RECONCILING THE INTERESTS OF CORPORATE STAKEHOLDERS: LEGAL OBLIGATIONS AND ETHICAL CONSIDERATIONS

1
RECONCILING THE INTERESTS OF CORPORATE
STAKEHOLDERSLEGAL OBLIGATIONS AND ETHICAL
CONSIDERATIONS

• Aaron J. Atkinson
• Partner, Fasken Martineau DuMoulin LLP
• Presentation for The Canadian Centre
• for Ethics and Corporate Policy
• April 23, 2009

2

• We refer to corporate behaviour which takes into
  account the interests of all of the corporations
  stakeholders asethical behaviour.
• Canadian Centre for Ethics Corporate
  PolicyJune 21, 1996

3
Introduction

• In 1996, the Canadian Centre for Ethics and
  Corporate Policy made a public proposal to amend
  the Canada Business Corporations Act to entitle
  corporate directors and officers to consider the
  interests of stakeholders (including customers,
  employees, lenders, suppliers and surrounding
  communities) affected by a corporations actions.

4
Introduction (cont.)

• Such an amendment, sometimes referred to as a
  community interest clause, was thought by some
  to diminish shareholder protection or affect
  other aspects of corporate law.
• A number of judicial developments have occurred
  since that time that may be viewed as vindicating
  the Centres view.
• The most recent development is the Supreme Court
  of Canadas decision in the BCE case in which the
  concept of shareholder primacy in corporate
  decision-making was firmly rejected.

5
Introduction (cont.)

• The BCE case does little to resolve the
  continuing tension between the interests of those
  who provide financial capital to a corporation,
  principally the shareholders, and a corporations
  other stakeholders.
• It is left to the directors and officers, with
  the assistance of their advisors, to resolve this
  tension in any particular situation.

6
The BCE Decision

• In June of 2008, the Court released its decision
  in BCE, reversing a decision of the Quebec Court
  of Appeal and allowing the transaction to
  proceed however, the Court did not release its
  reasons at that time.
• Without the benefit of reasons, some speculated
  that the Court must have based its decision on
  the overarching primacy of shareholder interests
  over all others.

7
The BCE Decision (cont.)

• In December of 2008 the Court released its
  reasons for decision.
• The Supreme Court expressly and unambiguously
  repudiated the idea of shareholder primacy in the
  governance of Canadian corporations.

8
The BCE Decision (cont.)

• There is no principle that one set of interests
  for example the interests of shareholders
  should prevail over another set of interests.
  Everything depends on the particular situation
  faced by the directors and whether, having regard
  to that situation, they exercised business
  judgment in a responsible way.
• The duty to act in the best interests of the
  corporation comprehends a duty to treat
  individual stakeholders affected by corporate
  actions equitably and fairly.

9
The Tension

• Corporate Canada is witnessing an increase in
  shareholder activism
• proxy battles
• say on pay
• majority voting for directors
• advocating for changes in corporate strategy

10
The Tension (cont.)

• Shareholders retain significant power they can
  determine the composition of the board, who in
  turn determine the composition of management.
• In addition, shareholders are required to approve
  many material corporate transactions.

11
The Tension (cont.)

• In BCE, the Court strongly endorsed the
  application of the business judgment rule in
  assessing the decisions of officers and
  directors.
• In corporate Canada following BCE, decisions may
  require a more rigorous analytical approach, but,
  if a proper decision-making process is followed
  and appropriately documented, corporate
  decision-makers may take comfort that their
  decisions are less likely to be second-guessed by
  courts.
• While the process of resolving these tensions is
  no easier following BCE, corporate
  decision-makers can rest assured that while a
  high degree of diligence is demanded, the
  standard by which they will be judged is less
  than perfection.

12
Some Background

• During the 1980s, a number of states in the
  United States amended their corporate law
  statutes, generally permitting (but not
  requiring) corporate directors and officers to
  consider non-shareholder interests when making
  business decisions.
• In 1996 the Ethics Centre made a public proposal
  to amend the Canada Business Corporations Act to
  permit (but not require) directors to take into
  account the interests of stakeholders in making
  corporate decisions.

