In each case, the SCC was not prepared to extend the fiduciary obligations of directors and held that there is no fiduciary duty of directors to act in the best interests of corporate stakeholders; rather, directors must discharge their fiduciary duty only to the corporation and in so doing may look to the interests of, inter alia, shareholders, employees, creditors, consumers, governments, and the environment.
In BCE, the Supreme Court also affirmed that courts will continue to respect the business judgment rule which grants deference to directors’ reasonable decisions, including decisions involving competing and conflicting stakeholder interests, and that the oppression remedy may be an appropriate mechanism available to stakeholders seeking relief.
A group of Bell Canada debentureholders opposed a leveraged buyout of BCE Inc., a large Canadian telecommunications corporation, by a group headed by the Ontario Teachers Pension Plan Board, financed in part by the assumption by Bell Canada, a wholly owned subsidiary of BCE Inc., of $30 billion of debt. The transaction was to proceed by way of a plan of arrangement pursuant to s. 192 of the Canada Business Corporations Act.
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The debentureholders opposed the transaction because the increased debt could reduce the value of their investments by about 20 per cent, while conferring a premium of approximately 40 per cent on the market price of BCE shares. As such, the debentureholders claimed they were entitled to relief under the oppression remedy and opposed the court approval of the plan.
The SCC held that the debentureholders were sophisticated entities and had the requisite information (prospectuses, trust indentures, etc.) to understand the debt instruments they held and the associated risks. If the debentureholders sought to include change of control or credit rating covenants from Bell Canada, they could have bargained for them. Furthermore, evidence adduced at trial showed that BCE’s directors did consider the interests of debentureholders. Consequently their claims failed.
Peoples arose out of the bankruptcy of Wise Stores Inc. and its wholly owned subsidiary Peoples Department Stores Inc. Wise had acquired Peoples Department Stores in 1992 from Marks & Spencer. Post acquisition, Wise and Peoples attempted to realize certain operational synergies and a new inventory procurement policy was instituted. Under this policy, Peoples made all domestic and most overseas purchases for both companies, charging Wise for transferring and shipping the merchandise to its stores.
Wise began experiencing cash flow problems, with the result that its indebtedness to Peoples began to grow. In December 1994, both Wise and Peoples filed for bankruptcy.
Peoples’ trustee in bankruptcy brought a petition to recover funds in reviewable transactions and to recover property that was transferred to Wise as a result of the inventory procurement policy. This petition was framed both as an action under s. 100 of the Bankruptcy and Insolvency Act and as a breach of the statutory duty of directors under s. 122 of the CBCA. The Wise brothers, the three directors of Peoples, were also directors of Wise Stores.
The SCC held that the Wise brothers, as directors of the subsidiary Peoples Department Stores, had not breached the duties they owed to the corporation as directors because their efforts to correct the financial problems were honest and in good faith. Furthermore, the court held that the directors did not owe a fiduciary duty to creditors.
The SCC in Peoples ruled that corporate directors “owe a duty of care to creditors, but that duty does not rise to a fiduciary duty” and that the “statutory fiduciary duty requires directors and officers to act honestly and in good faith vis-à -vis the corporation.”
Similarly, the Supreme Court in BCE held that directors have a fiduciary duty to the corporation “and only to the corporation.” Where the interests of the corporation and particular stakeholders do not coincide, “it is important to be clear that the directors owe their duty to the corporation, not to stakeholders, and that the reasonable expectation of stakeholders is simply that the directors act in the best interests of the corporation.”
BCE confirmed that Canadian corporate law in this regard is distinct and different than the shareholder-focused approach followed in the “Revlon line” of cases in the United States. In Canada, “there is no principle that one set of interests — for example the interests of shareholders — should prevail over another set of interests.” Fiduciary law promotes action involving integrity and fairness and protection of the vulnerable. The corporation, vulnerable because it can only act through its directors, is protected by a statutory fiduciary duty imposed on directors requiring them to act in its best interests.
Other stakeholders are not similarly vulnerable, and have access to other remedial processes like derivative actions or claims of oppression. Accordingly, the stakeholders of a corporation, including shareholders, creditors, and holders of debentures, are not afforded the same level of protection as the corporation itself. That is not to say that directors can ignore the interests of corporate stakeholders.
The SCC stated that, “one would expect the directors, acting in the best interests of the corporation, to consider their short- and long-term interests in the course of making their ultimate decision.”
Put another way, “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.”
BCE is also important as the SCC confirmed the application of the business judgment rule, which “accords deference from the courts to a business decision, so long as it lies within a range of reasonable alternatives.
“It reflects the reality that directors, who are mandated under the CBCA to manage the corporation’s business and affairs, are often better suited to determine what is in the best interests of the corporation.”
Business decisions need not be perfect, but must be reasonable and “provided the decision taken is within a range of reasonableness, the court ought not to substitute its opinion for that of the board even though subsequent events may have cast doubt on the board’s determination.”
Furthermore, the business judgment rule “applies to decisions on stakeholders’ interests, as much as other directorial decisions.”
It is often thought that directors owe a fiduciary duty to the corporation and its shareholders. In most instances that conclusion is harmless since what is good for the corporation is often good for the shareholders and other corporate stakeholders.
However, at all times, including on the eve of bankruptcy or insolvency proceedings, a plan of arrangement or other fundamental event that may cause the interests of the corporation and its stakeholders to conflict, directors of Canadian corporations have a fiduciary duty to the corporation, and only the corporation.
Graham King is a partner at Borden Ladner Gervais LLP. Nick G. Pasquino is a student-at-law in the Toronto office of Borden Ladner Gervais LLP.