SUPREME
COURT OF CANADA
Citation: BCE
Inc. v. 1976 Debentureholders,
[2008] 3
S.C.R. 560, 2008 SCC 69
|
Date of
Judgment:
20080620
Reasons
Delivered: 20081219
Docket: 32647
|
Between:
BCE
Inc. and Bell Canada
Appellants /
Respondents on cross‑appeals
and
A
Group of 1976 Debentureholders composed of: Aegon Capital Management Inc.,
Addenda Capital Inc., Phillips, Hager & North Investment Management Ltd.,
Sun Life Assurance Company of Canada, CIBC Global Asset Management Inc., Her
Majesty the Queen in Right of Alberta, as represented by the Minister of
Finance, Manitoba Civil Service Superannuation Board, TD Asset Management Inc.
and Manulife Financial Corporation
A
Group of 1996 Debentureholders composed of: Aegon Capital Management Inc.,
Addenda Capital Inc., Phillips, Hager & North Investment Management Ltd.,
Sun Life Insurance (Canada) Limited, CIBC Global Asset Management Inc., Manitoba Civil Service Superannuation Board and TD Asset
Management Inc.
A
Group of 1997 Debentureholders composed of: Addenda Capital Management Inc.,
Manulife Financial Corporation, Phillips, Hager & North Investment
Management Ltd., Sun Life Assurance Company of Canada, CIBC Global Asset
Management Inc., Her Majesty the Queen in Right of Alberta, as represented by
the Minister of Finance, Wawanesa Life Insurance Company, TD Asset Management
Inc., Franklin Templeton Investments Corp. and Barclays Global Investors Canada
Limited
Respondents /
Appellants on cross‑appeals
and
Computershare
Trust Company of Canada
and
CIBC Mellon Trust Company
Respondents
- and -
Director
Appointed Pursuant to the CBCA, Catalyst
Asset
Management
Inc. and Matthew Stewart
Interveners
AND BETWEEN:
6796508
Canada Inc.
Appellant /
Respondent on cross‑appeals
and
A
Group of 1976 Debentureholders composed of: Aegon Capital Management Inc.,
Addenda Capital Inc., Phillips, Hager & North Investment Management Ltd.,
Sun Life Assurance Company of Canada, CIBC Global Asset Management Inc., Her
Majesty the Queen in Right of Alberta, as represented by the Minister of
Finance, Manitoba Civil Service Superannuation Board, TD Asset Management Inc.
and Manulife Financial Corporation
A
Group of 1996 Debentureholders composed of: Aegon Capital Management Inc.,
Addenda Capital Inc., Phillips, Hager & North Investment Management Ltd.,
Sun Life Insurance (Canada) Limited, CIBC Global Asset Management Inc.,
Manitoba Civil Service Superannuation Board and TD Asset Management Inc.
A
Group of 1997 Debentureholders composed of: Addenda Capital Management Inc.,
Manulife Financial Corporation, Phillips, Hager & North Investment
Management Ltd., Sun Life Assurance Company of Canada, CIBC Global Asset
Management Inc., Her Majesty the Queen in Right of Alberta, as represented by
the Minister of Finance, Wawanesa Life Insurance Company, TD Asset Management
Inc., Franklin Templeton Investments Corp. and Barclays Global Investors Canada
Limited
Respondents /
Appellants on cross‑appeals
and
Computershare
Trust Company of Canada
and
CIBC Mellon Trust Company
Respondents
‑ and ‑
Director
Appointed Pursuant to the CBCA, Catalyst
Asset
Management
Inc. and Matthew Stewart
Interveners
Coram: McLachlin C.J. and Bastarache,* Binnie, LeBel,
Deschamps, Abella and Charron JJ.
Reasons for
Judgment:
(paras. 1 to 167)
|
The Court
|
* Bastarache J.
joined in the judgment of June 20, 2008, but took no part in these reasons for
judgment.
______________________________
BCE Inc. v. 1976 Debentureholders, [2008] 3 S.C.R. 560, 2008
SCC 69
BCE Inc. and Bell Canada Appellants/Respondents
on cross‑appeals
v.
A Group of 1976 Debentureholders composed of: Aegon Capital
Management Inc., Addenda Capital Inc., Phillips, Hager & North Investment
Management Ltd., Sun Life Assurance Company of Canada, CIBC Global Asset
Management Inc., Her Majesty the Queen in Right of Alberta, as represented by
the Minister of Finance, Manitoba Civil Service Superannuation Board, TD Asset
Management Inc. and Manulife Financial Corporation
A Group of 1996 Debentureholders composed of: Aegon Capital
Management Inc., Addenda Capital Inc., Phillips, Hager & North Investment
Management Ltd., Sun Life Insurance (Canada) Limited, CIBC Global Asset
Management Inc., Manitoba Civil Service
Superannuation Board and TD Asset Management Inc.
A Group of 1997 Debentureholders composed of:
Addenda Capital Management Inc., Manulife Financial Corporation, Phillips,
Hager & North Investment Management Ltd., Sun Life Assurance Company of
Canada, CIBC Global Asset Management Inc., Her Majesty the Queen in Right of
Alberta, as represented by the Minister of Finance, Wawanesa Life Insurance
Company, TD Asset Management Inc., Franklin Templeton Investments Corp. and
Barclays Global Investors Canada Limited Respondents/Appellants
on cross‑appeals
and
Computershare Trust Company of Canada
and CIBC Mellon Trust Company Respondents
and
Director
Appointed Pursuant to the CBCA, Catalyst
Asset
Management Inc. and Matthew Stewart Interveners
- and -
6796508 Canada Inc. Appellant/Respondent
on cross‑appeals
v.
A Group of
1976 Debentureholders composed of: Aegon Capital Management Inc., Addenda
Capital Inc., Phillips, Hager & North Investment Management Ltd., Sun Life
Assurance Company of Canada, CIBC Global Asset Management Inc., Her Majesty the
Queen in Right of Alberta, as represented by the Minister of Finance, Manitoba
Civil Service Superannuation Board, TD Asset Management Inc. and Manulife
Financial Corporation
A Group of
1996 Debentureholders composed of: Aegon Capital Management Inc., Addenda
Capital Inc., Phillips, Hager & North Investment Management Ltd., Sun Life
Insurance (Canada) Limited, CIBC Global Asset Management Inc., Manitoba Civil
Service Superannuation Board and TD Asset Management Inc.
A Group of 1997 Debentureholders composed of: Addenda Capital
Management Inc., Manulife Financial Corporation, Phillips, Hager & North
Investment Management Ltd., Sun Life Assurance Company of Canada, CIBC Global
Asset Management Inc., Her Majesty the Queen in Right of Alberta, as
represented by the Minister of Finance, Wawanesa Life Insurance Company, TD
Asset Management Inc., Franklin Templeton Investments Corp. and Barclays Global
Investors Canada Limited Respondents/Appellants
on cross‑appeals
and
Computershare
Trust Company of Canada
and CIBC Mellon Trust Company Respondents
and
Director
Appointed Pursuant to the CBCA, Catalyst
Asset
Management Inc. and Matthew Stewart Interveners
Indexed as: BCE Inc. v. 1976 Debentureholders
Neutral citation: 2008 SCC 69.
File No.: 32647.
2008: June 17; 2008: June 20.
Reasons delivered: December 19, 2008.
Present: McLachlin C.J. and Bastarache,
Binnie, LeBel, Deschamps, Abella and Charron JJ.
on appeal from the court of appeal for quebec
Commercial law — Corporations — Oppression —
Fiduciary duty of directors of corporation to act in accordance with best
interests of corporation — Reasonable expectation of security holders of fair
treatment — Directors approving change of control transaction which would
affect economic interests of security holders — Whether evidence supported
reasonable expectations asserted by security holders — Whether reasonable
expectation was violated by conduct found to be oppressive, unfairly
prejudicial or that unfairly disregards a relevant interest — Canada Business
Corporations Act, R.S.C. 1985, c. C‑44, ss. 122(1) (a), 241 .
Commercial law — Corporations — Plan of arrangement —
Proposed plan of arrangement not arranging rights of security holders but
affecting their economic interests — Whether plan of arrangement was fair and
reasonable — Canada Business Corporations Act, R.S.C. 1985, c. C‑44,
s. 192 .
At issue is a plan of arrangement that contemplates the
purchase of the shares of BCE Inc. (“BCE”) by a consortium of purchasers (the
“Purchaser”) by way of a leveraged buyout. After BCE was put “in play”, an
auction process was held and offers were submitted by three groups. All three
offers contemplated the addition of a substantial amount of new debt for which
Bell Canada, a wholly owned subsidiary of BCE, would be liable. BCE’s board of
directors found that the Purchaser’s offer was in the best interests of BCE and
BCE’s shareholders. Essentially, the arrangement provides for the compulsory
acquisition of all of BCE’s outstanding shares. The price to be paid by the
Purchaser represents a premium of approximately 40 percent over the market
price of BCE shares at the relevant time. The total capital required for the
transaction is approximately $52 billion, $38.5 billion of which will be
supported by BCE. Bell Canada will guarantee approximately $30 billion of
BCE’s debt. The Purchaser will invest nearly $8 billion of new equity capital
in BCE.
The plan of arrangement was approved by 97.93 percent of
BCE’s shareholders, but was opposed by a group of financial and other
institutions that hold debentures issued by Bell Canada. These debentureholders
sought relief under the oppression remedy under s. 241 of the Canada
Business Corporations Act (“CBCA ”). They also alleged that the
arrangement was not “fair and reasonable” and opposed court approval of the
arrangement under s. 192 of the CBCA . The crux of their complaints
is that, upon the completion of the arrangement, the short‑term trading
value of the debentures would decline by an average of 20 percent and
could lose investment grade status.
The Quebec Superior Court approved the arrangement as
fair and dismissed the claim for oppression. The Court of Appeal set aside
that decision, finding the arrangement had not been shown to be fair and held
that it should not have been approved. It held that the directors had not only
the duty to ensure that the debentureholders’ contractual rights would be
respected, but also to consider their reasonable expectations which, in its
view, required directors to consider whether the adverse impact on
debentureholders’ economic interests could be alleviated. Since the
requirements of s. 192 of the CBCA were not met, the court found it
unnecessary to consider the oppression claim. BCE and Bell Canada appealed the
overturning of the trial judge’s approval of the plan of arrangement, and the
debentureholders cross‑appealed the dismissal of the claims for
oppression.
Held: The
appeals should be allowed and the cross‑appeals dismissed.
The s. 241 oppression action and the s. 192
requirement for court approval of a change to the corporate structure are
different types of proceedings, engaging different inquiries. The Court of
Appeal’s decision rested on an approach that erroneously combined the substance
of the s. 241 oppression remedy with the onus of the s. 192
arrangement approval process, resulting in a conclusion that could not have
been sustained under either provision, read on its own terms. [47] [165]
1. The
Section 241 Oppression Remedy
The oppression remedy focuses on harm to the legal and
equitable interests of a wide range of stakeholders affected by oppressive acts
of a corporation or its directors. This remedy gives a court a broad
jurisdiction to enforce not just what is legal but what is fair. Oppression is
also fact specific: what is just and equitable is judged by the reasonable
expectations of the stakeholders in the context and in regard to the
relationships at play. [45] [58‑59]
In assessing a claim of oppression, a court must answer
two questions: (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?
For the first question, useful factors from the case law in determining whether
a reasonable expectation exists include: general commercial practice; the nature
of the corporation; the relationship between the parties; past practice; steps
the claimant could have taken to protect itself; representations and
agreements; and the fair resolution of conflicting interests between corporate
stakeholders. For the second question, a claimant must show that the failure
to meet the reasonable expectation involved unfair conduct and prejudicial
consequences under s. 241 . [68] [72] [89] [95]
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. [81‑83]
Here, the debentureholders did not establish that they
had a reasonable expectation that the directors of BCE would protect their
economic interests by putting forth a plan of arrangement that would maintain
the investment grade trading value of their debentures. The trial judge
concluded that this expectation was not made out on the evidence, given the
overall context of the relationship, the nature of the corporation, its
situation as the target of a bidding war, the fact that the claimants could
have protected themselves against reductions in market value by negotiating
appropriate contractual terms, and that any statements by Bell Canada
suggesting a commitment to retain investment grade ratings for the debentures
were accompanied by warnings precluding such expectations. The trial judge
recognized that the content of the directors’ fiduciary duty to act in the best
interests of the corporation was affected by the various interests at stake in
the context of the auction process, and that they might have to approve
transactions that were in the best interests of the corporation but which
benefited some groups at the expense of others. All three competing bids
required Bell Canada to assume additional debt. Under the business judgment
rule, deference should be accorded to the business decisions of directors
acting in good faith in performing the functions they were elected to perform.
