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Canada’s Supreme Court Rejects the Revlon Test for Directors’ Duties By Stephanie Ben-Ishai Associate Professor, Osgoode Hall Law School, York University, Toronto, Canada, INSOL International Scholar 2008 - 2009 In June 2008 the Supreme Court of Canada issued its ruling in the BCE case which concerned a proposed $52 billion leveraged buyout. On December 19, 2008, the Court finally released the much anticipated written reasons for the ruling.1 Despite the fact that the deal collapsed before the written reasons were released, due to a failure to meet the solvency closing condition, the decision is significant for the law surrounding directors’ duties in Canada. Background This case was put into motion by an offer to purchase all shares of BCE Inc. (“BCE”), Canada’s largest telecommunications corporation, by a group headed by the Ontario Teachers Pension Plan Board. This was made possible in part because Bell Canada, a wholly owned subsidiary of BCE, was willing to assume BCE’s $30 billion debt obligation. The leveraged buyout was opposed by debenture holders of Bell Canada on the ground that the increased debt contemplated by the purchase agreement, would reduce the value of their bonds. The buyout had to be approved as fair and reasonable under s. 192 of the Canada Business Corporations Act, R.S.C. 1985, c. C-44 (“CBCA”), which is generally applicable to change of control transactions where the arrangement is sponsored by the directors of the target company, and the goal is to require some or all shareholders to surrender their shares. Upon request for court approval under s.192, the debenture holders argued that the leveraged buyout should not be construed as fair. They also opposed the arrangement under s. 241 of the CBCA on the ground that it was oppressive. At first instance, Justice Silcoff of the Quebec Superior Court approved the arrangement as fair under the CBCA and dismissed the claims for oppression. The Quebec Court of Appeal found that the arrangement had not been shown to be fair and held that it should not have been approved. Thus, the Quebec Court of Appeal found it unnecessary to consider the oppression claim. BCE Supreme Court Decision On June 20, 2008, the Supreme Court of Canada allowed the appeals from the Court of Appeal’s disapproval of the arrangement and dismissed two cross-appeals from the dismissal of the claims for oppression, with reasons following on December 19, 2008. Departing from the position taken by the Quebec Court of Appeal, the Supreme Court viewed the s. 241 oppression action and the s. 192 requirement for court approval of a change to the corporate structure as different types of proceedings, engaging different inquiries.2 Under two separate inquiries, the Court concluded that the debenture holders failed to establish oppression under s. 241 of the CBCA and that the trial judge did not err in approving the arrangement under s. 192 of the CBCA. While it is important to flag that the Supreme Court clarified the s.192 approval process in its reasons, due to space constraints this comment will focus on the oppression remedy analysis, as it is likely of greater significance to the readership of this newsletter. The Oppression Remedy 1 BCE Inc. v. 1976 Debentureholders, 2008 SCC 69. 2 For a discussion of the challenges inherent in this approach in an insolvency reorganization situation see: Stephanie Ben-Ishai and Catherine Nowak, “The Threat of Oppression Remedy to Reorganizing Insolvent Corporations” (2008) Ann. Insolv. Rev. 429. The Canadian oppression remedy focuses on the harm to the legal and equitable interests of stakeholders affected by oppressive acts of a corporation or its directors, and is predicated on the concept of reasonable expectations. The remedy is available to a wide range of stakeholders — security holders, creditors, directors and officers.3 In BCE the Supreme Court made clear that in assessing an oppression remedy claimant’s reasonable expectations 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.” Following from this reasoning, the most significant pat of the Supreme Court decision in BCE is a clear rejection of the Revlon line of cases from Delaware that support the principle that where the interests of shareholders conflict with the interests of creditors, the interests of shareholders should prevail. The Court held that, “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 exercised business judgment in a responsible way.” The Supreme Court also referred to its earlier decision in Peoples Department Stores4 where it was called upon to consider whether, in the case of a corporation under threat of bankruptcy, creditors deserved special consideration. In Peoples Department Stores the Supreme Court held that directors owe their duty to the corporation, not to individual stakeholders, and this duty to the corporation does not change in the period preceding bankruptcy. In BCE¸ the Supreme Court confirmed that the Peoples decision does not stand for the proposition that the interests of creditors must prevail in an insolvency situation. The BCE decision provides that specific factors must be considered in determining whether expectations are reasonable including: commercial practice; the size, nature and structure of the corporation; the relationship between the parties; past practice; the failure to negotiate protections; agreements and representations; and the fair resolution of conflicting interests. The Supreme Court held that all these factors weigh against finding an expectation beyond honouring the contractual obligations of the debentures in this particular case and that the debenture holders had failed to establish a reasonable expectation that could give rise to a claim for oppression. The Court concluded, as the trial judge had, that the debenture holders did not have a reasonable expectation that the investment grade of the debentures would be maintained. Conclusion The “street” response to the Supreme Court’s reasons in BCE has been mixed. On the one hand, Canadian corporate lawyers and the directors they advise are reassured by the affirmation that so long as they exercise business judgment and consider the long term interests of the corporation, courts will not interfere. The BCE decision represents one of the strongest endorsements of the business judgment rule in Canada to date. On the other hand, given how fact specific the reasonable expectations test for establishing an oppression action claim remains, it is unclear how it will apply in situations other than a change of control situation. For example, there remains uncertainty as to how it will be applied in a situation where a corporation enters the zone of insolvency and must make certain decisions, such as closing down plants and laying off workers. 3 For more on the Canadian oppression remedy see: Stephanie Ben-Ishai, “The Promise of the Oppression Remedy” (2005) 42.3 C.B.L.J. 450 and Stephanie Ben-Ishai and Poonam Puri, “The Canadian Oppression Remedy Judicially Considered: An Empirical Analysis" (2004) 30 Queen's L.J. 79. 4 Peoples Department Stores Inc. (Trustee of) v. Wise,  3 S.C.R. 461.
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