Inside the Boardroom

Reflecting on the Supreme Court’s

BCE Decision1: What Can Directors Learn?
By David W. Anderson, PhD, ICD.D
The Anderson Governance Group

Oh, the irony. Bondholders did not
want BCE weighed down in debt and
fought their way to the Supreme Court
of Canada to stop it. They lost. And then
they won.
BCE chose to guarantee its solvency to reassure
bondholders in a leveraged buyout. Such was the
board’s magnanimity.2 This final condition to the close
of the deal was deemed unmet by an auditor – and
the largest leveraged buyout in history became an
unforeseen casualty of the broader market meltdown.
Despite this ending, what can directors learn from the
Supreme Court of Canada’s (SCC) judgement which
permitted the deal itself?
I offer three areas for consideration:3
1. A reminder the judicial system is intricately
engaged in capitalist enterprise;
2. The importance of sound board processes in
reaching decisions; and
3. The primacy of the corporation as the entity to
which directors owe their fiduciary duty.
transaction, existing shareholders would have to be
enticed or compelled to surrender their ownership claim
on BCE.
While the price offered by the buyers would be
sufficient inducement for most, the deal’s terms required
complete control to take BCE private. This proposed
change of control, though approved by 97.93 percent
of shareholders, required the oversight of a court to
adjudicate the fairness of the transaction. The law
requires the court to review proposed transactions that
are subject to a plan of arrangement under the Canada
Business Corporations Act, and look out for stakeholders
whose rights and interests may be affected.
In its BCE judgement, the SCC has demonstrated the
main functions of the law – to interpret legislation,
resolve disputes, explain rules and advance the common
understanding of how participants in civil society ought
to interact with each other. The Court has proved its
value, providing fairness, reliability and predictability in
the exercise of business.
Through its ruling, the SCC has continued the legal
tradition in North America of nurturing a stable

1 The rule of law, through government, is the

foundation of free enterprise
For directors engaged in the thrill of competitive free
enterprise, it is easy to find fault with the machinations
of government. It is also easy to forget that our
judiciary, as an organ of our societal governance, plays a
decisive role in corporate life and the maintenance of a
productive business environment.
In BCE’s case, the Board chose to sell the company to
a group of private equity investors. To complete the
environment in which contractual and property rights
are recognized, respected and enforced. At the core of
the ruling, the SCC had to decide if the business deal
entered into by BCE’s Board was fair. The concept of
fairness is vital, since it is only when citizens regard
the results of judicial decisions as being fair that they
will confer upon the courts legitimacy and consent to
submission to their judgement.
In the BCE case, bondholders saw their economic
interests infringed and sought the protection of the
courts against the business judgement of the Board of

1 BCE Inc. v. 1976 Debentureholders, 2008 SCC 69. Decided June 20, 2008. Reasons delivered December 19, 2008.
2 This self-imposed, binding condition provided bondholder protection beyond the contractual rights for which these bondholders had
bargained. The Supreme Court of Canada saw this and similar decisions of the board vis-à-vis bondholders as consistent with directors’
duty to consider the interests of bondholders, as stakeholders in the company, when determining the best interests of the corporation.
3 The BCE decision deals with three separate statutory provisions: duty of care, oppression remedies, and plans of arrangement – each
with different implications for directors. This article looks for common themes and attempts to blend the learnings. Directors should
consult with their legal counsel with respect to the BCE decision for applicability to their circumstance.