In this case, there was no error in the principles applied by the trial judge
nor in his findings of fact. [96‑100]
The debentureholders had also argued that they had a
reasonable expectation that the directors would consider their economic
interests in maintaining the trading value of the debentures. While the
evidence, objectively viewed, supports a reasonable expectation that the
directors would consider the position of the debentureholders in making their
decisions on the various offers under consideration, it is apparent that the
directors considered the interests of debentureholders, and concluded that
while the contractual terms of the debentures would be honoured, no further
commitments could be made. This fulfilled the duty of the directors to
consider the debentureholders’ interests and did not amount to “unfair
disregard” of the interests of debentureholders. What the claimants contend
is, in reality, an expectation that the directors would take positive steps to
restructure the purchase in a way that would provide a satisfactory price to
shareholders and preserve the high market value of the debentures. There was
no evidence that it was reasonable to suppose this could be achieved, since all
three bids involved a substantial increase in Bell Canada’s debt. Commercial
practice and reality also undermine their claim. Leveraged buyouts are not
unusual or unforeseeable, and the debentureholders could have negotiated
protections in their contracts. Given the nature and the corporate history of
Bell Canada, it should not have been outside the contemplation of
debentureholders that plans of arrangements could occur in the future.
While the debentureholders rely on the past practice of maintaining the
investment grade rating of the debentures, the events precipitating the
leveraged buyout transaction were market realities affecting what were
reasonable practices. No representations had been made to debentureholders
upon which they could reasonably rely. [96] [102] [104‑106] [108‑110]
With respect to the duty on directors to resolve the
conflicting interests of stakeholders in a fair manner that reflected the best
interests of the corporation, the corporation’s best interests arguably
favoured acceptance of the offer at the time. The trial judge accepted the
evidence that Bell Canada needed to undertake significant changes to be
successful, and the momentum of the market made a buyout inevitable.
Considering all the relevant factors, the debentureholders failed to establish
a reasonable expectation that could give rise to a claim for oppression. [111‑113]
2. The Section 192 Approval Process
The s. 192 approval process 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. The approval process focuses on
whether the arrangement, viewed objectively, is fair and reasonable. Its purpose
is to permit major changes in corporate structure to be made while ensuring
that individuals whose rights may be affected are treated fairly, and its
spirit is to achieve a fair balance between conflicting interests. In seeking
court approval of an arrangement, the onus is on the corporation to establish
that (1) the statutory procedures have been met; (2) the application has been
put forth in good faith; and (3) the arrangement is “fair and reasonable”.
[119] [126] [128] [137]
To approve a plan of arrangement as fair and reasonable,
courts must be satisfied that (a) the arrangement has a valid business purpose,
and (b) the objections of those whose legal rights are being arranged are being
resolved in a fair and balanced way. Whether these requirements are met is
determined by taking into account a variety of relevant factors, including the
necessity of the arrangement to the corporation’s continued existence, the
approval, if any, of a majority of shareholders and other security holders
entitled to vote, and the proportionality of the impact on affected groups.
Where there has been no vote, courts may consider whether an intelligent and
honest business person, as a member of the class concerned and acting in his or
her own interest, might reasonably approve of the plan. Courts must focus on
the terms and impact of the arrangement itself, rather than the process by
which it was reached, and must be satisfied that the burden imposed by the
arrangement on security holders is justified by the interests of the
corporation. Courts on a s. 192 application should refrain from
substituting their views of the “best” arrangement, but should not surrender
their duty to scrutinize the arrangement. [136] [138] [145] [151] [154‑155]
The purpose of s. 192 suggests that only security
holders whose legal rights stand to be affected by the proposal are
envisioned. It is the fact that the corporation is permitted to alter
individual rights that places the matter beyond the power of the directors and
creates the need for shareholder and court approval. However, in some
circumstances, interests that are not strictly legal could be considered. The
fact that a group whose legal rights are left intact faces a reduction in the trading
value of its securities generally does not, without more, constitute a
circumstance where non‑legal interests should be considered on a
s. 192 application. [133‑135]
Here, the debentureholders no longer argue that the
arrangement lacks a valid business purpose. The debate focuses on whether the
objections of those whose rights are being arranged were resolved in a fair and
balanced way. Since only their economic interests were affected by the
proposed transaction, not their legal rights, and since they did not fall
within an exceptional situation where non‑legal interests should be
considered under s. 192 , the debentureholders did not constitute an
affected class under s. 192 , and the trial judge was correct in concluding
that they should not be permitted to veto almost 98 percent of the shareholders
simply because the trading value of their securities would be affected.
Although not required, it remained open to the trial judge to consider the
debentureholders’ economic interests, and he did not err in concluding that the
arrangement addressed the debentureholders’ interests in a fair and balanced
way. The arrangement did not fundamentally alter the debentureholders’ rights,
as the investment and return they contracted for remained intact. It was well
known that alteration in debt load could cause fluctuations in the trading
value of the debentures, and yet the debentureholders had not contracted
against this contingency. It was clear to the judge that the continuance of
the corporation required acceptance of an arrangement that would entail
increased debt and debt guarantees by Bell Canada. No superior arrangement had
been put forward and BCE had been assisted throughout by expert legal and
financial advisors. Recognizing that there is no such thing as a perfect
arrangement, the trial judge correctly concluded that the arrangement had been
shown to be fair and reasonable. [157] [161] [163‑164]
Cases Cited
Referred to: Peoples
Department Stores Inc. (Trustee of) v. Wise, [2004]
3 S.C.R. 461, 2004 SCC 68; Bradbury v. English Sewing Cotton Co., [1923]
A.C. 744; Zwicker v. Stanbury, [1953] 2 S.C.R. 438; Sparling v.
Quebec (Caisse de dépôt et placement du Québec), [1988] 2 S.C.R. 1015; Maple
Leaf Foods Inc. v. Schneider Corp. (1998), 42 O.R. (3d) 177; Kerr
v. Danier Leather Inc., [2007] 3 S.C.R. 331, 2007 SCC 44; The Queen in
right of Canada v. Saskatchewan Wheat Pool, [1983] 1 S.C.R. 205; Scottish
Co‑operative Wholesale Society Ltd. v. Meyer, [1959] A.C. 324; Diligenti
v. RWMD Operations Kelowna Ltd. (1976), 1 B.C.L.R. 36; Stech v. Davies,
[1987] 5 W.W.R. 563; First Edmonton Place Ltd. v. 315888 Alberta Ltd. (1988),
40 B.L.R. 28, var’d (1989), 45 B.L.R. 110; 820099 Ontario Inc. v. Harold E.
Ballard Ltd. (1991), 3 B.L.R. (2d) 113; Westfair Foods Ltd. v. Watt (1991),
79 D.L.R. (4th) 48; Wright v. Donald S. Montgomery Holdings Ltd. (1998),
39 B.L.R. (2d) 266; Re Keho Holdings Ltd. and Noble (1987), 38 D.L.R.
(4th) 368; Ebrahimi v. Westbourne Galleries Ltd., [1973] A.C. 360; Main
v. Delcan Group Inc. (1999), 47 B.L.R. (2d) 200; GATX Corp. v. Hawker
Siddeley Canada Inc. (1996), 27 B.L.R. (2d) 251; Adecco Canada Inc. v.
J. Ward Broome Ltd. (2001), 12 B.L.R. (3d) 275; SCI Systems Inc. v.
Gornitzki Thompson & Little Co. (1997), 147 D.L.R. (4th) 300, var’d
(1998), 110 O.A.C. 160; Downtown Eatery (1993) Ltd. v. Ontario (2001),
200 D.L.R. (4th) 289, leave to appeal refused, [2002] 1 S.C.R. vi; Re
Ferguson and Imax Systems Corp. (1983), 150 D.L.R. (3d) 718; Gibbons
v. Medical Carriers Ltd. (2001), 17 B.L.R. (3d) 280, 2001 MBQB 229; Alberta
Treasury Branches v. SevenWay Capital Corp. (1999), 50 B.L.R. (2d) 294,
aff’d (2000), 8 B.L.R. (3d) 1, 2000 ABCA 194; Lyall v. 147250 Canada Ltd.
(1993), 106 D.L.R. (4th) 304; Tsui v. International Capital Corp.,
[1993] 4 W.W.R. 613, aff’d (1993), 113 Sask. R. 3; Deutsche Bank Canada v.
Oxford Properties Group Inc. (1998), 40 B.L.R. (2d) 302; Themadel
Foundation v. Third Canadian Investment Trust Ltd. (1995), 23 O.R. (3d) 7,
var’d (1998), 38 O.R. (3d) 749; Revlon, Inc. v. MacAndrews & Forbes
Holdings, Inc., 506 A.2d 173 (1986); Unocal Corp. v. Mesa Petroleum Co.,
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Papers Inc. v. Johnstone (2001), 15 B.L.R. (3d) 249, 2001 BCSC 1069;
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No. 16158 (QL), 2007 QCCS 6830; Canadian Pacific Ltd. (Re) (1990),
73 O.R. (2d) 212; Cinar Corp. v. Shareholders of Cinar Corp. (2004), 4
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34.
Statutes and Regulations Cited
Canada Business Corporations Act, R.S.C. 1985, c. C‑44, ss. 102(1) , 122 , 192 , 239 ,
241 .
Companies Act Amending Act, 1923, S.C. 1923, c. 39, s. 4.
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APPEALS and CROSS‑APPEALS from judgments of the
Quebec Court of Appeal (Robert C.J.Q. and Otis, Nuss, Pelletier and Dalphond
JJ.A.), [2008] R.J.Q. 1298, 43 B.L.R. (4th) 157, [2008] Q.J. No. 4173
(QL), 2008 CarswellQue 4179, 2008 QCCA 935; [2008] Q.J. No. 4170 (QL),
2008 QCCA 930; [2008] Q.J. No. 4171 (QL), 2008 QCCA 931; [2008] Q.J.
No. 4172 (QL), 2008 QCCA 932; [2008] Q.J. No. 4174 (QL), 2008 QCCA
933; [2008] Q.J. No. 4175 (QL), 2008 QCCA 934, setting aside decisions by
Silcoff J., [2008] R.J.Q. 1029, 43 B.L.R. (4th) 39, [2008] Q.J. No. 4376
(QL), 2008 CarswellQue 1805, 2008 QCCS 898; (2008), 43 B.L.R. (4th) 69, [2008]
Q.J. No. 1728 (QL), 2008 CarswellQue 2226, 2008 QCCS 899; [2008] R.J.Q.
1097, 43 B.L.R. (4th) 1, [2008] Q.J. No. 1788 (QL), 2008 CarswellQue 2227,
2008 QCCS 905; (2008), 43 B.L.R. (4th) 135, [2008] Q.J. No. 1789 (QL),
2008 CarswellQue 2228, 2008 QCCS 906; [2008] R.J.Q. 1119, 43 B.L.R. (4th) 79,
[2008] Q.J. No. 1790 (QL), 2008 CarswellQue 2229, 2008 QCCS 907. Appeals
allowed and cross‑appeals dismissed.
Guy Du Pont, Kent E.
Thomson, William Brock, James Doris, Louis‑Martin
O’Neill, Pierre Bienvenu and Steve Tenai, for the
appellants/respondents on cross‑appeals BCE Inc. and Bell Canada.
Benjamin Zarnett, Jessica
Kimmel, James A. Woods and Christopher L. Richter,
for the appellant/respondent on cross‑appeals 6796508 Canada Inc.
John Finnigan, John
Porter, Avram Fishman and Mark Meland, for the
respondents/appellants on cross‑appeals Group of 1976 Debentureholders
and Group of 1996 Debentureholders.
Markus Koehnen, Max
Mendelsohn, Paul Macdonald, Julien Brazeau and Erin
Cowling, for the respondent/appellant on cross‑appeals Group of 1997
Debentureholders.
Written submissions only by Robert Tessier and Ronald
Auclair, for the respondent Computershare Trust Company of Canada.
Christian S. Tacit,
for the intervener Catalyst Asset Management Inc.
Raynold Langlois, Q.C.,
and Gerald Apostolatos, for the intervener Matthew Stewart.
The following is the judgment delivered by
The Court —
I. Introduction
[1]
These appeals arise out of an offer to purchase all shares of BCE
Inc. (“BCE”), a large telecommunications corporation, by a group headed by the
Ontario Teachers Pension Plan Board (“Teachers”), financed in part by the
assumption by Bell Canada, a wholly owned subsidiary of BCE, of a $30 billion
debt. The leveraged buyout was opposed by debentureholders of Bell Canada on
the ground that the increased debt contemplated by the purchase agreement would
reduce the value of their bonds. Upon request for court approval of an
arrangement under s. 192 of the Canada Business Corporations Act, R.S.C.
1985, c. C-44 (“CBCA ”), the debentureholders argued that it should not
be found to be fair. They also opposed the arrangement under s. 241 of the CBCA
on the ground that it was oppressive to them.
[2]
The Quebec Superior Court, per Silcoff J., 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, it
found it unnecessary to consider the oppression claim.
[3]
On June 20, 2008, this Court 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 to follow. These are those reasons.
II. Facts
[4]
At issue is a plan of arrangement valued at approximately $52
billion, for the purchase of the shares of BCE by way of a leveraged buyout.
The arrangement was opposed by a group, comprised mainly of financial
institutions, that hold debentures issued by Bell Canada. The crux of their
complaints is that the arrangement would diminish the trading value of their
debentures by an average of 20 percent, while conferring a premium of
approximately 40 percent on the market price of BCE shares.
[5]
Bell Canada was incorporated in 1880 by a special Act of the
Parliament of Canada. The corporation was subsequently continued under the CBCA .
