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The role of a board of directors in responding to an unsolicited takeover bid Rankin, Mark W. J. 1992

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THE ROLE OF A BOARD OF DIRECTORS INRESPONDING TO AN UNSOLICITED TAKEOVER BIDByMARK W. J. RANKINLL.B., University of Ottawa, 1988B.A. York University, 1983A THESIS SUBMITTED IN PARTIAL FULFILMENT OFTHE REQUIREMENTS FOR THE DEGREE OFMASTER OF LAWSinTHE FACULTY OF GRADUATE STUDIES(FACULTY OF LAW)We accept this thesis as conformingto the required standard.THE UNIVERSITY OF BRITISH COLUMBIADecember 1992© Mark W.I. Rankin, 1992In presenting this thesis in partial fulfilment of the requirements for an advanceddegree at the University of British Columbia, I agree that the Library shall make itfreely available for reference and study. I further agree that permission for extensivecopying of this thesis for scholarly purposes may be granted by the head of mydepartment or by his or her representatives. It is understood that copying orpublication of this thesis for financial gain shall not be allowed without my writtenpermission.(Signature) Department ofThe University of British ColumbiaVancouver, CanadaDate 9„? DE-6 (2/88)ABSTRACTThe proliferation in the use^the "unsolicited' takeoverbid" as a means of acquiring corporate control has hadprofound implications, especially on large publicly tradedcompnies.Although =oh has been written about the efficacy oftakeover bids advancing shareholders' interests and economicprosperity in North America, surprisingly, opinions on thistopic remain divisive. What is evn more interesting is thediversity of opinions held with ra ,s.pect to diractors'obligations when responding to an unsolicited takeover hid.What is the "appropriate role" of a board of directorswhen their company becomes the subject of an unsolicitedtakeover bid? In the execution of their duties andobligations to manage the business and affairs of a coinpany,we are told that directors are in part, required to acthonestly and in good faith in promoting the best interests ofthe company. Much of the discussion in this paper will beconfined to how this phrase, "the best interests of theiiicompany" might be interpreted in the context of an unsolicitedtakeover bid. What are the constituent elements that make up"the company"? Which interests should be construed asbeing in the company's best interests? To whom are thedirectors' duties and obligations owed in endeavouring topromote the best interests of the company?In the conclusion of this thesis, a theory has beenadvanced based on the notion of reasonable shareholders'expectations and legitimate shareholders' interests, as apossible approach to understanding the correct meaning of thephrase, "tLe best interests of the company" and from that, therole directors are to play when confronted with an unsolicitedtakeover bid for their company.TABLE OF CONTENTSPageABSTRACT^ iiACKNOWLEDGMENT^ viCHAPTER ONE -^INTRODUCTION^ 1CHAPTER TWO -^THE MANAGEMENT OF THE BUSINESSAND AFFAIRS OF A COMPANY^21CRAPTER TWO -CHAPTER THREE -CHAPTER FOUR -PART II - DIRECTORS ASFIDUCIARIES^ 37THE EXERCISE OF DIRECTORS'POWERS "THE TECK TEST APPROACH"^48PART I - THE "APPROPRIATE" ROLEOF A BOARD OF DIRECTORS INRESPONDING TO AN UNSOLICITEDTAKEOVER BID^ 58CHAPTER FOUR -^PART II - WHOSE BEST INTERESTS?TO WHOM ARE DIRECTORS' OBLIGATIONSOWED?^ 63CHAPTER FOUR -^PART III - POTENTIAL CONFLICTOF DIRECTORS' DUTIES?^80CHAPTER FIVE - PART - I - WHAT ARE THE INTERESTSOF THE SHAREHOLDERS AS A WHOLE?REASONABLE SHAREHOLDERS' EXPECTATIONSESTABLISHING LEGITIMATE SHAREHOLDERS'INTLIIESTS.^ 115CHAPTER FIVE -^PART - II - ESTABLISHING REASONABLESHAREHOLDERS' EXPECTATIONS^131CHAPTER FIVE -^PART - III - ASSESSING THE ADRQUACYOF AN UNSOLICITED TAKEOVER BID.^140CHAPTER SIX -^CONCLUSION^ 162BIBIOGRAPHY -^ 176ACKNOWLEDGMENTI wish to acknowledge and thank the Law Foundation ofBritish Columbia for their generous Fellowship award, andProfessor B. Slutsky for kindly accepting to act as mysupervisor.Special thanks to my parents James and Elizabeth Rankin,and to Heather Brassem, James Miller and Catherine Tribble forall their love and support.viCHAPTER ONEINTRODUCTIONUse of the "unsolicited takeover bid" as a viable meansfor acquiring corporate control in North America, is arelatively novel business tactic, coming into its own around1960. 1 Changes in corporate control prior to this time,occurred chiefly through proxy battles. 2 By the 1970stakeover bids had begun to be used more and more frequently asthe corporate business community recognized their utility andmore importantly, tlieir cost effectiveness. 