Issue 144 | June 2009 | 39

I n s i d e the Boardroom
Directors. Although bondholders lost their argument
before the SCC, their acceptance of the verdict speaks to
the legitimacy with which they regard the legal process
and its outcomes.
The potential impact of this case on our international
standing is also germane. In the United States, the
State of Delaware is home to over 50 percent of public
companies. The state legislature and Court of Chancery
have developed a coordinated expertise in drafting and
interpreting corporate law, supported by the state’s
Supreme Court. The value proposition actively marketed
to U.S. and foreign companies is that they will find a
business environment grounded in stable laws and
specialized, efficient courts.
In the BCE case, the SCC has demonstrated its own
expertise and efficiency, signalling the ability of Canada’s
legal infrastructure to operate competitively in world
markets in producing sound decisions. The unusual
swiftness of the Court’s action in hearing and resolving
the BCE case sent a strong signal to the international
business community that Canada maintains both laws
and a court system capable of resolving contentious,
time- and business-sensitive matters in an expedited
manner when warranted.
Our courts act to uphold, through the application of
their power, the very credibility of our market economy.
By adjudicating, adjusting and approving corporate
transactions, they remind us that the basis of our economic
freedom is the mutual respect of rights and obligations,
and that the competitiveness of markets is made possible
through the unbiased application of the law.
It is a simple lesson, but no less powerful for it. Citizens,
corporations and government all have a role to play in
building and maintaining the civil society in which our
economic activities generate and distribute wealth. The
judiciary, as a branch of government, acts to ensure
fairness in the outcomes of decisions it controls (as you
would hope, when such a power intervenes to rearrange
your rights), and assesses the quality of the processes
directors undertake when judging the validity (not the
outcome) of corporate action.
4 See Peoples Department Stores Inc. (Trustee of) v. Wise, 2004 SCC 68: “…Canadian courts have developed a rule of deference to business
decisions called the ’business judgment rule’, adopting the American name for the rule.” (para 64; see also para 67).
5 The special committee chose to run an auction process in order to create a transparent process aimed at maximizing the eventual
price the suitors would pay. The process worked as intended, yielding three competing bids. On the recommendation of the special
committee, the board chose the option that it considered to be in the best interests of the corporation.
40 | Institute of Corporate Directors
2 Good process is a director’s best friend
Sound process confers legitimacy upon board
decisions. A thorough approach to decision-making
culminating in a thoughtful business judgement does
not make a business decision right or guarantee its
financial success, but such an approach does tend to
shield the decision from judicial second-guessing and
improves the credibility of the board in the eyes of its
stakeholders.4
Stakeholders want to know their interests will get a fair
hearing by directors. The board cannot possibly protect
all interests, because by definition some interests will
be conflicting. Decisions of the board must, therefore,
be fair in order to be regarded in law and in practice as
legitimate.
The SCC lauded the BCE Board for engaging in good
process, which included seeking out professional advice;
forming a committee of independent directors5 to run
an auction process; encouraging bidders to respect
the rights and interests of bondholders; listening to
opinions from diverse stakeholders; testing various
scenarios with prospective buyers to gauge the impact
on each stakeholder; carefully evaluating all options;
and, ultimately, making a business decision in the best
interests of the company. The quality of the Board’s
process – which helped it focus on its fiduciary duty
to the corporation –was a critical factor in the SCC’s
judgement supporting BCE’s decision-making process.
3 Directors serve the corporation
This sounds reassuringly simple, but there is a reason
why five learned judges on the Quebec Court of Appeal
(QCA) made a unanimous decision and seven judges on
the SCC unanimously reversed it.
The QCA ruled in essence that BCE’s Board should have
acted to protect the economic interests of bondholders
along with those of shareholders, putting neither
above the other. For failing to actively mitigate harm
to bondholders in the face of a shareholder windfall,
the QCA reversed the trial judge’s approval of the deal
before it.
This protection of bondholders did not arise out of
contractual obligations, as no breach of contract
was alleged.6 Rather, the judgement represented a
philosophical view of board responsibility toward
stakeholders that holds that boards should “divide
the spoils” of capitalist winnings equitably, regardless
of differential claims on the corporation based in
ownership7 or contractual rights and without regard for
differential risk associated with the structural form of
invested capital. In essence, when faced with a Solomon-
like decision, the QCA chose to divide the baby.
In sharp contrast, the commonly-held view among
directors and commentators at the time was that
shareholders’ rights come first and no duty existed
to protect (as opposed to consider) the economic
interests of bondholders (without such stipulated in
their contracts). Indeed, this is the case with Delaware
corporations: the board’s role is to serve the interests of
shareholders.
as to whom directors owed their fiduciary duty – and
whether that duty shifted to various stakeholders
depending upon the transaction being considered or
the solvency of the company.
This debate highlighted a lack of clarity regarding
the fiduciary duty of directors in Canada. It took this
SCC ruling to clarify the scope of directors’ duty to the
corporation.
Clarifying directors’ fiduciary duty to the
corporation
The SCC ruling resolved the heightened degree of
uncertainty concerning the fiduciary duty of directors
and the Courts’ application and interpretation of two
key sections of the Canada Business Corporations
Act – namely s. 192 pertaining to the fairness
and reasonableness of change of control plans of
arrangement and the oppression remedy standards
contained in s. 241.