BCE, a management holding company, was incorporated in 1970 and continued under
the CBCA in 1979. Bell Canada became a wholly owned subsidiary of BCE in
1983 pursuant to a plan of arrangement under which Bell Canada’s
shareholders surrendered their shares in exchange for shares of BCE. BCE and
Bell Canada are separate legal entities with separate charters, articles and
bylaws. Since January 2003, however, they have shared a common set of
directors and some senior officers.
[6]
At the time relevant to these proceedings, Bell Canada had $7.2
billion in outstanding long-term debt comprised of debentures issued pursuant
to three trust indentures: the 1976, the 1996 and the 1997 trust indentures.
The trust indentures contain neither change of control nor credit rating
covenants, and specifically allow Bell Canada to incur or guarantee additional
debt subject to certain limitations.
[7]
Bell Canada’s debentures were perceived by investors to be safe
investments and, up to the time of the proposed leveraged buyout, had
maintained an investment grade rating. The debentureholders are some of
Canada’s largest and most reputable financial institutions, pension funds and
insurance companies. They are major participants in the debt markets and
possess an intimate and historic knowledge of the financial markets.
[8]
A number of technological, regulatory and competitive changes
have significantly altered the industry in which BCE operates. Traditionally
highly regulated and focused on circuit-switch line telephone service, the
telecommunication industry is now guided primarily by market forces and
characterized by an ever-expanding group of market participants, substantial
new competition and increasing expectations regarding customer service. In
response to these changes, BCE developed a new business plan by which it would
focus on its core business, telecommunications, and divest its interest in
unrelated businesses. This new business plan, however, was not as successful as
anticipated. As a result, the shareholder returns generated by BCE remained
significantly less than the ones generated by its competitors.
[9]
Meanwhile, by the end of 2006, BCE had large cash flows and
strong financial indicators, characteristics perceived by market analysts to
make it a suitable target for a buyout. In November 2006, BCE was made aware
that Kohlberg Kravis Roberts & Co. (“KKR”), a United States private equity
firm, might be interested in a transaction involving BCE. Mr. Michael Sabia,
President and Chief Executive Officer of BCE, contacted KKR to inform them that
BCE was not interested in pursuing such a transaction at that time.
[10]
In February 2007, new rumours surfaced that KKR and the Canada
Pension Plan Investment Board were arranging financing to initiate a bid for
BCE. Shortly thereafter, additional rumours began to circulate that an
investment banking firm was assisting Teachers with a potential transaction
involving BCE. Mr. Sabia, after meeting with BCE’s board of directors
(“Board”), contacted the representatives of both KKR and Teachers to reiterate
that BCE was not interested in pursuing a “going-private” transaction at the
time because it was set on creating shareholder value through the execution of
its 2007 business plan.
[11]
On March 29, 2007, after an article appeared on the front page of
the Globe and Mail that inaccurately described BCE as being in
discussions with a consortium comprised of KKR and Teachers, BCE issued a press
release confirming that there were no ongoing discussions being held with
private equity investors with respect to a “going-private” transaction for BCE.
[12]
On April 9, 2007, Teachers filed a report (Schedule 13D) with the
United States Securities and Exchange Commission reflecting a change from a
passive to an active holding of BCE shares. This filing heightened press
speculation concerning a potential privatization of BCE.
[13]
Faced with renewed speculation and BCE having been put “in play”
by the filing by Teachers of the Schedule 13D report, the Board met with its
legal and financial advisors to assess strategic alternatives. It decided that
it would be in the best interests of BCE and its shareholders to have competing
bidding groups and to guard against the risk of a single bidding group
assembling such a significant portion of available debt and equity that the
group could preclude potential competing bidding groups from participating
effectively in an auction process.
[14]
In a press release dated April 17, 2007, BCE announced that it
was reviewing its strategic alternatives with a view to further enhancing
shareholder value. On the same day, a Strategic Oversight Committee (“SOC”)
was created. None of its members had ever been part of management at BCE. Its
mandate was, notably, to set up and supervise the auction process.
[15]
Following the April 17 press release, several debentureholders
sent letters to the Board voicing their concerns about a potential leveraged
buyout transaction. They sought assurance that their interests would be
considered by the Board. BCE replied in writing that it intended to honour the
contractual terms of the trust indentures.
[16]
On June 13, 2007, BCE provided the potential participants in the
auction process with bidding rules and the general form of a definitive
transaction agreement. The bidders were advised that, in evaluating the
competitiveness of proposed bids, BCE would consider the impact that their
proposed financing arrangements would have on BCE and on Bell Canada’s
debentureholders and, in particular, whether their bids respected the
debentureholders’ contractual rights under the trust indentures.
[17]
Offers were submitted by three groups. All three offers
contemplated the addition of a substantial amount of new debt for which Bell
Canada would be liable. All would have likely resulted in a downgrade of the
debentures below investment grade. The initial offer submitted by the appellant
6796508 Canada Inc. (the “Purchaser”), a corporation formed by Teachers and
affiliates of Providence Equity Partners Inc. and Madison Dearborn Partners
LLC, contemplated an amalgamation of Bell Canada that would have triggered the
voting rights of the debentureholders under the trust indentures. The Board
informed the Purchaser that such an amalgamation made its offer less
competitive. The Purchaser submitted a revised offer with an alternative
structure for the transaction that did not involve an amalgamation of Bell
Canada. Also, the Purchaser’s revised offer increased the initial price per
share from $42.25 to $42.75.
[18]
The Board, after a review of the three offers and based on the
recommendation of the SOC, found that the Purchaser’s revised offer was in the
best interests of BCE and BCE’s shareholders. In evaluating the fairness of the
consideration to be paid to the shareholders under the Purchaser’s offer, the
Board and the SOC received opinions from several reputable financial
advisors. In the meantime, the Purchaser agreed to cooperate with the Board in
obtaining a solvency certificate stating that BCE would still be solvent (and
hence in a position to meet its obligations after completion of the
transaction). The Board did not seek a fairness opinion in respect of the
debentureholders, taking the view that their rights were not being arranged.
[19]
On June 30, 2007, the Purchaser and BCE entered into a definitive
agreement. On September 21, 2007, BCE’s shareholders approved the arrangement
by a majority of 97.93 percent.
[20]
Essentially, the arrangement provides for the compulsory
acquisition of all of BCE’s outstanding shares. The price to be paid by the
Purchaser is $42.75 per common share, which represents a premium of
approximately 40 percent to the closing price of the shares as of March 28,
2007. The total capital required for the transaction is approximately $52
billion, $38.5 billion of which will be supported by BCE. Bell Canada
will guarantee approximately $30 billion of BCE’s debt. The Purchaser will
invest nearly $8 billion of new equity capital in BCE.
[21]
As a result of the announcement of the arrangement, the credit
ratings of the debentures by the time of trial had been downgraded from
investment grade to below investment grade. From the perspective of the
debentureholders, this downgrade was problematic for two reasons. First, it
caused the debentures to decrease in value by an average of approximately 20
percent. Second, the downgrade could oblige debentureholders with credit-rating
restrictions on their holdings to sell their debentures at a loss.
[22]
The debentureholders at trial opposed the arrangement on a number
of grounds. First, the debentureholders sought relief under the oppression
provision in s. 241 of the CBCA . Second, they opposed court approval of
the arrangement, as required by s. 192 of the CBCA , alleging that the
arrangement was not “fair and reasonable” because of the adverse effect on
their economic interests. Finally, the debentureholders brought motions
for declaratory relief under the terms of the trust indentures, which are not
before us: (2008), 43 B.L.R. (4th) 39, 2008 QCCS 898; (2008), 43 B.L.R. (4th)
69, 2008 QCCS 899.
III. Judicial History
[23]
The trial judge reviewed the s. 241 oppression claim as lying
against both BCE and Bell Canada, since s. 241 refers to actions by the
“corporation or any of its affiliates”. He dismissed the claims for oppression
on the grounds that the debt guarantee to be assumed by Bell Canada had a valid
business purpose; that the transaction did not breach the reasonable
expectations of the debentureholders; that the transaction was not oppressive
by reason of rendering the debentureholders vulnerable; and that BCE and its
directors had not unfairly disregarded the interests of the debentureholders:
(2008), 43 B.L.R. (4th) 79, 2008 QCCS 907; (2008), 43 B.L.R. (4th) 135, 2008
QCCS 906.
[24]
In arriving at these conclusions, the trial judge proceeded on
the basis that the BCE directors had a fiduciary duty under s. 122 of the CBCA
to act in the best interests of the corporation. He held that while the best
interests of the corporation are not to be confused with the interests of the
shareholders or other stakeholders, corporate law recognizes fundamental
differences between shareholders and debt security holders. He held that these
differences affect the content of the directors’ fiduciary duty. As a result,
the directors’ duty to act in the best interests of the corporation might
require them to approve transactions that, while in the interests of the corporation,
might also benefit some or all shareholders at the expense of other
stakeholders. He also noted that in accordance with the business judgment rule,
Canadian courts tend to accord deference to business decisions of directors
taken in good faith and in the performance of the functions they were elected
to perform by shareholders.
[25]
The trial judge held that the debentureholders’ reasonable
expectations must be assessed on an objective basis and, absent compelling
reasons, must derive from the trust indentures and the relevant prospectuses
issued in connection with the debt offerings. Statements by Bell Canada
indicating a commitment to retaining investment grade ratings did not assist
the debentureholders, since these statements were accompanied by warnings,
repeated in the prospectuses pursuant to which the debentures were issued, that
negated any expectation that this policy would be maintained indefinitely. The
reasonableness of the alleged expectation was further negated by the fact that
the debentureholders could have guarded against the business risks arising from
a change of control by negotiating protective contract terms. The fact that the
shareholders stood to benefit from the transaction and that the
debentureholders were prejudiced did not in itself give rise to a conclusion
that the directors had breached their fiduciary duty to the corporation. All
three competing bids required Bell Canada to assume additional debt, and there
was no evidence that the bidders were prepared to treat the debentureholders
any differently. The materialization of certain risks as a result of decisions
taken by the directors in accordance with their fiduciary duty to the
corporation did not constitute oppression against the debentureholders or unfair
disregard of their interests.
[26]
Having dismissed the claim for oppression, the trial judge went
on to consider BCE’s application for approval of the transaction under s. 192
of the CBCA : (2008), 43 B.L.R. (4th) 1, 2008 QCCS 905. He dismissed the
debentureholders’ claim for voting rights on the arrangement on the ground that
their legal interests were not compromised by the arrangement and that it would
be unfair to allow them in effect to veto the shareholder vote. However, in
determining whether the arrangement was fair and reasonable — the main issue on
the application for approval — he considered the fairness of the transaction
with respect to both the shareholders and the debentureholders, and concluded
that the arrangement was fair and reasonable. He considered the necessity of
the arrangement for Bell Canada’s continued operations; that the Board,
comprised almost entirely of independent directors, had determined the
arrangement was fair and reasonable and in the best interests of BCE and the
shareholders; that the arrangement had been approved by over 97 percent of the
shareholders; that the arrangement was the culmination of a robust strategic
review and auction process; the assistance the Board received throughout from
leading legal and financial advisors; the absence of a superior proposal; and
the fact that the proposal did not alter or arrange the debentureholders’ legal
rights. While the proposal stood to alter the debentureholders’ economic
interests, in the sense that the trading value of their securities would be
reduced by the added debt load, their contractual rights remained intact. The
trial judge noted that the debentureholders could have protected themselves
against this eventuality through contract terms, but had not. Overall, he
concluded that taking all relevant matters into account, the arrangement was
fair and reasonable and should be approved.
[27]
The Court of Appeal allowed the appeals on the ground that BCE
had failed to meet its onus on the test for approval of an arrangement under s.
192 , by failing to show that the transaction was fair and reasonable to the
debentureholders. Basing its analysis on this Court’s decision in Peoples
Department Stores Inc. (Trustee of) v. Wise, [2004] 3 S.C.R. 461,
2004 SCC 68, the Court of Appeal found that the directors were required to
consider the non-contractual interests of the debentureholders. It held that
representations made by Bell Canada over the years could have created
reasonable expectations above and beyond the contractual rights of the
debentureholders. In these circumstances, the directors were under a duty, not
simply to accept the best offer, but to consider whether the arrangement could
be restructured in a way that provided a satisfactory price to the shareholders
while avoiding an adverse effect on the debentureholders. In the absence of
such efforts, BCE had not discharged its onus under s. 192 of showing that the
arrangement was fair and reasonable. The Court of Appeal therefore overturned
the trial judge’s order approving the plan of arrangement: (2008), 43 B.L.R.
(4th) 157, 2008 QCCA 930, 2008 QCCA 931, 2008 QCCA 932, 2008 QCCA 933, 2008
QCCA 934, 2008 QCCA 935.
[28]
The Court of Appeal found it unnecessary to consider the s. 241
oppression claim, holding that its rejection of the s. 192 approval application
effectively disposed of the oppression claim. In its view, where approval is
sought under s. 192 and opposed, there is generally no need for an affected
security holder to assert an oppression remedy under s. 241 .
[29]
BCE and Bell Canada appeal to this Court arguing that the Court
of Appeal erred in overturning the trial judge’s approval of the plan of
arrangement. While formally cross-appealing on s. 241 , the debentureholders
argue that the Court of Appeal was correct to consider their complaints under
s. 192 , such that their appeals under s. 241 became moot.
