Corps de l’article

Introduction

One of the most contentious issues in corporate law is the proper scope of fiduciary duties.[1] Many scholars have argued that fiduciary duties are owed exclusively to shareholders,[2] while others have advocated a broader conception of directors’ fiduciary obligations, potentially encompassing a wide variety of stakeholder and community interests.[3] This debate has both normative and positive dimensions: Not only are there theoretical disagreements as to whom directors’ duties should be owed, there are also more basic disagreements as to what the law actually requires, including the extent to which business norms supplement (or undermine) legal rules.[4] In the Delaware legal context, case law has made increasingly clear that fiduciary duties are owed to shareholders,[5] but different jurisdictions feature different legal standards and exceptions continue to exist even under Delaware law.[6]

Although much of the literature on fiduciary duties has focused on the United States, debates regarding directors’ duties are also active in Canada. The Canadian legal context differs, however, in that unlike Delaware, Canadian law has seemingly embraced a “stakeholder” conception of the corporation.[7] In the past twenty years, Canadian law has shifted from a traditional, shareholder-oriented conception of fiduciary duties[8] to a more flexible and discretionary standard of balancing competing stakeholder interests.[9] In Peoples Department Stores Ltd. v. Wise[10] and BCE Inc. v. 1976 Debentureholders,[11] the Supreme Court of Canada held that it may be legitimate, in certain circumstances, for directors to consider not only shareholders but also “employees, suppliers, creditors, consumers, governments and the environment.”[12] These Supreme Court decisions have been ratified by amendments to the CBCA, which explicitly empower officers and directors to consider a range of stakeholder interests (including, perhaps redundantly, the “long-term interests of the corporation”).[13]

These changes have not been without controversy. Many scholars, including myself, have criticized BCE for providing insufficient guidance to corporate directors, undermining important shareholder protections, and exacerbating the agency problems inherent in corporate governance.[14] Even scholars sympathetic to the goals of corporate social responsibility have lamented that BCE confused more than clarified.[15] Despite normative disagreements regarding the proper scope of fiduciary duties, what many of these scholars share in common is an underlying assumption that the law of fiduciary duties is an important determinant of managerial behavior. Implicit within legal debates regarding the nature of fiduciary duties is a belief that these duties matter for purposes of corporate decision making.

There are, in fact, reasons to believe that legal standards play a limited role in corporate governance, not least with respect to the fundamental question of in whose interests the corporation is to be governed. For public corporations, a variety of factors, including the professional norms of corporate managers,[16] the realities of public financial markets,[17] and the central role of shareholders in the mechanisms of corporate democracy,[18] strongly encourage directors to prioritize shareholder interests.[19] In other words, just because directors are permitted to consider “employees, suppliers, creditors, consumers, governments and the environment[20]” does not mean they actually do so, and indeed, directors have strong incentives to focus exclusively on shareholders. Complicating the issue as an empirical matter, businesses face competing incentives to signal their commitment to stakeholders. As corporations face increasing scrutiny from activists, governments, and consumers, presenting themselves as socially responsible can be an effective business strategy, even if purely optical.[21] The result of these complex dynamics is that it can be difficult to know—as an empirical matter—in whose interests corporations are actually being governed.

This article addresses this empirical problem by analyzing “fiduciary out” provisions. More specifically, I examine two samples[22] of Canadian public M&A transactions, with the aim of identifying the specific interests (i.e., shareholders or stakeholders) prioritized by directors. A “fiduciary out” is a common provision in corporate acquisition agreements[23] that allows the target corporation to back out of a committed sale, contingent upon receiving a more favorable offer from a third party. These provisions are referred to as “fiduciary outs” because they allow target company directors to exercise their fiduciary duty to maximize shareholder value in a sale, a specific obligation known as “Revlon duties” in the United States.[24] Although this duty to maximize shareholder value is specific to Delaware law—and has been explicitly disclaimed by Canadian courts[25]—Canadian M&A agreements have featured fiduciary outs for decades. It is now standard practice for Canadian acquisition agreements to allow target company directors to abandon a sale in favor of a “Superior Proposal.”[26]

