ABA Section of Business Law Spring Meeting 2009, Vancouver, B.C.
International M&A Subcommittee
Lyondell / BCE Comparative Analysis
Presentation Notes*
A.
B.
*
Similarities

change of control transactions for large broadly held public companies

both entered into in heyday of takeover frenzy in 2007 prior to credit crisis

cash consideration

consensual deal: merger/plan of arrangement

directors found to be independent and disinterested

large majority stockholder approval: Lyondell > 99%; BCE > 97%

“best interests” concept acknowledged in both jurisdictions

business judgment rule acknowledged in both jurisdictions

duty of care and duty of loyalty (good faith) both recognized as separate duties in
both jurisdictions

dissent and appraisal rights available in both jurisdictions

motions for summary judgment are based upon similar principles

appeal court decisions: Lyondell – Delaware Supreme Court; BCE – Supreme Court
of Canada

both decisions reversing lower courts, in BCE’s case, unanimous decision of Québec
Court of Appeal
Dissimilarities

different classes of plaintiffs:
debentureholder group action

Lyondell – one bidder “blowout” price; BCE – three bidders (competitive auction)

Lyondell – financing not noted as an issue; BCE – all three bids heavily leveraged
(LBOs)

statutory oppression remedy for both public and closely held private companies
available in Canada (onus on plaintiff)

judicially approved plan of arrangement mechanism available in Canada (onus on
company)
Lyondell – stockholder class action; BCE –
Copies of “Revlon Redux: Reconciling the BCE Case in Change of Control Transactions – Is Lyondell the
Better Way?” are attached and will be distributed to IMAS Meeting attendees with these presentation notes.
-2-
C.

Delaware not a Model Act state, no constituency statute, director duties not statutorily
embodied

Canada does not have exculpation/raincoat provisions in corporate statutes permitting
articles of incorporation to excuse breaches of duty of care
Lyondell Analytical Framework

two residual plaintiff claims, flawed process and unreasonable deal protection, are
really two aspects of a single claim under Revlon: failure to obtain the best price in
selling the company

Revlon does not create any new fiduciary duties

board fiduciary duties must be performed in the service of a specific objective:
maximizing the sale price of the enterprise

distinct duties: duty of care and duty of loyalty

where board is found to be independent and not motivated by self-interest, breach of
duty of loyalty must be found by failure to act in good faith

court drew no distinction between bad faith and absence of good faith for purposes of
this case

no comprehensive or exclusive definition of bad faith

bad faith can encompass not only intentional harm (subjective bad faith) but also
intentional dereliction of duty (conscious disregard for one’s responsibilities)

lack of due care (action taken solely by reason of gross negligence without
malevolent intent) would not constitute bad faith

sustained or systemic failure to exercise oversight is necessary to establish lack of
good faith and is consistent with bad faith

however imposition of liability requires a showing that directors knew they were not
discharging their fiduciary obligations

motions for summary judgment can be deferred in order to expand the record in
certain circumstances

three factors mitigated against deferment: (i) Revlon duty arises only once board
decides to sell; (ii) Revlon and its progeny do not create a standard set of
requirements that must be satisfied during the sale process; and (iii) an imperfect
attempt to carry out Revlon duty does not constitute a knowing disregard of one’s
duties that constitutes bad faith

there is only one Revlon duty – to get the best price for the stockholders at a sale of
the company, but there is no single blueprint as to how to get there

the failure to take any specific steps during the sale process could not have
demonstrated a conscious disregard of director duties: a knowing and complete
failure is required

the duty of care implicates gross negligence without conscious or culpable intent
-3
D.
the duty of loyalty implicates bad faith or the failure to act in good faith
BCE Analytical Framework

the Revlon line of cases has not displaced the fundamental rule that the duty of the
directors cannot be confined to particular priority rules, but is rather a function of
business judgment of what is in the best interests of the corporation, in the particular
situation it faces

directors are responsible for the governance of the corporation and are subject to two
duties: (i) a fiduciary duty to the corporation to act honestly and in good faith with a
view to the best interests of the corporation; and (ii) a duty of care to exercise the
care, diligence and skill of a reasonably prudent person in comparable circumstances

the fiduciary duty at issue includes a fair treatment component which is fundamental
to the reasonable expectations of stakeholders claiming an oppression remedy

often the interests of shareholders and stakeholders are co-extensive with the interests
of the corporation, but if they conflict, the directors’ duty is clear and mandatory, it is
what is in the best interests of the corporation viewed as a good corporate citizen

in considering what is in the best interests of the corporation, directors may look to
the interests of, inter alia, shareholders, employees, creditors, consumers,
governments and the environment to inform their decisions

courts should give appropriate deference to the business judgment of directors who
take into account these ancillary interests, as reflected in the business judgment rule

the business judgment rule accords deference to a business decision, so long as it lies
within a range of reasonable alternatives

remedies for breaches of director duties include, (i) directors’ actions in the name of
the corporation; (ii) civil actions (such as in tort) for breaches of the duty of care; (iii)
oppression actions focusing on harm to the legal and equitable interests of certain
specified stakeholders; and (iv) remedial-like aspects of required court approvals in
certain cases such as plans of arrangement affecting certain stakeholders’ rights

the approach to oppression is two-pronged, firstly whether a reasonable expectation is
established, and if so, secondly whether the conduct complained of amounts to
“oppression”, “unfair prejudice” or “unfair disregard” to the interests of any security
holder, creditor, director or officer (covers corporation and affiliates)

reasonable expectation is a determination of not just what is legal, but what is fair,
recognizing that fairness is fact specific and bound by contextual and relationship
situations

the corporation and shareholders are entitled to maximize profit and share value, but
not by treating individual stakeholders unfairly, something such stakeholders are
entitled to reasonably expect

while reasonable expectations of stakeholders in a particular outcome often coincide
with what is in the best interests of the corporation, where they do not, the directors
owe their duty to the corporation, and the reasonable expectation of stakeholders is
simply that directors act in the best interests of the corporation
-4
in determining the first prong of the oppression approach (reasonable expectation)
there is a list of non-exclusive factors the court will examine: (i) commercial
practice; (ii) nature of the corporation; (iii) relationships; (iv) past practice; (v)
preventive steps; (vi) representations and agreements; and (vii) fair resolution of
conflicting interests, commensurate with the corporation’s duties as a responsible
corporate citizen

in determining the second prong of the oppression approach, wrongful conduct,
causation and compensable injury must be established in the claim for oppression

in the continuum of wrongful conduct, “oppression” is viewed as the most harsh and
abusive, “unfair disregard” is viewed as the least serious wrong, and “unfair
prejudice” ranks somewhere in the middle (implicating for example, a poison pill to
thwart a takeover, and minority squeeze-outs)

one must distinguish between protection of economic interests and consideration of
economic interests when determining reasonable expectations and the enquiry must
review the facts against the list of factors

“consideration” may not necessarily involve more than considering and intending to
honour contractual rights

regarding the arrangement and the determination of “fair and reasonable”, the court
will look primarily to the interests of parties whose legal rights are being arranged

the statutory arrangement provision specifically lists a going-private transaction or a
squeeze-out transaction and has been used frequently as a device for changes of
control

the CBCA Policy Statement suggests that only in extraordinary circumstances will
interests, other than strictly legal rights, impose voting approval

the determination of what is fair and reasonable, as with oppression, is a two-pronged
approach, firstly satisfaction that the arrangement has a valid business purpose, and
secondly that the legal rights of those objectors whose rights are being arranged must
be resolved in a fair and balanced way

valid business purpose is a fact specific inquiry, and necessity to the continued
operations of the corporation is an important factor

an important factor in the fair and reasonable determination is the degree of security
holder voting approval, along with procedural safeguards such as independent
committee approval, the existence of a fairness opinion and shareholder access to
dissent and appraisal rights