IV. Issues
[30]
The issues, briefly stated, are whether the Court of Appeal erred
in dismissing the debentureholders’ s. 241 oppression claim and in overturning
the Superior Court’s s. 192 approval of the plan of arrangement. These
questions raise the issue of what is required to establish oppression of
debentureholders in a situation where a corporation is facing a change of
control, and how a judge on an application for approval of an arrangement under
s. 192 of the CBCA should treat claims such as those of the
debentureholders in these actions. These reasons will consider both issues.
[31]
In order to situate these issues in the context of Canadian
corporate law, it may be useful to offer a preliminary description of the
remedies provided by the CBCA to shareholders and stakeholders in a
corporation facing a change of control.
[32]
Accordingly, these reasons will consider:
(1) the rights, obligations and
remedies under the CBCA in overview;
(2) the debentureholders’ entitlement
to relief under the s. 241 oppression remedy;
(3) the debentureholders’ entitlement
to relief under the requirement for court approval of an arrangement under s.
192 .
[33]
We note that it is unnecessary for the purposes of these appeals
to distinguish between the conduct of the directors of BCE, the holding
company, and the conduct of the directors of Bell Canada. The same directors
served on the boards of both corporations. While the oppression remedy was
directed at both BCE and Bell Canada, the courts below considered the entire
context in which the directors of BCE made their decisions, which included the
obligations of Bell Canada in relation to its debentureholders. It was not
found by the lower courts that the directors of BCE and Bell Canada should have
made different decisions with respect to the two corporations. Accordingly,
the distinct corporate character of the two entities does not figure in our
analysis.
V. Analysis
A. Overview of Rights, Obligations and
Remedies Under the CBCA
[34]
An essential component of a corporation is its capital stock,
which is divided into fractional parts, the shares: Bradbury v. English
Sewing Cotton Co., [1923] A.C. 744 (H.L.), at p. 767; Zwicker
v. Stanbury, [1953] 2 S.C.R. 438. While the corporation is ongoing, shares
confer no right to its underlying assets.
[35]
A share “is not an isolated piece of property . . . [but] a
‘bundle’ of interrelated rights and liabilities”: Sparling v. Quebec (Caisse
de dépôt et placement du Québec), [1988] 2 S.C.R. 1015, at p. 1025, per
La Forest J. These rights include the right to a proportionate part of the
assets of the corporation upon winding-up and the right to oversee the
management of the corporation by its board of directors by way of votes at
shareholder meetings.
[36]
The directors are responsible for the governance of the
corporation. In the performance of this role, the directors are subject to two
duties: a fiduciary duty to the corporation under s. 122(1) (a) (the
fiduciary duty); and a duty to exercise the care, diligence and skill of a
reasonably prudent person in comparable circumstances under s. 122(1) (b)
(the duty of care). The second duty is not at issue in these proceedings as
this is not a claim against the directors of the corporation for failing to
meet their duty of care. However, this case does involve the fiduciary duty
of the directors to the corporation, and particularly the “fair treatment”
component of this duty, which, as will be seen, is fundamental to the
reasonable expectations of stakeholders claiming an oppression remedy.
[37]
The fiduciary duty of the directors to the corporation originated
in the common law. It is a duty to act in the best interests of the
corporation. Often the interests of shareholders and stakeholders are
co-extensive with the interests of the corporation. But if they conflict, the
directors’ duty is clear — it is to the corporation: Peoples Department
Stores.
[38]
The fiduciary duty of the directors to the corporation is a
broad, contextual concept. It is not confined to short-term profit or share
value. Where the corporation is an ongoing concern, it looks to the long-term
interests of the corporation. The content of this duty varies with the
situation at hand. At a minimum, it requires the directors to ensure that the
corporation meets its statutory obligations. But, depending on the context,
there may also be other requirements. In any event, the fiduciary duty owed by
directors is mandatory; directors must look to what is in the best interests of
the corporation.
[39]
In Peoples Department Stores, this Court found that although
directors must consider the best interests of the corporation, it may
also be appropriate, although not mandatory, to consider the impact of
corporate decisions on shareholders or particular groups of stakeholders. As
stated by Major and Deschamps JJ., at para. 42:
We
accept as an accurate statement of law that in determining whether they are
acting with a view to the best interests of the corporation it may be
legitimate, given all the circumstances of a given case, for the board of
directors to consider, inter alia, the interests of shareholders,
employees, suppliers, creditors, consumers, governments and the environment.
As will be discussed, cases dealing with claims of oppression have
further clarified the content of the fiduciary duty of directors with respect
to the range of interests that should be considered in determining what is in
the best interests of the corporation, acting fairly and responsibly.
[40]
In considering what is in the best interests of the corporation,
directors may look to the interests of, inter alia, shareholders,
employees, creditors, consumers, governments and the environment to inform
their decisions. Courts should give appropriate deference to the business
judgment of directors who take into account these ancillary interests, as
reflected by the business judgment rule. The “business judgment rule” accords
deference to a business decision, so long as it lies within a range of reasonable
alternatives: see Maple Leaf Foods Inc. v. Schneider Corp. (1998), 42
O.R. (3d) 177 (C.A.); Kerr v. Danier Leather Inc., [2007] 3 S.C.R. 331,
2007 SCC 44. It reflects the reality that directors, who are mandated under s.
102(1) of the CBCA to manage the corporation’s business and affairs, are
often better suited to determine what is in the best interests of the
corporation. This applies to decisions on stakeholders’ interests, as much as
other directorial decisions.
[41]
Normally only the beneficiary of a fiduciary duty can enforce the
duty. In the corporate context, however, this may offer little comfort. The
directors who control the corporation are unlikely to bring an action against
themselves for breach of their own fiduciary duty. The shareholders cannot act
in the stead of the corporation; their only power is the right to oversee the
conduct of the directors by way of votes at shareholder assemblies. Other
stakeholders may not even have that.
[42]
To meet these difficulties, the common law developed a number of
special remedies to protect the interests of shareholders and stakeholders of
the corporation. These remedies have been affirmed, modified and supplemented
by the CBCA .
[43]
The first remedy provided by the CBCA is the s. 239 derivative
action, which allows stakeholders to enforce the directors’ duty to the
corporation when the directors are themselves unwilling to do so. With leave
of the court, a complainant may bring (or intervene in) a derivative action in
the name and on behalf of the corporation or one of its subsidiaries to enforce
a right of the corporation, including the rights correlative with the
directors’ duties to the corporation. (The requirement of leave serves to
prevent frivolous and vexatious actions, and other actions which, while
possibly brought in good faith, are not in the interest of the corporation to
litigate.)
[44]
A second remedy lies against the directors in a civil action for
breach of duty of care. As noted, s. 122(1) (b) of the CBCA
requires directors and officers of a corporation to “exercise the care,
diligence and skill that a reasonably prudent person would exercise in
comparable circumstances”. This duty, unlike the s. 122(1) (a) fiduciary
duty, is not owed solely to the corporation, and thus may be the basis for
liability to other stakeholders in accordance with principles governing the law
of tort and extracontractual liability: Peoples Department Stores. Section
122(1) (b) does not provide an independent foundation for claims.
However, applying the principles of The Queen in right of Canada v.
Saskatchewan Wheat Pool, [1983] 1 S.C.R. 205, courts may take this
statutory provision into account as to the standard of behaviour that should
reasonably be expected.
[45]
A third remedy, grounded in the common law and endorsed by the CBCA ,
is a s. 241 action for oppression. Unlike the derivative action, which is
aimed at enforcing a right of the corporation itself, the oppression remedy
focuses on harm to the legal and equitable interests of stakeholders affected
by oppressive acts of a corporation or its directors. This remedy is available
to a wide range of stakeholders — security holders, creditors, directors and
officers.
[46]
Additional “remedial” provisions are found in provisions of the CBCA
providing for court approval in certain cases. An arrangement under s. 192 of
the CBCA is one of these. While s. 192 cannot be described as a remedy per
se, it has remedial-like aspects. It is directed at the situation of
corporations seeking to effect fundamental changes to the corporation that
affects stakeholder rights. The Act provides that such arrangements require
the approval of the court. Unlike the civil action and oppression, which focus
on the conduct of the directors, a s. 192 review requires a court approving a
plan of arrangement to be satisfied that: (1) the statutory procedures have
been met; (2) the application has been put forth in good faith; and (3) the
arrangement is fair and reasonable. If the corporation fails to discharge its burden
of establishing these elements, approval will be withheld and the proposed
change will not take place. In assessing whether the arrangement should be
approved, the court will hear arguments from opposing security holders whose
rights are being arranged. This provides an opportunity for security holders
to argue against the proposed change.
[47]
Two of these remedies are in issue in these actions: the action
for oppression and approval of an arrangement under s. 192. The trial judge
treated these remedies as involving distinct considerations and concluded that
the debentureholders had failed to establish entitlement to either remedy. The
Court of Appeal, by contrast, viewed the two remedies as substantially
overlapping, holding that both turned on whether the directors had properly
considered the debentureholders’ expectations. Having found on this basis that
the requirements of s. 192 were not met, the Court of Appeal concluded that the
action for oppression was moot. As will become apparent, we do not endorse
this approach. In our view, the s. 241 oppression action and the s. 192
requirement for court approval of a change to the corporate structure are
different types of proceedings, engaging different inquiries. Accordingly, we find
it necessary to consider both the claims for oppression and the s. 192
application for approval.
[48]
The debentureholders have formally cross‑appealed on the
oppression remedy. However, due to the Court of Appeal’s failure to consider
this issue, the debentureholders did not advance separate arguments before this
Court. As certain aspects of their position are properly addressed within the
context of an analysis of oppression under s. 241 , we have considered them here.
[49]
Against this background, we turn to a more detailed
consideration of the claims.
B. The Section 241 Oppression Remedy
[50]
The debentureholders in these appeals claim that the directors
acted in an oppressive manner in approving the sale of BCE, contrary to s. 241
of the CBCA .
[51]
Security holders of a corporation or its affiliates fall within
the class of persons who may be permitted to bring a claim for oppression under
s. 241 of the CBCA . The trial judge permitted the debentureholders to
do so, although in the end he found the claim had not been established. The
question is whether the trial judge erred in dismissing the claim.
[52]
We will first set out what must be shown to establish the right
to a remedy under s. 241 , and then review the conduct complained of in the
light of those requirements.
(1) The Law
[53]
Section 241(2) provides that a court may make an order to rectify
the matters complained of where
(a) any
act or omission of the corporation or any of its affiliates effects a result,
(b) the
business or affairs of the corporation or any of its affiliates are or have
been carried on or conducted in a manner, or
(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 . . . .
[54]
Section 241 jurisprudence reveals two possible approaches to the
interpretation of the oppression provisions of the CBCA : M. Koehnen, Oppression
and Related Remedies (2004), at pp. 79-80 and 84. One approach emphasizes
a strict reading of the three types of conduct enumerated in s. 241
(oppression, unfair prejudice and unfair disregard): see Scottish
Co-operative Wholesale Society Ltd. v. Meyer, [1959] A.C. 324 (H.L.); Diligenti
v. RWMD Operations Kelowna Ltd. (1976), 1 B.C.L.R. 36 (S.C.); Stech v.
Davies, [1987] 5 W.W.R. 563 (Alta. Q.B.). Cases following this approach
focus on the precise content of the categories “oppression”, “unfair prejudice”
and “unfair disregard”. While these cases may provide valuable insight into
what constitutes oppression in particular circumstances, a categorical approach
to oppression is problematic because the terms used cannot be put into
watertight compartments or conclusively defined. As Koehnen puts it (at p. 84),
“[t]he three statutory components of oppression are really adjectives that try
to describe inappropriate conduct. . . . The difficulty with adjectives is
they provide no assistance in formulating principles that should underlie court
intervention.”
[55]
Other cases have focused on the broader principles underlying and
uniting the various aspects of oppression: see First Edmonton Place Ltd. v.
315888 Alberta Ltd. (1988), 40 B.L.R. 28 (Alta. Q.B.), var’d (1989), 45
B.L.R. 110 (Alta. C.A.); 820099 Ontario Inc. v. Harold E. Ballard Ltd. (1991),
3 B.L.R. (2d) 113 (Ont. Div. Ct.); Westfair Foods Ltd. v. Watt (1991),
79 D.L.R. (4th) 48 (Alta. C.A.).
[56]
In our view, the best approach to the interpretation of s. 241(2)
is one that combines the two approaches developed in the cases. One should
look first to the principles underlying the oppression remedy, and in
particular the concept of reasonable expectations. If a breach of a reasonable
expectation is established, one must go on to consider whether the conduct
complained of amounts to “oppression”, “unfair prejudice” or “unfair disregard”
as set out in s. 241(2) of the CBCA .
[57]
We preface our discussion of the twin prongs of the oppression
inquiry by two preliminary observations that run throughout all the
jurisprudence.
[58]
First, oppression is an equitable remedy. It seeks to ensure
fairness — what is “just and equitable”. It gives a court broad, equitable
jurisdiction to enforce not just what is legal but what is fair: Wright v.
Donald S. Montgomery Holdings Ltd. (1998), 39 B.L.R. (2d) 266 (Ont. Ct. (Gen.
Div.)), at p. 273; Re Keho Holdings Ltd. and Noble (1987), 38 D.L.R.