Fiduciary outs provide revealing evidence regarding directors’ legal and business considerations. Unlike sanctimonious public statements regarding corporate social responsibility, the terms of acquisition agreements are legally binding on the corporations that sign them, and can potentially give rise to director liability for breach of fiduciary duties. For this reason, they are often drafted and negotiated by outside counsel with a sophisticated understanding of the relevant legal risks.[27] More so than what directors say, the content of fiduciary outs reveals what directors actually believe. Thus, if corporate directors (or their legal counsel) believe directors are accountable to stakeholders, then we should expect the language of fiduciary outs to allow consideration of stakeholder interests. If, however, directors believe their fiduciary duties are exclusively enforceable by shareholders, then we should expect the language of fiduciary outs to be limited to shareholder interests.[28]

The evidence in this article suggests that in the M&A context, directors are primarily concerned with protecting shareholder interests. Nearly all fiduciary outs in a sample of large Canadian M&A transactions, and nearly 70% of fiduciary outs in a sample of smaller M&A transactions, are specifically contingent upon benefiting shareholders. Tellingly, only a single fiduciary out provision among more than 1,000 agreements makes any reference to stakeholder interests or the collective interests of “the corporation.”[29] Despite the absence of Revlon duties in Canada, fiduciary outs specifically address the economic interests of shareholders.[30]

The remainder of this article proceeds as follows. Part II discusses fiduciary outs and their relationship to directors’ duties. This part also discusses related developments in Canadian corporate law. Part III presents empirical evidence regarding fiduciary out provisions, while Part IV discusses the significance of this evidence to Canadian fiduciary duties. In the M&A context, at least, the evidence suggests that directors prioritize shareholder interests. Part V concludes by questioning the extent to which Canadian law meaningfully benefits stakeholders.

I. The Role of Fiduciary Outs

Fiduciary outs play an important role in M&A transactions. A corporate acquisition agreement represents a binding commitment on the part of both the buyer and the seller to consummate an acquisition. For public company acquisitions, there is inevitably a delay of several months between the signing of the agreement and the closing of the deal. During this window, the buyer is exposed to a risk of nonconsummation if the seller pursues an alternative transaction. To reduce this risk, the seller is often contractually prohibited from soliciting, discussing, or entering into any alternative transaction with another potential buyer (on pain of liability for breach of contract).[31] A fiduciary out is a narrow exception to this contractual restriction, allowing target company management to pursue a superior offer.[32]

A. The Evolution of Fiduciary Outs

Although they are today used in many countries, fiduciary outs were originally a product of Delaware jurisprudence. In 1986, the Revlon decision held that directors owe a duty to maximize shareholder value once a sale of the corporation has become inevitable. This duty was elaborated in Paramount Communications Inc v QVC Network Inc,[33] which held that directors cannot absolve themselves of their duty to maximize share value by entering into a binding acquisition agreement. In Paramount, the board of directors of the target corporation (Paramount Communications, Inc.) agreed to a merger agreement with Viacom, Inc. which included a range of “deal protection” measures, including a non-solicitation provision, a $100 million termination fee, and a lock-up option on approximately 20% of Paramount’s stock. When QVC Network, Inc. made a competing, higher-priced offer for Paramount, Paramount’s board of directors refused to entertain the offer, citing their contractual obligations to Viacom. Both the Delaware Court of Chancery and the Delaware Supreme Court held that Paramount’s directors had violated their duties under Revlon. Thus, Paramount established that—under Delaware law—directors may not contractually avoid their legal duties to shareholders.[34]

Revlon, Paramount, and subsequent Delaware decisions[35] led to the development of modern fiduciary outs.[36] To accommodate directors’ legal duties, parties often include provisions in acquisition agreements that allow target company directors to pursue a higher-value offer. Although buyers typically accept these provisions, they often insist that the contractual language be drafted as narrowly as possible, so that the provision itself is strictly limited to directors’ legal duties, and so that it only captures alternative offers that provide a higher financial value to shareholders. A common drafting technique is to limit exercise of the fiduciary out to a “Superior Proposal” (or similar term), which is defined in the agreement as an alternative acquisition that is more favorable, from a financial point of view, to the shareholders of the target corporation.[37] In Delaware, this language reflects the legal reality of shareholder primacy. Interestingly, however, practitioners in other jurisdictions with different fiduciary standards—Canada among them—have adopted similar language.