3 It was notuntil the 1980s however, that the use of takeover bids truly1 M. Borrelli, M. Marr & S. Young, "A Level PlayingField: Regulating Tender-Offers in Friendly versus HostileTakeovers" (1989) 42 Arkansas L. Rev. 887 at 888; M. R.Gillen, "Proposed Changes To Provincial Takeover BidLegislation: Deterrence Without Protection" (1991) U.B.C.L.Rev. 129 at 130; J. H. Farrar, "Business Judgment AndDefensive Tactics In Hostile Takeover Bids" (1989) 15 Can.Bus. L. S.T. 15 at 15-16.2 Borrelli, supra, note 1 at 888; Farrar, supra, note 1at 16._Changes in corporate control can also be achievedthrough other means, such as mergers or the sale of corporateassets, see M. J. Keliher, "Anti-Takeover Measures - WhatStandard Should Be Used To Evaluate Them?" (1988) 25 HoustonL. Rev. 419.3 Borrelli, supra, note 1 at 888.2began to proliferate at a tremendous pace. 4 Mid-way throughthat decade the volume and value of equity and debt exchangedin these transactions reached staggering proportions in theUnited States, 5 with comparatively equal vigour occurringwithin Canada. It has been said that, "[t]he dollar value ofmergers in Canada from 1975-1979, adjusted for the smallersize of the Canadian economy, was five times as large as thevalue of mergers in the United States. From 1980-1985, thevalue of Canadian mergers was two-and-a-half times as large asthe comparable value for the United States." 6 FrankIacobucci commented that the extent and publicity attendedthese events made even the most casual observer aware of thespectacular heights unsolicited takeover bid had achieved. 7Abraham Tarasosky has describes the use of takeovers, "... as4 H. L. Pitt, "On The Precipice: A Reexamination OfDirectors' Fiduciary Duties In The Context Of HostileAcquisitions" (1990) 15 Del. J. of Corp. L. 811 at 812-13.5 W. Adams & J. Brock, "Merger-Mania: An EmpiricalCritique" in L. McKee, ed., Hostile Takeovers Issues in PublicAnd Corporate Policy (New York: Praeger, 1989) 33; M. Lipton& A. R. Brownstein, "Takeover Responses and Directors'Responsibilities-An Update" (1985) Bus. Lawyer 1403.6 P. Dey & R. Yalden, "Keeping The Playing Field Level:Poison Pills And Directors' Fiduciary Duties In Canadian Take-Over Law" (1991) 17 Can. Bus. L. J. 252 at 262, citing D.DaMott, "Comparative Dimensions of Takeover Regulations"(1987) 65 Wash. U.L.Q. 69 at 81. See generally J. G.Macintosh, "Poison Pills In Canada: A Reply To Dey And Yalden"(1991) 17 Can. Bus. L. J. 323.7 "Planning And Implementing Defences To Take-Over Bids:The Directors' Role" (1980-81) 5 Can. Bus. L. J. 131 at 132.See J. G. Howard, "Takeover Defences: A Reappraisal" (1990)24 U.B.C. L. Rev. 53.one of tfir most striking features of the cdurse of economicevents in North America and Western Europe since the early1980s." 8 John H. Hickman of the Globe & Mail, in his Lookreview of Merchants of Debt: KKR and the  Mortgaging ofAmerican Businiess, aptly described the "merger mania" of the1980s, as "casino capitalism". 8(a)Although once regarded within the business community asethically inappropriate, 9 the unsolicited takeover bid hasbecome the most common type of transactions in corporatecontrol situations in the United States, Canada, Australia,New Zealand and the U.K. " Albeit somewhat diminished fromits heyday of the late 1980s, it is still appropriate todescribe the present trend of "the unsolicited takeover bids",as one of continual activity. 11a A. Tarasosky & R. Corvari, gpxwargteLjMergers  andAcquisitions: Evidence on Profitability, (Ottawa: EconomicCouncil of Canada, 19§1) at ix. See also The Economist,"Takeovers in Europe expected to pick up under su=inglemarket" The Globe & Mail (20 July 1992) B 5.8(a) "Goodbye, leverage takeovers; hello corporategovernace" The Globe & Mail (6 June 1992) B 21.9 Borrelli, supra, note 1 at 888.10 Farrar, supra, note 1 at 16.See S. Beck's comments in the Ontario SecuritiesCommission 1989 Annual Report at 2; Dey, supra, note 6 at 262;Howard, supra, note 7 at 54; S. Feschuk, "Analyst sees zig -zag decade ahead" The Globe & Mail (9 May 1992) B 5.4The vast malority of cox-porate control acquisitions arenegotiated business transactions, although with respect topublic companies there is typically some element of hostility. 