(4th) 368 (Alta. C.A.), at p. 374; see, more generally, Koehnen, at pp. 78-79.
It follows that courts considering claims for oppression should look at
business realities, not merely narrow legalities: Scottish Co-operative
Wholesale Society, at p. 343.
[59]
Second, like many equitable remedies, oppression is
fact-specific. What is just and equitable is judged by the reasonable
expectations of the stakeholders in the context and in regard to the
relationships at play. Conduct that may be oppressive in one situation may not
be in another.
[60]
Against this background, we turn to the first prong of the
inquiry, the principles underlying the remedy of oppression. In Ebrahimi v.
Westbourne Galleries Ltd., [1973] A.C. 360 (H.L.), at p. 379, Lord
Wilberforce, interpreting s. 222 of the U.K. Companies Act, 1948,
described the remedy of oppression in the following seminal terms:
The words [“just and equitable”] are a recognition of the fact that a
limited company is more than a mere legal entity, with a personality in law of
its own: that there is room in company law for recognition of the fact that
behind it, or amongst it, there are individuals, with rights, expectations and
obligations inter se which are not necessarily submerged in the company
structure.
[61]
Lord Wilberforce spoke of the equitable remedy in terms of the
“rights, expectations and obligations” of individuals. “Rights” and
“obligations” connote interests enforceable at law without recourse to special
remedies, for example, through a contractual suit or a derivative action under
s. 239 of the CBCA . It is left for the oppression remedy to deal with
the “expectations” of affected stakeholders. The reasonable expectations of
these stakeholders is the cornerstone of the oppression remedy.
[62]
As denoted by “reasonable”, the concept of reasonable
expectations is objective and contextual. The actual expectation of a
particular stakeholder is not conclusive. In the context of whether it would
be “just and equitable” to grant a remedy, the question is whether the
expectation is reasonable having regard to the facts of the specific case, the
relationships at issue, and the entire context, including the fact that there
may be conflicting claims and expectations.
[63]
Particular circumstances give rise to particular expectations.
Stakeholders enter into relationships, with and within corporations, on the
basis of understandings and expectations, upon which they are entitled to rely,
provided they are reasonable in the context: see 820099 Ontario; Main
v. Delcan Group Inc. (1999), 47 B.L.R. (2d) 200 (Ont. S.C.J.). These
expectations are what the remedy of oppression seeks to uphold.
[64]
Determining whether a particular expectation is reasonable is
complicated by the fact that the interests and expectations of different
stakeholders may conflict. The oppression remedy recognizes that a corporation
is an entity that encompasses and affects various individuals and groups, some
of whose interests may conflict with others. Directors or other corporate
actors may make corporate decisions or seek to resolve conflicts in a way that
abusively or unfairly maximizes a particular group’s interest at the expense of
other stakeholders. The corporation and shareholders are entitled to maximize
profit and share value, to be sure, but not by treating individual stakeholders
unfairly. Fair treatment — the central theme running through the oppression
jurisprudence — is most fundamentally what stakeholders are entitled to
“reasonably expect”.
[65]
Section 241(2) speaks of the “act or omission” of the corporation
or any of its affiliates, the conduct of “business or affairs” of the
corporation and the “powers of the directors of the corporation or any of its
affiliates”. Often, the conduct complained of is the conduct of the corporation
or of its directors, who are responsible for the governance of the
corporation. However, the conduct of other actors, such as shareholders, may
also support a claim for oppression: see Koehnen, at pp. 109-10; GATX Corp.
v. Hawker Siddeley Canada Inc. (1996), 27 B.L.R. (2d) 251 (Ont. Ct. (Gen.
Div.)). In the appeals before us, the claims for oppression are based on
allegations that the directors of BCE and Bell Canada failed to comply with the
reasonable expectations of the debentureholders, and it is unnecessary to go
beyond this.
[66]
The fact that the conduct of the directors is often at the centre
of oppression actions might seem to suggest that directors are under a direct
duty to individual stakeholders who may be affected by a corporate decision.
Directors, acting in the best interests of the corporation, may be obliged to
consider the impact of their decisions on corporate stakeholders, such as the
debentureholders in these appeals. This is what we mean when we speak of a
director being required to act in the best interests of the corporation viewed
as a good corporate citizen. However, the directors owe a fiduciary duty to the
corporation, and only to the corporation. People sometimes speak in terms of
directors owing a duty to both the corporation and to stakeholders. Usually
this is harmless, since the reasonable expectations of the stakeholder in a
particular outcome often coincide with what is in the best interests of the
corporation. However, cases (such as these appeals) may arise where these
interests do not coincide. In such cases, 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.
[67]
Having discussed the concept of reasonable expectations that
underlies the oppression remedy, we arrive at the second prong of the s. 241
oppression remedy. Even if reasonable, not every unmet expectation gives rise
to claim under s. 241 . The section requires that the conduct complained of
amount to “oppression”, “unfair prejudice” or “unfair disregard” of relevant
interests. “Oppression” carries the sense of conduct that is coercive and
abusive, and suggests bad faith. “Unfair prejudice” may admit of a less
culpable state of mind, that nevertheless has unfair consequences. Finally,
“unfair disregard” of interests extends the remedy to ignoring an interest as
being of no importance, contrary to the stakeholders’ reasonable expectations:
see Koehnen, at pp. 81‑88. The phrases describe, in adjectival terms,
ways in which corporate actors may fail to meet the reasonable expectations of
stakeholders.
[68]
In summary, the foregoing discussion suggests conducting two
related inquiries in a claim for 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?
[69]
Against the background of this overview, we turn to a more
detailed discussion of these inquiries.
(a) Proof of a Claimant’s
Reasonable Expectations
[70]
At the outset, the claimant must identify the expectations that
he or she claims have been violated by the conduct at issue and establish that
the expectations were reasonably held. As stated above, it may be readily
inferred that a stakeholder has a reasonable expectation of fair treatment.
However, oppression, as discussed, generally turns on particular expectations
arising in particular situations. The question becomes whether the claimant
stakeholder reasonably held the particular expectation. Evidence of an
expectation may take many forms depending on the facts of the case.
[71]
It is impossible to catalogue exhaustively situations where a
reasonable expectation may arise due to their fact-specific nature. A few
generalizations, however, may be ventured. Actual unlawfulness is not required
to invoke s. 241 ; the provision applies “where the impugned conduct is
wrongful, even if it is not actually unlawful”: Dickerson Committee (R. W. V.
Dickerson, J. L. Howard and L. Getz), Proposals for a New Business
Corporations Law for Canada (1971), vol. I, at p. 163. The remedy is
focused on concepts of fairness and equity rather than on legal rights. In
determining whether there is a reasonable expectation or interest to be
considered, the court looks beyond legality to what is fair, given all of the
interests at play: Re Keho Holdings Ltd. and Noble. It follows that not
all conduct that is harmful to a stakeholder will give rise to a remedy for
oppression as against the corporation.
[72]
Factors that emerge from the case law that are useful in
determining whether a reasonable expectation exists include: general commercial
practice; the nature of the corporation; the relationship between the parties;
past practice; steps the claimant could have taken to protect itself;
representations and agreements; and the fair resolution of conflicting
interests between corporate stakeholders.
(i) Commercial Practice
[73]
Commercial practice plays a significant role in forming the
reasonable expectations of the parties. A departure from normal business
practices that has the effect of undermining or frustrating the complainant’s
exercise of his or her legal rights will generally (although not inevitably)
give rise to a remedy: Adecco Canada Inc. v. J. Ward Broome Ltd. (2001),
12 B.L.R. (3d) 275 (Ont. S.C.J.); SCI Systems Inc. v. Gornitzki Thompson
& Little Co. (1997), 147 D.L.R. (4th) 300 (Ont. Ct. (Gen. Div.)), var’d
(1998), 110 O.A.C. 160 (Div. Ct.); Downtown Eatery (1993) Ltd. v.
Ontario (2001), 200 D.L.R. (4th) 289 (Ont. C.A.), leave to appeal refused,
[2002] 1 S.C.R. vi.
(ii) The Nature of the
Corporation
[74]
The size, nature and structure of the corporation are relevant
factors in assessing reasonable expectations: First Edmonton Place; G.
Shapira, “Minority Shareholders’ Protection — Recent Developments” (1982), 10 N.Z.
Univ. L. Rev. 134, at pp. 138 and 145-46. Courts may accord more latitude
to the directors of a small, closely held corporation to deviate from strict
formalities than to the directors of a larger public company.
(iii) Relationships
[75]
Reasonable expectations may emerge from the personal
relationships between the claimant and other corporate actors. Relationships
between shareholders based on ties of family or friendship may be governed by
different standards than relationships between arm’s length shareholders in a
widely held corporation. As noted in Re Ferguson and Imax Systems Corp.
(1983), 150 D.L.R. (3d) 718 (Ont. C.A.), “when dealing with a close
corporation, the court may consider the relationship between the shareholders
and not simply legal rights as such” (p. 727).
(iv) Past Practice
[76]
Past practice may create reasonable expectations, especially
among shareholders of a closely held corporation on matters relating to
participation of shareholders in the corporation’s profits and governance: Gibbons
v. Medical Carriers Ltd. (2001), 17 B.L.R. (3d) 280, 2001 MBQB 229; 820099
Ontario. For instance, in Gibbons, the court found that the
shareholders had a legitimate expectation that all monies paid out of the
corporation would be paid to shareholders in proportion to the percentage of
shares they held. The authorization by the new directors to pay fees to
themselves, for which the shareholders would not receive any comparable
payments, was in breach of those expectations.
[77]
It is important to note that practices and expectations can
change over time. Where valid commercial reasons exist for the change and the
change does not undermine the complainant’s rights, there can be no reasonable
expectation that directors will resist a departure from past practice: Alberta
Treasury Branches v. SevenWay Capital Corp. (1999), 50 B.L.R. (2d) 294
(Alta. Q.B.), aff’d (2000), 8 B.L.R. (3d) 1, 2000 ABCA 194.
(v) Preventive Steps
[78]
In determining whether a stakeholder expectation is reasonable,
the court may consider whether the claimant could have taken steps to protect
itself against the prejudice it claims to have suffered. Thus it may be
relevant to inquire whether a secured creditor claiming oppressive conduct
could have negotiated protections against the prejudice suffered: First
Edmonton Place; SCI Systems.
(vi) Representations and Agreements
[79]Shareholder agreements may be
viewed as reflecting the reasonable expectations of the parties: Main; Lyall
v. 147250 Canada Ltd. (1993), 106 D.L.R. (4th) 304 (B.C.C.A.).
[80]Reasonable expectations may also
be affected by representations made to stakeholders or to the public in
promotional material, prospectuses, offering circulars and other communications:
Tsui v. International Capital Corp., [1993] 4 W.W.R. 613 (Sask. Q.B.),
aff’d (1993), 113 Sask. R. 3 (C.A.); Deutsche Bank Canada v. Oxford
Properties Group Inc. (1998), 40 B.L.R. (2d) 302 (Ont. Ct. (Gen. Div.)); Themadel
Foundation v. Third Canadian Investment Trust Ltd. (1995), 23 O.R. (3d) 7
(Gen. Div.), var’d (1998), 38 O.R. (3d) 749 (C.A.).
(vii) Fair Resolution of
Conflicting Interests
[81]As discussed, conflicts may arise
between the interests of corporate stakeholders inter se and between
stakeholders and the corporation. Where the conflict involves the interests of
the corporation, 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, viewed as a good corporate citizen.
[82]The cases on oppression, taken as
a whole, confirm that the duty of the directors to act in the best interests of
the corporation comprehends a duty to treat individual stakeholders affected by
corporate actions equitably and fairly. There are no absolute rules. 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.
[83]Directors may find themselves in
a situation where it is impossible to please all stakeholders. The “fact that
alternative transactions were rejected by the directors is irrelevant unless it
can be shown that a particular alternative was definitely available and clearly
more beneficial to the company than the chosen transaction”: Maple Leaf
Foods, per Weiler J.A., at p. 192.
[84]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.
[85]On these appeals, it was
suggested on behalf of the corporations that the “Revlon line” of cases
from Delaware support the principle that where the interests of shareholders
conflict with the interests of creditors, the interests of shareholders should
prevail.
[86]The “Revlon line” refers
to a series of Delaware corporate takeover cases, the two most important of
which are Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506
A.2d 173 (Del. 1986), and Unocal Corp. v. Mesa Petroleum Co., 493 A.2d
946 (Del. 1985). In both cases, the issue was how directors should react to a
hostile takeover bid. Revlon suggests that in such circumstances,
shareholder interests should prevail over those of other stakeholders, such as
creditors. Unocal tied this approach to situations where the
corporation will not continue as a going concern, holding that although a board
facing a hostile takeover “may have regard for various constituencies in
discharging its responsibilities, . . . such concern for non‑stockholder
interests is inappropriate when . . . the object no longer is to protect or
maintain the corporate enterprise but to sell it to the highest bidder” (p.
182).