B. Developments in Canadian Corporate Law

Unlike directors of Delaware corporations, Canadian directors do not owe Revlon duties. However, the flexibility of directors to consider “employees, suppliers, creditors, consumers, governments and the environment” is a relatively recent development. Prior to BCE, it was generally assumed by courts and practitioners that directors’ fiduciary duties were intended to protect shareholders, despite the statutory fiduciary duty referring to the “the best interests of the corporation,”[38] and despite the clear rejection of Revlon duties in Canadian jurisprudence. This ambiguity as to the beneficiaries of directors’ duties is reflected in Pente, which explicitly rejected Revlon duties while implying that directors owe their fiduciary duties to shareholders. Although the court in Pente emphasized “the best interests of the corporation”—and explicitly rejected the argument that directors owe duties to specific shareholders—it also stated that directors owe a duty to “act in the best interests of the shareholders,”[39] to recommend the “best available transaction for the shareholders,”[40] and to “get the best transaction available to the shareholders.”[41] Thus, while Pente alludes to conflicts of interest between individual shareholders, it never suggests that directors owe duties to non-shareholder interests. In this sense, Pente is representative of pre-BCE jurisprudence. Although the decision is not explicitly clear as to the meaning of “the corporation,” nor does it suggest that “the corporation” encompasses non-shareholder groups.[42]

This understanding of the fiduciary duty has changed in light of BCE. In its 2004 Peoples decision, the Supreme Court stated, “given all the circumstances of a given case,” it may be legitimate for directors to consider “shareholders, employees, suppliers, creditors, consumers, governments and the environment.”[43] This somewhat ambiguous statement was elaborated in BCE, which went further in holding that directors “may be obliged to consider the impact of their decisions on corporate stakeholders”[44] and that their duty was to “the corporation viewed as a good corporate citizen.”[45] BCE heralded a shift in corporate law, raising questions as to the fundamental nature of the fiduciary duty. Following BCE, were directors required to consider stakeholder interests (and if so, when), or was consideration of stakeholder interests purely discretionary? These questions appear to have been answered by Parliament in 2019 with the adoption of s. 122(1.1) of the CBCA. This section clarifies that “[w]hen acting with a view to the best interests of the corporation,” directors and officers “may” consider the interests of stakeholders.[46] The use of the word “may” (as opposed to “should,” “shall,” or “must”) seems to answer the question of whether considering stakeholders is mandatory.[47] In either case, however, the Canadian fiduciary standard is clearly different from Delaware’s.[48]

Despite these differences, fiduciary outs are commonplace in Canadian M&A transactions. Although it is difficult to know—and my research does not reveal—exactly when fiduciary outs were introduced in Canada, it is reasonable to assume they were introduced following their emergence in the United States. They were already common by 2001, the first year of my samples. They were apparently necessary prior to BCE, as suggested by the 2007 case of Ventas, Inc. v Sunrise Senior Living Real Estate Investment Trust.[49] In Ventas, the Ontario Court of Appeal commented on the necessity of fiduciary outs, observing that there was “no doubt” that directors owed a duty to maximize shareholder value.[50] According to the court, fiduciary outs allow directors to exercise their duty to ensure that shareholders receive the best offer available.[51] Although certain language in Ventas suggests fiduciary outs are less necessary in Canada,[52] Ventas also shows that fiduciary outs play an important role in Canadian M&A.

The question posed by this article is whether, and to what extent, the law and practice of fiduciary duties have changed in light of Peoples, BCE, and the amendments to the CBCA. Do fiduciary outs continue to be tied to maximizing shareholder value? Have they evolved to reflect broader considerations of a plurality of stakeholder interests? How do directors conceive their duties (as revealed by legally binding contractual language)? The answers to these questions—discussed in Part III below—provide insight into the practical significance of legal changes to fiduciary duties.

