow:

  1. “To be eligible for anv cooperation credit, corporations must provide [DOJ] all relevant facts about the individuals involved in corporate misconduct.
  2. Both criminal and civil corporate investigations should focus on individuals from the inception of the investigation.
  3. Criminal and civil attorneys handling corporate investigations should be in routine communication with one another.
  4. Absent extraordinary circumstances, no corporate resolution will provide protection from criminal or civil liability for any individuals.
  5. Corporate cases should not be resolved without a clear plan to resolve related individual cases before the statute of limitations expires and declinations as to individuals in such cases must be memorialized.
  6. Civil attorneys should consistently focus on individuals as well as the company and evaluate whether to bring suit against an individual based on considerations beyond that individual's ability to pay.”

If organizations respond to these incentives by providing incriminating facts about individuals, the new policy will tend to create wedges between organizations and their personnel, which DOJ is now pledging to prosecute more vigorously. It remains to be seen how these incentives will actually be applied by prosecutors, followed by defendants, and reviewed by courts.

Self-Assessment Checklist

  • Has the organization established compliance and/or ethics programs to prevent and detect violations of applicable laws?
    • Do formal organizational policies define standards and procedures for agents and employees?
    • Are specific high-level personnel assigned responsibility and authority to ensure these standards and procedures are followed?
    • Does the organization provide training and/or other means to communicate standards and procedures effectively to its agents and employees?
    • Is there an effective program for enforcing these standards (e.g., monitoring and audits)?
    • Are there internal reporting mechanisms (including protections against possible retaliation)?
    • Does the program include clear and effective disciplinary mechanisms?
    • Does the program provide for immediate and appropriate steps to correct the condition giving rise to any detected offense or violation (e.g., program changes and individual disciplinary actions)?
    • Does the program include provisions for self-reporting to appropriate authorities?
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Tags: Corporate Governance, Employer Best Practices, Employee Rights

Director Found Liable for Transferring Assets

Posted by Ron Davis on Tue, Sep 01, 2015

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Tags: Corporate Governance, Business & Legal, Canadian

EEOC’s Latest Word On “Sex” Discrimination

Posted by Jon Elliott on Tue, Aug 25, 2015

Federal laws prohibit employers from basing employment decisions on a variety of factors, including “sex.” This term is not defined, leaving its interpretation to change and expand with social changes and court decisions. The central entity creating and applying these interpretations is the Equal Employment Opportunity Commission (EEOC), which administers and enforces Title VII of the Civil Rights Act of 1964 and a variety of subsequent laws. On July 15, EEOC reaffirmed its present interpretation, in an enforcement decision in which the plaintiff claimed he was denied access to a promotion because he’s gay (Baldwin v. Foxx). The EEOC’s order includes a clear summary of the agency’s approach to sex discrimination cases:

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Tags: Corporate Governance, Business & Legal, Employer Best Practices, Employee Rights, Workplace violence, EEOC, NLRB

Supreme Court Expands Employers’ Duty To Avoid Religious Discrimination

Posted by Jon Elliott on Thu, Jul 09, 2015

Federal laws protect individuals against job discrimination based on a variety of “protected classes” of characteristics. Most represent physical characteristics, such as race, sex, and disability. In addition, however, Title VII of the Civil Rights Act of 1964 prohibits a prospective employer from refusing to hire an applicant in order to avoid accommodating a religious practice that it could accommodate without undue hardship.

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Tags: Corporate Governance, Business & Legal, Employer Best Practices, Employee Rights, EEOC, NLRB

Join the Napping Revolution…at Work!

Posted by STP Editorial Team on Tue, Jun 16, 2015

You’ve likely heard it said that “everything we need to know we learned in kindergarten.” Well, that includes the benefits of taking a nap in the middle of the day, which has been shown to improve attitudes and enhance the ability to learn and manage tasks. Young children and elderly persons tend to nap, and napping is an important aspect of many cultures. However, as a nation, the United States appears to be becoming more and more sleep deprived. General reluctance to take naps may be attributed to a busy lifestyle and the demands of the North American workplace, or to the idea that napping will interfere with our nighttime sleep, or the stigma that napping equals laziness and results in poor productivity.

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Tags: Corporate Governance, Business & Legal, Employer Best Practices, Health & Safety, Employee Rights, Training

OSHA: Earthquake Preparedness

Posted by Jon Elliott on Tue, May 05, 2015

Last weekend’s disastrous earthquakes in Nepal are a reminder that natural disasters can strike anywhere. Employers can and should plan for a broad range of events, and can apply guidance from occupational safety and health agencies standards when doing so. The U.S. Occupational Safety and Health Administration (OSHA) requires employers with specified activities to prepare and implement emergency action plans (EAPs), provides guidance for EAPs, and recommends that all employers prepare these plans. Employers can use this structure to prepare for earthquakes.

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Tags: Corporate Governance, Employer Best Practices, OSHA, Environmental risks, Environmental, EHS, EPA

B.C. Court Rejects Director’s Plea That Manager Was Responsible For Environmental Damage

Posted by Ron Davis on Mon, Apr 27, 2015

The founder and principal of Northland Properties Corp. (“Northland”), Bob Gaglardi and his son, Tom Gaglardi, the president of Northland were found guilty, along with Northland, of two counts of “unlawfully carrying on a work or undertaking that resulted in the harmful alteration, disruption or destruction of fish habitat along the foreshore of Kamloops Lake” contrary to the federal Fisheries Act (R. v. Northland Properties Corp., 2014 BCPC 251 (BC Prov. Ct.). The charges related to land clearing and placing of fill on seven of Northland’s properties. The Crown alleged the work was performed unlawfully by Northland’s servants and under the direction of the Gaglardis. Both Northland and Tom Gaglardi denied they intended to cause the resulting damage to fish habitat, pleading that “the project supervisor for the work, Jim Parks, exceeded the directions he had been given on the project regarding landscaping.” They did admit that they had failed to be duly diligent in supervising the project, resulting in the damage to the fish habitat. Bob Gaglardi pleaded he was only briefly and peripherally involved in the project and thus, was not guilty. The Court held that there was sufficient reasonable doubt to acquit him on the charges.

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Tags: Corporate Governance, Business & Legal, Environmental risks, Environmental, Canadian

NIOSH Expands Recommendations for Tobacco-Free Workplaces and e-Cigarettes

Posted by Jon Elliott on Tue, Apr 21, 2015

As most readers know, employers have very broad responsibilities to provide their employees with a workplace that is “free from recognized hazards.” To meet this Employer’s General Duty, employers must do more than just identify and comply with applicable safety standards issued by the Occupational Safety and Health Administration (OSHA) and its equivalent (I discussed this general provision here). Employers also must take other – unspecified – steps to identify and “recognize” unregulated hazards. One important version of these steps is to watch for non-binding recommendations from OSHA, the National Institute for Occupational Safety and Health (NIOSH), and other credible organizations in industry, government and academia,

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Tags: Corporate Governance, Business & Legal, Employer Best Practices, Health & Safety, OSHA, Employee Rights