[87]What is clear is that the Revlon
line of cases has not displaced the fundamental rule that the duty of the
directors cannot be confined to particular priority rules, but is rather a
function of business judgment of what is in the best interests of the
corporation, in the particular situation it faces. In a review of trends in
Delaware corporate jurisprudence, former Delaware Supreme Court Chief Justice
E. Norman Veasey put it this way:
[I]t is
important to keep in mind the precise content of this “best interests” concept
— that is, to whom this duty is owed and when. Naturally, one often thinks that
directors owe this duty to both the corporation and the stockholders. That
formulation is harmless in most instances because of the confluence of
interests, in that what is good for the corporate entity is usually
derivatively good for the stockholders. There are times, of course, when the
focus is directly on the interests of stockholders [i.e., as in Revlon].
But, in general, the directors owe fiduciary duties to the corporation,
not to the stockholders. [Emphasis in original.]
(E. Norman Veasey with Christine T. Di Guglielmo, “What Happened in
Delaware Corporate Law and Governance from 1992‑2004? A Retrospective on
Some Key Developments” (2005), 153 U. Pa. L. Rev. 1399, at p. 1431)
[88]Nor does this Court’s decision in
Peoples Department Stores suggest a fixed rule that the interests of
creditors must prevail. In Peoples Department Stores, the Court had to
consider whether, in the case of a corporation under threat of bankruptcy,
creditors deserved special consideration (para. 46). The Court held that the
fiduciary duty to the corporation did not change in the period preceding the
bankruptcy, but that if the directors breach their duty of care to a
stakeholder under s. 122(1) (b) of the CBCA , such a stakeholder
may act upon it (para. 66).
(b) Conduct Which Is Oppressive, Is Unfairly
Prejudicial or Unfairly Disregards the Claimant’s Relevant Interests
[89]Thus far we have
discussed how a claimant establishes the first element of an action for oppression
— a reasonable expectation that he or she would be treated in a certain way.
However, to complete a claim for oppression, the claimant must show that the
failure to meet this expectation involved unfair conduct and prejudicial
consequences within s. 241 of the CBCA . Not every failure to meet a
reasonable expectation will give rise to the equitable considerations that
ground actions for oppression. The court must be satisfied that the conduct
falls within the concepts of “oppression”, “unfair prejudice” or “unfair
disregard” of the claimant’s interest, within the meaning of s. 241 of the CBCA .
Viewed in this way, the reasonable expectations analysis that is the
theoretical foundation of the oppression remedy, and the particular types of conduct
described in s. 241 , may be seen as complementary, rather than representing
alternative approaches to the oppression remedy, as has sometimes been
supposed. Together, they offer a complete picture of conduct that is unjust and
inequitable, to return to the language of Ebrahimi.
[90]In most cases, proof of a
reasonable expectation will be tied up with one or more of the concepts of
oppression, unfair prejudice, or unfair disregard of interests set out in s.
241 , and the two prongs will in fact merge. Nevertheless, it is worth stating
that as in any action in equity, wrongful conduct, causation and compensable
injury must be established in a claim for oppression.
[91]The concepts of oppression,
unfair prejudice and unfairly disregarding relevant interests are adjectival.
They indicate the type of wrong or conduct that the oppression remedy of s. 241
of the CBCA is aimed at. However, they do not represent watertight
compartments, and often overlap and intermingle.
[92]The original wrong recognized in
the cases was described simply as oppression, and was generally associated with
conduct that has variously been described as “burdensome, harsh and wrongful”,
“a visible departure from standards of fair dealing”, and an “abuse of power”
going to the probity of how the corporation’s affairs are being conducted: see
Koehnen, at p. 81. It is this wrong that gave the remedy its name, which now is
generally used to cover all s. 241 claims. However, the term also operates to
connote a particular type of injury within the modern rubric of oppression
generally — a wrong of the most serious sort.
[93]The CBCA has added “unfair
prejudice” and “unfair disregard” of interests to the original common law
concept, making it clear that wrongs falling short of the harsh and abusive
conduct connoted by “oppression” may fall within s. 241 . “Unfair prejudice” is
generally seen as involving conduct less offensive than “oppression”. Examples
include squeezing out a minority shareholder, failing to disclose related party
transactions, changing corporate structure to drastically alter debt ratios,
adopting a “poison pill” to prevent a takeover bid, paying dividends without a
formal declaration, preferring some shareholders with management fees and
paying directors’ fees higher than the industry norm: see Koehnen, at pp.
82-83.
[94]“Unfair disregard” is viewed as
the least serious of the three injuries, or wrongs, mentioned in s. 241 .
Examples include favouring a director by failing to properly prosecute claims,
improperly reducing a shareholder’s dividend, or failing to deliver property
belonging to the claimant: see Koehnen, at pp. 83-84.
(2) Application to These Appeals
[95]As discussed above (at para. 68),
in assessing a claim for oppression a court must answer two questions: (1) Does
the evidence support the reasonable expectation the claimant asserts? 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?
[96]The debentureholders in this case
assert two alternative expectations. Their highest position is that they had a
reasonable expectation that the directors of BCE would protect their economic
interests as debentureholders in Bell Canada by putting forward a plan of
arrangement that would maintain the investment grade trading value of their
debentures. Before this Court, however, they argued a softer alternative — a
reasonable expectation that the directors would consider their economic
interests in maintaining the trading value of the debentures.
[97]As summarized above (at para.
25), the trial judge proceeded on the debentureholders’ alleged expectation
that the directors would act in a way that would preserve the investment grade
status of their debentures. He concluded that this expectation was not made
out on the evidence, since the statements by Bell Canada suggesting a
commitment to retaining investment grade ratings were accompanied by warnings
that explicitly precluded investors from reasonably forming such expectations,
and the warnings were included in the prospectuses pursuant to which the
debentures were issued.
[98]The absence of a reasonable
expectation that the investment grade of the debentures would be maintained was
confirmed, in the trial judge’s view, by the overall context of the
relationship, the nature of the corporation, its situation as the target of a bidding
war, as well as by the fact that the claimants could have protected themselves
against reduction in market value by negotiating appropriate contractual terms.
[99]The trial judge situated his
consideration of the relevant factors in the appropriate legal context. He
recognized that the directors had a fiduciary duty to act in the best interests
of the corporation and that the content of this duty was affected by the
various interests at stake in the context of the auction process that BCE was
undergoing. He emphasized that the directors, faced with conflicting
interests, might have no choice but to approve transactions that, while in the
best interests of the corporation, would benefit some groups at the expense of
others. He held that the fact that the shareholders stood to benefit from the
transaction and that the debentureholders were prejudiced did not in itself
give rise to a conclusion that the directors had breached their fiduciary duty
to the corporation. All three competing bids required Bell Canada to assume
additional debt, and there was no evidence that bidders were prepared to accept
less leveraged debt. Under the business judgment rule, deference should be
accorded to business decisions of directors taken in good faith and in the
performance of the functions they were elected to perform by the shareholders.
[100]
We see no error in the principles applied by the trial judge nor
in his findings of fact, which were amply supported by the evidence. We
accordingly agree that the first expectation advanced in this case — that the
investment grade status of the debentures would be maintained — was not
established.
[101]
The alternative, softer, expectation advanced is that the
directors would consider the interests of the bondholders in maintaining the
trading value of the debentures. The Court of Appeal, albeit in the context of
its reasons on the s. 192 application, accepted this as a reasonable
expectation. It held that the representations made over the years, while not
legally binding, created expectations beyond contractual rights. It went on to
state that in these circumstances, the directors were under a duty, not simply
to accept the best offer, but to consider whether the arrangement could be
restructured in a way that provided a satisfactory price to the shareholders
while avoiding an adverse effect on debentureholders.
[102]
The evidence, objectively viewed, supports a reasonable
expectation that the directors would consider the position of the
debentureholders in making their decisions on the various offers under
consideration. As discussed above, reasonable expectations for the purpose of
a claim of oppression are not confined to legal interests. Given the potential
impact on the debentureholders of the transactions under consideration, one
would expect the directors, acting in the best interests of the corporation, to
consider their short and long-term interests in the course of making their ultimate
decision.
[103]
Indeed, the evidence shows that the directors did consider
the interests of the debentureholders. A number of debentureholders sent
letters to the Board, expressing concern about the proposed leveraged buyout
and seeking assurances that their interests would be considered. One of the
directors, Mr. Pattison, met with Phillips, Hager & North, representatives
of the debentureholders. The directors’ response to these overtures was that
the contractual terms of the debentures would be met, but no additional
assurances were given.
[104]
It is apparent that the directors considered the interests of the
debentureholders and, having done so, concluded that while the contractual
terms of the debentures would be honoured, no further commitments could be
made. This fulfilled the duty of the directors to consider the
debentureholders’ interests. It did not amount to “unfair disregard” of the
interests of the debentureholders. As discussed above, it may be impossible to
satisfy all stakeholders in a given situation. In this case, the Board
considered the interests of the claimant stakeholders. Having done so, and
having considered its options in the difficult circumstances it faced, it made
its decision, acting in what it perceived to be the best interests of the
corporation.
[105]
What the claimants contend for on this appeal, in reality, is not
merely an expectation that their interests be considered, but an expectation
that the Board would take further positive steps to restructure the purchase in
a way that would provide a satisfactory purchase price to the shareholders and
preserve the high market value of the debentures. At this point, the second,
softer expectation asserted approaches the first alleged expectation of
maintaining the investment grade rating of the debentures.
[106]
The difficulty with this proposition is that there is no
evidence that it was reasonable to suppose it could have been achieved. BCE,
facing certain takeover, acted reasonably to create a competitive bidding process.
The process attracted three bids. All of the bids were leveraged, involving a
substantial increase in Bell Canada’s debt. It was this factor that posed the
risk to the trading value of the debentures. There is no evidence that BCE
could have done anything to avoid that risk. Indeed, the evidence is to the
contrary.
[107]
We earlier discussed the factors to consider in determining
whether an expectation is reasonable on a s. 241 oppression claim. These
include 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. In our view, all these factors weigh against finding an
expectation beyond honouring the contractual obligations of the debentures in
this particular case.
[108]
Commercial practice — indeed commercial reality — undermines the
claim that a way could have been found to preserve the trading position of the
debentures in the context of the leveraged buyout. This reality must have been
appreciated by reasonable debentureholders. More broadly, two considerations
are germane to the influence of general commercial practice on the
reasonableness of the debentureholders’ expectations. First, leveraged buyouts
of this kind are not unusual or unforeseeable, although the transaction at
issue in this case is noteworthy for its magnitude. Second, trust indentures
can include change of control and credit rating covenants where those
protections have been negotiated. Protections of that type would have assured
debentureholders a right to vote, potentially through their trustee, on the
leveraged buyout, as the trial judge pointed out. This failure to negotiate
protections was significant where the debentureholders, it may
be noted, generally represent some of Canada’s largest and most reputable
financial institutions, pension funds and insurance companies.
[109]
The nature and size of the corporation also undermine the
reasonableness of any expectation that the directors would reject the offers
that had been presented and seek an arrangement that preserved the investment
grade rating of the debentures. As discussed above (at para. 74), courts may
accord greater latitude to the reasonableness of expectations formed in the
context of a small, closely held corporation, rather than those relating to
interests in a large, public corporation. Bell Canada had become a wholly owned
subsidiary of BCE in 1983, pursuant to a plan of arrangement which saw the
shareholders of Bell Canada surrender their shares in exchange for shares of
BCE. Based upon the history of the relationship, it should not have been
outside the contemplation of debentureholders acquiring debentures of Bell
Canada under the 1996 and 1997 trust indentures, that arrangements of this type
had occurred and could occur in the future.
[110]
The debentureholders rely on past practice, suggesting that
investment grade ratings had always been maintained. However, as noted,
reasonable practices may reflect changing economic and market realities. The
events that precipitated the leveraged buyout transaction were such realities.
Nor did the trial judge find in this case that representations had been made to
debentureholders upon which they could have reasonably relied.
[111]
Finally, the claim must be considered from the perspective of the
duty on the directors to resolve conflicts between the interests of corporate
stakeholders in a fair manner that reflected the best interests of the
corporation.
[112]
The best interests of the corporation arguably favoured
acceptance of the offer at the time. BCE had been put in play, and the
momentum of the market made a buyout inevitable. The evidence, accepted by the
trial judge, was that Bell Canada needed to undertake significant changes to
continue to be successful, and that privatization would provide greater freedom
to achieve its long-term goals by removing the pressure on short‑term public
financial reporting, and bringing in equity from sophisticated investors
motivated to improve the corporation’s performance. Provided that, as here, the
directors’ decision is found to have been within the range of reasonable
choices that they could have made in weighing conflicting interests, the court
will not go on to determine whether their decision was the perfect one.
[113]
Considering all the relevant factors, we conclude that the
debentureholders have failed to establish a reasonable expectation that could
give rise to a claim for oppression. As found by the trial judge, the alleged
expectation that the investment grade of the debentures would be maintained is
not supported by the evidence. A reasonable expectation that the
debentureholders’ interests would be considered is established, but was
fulfilled. The evidence does not support a further expectation that a better
arrangement could be negotiated that would meet the exigencies that the
corporation was facing, while better preserving the trading value of the
debentures.
[114]
Given that the debentureholders have failed to establish that the
expectations they assert were reasonable, or that they were not fulfilled, it
is unnecessary to consider in detail whether conduct complained of was
oppressive, unfairly prejudicial, or unfairly disregarded the debentureholders’
interests within the terms of s. 241 of the CBCA . Suffice it to say
that “oppression” in the sense of bad faith and abuse was not alleged, much
less proved. At best, the claim was for “unfair disregard” of the interests of
the debentureholders. As discussed, the evidence does not support this claim.