II. Fiduciary Outs in Canadian M&A Transactions

Fiduciary outs are a window into the thinking of corporate directors. These provisions reflect the concerns of directors and their legal counsel in two ways. First, from a legal perspective, fiduciary outs allow directors to pursue alternative transactions in situations, where failing to do so would violate their fiduciary duties. Second, from a business perspective, fiduciary outs allow directors to fulfill their own self-conception of their professional responsibilities, which may be broader (or narrower) than their formal legal responsibilities. Depending on how directors conceive their roles, these responsibilities may be limited exclusively to shareholders, or they may include a broader variety of collective stakeholder interests. For these reasons, the specific wording of fiduciary outs reveals important information regarding to whom directors believe their duties are actually owed.

A. Data Collection and Methodology

This article draws on two samples of Canadian M&A transactions: The first sample (“Sample 1”) includes the 100 largest M&A transactions signed[53] between May 1, 2001 and April 30, 2021 in which the target company was a publicly-traded Canadian corporation.[54] The second, larger sample (“Sample 2”) consists of all M&A transactions signed[55] between May 1, 2001 and April 30, 2021 in which the target company is identified by Capital IQ as a publicly-traded Canadian corporation.[56] Sample 2 includes a total of 2,078 distinct transactions. Unfortunately, because most corporations that are currently private are classified by Capital IQ as “private companies” (regardless of previous listing status), it was impracticable to identify all transactions in which the target company was public at the time of the transaction. As a practical matter, this means that Sample 2 is biased toward reverse takeover transactions,[57] acquisitions of majority stakes, and other (typically smaller) transactions in which the target company remained publicly traded following the transaction. Given the limitations of Capital IQ’s classification system, this two-sample design was intended to ensure coverage of both (1) large, economically salient M&A transactions and (2) the smaller, more speculative transactions that make up much of the Canadian M&A market.[58] Finally, to draw comparisons with the United States, I also compared the qualitative language of fiduciary out provisions in the 10 largest Canadian and 10 largest U.S. transactions over the past 20 years.

Analysis of both samples followed the same procedure: after creating each sample, a research assistant and I recorded several variables for each transaction and attempted to find the related acquisition agreement. If a particular acquisition agreement was unavailable on Capital IQ, we searched for it on SEDAR using the LexisNexis Securities Mosaic.[59] Once located, we reviewed each acquisition agreement for a fiduciary out provision. If an agreement contained a fiduciary out, we recorded the language of the provision and coded it for whether: (1) the fiduciary out is contingent upon directors’ exercise of their fiduciary duties; (2) the fiduciary out can be triggered by an alternative transaction that is more favorable to the financial interests of shareholders; and (3) the fiduciary out can be triggered by an alternative transaction that is more favorable to one or more stakeholder interests (including the interests of “the corporation”). In most agreements, the interests capable of triggering the fiduciary out are set forth in the definition of “Superior Proposal,” “Superior Offer,” or another similar term. For the sake of convenience, I refer to fiduciary out provisions together with their related definitional terms (e.g., “Superior Proposal”) as “fiduciary outs” for the remainder of this article.

Unfortunately, acquisition agreements could not be located for all transactions. According to the Canadian Securities Administrators, reporting issuers often fail to file material contracts, despite their legal obligation to do so.[60] Unsurprisingly, agreements relating to smaller transactions were less likely to be properly filed than agreements relating to larger transactions. In Sample 1, 93 agreements out of 100 transactions could be located; in Sample 2, only 1,188 agreements out of 2,078 transactions could be located. For Sample 2, three factors appear to influence whether a given agreement was filed. First, reverse takeovers are less likely to include filed agreements: Only 48.1%[61] of reverse takeover transactions include a filed agreement, compared to 69.1% of traditional M&A transactions. Second, transactions on larger securities exchanges are more likely to include filed agreements: Approximately 88.9% of acquisitions on the Toronto Stock Exchange (“TSX”) include a filed acquisition agreement, compared to only 55.7% of acquisitions on the smaller TSX Venture Exchange (“TSXV”) and 53.2% on the Canadian Stock Exchange (“CSE”). The vast majority of transactions in Sample 2 are acquisitions on the TSXV (reflecting the prominence of microcap corporations in the Canadian securities markets). The third factor appearing to influence the availability of acquisition agreements is the transaction’s vintage. Older transactions are less likely to include filed acquisition agreements than more recent transactions.[62] To take the first and last full years of Sample 2, only 52.1% of transactions from 2002 include a filed acquisition agreement, compared to 82.7% of transactions from 2020. Agreements in Sample 1 were more consistently available across all years.

