Executive Summary: Key Legal and Evidentiary Issues

• Sequencing dispute over whether Gildan’s declaratory action to obtain Norton Rose’s files should precede the former directors’ application for advancement of legal fees.
• Interpretation and application of the Canada Business Corporations Act, s. 124, and indemnity agreements governing directors’ rights to indemnification and advance funding of defence costs.
• Assessment of the “strong prima facie case of bad faith” standard as a judicial filter to deny advance funding and the evidentiary threshold Gildan must meet.
• Tension between directors’ right to timely advance of costs and the company’s interest in challenging alleged bad-faith “entrenchment” tactics in a high-stakes proxy contest.
• Use of the court’s inherent power under art. 49 C.p.c. to stay or manage proceedings, balanced against principles of proportionality, judicial economy, and avoidance of undue delay.
• Impact of unresolved privilege and client-of-record issues relating to Norton Rose files on Gildan’s claimed need for additional evidence to oppose advancement of funds.

Factual background and the proxy contest

Gildan Activewear Inc. (Les Vêtements de Sport Gildan inc.) is a Canadian public corporation incorporated under the Canada Business Corporations Act (LCSA), headquartered in Montréal. Its disputes with former directors arise out of one of the most significant proxy battles in Canadian corporate history. The controversy started when Gildan’s board began a succession process for senior management in spring 2023, including its long-time CEO, Glenn Chamandy. In December 2023, Gildan publicly announced that Chamandy had left his CEO position and that Vince Tyra would replace him. This triggered a major reaction from certain shareholders, notably activist investor Browning West and related funds, who publicly and in court demanded Chamandy’s reinstatement as CEO and director and sought the removal of board members who had supported his replacement. A potential sale transaction, dubbed “Project Sunrise,” opposed by Chamandy, also formed part of the broader dispute.

In this context, Gildan retained Norton Rose Fulbright Canada to advise on the CEO succession, respond to the activist campaign, contest Browning West’s attempt to call a shareholders’ meeting to vote on reinstating Chamandy, advise on Project Sunrise, and assess potential personal exposure of directors for their conduct during this contested process. Shareholders and governance commentators heavily criticized the former directors’ stance, and multiple proxy advisory firms recommended voting against them. Over roughly May 2023 to May 2024, Gildan estimates that Norton Rose billed it more than CAD 15 million, with overall proxy fight costs estimated around USD 70 million. Gildan ultimately lost the contest: a first group of directors resigned on 1 May 2024, and the remaining former directors, including CEO Tyra, resigned on 23 May 2024. Chamandy was re-appointed CEO on 24 May 2024, and new directors were elected at the 28 May 2024 shareholders’ meeting, after which Norton Rose closed its active Gildan files.

Subsequent disputes between Gildan and the former directors

Following their resignations, the former directors sent redemption notices under Gildan’s deferred share unit (DSU) plan between May 2024 and January 2025. Gildan refused to honour them immediately, stating that pending the outcome of its internal investigation, the sums allegedly owed would be placed in an interest-bearing segregated bank account. Meanwhile, Browning West issued a litigation hold letter to former directors’ counsel, emphasizing preservation of evidence.

Gildan repeatedly wrote to Norton Rose in May and September 2024 seeking copies of all its files. While some documents were provided, Norton Rose refused to produce two key files—one relating to advice to the Corporate Governance and Social Responsibility Committee and another to the Browning West court application—on the basis that the former directors claimed solicitor-client privilege over them. Gildan’s position is that these are its corporate files and necessary to evaluate the conduct and good faith of the former directors. Attempts to resolve the impasse through correspondence failed.

On 27 January 2025, Gildan instituted its declaratory and injunctive proceeding (the “Demande en jugement déclaratoire”) to compel Norton Rose to hand over those disputed files. Norton Rose then sought to have the former directors brought in as mis en cause, given their privilege assertions. On 7 March 2025, some former directors also launched a separate DSU claim exceeding CAD 25 million against Gildan, alleging amounts due under the DSU plan. Gildan responded with a defence and counterclaim alleging that, after Chamandy’s departure, the former directors adopted defensive tactics functioning as a board entrenchment device, allegedly breaching their fiduciary duties and that their reliance on privilege over the Norton Rose files was itself part of the impugned conduct.

Indemnity agreements and advance of legal fees

Well before the dispute, Gildan had exercised its prerogative under s. 124 LCSA to indemnify and advance costs to its directors through formal indemnity agreements. The company expressed an intention to protect its directors “to the fullest extent permitted by law.” The agreements provide that, upon a written request, Gildan must advance costs and expenses within five days, subject to repayment if a final judgment later finds that the director did not meet the LCSA’s conditions for indemnification. They also expressly recognize that court approval is required where the LCSA mandates it—particularly when the dispute is between the corporation and the director—and that any advance in those situations is contingent on prior court authorization “on such terms and conditions as may be ordered by the court.”