mere economic interests, in light of other factors, while not securing voting rights not
otherwise contractually provided for, are nevertheless entitled to be dealt with in a
fair and balanced manner and to be considered appropriately
REVLON REDUX: RECONCILING THE BCE CASE
IN CHANGE OF CONTROL TRANSACTIONS
– IS LYONDELL THE BETTER WAY?
Nicholas Dietrich
Introduction
Cross-border M&A practitioners have historically struggled with the different approaches
to target board director duties in change of control transactions in the U.S. and Canada. Recent
seminal cases on each side of the border within almost three months of one another, Lyondell
Chemical Co. v. Ryan (“Lyondell”)1 and BCE Inc. v. 1976 Debentureholders (“BCE”)2, have
highlighted the distinctions and, at least in the U.S. (Delaware specifically and those states
without constituency statutes who choose to follow Lyondell), brought clarity to the application
of these duties. In each case, Revlon v. MacAndrews & Forbes Holdings, Inc. (“Revlon”)3 and
its progeny were invoked, in the U.S. affirming, and in Canada, disaffirming, the paramount
principle of maximizing shareholder value and obtaining the best price possible.
Lyondell
The recently released Delaware Supreme Court decision (decided March 25, 2009)
reversed on appeal the Delaware Court of Chancery finding (“Lyondell Trial Decision”)4 that
1
Lyondell Chemical Co. v. Ryan, C.A. No. 3176 (Del. Ch. March 25, 2009, revised April 16, 2009), reversing
Ryan v. Lyondell Chemical Company, 2008 WL 2923427 (Del. Ch.).
2
BCE Inc. v. 1976 Debentureholders, 2008 SCC 69 [BCE (SCC)], setting aside the Quebec Court of Appeal
decisions (“Court of Appeal Judgment”), consisting of six appeals found at Computershare Trust Company of
Canada c. Bell Canada, 2008 QCCA 930, CIBC Mellon Trust Company c. Bell Canada, 2008 QCCA 93, Aegon
Capital Management c. Bell Canada, 2008 QCCA 932, Addenda Capital inc. c. Bell Canada, 2008 QCCA 933,
Addenda Capital inc. c. BCE inc., 2008 QCCA 934, BCE inc (Arrangement relatif à), 2008 QCCA 935, [2008]
R.J.Q. 1298 [BCE (Arrangement relatif à)] and affirming the Quebec Superior Court’s arrangement approval
(“Trial Court Approval”), consisting of five separate decisions found at CIBC Mellon Trust Company c. Bell
Canada, 2008 QCCS 898, [2008] R.J.Q. 1029, Computershare Trust Company of Canada c. Bell Canada, 2008
QCCS 899, 43 B.L.R. (4th) 69, BCE inc. (Arrangement relatif à), 2008 QCCS 905, [2008] R.J.Q. 1097, 43 B.LR.
(4th) 1, Addenda Capital inc. c. Bell Canada, 2008 QCCS 906, 43 B.L.R. (4th) 135, Aegon Capital Management
Inc. c. BCE inc., 2008 QCCS 907, [2008] R.J.Q. 1119 [Aegon].
3
Revlon v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 at 182 (Del. 1986).
4
Ryan v. Lyondell Chemical Company, 2008 WL 2923427 (Del. Ch.).
* Partner, Gowling Lafleur Henderson LLP © 2009 Nicholas Dietrich – ® All rights reserved.
the target board of directors’ “unexplained inaction” permitted a reasonable inference that the
directors may have consciously disregarded their fiduciary duties. The Lyondell Trial Decision
provoked a good deal of controversy as it appeared to set a new high water mark for target
company director duties in the face of a change of control transaction, particularly in the case of
a “blowout” offer with a short fuse for acceptance. In reviewing the record, the Delaware
Supreme Court concluded that, at most, a triable issue of fact might exist as to whether the
directors exercised due care, but there was no evidence upon which to infer that the directors
knowingly ignored their responsibilities, thereby breaching their duty of loyalty. The distinction
is important because of exculpatory or “raincoat” provisions in the Delaware Act 5, but first some
factual background is helpful to set the stage.
Lyondell Chemical Company was one of the largest independent public chemical
companies in North America with an eleven-person board composed of Dan Smith (“Smith”),
the Chairman and CEO, and ten other independent directors, many of whom were experienced as
heads or former heads of other large public companies. Basell AF (“Basell”) through its indirect
owner, Leonard Blavatnik (“Blavatnik”) approached Smith in April 2006 to indicate acquisition
interest. This was followed a few months later by a letter to Lyondell’s board suggesting an
offer price of $26.50-$28.50 per share. The Lyondell board found the price inadequate and for
the next year no other acquirors indicated an interest in Lyondell. However, in May 2007
another Blavatnik company, Access Industries, filed a Schedule 13D with the SEC indicating its
right to acquire an 8.3% block of stock and also disclosed Blavatnik’s interest in potential
transactions with Lyondell. This disclosure put the company in play.
The Lyondell board’s response to the Schedule 13D filing was a “wait and see” approach.
Shortly thereafter, Apollo suggested a management-led LBO to Smith, which was rejected. One
month later, Basell announced a $9.6 billion merger with Huntsman but was trumped by a
Hexion topping bid, which refocused Blavatnik’s interest in Lyondell. Blavatnik and Smith met
5
8 Del. Code s. 102(b)7, where exculpation for director breach of due care, but not duty of loyalty, in the
certificate of incorporation, is permitted. In Canada, such exculpation is generally not permitted; see Canada
Business Corporations Act, R.S.C. 1985, c. C-44, s. 122(3).
-2-
in July 2007 to discuss an all-cash bid by Basell at $40 per share, which was raised to $44-$45
per share, and then $48 per share, as Smith advised Blavatnik to present his best offer before
Smith would go to the board. The self-trumped best offer of $48 per share was not contingent
upon financing, but came with two strings attached: a $400 million break fee and a short fuse of
one week to sign a merger agreement.
At the Lyondell board meeting on July 10, 2007, which lasted a little less than an hour,
the board reviewed valuation material prepared by management and discussed the Basell offer,
the Huntsman merger, and the likelihood of other suitors. Smith was instructed to secure a
written offer and additional financing details, to which Blavatnik agreed. In the meantime,
Basell had until July 11 to make a higher bid for Huntsman, which led Blavatnik to request a
firm indication of interest from Lyondell to his written offer by the end of that day. Lyondell’s
board met on July 11, 2007, for less than an hour, to consider the proposal compared to the
advantages of remaining independent. The board authorized the retention of Deutsche Bank as
financial advisor and authorized Smith to negotiate. Basell then announced it would not exercise
its bid for Huntsman and their merger agreement was terminated.
Over the next four days, a Lyondell merger agreement was being negotiated, due
diligence was conducted, a fairness opinion was prepared by Deutsche Bank, and the board
instructed Smith to negotiate a higher price, a reduced break fee and a go-shop provision. The
Delaware Supreme Court observed that the trial court noted that Blavatnik was “incredulous”
about these new demands, but as a sign of good faith agreed to drop the break fee from $400
million to $385 million.
The board met on July 16, 2007 with management, financial advisors and legal advisors,
all of whom presented reports. In particular, the advisors confirmed that Lyondell would be free
pursuant to the fiduciary out provision in the merger agreement to consider superior proposals,
even though the merger agreement contained a no-shop provision. Deutsche Bank also opined
that the offer price was fair and in fact its MD described it as “an absolute home run”. The
evidence also showed that Deutsche Bank believed no one would top the Basell bid. Following
the presentations, the Lyondell board approved the merger and recommended it to the
stockholders, who approved the $13 billion deal by greater than 99% of the voted shares.
-3-
The class action complaint alleged that the directors breached their “fiduciary duties of
care, loyalty and candour … and … put their personal interests ahead of the Lyondell
stockholders”.6 Amongst the usual array of strike suit criticisms of inadequate price, selfinterest, flawed process, unreasonable deal protection and disclosure omissions, the trial court
found fault only with process and deal protection. The Delaware Supreme Court concluded that
these two residual claims were really two aspects of a single claim under Revlon, namely that
“the directors failed to obtain the best price in selling the company” 7, and that “Revlon did not
create any new fiduciary duties”. The court also agreed with the trial court that the “board must
perform its fiduciary duties in the service of a specific objective: maximizing the sale price of
the enterprise.”8
Although the trial court in reviewing the record concluded that Ryan might prevail at trial
on a director breach of duty of care, Lyondell’s charter exculpated the directors from liability for
a breach of duty of care. Accordingly, the Delaware Supreme Court concluded,
“This case turns on whether any arguable shortcomings on the part of the
Lyondell directors also implicate their duty of loyalty, a breach of which
is not exculpated.”9
The Delaware Supreme Court went on to say,
“Because the trial court determined that the board was independent and
was not motivated by self-interest or ill will, the sole issue is whether the
directors are entitled to summary judgment on the claim that they