B. The Legal Content of Fiduciary Outs

Not all acquisition agreements contain fiduciary outs. Although 95.7% of the agreements in Sample 1 (89 agreements) contain fiduciary outs, only 58.4% of the agreements in Sample 2 (694 agreements) contain fiduciary outs. In Sample 2, reverse takeovers are less likely to include fiduciary outs: only 44.3% (257 agreements) versus 73.6% (437 agreements) for traditional M&A transactions.[63] Acquisitions of corporations listed on the TSX are more likely to contain fiduciary outs than acquisitions on the TSXV or CSE: In Sample 2, approximately 83.9% of acquisitions on the TSX (177 agreements) contain fiduciary outs, compared to 54% (442 agreements) on the TSXV and 53.3% on the CSE (49 agreements).[64] The prevalence of fiduciary outs is consistent over time, with no significant increase or decrease over the period. The legal content of fiduciary outs in each sample is described below:

1. Sample 1

Approximately 94.4% of fiduciary outs (84 agreements) in Sample 1 are contingent upon directors’ exercising their fiduciary duties. The language of these provisions allows directors to pursue an alternative transaction only if doing so is consistent with or, more typically, required by their fiduciary duties. A textual association between fiduciary duties and pursuing a “Superior Offer” (or similar concept) is nearly universal.

Significantly, 98.9% of fiduciary outs (88 agreements) in Sample 1 are explicitly contingent upon benefiting shareholders’ financial interests — note that this percentage is even higher than provisions that reference fiduciary duties. The following language in the acquisition agreement regarding CNOOC Limited’s acquisition of Nexen Inc. is representative of Sample 1:

[A ‘Superior Proposal’ is an ‘Acquisition Proposal’] in respect of which the Board and any relevant committee thereof determines, in its good faith judgment, after receiving the advice of its outside legal counsel and its financial advisors and after taking into account all the terms and conditions of the Acquisition Proposal, including all legal, financial, regulatory and other aspects of such Acquisition Proposal and the party making such Acquisition Proposal, would, if consummated in accordance with its terms, but without assuming away the risk of noncompletion, result in a transaction which is more favourable, from a financial point of view, to Common Shareholders than the Arrangement (including any amendments to the terms and conditions of the Arrangement proposed by the Purchaser pursuant to Section 5.4(2)).[65]

The language of “more favourable, from a financial point of view, to Common Shareholders” (and variations thereon) is the most common phraseology found in “Superior Proposal” definitions.[66] The legal effect of this language is that in order for directors to pursue an alternative transaction, the transaction must provide greater financial value to shareholders. Thus, Canadian law notwithstanding, Canadian acquisition agreements entail a Revlon-like understanding of fiduciary duties. Indeed, only a single agreement in Sample 1 makes any reference to stakeholder interests.[67]

Since Canadian fiduciary duty law is often contrasted with that of the United States, I also performed a qualitative comparison of fiduciary out language in each of the 10 largest Canadian and 10 largest U.S. M&A transactions over the past 20 years. The results of this comparison—in the form of the operative language of each agreement—are set forth in the attached Appendix. As the language in the Appendix shows, the drafting of fiduciary outs in the United States and Canada is extremely similar, with almost identical language used to describe the fiduciary “out” itself. In particular, the requirement that a “Superior Proposal” be “more favorable, from a financial point of view, to shareholders” (or equivalent language) is standard in both countries.[68] The reasons for this similarity are discussed in Part IV, but suffice it to say, there is little difference between Canadian and U.S. fiduciary outs.

