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On June 17, the Supreme Court of Canada is scheduled to hear what could be the most important Canadian corporate law case in 35 years.
I'm referring to the appeal of the Quebec Court of Appeal decision that has for the moment stalled BCE's planned LBO transaction. The Quebec Court sided with aggrieved Bell Canada debenture holders. True, the debenture holders' contractual rights had been respected. The “trust indenture” under which their debentures were issued had not been breached. Nevertheless, the Quebec court said BCE should have done more to consider debenture holders', not just shareholders', interests to satisfy the requirements of the Canada Business Corporations Act (CBCA) section 192 arrangement provisions.
M&A lawyers are anxious to hear the Supreme Court's views. Our highest court may finally say “yea” or “nay” to what has been a guiding principle in Canadian corporate acquisitions for over two decades. Canadian counsel regularly advise clients that if a company is “in play,” management has a duty “to maximize shareholder value.” CEOs and CFOs echo this advice during conference calls hastily convened by companies targeted by hostile takeover bids. “We understand our duties,” the officers repeat the mantra. “We are pursuing strategic alternatives to maximize shareholder value.”
This “shareholder value maximization” obligation, sometimes called the Revlon duty, helps ensure public company shareholders participate in control premiums. It also keeps management honest, especially when hostile bidders are competing for a company. Directors permitted to consider non-shareholder interests could camouflage improper preference for management-friendly alternatives, claiming they were virtuously safeguarding (non-contractual) interests of creditors, or employees, or the endangered spotted owl. Directors shouldn't have that latitude. And debenture holders don't need that protection. They can bargain for rights that matter to them.
Named for a 1986 Delaware Supreme Court opinion, the Revlon duty, in Delaware today, goes beyond the narrowest principles announced in that eponymous case. The 2008 Delaware version of the Revlon duty is a nuanced doctrine developed through a series of judicial opinions dubbed “Revlon and its progeny” by Delaware takeover gurus and judges. In Wilmington, for example, the Revlon duty is not triggered simply because a company is “in play” - as explained in one of the “progeny” cases. There are other subtleties. For example, no Delaware Revlon duty applies when one widely held public corporation makes a bid for another, offering shares rather than cash.
So when Canadian directors of companies “in play” speak of their duty to maximize shareholder value, they are invoking a Canadianized notion - one that owes a debt to Revlon - but which is much more “change-of-control friendly” than the Revlon duty itself ever was. Some reports have unfairly criticized BCE's directors (and their lawyers) for sacrificing debenture holder interests on the altar of “American-style” shareholder wealth maximization. Putting aside factual disputes (BCE insists that it did consider debenture holders' interests), the legal question is too complicated and important to reduce to a silly call for “CanCon” rules for corporate acquisitions.
Though Canadian lawyers have long advised companies “in play” to go out and maximize shareholder value, there hasn't been much explicit Canadian judicial authority on the point. Some cases unquestionably presume (without necessarily deciding) such a duty exists.
But it's uncertain when or how that duty first entered Canadian law. Confusion abounds. In 1998, the Ontario Court of Appeal bluntly declared that Revlon was not the law in Ontario. But what the court really meant was that directors of a company in play aren't always required to conduct auctions - auctions were just one maximizing technique drawn from Revlon. Directors can maximize value in other ways.
As the Court said (reciting language from one of the Revlon “progeny” cases), “there is no single blueprint.” In other words, the 1986 version of Revlon did not apply in Ontario in 1998. But, by 1998, the 1986-style Revlon duty wasn't the law in Delaware either.
Unless the parties settle, the Supreme Court might finally sort out this Revlon business. But there are some peculiarities about the BCE case.
The Quebec Court of Appeal said BCE's board should balance the interests of its shareholders and debt holders, relying on the Supreme Court's 2004 decision, Peoples v. Wise. But Peoples wasn't a change of control case, didn't unambiguously impose a duty on directors (rather than a discretion) to consider creditors' interests, and didn't involve a public company. Besides, the aggrieved creditors are not BCE debt holders. They're debenture holders of subsidiary Bell Canada, a separate legal entity. BCE is “in play,” but doesn't have frustrated debenture holders. Bell Canada has the debenture holders, but isn't “in play.”
The trust indentures expressly stated when the issuer could take on more debt or give guarantees. Those provisions weren't violated, everyone apparently agrees. Should courts grant extra, unbargained-for rights to one party (absent “oppression,” under CBCA section 241)?
Contractual protections usually come at a price. A lower interest rate, say. That's what negotiation is all about. BCE/Bell Canada representatives had spoken from time to time about maintaining Bell Canada's investment grade bond ratings. There may be reputational risk when companies fall short of such post-contract “cold comfort” pronouncements. But do they raise “reasonable expectations” for which there should be legal recourse?
BCE's deal is structured as an Arrangement under the CBCA (section 192). Section 192 requires court approval (a fairness hearing) where the “applicant” (here, BCE) must demonstrate the plan is fair and reasonable. No Delaware case involved this sort of court-sanctioned deal. If directors must consider third parties' (non-contractual) interests, could this obligation be limited to section 192 arrangements? Companies “in play,” considering how to maximize shareholder value, might factor in this additional obligation when choosing a structure for a friendly deal.
The Supreme Court now has a historic opportunity to write the rule book for the next M&A wave, set the record straight on Canadian security holders' rights, and perhaps tie up some loose ends from its perplexing Peoples v. Wise decision to boot. For Canadian M&A law, the stakes, and the expectations, have never been higher.
Christopher C. Nicholls is a professor in the faculty of law at the University of Western Ontario in London, Ont.