breached their duty of loyalty by failing to act in good faith.”10
6
Supra note 1 at 8.
7
Ibid. at 9.
8
Ibid. From Malpiede v. Townson, 780 A.2d 1075 at 1083 (Del. 2000). This description of fiduciary duties is
clearly at odds with the Supreme Court of Canada’s approach in BCE which is explored later in this paper.
9
Lyondell, ibid.
10
Ibid. See also Gantler v. Stephens, 2009 WL 188828 (Del.), (“Gantler”), where the Delaware Supreme Court
recently affirmed that officers owe the same duties as directors and, more importantly for present purposes,
denied shelter under the business judgment rule where the pled facts included the chair’s failure to respond to
due diligence requests from a potential bidder (who would have terminated the board upon successful
-4-
The Delaware Supreme Court summoned its examination of the notion of “good faith” in
In re The Walt Disney Co. Deriv. Litig. (“Disney”)11 and in Stone v. Ritter (“Stone”).12 For the
purposes of the Lyondell appeal, the court drew no distinction between bad faith and the absence
of good faith. It cited Disney to disavow any attempt to provide a comprehensive or exclusive
definition of “bad faith” and recalled its dicta in Disney that bad faith could encompass not only
intentional harm (subjective bad faith) but also intentional dereliction of duty (conscious
disregard for one’s responsibilities). Lack of due care (action taken solely by reason of gross
negligence without malevolent intent), however, would not constitute bad faith. The court cited
Stone as authority that the standard articulated in In re Caremark Int’l Deriv. Litig.13 (sustained
or systemic failure of the board to exercise oversight is necessary to establish “lack of good
faith”) was consistent with the definition of “bad faith” in Disney. The court further stated that
Stone also “clarified any possible ambiguity about the directors’ mental state, holding that
imposition of liability requires a showing that the directors knew that they were not discharging
their fiduciary obligations.”14
As it happened, the Delaware Supreme Court acknowledged that the Court of Chancery
recognized the appropriate legal principles. However, the trial court denied granting summary
judgment so that it could obtain a complete record prior to deciding whether the Lyondell
directors acted in bad faith. This deferment, while appropriate in order to expand the record in
certain circumstances, was found by the appeal court to be inappropriate in these circumstances
because of three factors contributing to the trial court’s mistake:
acquisition), and the fact that two other directors provided services to the target which were likely to be
terminated upon successful completion of a merger. Accordingly, the standard to be applied to this nonindependent board’s actions was entire fairness (invoking critical review of fair dealing and fair price), not the
business judgment rule (customary deference to director decisions). See also infra note 36.
11
906 A.2d 27 (Del. 2006).
12
911 A.2d 962 (Del. 2006).
13
698 A.2d 959 at 971 (Del. Ch. 1996).
14
Supra note 1 at 11.
-5-
“First, the trial court imposed Revlon duties on the Lyondell directors
before they had decided to sell, or before the sale had become inevitable.
Second, the court read Revlon and its progeny as creating a set of
requirements that must be satisfied during the sale process. Third, the
trial court equated an arguably imperfect attempt to carry out Revlon
duties with a knowing disregard of one’s duties that constitutes bad
faith.”15
On the first factor, the appeal court found that the trial court’s imposition of Revlon
duties, after the Schedule 13D filing effectively put the company in play, was mistimed.
“The duty to seek the best available price applies only when a company
embarks on a transaction – on its own initiative or in response to an
unsolicited offer – that will result in a change of control.”16
Accordingly, the trial court’s criticism of director inaction following the Schedule 13D filing as
“slothful indifference” while knowing the company was in play was insufficient to warrant
denial of the Lyondell directors’ motion for summary judgment.17 A “wait and see” approach
was found to be entirely appropriate under the circumstances.
On the second factor, the appeal court found that the trial court’s scepticism about the
good faith of the directors based on the existing record, and based on the trial court’s reading of
Revlon and it progeny that a specific course of action must be taken, was misplaced:
“There is only one Revlon duty – to [get] the best price for the
stockholders at a sale of the company. No court can tell directors exactly
how to accomplish that goal, because they will be facing a unique
combination of circumstances, many of which will be outside their
control. As we noted in Barkan v. Amsted Industries, Inc., there is no
single blueprint that a board must follow to fulfill its duties.”18
15
Ibid. at 12.
16
Ibid. at 15, citing In re Santa Fe Pac. Corp. S’holder Litig., 669 A.2d 59 at 71 (Del. 1995) as authority.
17
Interestingly, the filing of a Schedule 13D in BCE did provoke full Revlon mode in the minds of the BCE
directors who determined that a sale of the company was in the best interests of the corporation.
18
Supra note 1 at 16. See also note 28 at page 16 of Lyondell which surveys a number of issues and cases: market
checks (Barkan v. Amsted Industries, Inc., 567 A.2d 1279 at 1286 (Del. 1989)), no-shops (Paramount
Communications, Inc. v. QVC Network, Inc., 637 A.2d 34 at 49 (Del. 1994)), and failure to consider strategic
buyers (In re Netsmart Technologies, Inc. S’holders Litig., 924 A.2d 171 at 199 (Del. Ch. 2007)).
-6-
While the trial court found that the directors had not sufficiently established that their
“impeccable knowledge” excused the failure to conduct an auction or a market check, the appeal
court held otherwise, but with a caveat:
“… we would not question the trial court’s decision to seek additional
evidence if the issues were whether the directors had exercised due care.
Where, as here, the issue is whether the directors failed to act in good
faith, the analysis is very different, and the existing record mandates the
entry of judgment in favor of the directors.”19
Since the appeal court had already opined that Revlon duties do not invoke any legally prescribed
steps, it was a small jump to conclude:
“… the failure to take any specific steps during the sale process could not
have demonstrated a conscious disregard of their duties. More
importantly, there is a vast difference between an inadequate or flawed
effort to carry out fiduciary duties and a conscious disregard for those
duties.”20
This comment from the appeal court segues into the third factor. Citing Paramount for
the proposition that “reasonableness not perfection” is the standard required in director decisionmaking and citing In re Lear Corp. S’holder Litig., 2008 WL 4053221 (Del. Ch.)21 for the
proposition that it requires an extreme set of facts to sustain disloyalty based on disinterested
directors intentionally disregarding duties, the appeal court held:
“… if the directors failed to do all that they should have under the
circumstances, they breached their duty of care. Only if they knowingly
and completely failed to undertake their responsibilities would they
breach their duty of loyalty. The trial court approached the record from
the wrong perspective. Instead of questioning whether disinterested,
independent directors did everything that they (arguably) should have
done to obtain the best sale price, the inquiry should have been whether
these directors utterly failed to attempt to obtain the best sale price.”22
19
Supra note 1 at 17.
20
Ibid. at 18.
21
2008 WL 4053221 (Del. Ch.).
22
Supra note 1 at 19.
-7-
The Delaware Supreme Court in Lyondell has clearly affirmed the objective of target
board directors maximizing shareholder value and obtaining the best sale price available, and it
has clarified when exactly that objective must be pursued (not simply when a company is in play,
but rather when embarking upon or responding to events leading to a change of control). It has
also brightened the line between the duty of care (implicating as it does gross negligence without
conscious or culpable intent), and the duty of loyalty (implicating as it does bad faith or the
failure to act in good faith).
The Supreme Court of Canada in BCE, on the other hand,
disaffirmed the pursuit of maximizing shareholder value as the sole objective and arguably
blurred the line for target board director duties in change of control transactions.
BCE
It is fair to say that the reasons in BCE delivered by the Supreme Court of Canada on
December 19, 2008, six months almost to the day after the terse judgment allowing the appeals
and dismissing the cross appeals, surprised more than a few observers who had assumed that the
summary judgment (prior to receiving written reasons) meant that Revlon was good law in
Canada. Any such illusion was shattered when the Supreme Court framed the issue:
“On these appeals, it was suggested on behalf of the corporations that the
‘Revlon line’ of cases from Delaware support the principle that where the
interests of shareholders conflict with the interests of creditors, the
interests of shareholders should prevail.”23
23
Supra note 2 at para. 85. It is unfortunate that the Supreme Court of Canada, in coming to this conclusion, did
