Canada: M&A BuildingBlocks - Duties of the Board or Special Committee

 In the context of a merger, plan of arrangement, significant acquisition or disposition, or a takeover bid, the board of directors of a corporation (the "Board") must take control of the process and ensure that, among other things, they fulfill their duties as directors.

Directors should familiarize themselves with their fiduciary duties in the context of the circumstances faced by the corporation and review these duties periodically as decisions are made. For public companies, where a transaction is subject to shareholder approval, it is important to remember that the process undertaken by the Board will be described in either a Directors' Circular or in an Information Circular prepared as part of the transaction and therefore the process undertaken will form part of shareholders' and the public's views of the transaction.

1 Directors' Fiduciary Duties

It is a fundamental principle of corporate law that directors are responsible to manage or supervise the business and affairs of the corporation. In managing the corporation, the directors owe certain duties to the corporation:

  • a fiduciary duty / duty of loyalty; and
  • a duty of care.

2 Fiduciary Duty

A director's fiduciary duty (duty of loyalty) is a duty to act honestly, in good faith and with a view to the best interests of the corporation. In satisfying this duty a director must avoid conflicts of interest, not use their position for personal gain, and maintain a duty of confidentiality.

It is clear in Canadian law that the director's fiduciary duty is owed to the corporation but requires consideration of the interests of all stakeholders. Those other stakeholders could include employees, creditors, consumers, governments, or the environment.

In the BCE case, the Supreme Court of Canada went further, stating that the fiduciary duty comprehends a duty to treat individual stakeholders affected by corporate actions equitably and fairly. The failure to do so could result in an oppression action under applicable corporate law. The incorporation of the oppression concept into directors' duties could be considered to be a third duty - the duty to act equitably and fairly. Where conflicting interests arise, it falls to the directors to resolve conflicts in a way that is in the best interests of the corporation and provides fair treatment to the stakeholders.

How does this impact a change of control transaction? BCE does not say that a corporation cannot maximize profit and shareholder value. However, if that is the decision of the Board, it must not do so by treating individual stakeholders unfairly (as fair treatment is a fundamental reasonable expectation of stakeholders).

3 Duty of Care

In exercising their powers and discharging their duties directors must use the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. This is an objective standard and the duty is owed to the corporation and its shareholders. In order to satisfy their duty in the context of a change of control transaction, directors should generally:

  • have adequate knowledge of the proposed transaction;
  • conduct an independent examination of the proposed transaction;
  • allow sufficient time to consider and analyze the proposed transaction;
  • where appropriate, seek independent legal, financial or other advice;
  • question information provided;
  • make decisions on an objective and informed basis; and
  • rely, where appropriate, on the advice of professionals.

In exercising their duty of care, directors will receive protection from the business judgement rule. Generally speaking, courts are reluctant to second-guess a Board's decision on matters of business judgement even where hindsight uncovers flaws in their decisions, provided that the decision falls within a range of reasonableness and in making their decision the Board follows appropriate processes and arrives at a conclusion reasonable in the circumstances

In conducting themselves in the context of a change of control transaction, directors are required to consider all reasonably available courses of action and to fully consider and understand the risks, opportunities, challenges and values associated with each of the alternatives under consideration and to conclude that, in their view, the approved alternative is in the best interests of the corporation and is the best one reasonably available to the corporation. Alternatives to be considered must be reflective of the context and the circumstances in which the corporation finds itself. Some alternatives to consider, include, but are not limited to, the status quo, the possibility of bids or proposals made by third parties, or other alternatives (e.g. financing or refinancing alternatives).

No matter which approach is chosen, directors must have a reasonable basis to conclude that the alternative chosen is the best alternative available in the circumstances.

4 Conflicts of Interest and the Importance of Independence

The independence of directors and a consideration of whether directors are free of conflicts and other competing interests that could reasonably be viewed as impacting their judgement should be considered at the outset of a potential change of control transaction, as this directly impacts whether directors will have discharged their fiduciary duty / duty of loyalty. In undertaking this, consideration should be given to not only actual conflicts but also to a perception of outside interests that could affect a directors' judgement.

Where there are conflicting interests, the appointment of an independent or special committee should be considered by the Board to assist in considering transactions or decisions which raise a concern about potential conflicts of interest.

5 Use of Special Committees of the Board

Canadian law does not expressly mandate that a special committee be established, however, applicable securities laws in certain circumstances such as related party transactions (see Multilateral Instrument 61-101 – Protection of Minority Securityholders in Special Transactions), requires the Board to constitute a special committee. In the case of conflicts of interest, establishing a special committee of independent directors functions as a procedural safeguard to ensure that any decision is made by those without ancillary interests.

In other cases, the Board may determine that because of the significance of the decision and the short time in which it must be made, a smaller group of directors should undertake an intensive review that the full Board is unable to conduct in the circumstances. In this way, the Board ensures that a detailed review is completed efficiently and is freed from the practical constraints of gathering the full Board for several meetings within a short time. This smaller working group has the mandate of investigating matters fully and bringing recommendations back to the Board to consider as a whole. In this way, a special committee may not only help directors discharge their fiduciary duty / duty of loyalty, but also their duty of care in following an appropriate process enabling them to reach an informed decision.

There are two common circumstances where a Board may choose to establish a special committee in the context of an M&A transaction:

  1. Where a corporation is facing a particular change of control transaction, the Board will often establish a special committee comprised of non-management directors to provide independence from the interests of majority or significant shareholders whose interests may differ from other shareholders or to provide independence from the influence of management representatives on the Board who may be influenced by the effects of a transaction on them personally.
  2. A Board may determine that an evaluation of strategic alternatives is necessary. These alternatives may include a change in the direction of the business of the corporation, a recapitalization or reorganization transaction or a sale of the corporation. In these circumstances, the Board may wish to evaluate these alternatives with the assistance of senior management and, potentially with outside legal and financial advisors.

If the Board decides to appoint a special committee, there are three general considerations that should be taken into account in determining the composition of the special committee:

  • independence;
  • expertise and experience; and
  • time commitment and the ability of the committee members to work together as a group.

With respect to independence, the key to evaluating any special committee process is to ensure that the decision at issue is made, and perceived to be made, on the merits, unclouded by outside considerations. In making this assessment, a perception that outside interests could affect the judgement of a committee member can be as important as the existence of an actual conflict.

Where a Board has acted on the advice of a special committee composed of persons having no conflict of interest, that decision will generally be respected under the business judgement rule and afforded deference provided that the committee has acted independently, in good faith and made an informed recommendation.

Use of Special Committees of the Board | Continued

6 Documenting Board/Special Committee Deliberations

In the context of a change of control transaction it is important for the Board / special committee to properly document the process undertaken, the advice received and the decisions made. Doing so assists in the recording of the process in the "Background to the Transaction" section of the disclosure document and forms the basis for establishing a business judgement rule defense.

An important element of this documentation is proper minute taking of Board / special committee meetings and deliberations. The goal of minute taking is to document decisions and to assist the parties in remembering / documenting the "whys" decisions were made, how conflicts were analyzed and resolved, etc. While there is no standard approach to minute taking it will be important to draft minutes that contain enough detail to identify the key factors the Board / special committee considered, including the input of advisors and the reasons why the Board / special committee did what they did, but are not so short as to lack any context

About BLG

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.