The Supreme Court of Canada ("SCC") has recently released its reasons for overturning the Quebec Court of Appeal's ("QCA") decision in BCE Inc. v. 1976 Debentureholders.1 The reasons offer guidance to corporate directors weighing stakeholders' interests in leveraged buyouts ("LBO"); corporate solicitors drafting contracts on behalf of their creditor clients; and commercial litigators pursuing the oppression remedy or challenging the court's approval of a plan of arrangement.
At issue in the BCE decision was a plan of arrangement that contemplated the purchase of the shares of BCE by a consortium of purchasers through an LBO. The arrangement provided for the purchasers' acquisition of all of BCE's outstanding shares at a premium of approximately 40% over the market price of BCE shares at the relevant time. Bell Canada, a wholly-owned subsidiary of BCE, was to guarantee approximately $30 billion of BCE's debt. While the plan of arrangement was approved by 97.93% of BCE's shareholders, it was opposed by a group of financial and other institutions that held debentures issued by Bell Canada. As the short-term trading value of the debentures would decline by an average of 20% and could lose investment grade status, the debentureholders pursued two legal remedies: an oppression action under s. 241 of the Canada Business Corporations Act ("CBCA"), and a challenge to the arrangement on the basis that it was not "fair and reasonable" pursuant to s. 192 of the CBCA.
In granting BCE's appeal, the SCC concluded that the QCA had erred in dismissing the debentureholders' action for oppression pursuant to s. 241 of the CBCA and in overturning the lower court's approval of the plan of arrangement pursuant to s. 192 of the CBCA. The QCA erred because it had viewed the two remedies as substantially overlapping, holding that both turned on whether the directors had properly considered the debentureholders' reasonable expectations. However, according to the SCC, the oppression remedy focuses on the reasonable expectations of stakeholders, and the onus is on the claimant to establish oppression or unfairness. In contrast, the s. 192 approval process focuses on whether the proposed arrangement, objectively viewed, is fair and reasonable, and looks primarily to the interests of the parties whose legal rights are being arranged. The onus in that case is on the corporation to establish that the arrangement is fair and reasonable.
The SCC reiterated the fundamental principle that directors owe a fiduciary duty to the corporation and only to the corporation. Affected stakeholders can reasonably expect two things: to be treated in a fair manner, commensurate with the corporation's duties as a responsible corporate citizen; and that directors will act in the best interests of the corporation. Insofar as shareholders have a stake in the equity of a corporation by which they participate in its profits and losses, the maximization of the interests of the corporation will frequently align with the maximization of shareholder interests. However, this alignment is merely a correlation and neither suggests that directors' fiduciary duties are to shareholders nor that shareholders' interests take priority over those of other stakeholders.
Directors' statutory fiduciary duties are a function of business judgment of what is contextually in the best interests of the corporation. The courts will give appropriate deference to the directors' business decision so long as it lies within a range of reasonable alternatives. To inform their decisions, directors may look to, among other things, the interests of shareholders, employees, creditors, consumers, governments and the environment. However, there is no fixed rule that the interests of such stakeholders must be maximized or that certain stakeholders have interests that supersede those of others.
As stakeholders, creditors are entitled to a reasonable expectation of fair treatment by directors regarding their non-contractual interests. However, such "fair treatment" is not so extensive as to entitle, for instance, bondholders to the maintenance of the investment grade status of their debentures. The best manner in which to guarantee a legitimate expectation for the protection of such a specific stakeholder interest would be to include a specific provision in the contract (i.e. in the bondholders' case, to negotiate for change of control and credit rating covenants in the trust indenture). Otherwise, the best that creditors can hope for is that their interests are in accordance with what the board, in exercising its business judgment, deems to be in the best interests of the corporation. In the BCE decision, merely "considering" but then ultimately disregarding the bondholders' interests was sufficient for the SCC to conclude that the board was not in breach of any reasonable expectation of the bondholders.
Oppression Remedy vs. Plan of Arrangement
In assessing a claim for oppression, a court must conduct a two-part analysis: (1) does the evidence support the reasonable expectation the claimant asserts? 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? With respect to the first branch of the test, the court considers the following factors: commercial practice; the size, nature and structure of the corporation; the relationship between the parties; past practice; the failure to negotiate protections; agreements and representations; and the fair resolution of conflicting interests.
The SCC further clarified the three-part test involved in approving a plan of arrangement (s. 192(3), CBCA). In seeking approval of a plan of arrangement, the corporation bears the onus of satisfying the court that: (1) the statutory procedures have been met; (2) the application has been put forward in good faith; and (3) the arrangement is fair and reasonable. With respect to factor (3), the Court must be satisfied that (a) the arrangement has a valid business purpose (i.e. the burden imposed by the arrangement on security holders is justified by the interests of the corporation), and (b) the objections of those whose legal rights are being arranged are being resolved in a fair and balanced way. An important factor to consider with respect to the analysis under (b) is whether a majority of security holders has voted to approve the arrangement. Parties whose legal rights are not being arranged are generally not entitled to vote on plans of arrangement unless there exist extraordinary circumstances. The fact there is a group which faces a reduction in the trading value of its securities, but whose legal rights are left intact, is insufficient to constitute such a circumstance.