Revlon Redux: Reconciling the BCE Case in Change of ... - Gowlings

218Revlon Redux: Reconciling theBCE Case in Change of ControlTransactions – Is Lyondell theBetter Way?Nicholas Dietrich*Cross-border M&A practitioners have historically struggled with the differentapproaches to target board director duties in change of control transactionsin the United States and Canada. Recent seminal cases on each side ofthe border within almost three months of one another, Lyondell ChemicalCo v Ryan (‘Lyondell’) 1 and BCE Inc v 1976 Debentureholders (‘BCE’), 2 havehighlighted the distinctions and, at least in the United States (Delawarespecifically and those states without constituency statutes who choose tofollow Lyondell), brought clarity to the application of these duties. In eachcase, Revlon v MacAndrews & Forbes Holdings, Inc (‘Revlon’) 3 and its progenywere invoked, in the United States affirming, and in Canada, disaffirming,* Partner, Gowling Lafleur Henderson LLP.1 Lyondell Chemical Co v Ryan, CA No 3176 (Del Ch 25 March 2009, revised 16 April 2009),reversing Ryan v Lyondell Chemical Company, 2008 WL 2923427 (Del Ch).2 BCE Inc v 1976 Debentureholders, 2008 SCC 69 (BCE (SCC)), setting aside the QuebecCourt of Appeal decisions (‘Court of Appeal judgment’), consisting of six appeals foundat Computershare Trust Company of Canada c Bell Canada, 2008 QCCA 930, CIBC MellonTrust Company c Bell Canada, 2008 QCCA 93, Aegon Capital Management c Bell Canada, 2008QCCA 932, Addenda Capital Inc c Bell Canada, 2008 QCCA 933, Addenda Capital Inc c BCEInc, 2008 QCCA 934, BCE Inc (Arrangement relatif à), 2008 QCCA 935, [2008] RJQ 1298(CE (Arrangement relatif à)) and affirming the Quebec Superior Court’s arrangementapproval (‘trial court approval’), consisting of five separate decisions found at CIBC MellonTrust Company c Bell Canada, 2008 QCCS 898, [2008] RJQ 1029, Computershare Trust Companyof Canada c Bell Canada, 2008 QCCS 899, 43 BLR (4th) 69, BCE Inc (Arrangement relatif à),2008 QCCS 905, [2008] RJQ 1097, 43 BLR (4th) 1, Addenda Capital Inc c Bell Canada, 2008QCCS 906, 43 BLR (4th) 135, Aegon Capital Management Inc c BCE Inc, 2008 QCCS 907,[2008] RJQ 1119 (Aegon).3 Revlon v MacAndrews & Forbes Holdings, Inc, 506 A 2d 173 at 182 (Del 1986).

Reconciling the BCE Case in Change of Control Transactions219the paramount principle of maximising shareholder value and obtainingthe best price possible.LyondellThe recently released Delaware Supreme Court decision (decided 25 March2009) reversed on appeal the Delaware Court of Chancery finding (‘Lyondelltrial decision’) 4 that the target board of directors’ ‘unexplained inaction’permitted a reasonable inference that the directors may have consciouslydisregarded their fiduciary duties. The Lyondell trial decision provoked agood deal of controversy as it appeared to set a new high watermark fortarget company director duties in the face of a change of control transaction,particularly in the case of a ‘blowout’ offer with a short fuse for acceptance. Inreviewing the record, the Delaware Supreme Court concluded that, at most,a triable issue of fact might exist as to whether the directors exercised duecare, but there was no evidence on which to infer that the directors knowinglyignored their responsibilities, thereby breaching their duty of loyalty. Thedistinction is important because of exculpatory or ‘raincoat’ provisions in theDelaware Act, 5 but first some factual background is helpful to set the stage.Lyondell Chemical Company was one of the largest independent publicchemical companies in North America with an 11-person board composedof Dan Smith (‘Smith’), the chairman and CEO, and ten other independentdirectors, many of whom were experienced as heads or former heads ofother large public companies. Basell AF (‘Basell’), through its indirectowner, Leonard Blavatnik (‘Blavatnik’), approached Smith in April 2006to indicate acquisition interest. This was followed a few months later by aletter to Lyondell’s board suggesting an offer price of US$26.50–US$28.50per share. The Lyondell board found the price inadequate and for the nextyear no other acquirers indicated an interest in Lyondell. However, in May2007 another Blavatnik company, Access Industries, filed a Schedule 13Dwith the Securities and Exchange Commission (SEC) indicating its right toacquire an 8.3 per cent block of stock and also disclosed Blavatnik’s interest inpotential transactions with Lyondell. This disclosure put the company in play.The Lyondell board’s response to the Schedule 13D filing was a ‘waitand see’ approach. Shortly thereafter, Apollo suggested a managementledleveraged buyout (LBO) to Smith, which was rejected. One monthlater, Basell announced a US$9.6 billion merger with Huntsman but was4 Ryan v Lyondell Chemical Company, 2008 WL 2923427 (Del Ch).5 8 Del Code s 102(b)7, where exculpation for director breach of due care, but not duty ofloyalty, in the certificate of incorporation, is permitted. In Canada, such exculpation isgenerally not permitted; see Canada Business Corporations Act, RSC 1985, c C-44, s 122(3).

220 Business Law International Vol 10 No 3 September 2009trumped by a Hexion topping bid, which refocused Blavatnik’s interest inLyondell. Blavatnik and Smith met in July 2007 to discuss an all-cash bidby Basell at US$40 per share, which was raised to US$44–US$45 per share,and then US$48 per share, as Smith advised Blavatnik to present his bestoffer before Smith would go to the board. The self-trumped best offerof US$48 per share was not contingent on financing, but came with twostrings attached: a US$400 million break fee and a short fuse of one weekto sign a merger agreement.At the Lyondell board meeting on 10 July 2007, which lasted a littleless than an hour, the board reviewed valuation material prepared bymanagement and discussed the Basell offer, the Huntsman merger andthe likelihood of other suitors. Smith was instructed to secure a writtenoffer and additional financing details, to which Blavatnik agreed. In themeantime, Basell had until 11 July to make a higher bid for Huntsman, whichled Blavatnik to request a firm indication of interest from Lyondell to hiswritten offer by the end of that day. Lyondell’s board met on 11 July 2007,for less than an hour, to consider the proposal compared to the advantagesof remaining independent. The board authorised the retention of DeutscheBank as financial adviser and authorised Smith to negotiate. Basell thenannounced it would not exercise its bid for Huntsman and their mergeragreement was terminated.Over the next four days, a Lyondell merger agreement was beingnegotiated, due diligence was conducted, a fairness opinion was prepared byDeutsche Bank and the board instructed Smith to negotiate a higher price,a reduced break fee and a go-shop provision. The Delaware Supreme Courtobserved that the trial court noted that Blavatnik was ‘incredulous’ aboutthese new demands, but as a sign of good faith agreed to drop the break feefrom US$400 million to US$385 million.The board met on 16 July 2007 with management, financial advisers andlegal advisers, all of whom presented reports. In particular, the advisersconfirmed that Lyondell would be free pursuant to the fiduciary outprovision in the merger agreement to consider superior proposals, eventhough the merger agreement contained a no-shop provision. DeutscheBank also opined that the offer price was fair and in fact its managingdirector described it as ‘an absolute home run’. The evidence also showedthat Deutsche Bank believed no one would top the Basell bid. Following thepresentations, the Lyondell board approved the merger and recommendedit to the stockholders, who approved the US$13 billion deal by greater than99 per cent of the voted shares.The class action complaint alleged that the directors breached their‘fiduciary duties of care, loyalty and candour… and… put their personal

