Canadian Supreme Court Reverses Extending Revlon Doctrine to Bondholders

On an expedited appeal, the Supreme Court of Canada set aside a court of appeals ruling 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 had 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, sad the appeals court, the directors must have regard for the reasonable expectations of bondholders. Because the board considered only the interests of the shareholders, ruled the appeals 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).

The Supreme Court issued no opinion, only a two paragraph judgment, which promised the Court’s reasoning at a later time. The effect of the Supreme Court’s set aside was to reinstate the trial court’s approval of the transaction. The trial court had faithfully applied the Revlon doctrine mandating the maximization of only shareholder value.

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 Canadian 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 appeals 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.