Canada: directors' duties during a takeover

The Quebec Court of Appeal has delivered an important and controversial opinion concerning the duties of directors during a takeover. In BCE inc. (Arrangement relatif à), 2008 QCCA 935 (available in PDF here) the court unanimously rejected the position adopted by the board of a target company (in reliance on the famous Revlon case from Delaware: 506 A. 2d 173, Del. Sup. Ct. 1986) that its overriding duty was to maximise shareholder value and obtain the highest value for the shareholders.  The court held:

It is clear from the principles enunciated by the Supreme Court in Peoples [Department Stores Inc. (Trustee of) v. Wisethat 2004 SCC 68] 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" (para. [99], emphasis in the original).

In Canada, the directors of a corporation have a more extensive duty. This more extensive duty embodied in the statutory duty of care encompasses, depending on the circumstances of the case, giving consideration to the interests of all stakeholders, which, in this case includes the debentureholders. They must have regard, inter alia, to the reasonable expectations of the debentureholders, and those may be more extensive than merely respecting their contractual legal rights" (para. [107]).

BCE, the target company, has begun appeal proceedings: the Canadian Supreme Court will hear the motion to appeal on June 17. For further background information see here.

NB: For further discussion of Revlon, see: Kraakman, R. and Black, B., "Delaware's Takeover Law: The Uncertain Search for Hidden Value", (2002) 95 Northwestern University Law Review, 521-566, available on SSRN here.