Reconciling the BCE Case in Change of Control Transactions221interests ahead of the Lyondell stockholders’. 6 Among the usual arrayof strike suit criticisms of inadequate price, self-interest, flawed process,unreasonable deal protection and disclosure omissions, the trial court foundfault only with process and deal protection. The Delaware Supreme Courtconcluded that these two residual claims were really two aspects of a singleclaim under Revlon, namely that ‘the directors failed to obtain the best pricein selling the company’, 7 and that ‘Revlon did not create any new fiduciaryduties’. The court also agreed with the trial court that the ‘board mustperform its fiduciary duties in the service of a specific objective: maximisingthe sale price of the enterprise’. 8Although the trial court in reviewing the record concluded that Ryanmight prevail at trial on a director breach of duty of care, Lyondell’scharter exculpated the directors from liability for a breach of duty of care.Accordingly, the Delaware Supreme Court concluded: ‘This case turns onwhether any arguable shortcomings on the part of the Lyondell directorsalso implicate their duty of loyalty, a breach of which is not exculpated.’ 9The Delaware Supreme Court went on to say: ‘Because the trial courtdetermined that the board was independent and was not motivated byself-interest or ill will, the sole issue is whether the directors are entitled tosummary judgment on the claim that they breached their duty of loyalty byfailing to act in good faith.’ 10The Delaware Supreme Court summoned its examination of the notionof ‘good faith’ in In re The Walt Disney Co Deriv Litig (‘Disney’) 11 and in Stone vRitter (‘Stone’). 12 For the purposes of the Lyondell appeal, the court drew nodistinction between bad faith and the absence of good faith. It cited Disneyto disavow any attempt to provide a comprehensive or exclusive definition6 Note 1 above, at 8.7 Ibid, at 9.8 Ibid. From Malpiede v Townson, 780 A 2d 1075 at 1083 (Del 2000). This description offiduciary duties is clearly at odds with the Supreme Court of Canada’s approach in BCE,which is explored later in this article.9 Lyondell, ibid.10 Ibid. See also Gantler v Stephens, 2009 WL 188828 (Del), (‘Gantler’), where the DelawareSupreme Court recently affirmed that officers owe the same duties as directors and, moreimportantly for present purposes, denied shelter under the business judgment rule wherethe pled facts included the chair’s failure to respond to due diligence requests from apotential bidder (who would have terminated the board on successful acquisition), andthe fact that two other directors provided services to the target which were likely to beterminated on successful completion of a merger. Accordingly, the standard to be appliedto this non-independent board’s actions was entire fairness (invoking critical review of fairdealing and fair price), not the business judgment rule (customary deference to directordecisions). See also n 36 below.11 906 A 2d 27 (Del 2006).12 911 A 2d 962 (Del 2006).

222Business Law International Vol 10 No 3 September 2009of ‘bad faith’ and recalled its dicta in Disney that bad faith could encompassnot only intentional harm (subjective bad faith) but also intentionaldereliction of duty (conscious disregard for one’s responsibilities). Lackof due care (action taken solely by reason of gross negligence withoutmalevolent intent), however, would not constitute bad faith. The court citedStone as authority that the standard articulated in In re Caremark Int’l DerivLitig 13 (sustained or systemic failure of the board to exercise oversight isnecessary to establish ‘lack of good faith’) was consistent with the definitionof ‘bad faith’ in Disney. The court further stated that Stone also ‘clarifiedany possible ambiguity about the directors’ mental state, holding thatimposition of liability requires a showing that the directors knew that theywere not discharging their fiduciary obligations’. 14As it happened, the Delaware Supreme Court acknowledged that theCourt of Chancery recognised the appropriate legal principles. However,the trial court denied granting summary judgment so that it could obtain acomplete record prior to deciding whether the Lyondell directors acted inbad faith. This deferment, while appropriate in order to expand the recordin certain circumstances, was found by the appeal court to be inappropriatein these circumstances because of three factors contributing to the trialcourt’s mistake:‘First, the trial court imposed Revlon duties on the Lyondell directors beforethey had decided to sell, or before the sale had become inevitable. Second,the court read Revlon and its progeny as creating a set of requirements thatmust be satisfied during the sale process. Third, the trial court equatedan arguably imperfect attempt to carry out Revlon duties with a knowingdisregard of one’s duties that constitutes bad faith.’ 15On the first factor, the appeal court found that the trial court’s impositionof Revlon duties, after the Schedule 13D filing effectively put the companyin play, was mistimed. ‘The duty to seek the best available price appliesonly when a company embarks on a transaction – on its own initiative or inresponse to an unsolicited offer – that will result in a change of control.’ 16Accordingly, the trial court’s criticism of director inaction following theSchedule 13D filing as ‘slothful indifference’ while knowing the company wasin play was insufficient to warrant denial of the Lyondell directors’ motion13 698 A 2d 959 at 971 (Del Ch 1996).14 Note 1 above, at 11.15 Ibid, at 12.16 Ibid, at 15, citing In re Santa Fe Pac Corp S’holder Litig, 669 A 2d 59 at 71 (Del 1995) asauthority.

Reconciling the BCE Case in Change of Control Transactions223for summary judgment. 17 A ‘wait and see’ approach was found to be entirelyappropriate under the circumstances.On the second factor, the appeal court found that the trial court’sscepticism about the good faith of the directors based on the existing record,and based on the trial court’s reading of Revlon and its progeny that a specificcourse of action must be taken, was misplaced:‘There is only one Revlon duty – to [get] the best price for the stockholdersat a sale of the company. No court can tell directors exactly how toaccomplish that goal, because they will be facing a unique combinationof circumstances, many of which will be outside their control. As we notedin Barkan v Amsted Industries, Inc, there is no single blueprint that a boardmust follow to fulfill its duties.’ 18While the trial court found that the directors had not sufficiently establishedthat their ‘impeccable knowledge’ excused the failure to conduct an auctionor a market check, the appeal court held otherwise, but with a caveat:‘we would not question the trial court’s decision to seek additionalevidence if the issues were whether the directors had exercised due care.Where, as here, the issue is whether the directors failed to act in goodfaith, the analysis is very different, and the existing record mandates theentry of judgment in favor of the directors.’ 19Since the appeal court had already opined that Revlon duties do not invokeany legally prescribed steps, it was a small jump to conclude:‘the failure to take any specific steps during the sale process could nothave demonstrated a conscious disregard of their duties. More importantly,there is a vast difference between an inadequate or flawed effort to carryout fiduciary duties and a conscious disregard for those duties.’ 20This comment from the appeal court segues into the third factor. CitingParamount for the proposition that ‘reasonableness not perfection’ is thestandard required in director decision-making and citing In re Lear CorpS’holder Litig, 21 for the proposition that it requires an extreme set of facts to17 Interestingly, the filing of a Schedule 13D in BCE did provoke full Revlon mode in the mindsof the BCE directors who determined that a sale of the company was in the best interestsof the corporation.18 Note 1 above, at 16. See also note 28 at p 16 of Lyondell, which surveys a number of issuesand cases: market checks (Barkan v Amsted Industries, Inc, 567 A 2d 1279 at 1286 (Del 1989)),no-shops (Paramount Communications, Inc v QVC Network, Inc, 637 A 2d 34 at 49 (Del 1994)),and failure to consider strategic buyers (In re Netsmart Technologies, Inc S’holders Litig, 924 A2d 171 at 199 (Del Ch 2007)).19 Note 1 above, at 17.20 Ibid, at 18.21 2008 WL 4053221 (Del Ch).

