Oppression Remedy, Expectations of Stakeholders in Publicly Traded Companies During Takeovers -- An Unexpected Result from
Yesterday’s Quebec Court of Appeal decision in BCE 2008 QCCA 935 has some important implications for the oppression remedy across the Country.
The narrow point the case seems to turn on the Court’s ruling that, once a publicly traded company is “in play” (there are bidders for the company), the directors’ duty is not merely to maximize shareholder value but to ensure all stakeholders of the company are treated fairly:
[99] It is clear from the principles enunciated by the Supreme Court in Peoples that at no time do the directors have an overriding duty to act only in the best interests of the shareholders and to ignore the adverse effect on the interests of the debentureholders.
…
[102] The Court agrees with this analysis and concludes that the premise advanced by BCE that, once the corporation was in play, the Board could only consider ways to maximize the value for the shareholders, is erroneous. From a reading of all the judgments under appeal, it appears that the trial judge accepted this premise. By so doing, the trial judge erred and conducted his assessment of the conduct of the SOC and the Board and the fairness of the Plan from an erroneous perspective.
[103] Besides looking to the contractual rights flowing from the Trust Indentures, the Board should have considered the interests (including reasonable expectations) of the debentureholders.
…
[106] The interests of the debentureholders, which are wider than their contractual legal rights flowing from the Trust Indentures, should have been considered by the Board. Having regard to the finding of fact that the Plan adversely affected the interests of a class of securityholder (debentureholders), it was incumbent on the Board to look at their interests with a view to examining whether it was possible to alleviate or attenuate all or some of the adverse effects. Could this have been accomplished? The answer is unknown, because the Board did not examine the issue. They operated on the principle expressed in Revlon v. MAC Andrew & Orbes Holdings Inc. This, indeed was the finding of fact by the trial judge:
In the present case, relying on the principles described by the Supreme Court of Delaware in Revlon, the Board determined that they had an overriding duty to maximize shareholder value and obtain the highest value for the shareholders, while respecting the contractual obligations of the corporation and its subsidiaries.
[107] This approach by the Board was mistaken. In
While unexpected (and contrary to a significant body of commercial caselaw, although the caselaw is mainly American with some
[66] A corporation is comprised of different stakeholders. Shareholders are stakeholders, as are creditors, in this case the debentureholders. Shareholders and debentureholders are securityholders within the terms of the CBCA. From time to time, their interests may differ. The Supreme Court of Canada in Peoples, stated at paragraph 47 that "[i]n resolving these competing interests, it is incumbent upon the directors to act honestly and in good faith with a view to the best interests of the corporation […] and not to favour the interests of any one group of stakeholders". If the Board fails in that task, stakeholders may invoke various statutory remedies available under the CBCA. Some are specific, as in the case of amalgamation (s. 185 CBCA), or arrangement (s. 192 CBCA), others are of broad application, such as the oppression remedy (s. 241 CBCA).
[67] With regard to creditors, a class of stakeholders, the Supreme Court stated in Peoples:
[48] The Canadian legal landscape with respect to stakeholders is unique. Creditors are only one set of stakeholders, but their interests are protected in a number of ways. Some are specific, as in the case of amalgamation: s. 185 of the CBCA. Others cover a broad range of situations. The oppression remedy of s. 241(2)(c) of the CBCA and the similar provisions of provincial legislation regarding corporations grant the broadest rights to creditors of any common law jurisdiction: see D. Thomson, "Directors, Creditors and Insolvency: A Fiduciary Duty or a Duty Not to Oppress?" (2000), 58 U.T. Fac. L. Rev. 31, at p. 48. One commentator describes the oppression remedy as "the broadest, most comprehensive and most open-ended shareholder remedy in the common law world": S. M. Beck, "Minority Shareholders' Rights in the 1980s", in Corporate Law in the 80s (1982), 311, at p. 312. While Beck was concerned with shareholder remedies, his observation applies equally to those of creditors.
[Emphasis added]
[68] Thus, one of the possible remedies of creditors is found in s. 241 CBCA. It authorizes a complainant who has been oppressed or whose interests have been unfairly prejudiced or unfairly disregarded by a corporation, its directors or its shareholders to apply for redress to a Superior Court. Debentureholders are a class of creditors who hold securities of a corporation, and as such they are specifically identified as complainants in s. 238(a) CBCA and have made use of the remedy from time to time.
[69] The thwarted reasonable expectations of a complainant are an important element of establishing its right to a remedy. The reasonable expectations of a holder of a publicly issued debenture are derived from the trust indentures, debentures in their hands, the prospectuses, public statements of the company and the various other representations made from time to time. Various factors can be examined, as stated by the author Kevin McGuiness:
[…] The identification of what were the reasonable expectations of the parties is a question of fact. In determining that fact, there is no error in principle in looking at prior statements and drawing an inference based on the respective weight of all the individual pieces of evidence. In deciding what is unfair, the history and nature of the corporation, the essential nature of the relationship between the corporation and the complainant, the type of rights affected and general corporate practice are material. Test of unfair prejudice or unfair disregard encompasses the protection of the underlying expectation of a creditor in its arrangement with the corporation, the extent to which the acts complained of were unforeseeable or the creditor could reasonably have protected itself from such acts, and the detriment to the interests of the creditor. The reasonable expectations of a shareholder or other potential complainant are not assessed in the abstract. They must be construed by reference to the context in which the complainant acquired his or her rights, and the context in which the conduct complained of transpired. […]
[70] This concept was also expressed by the
[…] one clear principle that emerges is that we regulate voluntary relationships by regard to the expectations raised in the mind of a party by the word or deed of the other and which the first party ordinarily would realize it was encouraging by its words and deeds. This is what we call reasonable expectations, or expectations deserving of protection. Regard for them is a constant theme, albeit variously expressed, running through the cases on this section or its like elsewhere. I emphasize that all the words and deeds of the parties are relevant to an assessment of reasonable expectations, not necessarily only those consigned to paper, and not necessarily only those made when the relationship first arose.
