The Bell Tolls: And It’s Unanimous

The Supreme Court of Canada released its decision today and sided with BCE, its shareholders and directors. In a unanimous decision (7-0), the Court overturned the decision of the Quebec Court of Appeal which had overturned the decision of the lower court and its approval of the BCE plan of arrangement for a leveraged buyout. Though the reasons for the decision will not come for a couple of weeks, the BCE shareholders are happy, the Directors are relieved and the Canadian equity markets are calmed.

This case has been a catalyst for useful discussions about some key issues in corporate governance: Do directors of a corporation owe a duty to shareholders to maximize profits or a more general duty to the corporation? If the duty is to the corporation, who constitutes the corporation? Is it shareowners, bondholders, creditors or any other number of possible stakeholders? What happens when the interests of those different stakeholders come into conflict? Whose rights take precedence? Or must directors take into account the interests of all these stakeholders and provide some evidence that these competing interests were, in fact, taken into account in reaching some sort of fair and reasonable accommodation? And will the rights of stakeholders depend on the circumstances and whether the event is a bankruptcy or leveraged buyout or some other form of important change in the corporation?

Answers to these questions lie ahead. Yet those answers may not come even with the Supreme Court’s reasons that it will release in the coming weeks. Answers may come only through future cases as the Court tries to construct good corporate law that takes into account the emergent complexities of director duties and business decisions and the growing number of complex stakeholder interests. The immediate result of today’s decision does not, for example,  answer whether the directors owed any duty to the bondholders beyond the duty to respect the contractual entitlements attached to the bonds. The Supreme Court may still have based its decision on the premise that there are non-contractual economic interests that directors need to take into account but that BCE directors did, in fact, meaningfully consider these interests. The trial court found that the directors did make reasonable efforts to consider the interests of bondholders and the Supreme Court may have reaffirmed those findings of fact rather than the Court of Appeal’s reinterpretation. Or the Supreme Court may have decided that directors do not have any obligation to bondholders in these cases of leveraged buyouts and that if bondholders are concerned about issues such as change in control, then they should negotiate that issue in the contractual provision of the bonds.

Whether or not the Supreme Court broadens the duties of directors to consult with stakeholders such as bondholders, this issue is not going to go away. The future will undoubtedly bring to the courts another case with a different group of stakeholders, with a different scenario and with different financial -and even social-  implications. Law in general, and particularly corporate law, is highly fact driven. In a previous case of People’s v. Wise, the Supreme Court decided that creditors were stakeholders whose interests the directors were obliged to take into account. But that was a bankruptcy case and the BCE case was a leveraged buyout and the arguments and interests were different.

The most important future implication of the BCE case is what principles the Court identifies in guiding the obligations of directors, at least in this context of a leveraged buyout. But articulating meaningful principles will be difficult. The Court does not want to prematurely define and limit who is a stakeholder. Stakeholders are clearly more than shareholders and may include groups beyond bondholders or creditors.  However, others may fall within this ambiguous category as well.

As for the duties owed to stakeholders, these may include making attempts to find fair and reasonable accommodation. The extent of reasonable and fair accommodation may depend on who the stakeholder is and what economic interests are in jeopardy. For example, though a group such as bondholders may be able to protect its interests through negotiation of the bond contract, other stakeholders may not be able to adequately protect themselves.  As such, the courts may impose an even greater obligation on directors both to consult and to reach fair and reasonable accommodation for these less- empowered groups.

This is what makes law interesting, complex and sometimes, highly arcane. Legal principles are important and critical as a guide for those the principles are meant to guide. But no principles can anticipate all the peculiarities and interests of corporations in the global and fluid world of modern capitalism. As new and sometimes unsophisticated investors participate in stock markets and invest in complex instruments, the old rules and expectations cede to new ones. In this environment, there will inevitably be more stakeholders recognized as constituents of corporate decision-making: stakeholders whose interests must be protected. How the Supreme Court, and other courts around the world, attempt to define these principles and how they choose to leave open the issue of who is a stakeholder is more important than the fact that BCE can now move forward with its plan of arrangement and leveraged buyout. But that too is important.

June 20, 2008
By Robert Adamson, Executive Director, CIBC Centre for Corporate Governance and Risk Management