Quebec Court reminds that shareholders aren't the only stakeholders

BCE Takeover Part 37

The Quebec Appeal Court has sided with BCE’s bondholders. The proposed BCE LBO lenders are meeting in New York with OTPPB, Madison Dearborn and Providence to see if they can agree on the debt covenants. And that was just yesterday’s news. Are we having fun yet?

As lenders, we occassionally find ourselves waxing philosophically with various lawyers regarding the “duties” that a Board of Directors owes to the various “stakeholders” in a business.

There are the shareholders, of course. But then you have the creditors, employees and customers as well. Shareholders aren’t the only ones with capital in the business, and although they enjoy all of the upside when things work out, they certainly aren’t alone on the downside when they don’t.

Employees lose their jobs (although Directors may need to make good on their accrued vacation pay, for example). Customers can get caught without key supplies. Lenders can get wiped out.

Some lawyers will sympathize with that point of view, and agree that there are more stakeholders in a business than just the shareholders. But most law firms are quite adamant (I’m simplifying the argument) that the Directors owe a duty to the “business”, and at the end of the day that means the shareholders.

Not so, according to the unanimous 5-0 decision of the Quebec Appeals Court. Although I haven’t had access to the actual decision as of yet, it appears that Quebec’s highest Court has advised that Directors owe a duty to the stakeholders, and those include the lenders (bondholders in this case) to the business in question.

In March 2007, my colleague Craig anticipated the activism we are seeing from BCE’s Bondholders (see prior post “Canadian bondholder activism” March 30-07). What no one could have anticipated is the huge can of worms that has been opened as a result of the lender activism of Manulife and CIBC Global Asset Management.

BCE lawyer Martine Turcotte says the decision “rewrites Canadian law”. Perhaps. But, according to the Quebec Appeals Court, Canadian law might just have been sorely misunderstood by many of the law firms plying the corporate governance trade.

If the Supreme Court doesn’t hear the appeal, then Boards across the land will need to dispense with their traditional view of their duties.

Who would have predicted that the banks wouldn’t be the big story on BCE this week (see prior post “The nervous silence breaks on BCE” May 19-08)?

For those looking for the ultimate impetus to move on from their BCE investment, the day appears to have arrived. If oil is going to $150 in the near term, perhaps Canadian Oil Sands Trust (COS.UN:TSX) will be a less tortuous investment over the next 6 weeks than good ole Ma Bell.

MRM
(disclosure – we own BCE and COS in our household)