The general understanding had been that bondholders
have a claim only insofar as the contractual terms with
the company set out. The sale of the company should
not change the obligation to pay interest and repay
principal, though it might change the price of the
bond. If the company fails to fulfill the contract, then
bondholders would have reason to sue the company for
breach of contract.
By overturning the QCA ruling and restoring that of the
trial judge, the SCC acted to clarify the fiduciary duty of
directors, particularly in the context of change of control
transactions. The SCC reaffirmed that directors owe a
fiduciary duty to the corporation. While contemplating
that duty to the corporation, directors must respect
existing contracts and evaluate the impact of various
options on all stakeholders.

Following the QCA ruling, many directors were unsure if
their duty now required them to protect the interests of
all stakeholders when selling a company – an impossible
task, they feared. The fact that BCE proposed an action
that would hurt bondholders, without mitigating their
loss, invalidated the deal in the eyes of the QCA. Neither
the interests of shareholders nor bondholders should be
put above the other, it seemed.
This set off a firestorm of activity, as directors and
their advisors sought to understand the rationale and
implications. Fundamental questions were raised about
Where the reasoning of the SCC differed from that of the
QCA was in the heart of the matter regarding fiduciary
duty: when faced with choices that contain differential
outcomes for stakeholders, the board is within its duty
to make a decision that clearly benefits one stakeholder
at the expense of another, if that decision is well
considered, preserves contractual obligations and
represents, in the business judgement of the board, the
best path forward for the corporation.
The SCC explicitly recognized that shareholders
would reap considerable benefit from the sale of their

6 The contract with bondholders (to pay interest and principal) was not affected by the proposed change of control. The SCC recognized
that bondholders could have negotiated contract provisions – extra protection against the eventuality contemplated by the proposed
action – requiring their approval for a change of control (or compensation for a loss resulting from the same). They did not. This
omission rendered as weak the bondholders’ argument for court protection, particularly as such rights are routinely negotiated, and
given the bondholders were themselves sophisticated investors. In making this latter point, the SCC reaffirmed the principle that one’s
professional stature and training influences one’s degree of responsibility.
7 The claim of owners on a corporation is weakest; shareholders are last in line when a corporation fails, having only a residual claim. One
may ask if the situation here were reversed, with shareholders facing losses, if bondholders would have thought of sharing the proceeds
of their contractual claim on the corporation. One may justifiably hope not, as this would distort the risks freely accepted by actors
contributing capital in different ways, with different expectations of risk and reward.

Issue 144 | June 2009 | 41

I n s i d e the Boardroom

ownership interest and the bondholders would face
losses in the value of their bonds. Significantly, the value
accruing to shareholders was seen as a consequence
of acting in the best interests of the corporation, not
as the criterion for the decision. The board had made a
business decision to accept the offer that provided the
best chance for the company to succeed – an offer that
also maximized shareholder value.
a deepening appreciation of the broad stakeholder
context in which the corporate interests must be divined.
Firstly, from the directors’ perspective, there is a
philosophical struggle – a seeming contradiction in
purpose rooted in accountability owed to those who
elect them to office and the fiduciary duty once in office
to the corporation they were elected to govern.

It is not as simple as saying a board’s sole objective
is to maximize shareholder value.8 Indeed, from the
SSC’s perspective, the phrase “in the best interests of
the corporation” is not a euphemism for shareholder
supremacy. This is what the QCA was struggling with.
Although the QCA got the “big picture” decision wrong,
its logic was based in the SCC’s 2004 unanimous decision
in Peoples v. Wise, in which it reaffirmed that directors
owe a fiduciary duty to the corporation – not to any
particular stakeholder.9 Directors, the SCC asserted,
need to consider the interests of all stakeholders10 when
deciding what constitutes the best interests of the
corporation. The QCA, it seems, took disproportionate
shareholder gain and bondholder loss as evidence that
not all stakeholder interests were adequately considered.
The BCE case clarifies the matter insofar as it (1)
distinguishes “consider the interests” from “protect
the interests” of stakeholders and (2) reinforces that
corporate interests are supreme when deciding the fate
of a company.
And yet, despite this clarification from our highest court,
the swift evolution in governance practice provides two
inter-related reasons directors may continue to struggle
with this concept: (1) a heightened accountability
to owners has increased the very ambiguity in
responsibility the Court has tried to clarify; and (2)
The shareholder democracy movement is predicated
on the idea that the role of directors is to represent
shareholders’ interests.11 As owners have discovered
their voice and institutional investors have begun to
engage directors directly in communication12, directors
have gotten the message that shareholders will vote
to remove directors who do not seem to be acting
according to their interest.
Effectively, directors are asked to function with two
potentially competing mindsets – as democratic
representatives of owners and as stewards of the
corporation which has its own objectives.
Secondly, the concept of “the best interests of the
corporation” is broadening – even within judicial
language. In its 2004 Peoples v. Wise decision, the SCC
allowed that “it may be legitimate... for a board of
directors to consider...the interests of shareholders,
employees, suppliers, creditors, consumers,
governments and the environment” (para. 42) when
considering the best interests of the corporation.
By 2008, in its BCE judgement, the SCC made explicit
reference beyond stakeholders to the larger concept
of the corporate responsibility of corporations.
Directors must now act “in the best interests of the
corporation…commensurate with the corporation’s