2. Sample 2

Approximately 95% of fiduciary outs (659 agreements) in Sample 2 refer to directors’ fiduciary duties. As in Sample 1, the majority of these provisions allow directors to pursue an alternative transaction only if doing so is required by their fiduciary duties. Although reverse takeover agreements are slightly less likely to refer to fiduciary duties than traditional M&A agreements (93.4% versus 95.9%), the prevalence of fiduciary language is otherwise consistent across transaction types, securities exchanges, and time.

Approximately 69.3% of all fiduciary outs (481 agreements) are explicitly contingent upon benefiting shareholders’ financial interests.[69] This percentage is higher for non-reverse takeover transactions and for acquisitions of corporations listed on the TSX: 83% (361 agreements) and 91% (161 agreements), respectively. Remarkably, not a single agreement in Sample 2 references stakeholder interests.

By tracking changes over time, I specifically investigated whether Peoples, BCE, and the amendments to the CBCA have affected the content of fiduciary outs. One might hypothesize that legal practitioners would respond to these developments (1) by eliminating the strict requirement of financially benefiting shareholders (to better conform contractual practice to the law), (2) by emphasizing this requirement (so as to “counteract” the law), or (3) by expanding fiduciary outs to cover broader stakeholder interests. As it turns out, however, Peoples, BCE, and the amendments to the CBCA have not significantly affected fiduciary outs. The graph below shows the total percentage of fiduciary outs containing exclusive shareholder value language over the 20-year period.[70]

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As seen in the graph above, there appears to be a slight downward trend in fiduciary outs containing shareholder value language. However, the timing of this pattern is not related to any specific legal change and is more likely due to annual variation in the number of reverse takeovers, which are less likely to include shareholder value language. Ultimately, there is nothing in the data from either sample providing any indication that legal changes have affected the drafting of fiduciary outs.

III. Discussion and Analysis

The data reveal a discrepancy between the theory and practice of fiduciary duties. Despite the fact that Canadian directors may legally consider stakeholder interests—and, prior to 2019, operated under a legal framework implying an obligation to consider stakeholder interests—fiduciary outs in Canadian M&A almost universally privilege shareholder value. This Part IV discusses why corporate practice diverges from the “law in books,”[71] and why directors are principally concerned with the financial interests of shareholders.

A. Explaining the Content of Fiduciary Outs

If the law allows directors to consider “employees, suppliers, creditors, consumers, governments and the environment,” then why do fiduciary outs focus exclusively on shareholders? As prior scholars have suggested, there are a number of reasons to expect shareholder value to remain the lodestar for directors.[72] In the context of fiduciary outs, I suggest five specific reasons, each of which are primarily grounded in business and economic factors, but which are also shaped by the broader legal context. These reasons are: (1) the exclusive role of shareholders in electing (and removing) directors; (2) fear of shareholder litigation; (3) a cultural and professional commitment to maximizing shareholder value; (4) the unwillingness of buyers to accept broad fiduciary outs; and (5) the mimetic influence of U.S. law firms.

First, under basic corporate law principles, shareholders hold the power to elect the board of directors.[73] Under Canadian law, shareholders can also remove directors at any time at a special meeting of shareholders.[74] No stakeholder group plays any role in choosing directors. Given that directors are, in a significant sense, accountable to shareholders, it is unsurprising that directors choose to prioritize shareholder interests.[75] In extreme cases, a board of directors that consistently fails to maximize shareholder value will eventually be replaced, typically through one of two market mechanisms. First, an activist investor or dissident shareholder may remove the board through a proxy contest,[76] or second, the firm’s low stock price (caused by selling on the part of dissatisfied shareholders) may attract a hostile takeover bid.[77] Either way, the board will be replaced by new directors who are more amenable to shareholder interests. Indeed, the very fact that proxy contests and hostile takeovers are relatively rare may be evidence of their disciplining effect.[78]

If anything, accountability to shareholders is even stronger outside the M&A context. In the context of M&A transactions, self-interested directors may welcome the flexibility to consider stakeholder concerns.[79] The greater the flexibility to consider stakeholder interests, the greater the opportunity for directors to pursue their own interests.[80] That directors are constrained by fiduciary outs to consideration of shareholder interests speaks to the economic and practical realities of the market for corporate control (discussed below), but it also underscores corporate directors’ fundamental accountability to shareholders. Without an effective stakeholder accountability mechanism (such as voting), there is little reason to expect directors to meaningfully protect stakeholder interests.