C. The Section 192 Approval Process
[115]
The second remedy relied on by the debentureholders is the
approval process for complex corporate arrangements set out under s. 192 of the
CBCA . BCE brought a petition for court approval of the plan under s.
192 . At trial, the debentureholders were granted standing to contest such
approval. The trial judge concluded that “[i]t seem[ed] only logical and
‘fair’ to conduct this analysis having regard to the interests of BCE and those
of its shareholders and other stakeholders, if any, whose interests are being
arranged or affected”: (2008), 43 B.L.R. (4th) 1, 2008 QCCS 905, at para. 151.
On the basis of Corporations Canada’s Policy concerning Arrangements Under
Section 192 of the CBCA , November 2003 (“Policy Statement 15.1”), the trial
judge held that the s. 192 approval did not require the Board to afford the
debentureholders the right to vote. He nonetheless considered their interests
in assessing the fairness of the arrangement. After a full hearing, he
approved the arrangement as “fair and reasonable”, despite the
debentureholders’ objections that the arrangement would adversely affect the
trading value of their securities.
[116]
The Court of Appeal reversed this decision, essentially on the
ground that the directors had not given adequate consideration to the
debentureholders’ reasonable expectations. These expectations, in its view,
extended beyond the debentureholders’ legal rights and required the directors
to consider whether the adverse impact on the debentureholders’ economic
interests could be alleviated or attenuated. The court held that the
corporation had failed to discharge the burden of showing that it was
impossible to structure the sale in a manner that avoided the adverse economic
effect on debentureholdings, and consequently had failed to establish that the
proposed plan of arrangement was fair and reasonable.
[117]
Before considering what must be shown to obtain approval of an
arrangement under s. 192 , it may be helpful to briefly return to the
differences between an action for oppression under s. 241 of the CBCA and
a motion for approval of an arrangement under s. 192 of the CBCA alluded
to earlier.
[118]
As we have discussed (at para. 47), the reasoning of the Court of
Appeal effectively incorporated the s. 241 oppression claim into the s. 192
approval proceeding, converting it into an inquiry based on reasonable
expectations.
[119]
As we view the matter, the s. 241 oppression remedy and the s.
192 approval process are different proceedings, with different requirements. While
a conclusion that the proposed arrangement has an oppressive result may support
the conclusion that the arrangement is not fair and reasonable under
s. 192 , it is important to keep in mind the differences between the two
remedies. The oppression remedy is a broad and equitable remedy that focuses
on the reasonable expectations of stakeholders, while the s. 192 approval
process focuses on whether the arrangement, objectively viewed, is fair and
reasonable and looks primarily to the interests of the parties whose legal
rights are being arranged. Moreover, in an oppression proceeding, the onus is
on the claimant to establish oppression or unfairness, while in a s. 192
proceeding, the onus is on the corporation to establish that the arrangement is
“fair and reasonable”.
[120]
These differences suggest that it is possible that a claimant
might fail to show oppression under s. 241 , but might succeed under s. 192 by
establishing that the corporation has not discharged its onus of showing that
the arrangement in question is fair and reasonable. For this reason, it is
necessary to consider the debentureholders’ s. 192 claim on these appeals,
notwithstanding our earlier conclusion that the debentureholders have not
established oppression.
[121]
Whether the converse is true is not at issue in these proceedings
and need not detain us. It might be argued that in theory, a finding of s. 241
oppression could be coupled with approval of an arrangement as fair and
reasonable under s. 192 , given the different allocations of burden of proof in
the two actions and the different perspectives from which the assessment is
made. On the other hand, common sense suggests, as did the Court of Appeal,
that a finding of oppression sits ill with the conclusion that the arrangement
involved is fair and reasonable. We leave this interesting question to a case
where it arises.
(1) The Requirements for Approval Under Section 192
[122]
We will first describe the nature and purpose of the s. 192
approval process. We will then consider the philosophy that underlies s. 192
approval; the interests at play in the process; and the criteria to be applied
by the judge on a s. 192 proceeding.
(a) The Nature and Purpose of the Section 192
Procedure
[123]
The s. 192 approval process has its genesis in 1923 legislation
designed to permit corporations to modify their share capital: Companies Act
Amending Act, 1923, S.C. 1923, c. 39, s. 4. The legislation’s
concern was to permit changes to shareholders’ rights, while offering
shareholders protection. In 1974, plans of arrangements were omitted from the CBCA
because Parliament considered them superfluous and feared that they could
be used to squeeze out minority shareholders. Upon realizing that
arrangements were a practical and flexible way to effect complicated
transactions, an arrangement provision was reintroduced in the CBCA in
1978: Consumer and Corporate Affairs Canada, Detailed background paper for
an Act to amend the Canada Business Corporations Act (1977), p. 5
(“Detailed Background Paper”).
[124]
In light of the flexibility it affords, the provision has
been broadened to deal not only with reorganization of share capital, but
corporate reorganization more generally. Section 192(1) of the present
legislation defines an arrangement under the provision as including amendments
to articles, amalgamation of two or more corporations, division of the business
carried on by a corporation, privatization or “squeeze-out”
transactions, liquidation or dissolution, or any combination of these.
[125]
This list of transactions is not exhaustive and has been
interpreted broadly by courts. Increasingly, s. 192 has been used as a device
for effecting changes of control because of advantages it offers the purchaser:
C. C. Nicholls, Mergers, Acquisitions, and Other Changes of Corporate
Control (2007), at p. 76. One of these advantages is that it permits the
purchaser to buy shares of the target company without the need to comply with
provincial takeover bid rules.
[126]
The s. 192 process is generally applicable to change of control
transactions that share two characteristics: the arrangement is sponsored by
the directors of the target company; and the goal of the arrangement is to
require some or all of the shareholders to surrender their shares to either the
purchaser or the target company.
[127]
Fundamentally, the s. 192 procedure rests on the proposition that
where a corporate transaction will alter the rights of security holders, this
impact takes the decision out of the scope of management of the corporation’s
affairs, which is the responsibility of the directors. Section 192 overcomes
this impediment through two mechanisms. First, proposed arrangements generally
can be submitted to security holders for approval. Although there is no
explicit requirement for a security holder vote in s. 192, as will be discussed
below, these votes are an important feature of the process for approval of
plans of arrangement. Second, the plan of arrangement must receive court
approval after a hearing in which parties whose rights are being affected may
partake.
(b) The Philosophy Underlying Section 192
[128]
The purpose of s. 192, as we have seen, is to permit major
changes in corporate structure to be made, while ensuring that individuals and
groups whose rights may be affected are treated fairly. In conducting the s.
192 inquiry, the judge must keep in mind the spirit of s. 192, which is to
achieve a fair balance between conflicting interests. In discussing the
objective of the arrangement provision introduced into the CBCA in 1978,
the Minister of Consumer and Corporate Affairs stated:
. . . the
Bill seeks to achieve a fair balance between flexible management and equitable
treatment of minority shareholders in a manner that is consonant with the other
fundamental change institutions set out in Part XIV.
(Detailed Background Paper, at p. 6)
[129]
Although s. 192 was initially conceived as permitting and has
principally been used to permit useful restructuring while protecting minority
shareholders against adverse effects, the goal of ensuring a fair balance
between different constituencies applies with equal force when considering the
interests of non-shareholder security holders recognized under s. 192. Section
192 recognizes that major changes may be appropriate, even where they have an
adverse impact on the rights of particular individuals or groups. It seeks to
ensure that the interests of these rights holders are considered and treated
fairly, and that in the end the arrangement is one that should proceed.
(c) Interests Protected by Section 192
[130]
The s. 192 procedure originally was aimed at protecting
shareholders affected by corporate restructuring. That remains a fundamental
concern. However, this aim has been subsequently broadened to protect other
security holders in some circumstances.
[131]
Section 192 clearly contemplates the participation of security
holders in certain situations. Section 192(1)(f) specifies that an
arrangement may include an exchange of securities for property. Section
192(4)(c) provides that a court can make an interim order “requiring a
corporation to call, hold and conduct a meeting of holders of securities”. The
Director appointed under the CBCA takes the view that, at a minimum, all
security holders whose legal rights stand to be affected by the transaction
should be permitted to vote on the arrangement: Policy Statement 15.1, s. 3.08 .
[132]
A difficult question is whether s. 192 applies only to security
holders whose legal rights stand to be affected by the proposal, or
whether it applies to security holders whose legal rights remain intact but
whose economic interests may be prejudiced.
[133]
The purpose of s. 192, discussed above, suggests that only
security holders whose legal rights stand to be affected by the proposal are
envisioned. As we have seen, the s. 192 procedure was conceived and has
traditionally been viewed as aimed at permitting a corporation to make changes
that affect the rights of the parties. It is the fact that rights are
being altered that places the matter beyond the power of the directors and
creates the need for shareholder and court approval. The distinction between
the focus on legal rights under arrangement approval and reasonable
expectations under the oppression remedy is a crucial one. The oppression
remedy is grounded in unfair treatment of stakeholders, rather than on legal
rights in their strict sense.
[134]
This general rule, however, does not preclude the possibility
that in some circumstances, for example threat of insolvency or claims by
certain minority shareholders, interests that are not strictly legal should be
considered: see Policy Statement 15.1, s. 3.08, referring to “extraordinary
circumstances”.
[135]
It is not necessary to decide on these appeals precisely what
would amount to “extraordinary circumstances” permitting consideration of
non-legal interests on a s. 192 application. In our view, the fact that a
group whose legal rights are left intact faces a reduction in the trading value
of its securities would generally not, without more, constitute such a
circumstance.
(d) Criteria for Court Approval
[136]
Section 192(3) specifies that the corporation must obtain court
approval of the plan. In determining whether a plan of arrangement should be
approved, the court must focus on the terms and impact of the arrangement
itself, rather than on the process by which it was reached. What is required
is that the arrangement itself, viewed substantively and objectively, be
suitable for approval.
[137]
In seeking approval of an arrangement, the corporation bears the
onus of satisfying the court that: (1) the statutory procedures have been met;
(2) the application has been put forward in good faith; and (3) the arrangement
is fair and reasonable: see Trizec Corp., Re (1994), 21 Alta. L.R. (3d)
435 (Q.B.), at p. 444. This may be contrasted with the s. 241 oppression action,
where the onus is on the claimant to establish its case. On these appeals, it
is conceded that the corporation satisfied the first two requirements. The
only question is whether the arrangement is fair and reasonable.
[138]
In reviewing the directors’ decision on the proposed arrangement
to determine if it is fair and reasonable under s. 192, courts must be
satisfied that (a) the arrangement has a valid business purpose, and (b) the
objections of those whose legal rights are being arranged are being resolved in
a fair and balanced way. It is through this two-pronged framework that courts
can determine whether a plan is fair and reasonable.
[139]
In the past, some courts have answered the question of whether an
arrangement is fair and reasonable by applying what is referred to as the
business judgment test, that is whether an intelligent and honest business
person, as a member of the voting class concerned and acting in his or her own
interest would reasonably approve the arrangement: see Trizec, at p.
444; Pacifica Papers Inc. v. Johnstone (2001), 15 B.L.R. (3d) 249, 2001
BCSC 1069. However, while this consideration may be important, it does not
constitute a useful or complete statement of what must be considered on a s.
192 application.
[140]
First, the fact that the business judgment test referred to here
and the business judgment rule discussed above (at para. 40) are so similarly
named leads to confusion. The business judgment rule expresses the need
for deference to the business judgment of directors as to the best interests of
the corporation. The business judgment test under s. 192, by contrast,
is aimed at determining whether the proposed arrangement is fair and
reasonable, having regard to the corporation and relevant stakeholders. The
two inquiries are quite different. Yet the use of the same terminology has
given rise to confusion. Thus, courts have on occasion cited the business
judgment test while saying that it stands for the principle that arrangements
do not have to be perfect, i.e. as a deference principle: see Abitibi-Consolidated
Inc. (Arrangement relatif à), [2007] Q.J. No. 16158 (QL), 2007 QCCS 6830.
To conflate the business judgment test and the business judgment rule leads to
difficulties in understanding what “fair and reasonable” means and how an
arrangement may satisfy this threshold.
[141]
Second, in instances where affected security holders have voted
on a plan of arrangement, it seems redundant to ask what an intelligent and
honest business person, as a member of the voting class concerned and acting in
his or her own interest, would do. As will be discussed below (at para. 150),
votes on arrangements are an important indicator of whether a plan is fair and
reasonable. However, the business judgment test does not provide any more
information than does the outcome of a vote. Section 192 makes it clear that
the reviewing judge must delve beyond whether a reasonable business person
would approve of a plan to determine whether an arrangement is fair and reasonable.
Insofar as the business judgment test suggests that the judge need only
consider the perspective of the majority group, it is incomplete.
[142]
In summary, we conclude that the business judgment test is not
useful in the context of a s. 192 application, and indeed may lead to
confusion.