224 Business Law International Vol 10 No 3 September 2009sustain disloyalty based on disinterested directors intentionally disregardingduties, the appeal court held:‘if the directors failed to do all that they should have under thecircumstances, they breached their duty of care. Only if they knowinglyand completely failed to undertake their responsibilities would they breachtheir duty of loyalty. The trial court approached the record from the wrongperspective. Instead of questioning whether disinterested, independentdirectors did everything that they (arguably) should have done to obtainthe best sale price, the inquiry should have been whether these directorsutterly failed to attempt to obtain the best sale price.’ 22The Delaware Supreme Court in Lyondell has clearly affirmed the objectiveof target board directors maximising shareholder value and obtaining thebest sale price available, and it has clarified when exactly that objectivemust be pursued (not simply when a company is in play, but rather whenembarking on or responding to events leading to a change of control). Ithas also brightened the line between the duty of care (implicating as it doesgross negligence without conscious or culpable intent), and the duty of loyalty(implicating as it does bad faith or the failure to act in good faith). TheSupreme Court of Canada in BCE, on the other hand, disaffirmed the pursuitof maximising shareholder value as the sole objective and arguably blurredthe line for target board director duties in change of control transactions.BCEIt is fair to say that the reasons in BCE delivered by the Supreme Court ofCanada on 19 December 2008, six months almost to the day after the tersejudgment allowing the appeals and dismissing the cross appeals, surprisedmore than a few observers who had assumed that the summary judgment(prior to receiving written reasons) meant that Revlon was good law in Canada.Any such illusion was shattered when the Supreme Court framed the issue:‘On these appeals, it was suggested on behalf of the corporations thatthe “Revlon line” of cases from Delaware support the principle that where22 Note 1 above, at 19.

Reconciling the BCE Case in Change of Control Transactions225the interests of shareholders conflict with the interests of creditors, theinterests of shareholders should prevail.’ 23and asserted:‘There is no principle that one set of interests – for example the interestsof shareholders – should prevail over another set of interests. Everythingdepends on the particular situation faced by the directors and whether,having regard to that situation, they exercise business judgment in aresponsible way.’ 24with a further nail in the Revlon coffin:‘What is clear is that the Revlon line of cases has not displaced thefundamental rule that the duty of the directors cannot be confined toparticular priority rules, but is rather a function of business judgment23 Note 2 above, at para 85. It is unfortunate that the Supreme Court of Canada, in comingto this conclusion, did not therefore attempt to distinguish earlier decisions in Canadawhich appeared to adopt Revlon. See for example Re CW Shareholdings Inc and WIC WesternInternational Communications Ltd et al (1998) 39 OR (3d) 755 (SC) at paras 41 and 42:‘The law as it relates to the general duties of the directors of Canadian corporations isnot controversial. The directors must exercise the common law fiduciary and statutoryobligation (a) to act honestly and in good faith with a view to the best interests of thecorporation, and (b) in doing so, to exercise the care, diligence and skill that a reasonablyprudent person would exercise in comparable circumstances: see the Canada BusinessCorporations Act. In the context of a hostile take-over bid situation where the corporationis ‘in play’ (ie where it is apparent there will be a sale of equity and/or voting control)the duty is to act in the best interests of the shareholders as a whole and to take active andreasonable steps to maximise shareholder value by conducting an auction. As CallaghanACJHC said in Corona Minerals Corp v CSA Management Ltd (1989) 68 OR (2d) 425 at 429:“The purpose of an auction in the securities industry is to try and achieve the highestvalue for the shareholders of the target companies for their shares. That in my view is anacceptable purpose …”In the American authorities this shareholder maximization-through-auction duty is knownas the “Revlon Duty”, based on the decision of the Delaware Supreme Court in Revlon Inc vMacAndrews & Forbes Holdings, 506 A 2d 173 (1986). At p 182 of that report, the court said:“The duty of the board had thus changed from the preservation of Revlon as a corporateentity to the maximisation of the company’s value at a sale for the stockholders’ benefit.This significantly altered the board’s responsibilities … the directors’ role changed fromdefenders of the corporate bastion to auctioneers charged with getting the best price forthe stockholders at a sale of the company.”The directors, moreover, are obliged to exercise these duties and carry out the maximisationprocess in a fashion which takes into account – and minimises, to the fullest extentreasonably possible – the conflict of interest which is inherent in the position in whichthey find themselves. The company for which they are responsible is under attack. Thereis a natural tendency to be defensive. More importantly, there is a natural tendency toprotect their own position of management and control. Jobs and careers are at stake.’24 Note 2 above, at para 84.

226 Business Law International Vol 10 No 3 September 2009of what is in the best interests of the corporation, in the particularsituation it faces.’ 25Ah yes, the illusive pursuit of the illusive ‘best interests of the corporation’!A fair question is whether BCE and its ‘best interests’ analysis leaves anyscope at all to come to a similar conclusion to where the applicationRevlon might have led? As with the Lyondell analysis, the answer to thatquestion requires some factual background before engaging further inthat illusive quest.The appeals in BCE arose out of the pursuit of BCE Inc by a private equityconsortium led by Ontario Teachers Pension Plan Board (‘Teachers’) inan LBO required to be financially supported by Bell Canada, the whollyowned operating subsidiary of BCE Inc. 26 Bell Canada’s debenture-holdersopposed the change of control transaction primarily on the basis that thedebt assumption would lead to credit ratings downgrades, which in turnwould lead to a reduction in the trading value of their bonds. Their legalchallenge was framed in accordance with the legal form of the acquisition,namely their standing at the court-required approval of the transactionvia a plan of arrangement pursuant to section 192 of the Canada Business25 Note 2 above, at para 87. The Supreme Court of Canada took some comfort for this positionby citing former Delaware Supreme Court Chief Justice Veasey (‘Veasey’):‘In a review of trends in Delaware corporate jurisprudence, former Delaware SupremeCourt Chief Justice E Norman Veasey put it this way:“[It] is important to keep in mind the precise content of this ‘best interests’concept – that is, to whom this duty is owed and when. Naturally, one often thinksthat directors owe this duty to both the corporation and the stockholders. Thatformulation is harmless in most instances because of the confluence of interests,in that what is good for the corporate entity is usually derivatively good for thestockholders. There are times, of course, when the focus is directly on the interestsof the stockholders [ie, as in Revlon]. But, in general, the directors owe fiduciaryduties to the corporation, not to the stockholders. [Emphasis in original.]”(E Norman Veasey with Christine T Di Guglielmo, ‘What Happened in DelawareCorporate Law and Governance from 1992–2004? A Retrospective on Some KeyDevelopments’ (2005) 153 U Pa L Rev 1399 at 1431).’Of course the Supreme Court of Canada is merely taking judicial notice of Veasey to statethe obvious, namely that the general rule informing director duties is ‘best interests’, butfails to take the next step, principally that in a change of control situation, the focus isdirectly on the interests of the stockholders.26 The other consortium members were Providence Equity Partners Inc and MadisonDearborn Partners, LLC. For the purposes of its analysis, since BCE Inc and Bell Canadahad the same boards of directors, the Supreme Court found it ‘unnecessary… to distinguishbetween the conduct of the directors of BCE [Inc], the holding company, and the conductof the directors of Bell Canada’: BCE, ibid, at para 33. The writer questions the virtue ofthis failure to so distinguish.