not therefore attempt to distinguish earlier decisions in Canada which appeared to adopt Revlon. See for
example Re CW Shareholdings Inc. and WIC Western International Communications Ltd. et al. (1998), 39 O.R.
(3d) 755 (S.C.) at paras. 41 and 42:
“The law as it relates to the general duties of the directors of Canadian corporations is not controversial. The
directors must exercise the common law fiduciary and statutory obligation (a) to act honestly and in good faith
with a view to the best interests of the corporation, and (b) in doing so, to exercise the care, diligence and skill that
a reasonably prudent person would exercise in comparable circumstances: see the Canada Business Corporations
Act. In the context of a hostile take-over bid situation where the corporation is “in play” (i.e., where it is apparent
there will be a sale of equity and/or voting control) the duty is to act in the best interests of the shareholders as a
whole and to take active and reasonable steps to maximize shareholder value by conducting an auction. As
Callaghan A.C.J.H.C. said in Corona Minerals Corp. v. CSA Management Ltd. (1989), 68 O.R. (2d) 425 at p. 429:
The purpose of an auction in the securities industry is to try and achieve the highest value for the
shareholders of the target companies for their shares. That in my view is an acceptable purpose…
-8-
and asserted:
“There is no principle that one set of interests – for example the interests
of shareholders – should prevail over another set of interests. Everything
depends on the particular situation faced by the directors and whether,
having regard to that situation, they exercise business judgment in a
responsible way.24
with a further nail in Revlon coffin:
“What is clear is that the Revlon line of cases has not displaced the
fundamental rule that the duty of the directors cannot be confined to
particular priority rules, but is rather a function of business judgment of
what is in the best interests of the corporation, in the particular situation
it faces.”25
In the American authorities this shareholder maximization-through-auction duty is known as the ‘Revlon Duty’,
based on the decision of the Delaware Supreme Court in Revlon Inc. v. MacAndrews & Forbes Holdings, 506
A.2d 173 (1986). At p. 182 of that report, the court said:
The duty of the board had thus changed from the preservation of Revlon as a corporate entity to the
maximization of the company’s value at a sale for the stockholders’ benefit. This significantly altered
the board’s responsibilities… the directors’ role changed from defenders of the corporate bastion to
auctioneers charged with getting the best price for the stockholders at a sale of the company.
The directors, moreover, are obliged to exercise these duties and carry out the maximization process in a fashion
which takes into account—and minimizes, to the fullest extent reasonably possible—the conflict of interest which
is inherent in the position in which they find themselves. The company for which they are responsible is under
attack. There is a natural tendency to be defensive. More importantly, there is a natural tendency to protect their
own position of management and control. Jobs and careers are at stake.”
24
Supra note 2 at para. 84.
25
Supra note 2 at para. 87. The Supreme Court of Canada took some comfort for this position by citing former
Delaware Supreme Court Chief Justice Veasey (“Veasey”):
“In a review of trends in Delaware corporate jurisprudence, former Delaware Supreme Court Chief Justice E.
Norman Veasey put it this way:
[It] is important to keep in mind the precise content of this “best interests” concept — that is, to
whom this duty is owed and when. Naturally, one often thinks that directors owe this duty to both the
corporation and the stockholders. That formulation is harmless in most instances because of the
confluence of interests, in that what is good for the corporate entity is usually derivatively good for
the stockholders. There are times, of course, when the focus is directly on the interests of the
stockholders [i.e., as in Revlon]. But, in general, the directors owe fiduciary duties to the
corporation, not to the stockholders. [Emphasis in original.]
(E. Norman Veasey with Christine T. Di Guglielmo, “What Happened in Delaware Corporate Law
and Governance from 1992-2004? A Retrospective on Some Key Developments” (2005), 153 U. Pa.
L. Rev. 1399, at p. 1431)”
-9-
Ah yes, the illusive pursuit of the illusive “best interests of the corporation”! A fair question is
whether BCE and its “best interests” analysis leaves any scope at all to come to a similar
conclusion to where the application Revlon might have led? As with the Lyondell analysis, the
answer to that question requires some factual background before engaging further in that illusive
quest.
The appeals in BCE arose out of the pursuit of BCE Inc. by a private equity consortium
led by Ontario Teachers Pension Plan Board (“Teachers”) in an LBO required to be financially
supported by Bell Canada, the wholly-owned operating subsidiary of BCE Inc.26 Bell Canada’s
debentureholders opposed the change of control transaction primarily on the basis that the debt
assumption would lead to credit ratings downgrades which in turn would lead to a reduction in
the trading value of their bonds. Their legal challenge was framed in accordance with the legal
form of the acquisition, namely their standing at the court-required approval of the transaction
via a plan of arrangement pursuant to s. 192 of the Canada Business Corporations Act
(“CBCA”)27 arguing that the arrangement should not be found to be fair, and alternatively,
pursuant to s. 241 of the CBCA, arguing that the LBO was “oppressive”. The Trial Court
Of course the Supreme Court of Canada is merely taking judicial notice of Veasey to state the obvious,
namely that the general rule informing director duties is “best interests”, but fails to take the next step,
principally that in a change of control situation, the focus is directly on the interests of the stockholders.
26
The other consortium members were Providence Equity Partners Inc. and Madison Dearborn Partners, LLC. For
the purposes of its analysis, since BCE Inc. and Bell Canada had the same boards of directors, the Supreme
Court found it “unnecessary … to distinguish between the conduct of the directors of BCE [Inc.], the holding
company, and the conduct of the directors of Bell Canada”: BCE, ibid. at para. 33. The writer questions the
virtue of this failure to so distinguish.
27
Canada Business Corporations Act, R.S.C. 1985, c. C-44. Under Canada’s constitution, unlike the U.S., there is
a concurrent federal incorporation power with the provinces. Most of the provinces have arrangement,
oppression (other than Québec, and in British Columbia, only shareholders have standing) and statutory director
duties of care and good faith provisions substantially similar to the CBCA. On expressly stated duties, they are
similar to Model Act states, which, unlike Delaware, have codified director duties. An “arrangement” can be
similar to a three-cornered amalgamation in Canada, which itself is similar to a U.S. style acquisition merger, to
effect a takeover, as opposed to a vanilla tender offer in either Canada or the U.S. Arrangements have the added
advantage in cross-border deals, as judicially approved devices, of avoiding comprehensive registration
statement filings under U.S. securities laws where the acquiror is offering non-cash consideration, and in Canada
of avoiding the need to comply with certain provincial takeover bid rules (in Canada, constitutionally, securities
laws are provincial, not federal). However, following BCE, takeover architecture will need to reconsider the
advantages of arrangements against these additional risks.
- 10 -
Approval found the plan of arrangement to be fair and dismissed the oppression claim. The
Court of Appeal Judgment held that the plan of arrangement had not been shown to be fair and
accordingly found it not necessary to deal with the oppression claim. The Supreme Court of
Canada ultimately concluded that the trial judge had not erred in approving the plan of
arrangement and that the debentureholders had failed to prove oppression.
The spotlight on the duties of the directors first arose in November, 2006, when BCE Inc.
became aware that KKR was interested in BCE. The President and Chief Executive Officer of
BCE Inc., Michael Sabia (“Sabia”), informed KKR that BCE Inc. had no interest in any
transactions with KKR. Rumours arose in early 2007 that KKR and Canada Pension Plan
Investment Board might be initiating a bid for BCE Inc. and that Teachers was also interested in
a potential transaction. After a BCE Inc. board meeting, Sabia informed each of KKR and
Teachers that BCE Inc. was not interested in a change of control transaction “because it was set
on creating shareholder value through the execution of its 2007 business plan.”28
After
erroneous press reports on March 29, 2007, BCE Inc. was forced to issue a press release stating
that no discussions were being held as to any going-private transaction. However, following a
Schedule 13D filing by Teachers on April 9, 2007, and faced with heightened speculation that
BCE Inc. was in play, the BCE Inc. directors met to discuss strategic alternatives with financial
and legal advisors and decided that “it would be in the best interests of BCE [Inc.] and its