13
Some Background (cont.)

• The Centre argued that a more flexible approach
  was required to encourage corporations to be
  proactive in considering the interests of various
  stakeholders and more responsive to the changing
  identity of those stakeholders.
• While the CBCA was not amended, this approach to
  stakeholder interests gained new life in the 2004
  Supreme Court decision in Peoples Jewellers v.
  Wise.

14
Some Background (cont.)

• In Peoples, the Court stated that it may be
  appropriate, although not mandatory, to consider
  the impact of corporate decisions on shareholders
  or particular groups of stakeholders.
• In the BCE case, the Court may now require that
  these interests be considered and balanced in
  order to properly exercise business judgment.

15
What did the Supreme Court say in BCE?

• The fiduciary duty of directors and officers is
  mandatory directors and officers must look to
  what is in the best interests of the corporation.
• The fiduciary duty of corporate directors and
  officers to the corporation is a broad,
  contextual concept which varies with the
  particular facts and circumstances.

16
What did the Supreme Court say in BCE? (cont.)

• The fiduciary duty is not confined to short-term
  profit or share value. Where the corporation is
  an ongoing concern, the duty looks to the
  long-term interests of the corporation.
• At a minimum, the duty requires that directors
  and officers ensure that the corporation meets
  its statutory obligations. Depending on the
  context, there may be other requirements.

17
What did the Supreme Court say in BCE? (cont.)

• The duty to act in the best interests of the
  corporation comprehends a duty to treat
  individual stakeholders affected by corporate
  actions equitably and fairly (or, in other words,
  in accordance with their reasonable
  expectations).
• Notwithstanding the need to consider the fair
  treatment of stakeholders, directors and officers
  do not owe any duty to any particular
  stakeholder the duty is always to the
  corporation.

18
How to Reconcile Conflicting Stakeholder
Interests?

• In circumstances where stakeholder interests
  conflict and that conflict involves the interests
  of the corporation, the directors must resolve
  them in accordance with their fiduciary duty to
  act in the best interests of the corporation,
  viewed as a good corporate citizen.

19
How to Reconcile Conflicting Stakeholder
Interests? (cont.)

• Everything depends on the particular situation
  faced by the directors and whether, having regard
  to that situation, they exercised business
  judgment in a responsible way.
• As a result, corporate decision-makers may be
  afforded greater latitude to make their decisions
  provided that an appropriate process is followed.

20
What is the Business Judgment Rule?

• Courts will grant deference to a business
  decision so long as it lies within a range of
  reasonable alternatives.
• The rule reflects the reality that directors and
  officers, who are mandated under applicable
  corporate statutes to manage the corporations
  business and affairs, are often better suited
  than judges (exercising perfect hindsight) to
  determine what is in the best interests of the
  corporation.
• The business judgment rule applies to decisions
  on stakeholders interests as much as other
  decisions.

21
What are some implications for including
stakeholder considerations in the Business
Judgment Rule?

• In the Ethics Centres 1996 proposal, the
  proposal clarified that the entitlement of
  directors and officers to consider stakeholder
  interests should not create any duties to any
  person or entity to consider or afford any
  particular weight to any stakeholder interest.

22
What are some implications for including
stakeholder considerations in the Business
Judgment Rule? (cont.)

• Now, the exercise of business judgment may
  require the consideration of stakeholder
  interests given the duty to treat individual
  stakeholders affected by corporate actions
  equitably and fairly.
• Decision-makers need to, as a preliminary step,
  turn their minds to the range of affected
  stakeholders and consider their reasonable
  expectations in making any significant corporate
  decision.

23
What are some implications for including
stakeholder considerations in the Business
Judgment Rule? (cont.)

• While stakeholder interests require
  consideration, the Court does not open the
  floodgates
• Corporate decision-makers need only consider the
  reasonable expectations of stakeholders.
• The profit motive is not to be abandoned.
• The corporation and shareholders are entitled to
  maximize profit and share value, to be sure, but
  not by treating individual stakeholders unfairly.
  Fair treatment is most fundamentally what
  stakeholders are entitled to reasonably
  expect."