Reconciling the BCE Case in Change of Control Transactions227Corporations Act (CBCA) 27 arguing that the arrangement should not befound to be fair, and alternatively, pursuant to section 241 of the CBCA,arguing that the LBO was ‘oppressive’. The trial court approval found theplan of arrangement to be fair and dismissed the oppression claim. TheCourt of Appeal judgment held that the plan of arrangement had not beenshown to be fair and accordingly found it not necessary to deal with theoppression claim. The Supreme Court of Canada ultimately concluded thatthe trial judge had not erred in approving the plan of arrangement and thatthe debenture-holders had failed to prove oppression.The spotlight on the duties of the directors first arose in November2006, when BCE Inc became aware that KKR was interested in BCE. Thepresident and CEO of BCE Inc, Michael Sabia (‘Sabia’), informed KKRthat BCE Inc had no interest in any transactions with KKR. Rumours arosein early 2007 that KKR and Canada Pension Plan Investment Board mightbe initiating a bid for BCE Inc and that Teachers was also interested in apotential transaction. After a BCE Inc board meeting, Sabia informed eachof KKR and Teachers that BCE Inc was not interested in a change of controltransaction ‘because it was set on creating shareholder value through theexecution of its 2007 business plan’. 28 After erroneous press reports on29 March 2007, BCE Inc was forced to issue a press release stating that nodiscussions were being held as to any going-private transaction. However,following a Schedule 13D filing by Teachers on 9 April 2007, and faced withheightened speculation that BCE Inc was in play, the BCE Inc directors metto discuss strategic alternatives with financial and legal advisers and decidedthat ‘it would be in the best interests of BCE [Inc] and its shareholders tohave competing bidding groups and to guard against the risk of a simplebidding group assembling such a significant portion of available debt and27 Canada Business Corporations Act, RSC 1985, c C-44. Under Canada’s constitution, unlikethe US, there is a concurrent federal incorporation power with the provinces. Most of theprovinces have arrangement, oppression (other than Québec, and in British Columbia,only shareholders have standing) and statutory director duties of care and good faithprovisions substantially similar to the CBCA. On expressly stated duties, they are similar toModel Act states, which, unlike Delaware, have codified director duties. An ‘arrangement’can be similar to a three-cornered amalgamation in Canada, which itself is similar to a USstyleacquisition merger, to effect a takeover, as opposed to a vanilla tender offer in eitherCanada or the United States. Arrangements have the added advantage in cross-borderdeals, as judicially approved devices, of avoiding comprehensive registration statementfilings under US securities laws where the acquirer is offering non-cash consideration, andin Canada of avoiding the need to comply with certain provincial takeover bid rules (inCanada, constitutionally, securities laws are provincial, not federal). However, followingBCE, takeover architecture will need to reconsider the advantages of arrangements againstthese additional risks.28 Note 2 above, at para 10. On the Lyondell analysis, this would not trigger Revlon duties.

228 Business Law International Vol 10 No 3 September 2009equity that the group could preclude potential competing groups fromparticipating effectively in an auction process’. 29 An appropriate press releasewas made on 17 April 2007.Following the issuance of this press release, a number of Bell Canadadebenture-holders wrote to the board expressing concern and seekingassurance that their interests would be considered, to which BCE Inc repliedthat it ‘intended to honour the contractual terms of the trust indentures’. 30As it turned out, the board got something else factually right as well: in itsauction bidding material to prospective acquirers, it apparently stated thatits evaluation of competing bids would consider the financing arrangementimpact on BCE Inc and Bell Canada’s debenture-holders, including respectfor the contractual terms.As the auction process unfolded, three consortia offers, all contemplatinga considerable amount of acquisition debt for which Bell Canada wouldbe liable (likely resulting in rating downgrades), were submitted. TheTeachers’ offer originally envisioned an amalgamation (which would havetriggered debenture-holder voting rights) and at the encouragement ofthe BCE Inc board, Teachers submitted a revised offer with a structure notinvoking a debenture-holder vote, by proposing a plan of arrangement,and incidentally raising its cash bid from C$42.25 to C$42.75 per share(a 40 per cent premium, with Bell Canada guaranteeing C$30 billion ofdebt out of total capital required of C$52 billion). After consideration,and on the recommendation of the independent committee, which hadreceived appropriate fairness opinions relating to the shareholders (butnot debenture-holders whose rights were viewed as not being arranged),the board found that the Teachers’ offer was ‘in the best interests of BCEand BCE’s shareholders’. 31 The definitive agreement was signed on 30 June2007, and shareholder approval of the arrangement on 21 September 2007was by a majority of 97.93 per cent. The ensuing credit rating downgradeto the debentures below investment grade not only caused a 20 per centtrading value decline, it also would cause certain institutional holders29 BCE, ibid, at para 13. The board went into classic Revlon mode at this point, creating anindependent committee to initiate and oversee an auction process and to review ‘strategicalternatives with a view to further enhancing shareholder value’: ibid, at para 14. This wasfollowed on 13 June 2007 with bidding rules and a general form of transaction document toauction participants. The Court of Appeal judgment at para 17 affirmed that the trial judgefound ‘the overriding objective of the strategic review and auction process was to maximizeshareholder value, while respecting the corporation’s legal and contractual obligations’.30 Ibid, at para 15. This doesn’t, of course, amount to much ‘consideration’ given thatpresumably one must honour contractual commitments of any kind under threat ofsuit for breach.31 Ibid, at para 18. The notion of ‘best interests of BCE’ (in addition to the best interests ofBCE’s shareholders) proved prescient: see n 25 above.