12The term takeover is often used interchangeably with theterm merger. A takeover is however, more commonly understoodto mean the premeditated and unsolicited acquisition of sharesof a company (the "target") to the extent that control overthe target passes to the purchaser of those shares (the"offeror"). A merger on the other hand, implies consensualnegotiations, whereby the companies involved combined to forma single new entity. nGenerally speaking, a takeover bid occurs when a person,or persons acting in concert, acquire either through a singlepurchase or through a series of purchases of a target'sshares, "control" of the target company. Corporate control ismanifested through various degrees of share ownership and/orinfluence over a company. What will constitute effectivecontrol over a target is to a large extent, dependent on anumber of factors unique to that particular company. What isclear however, is that effective control of a company can be12 C. R. Sector, "Takeovers And The Duties Of The Boardof Directors: Comparative Aspects Of American And CanadianStandards" (1989-90) 20 R. de D. 131 at 133.13 ^Rabinowitz, ed.,  Weinberg and Blank On Take-Overs And Mergers, 5th ed. (London: Sweet & Maxwell, 1989) at 1001.attained with far less than 51% of the company's shares. 14To illustrate the point, take for example the Canada BusinessCorporations  Act ("C.B.C.A.") and the Business CorporationsAct. 1982 (Ontario), ("0.B.C.A."). Both acts have designatedthat for the purpose of defining a takeover bid, thepercentage of control, be it direct or indirect, of the targetcompany's shares, is set at 10% 15 Meanwhile the SecuritiesAct (Ontario) and the British Columbia Securities Act,continue to maintain that effective control of a companyoccurs when 20% or more of that company's outstanding votingor equity shares have been acquired or are controlled by aperson or persons acting in concert. Once control is deemedto have been obtained, takeover bid rules and regulations areautomatically triggered. 16Prior to launching an unsolicited takeover bid it is most14 T. Madden, R. Forbes & R. Simmonds, Canadian BusinessOrganizations Law, (Toronto: Butterworths, 1984) at 509-512.F. Iacobucci, M. L. Pilkington & J. R. S. Prichard, CanadianBusiness Corporations An Analysis Of Recent LegislativeDevelopments, (Agincourt Ontario: Canada Law Book Ltd, 1977)at 462-463.15 R.S.C. 1985, c. C-44 at s. 194; S.O. 1982. c. 4 asamended at s. 186(2), respectfully.16 S.O., 1987, c.7 at s. 88(1); S.B.C. 1985, c. 83 asamended at s. 74(1), respectfully. See also 13 OntarioSecurities Bulletin at 2298, "Request for Comments" 3 June,1990, where the Canadian Securities Administrators proposedthat the present 20% level for the purposes of defining atakeover be reduced to 10%. See also Gillen's views to theproposed changes, and in respect to the rules and regualtionsgoverning the securites marketplace generally, supra, note 1.But also see Dey, supra, note 6.6likely that the offeror conducted an exhaustive research intothe background of the target, gathering and analyzing as muchinformation as is practical in respect to such matters, forexample; the target's financial position, the demographics ofits shareholders, whether it has any anti-takeover defensivemechanisms in place, and if so, how best to circumvent them,etc. All this is done in order to determine how to frame thetakeover bid so as to solicit the maximum positive responsepossible from the target shareholders. 17Although compelled to comply with the rules andregulation set out for making an unsolicited takeover takeoverbid in Canada, the goal of the offeror is to seize in as shortof time as DI legally possible, that requisite number ofshares in the target company necessary to garner control. Tothis end the offeror relies upon secrecy and speed inlaunching the bid. Secrecy is important so that the targetcompany's board of directors is not forewarned that a takeoverbid is imminent. This denies the target directors anopportunity to plan defensive response tactics specificallydesigned to thwart the offeror's bid. Also the offeror doesnot want the news of its upComing takeover bid to be madepublic prematurely because that would only cause the price ofthe target shares to increase. Generally, the price of acompany's shares will increase if it is anticipated that a17 See Iacobucci, supra, note 7 at 137ff.7takeover hid for that company will be made. Shares of H. j.Benz Company rose US$2.12 in the first few hours of trading"after rumors that the food and condiment maker could be thetarget of a takeover attempt". Conversely, rumours that a bidwill be blocked or withdrawn will typically result in thedecrease in value of a target company's shares. Once theofficial announcement of a takeover bid is made, the tradingvolume and price of the target's shares will risedramatically, reflecting investors' and arbitrageurs'perceptions that a premium will be paid on the -:hares shouldthe takeover bid, or a competing bid succeed. 