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Traditionally, at least in common law countries, corporate boards of directors owed a single minded fiduciary duty to its shareholders. Actually, more like a triple duty of care, loyalty and (sometimes) disclosure. At times the courts phrased that duty as one owing to the corporation. But the meaning was usually clear--the board of directors had a duty to maximize the welfare of equity holders in general and residual (common) shareholders in particular. Others needed less protection. For them, there was the availability of contract. Bondholders, in particular, have always been free to negotiate the terms under which they are willing to part with their money. In return, bondholders acquired an interest in the firm superior to that of equity holders. In the United States and elsewhere, there were always exceptions (that is the nature of law in common law jurisdictions in any case). In the usual cases, those special duties might arise because of the peculiar character of the debt or when the company became insolvent.

Of course, there has been a great effort to expand the nature of the duty of corporate boards. Thinkers everywhere have sought to include a host of stakeholders within the ambit of the board's duty. These could range from debt holders and employees, to virtually everyone on earth. There are a variety of reasons advanced, from the need to reduce the privileging of shareholders in law, to the utility of such an expansion in the accountability of corporations with respect to their "public" functions. These notions have been especially popular within the international community--perhaps because of the conceptual gulf between corporate and international law. See Larry Catá Backer, "Multinational Corporations, Transnational Law: The United Nation's Norms on the Responsibilities of Transnational Corporations as Harbinger of Corporate Responsibility in International Law," Columbia Human Rights Law Review, Vol. 37, 2005. In addition, int he United States, there have been tentative steps to incorporate a legal basis for stakeholder duty. These statutes are usually meant to be invoked only in the case of contests over corporate control and extend only to domestic corporations. Most importantly, these statutes might permit but do not compel an extension of a board's fiduciary duty. Indeed, some of these statutes insist that the duty of shareholders remains paramount. In any case, most of these efforts are overshadowed, in the United States, at least, both by the overarching importance of federal law and the power of the market to discipline corporate behavior.

Canada appears to be approaching the issue of fiduciary duty in a different way. And it has managed this foundational change in the essence of corporate governance through a judicial decision in a very large Canadian transaction, one worth about $52billion (Canadian). It seems "[i]n a unanimous ruling, the [Quebec Court of Appeal] declared the plan of arrangement of the $42.75-a-share offer put forward by a buyout group of private-equity funds, led by the Ontario Teachers Pension Plan, last summer was unfair to the firm's debt-holders, temporarily stalling the deal." Theresa Tedesco, BCE Wins Latest Round with Bondholders, The Montreal Gazette, May 27, 2008. The bondholders effectively argued that the board had a duty to reject an offer that might effectively reduce the value of their debt holdings. "The bondholders oppose the buyout because they claim the extra debt BCE will need for the privatization will increase the risk of default and degrade their debentures to "junk" status." Id. For a look at the company at issue see here.

Well, one might argue, the debt holders are right. It is not nice of the board to spioil the bondholders' positions merely to suit the needs of the shareholders. But shareholders do not bargain for their rights. Those are usually statutorily hard wired. Of course, such hard wiring is almost infinitely flexible, as long as one has the votes to amend the corporate charter, and as long as those amendments do not otherwise violate public policy or the limits on flexibility imposed through the corporate statutes. With publicly traded shares, the range of flexibility is usually even more constrained. Shareholders buy a uniform, easily valued and homogeneous product. Bondholders' rights, on the other hand, are creatures of contract. Ah. Surely, a clever lawyer might have thought that the corporation might have occasion to sacrifice the bondholders' position to satisfy thew wealth lusts of the equity holders. And it is easy enough to build protections against this in the debt instrument. That is, as long as the price the debt holders are willing to pay for the protection generates positive value. But surely, bondholders could protect themselves by, for example, including rights to approve certain changes in control or corporate reorganizations. Apparently, these bondholders sought to make up for their contractual deficiencies through lawmaking.

The case, of course, is considerably more complicated that this sound bite. The decision, IN THE MATTER of a proposed arrangement concerning BCE Inc., Court of Appeal, Quebec, No. 500-09-018525-089, (500-11-031130-079), slip op.,(MAY 21, 2008) is worth a close read. For the arguments against the case by the losing party, see, Factum of BCE and Bell Canada ? Quebec Court of Appeal (PDF 1.4 MB - Apr 24, 2008). It centers on the meaning of the fiduciary duty of Canadian companies when a corporation is "put in play." And those rules center on the interpretive possibilities inherent in Peoples Department Stores v. Wise, [2004] 3 S.C.R. 461. From Peoples the Quebec Appeals court extracted a broad based foundation for fiduciary duty by distinguishing between the consequences of imposing such duties for the best interests of the corporation rather than of the shareholders. While both terms tend to be used interchangeably int he U.S. and tend to refer to the aggregate long term best interests of equity, the Quebec Appeals Court quoted Peoples for the proposition "that "'the best interests of the corporation' should be read not simply as the 'best interests of the shareholders'" and enunciated: 'The various shifts in interests that naturally occur as a corporation's fortunes rise and fall do not, however, affect the content of the fiduciary duty under s. 122(1)(a) of the CBCA. At all times, directors and officers owe their fiduciary obligation to the corporation. The interests of the corporation are not to be confused with the interests of the creditors or those of any other stakeholders.'" IN THE MATTER of a proposed arrangement concerning BCE Inc., supra, at para 100 (quoting in part Peoples, supra. at 42, 43).

