In BCE Inc. v. 1976 Debentureholders, the Supreme Court of Canada clarified, to some extent, the laws governing change of control transactions in a corporate setting.
The deal underlying the litigation was a proposed $51.7 billion privatization of BCE Inc. that was opposed by debenture holders. The debentureholders opposed the deal because it would
result in the downgrading of Bell Canada’s credit rating and a decrease in the value of the debentures.
The debentureholders argued that (1) the BCE directors acted in an oppressive way in approving the BCE sale; and (2) that the proposed plan of arrangement (for the transaction) was not fair and
In rejecting the debentureholders arguments, the Supreme Court clarified the law with respect to the oppression remedy, the nature of directors’ fiduciary duties, and the test the courts will apply
for determining whether a plan of arrangement should be approved under the Canadian Business Corporations Act.
The Canadian Business Corporations Act contains a remedy for oppressive treatment. The oppression remedy effectively prohibits a corporation from acting (or failing to act) in a way that
is oppressive or unfairly prejudicial or that unfairly disregards the interests of a stakeholder of that corporation.
In considering the oppression remedy, the Court set out a two-pronged test that must be satisfied by the complainant. The first prong of the test asks whether there was a breach of
reasonable expectation, while the second prong asks whether the conduct causing the breach was “oppressive” or “unfairly prejudicial.”
With respect to the first prong of the test, the Court cited various factors to be considered in determining the reasonableness of a given expectation. These factors include: general
commercial practice; the relationship between the parties; the nature of the corporation; possible protective steps that the claimant could have taken; representations and agreements; and the fair resolution of the conflicting interests of different corporate stakeholders.
The second prong of the test will be satisfied where the conduct in question amounts to “oppression,” “unfair prejudice,” or “unfair disregard” of relevant interests. Conduct will
be oppressive where it is coercive and abusive, and suggestive of bad faith. “Unfair prejudice” results in unfair consequences; however, it may admit a less culpable state of mind (as compared
to conduct that is oppressive). To “unfairly disregard” a relevant interest is to ignore that interest as being unimportant, contrary to reasonable expectations.
Directors’ Fiduciary Duties
Under the Canadian Business Corporations Act, directors have a duty to act in the best interests of the corporation, as well as a duty to exercise the care, diligence, and skill of a reasonably
prudent person in similar circumstances.
When faced with a situation of conflicting interests among various corporate stakeholders, directors have a fiduciary duty to act in the best interests of the corporation, having regard to
all relevant considerations. These considerations include the need to treat fairly all affected shareholders, in a manner consistent with a corporation’s duties as a “responsible corporate
So long as the decision of the board of directors falls within a range of reasonable options, courts will give deference to the business judgment of directors that duly consider the various interests and act responsibly as described above.
The Court rejects the Delaware Revlon duty requiring directors to prioritize the interests of shareholders (i.e. to maximize shareholder value) where there is a cash offer for the corporation.
Indeed, directors in Canada are only permitted, and not obliged, to maximize shareholder value in such circumstances.
Test for Plan of Arrangement
The analysis for determining whether a plan of arrangement is fair and reasonable is distinct from the analysis determining the granting of the oppression remedy.
Unlike the oppression remedy (which is broad and equitable), the process for approving plans of arrangement is focused specifically on the interests of the parties whose legal rights are being
arranged, and not, barring exceptional circumstances, on securityholders who are impacted only economically.
For a plan of arrangement to be fair and reasonable, it must have a valid business purpose and must adequately respond to the conflicts between various stakeholders.
Reference to the following factors aids in determining whether the above criteria are met: the relationship between the arrangement and the corporation’s continued existence; whether or not
a majority of shareholders and other voting securityholders have approved the arrangement; the proportional impact of the arrangement on various affected groups; the potential approval of
the plan by a special committee of independent directors; and the existence of an expert fairness opinion.
There are at least two unanswered questions arising from the BCE decision. The first question involves the notion of a “good corporate citizen,” while the second question relates to the
dilution of directors’ duties.
As for the first question, the court, in the context of their discussion of the oppression remedy, commented that
“[d]irectors, acting in the best interests of the corporation, may be obliged to consider the impact of their decisions on corporate stakeholders, such as the debentureholders in these appeals. This is what we mean when we speak of a director being required to act in the best interest of a corporation viewed as a good corporate citizen. However, the directors owe a fiduciary duty to the corporation, and only to the corporation” (para 66, emphasis is mine).
Although the court seems to explicitly reject the idea that directors owe a duty to anybody outside of the corporation, such a rejection arguably contrasts with the notion of citizenship as
requiring some level of symbiosis between an individual and the broader society.
As for the second question, the Court outlined that directors’ duties may potentially be owed to a broad range of stakeholders. However, at least one commentator (Prof. Anita Anand of the
University of Toronto) has noticed that there is a risk of applying the duties so broadly as to render them essentially meaningless. As Prof. Anand says: a duty owed to everyone is in effect a
duty to no one.