18In anticipation of launching a successful 1:id, an offerorshould always be prepared for the eventuality that the initialplanned costs of the bid may have to be substantiallyaugmented should the target company's board of directorsemploy defensive tactics and/or competing offers for thetarget are made. Although rarely invoked in the past, anofferor should also be cognizant of the fact that a planned17(a) Ass. Press, "Takeover rumour heats Heinz" The Globe& Mail (21 Aug. 1991) B 3.17(b) D. Westell, "Campbell Soup shares fall" The Globe& Mail (22 June 1991) B 2.See R. Sappdeem, "Motivation Of Offeror CompanyDirectors In Corporate Acquisitions" (1987) 9 U. Pa. J. Int.Bus. L. 67 at 95- 98. See also B. E. Eckbo, "Mergers and themarket for corporate control: the Canadian evidence" (1986) 19Can. J. of Econ. 236; A. Robinson, "Arbitragers get panicky"The Globe & Mail (16 May 1992) B 1.8takeover (merger) may be deemed to contravene the federalgovernment's Competition Act,(S. C....) as preventing orsignificantly lessening competition in the market place. Asa consequence of the Act, Imperial Oil Ltd. was denied theright to complete its proposed $5 billion takeover of TexacoCanada Inc. unless it agreed to a number of pre-conditionsrequired by the federal Bureau of Competition Policy aimed atensuring continuous and vigorous competition amongst theindependent gasoline retailers in the Atlantic provinces. Sotoo, Southam Inc. came under the scrutiny of the Bureau ofCompetition with its purchase of control of two local B.C.newspapers back in early 1990. The Bureau was of the opinionthat S•;tham's acquisition would unduly lessen the competitionin respect to the newpaper advertisement business in the B.C..The Competiton Tribunal (the final arbitrater of these mattersunder the Act) decided early this past June, that because ofthe community based nature of the Vancouver Courier and theNorth Shore News (the two papers acquired by Southam) therewas no undue lessening of competition, for the reason that theadvertisers who use community based newpapers do not competewith advertisers who are likely to use the larger daily papersin Vancouver. 1919 See re: A Freeman Imperial Oil "Tribunal still notsatisfied on takeover" The Globe & Mail (27 Jan. 1990). Seere: Southam J. Partridge "Southam's B.C. takeover still onhold" The Globe & Mail (19 Sept. 1990) B 5; D. Fagan "Southambeats back anti-competition challenge" The Globe & Mail (3June 1992) B 3. Interestingly there is a provision under theAct allowing for a three year "monitoring period" within which9It may be expected that an offeror was actively engagedin a surreptitious acquisition programme ("creepingacquisitions") of shares in the target company prior to theofficial public disclosure that a takeover bid would be made.The acquisition of target shares under this practise will bekept to a point somewhere below that percentage of shareownership which would automatically trigger the takeover bidrules, or that would likely tip off the target company's boardof directors of the impending bid. It may be possible toacquire control of a company without ever having triggered theapplicable governing takeover bid provisions. It is said ofthe Toronto based Edper Bronfman conglomerate, that bycaptializing on those "grey and fuzzy areas in Canadian tax,corporate and securities laws" and through slow and steadystock purchases on the open market and by private agreement,that company has "made the creeping takeover into something ofa fine art." 20Buying up shares in a target before making its takeoverbid also allows the offeror to establish a "toehold" in thecompany. Furthermore, acquisitions of target shares purchasedat the "pre-takeover bid" price can also be advantageous totime the Competition Tribunal could disallow a takeover ormerger as having breached the Act's mandate.K. Noble,Globe & Mail ( 13mark" The Globerespectfully; see"Merchant .bankers test their limits" Thealpsro. Blo9r9r1e) 1^8;^Heesnotes 1 atdeal ^its& mail (( Feb. 1991) B 1-B 2, B 1810the offeror of a takeover bid should it be determined that acompeting bid for the target is likely to succeed. In thissituation the offeror's "pre-takeover bid" shares can betendered to its competitor at the higher "post-takeover bid"price, thus enabling the offeror to recoup some of the expenseit incurred in making its failed bid. 21An unsolicited takeover bid is usually an orchestratedattempt by the offeror to circumvent, (at least in the initialstages of its campaign for control) any necessary involvementwith, or approval from, the target company's board ofdirectors. 22Unsolicited takeover bids are frequently referred to as"hostile takeovers". The term "hostile", in reference to therelationship between the offeror and the shareholders of thetarget company is really a misnomer. If anything targetshareholders look upon, an unsolicited takeover bid for theirshares with favour. 