These were seasoned with an overtone of the well recognized exception to extend a limited fiduciary duty to debt holders in an insolvency context and broadening the concept of oppression that contorts the concept into another form of garden variety fiduciary duty--now applicable to stakeholders in the context of contests for control. See, e.g., Peoples Depart. Stores, supra. at para. 48:

"Creditors are only one set of stakeholders, but their interests are protected in a number of ways. Some are specific, as in the case of amalgamation: s. 185 of the CBCA. Others cover a broad range of situations. The oppression remedy of s. 241(2)(c) of the CBCA and the similar provisions of provincial legislation regarding corporations grant the broadest rights to creditors of any common law jurisdiction."

Cited by the Quebec Appeals Court, IN THE MATTER of a proposed arrangement concerning BCE Inc., supra, at para 57 (but noting, id., at para. 87 that "the Court will deal only with the plan of arrangement proceedings because if the plan is fair and reasonable, it cannot be said to be oppressive to security holders, or unfairly prejudicial to, or unfairly disregard their interests. Therefore, the Motions for Oppression Remedy become moot and the appeals from the judgment of the Superior Court will accordingly be dismissed, but without costs, given the circumstances.").

But the case appears to boil down to the aggregation of these concepts into a new mix producing an obligation to stakeholders, at least in the context of a change in control: the court concluded that " the premise advanced by BCE that, once the corporation was in play, the Board could only consider ways to maximize the value for the shareholders, is erroneous." IN THE MATTER of a proposed arrangement concerning BCE Inc., supra, at para 102.

The Board's effort to obtain the best value reasonably available to the shareholders cannot be considered in isolation from other factors, such as proper consideration for the interests of debentureholders. Similarly, the elimination of adverse effects on debentureholders cannot be examined in isolation from the proper consideration of the interests of the shareholders. As between obtaining the highest price for the shareholders and the elimination of all adverse effects on the debentureholders it might be possible, through accommodation or compromise, to reach a solution that is fair and reasonable; one that is in the best interests of the corporation and that gives proper consideration to the interests of the shareholders and the debenture holders, taking into account all the circumstances, including the relative eight of their interests.

IN THE MATTER of a proposed arrangement concerning BCE Inc., supra, at 40, para. 122. As a consequence, the Appeals Court determined that "Besides looking to the contractual rights flowing from the Trust Indentures, the Board should have considered the interests (including reasonable expectations) of the debentureholders." Id., at para. 103.

On the one hand, this is a strange result. Effectively the Court suggests that bondholders are protected at two levels. They can negotiate a great amount of protection through their debt instruments. At the same time, they are entitled to the protections of fiduciary duty over and above those provisions int he context of a sale of control. Equity holders, however, are entitled only to those fiduciary protections. But it is not clear why these non residuary holders ought to be entitled to these enhanced protection. On the other hand, there is a certain attraction to the judgment. From an institutional perspective, the elaboration of a juridical doctrine of a duty to maximize corporate wealth (rather than shareholder wealth) recognizes the autonomous legal personality of the corporation as a juridical person apart form its stakeholders. At the same time it recognizes that the institution owes those stakeholders duties arising from its primal obligation to maximize entity wealth. Still, even under a duty to corporation standard, the inevitable consequence need not be the extension of a duty to debt holders. Or better put, the duty might require the corporation to avoid entering into agreements with debt holders which detract from the value of shareholder interests (the arguments made by the debt holders in BCE, but inverted). And this sort of game playing, of course, is the great danger of the case.

The elaboration of a duty-to-entity rather than duty-to-equity-holder doctrine is well worth considerably more thought. It makes sense. But uts greatest utility might be to liberate boards of directors of the traditional and over narrow framework within which fiduciary duty has been understood. For all that, the principal focus of a duty to the entity must be to increase the aggregate value of the entity as a whole rather than to preserve the interests of various classes of stakeholders. And because residuary stakeholders are least protected beyond law, then they might merit the greatest deference under the standard. As a result, the Quebec Appeals Court might have been right on the law (as a general proposition) but very wrong in its application ot debt holders. The appellate decision ought to be reversed, but the opportunity taken to elaborate an appropriate fiduciary duty theory. Fortunately we will get a chance to return to these issues soon. The Canadian Supreme Court has indicated a willingness to tackle these issues on appeal.

BCE Inc. may gain on the Toronto Stock Exchange today after Canada's highest court agreed to expedite an appeal of a Quebec court ruling that blocked the Canadian phone company's record C$52 billion ($52 billion) leveraged buyout.

The Supreme Court of Canada late yesterday gave the two sides until May 30 to file the application for a hearing and responses. If the court agrees to grant the hearing, it would be held on June 17 in Ottawa.

Joe Schneider, BCE May Rise After Supreme Court Agrees to Expedite Appeal, Bloomberg.com, May 27, 2008. We will come back to this in more detail then.

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