Canadian Appeals Court Extends Revlon Doctrine to Bondholders

In a significant and groundbreaking ruling, a Canadian appeals court said that the Delaware doctrine requiring directors to maximize shareholder value through an auction process when a company is in play also applies to bondholders. In a unanimous decision, the Quebec Court of Appeals said that Canadian directors have a more extensive duty than that of directors of Delaware companies. The duty of care in Canada requires consideration of the impact of a takeover or leveraged buyout on bondholders as well as shareholders. Specifically, the directors must have regard for the reasonable expectations of bondholders. Because the board considered only the interests of the shareholders, ruled the court, its decision to accept a buyout offer was not protected by the business judgment rule. In the Matter of BCE, Inc., No. 500-09-018525-089, May 21, 2008).

In 1986, the Delaware Supreme Court ruled that, when the sale of a target company becomes inevitable, the role of the company’s directors changes from that of defenders of the corporate bastion to that of auctioneers charged with getting the best for the stockholders at a sale of the company. Revlon v. MacAndrews & Forbes Holding, Inc. These enhanced Revlon duties are triggered when a company initiates an active bidding process seeking to sell itself

When the company went into play, the board applied Delaware’s Revlon doctrine and conducted an auction process to maximize shareholder value. The offer and plan finally accepted would have had a significant negative impact on the bondholders, while at the same time giving a substantial premium to shareholders. The court emphasized that the board’s efforts to obtain the best value reasonably available to the shareholders cannot be considered in isolation from the interests of the bondholders.

That said, there are no absolutes in considering the interests of various security holders in the event of an LBO. For example, the court acknowledged the likelihood that the weight of shareholders’ interests could be appreciably higher than bondholders in an LBO. But, the board must give proper consideration to the interests of the shareholders and the bondholders, said the court, taking into account all the circumstances, including the relative weight of their interests. Here, the company did not satisfy its burden of demonstrating that the arrangement was fair to the bondholders.