Corporate governance

Duties of Directors in both Canada and the United States

US securities and exchange commission with respect to the duties of directors
BCE INC v 1976 Debentureholders
Deference to board members. Business Judgement rule. The meaning of a ‘tactical pill’
and how that plays into whether that decision took into consideration the wellbeing of
shareholders.
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What is corporate governance?Corporate Governance - Overview, Principles,
Importancecorporatefinanceinstitute.com › ... › Knowledge › Other
Corporate governance is something altogether different from the daily operational management
activities enacted by a company’s executives. It is a system of direction and control that dictates
how a board of directorsgoverns and oversees a company.
Summary:
• Corporate governance is a system of rules, policies, and practices that dictate how a
company’s board of directors manages and oversees the operations of a company;
• Corporate governance includes principles of transparency, accountability, and security.
• Poor corporate governance, at best, leads to a company failing to achieve its stated
goals, and, at worst, can lead to the collapse of the company and significant financial
losses for shareholders.

Other links:
https://www.investopedia.com/terms/c/corporategovernance.asp
https://www.bdc.ca/en/articles-tools/entrepreneur-toolkit/templates-business-
guides/glossary/corporate-governance
https://en.wikipedia.org/wiki/Corporate_governance
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Duties of directors https://www.mondaq.com/canada/shareholders/452500/the-balancing-
act-directors39-duties-in-canada-vs-the-us
Board of directors tasked with managing and considering the best interests of the cooperation.
In USA, this is considered to be the best interests of the cooperation and the shareholders,
where shareholder value is prioritized. In Canada, other considerations might be made, such as
the interest of shareholders, as well as other stakeholders such as employees, consumers, and
the environment.

· Revlon Rule:
o https://www.law.upenn.edu/journals/jbl/articles/volume11/issue3/Furlow11U.Pa.J.Bus.
L.519(2009).pdf
o States that a company’s board of directors shall make reasonable effort to obtain
highest value for a company, when a hostile takeover is imminent.
o Shifts the focus of directors from long term health of the corporation to increasing the
short-term financial gains of shareholders
o https://en.wikipedia.org/wiki/Revlon,_Inc._v._MacAndrews_%26_Forbes_Holdings,_I
nc.
o Fiduciary Duty:
§ When someone has a fiduciary duty to someone else, the person with
the duty must act in a way that will benefit someone else, usually
financially.
 § The person who has a fiduciary duty is called the fiduciary, and the
person to whom the duty is owed is called the principal or the beneficiary.
If the fiduciary breaches the fiduciary duties, he or she would need to
account for the ill-gotten profit. The beneficiaries are typically entitled to
damages.
§ https://www.law.cornell.edu/wex/fiduciary_duty
· Business Judgement Rule:
o The business judgment rule is the judicial standard of review by which courts
determine whether or not a director breached the duty of care to shareholders.
The business judgment rule establishes a presumption that the director acted in
good faith, was reasonable, and acted in the best interest of the corporation—
placing the burden of proof on the plaintiff bringing suit.
o From a policy standpoint, the business judgment rule relies upon the principle
that the board of directors and the interests of the shareholders are aligned. The
business judgment rule assumes board members benefit most from the long-
term success of the corporation and shareholders are best served by long-term,
corporate success. In such cases, it would be unreasonable for the judiciary to
interfere with the methods by which these goals are realized.
o https://revlonduties.com/board-governance/revlon-rule/
· Poison Pill:
o Also known as a shareholder rights plan, a poison pill is a defensive measure
used by public companies to defend against hostile takeover attempts by third
parties.
o A typical poison pill gives all shareholders other than the unwelcome acquiror
or hostile bidder the right to buy additional stock, either in their own company or
the acquiror, at a substantial discount.
o https://ca.practicallaw.thomsonreuters.com/5-383-
2209?transitionType=Default&contextData=(sc.Default)&firstPage=true
o https://lawjournal.mcgill.ca/article/the-future-of-poison-pills-in-canada-are-takeover-
bid-reforms-needed-2/
o

Background: Canadian and American judicial interpretations of directors’ fiduciary duties have
historically differed
USA:
• Best interest considered with the maximum shareholders, dates back to the Michigan
supreme court decision between Dodge vs Ford
o When it came between either paying a special dividend, or reinvesting money
into the company, paying the dividend won
• Boards of directors are responsible for maximizing shareholder value above all other
considerations
Canada:
• Duties of directors consist of 2 factors: duty to act honestly and in good faith with the
best interests of the cooperation, and to exercise the care and diligence a prudent
person would exhibit in comparable circumstances, also known as “the duty of loyalty”
and the “duty of care”
• Duty of loyalty and care can also be referred to as “business judgement rule”
• In the case of BCE Inc vs. 1976 Debentures, Canada’s highest court considered the duty
of loyalty and held that when determining the best interest of a cooperation, directors
 must look at the interest of a variety of stakeholders, such as shareholders, employees,
creditors, consumers, government, and the environment
• There is no principle in Canada that the interests of the shareholders should
predominant over the other stakeholders

BCE INC v 1976 Debentureholders:

• Leading decision on the nature of duties of corporate directors to act in the best interests
of their corporation
• Principle of fair treatment
· When assessing the merits of three takeover offers the BCE board of director’s found
the Purchaser’s offer to be in the best interest of BCE and BCE shareholders. All offers
before the board involved a substantial increase in debt liability for Bell Canada, a
subsidiary of BCE. The deal was huge. A premium of 40 per cent over market value was
paid per share, with a total value of $52 billion. The deal also involved Bell Canada
guaranteeing $30 billion of BCE’s debt. This arrangement was approved by 97.93
percent of BCE shareholders.

