Legal scholars recently delivered a scathing critique of the Supreme Court of Canada’s decision in the BCE case, saying the ruling lacks meaningful instructions for corporate directors.
“This is a failed process and I think that it’s something we should be as concerned about [in BCE] as any other aspect of this case, the way the Supreme Court has come to view its role in private law cases,” said University of Toronto Faculty of Law Prof. Jeffrey MacIntosh, in a recent roundtable discussion at the school.
The top court in June 2008 allowed the attempted buyout of BCE by the Teachers’ Pension Plan of Ontario, later issuing a ruling that stated the deal did not “fundamentally alter the debentureholders’ rights.”
The takeover later collapsed after auditors offered an opinion that failed to ensure the company would stay solvent after the leveraged buyout.
While the deal fell through, lawyers continue to squabble over just what the court said in BCE.
Prof. Edward Iacobucci, Osler Chair in Business Law at the University of Toronto Faculty of Law, targeted his remarks to the “indeterminacy” of the top court’s determination of corporate fiduciary duties expressed in BCE.
“The duty to act in the best interest of the corporation is as indeterminate and as socially useful as the duty of a bus driver to act in the best interest of a motor vehicle,” said Iacobucci.
He noted that a corporation is a fictional entity, and asserted that there is no social reason to protect it. What is important, said Iacobucci, are the people behind a corporation.
MacIntosh, Toronto Stock Exchange Chair in Capital Markets Law at the faculty, referred to BCE as “the case that ate Canadian corporate law.”
He suggested the decision shows that the Supreme Court is “suffering from Charter disease.”
MacIntosh said, “They have come to think that they no longer need to read prior cases; they no longer need to consult books on statutory interpretation. In fact, they just do willy-nilly what they will.”
He added that, “They have made it clear that their obiters are to be respected as much as the ratio part of their decision. I find that particularly troubling. The essence of our legal system is that we have adversaries come into court armed with their best arguments, and they beat each other’s brains out and the court gets to hear all the best arguments.
“Now if the court just goes off on a lark and gives us some obiter that arises from who knows what - something that might not even have been argued - we don’t get the discipline of having people fighting it out in court and bringing cases, bringing arguments, bringing information, and the Supreme Court seems to be quite comfortable just going off on larks and essentially doing whatever it wants to.”
MacIntosh said there are “many cases” that define the best interests of the corporation as in line with the shareholders’. The Dickerson committee, which drafted the Canada Business Corporations Act during its 1971 review of Canadian corporate law, also came to that conclusion, said MacIntosh.
“There was no attempt made to go back, look at the legislative history, the Dickerson report, or prior cases,” he said. “They simply decided this is the way that it’s going to be.”
MacIntosh said the business judgment rule was “fashioned in a very different context, in which shareholder primacy is assumed to be the end. How do we apply the business judgment rule now that we’ve got all these different stakeholders?”
Markus Koehnen, a partner at McMillan LLP who acted at the Supreme Court for a group of institutional bondholders who lost their challenge of the leveraged buyout of BCE, admitted at the roundtable discussion of taking the “curious position” of defending the court.
He said the top court took the right position in terms of directors’ duties.
“On this whole issue of duty to care, the Supreme Court said absolutely nothing new in BCE,” said Koehnen. “We’ve always had a stakeholder or shareholder primacy model with a heavy duty and heavy emphasis of stakeholder interest.”
He added, “Life is simply too complicated to tell a group of directors, ‘No, there is one guiding rule in life and no matter what the circumstances, you must follow that one guiding rule.’ If life were like that, we would all be unemployed, because you wouldn’t need courts to fight out problems.”
Iacobucci said there is “one piece of certainty” in the BCE decision: “There is a duty to ensure that the corporation complies with its statutory obligations,” he paraphrased the decision as stating.
“I don’t really understand this,” he said. “It’s not necessarily the case that ensuring compliance with a statute is in the best interest of the corporation. Nor is necessarily the case that it is in the best interest of society as a whole.”
He raised a concern of “over-deterrence,” which he suggested could stifle the risk taking that could lead to the development of useful new products.
Iacobucci notes, however, that the business judgment rule will continue to protect directors who make reasonable and informed decisions.