Section 124 LCSA permits a corporation to indemnify directors for costs incurred in investigations or civil, penal, administrative, or other proceedings by reason of their position, but only where they acted with integrity and in good faith in the best interests of the corporation (and, for fines in penal or administrative matters, where they reasonably believed their conduct was lawful). The statute also authorizes the corporation to advance funds for defence costs, again subject to repayment if the statutory good-faith test is ultimately not met. Where the litigation is between the company and its own directors, the LCSA requires court approval for indemnification or advancement. Canadian appellate jurisprudence treats this approval as involving a preliminary, not final, assessment of the directors’ conduct. The court applies a stringent “strong prima facie case of bad faith” test as a judicial filter: advancement should generally be granted, and refusal is justified only where the company can robustly demonstrate prima facie mala fides. The final determination of good faith and indemnification is reserved for trial on the merits and remains revisable, so an order advancing funds does not typically create irreparable prejudice to the corporation.

In addition to the statutory framework, the indemnity agreements’ clause 5(a) presumes that directors seeking indemnification acted honestly, in good faith, and in Gildan’s best interests, reinforcing that Gildan bears the evidentiary burden to rebut this presumption when opposing advance funding. The agreements also oblige Gildan to bring any necessary court application to obtain the approvals required by s. 124(4) LCSA.

The former directors’ funding and privilege dispute

On 20 May 2024, while still in office, the remaining directors retained the law firm Torys LLP as their own counsel and authorized Gildan to pay a CAD 350,000 retainer into trust for their legal fees, without seeking prior court approval. After they left the board, this initial advance was largely consumed by legal responses to threatened actions by both Gildan and Browning West, and by work related to the privilege dispute and ensuing proceedings.

On 19 April 2025, the former directors requested an additional CAD 350,000 advance to fund their defence in the declaratory proceeding regarding the Norton Rose files. Gildan did not agree, and on 14 May 2025 the former directors filed a formal application for an “Advance of Funds” in the declaratory action. Separately, in the DSU litigation, they argued that discovery or other evidentiary steps that might touch the Norton Rose documents should be stayed until the privilege issues were resolved in what they termed the “Privilege Matter,” citing concerns about judicial economy, coherence between proceedings, protection of privilege, and consistency of rulings.

Gildan, for its part, took the view that it needed access to the approximately 40,000 disputed Norton Rose documents before any hearing on advance funding. It argued that those materials go to the core of the evidence on the former directors’ alleged bad faith and entrenchment tactics. According to Gildan, to properly apply the strong prima facie bad faith standard under s. 124 LCSA, the court must allow it to mount a full evidentiary defence at the advance-funds stage, which in turn required resolving the privilege issue first.

Application to stay the advance-of-funds motion

On 11 December 2025, Gildan brought a motion in the commercial division of the Québec Superior Court to stay (suspend) the former directors’ advance-of-funds application until after the court decided the declaratory proceeding on privilege. It relied on article 49 of the Code of Civil Procedure (C.p.c.), which confers an inherent power on the court to make any order necessary for the exercise of its jurisdiction and to fill procedural gaps, including ordering a stay where dictated by the proper administration of justice.

Québec procedural law starts from the premise that cases should proceed diligently and that a stay is exceptional. The guiding principles—right to be heard within a reasonable time, proportionality, sound case management, and judicial economy—push against unnecessary delay or duplication. Appellate case law provides several criteria that can justify a stay: a strong link between two proceedings; the extent to which one proceeding’s outcome will largely determine the other; whether a stay promotes proportionality; the risk of conflicting judgments on common issues; and whether proceeding without a stay would unnecessarily multiply costs and procedures. The stay power must also be exercised in light of limited judicial resources.

Both sides agreed that there was a connection between the declaratory action and the advance-of-funds motion, but they saw it differently. Gildan argued that its ability to present “complete” evidence on alleged bad faith depended on access to the Norton Rose files, so the declaratory judgment should come first. The former directors countered that the very purpose of advance funding is to avoid forcing directors to self-finance defence costs through the full litigation; to stay their funding request until after the privilege dispute would, in substance, negate the statutory and contractual right to timely advances.

