Canada: mergers, acquisitions and the role of directors

At the end of June, Canada's Competition Policy Review Panel published a report titled "Compete to Win". The report makes many recommendations and of particular interest are those concerning company directors. In a section titled "Strengthening the Role of Directors in Mergers and Acquisitions" (pp. 76-77) the Panel concluded:

the new global context in which mergers and acquisitions (M&As) occur requires that Canada update its regulatory framework to place the directors of Canadian companies on the same footing as their counterparts at Delaware companies".

The Panel recommended:

• Securities commissions should repeal National Policy 62-202 (Defensive Tactics).
• Securities commissions should cease to regulate conduct by boards in relation to shareholders rights plans (“poison pills”).
• Substantive oversight of directors’ duties in mergers and acquisitions matters should be provided by the courts.
• The Ontario Securities Commission should provide leadership to the Canadian Securities Administrators in making the above changes, and initiate action if collective action is not taken before the end of 2008.

For further information see:
Review website | Terms of reference | Report | Review research reports | Earlier consultation paper | Ontario Securities Commission | Canadian Securities Administrators | 

Canada: financial regulation reform - proposed Securities Act published

The Department of Finance yesterday published a copy of the proposed Canadian Securities Act: see here (html) or here (pdf). The purpose of the Act is to bring about significant reform, most notably through the creation of a national securities regulator - the Canadian Securities Regulatory Authority (CSRA) - with oversight over capital markets. At present there are separate securities regulators (and securities legislation) in the provinces and territories.

The CSRA's objectives include:

• Protecting investors from unfair, improper or fraudulent practices.
• Fostering fair, efficient and competitive capital markets in which the public has confidence.
• Contributing, as part of the Canadian financial regulatory framework, to the integrity and stability of the financial system.

The Government's intention is that the CSRA should be established and operating across participating provinces and territories within three years. This will require the provinces and territories to opt-in. The transition is being led by the Securities Transition Office and a transition plan will be published in July. Meanwhile, the Government has referred the Act to the Supreme Court of Canada for an opinion as to whether it falls within the legislative authority of Canada's Parliament.

An overview of the proposed Act is available here and further information is available here. The Government's proposals build on the recommendations of the Expert Panel on Securities Regulation, which published its final report in 2009: see here.

Canada: Supreme Court grants BCE's appeal

The Canadian Supreme Court has today given judgment in BCE Inc., et al. v. A Group of 1976 Debentureholders, et al. (No. 32647, June 20, 2008) (on appeal from BCE inc. (Arrangement relatif à), 2008 QCCA 935). The Court upheld BCE's appeal and stated that reasons for its judgment would be published later. For background information, see this earlier post and this post from the Wall Street Journal Law Blog. A brief report has also appeared on the FT.com website here.

Canada: BCE, takeovers and directors' duties - Supreme Court reserves judgment

A panel of seven judges sitting in Canada's Supreme Court today heard argument in the appeal from the Quebec Court of Appeal's decision in BCE inc. (Arrangement relatif à), 2008 QCCA 935. Those hoping (optimistically) for judgment to be given quickly at the end of the hearing will be disappointed: judgment has been reserved (see this Reuters report and this report in the Financial Times). Some of the questions asked by the judges have been noted here. For background information, see this earlier post.

Canada: the Canada Not-For-Profit Corporations Act

The Canada Not-for-Profit Corporations Bill (C-62) received its first reading in Canada's House of Commons on June 13. According to a press release issued by Industry Canada (the relevant Government department):

The proposed Canada Not-For-Profit Corporations Act will enable organizations to incorporate faster and improve their financial accountability, clarify the roles and responsibilities of directors and officers, and enhance the protection of members' rights ... [It] will allow for the repeal of the outdated Canada Corporations Act. It will also move share capital corporations created by Special Acts of Parliament into the Canada Business Corporations Act, which will provide a modern, efficient corporate governance regime for the affected companies".

Background information is available here and the Bill's progress can be followed here.

Canada: governance at financial institutions

Ted Price, an assistant superintendent at the Office of the Superintendent of Financial Institutions (OSFI), delivered a speech earlier this week titled "Defining the New Agenda for Governance at Financial Institutions": see here (pdf).

The speech provides some useful insights into governance in Canada as well as the actions being taken by the OSFI with regard to governance, including the assessment of board directors and the functions of the board with regard to risk, about which Mr Price observed:

At OSFI, we believe that defining financial risk appetite is as important in an institution’s strategic planning as other production inputs, like budgets. It has been long accepted that major expenditures and budgets should be reviewed by the board, but when it comes to setting risk appetite, some boards have, incorrectly, abdicated that responsibility to management. We believe that boards have an essential oversight role in setting and limiting risk appetite in financial institutions".

Canada: gender diversity and corporate boards

Catalyst has published a report titled 2007 Census of Women Board Directors of the FP500: Voices From the Boardroom. In the accompanying press release, the following summary is provided:

The report found that women’s representation on corporate boards in Canada remains remarkably low. Women held 13.0 percent of board seats in the FP500, up only one percentage point since 2005. In 2007, just over 40 percent of FP500 companies in Canada still had no women board directors ... Census interviewees suggested several reasons why the overall representation of women on corporate boards remains frustratingly low. They said the positions, opportunities, and networks that had been so vital to their own success are still not available or accessible to most women in corporate Canada. Interviewees stressed that reliance on informal “old boys’ networks” continues to be a significant factor in how new board directors are recruited".

