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Supreme Ambiguity

Updated: Mar 31, 2018

First published in The National Post

By: Anita Anand

Three weeks ago, the Supreme Court of Canada issued a long- awaited decision on the issue of directors' duties in Canada. In Peoples Department Stores Inc. (Trustee of) v. Wise, the Supreme Court held that directors do not owe a fiduciary duty to creditors. Rather, the fiduciary duty is owed "to the corporation." While this decision seems potent on the issue of fiduciary duties, it is not. Its effect is to render almost meaningless the board's fiduciary duty and create significant ambiguity in the process.

On first blush, the decision may seem clear and uncontroversial. After all, the idea that directors owe their fiduciary duty to the corporation has a firm basis in existing law. The leading authority on point is Canadian corporate statues that state that directors and officers "owe a duty to act honestly, in good faith and in the best interests of the corporation." Case law such as Teck v Millar, a decision cited by the court, further sets forth that the directorial duty is not owed to any one particular shareholder (here in the takeover bid context) but to the "corporation" as a whole.

But when we try to analyze who is the corporation, the decision becomes murky. The court rejects the idea that discharging the duty means simply respecting shareholder interests. Rather, at all times, directors "owe their fiduciary obligations to the corporation, and the corporations' interests are not to be confused with the interests of the creditors or those of any other stakeholder."

Here, the court could be making a specific policy choice to provide utmost flexibility to the board as the wording of the statute suggests should be the case. That is, no particular constituency should have the ability demand the board's attention to the exclusion of any other stakeholder. Rather, the board must have space to manage and sort out conflicting priorities. Regardless of the court's intent here, however, the practical consequences of this holding are enormous because the court further states that in discharging the fiduciary duty to the corporation, it may be legitimate for the board to consider the interests of any number of groups including "the interests of shareholders, employees, suppliers, creditors, consumers, governments and the environment."

This broad list of possible recipients goes further than statutory and case law to date. Indeed, the danger of listing the recipients of the fiduciary duty is that the duty has been expanded considerably, rendering it ineffective. If so many different stakeholder interests can benefit from the duty, how potent can the duty be? To take a simple example, suppose that a company's share price will be cut in half unless a significant percentage of its employees are laid off. If directors are to abide by their duty to the "corporation" -- a duty that includes taking into account shareholders' and employees' interests -- should they lay off the employees or not? Under current law, it seems that either decision is justifiable. In short, the duty to the "corporation" tells directors very little about which actions they should take from a practical standpoint.

Who then would favour the decision as it relates to fiduciary duty? This is a difficult question to answer because of the various interpretations that the decision allows. Proponents of shareholder primacy argue that shareholders are owners of the corporation, or at least owners of an interest in the corporation, and as such they and they alone should be the beneficiary of directors' fiduciary duty. These advocates thus will likely not view the Wise decision favourably; at any point in time, directors could avert their attention away from shareholder interests to any one of the enumerated stakeholder groups. This decision undermines directorial accountability. On the other hand, these advocates may favour the Wise decision in its result since the court was not prepared to state that the duty to creditors "rises" to a fiduciary duty.

Certainly there are times when the shareholders cannot be "prime" and the interests of other stakeholders should be. For example, in the Wise decision, the shareholders had no practical interest in that case since the corporation was, at the commencement of the litigation, near insolvent. As Edward Iacobucci has argued, the interests of the creditors and shareholders are not in conflict with each other here. If boards are able to take into account the interests of creditors, as the Supreme Court states that they can in discharging their duty to act in the best interests of the corporation, then why is not this a case in which creditors' interests should be considered? Or is it enough that they are considered and then rejected as important by the board?

Proponents of corporate social responsibility (CSR) may favour this decision. The court enumerates a wide array of stakeholders whose interests can be taken into account in discharging the duty. The CSR movement has long argued that the fiduciary duty is more than a duty to shareholders and should include other stakeholder interests (witness the 2002 report of the Canadian Democracy and Corporate Accountability Commission). But even CSR types may have difficulties endorsing the judgment since the court rejected a fiduciary duty owed to creditors on the facts of the case. Why aren't creditors worthy of a fiduciary duty here?

And, we should not forget directors themselves. They may applaud this decision as they arguably can retain a level of flexibility that now insulates them from owing any one particular group a fiduciary duty. Their decisions are also insulated by the business judgment rule. But in the world of ultra-vigilant corporate governance practices, directors may view this decision as nebulous, thus making the discharge of their duties even more difficult. They will be asking: How does this case change what we are currently doing? There is no clear answer to this question. At the very least, if counsel were previously advising that discharging one's fiduciary duty meant acting in the best interests of shareholders, this no longer seems true.

Furthermore, the Supreme Court's decision with regards to the standard of care should cause boards concern since the court held that a duty of care (as distinct from a fiduciary duty) is owed to creditors. This holding has the potential to leave directors open to a new claim from creditors (and other stakeholders) that the directors have acted negligently towards them and have therefore breached the duty of care. Certainly, after Peoples v. Wise, directors will be concerned about which stakeholder groups stand to be "harmed" by their conduct. Has this case opened up a new cause of action against directors?

In short, the Supreme Court missed an opportunity in Peoples v. Wise to clarify existing law including specifying to whom the fiduciary duty is owed. The case only confirms that the corporate fiduciary duty is void of content. Surely the fiduciary duty cannot be owed to everyone. Surely creditors are worthy recipients of the duty in the insolvency situation, especially when shareholder interests are non-existent. Shareholder advocates, CSR proponents and directors' counsel would benefit from an unequivocal response on the matter, either from the legislature that originally set forth this "duty to the corporation" or from the courts themselves.

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