On December 19, 2008, the Supreme Court of Canada released reasons supporting its June 20, 2008 decision to unanimously overturn the controversial Québec Court of Appeal decision and approve BCE's proposed plan of arrangement. Although the transaction did not ultimately proceed due to the recent turmoil in the credit markets and concerns regarding the impact of the transaction on the solvency of BCE, the Supreme Court's reasons provide valuable clarification regarding the duties of directors and the thresholds for challenging a transaction under the oppression remedy or the statutory standard for approval of a plan of arrangement.
The Supreme Court determined:
- The directors' fiduciary duty is to act in the best interests of the corporation and that duty is owed only to the corporation.
- Directors may consider the interests of stakeholders in fulfilling their fiduciary duty to the corporation, but are not required to act in the interests of any particular stakeholders or to favour the interests of any one group of stakeholders (including shareholders) over any other.
- Courts should accord deference to the business judgment of directors who, in fulfilling their fiduciary duty to the corporation, take into account ancillary interests of stakeholders.
- A breach of a reasonable expectation of the objecting parties is required for a finding of oppression.
- Absent exceptional circumstances, only the compromise of legal rights of stakeholders, rather than their economic interests, should be considered in determining whether a proposed plan of arrangement is fair and reasonable.
On June 29, 2007, BCE reached an agreement for the largest leveraged buyout in Canadian history whereby an investor consortium led by Teachers' Private Capital, Providence Equity Partners Inc. and Madison Dearborn Partners Inc. would acquire, by way of a plan of arrangement under the Canada Business Corporations Act (the Plan), all the outstanding common shares of BCE. The transaction was initially scheduled to close prior to June 30, 2008; however, due to the deterioration of the credit markets, the transaction was restructured and the closing was rescheduled to December 11, 2008. On December 11, 2008, BCE announced that the transaction would not proceed due to the inability of its auditor to deliver a positive solvency opinion, as contemplated under the amended agreement.
The transaction was opposed by several holders (Debentureholders) of debentures (Debentures) issued by Bell Canada, a wholly-owned subsidiary of BCE. The transaction contemplated BCE issuing approximately $30 billion of additional debt that would be guaranteed by Bell Canada. Following the announcement of the transaction, the Debentures' market value dropped by approximately 18% and they lost their investment-grade rating status.
The Debentureholders challenged the fairness of the Plan, alleging that it adversely affected their interests. In March 2008, the Québec Superior Court dismissed the Debentureholders' allegations and approved the Plan. In May 2008, the Québec Court of Appeal overturned the trial decision, concluding that the BCE Board had overlooked the interests of Debentureholders.
The Québec Court Of Appeal Decision
In overturning the trial decision and denying approval of the Plan, the Québec Court of Appeal considered the fiduciary duty of the BCE Board and assessed whether the Plan was fair and reasonable given all the circumstances.
With respect to the BCE Board's fiduciary duty, the Québec Court of Appeal found that the BCE Board did not give any consideration to the Debentureholders' reasonable expectations in negotiating the terms of the transaction. On the basis of its interpretation of the principles enunciated in 2004 by the Supreme Court of Canada in the Peoples Department Stores case, the Court of Appeal held that the process followed by the BCE Board was flawed.
On the assessment of the fairness and reasonableness of the Plan, the Court of Appeal noted: "If it was possible to structure an arrangement so that a satisfactory price could be obtained for the shares, while attenuating the adverse effect to the debentureholders, then the Board had a duty to examine it." Since BCE did not conduct such an exercise, the Court of Appeal concluded that BCE failed to discharge its burden of proving that the Plan was fair and reasonable given all the circumstances.