Second, directors fear shareholder litigation resulting from non-value maximizing decisions. This fear is less pressing in Canada than the United States, partly due to the broader conception of fiduciary duties. Since directors enjoy greater latitude to protect non-shareholder interests, they can more easily defend managerial decisions that reduce shareholder value. In addition, class actions are less common in Canada for a number of institutional reasons, including the “English rule” of cost shifting, lower damages awards, and lower counsel fees for plaintiff attorneys.[81] In combination, these factors mean that Canadian directors are less subject to shareholder litigation than their American counterparts. Fiduciary duty lawsuits exist in Canada, but they are less often class actions and more often individual lawsuits. Given the concentrated ownership structure of many public corporations in Canada, controlling shareholders have strong incentives to sue (or simply replace) disloyal directors.[82]

In addition to fiduciary duty claims, Canadian law also provides the oppression remedy.[83] The oppression remedy is a statutory remedy used to prevent corporate action that is “oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditor, director or officer.”[84] It is a powerful tool that allows shareholders to directly challenge corporate decisions.[85] Although the oppression remedy is an equitable remedy,[86] and thus rarely results in monetary damages, it is taken seriously by directors when considering strategic alternatives. The oppression remedy is not limited to shareholders—it explicitly extends to creditors[87]—but it does not protect the full range of interests encompassed by the fiduciary duty.[88] This means that when directors face a decision that pits shareholders against non-creditor stakeholders (employees, for example),[89] they are more likely to favor shareholders, who are empowered to vindicate their interests.[90]

Third, despite academic and political criticism of shareholder wealth maximization,[91] shareholder primacy has been widely embraced by professional corporate managers.[92] The reasons are both cultural and economic. From a cultural standpoint, the business professionals who fill the ranks of boards of directors and executive management are socialized within a network of business schools, professional organizations, and financial and accounting advisors that emphasize maximizing investor returns.[93] Many corporate managers view this objective as their central professional responsibility.[94] It is also what they get paid to do. Since managers are hired, fired, and compensated based on financial performance metrics, it is unsurprising that financial outcomes are what managers choose to prioritize. Indeed, most officers and directors are compensated primarily with stock options, which provide enormous personal financial gains in high-value acquisitions. Although there has recently been an increase in the rhetoric of corporate social responsibility,[95] there is little evidence this rhetorical shift has meaningfully affected corporate governance, or that mangers are willing to sacrifice profits for the benefit of stakeholder groups.[96]

Fourth, the structure of the M&A market itself is such that buyers are unwilling to accept broad fiduciary outs. Since fiduciary outs are a specific exception to negotiated deal protections, buyers insist that they be drafted narrowly. A fiduciary out that encompasses transactions that are more favorable to stakeholders would allow too much optionality on the part of the seller and create unacceptable uncertainty for the buyer.[97] Assumedly, a buyer would only accept such uncertainty at a significantly reduced price, resulting in less value for shareholders—exactly the outcome that directors seem motivated to avoid. The fact that the content of fiduciary outs is so consistent across Sample 1, and that any variation in Sample 2 appears unrelated to market cycles, suggests that inclusion of a fiduciary out provision focusing exclusively on shareholder value (combined with a breakup fee) has become a stable market equilibrium.

Finally, it seems clear that U.S. legal practice has influenced the Canadian market. Contractual provisions and drafting language are transmitted through the M&A market in a process of mimesis, as law firms adopt each other’s contractual innovations.[98] Eventually, the legal, business, and financial communities settle on an accepted standard. In an increasingly globalized legal industry, these standards often cross national lines—and given the enormous size and influence of the largest U.S. law firms, the structural similarities between the U.S. and Canadian legal systems, and the significant interconnectedness of the two countries’ economies, the practices of large U.S. law firms have a major influence in Canada.[99] This may be why fiduciary outs that seem tailored to Delaware law have been adopted in Canada essentially unchanged.[100] In this context, it is also important to emphasize the role of Canadian law firms, many of which are themselves influential market actors. If Canadian practitioners truly believed that broadening fiduciary outs were necessary to protect their clients, they would insist on doing so. The fact that they do not speaks to the lack of meaningful stakeholder protections under Canadian law.