Reconciling the BCE Case in Change of Control Transactions229subject to credit-rating restrictions to be obliged to dispose of their holdings.The debenture-holders opposed the plan of arrangement on a number ofgrounds in the trial court, two of which survived and were at issue in theSupreme Court:‘First, the debentureholders sought relief under the oppressionprovision in s 241 of the CBCA. Second, they opposed court approvalof the arrangement, as required by s 192 of the CBCA, alleging that thearrangement was not “fair and reasonable” because of the adverse effecton their economic interests.’ 32In order to consider these two issues in the context of a change of controltransaction, the Supreme Court felt obliged first to clarify the nature ofdirector duties generally:‘The directors are responsible for the governance of the corporation. Inthe performance of this role, the directors are subject to two duties: afiduciary duty to the corporation under s 122(1)(a) (the fiduciary duty);and a duty to exercise the care, diligence and skill of a reasonably prudentperson in comparable circumstances under s 122(1)(b) (the duty of care).The second duty is not at issue in these proceedings as this is not a claimagainst the directors of the corporation for failing to meet their duty ofcare. However, this case does involve the fiduciary duty of the directors tothe corporation, and particularly the “fair treatment” component of thisduty, which, as will be seen, is fundamental to the reasonable expectationsof stakeholders claiming an oppression remedy.’ 33The Supreme Court noted that the fiduciary duty arose in the common lawand equated it with a duty to act in the best interests of the corporation. Italso relied on its earlier decision in Peoples Department Stores Inc (Trustee of) vWise (‘Peoples’) 34 to clarify just what that means:‘Often the interests of shareholders and stakeholders are co-extensivewith the interests of the corporation. But if they conflict, the directors’duty is clear – it is to the corporation: Peoples Department Stores. Thefiduciary duty of the directors to the corporation is a broad, contextual32 BCE, ibid, at para 22.33 Ibid, at para 36. Section 122(1)(a) specifically reads: ‘Every director and officer of acorporation in exercising their powers and discharging their duties shall (a) act honestlyand in good faith with a view to the best interests of the corporation… .’ This codificationof fiduciary duty is likely very close to Delaware’s non-codification of the ‘duty of loyalty’at common law.34 Peoples Department Stores Inc (Trustee of) v Wise, 2004 SCC 68, [2004] 3 SCR 461. Peoples wasnot a change of control case and there has been much speculation on whether its holdingwas relegated to a distress situation, or had wider applicability, which has now been clarifiedby the Supreme Court in BCE. See also BCE, n 2 above, at para 88.

230 Business Law International Vol 10 No 3 September 2009concept. It is not confined to short-term profit or share value. Where thecorporation is an ongoing concern, it looks to the long-term interests ofthe corporation. The content of this duty varies with the situation at hand.At a minimum, it requires the directors to ensure that the corporationmeets its statutory obligations. But, depending on the context, theremay also be other requirements. In any event, the fiduciary duty owed bydirectors is mandatory; directors must look to what is in the best interestsof the corporation.’ 35The Supreme Court did not shy away from the obvious question of whatspecific interests an amorphous concept such as ‘best interests of thecorporation’ encompasses by suggesting a possible non-exclusive shoppinglist:‘In considering what is in the best interests of the corporation, directorsmay look to the interests of, inter alia, shareholders, employees, creditors,consumers, governments and the environment to inform their decisions.Courts should give appropriate deference to the business judgment ofdirectors who take into account these ancillary interests, as reflected by thebusiness judgment rule. The “business judgment rule” accords deferenceto a business decision, so long as it lies within a range of reasonablealternatives …’ 36In discussing remedies for director breaches of section 122(1) duties, theSupreme Court surveyed four in particular: directors’ actions in the name35 BCE, ibid, at paras 37 and 38.36 Ibid, at para 40. It is fair to say that the business judgment rule receives similar judicialdeference on both sides of the US–Canada border: See Paramount’s ‘reasonableness notperfection’ standard, n 18 above, and Gantler, n 10 above, as to when ‘entire fairness’will be applied. In Canada, the foundation of the business judgment rule often citedin Canadian cases is as enunciated in the ‘Repap case’ (UPM – Kymmene Corp v UPM –Kymmene Miramichi Inc (2002) 27 BLR (3d) 53 (Ont Sup Ct J), aff’d (2004) 42 BLR (3d)34 (Ont CA) at para 153:‘However, directors are only protected to the extent that their actions actuallyevidence their business judgment. The principle of deference presupposes thatdirectors are scrupulous in their deliberations and demonstrate diligence in arrivingat decisions. Courts are entitled to consider the content of their decision and theextent of the information on which it is based and to measure this against the facts asthey existed at the time the impugned decision was made. Although Board decisionsare not subject to microscopic examination with the perfect vision of hindsight, theyare subject to examination.’See also Nicholas Dietrich, ‘The “Business Judgment Rule”: Whose Judgment?’ (2002) 14(4)Corporate Governance Review 7. It is also fair to say that ‘best interests of the corporation’,as a general principle, whether express or implied in the common law, is another notionrespected on both sides of the border as a general director duty. However, in a change ofcontrol transaction, Revlon, as affirmed by Lyondell, narrows that duty to obtaining the bestprice available. See nn 66 and 67 below.

Reconciling the BCE Case in Change of Control Transactions231of the corporation; civil actions (such as in tort) for breaches of the duty ofcare; oppression actions focusing on harm to the legal and equitable interestsof certain specified stakeholders; and the remedial-like aspect of requiredcourt approvals in certain cases such as plans of arrangement affectingcertain stakeholders’ rights. It was the latter two of these four broad areasof remedial action which the debenture-holders claims focused on. Thetrial court approval dealt with the oppression claim and the arrangementclaim as entailing distinct deliberations and held that the debenture-holderswere entitled to neither remedy. The Court of Appeal judgment regardedthe two remedies as overlapping, with both grounded on failure to considerdebenture-holder expectations, an approach rejected by the Supreme Court,which felt it was necessary to deal with them distinctly.OppressionThe Supreme Court reviewed the two distinct (strict wording vs broadprinciple) approaches in oppression case law interpreting CBCA, s 241(2) 37and adopted a two-prong approach, namely looking first to underlyingprinciples, and specifically ‘the concept of reasonable expectations’. 38 Oncea reasonable expectation is established, then one continues to consider‘whether the conduct complained of amounts to “oppression”, “unfairprejudice” or “unfair disregard”… .’ 39 The first enquiry focuses on thecourt’s equitable jurisdiction to determine not just what is legal, but whatis fair, recognising that fairness is fact specific and bound by contextualand relationship situations. The issue is not whether the party has an actualexpectation but whether that expectation is reasonable having regard toall of the facts and circumstances, including the fact that there may beconflicting claims and expectations. It is here in its decision where theSupreme Court first indirectly rejects Revlon’s singular focus in a change ofcontrol transaction:‘The corporation and shareholders are entitled to maximize profit andshare value, to be sure, but not by treating individual stakeholders unfairly.Fair treatment – the central theme running through the oppression37 A court may order remedied action where:‘(a) any act or omission of the corporation or any of its affiliates effects a result,(b) the business or affairs of the corporation or any of its affiliates are or have beencarried on or conducted in a manner, or(c) the powers of the directors of the corporation or any of its affiliates are or havebeen exercised in a manner that is oppressive or unfairly prejudicial to or that unfairlydisregards the interests of any security holder, creditor, director or officer … .’38 Note 2 above, at para 56.39 Ibid.

