The Supreme Court of Canada's landmark decision in the BCE Inc. case sets out a distinctively Canadian understanding of directors' fiduciary duty and has important implications for how directors make decisions.
The case concerned a challenge by a group of Bell Canada debenture holders to the proposed acquisition of BCE through a $52-billion plan of arrangement. The debenture holders objected to the arrangement on grounds that it would result in the loss of Bell's investment-grade rating and reduce the value of their debentures.
The Quebec Superior Court approved the arrangement. In a decision that rocked corporate Canada, the Quebec Court of Appeal overturned that decision and ruled that the transaction could not proceed. The Court of Appeal found that BCE's directors had a duty to consider debenture holders' non-contractual interests and were required not simply to accept the best offer for shareholders, but to consider whether the arrangement could be structured in a way that provided a satisfactory price to the shareholders while avoiding an adverse effect on the debenture holders.
In a unanimous decision, the Supreme Court overturned the Court of Appeal and reaffirmed its holding in Peoples Department Stores (Trustee of) v. Wise that the directors' fiduciary duty is owed at all times to the corporation and not to shareholders or any other stakeholders.
In doing so, the court chose not to follow the "Revlon line" of cases from the influential Delaware courts which state that there is a distinct legal duty to maximize shareholder value in change of control transactions.
Although the Supreme Court said that in considering what is in the best interests of the corporation directors "may" look to the interests of various stakeholders (including shareholders, employees, creditors, consumers, governments and the environment), in practice directors will need to consider the impact of their decisions on affected stakeholders. This is because the Supreme Court found that the duty of directors to act in the best interests of the corporation "comprehends a duty to treat individual stakeholders affected by corporate actions fairly and equitably".
In circumstances where stakeholders' interests conflict, the court noted that "[t]ere is no principle that one set of interests - for example the interests of shareholders - should prevail over another set of interests. Everything depends on the particular situation faced by the directors and whether, having regard to that situation, they exercised business judgment in a responsible way."
It is important that the Supreme Court endorsed the business judgment rule, which accords judicial deference to a business decision - including the weighing of conflicting stakeholder interests - so long as it lies within a range of reasonable alternatives.
The decision also made some noteworthy observations about the oppression remedy and what constitutes fair treatment. Oppression is an equitable remedy that focuses on the reasonable expectations of certain stakeholders as opposed to their strict legal rights. The court concluded that the debenture holders did not have a reasonable expectation that the investment-grade rating of their debentures would be maintained.
Statements by Bell Canada suggesting a commitment to retain investment grade ratings were accompanied by warnings that precluded investors from reasonably forming such expectations. The debenture holders also did not negotiate contractual protections such as change of control and credit rating covenants.
The debenture holders did, however, have a reasonable expectation that their economic interests would be considered by the directors, but the Supreme Court found that this expectation had been fulfilled.
The court concluded that BCE's directors had acted reasonably in concluding that while the contractual terms of the debentures would be honoured, no further commitments could be made. This conclusion suggests that, absent unusual circumstances, it will not be oppressive to hold sophisticated parties to the terms of their negotiated agreements.
The Supreme Court's repeated references to stakeholders, the emphasis placed on the need to treat stakeholders fairly and the focus on what is in the corporation's best interests are all indications that the court rejects the Delaware model of directors' fiduciary duties in which shareholder interests prevail in a change of control transaction.
In the course of deciding what is best for the corporation, it will therefore be important for boards to identify which stakeholders will be affected by their decision, think carefully about the impact of the transaction on those stakeholders and assess what expectations those stakeholders may reasonably have concerning how they will be treated in the circumstances.
In a change of control transaction, shareholders obviously have a great deal at stake. The Supreme Court recognized the importance of shareholder interests in directors' decision-making and was satisfied that BCE's board acted properly in choosing the transaction offering the highest value to shareholders.
The reality that shareholder approval is required for a transaction to proceed and the fact that the oppression remedy is available to shareholders mean that directors will continue to have to ask whether a transaction offers the best value reasonably available to shareholders as a central part of their deliberations.
What is less clear after the Supreme Court's decision is in what circumstances directors would be justified in supporting a transaction that does not maximize shareholder value.
How would a court respond if a board, for example, approves a less lucrative takeover proposal on the grounds that it would result in fewer job losses? The acceptability of such a decision would turn on the particular situation faced by the board, the reasonable expectations of the stakeholders and whether the board's decision was within a range of reasonable alternatives.
Although some may be disappointed that the Supreme Court avoided setting out any "bright line" tests or "priority rules" governing directors' duties in the change of control context, directors should take comfort in the knowledge that the BCE decision gives them room to do what they are expected to do: balance competing interests when making difficult business decisions. Provided that those decisions are made in good faith, on an informed basis and lie within a range of reasonable alternatives, Canadian courts will continue to defer to directors' decisions about what is in the best interests of the corporation.
Jeremy Fraiberg and Emmanuel Pressman are partners at Osler, Hoskin & Harcourt LLP.