23 Any hostility that may develop as aconsequence of an unsolicited takeover bid being made is moreaptly seen as a reflection of the often derisive relationshipthat can exist between the boards of directors of theSee the comments of Gillen, supra, note 1 at 139-40.22 Iacobucci, supra, note 7 at 133.23 This will be discussed in more detail below.11participating companies. 24The affects on the target company once a takeover bid isannounced can be quite drastic. Expectedly, the targetcompany's board of directors will be engrossed in determininghow best to respond to the offer, while all other managementconsiderations will likely become secondary in importance.Employees of the target company will also have concerns overtheir own prospects should the company be taken over. Oftenopportunistic head-hunters or competitors of the targetcompany will try to capitalize on the this mood ofuncertainty, endeavouring to solicite away the target's topemployees. It has been said that once a company becomes atarget of an unsolicited takeover bid it develops a "siege-like mentality". 25Why it may be asked, does one company seek to gaincontrol over another? The primary reason is that the offeroranticipates that some positive benefit will be incurred,usually in the form of enhanced profits. Although there arenumerous reasons, the following are some examples of why onecompany would seek to control another: 1) The offeror may feel24 Iacobucci, supra note 7 at 133. See R. C. Brown, "TheRole of the Courts in Hostile Takeovers" (1988/89) 93 Dick. L.Rev. 195 at 197.25 Pitt, supra, note 4 at 839-842. Iacobucci, supra, note7 at 134-35.12that the poor management practices of the target has resultedin the company operating at below full capacity. By gainingcontrol of the target company and installing its ownmanagement team, the offeror hopes to rectify thesedeficiencies and benefit from the target's new efficiency. 2)The offeror may perceive that the market price of the targetshares are extremely depressed and not reflective of thecompany's true worth. If control can be achieved at, or near,the present trading value of the target's shares, a bargainacquisition can be made. 3) Possibly the target's modes ofproduction or its market share for its products or serviceswould complement or supplement those of the offeror, or the6fferor's plans for future expansion. 4) Control of thetarget company may eliminate the threat of it becoming asignificant competitor of the offeror. 5) The target may havea subsidiary, or segment of its own operations that isparticularly desirable to the offeror, 6) The target companymay be highly liquid, enabling the offeror to sell off thetarget 'piecemeal' at a profit over the acquisition costs. 7)Tax ramification for the offeror may play an important reasonin why a target was sought out. 8) The target may be acquiredsimply to reinforce or satisfy subjective desires for power orprestige of certain members of the offeror's executivemanagement team. 2626 See generally, J. G. Christy, "Corporate MismanagementAs Malpractice: A Critical Reanalysis Of Corporate Managers'Duties Of Care And Loyalty" (1984) 21 Houston L. Rev. 105 at13The use of the unsolicited takeover bid as a means toacquire corporate control has become, and is likely to remain,a permanent fixture within the business community. While itsprevalence may be an acknowledged fact, its utility inpromoting the interests of shareholders specifically, and itseffect on the economy and our society remains disputed. Is thetakeover bid situation so unique as to require specialconsiderations and placement of safeguards when it comes tothe involvement of the target company's board of directors.Are the benefits that may be incurred by permitting targetdirectors to become involved in the takeover bid processoutweighed by the potential risks such involvement mightcarry? When a takeover bid is announced, should the board ofdirectors of the target company be banned completely frominterfering in anyway with the bid or, should their activitiesmerely be restricted in some fashion? If so, how so? 27This issue, unlike any other in the area of corporatecontrol management, is extremely divisive there are a widerange of theories proffered with respect to what extent targetdirectors should be permitted to respond to an unsolicitedtakeover bid running the gambit from total abstinence to112; Brown, supra, note 24 at 198-99; Tarasofsky, supra, note8 at 10; Rabinowitz, supra, note 13. Iacobucci, supra, note 7at 137-38.27 Stephanie Rees, "Directors' Unfair Conduct as a Groundfor Remedy under the Companies Act (1985-86) Co. & Sec. L. J.63 at 65-66.14unbridled involvement. 