232 Business Law International Vol 10 No 3 September 2009jurisprudence – is most fundamentally what stakeholders are entitled to“reasonably expect”.’ 40If the Supreme Court had stopped here, one might conclude that somecertainty could be extricated from the dicta in that section 241(2) limitsoppression to security holders, creditors, directors and officers, and thereforeconflicting, reasonably held interests among a known universe could besensibly determined in a change of control transaction. However, the courtwent much further in muddying the waters of pursuit of the elusive holygrail of ‘best interests of the corporation’:‘The fact that the conduct of the directors is often at the centre ofoppression actions might seem to suggest that directors are under adirect duty to individual stakeholders who may be affected by a corporatedecision. Directors, acting in the best interests of the corporation,may be obliged to consider the impact of their decisions on corporatestakeholders, such as the debentureholders in these appeals. This is whatwe mean when we speak of a director being required to act in the best interests ofthe corporation viewed as a good corporate citizen. However, the directors owea fiduciary duty to the corporation, and only to the corporation. Peoplesometimes speak in terms of directors owing a duty to both the corporationand to stakeholders. Usually this is harmless, since the reasonableexpectations of the stakeholder in a particular outcome often coincideswith what is in the best interests of the corporation. However, cases (such asthese appeals) may arise where these interests do not coincide. In such cases, it isimportant to be clear that the directors owe their duty to the corporation,not to stakeholders, and that the reasonable expectation of stakeholdersis simply that the directors act in the best interests of the corporation.’ 41[Emphasis added.]With the greatest respect, it is submitted that in a change of controltransaction, conflicting interests of stakeholders, whether they bestockholders, creditors, employees, suppliers, customers or others with a‘stake’ in the corporation, will almost inevitably be in conflict when facedwith alternative bids whose proponents will almost always have differentpost-closing plans affecting various stakeholders. One can only imagine thedifficulties faced by directors attempting to come to terms with the ‘bestinterests of the corporation’, as well as the defensive mischief that might arisein a change of control transaction in the name of good corporate citizenship.Presumably, this is why Revlon and its progeny, including Lyondell, oblige40 Ibid, at para 64.41 Ibid, at para 66.

Reconciling the BCE Case in Change of Control Transactions233directors to channel that pursuit towards a singular objective, maximisingshareholder value.Returning to its specific analysis of the first prong of the oppressionapproach (whether the claimant reasonably held its expectation), the courtlisted a non-exclusive list of factors to determine reasonable expectation: (1)commercial practice; (2) nature of the corporation; (3) relationships; (4)past practice; (5) preventive steps; (6) representations and agreements, and(7) fair resolution of conflicting interests. It is in connection with this lastfactor where the court again ventured into ‘corporate citizenship’ territory:‘In each case, the question is whether, in all the circumstances, thedirectors acted in the best interests of the corporation, having regardto all relevant considerations, including, but not confined to, the needto treat affected stakeholders in a fair manner, commensurate with thecorporation’s duties as a responsible corporate citizen.’ 42It is also in connection with this last factor where the court expressly rejectedRevlon shareholder interest paramountcy in change of control transactions,including Unocal’s 43 overlay to circumstances where the objective is not tomaintain the enterprise but rather to sell to the highest bidder. 44The court then turned its attention to the second prong of the oppressionanalysis approach, namely whether the conduct complained of rises to‘oppression’, ‘unfair prejudice’ or ‘unfair disregard’ of its claimants’ interests.While acknowledging that an examination of these types of conduct wascomplementary to reasonable expectation analysis, and that the two prongsmay merge, the court felt it was worth noting that ‘as in any action in equity,wrongful conduct, causation and compensable injury must be establishedin a claim for oppression’. 45 The court also viewed the adjectival trilogy ofprescribed conduct as a continuum with ‘oppression’ being viewed as themost harsh and abusive, and with ‘unfair disregard’ being viewed as the leastserious wrong. As to ‘unfair prejudice’ ranking somewhere in the middle,the court cited adopting a ‘poison pill’ to thwart a takeover bid and minoritysqueeze-outs, two features often seen in change of control transactions. 46In applying the two prongs (reasonable expectation, and if so, violationof that expectation by conduct constituting oppression, unfair prejudiceor unfair disregard) to the two aspects of the debenture-holder oppressionclaims (that they had a reasonable expectation that the directors would42 Ibid, at para 82.43 Unocal Corp v Mesa Petroleum Co, 493 A 2d 946 (Del 1985). See the additional SupremeCourt’s Revlon rejection language, nn 23, 24 and 25 above.44 Note 2 above, at para 86.45 Ibid, at para 90.46 Ibid, at para 93.

234 Business Law International Vol 10 No 3 September 2009protect their economic interests in an arrangement that would maintain thetrading value of the debentures, and, alternatively, that they had a reasonableexpectation that the directors would consider their economic interests),the court carefully reviewed the conclusions of the trial court based onthe evidence. This included the existence of non-reliance warnings in BellCanada public statements regarding investment grade ratings, the context ofthe relationship, the nature of the corporation as a large widely held publicentity, its status as a takeover target pursuant to an auction process and,perhaps most importantly, ‘the fact that the claimants could have protectedthemselves against reduction in market value by negotiating appropriatecontractual terms’ in their trust indentures. 47 Noting and approving as wellthat ‘under the business judgment rule, deference should be accorded tobusiness decisions of directors taken in good faith and in the performanceof the functions they were elected to perform by the shareholders’, 48 theSupreme Court upheld the trial court’s conclusions that a reasonableexpectation of protection of investment grade status was not made out.However, on the alternative ‘softer’ consideration claim, the SupremeCourt held that on the evidence, the debenture-holders were entitled to areasonable expectation that their position would be ‘considered’ in comingto a conclusion on the offers for the company:‘As discussed above, reasonable expectations for the purpose of a claim ofoppression are not confined to legal interests. Given the potential impacton the debentureholders of the transactions under consideration, onewould expect the directors, acting in the best interests of the corporation,to consider their short and long-term interests in the course of makingtheir ultimate decision.’ 49and concluded that this duty was met:‘It is apparent that the directors considered the interests of thedebentureholders and, having done so, concluded that while thecontractual terms of the debentures would be honoured, no furthercommitments could be made. This fulfilled the duty of the directors toconsider the debentureholders’ interests. It did not amount to “unfairdisregard” of the interests of the debentureholders.’ 5047 Ibid, at para 98.48 Ibid, at para 99.49 Ibid, at para 102.50 Ibid, at para 104.

Reconciling the BCE Case in Change of Control Transactions235It is very instructive also to consider dicta by the Supreme Court in comingto its conclusion (including the seven factors) 51 , which at least provides someguidance to directors as to process in a change of control transaction:‘BCE, facing certain takeover, acted reasonably to create a competitivebidding process. The process attracted three bids. All of the bids wereleveraged, involving a substantial increase in Bell Canada’s debt. It was thisfactor that posed the risk to the trading value of the debentures. Thereis no evidence that BCE could have done anything to avoid that risk.’ 52However, this begs the question as to whether a significantly lesser leveragedtransaction with a lower price rejected by the directors would have beenfound by the court to be more ‘in the best interests of the corporation’ as agood corporate citizen and less inferior to the debenture-holders.ArrangementAs noted above, the second avenue of challenge by the debenture-holders(who were given standing to do so) involved their contesting the plan ofarrangement under section 192 of the CBCA. It will be recalled that whilethe trial court approval did not grant a voting right to the debenture-holders,their interests were considered by the trial judge and the arrangement wasfound to be ‘fair and reasonable’, notwithstanding the adverse impact on thetrading value of the debentures. The Court of Appeal judgment reversed,on the basis ‘that the directors had not given adequate consideration tothe debentureholders’ reasonable expectations’, which in its view wentbeyond legal rights and encompassed ‘economic interests’. 53 The SupremeCourt viewed the Court of Appeal’s conversion of the section 192 approvalproceedings into a ‘reasonable expectation’ oppression inquiry as simplyincorrect. They are distinct proceedings with distinct requirements, withsection 241(2) oppression focusing on reasonable expectations while section192 arrangement approval ‘focuses on whether the arrangement, objectively51 The court’s findings included consideration of commercial practice/reality (LBOs areforeseeable, the trust indentures could have included negotiated change of control andcredit rating covenants, but did not), the nature and size of the corporation as a largepublic company, past practice in the face of changing economic and market realities and,finally, resolving conflicting stakeholder interests in ‘a fair manner that reflected the bestinterests of the corporation’ in light of the inevitability of buyout and the advantages ofgoing private: n 2 above, at paras 107–113.52 BCE, ibid, at para 106.53 Ibid, at paras 115 and 116.

