BCE Inc v 1976 Debentureholders: Directors Do What Is Best for the Firm

On Friday December 19, 2008, the SCC released its eagerly anticipated decision in BCE Inc v 1976 Debentureholders, 2008 SCC 69 [BCE]. I began to appreciate the magnitude of the BCE decision – which contemplated Canada’s largest ever corporate takeover – while sitting in my research librarian’s office at 4:30 pm on June 20, 2008, the day the BCE decision was released (without reasons). In anticipation of the the verdict, the librarian incessantly refreshed the SCC’s Lexum page so the three sentence decision could be distributed to the legal community post haste. Refer here for a commentary on the initial BCE decision.

Then, on December 11, 2008 the group of prospective buyers (the “Purchaser”) pulled their $52-billion takeover offer for BCE Inc. (BCE). The Purchaser claims BCE failed to obtain “a clean bill of financial health” from accounting firm KPMG as required by their agreement. As a result, the BCE deal is effectively dead and the circumstances of its termination may be litigated to determine if a party is responsible for the $1.2 billion breakup fee.

In this context, the SCC released its reasons on December 19, 2008. Despite the collapse of the BCE deal, this decision does form a useful precedent for clarifying director’s duties. Of particular interest is the SCC’s main finding that
in each case directors must act in the best interests of the corporation in a fair manner commensurate with the corporation’s duties as a responsible corporate citizen. This post will highlight the key facts and issues, setting the stage for future commentary.


When assessing the merits of three takeover offers the BCE board of director’s found the Purchaser’s offer to be in the best interest of BCE and BCE shareholders. All offers before the board involved a substantial increase in debt liability for Bell Canada, a subsidiary of BCE. The deal was huge. A premium of 40 per cent over market value was paid per share, with a total value of $52 billion. The deal also involved Bell Canada guaranteeing $30 billion of BCE’s debt. This arrangement was approved by 97.93 percent of BCE shareholders.

This arrangement was opposed, however, by a group holding debentures (“debentureholders”) issued by Bell Canada. The debentureholders were concerned that the trading value and investment grade status of their debentures would decline by approximately 20 percent if the the offer from the Purchaser was approved by the court.

The debentureholders sought relief under s. 241 of the Canada Business Corporations Act, RSC 1985, c C-44 [CBCA], commonly known as the oppression remedy, which states:

241. (1) A complainant may apply to a court for an order under this section.

(2) If, on an application under subsection (1), the court is satisfied that in respect of a corporation or any of its affiliates…

(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, the court may make an order to rectify the matters complained of.

The debentureholders also claimed the arrangement was not “fair and reasonable” opposing court approval under s. 192 of the CBCA:

192. (4) In connection with an application under this section, the court may make any interim or final order it thinks fit including, without limiting the generality of the foregoing…

(e) an order approving an arrangement as proposed by the corporation or as amended in any manner the court may direct.

Lower Courts

The oppression claim by the debentureholders was dismissed by the Quebec Superior Court, which also approved BCE’s arrangement. This finding was overturned by the Court of Appeal which found that the requirements of s. 192 of the CBCA were not met. The Court of Appeal held BCE directors had a duty to consider whether debentureholders’ contractual rights were respected and also how the adverse impacts on debentureholders’ economic interests could be alleviated. Since the Court of Appeal found s. 192 was not satisfied, it was unnecessary to consider the oppression claim.

Following the decision of the Court of Appeal, BCE and Bell Canada appealed and the debentureholders cross-appealed the dismissal of their oppression claim.

SCC Finding for Section 241 Oppression Remedy

The SCC answered two questions in assessing the debentureholders’ claim of oppression: (1) Does the evidence support the reasonable expectation asserted by the claimant? and (2) Does the evidence establish that the reasonable expectation was violated by conduct falling within the terms “oppression”, “unfair prejudice” or “unfair disregard” of a relevant interest?

With regard to the first question, the SCC held that the debentureholders had not established the reasonable expectation that BCE would protect their economic interests by maintaining their investment grade. The SCC found no error in principle or fact finding in the following determinations made by the trial judge:

  1. BCE was essentially the target of a bidding war and the debentureholders could have negotiated contractual terms to protect their economic interests;
  2. BCE directors’ fiduciary duty to act in the best interests of the corporation would benefit some groups while hurting others, and that all three offers involved increased debt; and
  3. The business judgment rules require deference to be accorded to the decisions of directors acting in good faith for their elected duties. Thus the debentureholders failed to establish a reasonable expectation which would form the basis for a successful oppression claim.

The SCC summarized its approach to oppression cases as follows:

Where conflicting interests arise, it falls to the directors of the corporation to resolve them in accordance with their fiduciary duty to act in the best interests of the corporation. The cases on oppression, taken as a whole, confirm that this duty comprehends a duty to treat individual stakeholders affected by corporate actions equitably and fairly. There are no absolute rules and no principle that one set of interests should prevail over another.

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. Where it is impossible to please all stakeholders, it will be irrelevant that the directors rejected alternative transactions that were no more beneficial than the chosen one. (paras 81-83)

SCC Finding for Section 192 Approval Process

Approval under s. 192 of the CBCA hinges on whether a proposed agreement is fair and reasonable when viewed objectively. To gain court approval a corporation must establish statutory rules have been met, the application is in good faith and that the arrangement is “fair and reasonable.” In assessing the “fair and reasonable” requirement courts look to whether the arrangement has a valid business purpose and if objections regarding legal rights are resolved in fair and balanced way.

The debentureholders argued their objections were not dealt with in a fair and balanced way. The SCC found the debentureholders did not constitute an affected class under s. 192 and only their economic, and not their legal rights were affected by the proposed transaction. The SCC agreed with the trial judge’s conclusion that debenture holders should not be permitted to veto almost 98 percent of the shareholders because the trading value of their securities would be affected. The debentureholders were free to contract against fluctuations in debt load as a contingency, which they did not. Furthermore, there was no better agreement put forward and BCE was advised by both legal and financial experts throughout the process. In summary, the arrangement addressed the debentureholders’ interests in a fair and balanced manner for the purposes of s. 192.

Conclusion and Initial Commentary

The SCC allowed the appeals by BCE and Bell Canada and dismissed the debentureholders’ cross-appeal. Some immediate reaction found “the ruling shifts Canadian law further away from the so-called Revlon rule in the United States which compels directors to maximize only shareholder interests when a company is in play.” This commentary suggests that in certain circumstances, a company’s board of directors could accept a lower bid if it offered more value to a wider group of stakeholders. Anita Anand, a University of Toronto Faculty of Law professor, said “this decision is positive for corporate directors as it provides them with latitude and discretion to make decisions that they believe are in the best interests of the corporation.”

Surely, more commentary will follow in the weeks and months ahead regarding both the BCE decision and fate of the BCE acquisition.

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