Business Law Blog

As described in our recent blog post, the 2019 federal budget includes proposed changes to the Canada Business Corporations Act (the “CBCA”) that appear intended to clarify the nature of the fiduciary duty of directors and officers. The amendments include a new subsection that sets out a non-exhaustive list of interests that directors and officers may consider in acting in the best interests of the corporation, including interests external to the corporation that could be affected by its acts, such as those of a number of stakeholder groups and the environment, and internal interests that are “long-term”. The amendment is drafted as follows:

(1.1) When acting with a view to the best interests of the corporation under paragraph (1)(a), the directors and officers of the corporation may consider, but are not limited to, the following factors: (a) the interests of (i) shareholders, (ii) employees, (iii) retirees and pensioners, (iv) creditors, (v) consumers, and (vi) governments; (b) the environment; and (c) the long-term interests of the corporation.

Various commentators have stated that the intent of this portion of the amendments is to incorporate into the statute the principles set forth in BCE Inc. v. 1976 Debentureholders,[1] which after a decade remains the leading case on the fiduciary duty of directors and officers in Canada. However, while the amendments do reflect the general tone of the BCE decision, in the sense of contemplating the interests of stakeholders beyond the immediate interests of shareholders, they in fact diverge from BCE in a fundamental way.

The Fiduciary Duty

Apart from the explicit addition of retirees and pensioners, the list of stakeholders that directors or officers may consider essentially adopts the court’s language from BCE.[2] The divergence from BCE, however, begins with the statement about the long-term interests of the corporation. To understand why this change is meaningful, a brief overview of the fiduciary duty may be helpful.

Under the CBCA, the board of directors is a steward of the corporation. It is charged with managing or supervising the management of the corporation’s business and affairs, with the power to delegate the day-to-day management to the officers. This duty to manage or supervise the management of the corporation is guided by two key statutory duties, known as the “fiduciary duty” or “duty of loyalty” and the “duty of care,” respectively. These duties are set forth in Section 122 of the CBCA, which states:

(1) Every director and officer of a corporation in exercising their powers and discharging their duties shall (a) act honestly and in good faith with a view to the best interests of the corporation; and (b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.

These provisions establish the standards that guide the directors’ and officers’ relationship to the corporation as stewards and managers. The authority to manage and supervise the management of the corporation is thus limited by the requirement that it must be done in a particular way, though the “business judgment rule” serves as a robust protection from judicial second-guessing.

While historically Canadian courts had struggled to reconcile the statutory requirement that the corporation itself be the object of the duty of loyalty with aspects of agency theory and certain developments of Delaware law, particularly relating to so-called Revlon duties,[3] at least since 2004, with the Supreme Court of Canada’s decision in Peoples Department Stores Inc. (Trustee of) v. Wise,[4] and unequivocally since 2008, with the BCE decision, it has been inarguable that the duty of loyalty is owed only to the corporation itself.

It is worth remembering that BCE is not directly a decision about Section 122 of the CBCA. It is a case about plans of arrangement and about oppression. In its oppression analysis, the Supreme Court enumerated a number of factors that could be considered as a means to determine whether an applicant had a reasonable expectation that had been violated. The analysis of one of these factors – the fair resolution of conflicting interests between corporate stakeholders – involved consideration of the directors’ duty of loyalty. In that context, the Court confirmed two things: first, that the duty of loyalty is owed only to the corporation itself;[5] and second, that in considering the best interests of the corporation, the board may need to consider the interests of stakeholders affected by its decisions, as those stakeholders are entitled to be treated equitably and fairly.[6]

This pronouncement, which confirmed the CBCA as a stakeholder-oriented corporate statute, appears to have been behind the amendments to the CBCA, and the permissive language (the directors and officers “may consider”), along with the non-exhaustive list of stakeholder groups, reflect the flexibility envisioned by the Supreme Court. But enshrining in statute Canadian corporate law’s rejection of “shareholder primacy” and its concomitant embrace of a more stakeholder-oriented philosophy, particularly where that rejection has been manifest for more than a decade under the common law, does not give directors and officers a clearer path to fulfilling their duties. In fact, it has muddied the waters through which, in recent years, they had begun to understand what “the best interests of the corporation” might actually be.

