Lessons for Directors Following the BCE Inc. Decision 

publication 

November 2009 - ( Business in Vancouver and Lexology )

Business in Vancouver and Lexology
On December 19, 2008, the $52 billion saga of the proposed leveraged buyout of BCE Inc. by a private- equity consortium led by the Ontario Teachers' Pension Plan Board came to an anti-climatic end when the Supreme Court of Canada issued unanimous reasons for its June 20 judgment approving the plan.

The story had gripped Canadian legal and business observers for much of 2008 but, shortly before the Supreme Court issued its reasons, the underlying transaction came to an end when a required solvency opinion could not be obtained. 

Although the transaction did not complete, the court's judgment provides important clarification on the duties of corporate directors, and offers guidance, particularly in situations where the interests of stakeholders conflict. However, it is worth noting that some commentators have expressed the understandable concern that this decision may have opened the floodgates to actions challenging decisions made by directors. 

The transaction and the court case

At issue in the BCE decision was a plan of arrangement for the purchase of all of BCE's outstanding shares at a 40% premium above market price through a leveraged buyout. BCE announced in June 2007 that it had entered into an agreement with an investor group for the buyout, which would have been the largest leveraged buyout in Canadian history. The plan was opposed by a group of financial and other institutions that held debentures issued by Bell Canada, as the short-term trading value of the debentures would be adversely affected. The arrangement was challenged on the basis that it was not "fair and reasonable" pursuant to the Canada Business Corporations Act, and an "oppression" action was also brought against the directors. In the end, the Supreme Court rejected the claims and approved the plan. 

Directors' duties after the BCE Inc. decision  

The Supreme Court's analysis of directors' duties in the judgment is significant to all directors, as many of the court's statements apply generally to corporate decision-making. 

First, it is important that the court reaffirmed that the fiduciary duty directors owe is to the corporation rather than to any particular interest group, such as shareholders. In affirming this principle, the court definitively rejected the so-called "Revlon" duty from U.S. law to maximize shareholder value in change of control transactions. However, while the fiduciary duty is owed to the corporation, the court stated that directors may, but are not required to, give consideration to the interests of a range of stakeholders depending on the circumstances. 

While it sounds permissive, what this means in practice is that boards will have to consider the impact of their business decisions on all affected stakeholders, including shareholders, employees, suppliers, creditors, consumers, governments and the environment. Ultimately, the directors' fiduciary duty includes an obligation to treat stakeholders impacted by corporate action equitably and fairly in the circumstances. 

To discharge this obligation, and particularly to minimize the potential for the stakeholders' oppression remedy, directors should, at the very least, be able to demonstrate that they: 
  • identified and considered all the alternative courses of action reasonably open to the corporation in the circumstances;
  • identified the groups of stakeholders potentially affected and determined the reasonable expectations of each group regarding the corporation's obligations to them based on general commercial practice and the particular arrangements in place between the group and the corporation; and
  • having determined the impact of the board decision on each affected stakeholder group, took steps to ensure that their reasonable expectations were not unfairly disregarded or made subject to unfair prejudice or treatment.

In the BCE decision, the court noted that it was significant that the debentureholder had not stipulated any contractual term to deal with a change of control. 

Second, since there is no "bright-line" test for how to balance the potentially conflicting interests of all the stakeholders and the corporation, and no priority rules exist to rank the interests of stakeholder groups, directors must ultimately make a contextual decision based on the particular circumstances. Among other things, directors should consider: 

  • general commercial practice;
  • past practices between the parties;
  • any relationships between the parties (e.g., personal or familial); <br>representations made by the parties;
  • provisions in any relevant agreements (e.g., shareholder or other agreements);
  • soliciting and relying on expert opinion where appropriate; and
  • the fairness of the resolution of the conflicting stakeholders' interests.
The court's definition of the scope of directors' duties is imprecise and raises a number of questions. For example, the court states that the directors must consider the company's position as "responsible corporate citizen." Large corporations are frequently accused of being interested only in the financial bottom line, but the Supreme Court has now at least allowed directors to consider other interests. However, while the vagueness of the duty is troubling, it is of some comfort that the court emphasized that deference will be afforded to directors' decisions under the "business judgment rule." 

Because courts will focus on the decision-making process rather than the actual decision, it is critical that an appropriate process should be followed and properly recorded to make certain the decision is given deference. However, to take advantage of the business-judgment rule, directors must be seen to make their decisions in good faith, on an informed basis and after due consideration of the interests of all affected stakeholders including at least the factors listed above.

This article was prepared with the assistance of Renata Germann, articled student at Lang Michener LLP.