B. The Scope of Directors’ Duties

Fiduciary outs are only part of the story when it comes to the meaning of fiduciary duties. Given that they address business situations that are by definition out of the ordinary, fiduciary outs have limited bearing on corporate governance in more ordinary circumstances. When it comes to longer-term issues such as strategic planning, financial policy, and relationships with employees, suppliers, and customers, corporate managers have greater scope to consider stakeholder interests. From a legal perspective, since directors owe their fiduciary duties to “the corporation”—an abstract concept which potentially includes a wide array of corporate constituencies—directors enjoy broad discretion in the weighing and balancing of stakeholder concerns.[101] If shareholders were to complain, the business judgement rule shelters any reasonable determination as to the best interests of the corporation.[102] Even the oppression remedy, ostensibly a shareholder protection measure, has been diluted by the Supreme Court’s fiduciary duty jurisprudence. By conflating the oppression remedy with the fiduciary duty in BCE, the Court has limited the protective scope of the oppression remedy itself.[103] According to BCE’s conception of the oppression remedy’s “reasonable expectations” test, shareholders may only “reasonably expect” that directors “act in the best interests of the corporation,” the same open-ended standard that exists under the fiduciary duty.[104]

That said, the incentives that limit fiduciary outs to shareholder interests are even stronger outside the M&A context. Although the sale of a corporation is a focal point for management attention to shareholder value, the structure of corporate democracy and the reality of public financial markets exert strong pressure on directors to prioritize shareholders in all circumstances. And although shareholder and stakeholder interests can certainly be aligned, any board that consistently sacrifices shareholder value to other interests will eventually be replaced. The reality is that in a system of corporate governance that assigns final control to shareholders, and in a capitalist economic system in which shareholders are primarily motivated by profit, there is little reason for directors to prioritize anything else. Ultimately, the legal definition of fiduciary duties may be less important than it appears.

Conclusion

Fiduciary outs reveal the practical limits of fiduciary duties. The purpose of fiduciary outs is to accommodate directors’ legal obligations, which means their language reflects practical understandings of those obligations’ boundaries. If directors believe their fiduciary duties are primarily owed to shareholders, then fiduciary outs will be targeted to maximizing shareholder value. If, however, directors believe they owe enforceable duties to a plurality of stakeholder groups, then stakeholders will be encompassed in the drafting of fiduciary outs.

The data presented in this article suggest that directors do not believe they owe enforceable duties to stakeholders. The vast majority of fiduciary out provisions are drafted such that directors may only consider alternative transactions that provide greater value to shareholders, irrespective of stakeholder interests. If directors and their legal counsel really believed that directors owe enforceable duties to, e.g., employees, suppliers, creditors, consumers, governments, and the environment, then they would include those interests as factors to consider in evaluating alternative offers. The fact that they do not is strongly suggestive of a legal risk assessment that the danger of successful stakeholder litigation is remote.[105] In a sense, this assessment is supported by BCE itself, in which directors were deemed to have fulfilled their duties by merely “considering” creditors’ interests.[106]

Ultimately, this article shows how formal law and practical realities can diverge. Many commentators have emphasized BCE’s reconceptualization of fiduciary duties, with the implication that Canadian law empowers directors to protect stakeholders.[107] In the context of M&A transactions, however, this is not a practical reality. During a change of control, directors contractually bind themselves from considering transactions that do not maximize shareholder value, regardless of stakeholder interests. This practice raises serious questions as to the relevance of fiduciary duties to non-shareholder constituencies. It also has broader implications for corporate social responsibility: Despite the formal allowances of Canadian law, structural economic factors make it exceedingly unlikely that directors meaningfully or consistently pursue corporate objectives other than profits. To the extent we desire corporations to serve a broader vision of the common good (a question I leave unaddressed for purposes of this article), we may require stronger measures than fiduciary duties.