236 Business Law International Vol 10 No 3 September 2009viewed, is fair and reasonable and looks primarily to the interests of theparties whose legal rights are being arranged’. 54 [Emphasis added.]It is instructive to note that section 192 specifically defines ‘arrangement’non-exhaustively to include ‘a going-private transaction or a squeeze-outtransaction in relation to a corporation’, 55 and the Supreme Court tookjudicial notice of the fact that section 192 ‘has been used as a device foreffecting changes of control because of advantages it offers the purchaser’. 56It is important to note that section 192 does not prescribe voting orprocedural requirements but that the director appointed under the CBCAhas instituted Policy Statement 15.1 (the ‘Arrangement Policy Statement’),which prescribes scope and use as well as procedural guidelines which thecourts generally follow. The Arrangement Policy Statement suggests that in‘extraordinary circumstances’, interests other than strictly legal rights mightimpose voting approval 57 ; however, the Supreme Court was of the view that‘the fact that a group whose legal rights are left intact faces a reduction in thetrading value of its securities would generally not, without more, constitutesuch a circumstance’. 58As with its consideration of the oppression claim, the Supreme Courtformulated a two-pronged approach to determining what is fair andreasonable under section 192: first, the court must be satisfied that thearrangement has a valid business purpose and, secondly, legal rights of thoseobjectors whose rights are being arranged must be resolved in a fair andbalanced way. 59 The necessity of the plan of arrangement to the continuedoperations of the corporation is an important factor in determining ‘validbusiness purpose’ and is, of course, a fact-specific inquiry. Equally, animportant factor in the determination of ‘fair and reasonable’ is the degree54 Ibid, at para 119. The Supreme Court also pointed out the differing burden of proof in eachproceeding: for oppression, the onus is on the claimant to establish reasonable expectationand oppression or unfairness, while in arrangements the onus is on the corporation toestablish that the plan is fair and reasonable.55 CBCA, n 27 above, s 192(1)(f.1).56 Note 2 above, at para 125. See n 27 above, for consideration of some of these advantages.57 Canada. Industry Canada. Corporations Canada. Policy concerning Arrangements UnderSection 192 of the CBCA: Policy Statement 15.1 (Ottawa: Industry Canada, 7 November 2003)(online: www.ic.gc.ca/eic/site/cd-dgc.nsf/eng/cs01073.html) at s 3.08: ‘At the sametime, the Director recognizes that in determining whether debt security holders shouldbe provided with voting and approval rights, the trust indenture or other contractualinstrument creating such securities should ordinarily be determinative absent extraordinarycircumstances.’ [Emphasis added.]58 Note 2 above, at para 135.59 Ibid, at paras 138 and 143. The Supreme Court noted that an arrangement, in furtheringthe interests of the corporation as an ongoing concern, ‘may’ be more narrow than theinquiry of ‘best interests of the corporation’ pursuant to the director fiduciary duty unders 122 of the CBCA: ibid, at para 145.

Reconciling the BCE Case in Change of Control Transactions237of security holder voting approval, along with procedural safeguards such asindependent committee approval, the existence of a fairness opinion andshareholder access to dissent and appraisal rights. 60The debenture-holders relinquished their challenge to the arrangement’svalid business purpose, leaving therefore only the second prong of theSupreme Court’s framework to be dealt with. The Supreme Court decidedthat economic interest in preserving the trading value of the debentures didnot constitute an exceptional circumstance to alter section 192’s principalconcern with legal rights and affirmed the trial court approval’s reliance onthe Arrangement Policy Statement in denying the debenture-holders a voteand therefore veto right over transactions involving C$35 billion commonequity value approved by 97 per cent of the shareholders. On the residualquestion of whether the economic interests were dealt with in a fair andbalanced manner, the Supreme Court also affirmed the trial court’s findingthat the debenture-holders’ rights were considered appropriately:‘We find no error in these conclusions. The arrangement does notfundamentally alter the debentureholders’ rights. The investment andthe return contracted for remain intact. Fluctuation in the trading valueof debentures with alteration in debt load is a well-known commercialphenomenon. The debentureholders had not contracted against thiscontingency. The fact that the trading value of the debentures stoodto diminish as a result of the arrangement involving new debt was aforeseeable risk, not an exceptional circumstance. It was clear to thejudge that the continuance of the corporation required acceptance ofan arrangement that would entail increased debt and debt guaranteesby Bell Canada: necessity was established. No superior arrangement hadbeen put forward, and BCE had been assisted throughout by expert legaland financial advisors, suggesting that the proposed arrangement had avalid business purpose.’ 61Accordingly, the Supreme Court of Canada held that the debenture-holdersfailed to establish oppression under section 241 of the CBCA and failed toestablish that the trial judge made an error approving the arrangementunder section 192 of the CBCA.60 BCE, ibid, at paras 146–153. Most, if not all, plans of arrangement implementing change ofcontrol, such as BCE Inc’s, build into the draft judicial order pursuant to s 192(4)(d) of theCBCA a right to dissent and be paid the fair value of shares pursuant to s 190 of the CBCA.61 Ibid, at para 163.

238 Business Law International Vol 10 No 3 September 2009ConclusionsThe question was posed earlier in this article as to whether, in a change ofcontrol situation, BCE and its ‘best interests of the corporation’ constructleaves any scope for the application of Revlon’s/Lyondell’s ‘maximisation ofshareholder value’? Certainly as a paramountcy principle, where there is aconflict between or among various stakeholders’ interests, the answer appearsto be ‘no’. And yet, the Supreme Court of Canada, notwithstanding thecomplicated analytical framework, constructs, prongs and factors associatedwith each of the oppression and arrangement challenges, appeared tocondone target directors employing Revlon and progeny-like process in achange of control transaction: ‘BCE, facing certain takeover, acted reasonablyto create a competitive bidding process.’ 62Each case will always be factually situated. However, in the case ofcompeting interests of debenture-holders who have failed to contract fornecessary protections and are faced with overwhelming shareholder approvalof a particular arrangement, such stakeholders face a significant hurdle,especially where the directors observe all of the window dressing and arecareful to mouth the appropriate platitudes in minutes of meetings andbid documents, of considering debenture-holder interests in a fair manner(which may amount to little more than an acknowledgment to honourcontractual commitments). One gets to the same place, but one has toendure some pain to get there.What about the next train to come ’round the corner? How are targetdirectors to handle other stakeholder impacts where a lower pricedbid is accompanied by bidder intended affirmations to keep plantsopen (employees), go green (environment), offer extended warranties(consumers), or just be swell guys by not doing business in jurisdictions thatdon’t share Canadian social values (good corporate citizenship). It becomesan impossible morass where the ultimate owners (shareholders) will have onelast chance to reap rewards as the ultimate risk takers among all stakeholders.In this sense, it is a zero sum game.While it is beyond the scope of this article to consider the Delawarestatutory corporate governance model and its extensive common lawfiduciary duty jurisprudence in a robust manner, as well as the intersectionof corporate and securities law (which has its own overlay of permissibledefensive tactics) 63 , Lyondell’s affirmation of Revlon offers a much cleaner62 Note 2 above, at para 106.63 See Ontario Securities Commission, National Policy 62-202, ‘Take-Over Bids – DefensiveTactics’ (4 August 1997), online: Ontario Securities Commission https://osc.gov.on.ca/Regulation/Rulemaking/Current/Part6/pol_19970704_62-202_fnp.jsp.