The Supreme Court Of Canada Decision
Fiduciary Duty Of Directors
In unanimously allowing the appeal and overturning the Québec Court of Appeal decision, the Supreme Court discussed its previous ruling in Peoples Department Stores and reiterated that the directors' fiduciary duty is to act in the best interests of the corporation, not any particular class of stakeholders. Although the directors' duty to the corporation may also include a duty to treat the corporation's stakeholders fairly, it is the interests of the corporation that prevail:
Where conflicting interests arise, it falls to the directors of the corporation to resolve them in accordance with their fiduciary duty to act in the best interests of the corporation. The cases on oppression, taken as a whole, confirm that this duty comprehends a duty to treat individual stakeholders affected by corporate actions equitably and fairly. There are no absolute rules and no principle that one set of interests should prevail over another. In each case, the question is whether, in all the circumstances, the directors acted in the best interests of the corporation, having regard to all relevant considerations, including — but not confined to — the need to treat affected stakeholders in a fair manner, commensurate with the corporation's duties as a responsible corporate citizen. Where it is impossible to please all stakeholders, it will be irrelevant that the directors rejected alternative transactions that were no more beneficial than the chosen one.
The Supreme Court noted that the "business judgment rule" applies to decisions on stakeholders' interests as much as other directorial decisions and the Courts should give appropriate deference to the business judgment of directors in this respect, referring to the Danier Leather and Maple Leaf Foods cases.
It will be interesting to see how broadly the reference to the "corporation's duties as a responsible corporate citizen" in the passage quoted above is interpreted. However, the Supreme Court's decision clearly provides boards of directors with the ability to approve transactions that negatively impact specific corporate stakeholders.
Oppression Claims Distinct From Fair And Reasonable Analysis Of A Plan Of Arrangement
The Supreme Court held that the Court of Appeal made a fundamental error in combining the analysis of whether stakeholders are entitled to the oppression remedy with the fair and reasonable analysis required for a court to approve a plan of arrangement under the CBCA. The Supreme Court found that two distinct inquiries are required.
The Oppression Remedy
The Supreme Court reiterated that a two-phase analysis applies to claims under the oppression remedy. The first phase requires consideration of the objecting parties' reasonable expectations. Only where a breach of the objecting parties' reasonable expectations is established, is the second-phase analysis of whether the conduct complained of amounts to "oppression", "unfair prejudice" or "unfair disregard" then undertaken.
The Supreme Court agreed with the trial judge's finding that there was no breach of the reasonable expectations of the Debentureholders. The evidence did not support the alleged expectation that the investment grade rating or the trading value of the Debentures would be maintained. The Court found that a reasonable expectation that the interests of the Debentureholders would be considered had been established; however, this expectation was fulfilled. The BCE Board considered the interests of the Debentureholders and concluded that the contractual terms of the Debentures would be honoured. There was no affirmative obligation to go further and restructure the transaction. The Court noted that leveraged buyouts of the kind proposed by BCE are not unusual. Given the financial sophistication of the Debentureholders, the failure to negotiate contractual protections for this contingency was significant.
Approval Of A Plan Of Arrangement Under The CBCA
The Supreme Court articulated the test for approving a plan of arrangement as requiring a court to be satisfied that the arrangement: (1) serves a valid business purpose that furthers the interests of the corporation as an ongoing concern; and (2) resolves the objections of those whose rights are being arranged in a fair and balanced way.
The valid business purpose of the Plan was not disputed. On the second question, the Supreme Court noted that, in the absence of exceptional circumstances, it is the legal rights of the objecting parties that should be considered. The Court found that the Plan did not fundamentally alter the Debentureholders' rights, since both the investment and return contracted for would remain intact. The Court further found that the fact that the trading value of the Debentures would diminish as a result of the Plan was a foreseeable risk, not an exceptional circumstance. Accordingly, the Court agreed with the trial judge's conclusion that the Plan had been shown to be fair and reasonable.
The Supreme Court's reasons in the BCE decision clarify the scope of directors' fiduciary duties and provide useful guidance regarding the distinction between the oppression remedy analysis and the standards for court approval of a plan of arrangement.
If you have any questions or need more information concerning the BCE decisions, please contact the authors or any of the Securities and Capital Markets Group leaders noted below.
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