shareholders to have competing bidding groups and to guard against the risk of a simple bidding
group assembling such a significant portion of available debt and equity that the group could
preclude potential competing groups from participating effectively in an auction process.” 29 An
appropriate press release was made on April 17, 2007.
28
Supra note 2 at para. 10. On the Lyondell analysis, this would not trigger Revlon duties.
29
BCE, ibid. at para. 13. The board went into classic Revlon mode at this point, creating an independent
committee to initiate and oversee an auction process and to review “strategic alternatives with a view to further
enhancing shareholder value”: Ibid. at para. 14. This was followed on June 13, 2007 with bidding rules and a
general form of transaction document to auction participants. The Court of Appeal Judgment at para. 17
affirmed that the trial judge found “the overriding objective of the strategic review and auction process was to
maximize shareholder value, while respecting the corporation’s legal and contractual obligations.”
- 11 -
Following the issuance of this press release, a number of Bell Canada debentureholders
wrote to the board expressing concern and seeking assurance that their interests would be
considered, to which BCE Inc. replied that it “intended to honour the contractual terms of the
trust indentures.”30 As it turned out, the board got something else factually right as well: in its
auction bidding material to prospective acquirors, it apparently stated that its evaluation of
competing bids would consider financing arrangement impact on BCE Inc. and Bell Canada’s
debentureholders, including respect for the contractual terms.
As the auction process unfolded, three consortia offers, all contemplating a considerable
amount of acquisition debt for which Bell Canada would be liable (likely resulting in rating
downgrades), were submitted.
The Teachers’ offer originally envisioned an amalgamation
(which would have triggered debentureholder voting rights) and at the encouragement of the
BCE Inc. board, Teachers submitted a revised offer with a structure not invoking a
debentureholder vote, by proposing a plan of arrangement, and incidentally raising its cash bid
from $42.25 to $42.75 per share (a 40% premium, with Bell Canada guaranteeing $30 billion of
debt out of total capital required of $52 billion).
After consideration, and on the
recommendation of the independent committee which had received appropriate fairness opinions
relating to the shareholders (but not debentureholders whose rights were viewed as not being
arranged), the board found that the Teachers’ offer was “in the best interests of BCE and BCE’s
shareholders.”31 The definitive agreement was signed June 30, 2007, and shareholder approval
of the arrangement on September 21, 2007 was by a majority of 97.93%. The ensuing credit
rating downgrade to the debentures below investment grade not only caused a 20% trading value
decline, it also would cause certain institutional holders subject to credit-rating restrictions to be
obliged to dispose of their holdings. The debentureholders opposed the plan of arrangement on a
number of grounds in the trial court, two of which survived and were at issue in the Supreme
Court:
30
Ibid. at para. 15. This doesn’t, of course, amount to much “consideration” given that presumably one must
honour contractual commitments of any kind under threat of suit for breach.
- 12 -
“First, the debentureholders sought relief under the oppression provision
in s. 241 of the CBCA. Second, they opposed court approval of the
arrangement, as required by s. 192 of the CBCA, alleging that the
arrangement was not ‘fair and reasonable’ because of the adverse effect
on their economic interests.”32
In order to consider these two issues in the context of a change of control transaction, the
Supreme Court felt obliged to first clarify the nature of director duties generally:
“The directors are responsible for the governance of the corporation. In
the performance of this role, the directors are subject to two duties: a
fiduciary duty to the corporation under s. 122(1)(a) (the fiduciary duty);
and a duty to exercise the care, diligence and skill of a reasonably
prudent person in comparable circumstances under s. 122(1)(b) (the duty
of care). The second duty is not at issue in these proceedings as this is
not a claim against the directors of the corporation for failing to meet
their duty of care. However, this case does involve the fiduciary duty of
the directors to the corporation, and particularly the “fair treatment”
component of this duty, which, as will be seen, is fundamental to the
reasonable expectations of stakeholders claiming an oppression
remedy.”33
The Supreme Court noted that the fiduciary duty arose in the common law and equated it
with a duty to act in the best interests of the corporation. It also relied on its earlier decision in
Peoples Department Stores Inc. (Trustee of) v. Wise (“Peoples”)34 to clarify just what that
means:
“Often the interests of shareholders and stakeholders are co-extensive
with the interests of the corporation. But if they conflict, the directors’
31
Ibid. at para. 18. The notion of “best interests of BCE” (in addition to the best interests of BCE’s shareholders)
proved prescient: see supra note 25.
32
BCE, ibid. at para. 22.
33
Ibid. at para. 36. Section 122(1)(a) specifically reads: “Every director and officer of a corporation in exercising
their powers and discharging their duties shall (a) act honestly and in good faith with a view to the best interests
of the corporation …” This codification of fiduciary duty is likely very close to Delaware’s non-codification of
the “duty of loyalty” at common law.
34
Peoples Department Stores Inc. (Trustee of) v. Wise, 2004 SCC 68, [2004] 3. S.C.R. 461. Peoples was not a
change of control case and there has been much speculation on whether its holding was relegated to a distress
situation, or had wider applicability, which has now been clarified by the Supreme Court in BCE. See also BCE,
supra note 2 at para. 88.
- 13 -
duty is clear — it is to the corporation: Peoples Department Stores. The
fiduciary duty of the directors to the corporation is a broad, contextual
concept. It is not confined to short-term profit or share value. Where the
corporation is an ongoing concern, it looks to the long-term interests of
the corporation. The content of this duty varies with the situation at
hand. At a minimum, it requires the directors to ensure that the
corporation meets its statutory obligations. But, depending on the
context, there may also be other requirements. In any event, the
fiduciary duty owed by directors is mandatory; directors must look to
what is in the best interests of the corporation.”35
The Supreme Court did not shy away from the obvious question of what specific interests an
amorphous concept such as “best interests of the corporation” encompasses by suggesting a
possible non-exclusive shopping list:
“In considering what is in the best interests of the corporation, directors
may look to the interests of, inter alia, shareholders, employees,
creditors, consumers, governments and the environment to inform their
decisions. Courts should give appropriate deference to the business
judgment of directors who take into account these ancillary interests, as
reflected by the business judgment rule. The ‘business judgment rule’
accords deference to a business decision, so long as it lies within a range
of reasonable alternatives …”36
35
BCE, ibid. at paras. 37 and 38.
36
Ibid. at para. 40. It is fair to say that the business judgment rule receives similar judicial deference on both sides
of the U.S.-Canada border: See Paramount’s “reasonableness not perfection” standard, supra note 18 and
Gantler, supra note 10, as to when “entire fairness” will be applied. In Canada, the foundation of the business
judgment rule often cited in Canadian cases is as enunciated in the “Repap case” (UPM‑ Kymmene Corp. v.
UPM‑ Kymmene Miramichi Inc. (2002), 27 B.L.R. (3d) 53 (Ont. Sup. Ct. J.), aff’d (2004), 42 B.L.R. (3d) 34
(Ont. C.A.) at para. 153:
“However, directors are only protected to the extent that their actions actually evidence their business judgment.
The principle of deference presupposes that directors are scrupulous in their deliberations and demonstrate
diligence in arriving at decisions. Courts are entitled to consider the content of their decision and the extent of the
information on which it as based and to measure this against the facts as they existed at the time the impugned
decision was made. Although Board decisions are not subject to microscopic examination with the perfect vision
of hindsight, they are subject to examination.”
See also Nicholas Dietrich, “The ‘Business Judgment Rule’: Whose Judgment?” (2002) 14:4 Corporate
Governance Review 7. It is also fair to say that “best interests of the corporation”, as a general principle,
whether express or implied in the common law, is another notion respected on both sides of the border as a
general director duty. However, in a change of control transaction, Revlon, as affirmed by Lyondell, narrows
that duty to obtaining the best price available. See infra notes 66 and 67.
- 14 -
In discussing remedies for director breaches of s. 122(1) duties, the Supreme Court
surveyed four in particular: directors’ actions in the name of the corporation, civil actions (such
as in tort) for breaches of the duty of care, oppression actions focusing on harm to the legal and