24
How do corporate decision-makers exercise proper
business judgment in light of the BCE decision?

• A director or officer must, in carrying out his
  or her duties, act prudently and on a reasonably
  informed basis.
• While a high degree of diligence is demanded, the
  standard is less than perfection.

25
How do corporate decision-makers exercise proper
business judgment in light of the BCE decision?
(cont.)

• Where a directors decision is a reasonable one
  in light of all the circumstances about which the
  director knew or ought to have known, courts will
  not interfere with that decision. The courts
  inquiry will generally focus on whether the
  directors applied an appropriate degree of
  prudence and diligence in reaching their
  decisions.

26
How do corporate decision-makers exercise proper
business judgment in light of the BCE decision?
(cont.)

• Identify, at an early stage, the various
  stakeholder interests that should be considered.
• The list cited by the Supreme Court included
  employees, creditors, consumers, governments and
  the environment. While this list could be
  lengthy, this exercise is tempered by the next
  step in the process.

27
How do corporate decision-makers exercise proper
business judgment in light of the BCE decision?
(cont.)

• Consider what are the reasonable expectations
  of those stakeholders that have been identified.
• commercial practice
• the relationship between the parties
• past practice
• steps the claimant could have taken to protect
  itself
• representations and agreements
• fair resolution of conflicting interests between
  corporate stakeholders
• reasonable expectations can also be grounded in
  any number of public statements and disclosures
  (including ethics policies and codes of conduct)

28
How do corporate decision-makers exercise proper
business judgment in light of the BCE decision?
(cont.)

• Take steps to ensure that their decisions are
  made free of conflict whereby the interests of
  one stakeholder will not be seen to have been
  unduly favoured over the interests of others.
• Corporate decisions should not be made with undue
  haste.

29
How do corporate decision-makers exercise proper
business judgment in light of the BCE decision?
(cont.)

• Properly document their proceedings with
  appropriate evidence.
• Solicit outside advice where necessary.
• Consider the public disclosure of any decision
  that will be made.

30
What about Shareholders?

• On the facts, the Court ultimately vindicated the
  process that was undertaken by the BCE board and
  dismissed the claims of the bondholders.
• The substantive result in the BCE case may
  actually provide additional comfort to corporate
  directors and officers who may be concerned about
  the implications of the BCE case on their
  decision-making processes.
• The tension remains.

31
Conclusion

• In Canada after BCE, directors and officers must
  ensure that their focus is on the long-term
  interest of the corporation.
• Corporate decision-makers now have to turn their
  minds to factors that may not have been given
  significant consideration in the past.

32
Conclusion (cont.)

• At the same time, Canadian courts will generally
  defer to the decisions of corporate directors and
  officers, provided that those decisions are made
  within an expanded scope of what is in the best
  long-term interests of the corporation.
• Canadian corporate decision-makers may, if the
  courts guidance is considered, make their
  decisions on a more fully-informed basis and,
  from the perspective of this organization,
  demonstrate ethical behaviour.

33
Aaron Atkinson is a partner in the Toronto office
of Fasken Martineau DuMoulin LLP, practicing
principally in the areas of Corporate Finance and
Mergers Acquisitions. In addition to his
transactional work, Aaron has advised a number of
public companies on a day-to-day basis with
respect to securities law matters and corporate
governance compliance. Aaron also has advised a
number of special committees in connection with
public take-over transactions and other mandates.
He is the author of Fair To Whom? The Quebec
Court of Appeals Decision in the Matter of the
Proposed Arrangement Concerning BCE Inc., in
June 2008 and co-author of 20 Questions
Directors Should Ask About Special Committees, a
publication in 2008 for the Canadian Institute of
Chartered Accountants and the Institute of the
Corporate Directors. In addition to his practice,
Aaron serves as a sessional instructor at the
University of Windsor Faculty of Law where he
teaches Corporate Finance. He is also a member
of the Securities Law Subcommittee of the Ontario
Bar Association.
Aaron J. Atkinson [phone] aatkinson_at_fasken.
com