[143]
The framework proposed in these reasons reformulates the s. 192
test for what is fair and reasonable in a way that reflects the logic of s. 192
and the authorities. Determining what is fair and reasonable involves two
inquiries: first, whether the arrangement has a valid business purpose; and
second, whether it resolves the objections of those whose rights are being
arranged in a fair and balanced way. In approving plans of arrangement, courts
have frequently pointed to factors that answer these two questions as discussed
more fully below: Canadian Pacific Ltd. (Re) (1990), 73 O.R. (2d) 212
(H.C.); Cinar Corp. v. Shareholders of Cinar Corp. (2004), 4
C.B.R. (5th) 163 (Que. Sup. Ct.); PetroKazakhstan Inc. v. Lukoil Overseas
Kumkol B.V. (2005), 12 B.L.R. (4th) 128, 2005 ABQB 789.
[144]
We now turn to a more detailed discussion of the two prongs.
[145]
The valid business purpose prong of the fair and reasonable
analysis recognizes the fact that there must be a positive value to the
corporation to offset the fact that rights are being altered. In other words,
courts must be satisfied that the burden imposed by the arrangement on security
holders is justified by the interests of the corporation. The proposed plan of
arrangement must further the interests of the corporation as an ongoing
concern. In this sense, it may be narrower than the “best interests of the
corporation” test that defines the fiduciary duty of directors under
s. 122 of the CBCA (see paras. 38-40).
[146]
The valid purpose inquiry is invariably fact-specific. Thus, the
nature and extent of evidence needed to satisfy this requirement will depend on
the circumstances. An important factor for courts to consider when determining
if the plan of arrangement serves a valid business purpose is the necessity of
the arrangement to the continued operations of the corporation. Necessity is
driven by the market conditions that a corporation faces, including
technological, regulatory and competitive conditions. Indicia of necessity
include the existence of alternatives and market reaction to the plan. The
degree of necessity of the arrangement has a direct impact on the court’s level
of scrutiny. Austin J. in Canadian Pacific concluded that
while courts are prepared to assume jurisdiction notwithstanding a lack
of necessity on the part of the company, the lower the degree of necessity,
the higher the degree of scrutiny that should be applied. [Emphasis added;
p. 223.]
If the plan of
arrangement is necessary for the corporation’s continued existence, courts will
more willingly approve it despite its prejudicial effect on some security holders.
Conversely, if the arrangement is not mandated by the corporation’s financial
or commercial situation, courts are more cautious and will undertake a careful
analysis to ensure that it was not in the sole interest of a particular
stakeholder. Thus, the relative necessity of the arrangement may justify
negative impact on the interests of affected security holders.
[147]
The second prong of the fair and reasonable analysis focuses on
whether the objections of those whose rights are being arranged are being resolved
in a fair and balanced way.
[148]
An objection to a plan of arrangement may arise where there is
tension between the interests of the corporation and those of a security
holder, or there are conflicting interests between different groups of
affected rights holders. The judge must be satisfied that the arrangement
strikes a fair balance, having regard to the ongoing interests of the
corporation and the circumstances of the case. Often this will involve complex
balancing, whereby courts determine whether appropriate accommodations and
protections have been afforded to the concerned parties. However, as noted by
Forsyth J. in Trizec, at para. 36:
[T]he court must be careful not to cater to the special needs of one
particular group but must strive to be fair to all involved in the transaction
depending on the circumstances that exist. The overall fairness of any
arrangement must be considered as well as fairness to various individual
stakeholders.
[149]
The question is whether the plan, viewed in this light, is fair
and reasonable. In answering this question, courts have considered a variety
of factors, depending on the nature of the case at hand. None of these alone
is conclusive, and the relevance of particular factors varies from case to case.
Nevertheless, they offer guidance.
[150]
An important factor is whether a majority of security holders has
voted to approve the arrangement. Where the majority is absent or slim, doubts
may arise as to whether the arrangement is fair and reasonable; however, a
large majority suggests the converse. Although the outcome of a vote by
security holders is not determinative of whether the plan should receive the
approval of the court, courts have placed considerable weight on this factor.
Voting results offer a key indication of whether those affected by the plan
consider it to be fair and reasonable: St. Lawrence & Hudson Railway Co.
(Re), [1998] O.J. No. 3934 (QL) (Gen. Div.).
[151]
Where there has been no vote, courts may consider whether an
intelligent and honest business person, as a member of the class concerned and
acting in his or her own interest, might reasonably approve of the plan: Re
Alabama, New Orleans, Texas and Pacific Junction Railway Co., [1891] 1 Ch.
213 (C.A.); Trizec.
[152]
Other indicia of fairness are the proportionality of the
compromise between various security holders, the security holders’ position
before and after the arrangement and the impact on various security holders’
rights: see Canadian Pacific; Trizec. The court may also
consider the repute of the directors and advisors who endorse the arrangement
and the arrangement’s terms. Thus, courts have considered whether the plan has
been approved by a special committee of independent directors; the presence of
a fairness opinion from a reputable expert; and the access of shareholders to
dissent and appraisal remedies: see Stelco Inc., Re (2006), 18 C.B.R.
(5th) 173 (Ont. S.C.J.); Cinar; St. Lawrence & Hudson Railway;
Trizec; Pacifica Papers; Canadian Pacific.
[153]
This review of factors represents considerations that have
figured in s. 192 cases to date. It is not meant to be exhaustive, but
simply to provide an overview of some factors considered by courts in
determining if a plan has reasonably addressed the objections and conflicts
between different constituencies. Many of these factors will also indicate
whether the plan serves a valid business purpose. The overall determination of
whether an arrangement is fair and reasonable is fact‑specific and may
require the assessment of different factors in different situations.
[154]
We arrive then at this conclusion: in determining whether a plan
of arrangement is fair and reasonable, the judge must be satisfied that the
plan serves a valid business purpose and that it adequately responds to the
objections and conflicts between different affected parties. Whether these
requirements are met is determined by taking into account a variety of relevant
factors, including the necessity of the arrangement to the corporation’s
continued existence, the approval, if any, of a majority of shareholders and
other security holders entitled to vote, and the proportionality of the impact
on affected groups.
[155]
As has frequently been stated, there is no such thing as a
perfect arrangement. What is required is a reasonable decision in light of the
specific circumstances of each case, not a perfect decision: Trizec; Maple
Leaf Foods. The court on a s. 192 application should refrain from
substituting their views of what they consider the “best” arrangement. At the
same time, the court should not surrender their duty to scrutinize the
arrangement. Because s. 192 facilitates the alteration of legal rights, the
Court must conduct a careful review of the proposed transactions. As Lax J.
stated in UPM-Kymmene Corp. v. UPM-Kymmene Miramichi Inc. (2002), 214
D.L.R. (4th) 496 (Ont. S.C.J.), at para. 153: “Although Board decisions are not
subject to microscopic examination with the perfect vision of hindsight, they
are subject to examination.”
(2) Application to These Appeals
[156]
As discussed above (at paras. 137-38), the corporation on a s.
192 application must satisfy the court that: (1) the statutory procedures are
met; (2) the application is put forward in good faith; and (3) the arrangement
is fair and reasonable, in the sense that: (a) the arrangement has a valid
business purpose; and (b) the objections of those whose rights are being
arranged are resolved in a fair and balanced way.
[157]
The first and second requirements are clearly satisfied in this
case. On the third element, the debentureholders no longer argue that the
arrangement lacks a valid business purpose. The debate before this Court
focuses on whether the objections of those whose rights are being arranged were
resolved in a fair and balanced way.
[158]
The debentureholders argue that the arrangement does not address
their rights in a fair and balanced way. Their main contention is that the
process adopted by the directors in negotiating and concluding the arrangement
failed to consider their interests adequately, in particular the fact that the
arrangement, while upholding their contractual rights, would reduce the trading
value of their debentures and in some cases downgrade them to below investment
grade rating.
[159]
The first question that arises is whether the debentureholders’
economic interest in preserving the trading value of their bonds was an
interest that the directors were required to consider on the s. 192
application. We earlier concluded that authority and principle suggest that s.
192 is generally concerned with legal rights, absent exceptional
circumstances. We further suggested that the fact that a group whose legal
rights are left intact faces a reduction in the trading value of its securities
would generally not constitute such a circumstance.
[160]
Relying on Policy Statement 15.1, the trial judge in these
proceedings concluded that the debentureholders were not entitled to vote on
the plan of arrangement because their legal rights were not being arranged;
“[t]o do so would unjustly give [them] a veto over a transaction with an
aggregate common equity value of approximately $35 billion that was approved by
over 97% of the shareholders” (para. 166). Nevertheless, the trial judge went
on to consider the debentureholders’ perspective.
[161]
We find no error in the trial judge’s conclusions on this point.
Since only their economic interests were affected by the proposed transaction,
not their legal rights, and since they did not fall within an exceptional
situation where non‑legal interests should be considered under s. 192,
the debentureholders did not constitute an affected class under s. 192. The
trial judge was thus correct in concluding that they should not be permitted to
veto almost 98 percent of the shareholders simply because the trading value of
their securities would be affected. Although not required, it remained open to
the trial judge to consider the debentureholders’ economic interests in his
assessment of whether the arrangement was fair and reasonable under s. 192, as
he did.
[162]
The next question is whether the trial judge erred in concluding
that the arrangement addressed the debentureholders’ interests in a fair and
balanced way. The trial judge emphasized that the arrangement preserved the
contractual rights of the debentureholders as negotiated. He noted that it was
open to the debentureholders to negotiate protections against increased debt
load or the risks of changes in corporate structure, had they wished to do so.
He went on to state:
. . . the evidence
discloses that [the debentureholders’] rights were in fact considered and
evaluated. The Board concluded, justly so, that the terms of the 1976, 1996
and 1997 Trust Indentures do not contain change of control provisions, that
there was not a change of control of Bell Canada contemplated and that,
accordingly, the Contesting Debentureholders could not reasonably expect BCE to
reject a transaction that maximized shareholder value, on the basis of any
negative impact [on] them.
((2008), 43 B.L.R. (4th) 1, 2008 QCCS 905, at para. 162, quoting (2008),
43 B.L.R. (4th) 79, 2008 QCCS 907, at para. 199)
[163]
We find no error in these conclusions. The arrangement does not
fundamentally alter the debentureholders’ rights. The investment and the
return contracted for remain intact. Fluctuation in the trading value of
debentures with alteration in debt load is a well-known commercial phenomenon.
The debentureholders had not contracted against this contingency. The fact
that the trading value of the debentures stood to diminish as a result of the
arrangement involving new debt was a foreseeable risk, not an exceptional
circumstance. It was clear to the judge that the continuance of the
corporation required acceptance of an arrangement that would entail increased
debt and debt guarantees by Bell Canada: necessity was established. No
superior arrangement had been put forward, and BCE had been assisted throughout
by expert legal and financial advisors, suggesting that the proposed
arrangement had a valid business purpose.
[164]
Based on these considerations, and recognizing that there is no
such thing as a perfect arrangement, the trial judge concluded that the
arrangement had been shown to be fair and reasonable. We see no error in this
conclusion.
[165]
The Court of Appeal’s contrary conclusion rested, as suggested
above, on an approach that incorporated the s. 241 oppression remedy with its
emphasis on reasonable expectations into the s. 192 arrangement approval
process. Having found that the debentureholders’ reasonable expectations (that
their interests would be considered by the Board) were not met, the court went
on to combine that finding with the s. 192 onus on the corporation. The result
was to combine the substance of the oppression action with the onus of the s.
192 approval process. From this hybrid flowed the conclusion that the
corporation had failed to discharge its burden of showing that it could not
have met the alleged reasonable expectations of the debentureholders. This
result could not have obtained under s. 241 , which places the burden of
establishing oppression on the claimant. By combining s. 241 ’s substance with
the reversed onus of s. 192, the Court of Appeal arrived at a conclusion that
could not have been sustained under either provision, read on its own terms.
VI. Conclusion
[166]
We conclude that the debentureholders have failed to establish
either oppression under s. 241 of the CBCA or that the trial judge erred
in approving the arrangement under s. 192 of the CBCA .
[167]
For these reasons, the appeals are allowed, the decision of the
Court of Appeal set aside, and the trial judge’s approval of the plan of
arrangement is affirmed with costs throughout. The cross-appeals are dismissed
with costs throughout.
Appeals allowed with costs. Cross‑appeals
dismissed with costs.
Solicitors for the appellants/respondents on cross‑appeals
BCE Inc. and Bell Canada: Davies, Ward, Phillips & Vineberg,
Montréal; Ogilvy Renault, Montréal.
Solicitors for the appellant/respondent on cross‑appeals
6796508 Canada Inc.: Woods & Partners, Montréal.
Solicitors for the respondents/appellants on cross‑appeals
Group of 1976 Debentureholders and Group of 1996
Debentureholders: Fishman, Flanz, Meland, Paquin, Montréal.
Solicitors for the respondent/appellant on cross‑appeals
Group of 1997 Debentureholders: McMillan, Binch, Mendelsohn,
Toronto.
Solicitors for the respondent Computershare Trust
Company of Canada: Miller, Thomson, Pouliot, Montréal.
Solicitor for the intervener Catalyst Asset
Management Inc.: Christian S. Tacit, Kanata.
Solicitors for the intervener Matthew
Stewart: Langlois, Kronström, Desjardins, Montréal.
Bastarache J. joined in the judgment of June 20, 2008, but
took no part in these reasons for judgment.