dentons.com Insights and Commentary from Dentons On March 31, 2013, three pre-eminent law firms Salans, Fraser Milner Casgrain, and SNR Denton combined to form Dentons, a Top 10 global law firm with more than 2,500 lawyers and professionals worldwide. This document was authored by representatives of one of the founding firms prior to our combination launch, and it continues to be Growing with offered to provide our clients with the information they need to do business in an increasingly complex, interconnected and competitive marketplace. The role of government has never been more critical
Securities Law Newsletter February 2009 Westlaw ecarswell SUPREME COURT S BCE REASONS TIE UP SOME LOOSE ENDS BUT NOT TOO TIGHTLY Ralph Shay, Fraser Milner Casgrain LLP The Supreme Court of Canada s eagerly anticipated reasons in the case of BCE Inc. v. 1976 Debentureholders, 2008 SCC 69, have provided some clarification to the judicial interpretation of the fiduciary duty of corporate directors in Canada in the mergers and acquisitions context. In particular, the business judgment rule likely is now more firmly entrenched than ever before, and it may be even more difficult than previously to challenge a board s business decisions in the absence of a clear demonstration of bad faith or wanton recklessness. The BCE reasons may, however, have left the door slightly more open to challenges based on allegations that a board has ignored the interests of stakeholders other than shareholders. There has been a general understanding in the past that, although the fiduciary duty is owed to the corporation and not to any particular stakeholder group (as confirmed by the Supreme Court of Canada in Peoples Department Stores Inc. (Trustee of) v. Wise, 2004 SCC 68), corporate boards are expected to focus their attention on value maximization for shareholders, who are perceived as the owners of the corporation, particularly when the immediate solvency of the corporation is not in question. The BCE case has provided ammunition to those who may wish to challenge this assumption in the future, even where control of a company is in play, although the business judgment rule will be a formidable obstacle to overcome. Background In 2007, the board of directors of BCE Inc. ( BCE ), in response to clear indications that certain parties were contemplating a possible acquisition of BCE, established a special committee to set up and supervise an auction process. Offers were received from three groups, all of which contemplated a leveraged buyout entailing the incurrence of substantial debt obligations on the part of Bell Canada, a wholly-owned subsidiary of BCE, either as borrower or guarantor. The BCE board eventually accepted the offer from a group headed by the Ontario Teachers Pension Plan Board. The transaction was to take the form of a plan of arrangement under which the shareholders of BCE would receive $42.75 per share in cash, which represented a premium of approximately 40% to the average closing market price for the three-month period before public media speculation of a potential privatization began in March 2007. Bell Canada was to guarantee approximately $30 billion of acquisition debt to be incurred by BCE. The plan of arrangement, which was eventually approved by a 98% favourable vote of BCE s shareholders, was opposed by certain holders of debentures of Bell Canada, because the debt obligation of Bell Canada resulting from the arrangement was expected to diminish the value of the debentures, including the loss of their important investment grade designation by credit rating agencies. Over the previous years, Bell Canada had made representations to the investment community about the importance it attached to maintaining investment grade ratings. These representations were accompanied by warnings to convey that the ratings could not be guaranteed.
2. A number of the debentureholders had expressed their concerns to the BCE board about a potential leveraged buyout transaction after BCE first announced that it was reviewing strategic alternatives to enhance shareholder value. BCE replied that it intended to honour the contractual terms of the trust indentures under which the debentures had been issued. (Compliance with the terms of the trust indentures was not in issue before the Supreme Court of Canada.) At the hearing before the Quebec Superior Court for the consideration of BCE s application for approval of the plan of arrangement under section 192 of the Canada Business Corporations Act (the CBCA ), the debentureholders argued against the approval and also opposed the arrangement on the basis of oppression, under section 241 of the CBCA. The Quebec Superior Court approved the arrangement and dismissed the oppression claim. On appeal by the debentureholders, the Quebec Court of Appeal set aside the Superior Court s decision on the arrangement application on the basis that the BCE board had a duty to consider the interests of the debentureholders (including their reasonable expectations), beyond just their contractual rights under the trust indentures, and the board failed to do so in the context of the arrangement. The Court of Appeal was of the view that the fiduciary duty of directors encompasses, depending on the circumstances of the case, giving consideration to the interests of all stakeholders, which, in this case includes the debentureholders. The Court did not consider it necessary to address the oppression issue, because the approval of a plan of arrangement requires a finding that the arrangement is fair and reasonable, which would be inconsistent with a finding of oppression. The Supreme Court s Decision The Supreme Court of Canada overturned the decision of the Court of Appeal and restored the Superior Court s approval of the plan of arrangement. Unlike the Court of Appeal, the Supreme Court considered it necessary to consider the oppression claim and approval of the arrangement separately, viewing them as different types of proceedings, engaging different inquiries. The court confirmed that the directors fiduciary duty was owed to the corporation, rather than a particular stakeholder group. This does not change when control of a company is put in play (in contrast to the Revlon duty to maximize shareholder value when a company is put in play, as espoused by the Delaware courts). However, in considering what is in the best interests of the corporation, the directors may, according to the court, look to the interests of stakeholders to inform their decisions. The court determined that the evidence did support a reasonable expectation that the BCE board of directors would consider the position of the debentureholders in making its decision regarding the offers it was considering. However, the court also concluded that the directors fulfilled this duty by listening to the concerns expressed by the debentureholders (including by way of a meeting between a BCE board member and representatives of the debentureholders) and deciding that the contractual terms of the debentures would be met, but that no further commitments could be made. In addressing the oppression claim, the court also concluded that the debentureholders did not have a reasonable expectation that the directors of BCE would protect the economic interests of the debentureholders by structuring a plan of arrangement that would preserve the investment grade rating of the debentures, because the qualifications in the warnings that accompanied previous public statements of Bell Canada regarding the maintenance of investment grade status precluded that expectation. In addition, noting that BCE had been
