Sean Stevens, Gesta Abols and Jon Conlin are partners at Fasken Martineau DuMoulin LLP.
To address Canada’s productivity crisis, we must revisit the building blocks that drive economic growth: efficient capital markets and an investment framework that attracts investors looking to commit funds for the long term.
Central to this foundation is what it means for a board of directors to steer the company in its best interests under corporate law. For almost two decades this question has been muddied by effectively asking boards to consider a host of different stakeholders when making key strategic decisions. To make Canada more competitive, we must cut through this fog to put shareholders first.
In 2008, all eyes on Bay Street and across corporate Canada were on the Supreme Court. Bell had agreed to be bought by a group of financial investors in a deal valued at $52-billion. The sale was opposed by a group of Bell’s debt holders because it would mean the loss of the investment grade rating of their debentures.
The main question before the court was whether Bell’s board had given enough weight to the debt holders’ interests in approving the deal, and the court found that they had. But in reaching this result the court also instructed where directors should look in deciding the company’s best interests.
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Technically, the court only advised that directors “may” look to the interests of the company’s various stakeholders, including not only shareholders but also creditors, employees, consumers, the environment and government. But in practice, this suggestion has evolved into a de facto duty, including so boards don’t expose themselves and their decisions to vulnerability under other corporate law.
Commentators Jeremy Fraiberg and Emmanuel Pressman, writing in The Globe and Mail at the time, called the court’s approach a “distinctively Canadian understanding of directors’ fiduciary duty.” They contrasted the ruling with a principle under U.S. law – the Revlon doctrine – which imposes a clear duty on directors to maximize shareholder value in all cash mergers.
The reception among prominent Canadian legal scholars to the Supreme Court’s ruling was mixed at best. They interpreted it as inspired by the corporate social responsibility movement – a precursor of today’s ESG framework – even though principles of this kind were not actually before the court in the dispute.
But legal scholars also puzzled at the mixed messages the court sent about whose best interests boards had to consider and when. They worried that by trying to give a little something to everyone, the court had in the end not given anything to anybody at all.
In the years since, and as predicted by these academics, Canadian boards have regularly wrestled with what the Supreme Court’s ruling asks of them. William Glenn Rowe, professor emeritus at the Ivey Business School at Western University, calls this the “Canadian director’s dilemma.”
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The problem is most acute in public M&A transactions, i.e., for the directors of a publicly traded Canadian company that is the target of either a friendly or hostile acquisition attempt. While the court’s ruling tells them that the company’s shareholders are only one of the stakeholders whose best interests they should consider, Canadian securities law essentially says it’s only the shareholders that matter.
The productivity and investment challenges Canada faces are an opportune catalyst to resolve this contradiction and the other uncertainties the Supreme Court’s ruling often leads to. Canadian lawmakers – both in Ottawa and across the provinces and territories – should amend our corporate statutes to make clear that the long-term financial interests of shareholders are the key priority in setting corporate strategy.
This would set a clear guiding light for Canadian directors and executives. It would also send a clear signal to markets and investors that Canada is open for business and serious about promoting and protecting shareholder value and returns.
To be crystal clear, we are not suggesting that the other stakeholder groups identified by the Supreme Court – creditors, employees, consumers, the environment or government – are not incredibly important constituencies deserving of diligent protection. They unquestionably are.
We only highlight that these stakeholders already benefit from laws and regulators specifically focused on them, from employment law to consumer protection law to environmental protection law and beyond. If protection for any of these stakeholders is lacking in the context of business transactions, the remedy should lie in these areas of legal focus and expertise.
Boards of directors, on the other hand, should be left to focus on what they do best: driving growth.
The Bell acquisition didn’t go through. The onset of the 2008 financial crisis saw to that. But the Supreme Court’s ruling has stayed with us. And so, part of tackling the competitive crisis Canada faces 18 years later calls for a corporate law fix: clear direction to boards that when push comes to shove, shareholders come first