28 These issues are very involved andunfortunately, for the purposes of this paper, can only, inthe briefest of ways, be addressed below.At the heart of this dichotomy is a perception of theefficacy of a target company's board of directors respondingto an unsolicited takeover bid for the purpose of promotingthe interests of the company and its shareholders. In abroader sense it may be asked whether takeover bids in generalplay any positive role in advancing the betterment of theeconomy or the welfare of our society. Unfortunately theempirical data proffered by both the promoters and thedetractors on these issues at the very best, indecisive.29On the "pro" side, it is argued that corporate takeoverscan have a salutary affect both on the interests of theshareholders and on the welfare of the economy and society.The salient features of these benefits are that the threatthat an unsolicited takeover bid could be made acts upon a28 See generally Brown, supra, note 24 at 199-203;Borelli, supra note 1 at 892-3; Farrar, supra, note 1 at17ff; Howard, supra, note 7 at 57-63; Iacobucci, supra. note7 at 133-36.29 Farrar, supra, note 1 at 40. See generally Eckbo,supra, note 18; Tarasofsky, supra, note 8; Howard, supra note7; Adams, supra, note 5; Sapppdeem, supra, note 18; A.Freeman, "Takeovers no sure cure" The Globe & Mail (13 June1991) B 13.15company's board of directors as a catalyst to ensure thattheir corporation performs at its optimum level. Thisincreases corporate efficiency which correspondingly advancesthe interests of shareholders. Company's with poor businessrecords will become subject to takeover bids by others whoperceive that they can utilize the assets of the target moreefficiently, hence more profitably. In turn, this means thatnot only are poor management practices weeded out, but alsothat the nation's resources are put to their maximum use. 30It is reasonable to speculate that, (as in any armslength business transaction) in the context of an unsolicitedtakeover bid, the offeror will try to purchase the targetshares at the lowest price possible. 31 As such, it has beenargued that the participation of a target company's board ofdirectors in responding to an unsolicited takeover bid is goodfor the target shareholders who, as a diverse group, are in aninferior bargaining position to the offeror. The board ofdirectors of the target company on the other hand, caneffectively represent all the company's shareholders andnegotiate with the offeror on a more equitable basis.Further, it is maintained that the target directors, because30 See F. H. Easterbrook & D. R. Fischel, "The Proper RoleOf A Target's Management In Responding To A Tender Offer"(1981) 94 Marv. L. Rev. 1161 particular at 1182ff; Gillen,supra, note 1. See generally Howard, supra, note 7 at 55-63 &74-77.31^•Pitt, supra, note 4 at 834.16of their intimate knowledge of the company; will know whetherthe true and intrinsic value of the company is properlyreflected in the bid. Where it is not, the target directorscan implement defensive tactics and/or solicit competing bidsin order to secure for the shareholders a better deal. 32Alternatively, those on the "con side" maintain that theuse of unsolicited takeover bids to obtain corporate controlhas had a chilling affect on the welfare of our society and onour economy as a whole, by increasing market instability andgenerating vast exchanges of corporate equity for debt, whileat the same time causing massive disruptions and unemploymentfor the country's work force. 33(a)A primary concern for those who advocate that targetdirectors refrain from intervening in takeover bids, is thatif a takeover bid were to succeed, the threat posed to theincumbent directors is painfully apparent - the targetdirectors may very well be removed from office. On this basisit is argued that target directors may be tempted to pervertthe wide range of their powers to manage the business andaffairs of the company by implementing defensive tactics underthe guise of serving the best interests of the company, but32 Dey, supra, note 6 at 256; G. Coleman, "Poison PillsIn Canada" (1989) 15 Can. Bus. L. J. 1 at 4; L. Herzel, J. R.Schmidt & S. J. Davis, "Why Corporate Directors Have a Rightto Resist Tender Offers" (1980) 3 The Corp. L. Rev. 107particularly at 111.17which are in fact for the. purpose of perpetuating themselvesin office. 