This arrangement was opposed, however, by a group holding debentures (“debenture

holders”) issued by Bell Canada. The debenture holders were concerned that the trading
value and investment grade status of their debentures would decline by approximately
20 percent if the offer from the Purchaser was approved by the court.

http://www.thecourt.ca/bce-inc-v-1976-debentureholders-directors-do-what-is-best-for-
the-firm/

· In this case the debenture holders sought relief s.241 of the Canada Business
Corporations Act: Oppression remedy

BCE Inc Vs. 1976 Debentureholders UBC law review article:

https://poseidon01.ssrn.com/delivery.php?ID=257084068082094073110028070085091014121
0200610020910510090200180760061020730980911050550550370221071261101170990810
0310000312201001206805001511007403111900308009708005205907710402506900600709
7005031007096123117086006093017007103116026025126088112004008&EXT=pdf&INDEX
=TRUE

Quotes:

“In BeE Inc v 1976 Debentureholdersl the Supreme Court of Canada articulated an approach to the
duties of corporate directors that dramatically departs from two competing economic theories often
applied to Canadian corporate law.2 This decision has receivedscathingscholarlycritiques, fuelled in part
by the Court's departure from both stakeholder theory and shareholder primacy”

“the Supreme Court of Canada in BCE rejects the notion that a particular group of stakeholders holds
priority over another? Rather, the Court's reasons indicate that directors owe a fiduciary duty that is fixed,
"to act in the best interests of the corporation, viewed as a good corporate citizen': which is composed of
"a duty to treat individual stakeholders affected by corporate actions equitably and fairly."
Mcgill Law Review:

https://www.mcgill.ca/mjsdl/files/mjsdl/volume_12_issue_1_paramanov-15-09-16.pdf

Quotes:

“Historically, Canadian common law has embraced a shareholder-centric fiduciary duty.

However, the recent Supreme Court of Canada (SCC) case BCE Inc v 1976
Debentureholdershas overtly departed from shareholder primacy and arguably embraced
elements of stakeholder theory, even if the Court did not explicitly refer to the theory in the
decision.”

“The case involved a plan of arrangement contested by a group of debentureholders on the

grounds that it was oppressive and in breach of management’s fiduciary duty to them. The SCC
explained that the fiduciary duty is a “broad, contextual concept. It is not confined to short term
profit or share value. Where the corporation is an ongoing concern, it looks to the long-term
interests of the corporation.”86 The Court added, “In considering what is in the best interests of
the corporation, directors may look to the interests of, inter alia, shareholders, employees,
creditors, consumers, governments, and the environment to inform their decision.”87 Lastly, the
SCC implied that corporations may have a socially-oriented component when it described
directors as acting in the best interests of the corporation as a “good corporate citizen” or
“responsible corporate citizen”—language not previously used by the Court to describe
corporations.”

Revlon Rule in the United States:

“an affirmative legal obligation to conduct a fair auction for the company and to sell it to the
highest bidder” from
https://www.americanbar.org/groups/business_law/publications/the_business_lawyer/find_b
y_subject/buslaw_tbl_mci_revlon/

“The Revlon Rule resulted from a legal case decided by the Supreme Court of Delaware
in 1985. Revlon, Inc. found itself in a hostile takeover, which management and the
board fought hard to defend. Ultimately, a white knight provided a friendly, but lower, bid
that the board accepted. The bid approval was overturned by the Supreme Court of
Delaware, which claimed that in the case of a company sale, the board must look after
the shareholders first and accept the highest, and cleanest, bid in order to maximize
shareholder value.”
https://www.divestopedia.com/definition/4710/revlon-rule

Other links:
https://digitalcommons.osgoode.yorku.ca/cgi/viewcontent.cgi?referer=https://www.google.com/&
httpsredir=1&article=1035&context=ohlj
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US securities and exchange commission with respect to the duties of directors
What is US securities and exchange commission?
https://en.wikipedia.org/wiki/U.S._Securities_and_Exchange_Commission
• Independent agency of the US federal government created following the stock crash in
the 1920s to protect investors and banks
 • Responsible for enforcing federal securities laws
• Proposing securities rules
• Regulating securities industry, nation’s stock and options exchanges
• Enforces securities exchange act of 1934, securities act of 1933, trust indenture act of
1939, the investment company act of 1940, the investment advisers act of 1940, and
more

https://complyadvantage.com/knowledgebase/securities-exchange-commission/
• Organized in 5 divisions : corporate finance, trading and markets, investment
management, enforcement, economic and risk analysis
• Monitors key participants in the industry
• Monitors brokers, mutual funds, securities exchanges, and investment advisors
• Brings enforcements to those that break the law, to both firms and individuals
What directors should know about the SEC: https://www.sec.gov/news/speech/2014-
spch062314mjw
• Directors play an important role in overseeing what the company is doing, and
preventing, detecting, and stopping any violations of the federal security laws at your
companies
• Directors to establish expectations for senior management and the company as a whole
• Instilling a strong corporate culture
• Fostering a community that encourages employees to report wrongdoings