On December 19, 2008, the Supreme Court of Canada (the "SCC") released the detailed reasons for its decision of June 20, 2008, in the matter of BCE Inc. v. 1976 Debentureholders. The case was an attempt by certain debentureholders of Bell Canada (the "Debentureholders") to prevent the proposed privatization of BCE Inc. ("BCE").
In the summer of 2007, BCE announced that it had entered into an agreement with a consortium of purchasers including the Ontario Teachers Pension Plan (the "Purchasers"). The agreement envisioned a transaction by which the Purchasers would acquire all of the issued and outstanding common and preferred shares of BCE by way of a statutory plan of arrangement (the "Plan") under the Canada Business Corporations Act. To that effect, one of the statutory requirements for the implementation of the Plan is approval from the court, which is often dependent on whether the Plan is fair and reasonable given all of the circumstances. The Debentureholders opposed the approval by the court of the Plan on the basis that it adversely affected their rights.
On March 7, 2008, the Quebec Superior Court approved the Plan. The trial judge concluded, amongst other things, that determining whether the Plan was fair and reasonable was not a question that involved assessing its impact on the Debentureholders.
On May 21, 2008, the Quebec Court of Appeal (the "Court of Appeal") overturned the trial judge's decision regarding the approval of the Plan. The Court of Appeal concluded that the Plan was not fair and reasonable.
On June 20, 2008, the SCC, in a unanimous decision, rejected the claims made by the Debentureholders and reaffirmed the trial judge's approval of the Plan.
Summary of the Supreme Court of Canada's Decision
The issues before the SCC were (1) determining what is required to establish oppression of debentureholders in a change of control transaction, and (2) how a judge should treat claims of different stakeholders in an application for the approval of a plan of arrangement.
a) Oppression Remedy
The SCC determined that in assessing a claim of oppression two questions must be asked: (1) Does the evidence support the reasonable expectation asserted by the claimant? and (2) Does the evidence establish that the reasonable expectation was violated by conduct falling within the terms "oppression", "unfair prejudice" or "unfair disregard of a relevant interest"? In analyzing the above questions, the court must use an objective and contextual approach.
Concerning the first question, some of the factors that are considered include; commercial practices, representations and agreements and the fair resolution of conflicting interests between corporate stakeholders. In analyzing the last factor, the court must consider whether the directors acted in accordance with their fiduciary duty to act in the best interests of the corporation when resolving conflicts of interests between stakeholders. Regarding the second question, the claimant must also prove that failing to meet the reasonable expectation involved unfair conduct and prejudicial consequences.
In this case, the SCC rejected the oppression claim. The Debentureholders did not demonstrate that they reasonably expected the directors of BCE to protect their financial interests in only proposing a Plan that would maintain the investment grade trading value of their debentures. All of the competing offers required Bell Canada to assume a substantial amount of debt; thus BCE had no choice but to approve the transaction that was both in the best interests of the corporation and favoured the interests of certain stakeholders over others. The SCC confirmed the existing business judgement rule, which accords deference to a business decision made by directors acting in good faith in executing their functions.
b) Plan of Arrangement Approval Process
The SCC clarified the differences between an action in oppression and an arrangement approval process. Essentially, in an action for oppression, the responsibility resides with the Debentureholders to establish the oppression. On the other hand, in the approval process for the Plan, the obligation shifted to BCE to establish that the arrangement had a valid business purpose and that those whose legal rights were affected by the Plan were being looked after in a fair and balanced way.
The SCC focused its attention on whether the rights of those subject to the arrangement approval process were considered in a fair and balanced way. The SCC concluded that since the Debentureholders did not have any legal rights that would be affected by the Plan and that the Plan received approval from almost 98% of BCE shareholders, the Plan was judged to be fair and reasonable. The SCC did provide one caveat, however, that in extraordinary circumstances, which were not present in the BCE case, interests that are not strictly legal may also be considered in contemplating the approval of a plan of arrangement.
Potential Impact of the Decision
Upon analysis of the decision, it would appear that the expectations of some in the business and legal communities for clarity of certain legal issues were not met. It was expected that the reasons would shed light on what constitutes fair and efficient business practices by establishing clear guidelines for directors in order for them to more readily ascertain their fiduciary obligations.
The concept of reasonable expectations of stakeholders is both objective and contextual, as described by the SCC for oppression claims, and does not allow one to clearly identify the different factors directors must take into account when making a business decision. The BCE case does not clear up the confusion that reigns following the decision rendered in the earlier case of Peoples Department Stores Inc. v. Wise.
The SCC clearly indicated that the fiduciary duty of the directors is not simply confined to particular priority rules between possibly competing interests. Rather, directors must act reasonably in the best interests of the corporation by considering all circumstances, including the divergent interests of various stakeholders. In a way, the objective criteria of the analysis corresponds to a variation of the business judgment rule which requires courts to treat with deference business decisions made in good faith by directors.
Finally, even if the analysis of reasonable expectations supersedes a more general analysis, the SCC appears to have attached substantial weight to the limits imposed on the rights of debentureholders provided for by contract. In fact, while the SCC accepted examining the public declarations made by Bell Canada to determine the reasonable expectations of debentureholders, it nevertheless underlined that the holders could have protected themselves from the adverse effects of the transaction by negotiating appropriate contract terms.