3. put in play, the court determined that the momentum of the market made a buyout inevitable and the only choices available to the BCE board were leveraged buyouts, none of which would preserve the trading value of the debentures. According to the court, given commercial realities, it should not have been outside the contemplation of the debentureholders that an arrangement of this type would occur. The court also attached importance to the fact that the debentureholders, who generally represent some of Canada s largest and most reputable financial institutions, pension funds and insurance companies, could have negotiated terms in the trust indentures that would have prevented the issue from arising. This factor came into play both in the court s consideration of reasonable expectations in the oppression claim and in the court s determination in the arrangement application that the arrangement addressed the debentureholders interests in a fair and balanced way. In regard to the arrangement application, the Supreme Court also stated that it was clear to the Superior Court judge that the continuance of BCE required acceptance of an arrangement that would entail increased debt obligations for Bell Canada, and necessity was thereby established. No superior arrangement had been put forward and BCE had been assisted throughout by expert legal and financial advisors, suggesting to the Superior Court judge that the arrangement had a valid business purpose. Acknowledging that there is no such thing as a perfect arrangement, the Supreme Court saw no error in the Superior Court judge s conclusion that the arrangement had been shown to be fair and reasonable. Observations from the Supreme Court s Reasons The following observations of general application can be taken from the Supreme Court s reasons: The fiduciary duty of corporate directors is not confined to short-term profit or share value. Where the corporation is an ongoing concern, the duty looks to the long-term interests of the corporation. (para. 38) This statement, in combination with the business judgment rule, gives boards powerful ammunition in defending a course of action that causes a temporary drop in profit or stock price. It is not mandatory to consider the impact of corporate decisions on shareholders. There is no principle that the interests of shareholders should prevail over another set of interests. (paras. 39 and 84) This would suggest that there may be circumstances where a court would be receptive to defensive actions taken by directors against hostile take-over bids in order to protect, for example, its employees or on the basis of concerns for the environment. This presently appears to conflict with the policies of the Canadian securities regulators. Relevant stakeholders are not confined to security holders. (para. 40) They include employees, creditors, consumers, governments and the environment. This confirms Peoples, but it may be significant that it is repeated in a judgment involving a proposed change of control transaction. The business judgment rule applies to the board s consideration of the ancillary interests of stakeholders. (para. 40) As stated by the court: Courts should give appropriate deference to the business judgment of directors who take into account these ancillary interests, as reflected by the business judgment rule. The business judgment rule accords deference to a business decision, so long as it lies within a range of reasonable
4. alternatives This applies to decisions on stakeholders interests, as much as other directorial decisions. It is not acceptable to maximize profit and share value by treating individual stakeholders unfairly. (para. 64) In fulfilling their fiduciary duties, directors may be obliged to consider the impact of their decisions on stakeholders in a manner consistent with the corporation s duties as a good corporate citizen. (para. 66) This may add an additional element to the fiduciary duty analysis in any particular case. The reasonable expectation of stakeholders is simply that the directors act in the best interests of the corporation. (para. 66) Regarding the fiduciary duty and stakeholders there are no absolute rules. (paras. 82 and 84) In discussing the cases on oppression, the court pointed to a duty to treat individual stakeholders affected by corporate actions equitably and fairly. There are no absolute rules 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. In an application for approval of an arrangement, only the interests of security holders whose rights are being affected (as opposed to just economic interests) need be considered in the assessment of whether the arrangement is fair and reasonable, in the absence of extraordinary circumstances. (paras. 133 and 134) In the case of the debentureholders, the Supreme Court was of the view that the fact that a group whose legal rights are left intact faces a reduction in the trading value of its securities would generally not, without more, constitute [an extraordinary] circumstance. (The court referred several times in the reasons to the effect the arrangement would have on the trading value of the debentures, but did not make reference to the investment market s determination that there would be an increased risk of default on the debentures, which was the underlying cause of the investment downgrade and the lower trading price.) Nevertheless, the Superior Court judge had considered the debentureholders economic interests in his assessment of whether the arrangement was fair and reasonable, and the Supreme Court of Canada was of the view that it was open to him to do so. In considering whether to approve a plan of arrangement, the court must focus on the terms and impact of the arrangement itself, rather than on the process by which it was reached. (para. 136) Some of these observations may not be entirely consistent with previous conventional wisdom as to the nature of the fiduciary duty of a board of directors, particularly in the context of a sale of a corporation. The business judgment rule, however, remains not only intact but strongly reinforced.