First published on the University of Toronto Faculty of Law Blog - https://www.law.utoronto.ca/blog/faculty/backing-bce-bondholders-beyond-law-and-contract
By: Anita Anand
On May 21, 2008, the Quebec Court of Appeal reversed the lower court finding in the BCE Inc. case. BCE proposed an arrangement in which certain bondholders stood to be disadvantaged because the level of BCE's debt would be increased. The higher level of debt would in turn decrease the value of the existing debt as well as occasion a loss of investment grade status. The Court of Appeal held that the bondholders' interests must be considered when the board is discharging fiduciary duties. But the Court has pushed the concept of fiduciary duties into new territory, a move that seems to stretch existing law.
The Court conceives directors' fiduciary duties broadly, criticizing the BCE board for not considering how the plan of arrangement at issue might be unfair to bondholders. The Court relies on the SCC decision in Peoples v Wise (SCC 2004). However, Peoples in my view misconceives fiduciary duties, thus creating a potential domino effect for future decisions like BCE. The problem with Peoples is that it interprets directors’ fiduciary duties as applying to a broad range of corporate stakeholders (creditors, suppliers, consumers, employees, enivronmental groups etc.), thus watering down the duty significantly: a duty owed to everyone is in effect a duty to no one. But the BCE board was seeking to maximize shareholder value in a change of control transaction, something that most lawyers take to be settled law.
At the heart of the issue is the different relationship that shareholders and bondholders each have with the corporation. The terms of the bondholders' agreement with the corporation are found in the contract that they negotiated with BCE - the lower court was right to interpret that contract literally. The Quebec Court of Appeal was not bound to follow Peoples since Peoples was not a change of control transaction but rather one relating to fiduciary duties to creditors when the corporation is in the vicinity of insolvency. The BCE case could have been distinguished on that basis. Unfortunately, the Quebec Court of Appeal has now broadened Peoples as applying to change of control transactions and, contrary to legal advice frequently given, there appears to be no effective duty to maximize shareholder value in this circumstance.
The decision raises the larger question of the standard of fairness in the plan of arrangement context and whose interests the board must legally take into account. The Court holds that plans of arrangement require a standard of fairness in which bondholders’ interests are respected even though these interests may conflict with those of shareholders. This is puzzling, especially since the corporate statutory provisions dealing with arrangements are focused on the protection of shareholders. Why? Because unlike shareholders, debtholders protect themselves through contract and therefore do not need the protection of the statutory law. The risk profile of these stakeholders differs!
The Supreme Court of Canada may not grant leave to hear the appeal that will be launched by BCE. But clarity is needed on these issues: does the broad fiduciary duty in Peoples apply to change of control transactions? Is there a particular standard of fairness in plans of arrangement that is separate from existing fiduciary duties?