Program on Ethics in Law and Business panel dissected the Supreme Court’s 2008 decision on fiduciary duty

By Christopher R. Graham, JD 2007 / Illustration by Alex Nabaum

From the Spring/Summer 2016 issue of Nexus.

Illustration for directors' dutiesIn 2008, the Supreme Court of Canada decided that boards of directors owe a fiduciary duty to the corporation rather than to its shareholders.  The case was BCE Inc. v. 1976 Debentureholders, [2008] 3 SCR 560, and for eight years, lawyers and academics have struggled with the decision.  In particular, two broad questions: How can a corporation—a legal fiction, a non-entity—have its own interests, separate and distinct from those of its owners?  And if directors get to decide those interests, what protection do investors really have under Canadian corporate law?

Beneath uncertain April skies, a panel of the city’s mergers and acquisitions specialists took up these questions.  The panel featured Anita Anand (U of T), James C. Tory (Torys LLP), Naizam Kanji (Ontario Securities Commission), John Tuer (Scotiabank), Howard Wetston (C.D. Howe Institute and past chair of the OSC) and Robert Yalden (Oslers LLP).  Quipped one audience member, “It’s like Bay Street took the afternoon off from doing any M&A.”

Professor Anand, J.M. Kimber Chair in Investor Protection and Corporate Governance, organized and chaired the discussion, and began by reviewing the key findings of the BCE case.  She explained the Court’s view that directors have a duty to act in the best interests of the corporation but that does not mean simply maximizing shareholder value.  In assessing whether directors had discharged their duty, courts must consider the effect of their decision on the corporation but could also consider, where appropriate, the effects of that decision on “shareholders or particular groups of stakeholders.”  Anand suggested that one result of the BCE case was a renewed emphasis on the process boards of directors adopt when reaching their decisions. She also argued that the corporation is an entity comprised of numerous contractual relationships.

The panelists debated the issues vigorously.  Yalden flatly rejected any view of the corporation as an “inchoate legal fiction” or as something “nebulous and intangible.” 

“That’s not how boards think about corporations. It’s more tangible. What [directors] are worrying about is very real: the business, employees… Those are very real,” said Yalden.  Anand responded that these relationships are real but they are at bottom all contractual arrangements.

Tory, drawing on his litigation experience, said: “BCE complicates the content of directors’ duties because the interests of the corporation can’t be defined in reference to any one stakeholder group.”  The net result of this indeterminacy, in Tory’s view, is that “there is no meaningful standard to which directors can be held accountable.”  The right process can, in theory, justify any result.

Tuer, an investment banker, agreed but saw it in a different light. “The BCE decision gives directors comfort that they have leeway to come up with what they think is the right answer.”  Boards, in other words, know best, and the Court in BCE simply demanded evidence of a rigorous process in deploying the board’s (preeminent) business judgment.

The panel disagreed on whether, and in what direction, the BCE decision had moved Canadian corporate law.  Tory lamented the move away from shareholder primacy (i.e., the American and UK view that the best interests of the corporation are synonymous with the best interests of its shareholders); Yalden reminded everyone that the law in Canada has never been shareholder primacy; and Tuer thought boards were getting on in much the same way they were before, albeit with an increased emphasis on documenting their decision-making process.

Spirited debate with the audience provided little resolution on any of the issues before the roundtable.  At one point Anand suggested to Yalden that in her review of the literature, academic discussions and conversations with practitioners, “I’ve never heard anyone take your view.”  Yalden suggested that was because people prefer simplistic statements and clear lines, but that doesn’t change the fact that what directors need is “space to balance varied interests.”

The roundtable then moved on to consider the policy considerations underlying securities regulation: specifically, securities regulators focus on protecting investors—a version of shareholder primacy—which seems at odds with the Court’s holding in BCE that shareholder interests are only one type of interest relevant to directors’ in discharging their duty to act in the best interests of the corporation.

Kanji, director of mergers and acquisitions at the OSC, suggested that concerns about a serious conflict were misplaced.  The BCE decision is not a statement of policy, said Kanji, but rather “the Court commenting on how to apply existing law to specific circumstances”.  “Securities regulators have never said that boards have a duty to maximize shareholder value,” said Kanji.  “What they say is we will supervise takeover conduct to ensure that boards have a role… but not [to the point] that shareholders lose their right to [vote on a proposed transaction]”. 

The last word was giving to Wetston, past chair of the OSC, who took something of the long view.  “Whether its shareholder primacy or not, we all recognize the important role of shareholders.”  Intensive parsing of the Court’s language notwithstanding, Wetston stated what was otherwise implicit the afternoon’s discussions: “The system that we have works fairly well but that doesn’t mean it can’t be improved.” 

“If you think about BCE in the context of a boardroom,” said Wetston, “people will figure it out.”