equitable interests of certain specified stakeholders, and the remedial-like aspect of required
court approvals in certain cases such as plans of arrangement affecting certain stakeholders’
rights.
It was the latter two of these four broad areas of remedial action which the
debentureholders claims focused on. The Trial Court Approval dealt with the oppression claim
and the arrangement claim as entailing distinct deliberations and held that the debentureholders
were entitled to neither remedy. The Court of Appeal Judgment regarded the two remedies as
overlapping with both grounded on failure to consider debentureholder expectations, an approach
rejected by the Supreme Court, which felt it was necessary to deal with them distinctly.
Oppression
The Supreme Court reviewed the two distinct (strict wording vs. broad principle)
approaches in oppression case law interpreting CBCA s. 241(2)37 and adopted a two-prong
approach, namely looking first to underlying principles, and specifically “the concept of
reasonable expectations”38. Once a reasonable expectation is established, then one continues to
consider “whether the conduct complained of amounts to ‘oppression’, ‘unfair prejudice’ or
‘unfair disregard’ …39
The first enquiry focuses on the court’s equitable jurisdiction to
determine not just what is legal, but what is fair, recognizing that fairness is fact specific and
bound by contextual and relationship situations. The issue is not whether the party has an actual
expectation but whether that expectation is reasonable having regard to all of the facts and
37
A court may order remedied action where:
“(a) any act or omission of the corporation or any of its affiliates effects a result,
(b) the business or affairs of the corporation or any of its affiliates are or have been carried on or conducted in a manner, or
(c) the powers of the directors of the corporation or any of its affiliates are or have been exercised in a manner
that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditor, director or
officer …”
38
Supra note 2 at para. 56.
39
Ibid.
- 15 -
circumstances, including the fact that there may be conflicting claims and expectations. It is here
in its decision where the Supreme Court first indirectly rejects Revlon’s singular focus in a
change of control transaction:
“The corporation and shareholders are entitled to maximize profit and
share value, to be sure, but not by treating individual stakeholders
unfairly. Fair treatment – the central theme running through the
oppression jurisprudence – is most fundamentally what stakeholders are
entitled to ‘reasonably expect’.”40
If the Supreme Court had stopped here, one might conclude that some certainty could be
extricated from the dicta in that s. 241(2) limits oppression to security holders, creditors,
directors and officers, and therefore conflicting, reasonably held interests amongst a known
universe could be sensibly determined in a change of control transaction. However, the court
went much further in muddying the waters of pursuit of the elusive holy grail of “best interests of
the corporation”:
“The fact that the conduct of the directors is often at the centre of
oppression actions might seem to suggest that directors are under a direct
duty to individual stakeholders who may be affected by a corporate
decision. Directors, acting in the best interests of the corporation, may
be obliged to consider the impact of their decisions on corporate
stakeholders, such as the debentureholders in these appeals. This is what
we mean when we speak of a director being required to act in the best
interests of the corporation viewed as a good corporate citizen.
However, the directors owe a fiduciary duty to the corporation, and only
to the corporation. People sometimes speak in terms of directors owing a
duty to both the corporation and to stakeholders. Usually this is
harmless, since the reasonable expectations of the stakeholder in a
particular outcome often coincides with what is in the best interests of
the corporation. However, cases (such as these appeals) may arise where
these interests do not coincide. In such cases, 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.”41 [emphasis added]
40
Ibid. at para. 64.
41
Ibid. at para. 66.
- 16 -
With the greatest respect, it is submitted that in a change of control transaction, conflicting
interests of stakeholders, whether they be stockholders, creditors, employees, suppliers,
customers or others with a “stake” in the corporation, will almost inevitably be in conflict when
faced with alternative bids whose proponents will almost always have different post-closing
plans affecting various stakeholders. One can only imagine the difficulties faced by directors
attempting to come to terms with the “best interests of the corporation”, as well as the defensive
mischief which might arise in a change of control transaction in the name of good corporate
citizenship. Presumably, this is why Revlon and its progeny, including Lyondell, oblige directors
to channel that pursuit towards a singular objective, maximizing shareholder value.
Returning to its specific analysis of the first prong of the oppression approach (whether
the claimant reasonably held its expectation), the court listed a non-exclusive list of factors to
determine reasonable expectation: (i) commercial practice, (ii) nature of the corporation, (iii)
relationships, (iv) past practice, (v) preventive steps, (vi) representations and agreements, and
(vii) fair resolution of conflicting interests. It is in connection with this last factor where the
court again ventured into “corporate citizenship” territory:
“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.”42
It is also in connection with this last factor where the court expressly rejected Revlon shareholder
interest paramountcy in change of control transactions, including Unocal’s43 overlay to
circumstances where the objective is not to maintain the enterprise but rather to sell to the
highest bidder.44
42
Ibid. at para. 82.
43
Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985). See the additional Supreme Court’s Revlon
rejection language, supra notes 23, 24 and 25.
44
Supra note 2 at para. 86.
- 17 -
The court then turned its attention to the second prong of the oppression analysis
approach, namely whether the conduct complained of rises to “oppression”, “unfair prejudice” or
“unfair disregard” of its claimants’ interests. While acknowledging that an examination of these
types of conduct was complementary to reasonable expectation analysis, and that the two prongs
may merge, the court felt it was worth noting that “as in any action in equity, wrongful conduct,
causation and compensable injury must be established in a claim for oppression.” 45 The court
also viewed the adjectival trilogy of prescribed conduct as a continuum with “oppression” being
viewed as the most harsh and abusive, and with “unfair disregard” being viewed as the least
serious wrong. As to “unfair prejudice” ranking somewhere in the middle, the court cited
adopting a “poison pill” to thwart a takeover bid and minority squeeze-outs, two features often
seen in change of control transactions.46
In applying the two prongs (reasonable expectation, and if so, violation of that
expectation by conduct constituting oppression, unfair prejudice or unfair disregard) to the two
aspects of the debentureholder oppression claims (that they had a reasonable expectation that the
directors would protect their economic interests in an arrangement which would maintain the
trading value of the debentures, and, alternatively, that they had a reasonable expectation that the
directors would consider their economic interests), the court carefully reviewed the conclusions
of the trial court based on the evidence. This included the existence of non-reliance warnings in
Bell Canada public statements regarding investment grade ratings, the context of the relationship,
the nature of the corporation as a large widely-held public entity, its status as a takeover target
pursuant to an auction process and, perhaps most importantly, “the fact that the claimants could
have protected themselves against reduction in market value by negotiating appropriate
contractual terms” in their trust indentures.47 Noting and approving as well that “under the
business judgment rule, deference should be accorded to business decisions of directors taken in
good faith and in the performance of the functions they were elected to perform by the
45
Ibid. at para. 90.
46
Ibid. at para. 93.
47
Ibid. at para. 98.
- 18 -
shareholders”48, the Supreme Court upheld the trial court’s conclusions that a reasonable
expectation of protection of investment grade status was not made out.
However, on the alternative “softer” consideration claim, the Supreme Court held that on
the evidence, the debentureholders were entitled to a reasonable expectation that their position
would be “considered” in coming to a conclusion on the offers for the company:
“As discussed above, reasonable expectations for the purpose of a claim
of oppression are not confined to legal interests. Given the potential
impact on the debentureholders of the transactions under consideration,
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.”49
and concluded that this duty was met:
“It is apparent that the directors considered the interests of the
debentureholders and, having done so, concluded that while the
