The BCE Blunder: An Argument in Favour of Shareholder Wealth Maximization in the Change of Control Context
The job of a corporate director has become increasingly complex - gone are the days where board members were essentially “rubber stamps” to management initiatives. Currently, the board of directors is the highest governing authority within the management structure of any company. Some responsibilities of boards include selecting, evaluating, and approving compensation for the company’s chief executive officer, approving the company’s financial statements and paying dividends. One of the most difficult decisions that a director may face has to do with recommendations on change of control transactions. Changes of control include transactions where shareholders lose control of the corporation or where the corporation ceases to exist. This type of transaction represents a significant event in the existence of any company. The most common change of control transaction is the sale of a corporation. It is the responsibility of the board to recommend whether or not shareholders should approve any change of control. When making determinations with regard to changes in control, directors are guided by their fiduciary duty. This duty requires them to act in “the best interests of the corporation”. Unfortunately, understanding what acting in “the best interests of the corporation” entails may be a more difficult task than determining whether or not to recommend the sale of a company. One of the main issues with the “best interests of the corporation” standard is that corporations are made up of multiple interests with independent goals and welfare concerns. For example, during a change of control transaction, shareholders will seek to maximize the value of their shares, employees will seek job security, and creditors will want to ensure that their loans continue be repaid. Given these largely conflicting goals, it is almost impossible for a director to please all interested parties. Two theoretical models provide guidance to directors as to what “the best interests of the corporation” standard requires: shareholder primacy and stakeholder theory. Generally, shareholder primacy necessitates that directors maximize shareholder value when making decisions. Although directors may consider the interests of other stakeholders, they are unable to act in a way that has a negative impact on shareholders. Conversely, stakeholder theory contemplates a broader social role for corporations. Stakeholder theorists argue that unilateral focus on shareholder wealth fails to recognize that groups outside of shareholders are integral to the success of the corporation. According to stakeholder theory, directors’ fiduciary duties should require them to contemplate a broader range of interests than just shareholders. The Supreme Court of Canada recently weighed in on the debate in the cases of Peoples v Wise and BCE v 1976 Debentureholders. These decisions stand for the proposition that directors’ fiduciary duties permit them to consider the interests of a wide variety of stakeholders when making a determination. In the change of control context, directors are free to consider the interests of all corporate constituents prior to recommending whether or not shareholders should approve a given transaction. This paper will explore some of the issues that Peoples and BCE raise. It will be argued that directors’ duties should require them to focus exclusively on increasing shareholder value in the change of control context. Although ensuring that stakeholder interests are not disregarded is an important goal, mechanisms such as contracting, legislation and the political process provide an effective regime for protecting stakeholders. In contrast, shareholders status as residual claimants necessitates that they be protected by an exclusive fiduciary duty. The paper will be broken into three sections. Section I will examine the case law and legislation, which detail the content of fiduciary duties in Canada. Section II will critique the fiduciary duties outlined by the Supreme Court in Peoples and BCE. Section III will outline a variety of arguments as to why directors’ fiduciary duties should require them to focus exclusively on maximizing shareholder value in the change of control context.
Creative Commons License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 3.0 License.
Patrick Lupa, "The BCE Blunder: An Argument in Favour of Shareholder Wealth Maximization in the Change of Control Context" (2011) 20 Dal J Leg Stud 1.