Jeffrey MacIntosh is a law professor at the University of Toronto and a director of the Canadian Securities Exchange.
The goings-on at Rogers Communications Inc., with two competing boards contending for mastery, demonstrates how corporate governance can sometimes resemble a blood sport.
We now have a winner in the battle of the boards, with Edward Rogers coming out on top. Last Friday, Justice Shelley Fitzpatrick of the B.C. Supreme Court held that Mr. Rogers was fully entitled to remove and replace five directors by an instrument in writing signed only by him. Christmas dinner with the Rogers will never be the same.
There are, however, a number of troubling aspects of this decision.
Mr. Rogers’s opponents argued that the outcome of the case should depend not only on the company’s constitution and its interaction with the governing legislation (the Business Corporations Act in British Columbia, where Rogers Communications is registered).
Rather, his opponents argued, the court should have regard to a reasonable shareholder expectation that company directors would only be removed and/or replaced as they always had been in the past: at a shareholders meeting.
These shareholder expectations were furthered by Rogers Communications’ repeated public statements that it is committed to “good” or “sound” corporate governance practices.
Mr. Rogers’s removal and replacement of directors without a shareholders meeting, however, defied shareholder expectations and fell several parsecs short of honouring the company’s commitment to good governance. Thus, they argued, the court should rule against him.
Justice Fitzpatrick rejected these arguments, holding that, under common law applicable to the Business Corporations Act, the company’s constitution is to be regarded as a contract between Rogers Communications and its shareholders.
Thus, her task was simply to parse the words of the contract against the backdrop of the act. Whether Mr. Rogers’s actions were consistent with good governance, and what shareholders might or might not have reasonably expected concerning the election of directors, were essentially irrelevant.
This is worrisome for a number of reasons. While a strict construction of the constitution is without question a good starting point, it is far from a satisfactory end point.
Over the past several decades, Canadian courts have signalled that defendants are not always entitled to exercise their strict legal rights, if it would be unfair for them to do so.
The key metric in mediating the issue of unfairness is reasonable expectations. That is, even if a defendant has dotted all the legal i’s and crossed all the legal t’s, if they have nonetheless acted in a manner that does violence to a plaintiff’s reasonable expectations, the plaintiff wins.
A 2008 decision of the Supreme Court of Canada in a leading corporate law case involving BCE Inc. offers much weight to the argument that the reasonable expectations of shareholders should have led to a different result in the Rogers case. The Supreme Court identified a variety of factors that might give rise to a reasonable expectation. These include “general commercial practice” and “past practice.”
In the Rogers case, both factors push strongly in the direction of a shareholder expectation that directors would not be replaced without a shareholders meeting. Indeed, the idea that directors might be replaced by a written document signed only by the controlling shareholder would have been utterly foreign to most shareholders (most of whom are likely resident outside of B.C.).
The pertinent provisions in B.C.’s Business Corporations Act are unique in Canada – perhaps the world – and it appears that even the most senior Rogers Communications corporate insiders were unaware of this avenue for removing and replacing directors until the eve of litigation.
An additional factor the Supreme Court identified as potentially productive of reasonable expectations is “the nature of the corporation.” Completely aside from Rogers Communications’ public commitment to good governance, the market’s natural assumption would be that a company of the size, importance and public profile of Rogers, and with its access to sophisticated legal advice, would be committed to good governance. The company’s public statements to that effect were thus just icing on the cake.
In Madam Justice Fitzpatrick’s defence, the primary (although not exclusive) legal avenue for according “reasonable expectations” legal significance is the somewhat quixotically named “oppression remedy” found in the Business Corporations Act.
Regrettably, Mr. Rogers’s opponents did not invoke this section of the statute. This appears to have been a consequence of several factors, including the tight timeline surrounding the hearing of the case, the need for family members who opposed him (whose counsel was excluded from participating in the legal argument) to apply for and secure leave from the court to argue oppression, and a belief that the case could be won purely on the interpretation of Rogers Communications’ constitution and the legislation.
As the company has decided not to appeal the case, the only remedy is for the B.C. Legislature to step in and strip away the Business Corporations Act’s entitlement for directors to be removed or appointed without a shareholders meeting.
Savvy investors would do well, however, to take a look at other public companies incorporated in B.C. (e.g. Telus Corp., Finning International Inc. and Lululemon Athletica Inc.). Who knows what similar governance surprises might lurk in the belly of the beast?
Editor’s note: An earlier version of this story incorrectly said Teck Resources Ltd. is incorporated under the B.C. Business Corporations Act. In fact it is federally incorporated under the Canada Business Corporations Act.
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