33It has been argued that in the context of an unsolicitedtakeover bid, the interests of the shareholders are betterserved by requiring the directors of the target company torefrain from implementing defensive manoeuvres and instead,limiting their role to such things as disseminatinginformation to their shareholders with respect to the adequacyof the takeover bid. 34Even if one accepted that the involvement of targetdirectors in the takeover bid scenario results in increases ofthe premiums paid to the target company's shareholders,Professors Frank Easterbrook and Daniel Fischel argue thatsuch activity is counter-productive to the overall welfare ofshareholders in the market place. This is because the costsfor conducting a successful takeover bid would necessarilyincrease, which correspondingly would decrease the frequencyin which takeover bids are made. A diminution of the number33(a) See Borrelli, supra, note 1 at 892-93.33 See J. G. MacIntosh, "The Poison Pill"; A NoxiousNostrum For Canadian Shareholders" (1989) 15 Can. Bus. L. J.276 at 281; Howard, supra note 7 at 58; Easterbrook & Fischel,supra, note 30 at 1175; Michael St. Patrick Baxter, "TheFiduciary Obligations Of Directors Of A Target Company InResisting An Unsolicited Takeover Bid" (1988) 20 Ottawa L.Rev. 63 at 74.34 Iacobucci, supra, note 7 at 165-166.18of takeovers is detrimental, say Professors Easterbrook andFischel, because the existence of a general threat of apossible takeover bid acts as an effective and cost efficientway in which to monitor poor management performance in thepublic sector. 35 Along these same lines, it has beadvanced that there is a zero sum again for the shareholdersof the companies involved in a contested takeover bid thatresults in an increase in the premiums paid, because what isa gain for the one side is a corresponding loss to the other. 36It can also be seen that in today's business environment,at least in respect to widely held public companies, thecentralization and concentration of power within the board ofdirectors has led to a marked decrease in what has been termed"shareholder democracy". With the rise in the number ofshareholders in a company there can result a correspondingdecrease in the ability of the shareholders to instill intheir board of directors a sense of accountability. The sheernumber and diversity of shareholders can create an inabilityfor shareholders to collectively utilize the voting power35 Supra, note 31 particulally at 1169, 1178-79. Seegenerally, Macintosh, "The Poison Pill;A Noxious Nostrum",supra, note 33, particularly at 315-16; But se J. G.MacIntosh, "The Shareholders' Appraisal Right in Canada: ACritical Reappraisal" (1988) 13 Can-U.S. L. J. 299 at 322-27.36 See Sappdeem, supra, note 18 at 104; MacIntosh, "ThePoison Pill; A Noxious Nostrum", supra, note 33 at 315.19attached to their shares to effectively determine who will beelected to the board of directors. Shareholders of largecompanies often are not interested in and therefore do notattend to intra-corporate matters such as the election of theboard of directors. Those who do, usually vote in favour ofthe recommended slate of directors set out in the proxysolicitation which is controlled by the board of directors inthe first place. Professor Berle addressed these concerns inhis celebrated article, "Corporate Powers As Powers In Trust".Professor Berle advocates that the powers afforded directorsin the management of their companies are powers held in trust,exercisable for the sole - benefit- of the company'sshareholders. The "trust" aspect of Professor Berle's theoryreflects his concerns for the need to control the potentialfor abuse by directors of their powers - in short, directorsneed to be held more accountable to the shareholders for theirconduct. 37 As such, it has been argued that the finaldecision of whether a takeover bid will succeed or not shouldremain solely with purview of the target shareholders as avital check in controlling directors' powers and giving somesemblance to the concept of directors' accountability. 3837 See A. A. Berle, "Corporate Powers As Powers In Trust"(1930-31) 44 Harv. L. Rev. 1049. See also E. M. Dodd, "ForWhom Are Corporate Managers Trustees?" (1931-32), 45 Harv. L.Rev. 1145 at 1147; Easterbrook & Fischel, supra, note 30 at1171, 1192.38 Tarasofsky, supra, note 8 at 2.20Despite the potential that target directors may bemotivated to respond to an unsolicited takeover bid out ofself-interests, the general consensus, at least of those whoare responsible for overseeing securities activity in Canada,is that such intervention can have a benefit in promoting theinterests of shareholders, and of our economy. 