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

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Title: 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 (416) 865-5492 aatkinson_at_fasken.
com
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