I’ll be focusing on two things from BCE: the test for determining whether an arrangement is fair and reasonable, and the threshold considerations for an oppression claim.

I’ll give some brief context, a bit of the rationale behind the analysis, and say a little bit about the application to the specific facts of BCE.

To start with the oppression claim, the analysis follows two steps, and it’s important to distinguish these steps.

First: does the evidence support the reasonable expectation asserted by the claimant? There’s a number of factors outlined in the case law which I’ll go through in the next slide, but it’s important to note that “reasonable expectation” is an objective and contextual assessment. Think here about first year contracts: what’s actually in the minds of the parties or what their actual expectations were is not conclusive; it’s really dependent on the facts.

Moving on to the second step of the analysis: does the evidence establish that the reasonable expectation was violated by conduct falling within the terms “oppression”, “unfair prejudice” or “unfair disregard” of a relevant interest? Here, once you establish a reasonable expectation from step one, you have to show that they failed the reasonable expectation in a way that’s oppressive or unfair to a relevant interest. To be clear, it’s not enough that the reasonable expectation fails, it has to fail a relevant interest (the most obvious is a legal right or entitlement) and it has to fail in an unfair way. More to come on this.

Returning to the first step of establishing a reasonable expectation, there are a number of factors the Court noted from case law. I noted the paragraph references for each one, but feel free to ask questions on any of these and I can elaborate.

73 Commercial practice plays a significant role in forming the reasonable expectations of the parties. A departure from normal business practices that has the effect of undermining or frustrating the complainant’s exercise of his or her legal rights will generally (although not inevitably) give rise to a remedy

74 The size, nature and structure of the corporation are relevant factors in assessing reasonable expectations:

75 Reasonable expectations may emerge from the personal relationships between the claimant and other corporate actors. Relationships between shareholders based on ties of family or friendship may be governed by different standards than relationships between arm’s length shareholders in a widely held corporation

76 Past practice may create reasonable expectations, especially among shareholders of a closely held corporation on matters relating to participation of shareholders in the corporation’s profits and governance

78 In determining whether a stakeholder expectation is reasonable, the court may consider whether the claimant could have taken steps to protect itself against the prejudice it claims to have suffered.

79 Shareholder agreements may be viewed as reflecting the reasonable expectations of the parties:

82 The cases on oppression, taken as a whole, confirm that the duty of the directors to act in the best interests of the corporation comprehends a duty to treat individual stakeholders affected by corporate actions equitably and fairly. There are no absolute rules. In each case, the question is whether, in all the circumstances, the directors acted in the best interests of the corporation, having regard to all relevant considerations, including, but not confined to, the need to treat affected stakeholders in a fair manner, commensurate with the corporation’s duties as a responsible corporate citizen.

What’s important to note about these factors is that they’re fact driven and there’s no definitive answer by completely satisfying one factor while partially satisfying another. It’s a holistic analysis. And the interpretative guide is that it’s a objective, contextual analysis.

It’s really important to carry this interpretative approach to the second step. The two quotes on the screen outline the animating rationale behind these two steps: namely, as an equitable remedy. Recall first year contracts again, and think about doctrines of conscionability or estoppel (and Lord Denning), and the way that they identified unfairness or oppressive circumstances—the analysis was driven by the specific facts of the case.

As we move to a closer look at the second step, it’s important to keep close to the statutory language. The Court emphasizes that “oppression” and “unfairness” is not completely open-ended and it’s reined in by how these concepts are used within section 241.

In the facts of BCE, the Courts said that there was a reasonable expectation that the directors would consider the interests debentureholders, but the debentureholders failed to prove that this reasonable expectation protected their economic interest. The directors gave sufficient consideration to the debentureholders’ legal interest, which amounted to the adequate attention to the contractual rights of the debentureholders. Since their legal interests were considered, the directors satisfied their duty and didn’t show any oppressive or unfair disregard.

Before we move onto section 192, are there any questions? Anything I can clarify? You can also save them for the end.

The Court really emphasizes the distinctness of sections 241 and 192, especially because conflating the two is the main error that the Court of Appeals made.

Note the quote: “The oppression remedy is a broad and equitable remedy that focuses on the reasonable expectations of stakeholders, while the s. 192 approval process focuses on whether the arrangement, objectively viewed, is fair and reasonable and looks primarily to the interests of the parties whose legal rights are being arranged.”

I think it’s helpful to understand some of the legislative history around section 192 to get a sense of what “fair and reasonable” is supposed to mean. In 1923, there was a Companies Act Amending Act designed to permit corporations to modify their share capital and permit changes to shareholders’ rights while offering shareholders protection. In 1974, plans of arrangements were omitted from the CBCA because Parliament considered them superfluous and feared that they could be used to squeeze out minority shareholders. Upon realizing that arrangements were a practical and flexible way to effect complicated transactions, an arrangement provision was reintroduced in the CBCA in 1978: Consumer and Corporate Affairs Canada.

So, there is a persistent policy goal of protecting minority shareholders, but section 192 also protects other stakeholders, like debentureholders.

On these appeals, it is conceded that the corporation satisfied the first two requirements. The only question is whether the arrangement is fair and reasonable.

How do we understand the third branch of “fair and reasonable”? (a) the arrangement has a valid business purpose, and (b) the objections of those whose legal rights are being arranged are being resolved in a fair and balanced way.

This is another fact driven test. There are a variety of relevant factors, including the necessity of the arrangement to the corporation’s continued existence, the approval, if any, of a majority of shareholders and other security holders entitled to vote, and the proportionality of the impact on affected groups. The procedure involved in coming to the arrangement is less important than the consequences of the arrangement on the rights of the parties and what’s in the best interest of the coproration as a whole.

Courts may consider whether an intelligent and honest business person, as a member of the class concerned and acting in his or her own interest, might reasonably approve of the plan. Courts on a s. 192 application should refrain from substituting their views of the “best” arrangement, but should not surrender their duty to scrutinize the arrangement. This isn’t the business judgement rule.

…the fact that the business judgment test referred to here and the business judgment rule discussed above (at para. 40) are so similarly named leads to confusion. The business judgment rule expresses the need for deference to the business judgment of directors as to the best interests of the corporation. The business judgment test under s. 192, by contrast, is aimed at determining whether the proposed arrangement is fair and reasonable, having regard to the corporation and relevant stakeholders. The two inquiries are quite different. Yet the use of the same terminology has given rise to confusion. Thus, courts have on occasion cited the business judgment test while saying that it stands for the principle that arrangements do not have to be perfect, i.e. as a deference principle… (para 140)

Again, some indicia of fairness include voting, proportionality of the compromise, and the impact on securityholders’ rights. Other factors include a special committee of independent directors, fairness opinions from experts, and access of shareholders to dissent and appraisal remedies.

In the facts of BCE:  Since only their economic interests were affected by the proposed transaction, not their legal rights, and since they did not fall within an exceptional situation where non-legal interests should be considered under s. 192, the debentureholders did not constitute an affected class under s. 192, and the trial judge was correct in concluding that they should not be permitted to veto almost 98 percent of the shareholders simply because the trading value of their securities would be affected.

It was well known that alteration in debt load could cause fluctuations in the trading value of the debentures, and yet the debentureholders had not contracted against this contingency.