contractual terms of the debentures would be honoured, no further
commitments could be made. This fulfilled the duty of the directors to
consider the debentureholders’ interests. It did not amount to ‘unfair
disregard’ of the interests of the debentureholders.”50
It is very instructive to also consider dicta by the Supreme Court in coming to its conclusion
(including the seven factors51), which at least provides some guidance to directors as to process
in a change of control transaction:
“BCE, facing certain takeover, acted reasonably to create a competitive
bidding process. The process attracted three bids. All of the bids were
48
Ibid. at para. 99.
49
Ibid. at para. 102.
50
Ibid. at para. 104.
51
The court’s findings included consideration of commercial practice/reality (LBOs are foreseeable, the trust
indentures could have included negotiated change of control and credit rating covenants, but did not), the nature
and size of the corporation as a large public company, past practice in the face of changing economic and market
realities, and finally, resolving conflicting stakeholder interests in “a fair manner that reflected the best interests
of the corporation” in light of the inevitability of buyout and the advantages of going private: Supra note 2 at
paras. 107-113.
- 19 -
leveraged, involving a substantial increase in Bell Canada’s debt. It was
this factor that posed the risk to the trading value of the debentures.
There is no evidence that BCE could have done anything to avoid that
risk.”52
However, this begs the question as to whether a significantly lesser leveraged transaction with a
lower price rejected by the directors would have been found by the court to be more “in the best
interests of the corporation” as a good corporate citizen and less inferior to the debentureholders.
Arrangement
As noted above, the second avenue of challenge by the debentureholders (who were
given standing to do so) involved their contesting the plan of arrangement under s. 192 of the
CBCA. It will be recalled that while the Trial Court Approval did not oblige a voting right by the
debentureholders, their interests were considered by the trial judge and the arrangement was
found to be “fair and reasonable”, notwithstanding the adverse impact on the trading value of the
debentures. The Court of Appeal Judgment reversed, on the basis “that the directors had not
given adequate consideration to the debentureholders’ reasonable expectations”, which in its
view went beyond legal rights and encompassed “economic interests”.53 The Supreme Court
viewed the Court of Appeal’s conversion of the s. 192 approval proceedings into a “reasonable
expectation” oppression inquiry as simply incorrect. They are distinct proceedings with distinct
requirements, with s. 241(2) oppression focusing on reasonable expectations while s. 192
arrangement approval “focuses on whether the arrangement, objectively viewed, is fair and
reasonable and looks primarily to the interests of the parties whose legal rights are being
arranged.”54 [Emphasis added.]
52
BCE, ibid. at para. 106.
53
Ibid. at paras. 115 and 116.
54
Ibid. at para. 119. The Supreme Court also pointed out the differing burden of proof in each proceeding: for
oppression, the onus is on the claimant to establish reasonable expectation and oppression or unfairness, whilst
in arrangements the onus is on the corporation to establish that the plan is fair and reasonable.
- 20 -
It is instructive to note that s. 192 specifically defines “arrangement” non-exhaustively to
include “a going-private transaction or a squeeze-out transaction in relation to a corporation”55,
and the Supreme Court took judicial notice of the fact that s. 192 “has been used as a device for
effecting changes of control because of advantages it offers the purchaser.”56 It is important to
note that s. 192 does not prescribe voting or procedural requirements but that the Director
appointed under the CBCA has instituted Policy Statement 15.1 (the “Arrangement Policy
Statement”) which prescribes scope and use as well as procedural guidelines which the courts
generally follow.
The Arrangement Policy Statement suggests that in “extraordinary
circumstances”, interests other than strictly legal rights might impose voting approval 57,
however, the Supreme Court was of the view that “the fact that a group whose legal rights are
left intact faces a reduction in the trading value of its securities would generally not, without
more, constitute such a circumstance.”58
As with its consideration of the oppression claim, the Supreme Court formulated a twopronged approach to determining what is fair and reasonable under s. 192: firstly, the court must
be satisfied that the arrangement has a valid business purpose and, secondly, legal rights of those
objectors whose rights are being arranged must be resolved in a fair and balanced way. 59 The
necessity of the plan of arrangement to the continued operations of the corporation is an
important factor in determining “valid business purpose” and is, of course, a fact specific
inquiry. Equally, an important factor in the determination of “fair and reasonable” is the degree
55
CBCA, supra note 27, s. 192(1)(f.1).
56
Supra note 2 at para. 125. See supra note 27 for consideration of some of these advantages.
57
Canada. Industry Canada. Corporations Canada. Policy concerning Arrangements Under Section 192 of the
CBCA: Policy Statement 15.1. Ottawa: Industry Canada, November 7, 2003 (online: www.ic.gc.ca/eic/site/cddgc.nsf/eng/cs01073.html) at s. 3.08: “At the same time, the Director recognizes that in determining whether
debt security holders should be provided with voting and approval rights, the trust indenture or other contractual
instrument creating such securities should ordinarily be determinative absent extraordinary circumstances.”
[Emphasis added.]
58
Supra note 2 at para. 135.
59
Ibid. at para. 138 and para. 143. The Supreme Court noted that an arrangement, in furthering the interests of the
corporation as an ongoing concern, “may” be more narrow than the inquiry of “best interests of the corporation”
pursuant to the director fiduciary duty under s. 122 of the CBCA: Ibid. at para. 145.
- 21 -
of security holder voting approval, along with procedural safeguards such as independent
committee approval, the existence of a fairness opinion and shareholder access to dissent and
appraisal rights.60
The debentureholders relinquished their challenge to the arrangement’s valid business
purpose, leaving therefore only the second prong of the Supreme Court’s framework to be dealt
with. The Supreme Court decided that economic interest in preserving the trading value of the
debentures did not constitute an exceptional circumstance to alter s. 192’s principal concern with
legal rights and affirmed the Trial Court Approval’s reliance on the Arrangement Policy
Statement in denying the debentureholders a vote and therefore veto right over transaction
involving $35 billion common equity value approved by 97% of the shareholders. On the
residual question of whether the economic interests were dealt with in a fair and balanced
manner, the Supreme Court also affirmed the trial court’s finding that the debentureholders’
rights were considered appropriately:
“We find no error in these conclusions. The arrangement does not
fundamentally alter the debentureholders’ rights. The investment and the
return contracted for remain intact. Fluctuation in the trading value of
debentures with alteration in debt load is a well-known commercial
phenomenon. The debentureholders had not contracted against this
contingency. The fact that the trading value of the debentures stood to
diminish as a result of the arrangement involving new debt was a
foreseeable risk, not an exceptional circumstance. It was clear to the
judge that the continuance of the corporation required acceptance of an
arrangement that would entail increased debt and debt guarantees by Bell
Canada: necessity was established. No superior arrangement had been
put forward, and BCE had been assisted throughout by expert legal and
financial advisors, suggesting that the proposed arrangement had a valid
business purpose.”61
60
BCE, ibid. at para. 146-153. Most, if not all, plans of arrangement implementing change of control, such as BCE
Inc.’s, build into the draft judicial order pursuant to s. 192(4)(d) of the CBCA a right to dissent and be paid the
fair value of shares pursuant to s. 190 of the CBCA.
61
Ibid. at para. 163.
- 22 -
Accordingly, the Supreme Court of Canada held that the debentureholders failed to establish
oppression under s. 241 of the CBCA and failed to establish that the trial judge made an error
approving the arrangement under s. 192 of the CBCA.
Conclusions
The question was posed earlier in this paper as to whether, in a change of control
situation, BCE and its “best interests of the corporation” construct leaves any scope for the
application of Revlon’s/Lyondell’s “maximization of shareholder value”?
Certainly as a
paramountcy principle, where there is a conflict between or amongst various stakeholders’
interests, the answer appears to be “no”.
And yet, the Supreme Court of Canada,
notwithstanding the complicated analytical framework, constructs, prongs and factors associated
with each of the oppression and arrangement challenges, appeared to condone target directors
employing Revlon and progeny-like process in a change of control transaction: “BCE, facing