8 As one governance expert opined in correspondence with me on the matter: “The rhetoric of directors needing to maximise shareholder
value is only true in the sense that this is what shareholders want to believe and what dominant shareholders demand to hear when re-
appointing directors. It is thus a self-serving political imperative for directors, not a legal fiduciary imperative as may be implied by many
of the less informed. There has always been a fundamental conflict of interest in the political interest of directors to get elected and their
duty to the company as a whole that must include other stakeholders.”
9 In Peoples v. Wise, supra, the SCC wrote “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 stakeholder.” (para. 43). “Insofar as
their statutory fiduciary duty is concerned, it is clear that the phrase “best interests of the corporation” should be read not simply as
“best interests of the shareholders”.... [T]he courts have long recognized that various other factors may be relevant in determining what
directors should consider in soundly managing with a view to the best interests of the corporation.” (para. 42).
10 In distinguishing the duties owed by directors to the corporation versus those owed to its stakeholders, the SCC wrote in Peoples v. Wise,
supra, “…directors owe a duty of care to creditors, but that does not rise to a fiduciary duty [which directors owe to the corporation by
statute].” (para. 1). This statutory fiduciary duty “is better described as the “duty of loyalty”.” (para. 32).
11 Anderson, David W. (2006). Shareholder democracy: What does it mean for directors? ICD Director, 129 (Dec), 13 – 15.
12 Anderson, David W. (2008). Are you listening to your owners? Directors must step up their game, once again. ICD Director, 139 (Aug), 22 – 25.

42 | Institute of Corporate Directors

duties as a responsible corporate citizen.” (para. 82) The
SCC’s use of corporate social responsibility language
when articulating the role of the board and the standard
against which corporate behaviour will be judged
suggests that the interpretation of director duties
evolves along with changing expectations in society.
In the final analysis, the interests of the corporation must
be distinguished from those of any one stakeholder.
However, when one integrates a corporate social
responsibility perspective with a classical business
perspective13, the corporation’s long-term interests
may well converge with the interests of the long-term
shareholder as, in the long run, company strategy and
behaviour must take into account the broader community
of stakeholders in which the business operates.
While the business judgement rule is explicitly
supported in this decision, it is possible that the addition
of this “responsible corporate citizen” language may
actually reduce the scope historically accorded to a
board’s business judgement. If the Court’s decision is
interpreted as creating a new criterion of responsible
corporate citizenship distinct from either the corporate
or stakeholder interests, when courts assess directors’
business judgement, then directors may require further
clarification as their duties in subsequent decisions.
Conclusion
Directorship is hard work and it demands dealing with
complex matters. It is helpful therefore to be assisted
by the Courts in understanding directors’ roles and
13 Anderson, David W. (2008). Finding value in Corporate Social Responsibility: Is it time for CSR to come out of the closet? ICD Director, 140
(Oct), 26 – 29.
14 Shareholders, like all other stakeholder, do not necessarily know the corporate interests, nor can it be said that shareholder interests are
synonymous with the corporation’s interests. It is up to the board to understand and act in the corporation’s best interests. Directors
are uniquely positioned to comprehend this bigger picture, and must use that power wisely to realize their potential and make fair
decisions.
responsibilities. Learnings from the SCC’s BCE decision
suggest that when boards are thorough in process and
fair in judgement, placing the corporation’s interests
above any particular stakeholder (including their own),
then their decisions will withstand legal scrutiny. If
courts interpret the new language requiring decisions
to be in the best interests of the corporation as a
responsible corporate citizen to be a reinforcement of
corporate interests (which take account of stakeholder
interests), then it will remain up to the market to judge a
board’s business acumen.
A final point of learning for directors from the BCE
experience beyond the legal decision itself: shareholder
initiatives can radically change the game, calling into
question all aspects of a company’s strategy and risk
profile, capital structure, board and management
composition and relationships with stakeholders.
While acting diligently to fulfill their fiduciary duty to
the corporation, directors are well advised to pay close
attention to the human relationships and judgement
that are at the heart of good governance. Actively
managing the board’s relationship with shareholders
is important. Given the stakes, the days of Investor
Relations being solely a management function are
over. Smart boards are being proactive in engaging
shareholders in constructive dialogue to gauge
perceptions of performance and in explaining the
board’s approach to governing in the corporation’s best
interests, before shareholders vigorously exercise their
ownership prerogatives.14
David Anderson is the President of The Anderson
Governance Group www.taggra.com. He can be reached at
(416) 815-1212 and david.anderson@taggra.com
Issue 144 | June 2009 | 43
I n s i d e the Boardroom

