Before the ink could dry on the most important and highly anticipated judicial decision to affect corporate directors and officers in over a year, BCE et al. v. A Group of 1976 Debenture holders, et al., the justices of the Supreme Court of Canada raced off to their summer retreats without so much as an explanation. Left in their wake was the approval of the highest buy-out in Canadian corporate history, a plan of arrangement between the Ontario Teachers Pension Plan and BCE Inc. However, here we sit in the fall, still without any judicial reasoning, trying to determine how the courts nearly put corporations in the unsettling position of being squeezed by creditors.

The facts of the case are rather simple. The Ontario Teachers Pension Plan leveraged a $52 million buyout of BCE Inc. BCE Inc. subsequently commenced a proceeding before the Quebec Superior Court to implement the transaction by way of a court-supervised plan of arrangement.

Certain debenture holders of Bell Canada, a BCE Inc. subsidiary, argued that the buy-out adversely affected their interests. These creditors indicated that the Ontario Teachers Pension Plan’s buy-out of BCE would result in a drop-off in value of their bonds. Some speculated that because of the downgrade in ratings on the bonds, the debenture holders could experience
a decline of as much as 23 per cent and strip bonds could lose 50 per cent of their value. Conversely, common shareholders expected a 40 per cent return on their shares, and preferred shareholders also expected to receive a premium return.

The issue before the Court was, which group did the board of directors of BCE Inc. owe a duty to protect in these circumstances? The creditors of BCE Inc. who faced diminished returns on their bonds as a result of the transaction or the shareholders of BCE Inc. who could obtain significant gains from the Ontario Teachers Pension Plan’s buy-out?

Past legal precedent did not assist in this matter. The leading case defining the duties of a corporate board is People’s Department Stores (Trustees of) v. Wise. In People’s the Court stated that a board of directors’ fiduciary duty is to the corporation, more specifically to maximize the value of the corporation. A point argued vigorously by BCE Inc.’s counsel. However, the People’s decision also states that in disposing its duty of care to a corporation, a board of directors cannot prefer any one stakeholder over another.
Herein lies the contradiction. If a board of director’s goal is to maximize the value of a corporation, is it not playing up to the interests of shareholders more than any other stakeholder? Furthermore, it can be argued that there is an underlying message in People’s, which states that the interests of shareholders rank superior to those of any stakeholder, regardless of the transaction.

Instead, it took the influence of BCE Inc.’s counsel to restore order to the obligations of a corporate board in a plan of arrangement, which the Court unanimously backed. And here is what can be learned. In the context of change of control transactions, the duty of a board is to act in the best interests of the corporation. A corporate board fulfills this duty by taking reasonable steps to maximize shareholder value. What does this mean to a group of debenture holders as was seen in this case? It means that a corporate board cannot trample over the rights of its bondholders. A bondholder’s rights are restricted by contract. As long as a board of directors does not impede on the debenture holder’s contract rights and respects the obligations enumerated in those contracts then a board has acted fair and reasonable. The trade-off is simple: in return for certainty of payment, a creditor forgoes the upside of the company.

Looking back, it can be argued that if the Supreme Court in People’s had been this direct in rendering its decision, the Quebec Court of Appeal never would have decided in favour of the debenture holders in this matter.