Canada: directors' duties during a takeover

The Quebec Court of Appeal has delivered an important and controversial opinion concerning the duties of directors during a takeover. In BCE inc. (Arrangement relatif à), 2008 QCCA 935 (available in PDF here) the court unanimously rejected the position adopted by the board of a target company (in reliance on the famous Revlon case from Delaware: 506 A. 2d 173, Del. Sup. Ct. 1986) that its overriding duty was to maximise shareholder value and obtain the highest value for the shareholders.  The court held:

It is clear from the principles enunciated by the Supreme Court in Peoples [Department Stores Inc. (Trustee of) v. Wisethat 2004 SCC 68] that at no time do the directors have an overriding duty to act only in the best interests of the shareholders and to ignore the adverse effect on the interests of the debentureholders" (para. [99], emphasis in the original).

In Canada, the directors of a corporation have a more extensive duty. This more extensive duty embodied in the statutory duty of care encompasses, depending on the circumstances of the case, giving consideration to the interests of all stakeholders, which, in this case includes the debentureholders. They must have regard, inter alia, to the reasonable expectations of the debentureholders, and those may be more extensive than merely respecting their contractual legal rights" (para. [107]).

BCE, the target company, has begun appeal proceedings: the Canadian Supreme Court will hear the motion to appeal on June 17. For further background information see here.

NB: For further discussion of Revlon, see: Kraakman, R. and Black, B., "Delaware's Takeover Law: The Uncertain Search for Hidden Value", (2002) 95 Northwestern University Law Review, 521-566, available on SSRN here.

Canada: Canadian Securities Administrators decide to maintain current governance regime

In December last year the Canadian Securities Administrators published for consultation a proposal for changes in the governance regime in Canada. Last week the CSA announced that this proposal would not be implemented. In CSA Staff Notice 58-305 – Status Report on the Proposed Changes to the Corporate Governance Regime, the CSA explained:

We received numerous comments about the timing of the Proposal. A majority of commenters expressed the view that now is not an appropriate time to introduce significant changes to the corporate governance regime in Canada. Commenters pointed out that issuers are currently focused on business sustainability issues in a challenging economic climate, and on the transition to International Financial Reporting Standards. We also received significant comments on a wide range of other matters related to the Proposal. Based on the comments we received, the CSA does not intend to implement the Proposal as originally published. We have concluded that now is not an appropriate time to recommend significant changes to the corporate governance regime.

We are reconsidering whether to recommend any changes to the corporate governance regime. We will publish any proposed changes for comment. They would not be effective until the 2011 proxy season at the earliest. The CSA will provide sufficient advance notice for issuers to adapt their corporate governance practices to fully comply with any revised regime".

Canada: Ontario: The Relationship between the Oppression Remedy and Derivative Action

Many jurisdictions provide shareholders with the right (a) to seek relief in respect of oppressive or unfairly prejudicial conduct, and (b) to instigate legal action on the company's behalf where the company has suffered harm (often described as a derivative action). In Canada, Part XVII of the Business Corporations Act, R.S.O. 1990 (c. B.16) provides shareholders with relief in respect of oppression (Section 248) and the ability to instigate a derivative action (Section 246). The Ontario Court of Appeal in Malata Group (HK) Limited v. Jung, 2008 ONCA 111 has recently considered the relationship and differences between these two remedies, against the background of the English decision Foss v Harbottle (1843) 2 Hare 461 (available here and discussed here). Armstrong JA (with whom MacPherson JA and Epstein JA agreed) observed (paras. [34] - [35]):

"In my view, allowing s. 248 oppression claims to proceed where there is harm to the corporation would not nullify s. 246, because the two sections involve different threshold tests. Section 246 simply requires a violation of the corporation’s legal rights. On the other hand, s. 248 requires, in the case of harm to the corporation, a violation of corporate legal rights that is oppressive or unfairly prejudicial, or that unfairly disregards the complainant’s interests"

"It is perhaps worth noting that another relevant difference between the derivative action and the oppression remedy relates to costs. Subsection 247(d) explicitly allows a court to order the corporation to pay the legal fees or other costs reasonably incurred in connection with a derivative action. The oppression remedy section of the Act, though it invests courts with broad remedial authority, contains no such provision".

Europe: European Commission: Alternative capital maintenance regime

Several years ago the European Commission began to consider the feasibility of establishing an alternative to the current capital maintenance regime established by the Second Company Law Directive (77/91/EEC). In October 2006, KPMG was commissioned to undertake a study exploring the main features of the current regime (including the costs imposed) as well as that in Australia, Canada, New Zealand, California and Delaware. KPMG also considered four academic proposals for alternative regimes to the current capital maintenance rules. The KPMG study has now been published and is available here. Background information is available here.

UK: gender diversity on FTSE100 boards

The UK's Equality and Human Rights Commission has published a survey of the proportion of women in positions of power and influence, including FTSE100 companies. The survey reports that women hold 11% of FTSE100 directorships. Click here for a related post concerning Canada and here for a post concerning Norway.