The Best Interests of the Corporation

One of the more incisive criticisms of the BCE decision has been that a duty to a fictional entity is, by definition, “indeterminate.”[7] A duty to an entity that has no discernible welfare concerns of its own, even if correct on a literal reading of the statute, is helpful to neither directors nor judges (though in any event of little consequence, given the deference granted by the business judgment rule).

The answer to this criticism - which admittedly must be inferred from the BCE decision itself, in which the analysis of the fiduciary duty is entangled with the oppression analysis and not always as clear as it could have been - is the doctrine of “corporate purpose”, which is described in detail in my past blog posts here and here. In short, the doctrine of corporate purpose states that corporations are formed to solve real problems and fulfill real people’s desires in a profitable way. When a business is placed inside a corporation, the corporation is endowed with a purpose, and it is incumbent on the directors and officers to think deeply on what that purpose is and how best to achieve it over the long term. As a result, the best interests of the corporation are not indeterminate at all, from the perspective of the individuals charged with managing and supervising the management of the business. The best interests of the corporation are to achieve the corporation’s purpose.

The Supreme Court’s articulation of the fiduciary duty makes good sense when viewed through this lens of corporate purpose, as it allows each company to pursue its particular purpose in its own particular way. The Supreme Court stated: “The fiduciary duty of the directors to the corporation 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”[8] (emphasis added). Two elements of this short passage are notable. First, the fiduciary duty must be wrought into a unique form for each individual corporation, which will engage a unique constellation of risks, opportunities and stakeholders. And second, no matter that form, consideration of the long-term interests of the corporation is mandatory.

In other words, under the common law, the long-term interests of the corporation are a fundamental element of the fiduciary duty. It is not possible to act in the best interests of the corporation without considering its long-term interests. The amendments to the CBCA, in contrast, are making the consideration of the long-term interests of the corporation permissive.

In doing so, they are truly rendering the fiduciary duty indeterminate.

A Turn Towards Indeterminacy

Practically speaking, the amendments are likely to have little effect on the procedures that have been adopted by boards since the BCE decision and, given the breadth of the business judgment rule in Canada, the exposure of directors and officers to claims for breaches of fiduciary duty is unlikely to increase; if anything, the scope for deference under the CBCA will broaden. Nonetheless, the way the amendments have been drafted exposes a rift in the philosophy underlying corporate law between the Supreme Court and the Parliament of Canada. Just as an international movement is coalescing around an understanding of the corporate form that places the long-term interests of the corporation at the centre of the fiduciary duty, the CBCA has taken a step backwards, towards indeterminacy.

[1] BCE Inc. v. 1976 Debentureholders, 2008 SCC 69.

[2] Ibid. at para. 41: “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 decisions.”

[3] See CW Shareholdings Inc. v. WIC Western International Communications Ltd. (1998), 160 D.L.R. (4th) 131 (Ont. Gen. Div.), at para. 41; the court's decision in WIC endorsed Revlon Inc. v. MacAndrews & Forbes Holdings, 506 A.2d 173 (1986), essentially making it the law in Ontario prior to Peoples, infra, footnote 4.

[4] Peoples Department Stores Inc (Trustee of) v. Wise, [2004] 3 S.C.R. 68.

[5] BCE, supra, footnote 1, at para. 66.

[6] Ibid. at para. 82. It is submitted that this theory relies on the principle that understanding the interests of stakeholders dovetails with the interests of long-term investors, as the latter require an expansive understanding of the long-term trends that can engender risks and opportunities over many years. As noted in a previous post, long-term planning requires a broad assessment of stakeholder interests because a well-conceived strategic plan will account for the social, cultural and economic trends that affect the various groups of stakeholders, as well as the risks of a negative impact on or by any one of those groups.

[7] Edward Iacobucci, “Indeterminacy and the Canadian Supreme Court's Approach to Corporate Fiduciary Duties” (2009) 48 Can. Bus. L.J. 232.

[8] BCE, supra, footnote 1, at para. 38.