Corporate interests come first, court rules
OTTAWA–In a precedent-setting judgment, the Supreme Court of Canada has written that executives who run a company have a primary duty to do what is best for the corporation, not necessarily its shareholders or its bondholders.
Canada’s top court has ruled against the idea that the interests of shareholders supersede other stakeholders in a corporation, such as investors who have bought bonds.
The clarifications governing corporate law in Canada come from a 76-page written judgment on a decision the court made in June, when it gave the go-ahead on the planned privatization of BCE Inc., owner of Bell Canada.
Both the written reasons – and the original ruling – were unanimous, giving greater clarity to the rights of directors and stakeholders of corporations.
The court noted that, in most cases, the interests of the corporation and its investors and creditors were identical, but as was the case with BCE’s proposed acquisition by a group of investors headed by the Ontario Teachers’ Pension Plan, sometimes conflicts arise.
"Directors may find themselves in a situation where it is impossible to please all stakeholders," the court said.
"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 shareholders in a fair manner."
The written ruling will bring no comfort to BCE, or shareholders who stood to benefit from the $42.75 per share sale price. It comes just over a week after the $52 billion leveraged buyout collapsed because of volatile credit markets and the impact of the North American recession.
The written reasons, nevertheless, were called important by Michael Gans, a partner with Blake, Cassels & Graydon LLP, for clarifying points of confusion that arose from an earlier decision the Quebec Court of Appeal cited to rule against the acquisition bad credit pay day loans.
In that case, the Quebec court found BCE’s directors did not give adequate consideration to how the deal would impact bondholders. Bondholders had argued that BCE would be crippled by taking on $34 billion in debt and that the value of their bonds would be diminished.
Gans said the Supreme Court found BCE had considered the effect on bondholders but decided the directors were acting in the best interest of the corporation.
"If you are a director of a Canadian corporation, you can feel good about this judgment, because it gives you significant leeway to do your job as long as you do so in a reasonable and informed manner," he said.
Gans said the top court made clear Canadian law differs from the U.S., where judgments have placed shareholders at the top of the totem pole in a contest of interests.
"There is no principle that one set of interests – for example the interests of shareholders – should prevail over another set of interests," the court wrote.
"Everything depends on the particular situation faced by the directors and whether … they exercised business judgment in a responsible way."
The ruling will likely be used to clarify the relationships of corporate executives, shareholders and bondholders in future mergers, bankruptcies or hostile takeovers when stakeholder interests collide.
In June, the Supreme Court had approved the "plan of arrangement" – dismissing a challenge from bondholders that their interests had not been protected – but given the time constraints issued no reasons for its decision.
That ruling appeared to clear the last hurdle to the world’s largest leveraged buyout … until the size of the debt proved a bridge too far.