[71] In other words, these reasonable expectations are not limited to the legal rights spelled out in the contractual terms of the trust indentures. However, these expectations, to remain reasonable, cannot run contrary to the express terms of the relevant contracts.
[72] The concept of fairness is central to the application of s. 241 CBCA.
[73] The CBCA requires a corporation to apply for approval to a Superior Court when it wishes to carry out certain specific transactions, such as an amalgamation (s. 182 CBCA) or an arrangement (s. 192 CBCA).
[74] In the present case, BCE chose to proceed by way of a plan of arrangement. It is not disputed that the contemplated Plan constitutes an arrangement within the meaning of s. 192 CBCA.
[75] Amongst the securityholders affected by an arrangement, there can be shareholders as well as debentureholders.
[76] It is now settled law that the court will approve a plan of arrangement only if it is fair and reasonable. Once more, the concept of fairness is crucial.
[77] Both the approval procedure under s. 192 CBCA and the oppression remedy under s. 241 CBCA are measures that Parliament designed to assure fairness in the conduct of the affairs of a corporation. In the first case, the proceedings are instituted by the corporation and in the second, they are generally taken against the corporation.
[78] The relationship between these two provisions has been discussed in various judgments. In Re Canadian Pacific Ltd., Austin J., as he then was, writes at p. 233:
In my view, much the same tests apply in the present case. If anything, the standard is higher under s. 192. It does not specify what standard must be attained, whereas under s. 241 the conduct must be "oppressive" before it will be struck down. Although s. 192 provides no standard, the jurisprudence has established that for an arrangement to get court approval it must not only be not oppressive, it must be fair and reasonable.
[79] If a plan of arrangement is found to be fair and reasonable, it could generally not be argued that the implementation of the plan as approved is oppressive to a complainant. In Re
It becomes unnecessary to say very much about the claim of oppression made by Cerberus because, as indicated, an Arrangement that is fair cannot be oppressive.
[80] In Re Canadian Airlines Corp., Paperny J., as she then was, in the context of a bankruptcy matter, writes at paragraph 145:
It is through the lens of insolvency legislation that the rights and interests of both shareholders and creditors must be considered. The reduction or elimination of rights of both groups is a function of the insolvency and not of oppressive conduct in the operation of the CCAA. The antithesis of oppression is fairness, the guiding test for judicial sanction. If a plan unfairly disregards or is unfairly prejudicial it will not be approved. However, the court retains the power to compromise or prejudice rights to effect a broader purpose, the restructuring of an insolvent company, provided that the plan does so in a fair manner.
[Emphasis added]
[81] However, the rejection of a motion alleging oppression is not conclusive on the fairness of a plan of arrangement. In 3017970 Nova Scotia Co. v. Johnstone, Cameron J. states at paragraph 15:
The fairness hearing is open to consideration of all relevant issues, including good faith, the availability of fairness opinions, adequacy of disclosure in the information circular, the results of the shareholder vote and the right to exercise dissenting appraisal rights. The standard of fairness and reasonability for approval of the Arrangement under CBCA s. 192 is clearly higher than merely "not oppressive" or "not unfair". If CBCA s. 241 is breached, the Arrangement cannot be approved.
[Emphasis added]
[82] In Scion Capital, LLC v. Gold Fields Ltd., Veale J. says at paragraph 72:
The petition for oppression has been heard at the same time as the application for approval of the plan of arrangement. There is some relationship between the two proceedings in that a plan of arrangement cannot be approved if it is oppressive. However, if the oppression proceeding fails, it does not automatically result in approval of the proposed arrangement; the applicant must demonstrate that the requirements of s. 195 of the Y.B.C.A. have been met; Re Canadian Pacific Ltd., cited above.
[83] Finally, if an arrangement has an oppressive result, it cannot be approved as fair.
[84] The trial judge, correctly, agreed with the principles enunciated in the foregoing cases.
[85] It follows that when a contemplated transaction is an arrangement under s. 192 CBCA, there would, in most cases, likely be no need for an affected securityholder to assert an oppression remedy under s. 241 CBCA to protect its interests. The affected securityholder could rather participate in the plan of arrangement proceedings and oppose the approval of the plan.
[86] In the case before the Court, the appellants acknowledged that their motions for an oppression remedy were made ex abundante cautela, after BCE asserted that they had no standing to participate in the arrangement proceedings. The principal remedy sought by the appellants under their oppression motions is refusal of the approval of the plan. In fact, their contestations of the motion for the approval of the plan of arrangement and their oppression motions are similar in their content, and seek to achieve the same result.
[87] Having regard to these circumstances, the Court will deal only with the plan of arrangement proceedings because if the plan is fair and reasonable, it cannot be said to be oppressive to securityholders, or unfairly prejudicial to, or unfairly disregard their interests. Therefore, the Motions for Oppression Remedy become moot and the appeals from the judgment of the Superior Court will accordingly be dismissed, but without costs, given the circumstances.
James Morton
Steinberg Morton Hope &
M2N 6P4
416 225 2777
Blog: http://jmortonmusings.blogspot.com/
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