certain takeover, acted reasonably to create a competitive bidding process.”62
Each case will always be factually situated. However, in the case of competing interests
of debentureholders who have failed to contract for necessary protections and are faced with
overwhelming shareholder approval of a particular arrangement, such stakeholders face a
significant hurdle, especially where the directors observe all of the window dressing and are
careful to mouth the appropriate platitudes in minutes of meetings and bid documents, of
considering debentureholder interests in a fair manner (which may amount to little more than an
acknowledgment to honour contractual commitments). One gets to the same place, but one has
to endure significant pain to get there.
What about the next train to come ’round the corner? How are target directors to handle
other stakeholder impacts where a lower priced bid is accompanied by bidder intended
affirmations to keep plants open (employees), go green (environment), offer extended warranties
(consumers), or just be swell guys by not doing business in jurisdictions which don’t share
Canadian social values (good corporate citizenship). It becomes an impossible morass where the
62
Supra note 2 at para. 106.
- 23 -
ultimate owners (shareholders) will have one last chance to reap rewards as the ultimate risk
takers amongst all stakeholders. In this sense, it is a zero sum game.
While it is beyond the scope of this paper to consider the Delaware statutory corporate
governance model and its extensive common law fiduciary duty jurisprudence in a robust
manner, as well as the intersection of corporate and securities law (which has its own overlay of
permissible defensive tactics63), Lyondell’s affirmation of Revlon offers a much cleaner
approach64 and appears to acknowledge the whole reason for Revlon in the first place, namely
that target directors in change of control transactions can’t be trusted to act in the best interests of
the corporation, particularly if afforded business judgment rule protection. Stockholder primacy
should be the animating objective, not the type of elastic flexibility obliged by a “best interests”
framework. As mentioned by the court in WIC (which sanctioned Revlon duty in Canada
(Ontario in particular), and was why, prior to BCE, Revlon was presumed to be good law in
Canada), “there is a natural tendency to protect their own position of management and control.
Jobs and careers are at stake.”65 Entrenchment and defensive tactics are, after all, human nature,
and with appropriate coaching, most directors can avoid a fatal faux pas smoking gun process
error under a “best interests” doctrine.
63
See Ontario Securities Commission, National Policy 62-202, "Take-Over Bids - Defensive Tactics" (August 4,
1997), online: Ontario Securities Commission
<https://osc.gov.on.ca/Regulation/Rulemaking/Current/Part6/pol_19970704_62-202_fnp.jsp>.
64
By cleaner approach, what is meant is shareholder primacy and Revlon’s objective of maximizing shareholder
value in a change of control situation. There are many critics of Lyondell’s holding as it pertains to the treatment
of good faith. See for example Lawrence Cunningham, Delaware Back to Sturdy Doctrine; Good Faith in
Coma, Concurring Opinions, March 31, 2009,
http://www.concurringopinions.com/archives/2009/03/delaware_back_t.html:
“Of course, given Delaware’s notoriously shifting corporate law, what Justice Berger settles in Lyondell could
change in Delaware’s next big case. After all, Delaware courts, consciously seeing themselves as judges in equity,
may, on egregious facts, revive the notion of good faith as an independent fiduciary duty or some vital aspect of
obligation, such as a component or cognate of the duty of loyalty. But, for now, Lyondell puts the notion of good
faith in something of a coma. Not dead, but nary alive. Where that leaves Delaware corporate fiduciary duty
doctrine is on more familiar terrain.”
65
WIC, supra note 23.
- 24 -
Whether either country’s application of its specific principles should be predicated on the
certainty of a bright-line test and practical, helpful guidance to target directors while
discouraging rogue director behaviour is a nice point. An ancillary matter is whether in Canada,
BCE will engender more strike suits and challenges than would otherwise be the case if Revlon
and Lyondell were the law in Canada. Given current markets, it may be some time before that
theory is put to the test.
Others have considered the theoretical and empirical aspects of the question as to whether
Lyondell (read Revlon) is the better way. Ten years ago, R. Cammon Turner66 considered Revlon
in the context of “best interests of the corporation”. Acknowledging that corporate governance
has evolved to encompass more than just the best interests of shareholders (for example, the
welfare of employees, customers, creditors and communities) and that even Delaware law
generally permits the directors to consider the interest of their constituencies (subject to
situations involving sale, break up or transfer of control where the duty narrows to maximize
shareholder value), Turner quibbles with what constitutes a change of control and welcomes
constituency statutes as a way of getting back to the “best interests of the corporation”:
“The duty to maximize shareholder wealth by any permissible method is
often at odds with plans to merge a company for its continued health or
survival. All is not lost for companies with long-range, ambitious plans.
State legislation may temper strict Revlon Duties and provide adequate
protection for directors of companies engaged in mergers that do not
bring short-term value to shareholders. The role of such statutes is
especially important in light of the QVC decision, which prohibits
directors from simply approving a strategic merger based on their
business judgment that the transaction provides more value in the long
term.”67
Turner appears to come to the side of constituency statute amelioration of Revlon partly as a
result of the destructive era of merger mania in the 1980s. Had he written his article 20 years
later, he might very well have found the first part of the 21st century (at least until the summer of
66
R. Cammon Turner, “Shareholders vs. the world: ‘Revlon Duties’ and state constituency statutes”, Business Law
Today (January/February 1999), online: <http://www.abanet.org/buslaw/blt/8-3shareholders.html>.
67
Ibid.
- 25 -
2007) equally objectionable. He does, however, make the distinction between constituency
statutes which permit consideration of parties other than shareholders and those that require such
consideration. It is not a stretch to consider BCE effectively making Canada (the CBCA and all
similar statutes) a constituency jurisdiction which now “permits” (and one could perhaps even
argue “obliges” (by failing to do so at one’s peril)) consideration of the interests of, inter alia,
shareholders, employees, creditors, consumers, governments and the environment to inform their
decisions68 and, perhaps most notoriously, all “in the best interests of the corporation viewed as a
good corporate citizen” [emphasis added].69
Should corporate social responsibility and stakeholder theory have a role in the
boardroom when a change of control scenario has been adopted by directors?
In most
constituency statute states, the answer to the question of where director duties lie when
confronted by conflicting stakeholder interests remains an interesting inquiry, particularly when
a lower price bid is accepted on the basis of consideration of other stakeholder interests. 70 At the
very least, it makes the job of target directors in change of control transactions extremely
difficult in practice71 and arguably can create mischief when one thinks in terms of defensive
measures and entrenchment. In the end, it may come down to a philosophical debate involving
the very heart of the fiction of the corporation and whether one can trust the boards of North
68
Supra note 2 at para. 46.
69
Ibid. at para. 66. In a quote cited in Law Times (April 13, 2009) and attributed to Professor Edward Iacobucci in
a recent roundtable discussion on BCE at the University of Toronto Law School, scholars are having similar
difficulty in the application of a “best interests of the corporation” doctrine:
“The duty to act in the best interest of the corporation is as indeterminate and as socially useful as the duty of a
bus driver to act in the best interest of a motor vehicle.”
70
Turner cites as an example, however, Norfolk Southern Corp. v. Conrail Inc., C.A. No. 96-CV-7167 (E.D. Pa.
Nov. 19, 1996) where the U.S. District Court for the Eastern District of Pennsylvania held in a hearing for a
preliminary injunction that “a board did not breach its fiduciary duties to shareholders by rebuffing a rival bid in
favor of a less lucrative offer that ostensibly provided better protection for employees.” Supra note 66.
71
For a further treatment of theoretical and empirical consideration, see Edward B. Brock & Richard L. Wachter,
Symposium – Corporate Control Transactions, 152 U. Pa. L. Rev. 463 (2003) and following, and Ian Lee,
Efficiency and Ethics in the Debate about Shareholder Primacy, 31 Del. J. Corp. L. 533 (2006).
- 26 -
American companies to do the right thing in change of control transactions. And the answer to
that question may have profound consequences in the current economic crisis.
- 27 -