In its own words:

The Supreme Court of Canada wants corporation, not to stakeholders, and that the
you to know...15 reasonable expectation of stakeholders is simply
that the directors act in the best interests of the

1 How should directors make decisions when

balancing competing stakeholder interests?
corporation.” (para. 66)

E. Make a business decision as to what is best;

A. Resolve conflicting stakeholder interests in
favour of the corporation’s interests
“Where conflicting interests arise, it falls to the
directors of the corporation to resolve them in
accordance with their fiduciary duty to act in the
best interests of the corporation...” (para. 81)
sometimes stakeholders lose
“Where it is impossible to please all stakeholders,
it will be irrelevant that the directors rejected
alternative transactions that were no more beneficial
than the chosen one.” (headnote, p.9; para 83)

B. Consider the impact of decisions on

stakeholders
2 How do a corporation’s interests relate to
good corporate citizenship?

“Directors, acting in the best interests of the
corporation, may be obliged to consider
the impact of their decisions on corporate
stakeholders, such as the debentureholders in
these appeals.” (para. 66)
C. Treat all stakeholders fairly; none enjoys
inherent primacy
“The cases on oppression, taken as a whole,
confirm that the [fiduciary] duty of directors
to act in the best interests of the corporation
comprehends a duty to treat individual
stakeholders affected by corporate actions
equitably and fairly. There are no absolute
rules.” (para. 82) “There is no principle that one
set of interests – for example the interests of
shareholders – should prevail over another set of
interests.” (para. 84)
D. Remember, however, that stakeholders are not
owed a fiduciary duty by directors
“[Where stakeholder] interests do not coincide
[with the corporation’s interests], it is important
to be clear that the directors owe their duty to the
The corporate interests must be understood
in the context of good corporate citizenship
“[D]irectors [must] act in the best interests of
the corporation…commensurate with the
corporation’s duties as a responsible corporate
citizen.” (para 82)
Good corporate citizenship entails
considering stakeholder impact when
deciding the corporation’s interest
“[Considering] the impact of their decisions on
corporate stakeholders…is what we mean when
we speak of a director being required to act in the
best interests of the corporation viewed as a good
corporate citizen.” (para. 66)
Fiduciary duty to the corporation is bounded
by good corporate citizenship behaviour
“Where the conflict involves the interests of
the corporation, it falls to the directors of the
corporation to resolve them in accordance with
their fiduciary duty to act in the best interests
of the corporation, viewed as a good corporate
citizen.” (para. 81)

Do your board decisions pass this test?

“In each case, the question is whether, in all the circumstances, the directors acted in the best interests of the corporation,
having regard to all relevant considerations, including, but not confined to, the need to treat affected stakeholders in a
fair manner, commensurate with the corporation’s duties as a responsible corporate citizen.” (para. 82)

15 Paragraph numbers provided here are in reference to BCE Inc. v. 1976 Debentureholders, 2008 SCC 69. Decided June 20, 2008. Reasons
delivered December 19, 2008.

44 | Institute of Corporate Directors