Reconciling the BCE Case in Change of Control Transactions239approach 64 and appears to acknowledge the whole reason for Revlon in thefirst place, namely that target directors in change of control transactionscan’t be trusted to act in the best interests of the corporation, particularly ifafforded business judgment rule protection. Stockholder primacy should bethe animating objective, not the type of elastic flexibility obliged by a ‘bestinterests’ framework. As mentioned by the court in WIC (which sanctionedRevlon duty in Canada (Ontario in particular), and was why, prior to BCE,Revlon was presumed to be good law in Canada), ‘there is a natural tendencyto protect their own position of management and control. Jobs and careersare at stake’. 65 Entrenchment and defensive tactics are, after all, humannature, and with appropriate coaching, most directors can avoid a fatal fauxpas smoking gun process error under a ‘best interests’ doctrine.Whether either country’s application of its specific principles shouldbe predicated on the certainty of a bright-line test and practical, helpfulguidance to target directors while discouraging rogue director behaviour isa nice point. An ancillary matter is whether in Canada, BCE will engendermore strike suits and challenges than would otherwise be the case if Revlonand Lyondell were the law in Canada. Given current markets, it may be sometime before that theory is put to the test.Others have considered the theoretical and empirical aspects of thequestion as to whether Lyondell (read Revlon) is the better way. Ten years ago,R Cammon Turner 66 considered Revlon in the context of ‘best interests ofthe corporation’. Acknowledging that corporate governance has evolved toencompass more than just the best interests of shareholders (for example,the welfare of employees, customers, creditors and communities) and thateven Delaware law generally permits the directors to consider the interest oftheir constituencies (subject to situations involving sale, break up or transfer64 By cleaner approach, what is meant is shareholder primacy and Revlon’s objective ofmaximising shareholder value in a change of control situation. There are many critics ofLyondell’s holding as it pertains to the treatment of good faith. See for example LawrenceCunningham, Delaware Back to Sturdy Doctrine; Good Faith in Coma, Concurring Opinions,31 March 2009, www.concurringopinions.com/archives/2009/03/delaware_back_t.html:‘Of course, given Delaware’s notoriously shifting corporate law, what Justice Bergersettles in Lyondell could change in Delaware’s next big case. After all, Delaware courts,consciously seeing themselves as judges in equity, may, on egregious facts, revive thenotion of good faith as an independent fiduciary duty or some vital aspect of obligation,such as a component or cognate of the duty of loyalty. But, for now, Lyondell puts thenotion of good faith in something of a coma. Not dead, but nary alive. Where thatleaves Delaware corporate fiduciary duty doctrine is on more familiar terrain.’65 WIC, n 23 above.66 R Cammon Turner, ‘Shareholders vs the world: “Revlon Duties” and state constituencystatutes’, Business Law Today (January/February 1999), online: www.abanet.org/buslaw/blt/8-3shareholders.html.

240 Business Law International Vol 10 No 3 September 2009of control where the duty narrows to maximise shareholder value), Turnerquibbles with what constitutes a change of control and welcomes constituencystatutes as a way of getting back to the ‘best interests of the corporation’:‘The duty to maximise shareholder wealth by any permissible method isoften at odds with plans to merge a company for its continued health orsurvival. All is not lost for companies with long-range, ambitious plans.State legislation may temper strict Revlon Duties and provide adequateprotection for directors of companies engaged in mergers that do notbring short-term value to shareholders. The role of such statutes isespecially important in light of the QVC decision, which prohibits directorsfrom simply approving a strategic merger based on their business judgmentthat the transaction provides more value in the long term.’ 67Turner appears to come to the side of constituency statute amelioration ofRevlon partly as a result of the destructive era of merger mania in the 1980s.Had he written his article 20 years later, he might very well have found thefirst part of the 21st century (at least until the summer of 2007) equallyobjectionable. He does, however, make the distinction between constituencystatutes which permit consideration of parties other than shareholders andthose that require such consideration. It is not a stretch to consider BCEeffectively making Canada (the CBCA and all similar statutes) a constituencyjurisdiction which now ‘permits’ (and one could perhaps even argue ‘obliges’(by failing to do so at one’s peril)) consideration of the interests of, interalia, shareholders, employees, creditors, consumers, governments and theenvironment to inform their decisions 68 and, perhaps most notoriously,all ‘in the best interests of the corporation viewed as a good corporate citizen’[emphasis added]. 69Should corporate social responsibility and stakeholder theory have a rolein the boardroom when a change of control scenario has been adopted bydirectors? In most constituency statute states, the answer to the questionof where director duties lie when confronted by conflicting stakeholderinterests remains an interesting inquiry, particularly when a lower price bid67 Ibid.68 Note 2 above, at para 46.69 Ibid, at para 66. In a quote cited in Law Times (13 April 2009) and attributed to ProfessorEdward Iacobucci in a recent roundtable discussion on BCE at the University of TorontoLaw School, scholars are having similar difficulty in the application of a ‘best interests ofthe corporation’ doctrine: ‘The duty to act in the best interest of the corporation is asindeterminate and as socially useful as the duty of a bus driver to act in the best interestof a motor vehicle.’

Reconciling the BCE Case in Change of Control Transactions241is accepted on the basis of consideration of other stakeholder interests. 70At the very least, it makes the job of target directors in change of controltransactions extremely difficult in practice 71 and arguably can create mischiefwhen one thinks in terms of defensive measures and entrenchment. In theend, it may come down to a philosophical debate involving the very heart ofthe fiction of the corporation and whether one can trust the boards of NorthAmerican companies to do the right thing in change of control transactions.And the answer to that question may have profound consequences in thecurrent economic crisis.70 Turner cites as an example, however, Norfolk Southern Corp v Conrail Inc, CA No 96-CV-7167 (ED Pa 19 November 1996) where the US District Court for the Eastern District ofPennsylvania held in a hearing for a preliminary injunction that ‘a board did not breachits fiduciary duties to shareholders by rebuffing a rival bid in favor of a less lucrative offerthat ostensibly provided better protection for employees’. Note 66 above.71 For a further treatment of theoretical and empirical consideration, see Edward B Brockand Richard L Wachter, ‘Symposium – Corporate Control Transactions’ (2003) 152 U Pa LRev 463 and following, and Ian Lee, ‘Efficiency and Ethics in the Debate about ShareholderPrimacy’ (2006) 31 Del J Corp L 533.