The court recognized Gildan’s argument that some relevant documents could not be used while privilege was unresolved and noted that the former directors had warned Gildan not to rely on materials over which they asserted privilege. Nevertheless, the judge found that Gildan would not suffer significant prejudice if the advance-of-funds application were heard first. Even if the court granted an advance and later rejected the privilege claim in the declaratory action, Gildan could then use the Norton Rose files in subsequent proceedings—whether in a later application to recover advanced sums or in its counterclaim in the DSU case. In any event, Gildan was already setting aside DSU amounts in a segregated account, which could serve as a source of set-off if reimbursement were ultimately ordered.

The judge held that the primary basis for imposing the burden of showing a strong prima facie case of bad faith on the corporation is not merely its superior access to corporate records but the general presumption of directors’ good faith. The statutory and contractual regime presumes an advance should normally be granted unless there is compelling preliminary evidence of bad faith. As with an insurer’s duty to defend, which is “autonomous” from the duty to indemnify and assessed on a preliminary standard, the directors’ right to advance funding must be meaningful at an early stage, not deferred until after a full evidentiary inquiry. To require final-merits-level proof before deciding on advance funding would undercut the very policy of s. 124(4) LCSA.

Judicial analysis of the stay criteria

Turning to the stay criteria, the court found that although the two proceedings are related, they engage different primary questions: the declaratory action concerns who holds the privilege and Gildan’s right to obtain Norton Rose’s files, while the advance-funds motion concerns the former directors’ entitlement to interim payment of legal fees under the LCSA and the indemnity agreements. Gildan itself acknowledged in its submissions that the declaratory proceeding will not ultimately decide the directors’ good faith, but rather the identity of the privilege holder. The outcome of one will not legally determine the outcome of the other, aside from the potential evidentiary impact.

There was no risk of conflicting judgments in the strict sense. It is structurally inherent in the advance-funding regime that a court may initially authorize advances and later, upon a full record, find that the statutory conditions for indemnification are not met, requiring repayment—or conversely, might initially refuse an advance and later conclude the directors are entitled to indemnification. This built-in two-stage process is analogous to the separation between an insurer’s duty to defend and its duty to indemnify the insured, and it does not constitute the kind of contradictory judgments that justify a stay.

Nor would proceeding with the advance-funds motion first unduly multiply procedures or inflate costs: the evidence and legal questions differ from those in the declaratory case. The privilege issues will be adjudicated in the declaratory action by a different judge, and the advance-funds hearing need not, and cannot, pre-determine those privilege questions. The court emphasized that the only significant prejudice on either side, whichever sequence was chosen, was the temporary obligation of one party or the other to finance legal fees until final resolution of indemnity obligations—a burden that should remain modest compared to the fees already incurred and one that the statutory scheme is designed to manage.

Gildan also pointed to the fact that the former directors had, in the DSU proceeding, argued in favour of a stay pending resolution of the privilege questions, suggesting inconsistency with their current opposition to a stay of the advance-funds motion. The court treated this inconsistency as only apparent: while it might be appropriate to await the privilege ruling before a final determination on indemnification or liability in the DSU action, that does not prevent a judge from issuing a preliminary, interlocutory ruling on advance funding, which by design is subject to later revision. The judge anchored the decision not on past litigation positions, but on the broader interest of justice and coherence with the LCSA’s remedial structure.

Finally, Gildan relied on the already-paid advance of CAD 350,000 and its later offers to top this up by CAD 150,000, and then by another CAD 350,000 (for a total of CAD 700,000), to suggest that the former directors were not truly prejudiced and that a stay would be acceptable. The former directors responded that the initial CAD 350,000 had been fully consumed and that the additional offers remained insufficient in light of the ongoing and anticipated costs. The judge considered the existence and quantum of these advances and offers as a factor to be analyzed at the merits hearing of the advance-funds application itself; it was neutral in deciding whether to stay that application.

Outcome and implications for the parties

In the result, the Superior Court refused to grant Gildan the extraordinary remedy of suspending the former directors’ advance-of-funds application. It held that the statutory and contractual framework for director indemnification and cost advancement under the LCSA is intended to function as a two-stage process, with advance funding decided on a preliminary basis, subject to repayment if bad faith is ultimately established. Delaying the funding decision until after resolution of the privilege dispute would contradict that structure and effectively deprive former directors of the practical benefit of their right to advancement.

The court therefore dismissed Gildan’s motion to stay, ordered the parties to file a timetable to ready the advance-funds application by 10 April 2026, and reserved any order on court costs to follow the final outcome of the broader dispute. As a result, the successful party in this decision is the group of former directors; however, no monetary damages, specific funding amount, or quantified costs are awarded in their favour in this judgment, and the total amount that may ultimately be ordered or recovered in the various related proceedings cannot be determined from this decision alone.