February 25 2009
On December 19 2008 the Supreme Court of Canada released reasons supporting its June 20 2008 unanimous decision to overturn the controversial Quebec 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 that:
On June 29 2007 BCE reached an agreement for the largest leveraged buy-out 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, 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 of debentures issued by Bell Canada, a wholly owned subsidiary of BCE. The transaction contemplated BCE issuing approximately C$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 debenture holders challenged the fairness of the plan of arrangement, alleging that it adversely affected their interests. In March 2008 the Quebec Superior Court dismissed the debenture holders' allegations and approved the plan.
In May 2008 the Quebec Court of Appeal overturned the trial decision, concluding that the BCE board had overlooked the interests of debenture holders.
Quebec Court of Appeal Decision
In overturning the trial decision and denying approval of the plan, the Quebec 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 Quebec Court of Appeal found that the BCE board gave no consideration to the debenture holders' 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 that:
"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 debenture holders, 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.
Supreme Court of Canada Decision
Fiduciary duty of directors
In unanimously allowing the appeal and overturning the Quebec 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. According to the Supreme Court:
"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 with 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 judgement rule applies to decisions on stakeholders' interests as much as other directorial decisions and the courts should give appropriate deference to the business judgement 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 affect 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 Canada Business Corporations Act. The Supreme Court found that two distinct inquiries are required.
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 debenture holders. 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 debenture holders would be considered had been established; however, this expectation was fulfilled. The BCE board considered the interests of the debenture holders 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 buy-outs of the kind proposed by BCE are not unusual. Given the financial sophistication of the debenture holders, the failure to negotiate contractual protections for this contingency was significant.
Approval of a plan of arrangement under the Canada Business Corporations Act
The Supreme Court articulated the test for approving a plan of arrangement as requiring a court to be satisfied that the arrangement: (i) serves a valid business purpose that furthers the interests of the corporation as an ongoing concern; and (ii) 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 debenture holders' 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.
For further information on this topic please contact Robert N Black, Paul AD Mingay or David Surat at Borden Ladner Gervais LLP by telephone (+1 416 367 6000) or by fax (+1 416 367 6749) or by email (email@example.com or firstname.lastname@example.org or email@example.com).
ILO provides online commentaries as specialist Legal Newsletters. Written in collaboration with over 500 of the world's leading experts and covering more than 100 jurisdictions, it delivers individually requested information via email to an influential global audience of law firm partners and international corporate counsel. Please click here to register for the service.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
ILO is a premium online legal update service for major companies and law firms worldwide. In-house corporate counsel and other users of legal services, as well as law firm partners, qualify for a free subscription. Register at www.iloinfo.com.