BCE Inc. v. 1976 Debentureholders: the new fiduciary duties of fair treatment, statutory compliance and good corporate citizenship?

• Author: Bradley, Sarah P.
• Position: Canada

Directors' fiduciary duties oblige them to act in the best interests of the corporations they serve, but the interests of a corporation are not monolithic, and the question of how directors should balance the various competing interests of the constituencies that comprise a modern corporation has been the subject of considerable debate throughout the common law world. In Canada, this question is often raised in conjunction with a consideration of the oppression remedy, as it was in the BCE case, where the Supreme Court of Canada took the opportunity to comment on this important and relatively neglected area of Canadian corporate law. This comment is critical of a number of aspects of the Court's discussion of directors' fiduciary duties, particularly its interweaving of the oppression remedy with fiduciary obligations and its expansion of traditional conceptions of directors' fiduciary duties through the introduction of such novel and virtually unexplained elements as the "fair treatment" component, a duty to ensure that the corporation meets its statutory obligations, and a duty to ensure that the corporation is a "good corporate citizen." Concerns regarding doctrinal precision aside, such an expansion of directors fiduciary duties, are not without consequence. This comment discusses the practical need for certainty in this area of law and presents a number of policy arguments against the expansion of directors' duties without a careful analysis of legal rationales and consequences.

De par ses obligations fiduciaires, l'administrateur est tenu d'agir au mieux des interets de la societe qu'il sert. Les interets d'une societe n'etant toutefois pas monolithiques, la question de savoir comment les administrateurs devraient concilier les interets conflictuels des diverses composantes qui forment une societe moderne a fait l'objet d'un vaste debat dans es ressorts de common law. Au Canada, cette question se pose en general lorsqu'il s'agit d'exammer le recours en cas d'abus, comme ce rut le cas dans l'affaire BCE, a l'occasion de laquelle la Cour supreme du Canada a commente ce secteur important mais relativement neglige du droit canadien des societes. Dans ce commentaire, on critique un certain nombre d'aspects de la discussion de la Cour a propos des obligations fiduciaires des administrateurs, en particulier l'enchevetrement entre le recours en cas d'abus et les obligations fiduciaires et l'expansion des conceptions traditionnelles des obligations fiduciaires de l'administrateur par l'introduction des e1ements aussi inedits qu'obscurs que sont l'obligation de >, le devoir de veiller a ce que la societe s'acquitte de ses obligations 1egales et celui d'agir en tant >. Hormis les reserves relatives a la precision doctrinale, un tel developpement des Obligations fiduciaires de l'administrateur n'est pas sans consequence. Dans le cadre de ce commentaire, on discute de la necessite pratique d'etablir une certitude dans ce secteur du droit et on presente un certain nombre d'arguments strategiques contre l'accroissement des obligations des administra teurs de societes jusqu'a ce qu'on ait procede a une analyse rigoureuse des justifications et consequences juridiques d'un tel changement.

Table of Contents I. INTRODUCTION II. FIDUCIARY DUTIES IN CANADA A. Factual Background and Decisions of the Quebec Superior Court and Court of Appeal B. The Fiduciary Duty of Fair Treatment? C. The Fiduciary Duty to Meet Statutory Obligations? D. The Fiduciary Duty to Manage the Corporation as a Good Corporate Citizen? III. CONCLUSION BCE Inc. v. 1976 Debentureholders: The New Fiduciary Duties of Fair Treatment, Statutory Compliance and Good Corporate Citizenship?

INTRODUCTION

Few corporate law cases have been as eagerly anticipated as the Supreme Court's recent decision in BCE Inc. v. 1976 Debentureholders. (1) In the summer of 2008, business people, legal practitioners, academics and social commentators all anxiously awaited the Supreme Court's determination, while the fate of the largest leveraged buy-out in Canadian history hung in the balance and the economy teetered on the brink of the worldwide financial credit crisis. The outcome was uncertain. The case turned on the question of whether the proposed corporate arrangement was fair and reasonable, and whether the oppression remedy was available to creditors of a subsidiary corporation whose economic interests would be adversely affected by the transaction. The resolution of these questions required an assessment of the directors' statutory fiduciary duties in a change-of-control situation, and raised the question of the appropriate procedural interrelationship between these two key issues. The existing Canadian jurisprudence provided little guidance, with no consequential cases directly on point. Canadian law relating to corporate stakeholder protection has diverged definitively from that of other jurisdictions, and similar cases from the UK and US were of no assistance, although some commentators speculated about whether the Supreme Court would opt to align its reasons with the well-understood American standards. The trial court and the Quebec Court of Appeal reached different conclusions in the case and applied different procedures in reaching their decisions. The BCE appeal to the Supreme Court of Canada provided the Court with the opportunity to clarify an important and relatively neglected area of Canadian corporate law.

