Others may still blow BCE's $42.75 a share takeover out of the water, but at least now we know it will not explode at the hands of a court reshaping Canadian corporate law.
The May 21 Quebec Court of Appeal's BCE decision was a time bomb from the minute it landed. In a bizarre crawl through legal history and jurisprudence, it essentially said that corporate directors of a Canadian corporation have some kind of higher or extra duty to "stakeholders" rather than primarily to shareholders.
Now the Supreme Court of Canada, in a major strike for shareholder rights, has overturned that decision.
Yesterday's decision, even if it turns out to be a narrow one, has a larger significance. It runs to the heart of the current debate over corporate ownership and the long-term future of Canadian corporate control.
More immediately, had the Quebec appeal court decision been upheld, Canadian corporate law would have been turned on its head.
Directors making takeover decisions, bankers making loans, CEOs setting strategy, shareholders valuing their holdings and making investment decisions -- all would have had to start looking over their shoulders, wondering which special interest -- bondholders, unions, local communities, environmentalists -- might jump forward to make a stakeholder claim.
If nothing else, at least now we know that Canadian law continues to support the highest principle of corporate governance, the primacy of the shareholder.
What we don't know is how deep that support runs, something we won't discover until the Supreme Court justices deliver their BCE reasons several months from now. It is unlikely the court will emerge as the Milton Friedman of Canadian jurisprudence.
The late Nobel economist once famously said, "Few trends could so thoroughly undermine the very foundation of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible."
It's a view that could easily be extended to corporate law and the stakeholder threat.
The Supreme Court won't go there, even if it should. The court is more likely, in its reasons, to stick to the narrow legal and factual issues it faced in the BCE case. The bondholders who brought the case to the courts are entitled to what their bond agreements give them, and no more.
The bondholders' claims that they deserve extra consideration beyond their legal contract, to compensate for the temporary loss in market value as a result of the takeover by Ontario Teachers' Pension Plan, have clearly been rejected by the highest court.
The general shareholder victory in the decision, and the victory for Canadian corporate governance and law, is not so much in how far the court entrenched what Jeffrey MacIntosh, capital markets law professor at the University of Toronto, describes as "shareholder primacy." The victory is in the fact that the Supreme Court did not extend the competing and destructive stakeholder theory to bondholders under takeover circumstances. The court had already inched in that stakeholer direction with a confusingly written decision in 2004 in the bankruptcy of Peoples Department Stores.
But BCE is not a bankruptcy, something the Supreme Court is certain to acknowledge. The BCE bondholders, moreover, are not on the brink of getting wiped out in a liquidation sell-off.
Also defused is the growing belief that there might be something to the idea that the business of a corporation is something other than making money for shareholders.
As Prof. MacIntosh put it in a recent Financial Post commentary, "The principle of shareholder primacy is, without question, an indispensable foundational element of the corporation's mission as the primary engine of wealth creation in our economy."
To undermine that foundation with legal burdens that force boards and CEOs to raise others -- bondholders or even employees -- to greater stature would threaten corporations as engines of wealth creation.
The BCE decision may even have a longer reach beyond BCE in unexpected ways.
Next week, Ottawa's Competition Policy Review Panel, led ironically by former BCE Inc. chief executive officer Lynton (Red) Wilson, will release its report.
One issue before the panel is what Canada should do to prevent the so-called "hollowing out" of Canadian business.
Should the law (or the courts) force Canadian boards and CEOs to take into account some national "stakeholder" interest in maintaining Canadian control? It's not something the Supreme Court had to decide in the BCE case.
In siding with BCE shareholders, the Supreme Court has allowed a Canadian company to take control of BCE by upholding the right of shareholders to maximum value within the law.
Would it do the same if a foreign buyer were paying maximum value at the expense of claims of national. stakeholders?
James Morton
1100 - 5255 Yonge Street
Toronto, Ontario
M2N 6P4
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