Due to the critical time constraints of the parties and the potential impact on the Canadian economy of the success or failure of a transaction of such magnitude, the Court heard the case on a remarkably expedited basis and delivered a summary decision without reasons just three days later, overturning the decision of the Quebec Court of Appeal and allowing the transaction to go forward. It appeared that the Court had adopted a relatively deferential position with respect to the business decisions of the board of directors. But without reasons, the legal uncertainty remained and the full decision was eagerly anticipated. The importance of the Court's reasons was highlighted by the degree of interest and speculation that continued across a broad spectrum of the Canadian business world, from newspaper editorial pages to legal periodicals, boardrooms and faculty lounges. (2) However, when the Court's reasons were delivered in December of 2008, some six months after hearing the case, they proved somewhat anticlimactic.

In its full decision, the Supreme Court provided a useful and relatively uncontroversial analysis of certain aspects of the case, clarifying and distinguishing the analytical procedure to be used by courts when considering an oppression claim in the context of a court-supervised statutory arrangement. The Supreme Court's clarification of these matters has indeed already provided useful guidance in several subsequent lower court decisions. (3) The decision also provided some comfort to boards and their advisors by reiterating the deferential standard of the business judgment rule and restating the fundamental principle of Canadian law that the fiduciary obligations of directors are owed only to the corporation itself and not to any particular stakeholder, even in a change-of-control situation. This holding has also been followed in subsequent lower court decisions. (4) But in other respects, particularly the discussion of the content of directors' fiduciary obligations, the decision was less satisfactory, introducing confusion rather than the clarity many had hoped for.

Most notably, the Court's discussion of the interrelationship of the fiduciary duty and the oppression remedy failed to clarify and distinguish these concepts. Instead, the Court unnecessarily expanded the scope of directors' fiduciary duty under the Canada Business Corporations Act, (5) incorporating novel and virtually unexplained elements, and conflated the oppression remedy with fiduciary duties in a manner that will be challenging for future interpretations and judicial decisions. An important opportunity for clarification has been lost.

The regrettable absence of doctrinal precision with respect to the Court's discussion of fiduciary duties is evident early in the decision, when the Court defines the duty of directors to act in the best interests of the corporation as required by paragraph 122(1)(a) of the CBCA (6) as their "fiduciary duty." (7) It is questionable whether the term "fiduciary duty," with its long and rich jurisprudential history and distinct meaning across a broad range of legal relationships, is appropriate to describe this statutory duty of corporate directors and officers, or whether using the term in this manner will lead to confusion. The Supreme Court itself identified this potential problem in Peoples Department Stores Inc. (Trustee of) v. Wise, (8) when it said that the duty to act in good faith with a view to the best interests of the corporation pursuant to paragraph 122(1)(a) "[h]as been referred to [by lower courts] in this case as the 'fiduciary duty.' It is better described as the 'duty of loyalty.' We will use the expression 'statutory fiduciary duty' for purposes of clarity when referring to the duty under the CBCA." (9)

The Court in Peoples went on to discuss the common law fiduciary duty, which can arise in a wide variety of contexts, distinctly from that of the statutory fiduciary duty set out in the CBCA. (10) It is not apparent why the Court in BCE chose not to make such a clarifying distinction. Robert Flannigan has commented on this shortcoming in a recent analysis of common law fiduciary duty in the wake of BCE. (11) However, the Court's analysis also has important implications for the interpretation of directors' and officers' statutory fiduciary duties under the CBCA, which will be the focus of this comment.

It has been frequently noted that Canada's stakeholder protection law is unique, (12) imposing statutory fiduciary...