39 The largerand more pressing question it is proposed, is to what extentcan a board of directors go in defending their company from anunsolicited takeover bid which they perceive not to be in thebest interests of their company, and why?39 National Policy No. 38, Take-Over Bids - DefensiveTactics at particularly para. 1 and 6. See V. P. Alboini,Securities Law and Practice (Toronto: Carswell, 1984) Vol. 4at 27-109. National Policy No. 38 follows and mirrors anearlier policy statement guideline (9.4) of the OntarioSecurities Commission. Note, at present there is no federalagency responsible for the management of the securitiesindustry in Canada, rather it is regulated at the provinciallevel.21CHAPTER TWOTHE MANAGEMENT OF THE BUSINESS ANDAFFAIRS OF A COMPANYAs previously discussed, a typical unsolicited takeoverbid will be made directly to the shareholders of the targetcompany, negating the necessity of having to engage theconsent of the target company's board of directors. Where anoffer to purchase shares, or the solicitation to sell shares,is made directly to a shareholder the relationship createdbetween the offeror and the shareholder is one of a privatematter. Subject to any restrictions with respect to a sharestransferability, shareholders are generally at liberty to selltheir shares to whomever, and at whatever price they choose.Lord Greene M.R., once pointed out, in the case of Smith v.Fawcett that, "...it is to be borne in mind that one of thenormal rights of a shareholder is the right to deal freelywith his property and to transfer it to whomsoever hepleases." 4° Lord Wilberforce stated in Howard Smith Ltd. v.Ampol Petroleum Ltd. that, "[t]he right to dispose of sharesat a given price is essentially an individual right to beexercised as an individual decision..." 4141) [1942] Ch. 304, at 306.41 [1974] A.C. 821, [1974] 1 All E. R. 1126 (P.C.) at 1All E. R. 1135-36.22Although abstinence is one view exposed as to theappropriate role of the target company's board of directors inthe context of an unsolicited takeover bid, the law states, asis set forth under the applicable provincial or federalcorporate statute, that it is the board of directors, actingin their collective capacity who are responsible for managing,or supervising the management of, the business and affairs ofthe company. Professor Welling stated that, "[i]n themodernized Canadian corporate jurisdictions the board ofdirectors are collectively given a statutory power to run thebusiness of the corporation." 42 This statutory requirement(which essentially is a codification of the applicable commonlaw 43 ) is aptly illustrated by sections 102(1) & 122(1) ofthe C.B.C.A.:s.102(1) Subject to any unanimous shareholder agreement,the directors shall manage the business and affairs of acorporation. "42 B. L. Welling, Corporate Law In Canada The GoverningPrinciples 2d. ed. (Vancouver: Butterworths, 1991) at 317.See J. L. Howard, "Fiduciary Relations In Corporate Law"(1991) 19 Can. Bus. L. J. 1 at 9.43 J. Stransman & A.for Directors" (August,Acquisitions, 61 at 62.E.g. provincialBritish Columbia Company"B.C.C.A." s.141(1).A. Greenwood, "Appropriate Actions1988) vol. 5 No. 8 Mergers &legislation, O.B.C.A.^s.115(1);Act, R.S.B.C. 1979, c.59, as am.An unanimous shareholder agreement is, "[a]n otherwise lawfulwritten agreement among all the shareholders of a corporation,23s. 122(1) Every director and officer of a corporation inexercising his powers and discharging his duties shall(a) act honestly and in good faith with a view to thebest interests of the corporation; and(b) exercise the care, diligence and skill that areasonably prudent person would exercise in comparablecircumstances. 45Whether in actual fact, business strategies are morelikely to be determined by a company's higher echelon ofsenior management employees rather than the board ofdirectors, is another matter. Professor Welling is of theopinion (an opinion widely shared by others) that in today'sor among all the shareholders and a person who is not ashareholder, that restrict, in whole or in part, the powers ofthe directors to manage the business and affairs of thecorporation..." See C.B.C.A. s.146(2), O.B.C.A. ss.115(1) &108(2), B.C.C.A. ss. 141(1)(2) & 243.45 See O.B.C.A. s. 134(1) (2); B.C.C.A. s. 142(1) (a) (b) (i)(ii). Note: In the B.C.C.A. there is no reference thatdirectors are to act with a "view to the best interests of thecorporation".The statutory duty of care of a director or officer, hascodified and substantially augmented what was demanded atcommon law. See for example, Neville J.'s comments, in ReBrazilian Rubber Plantation v. East States Limited, [1911] 1Ch. 425 (C.A.) at 437. The test now is objective and therequirements are that the directors & officers exercise thecare, diligence and skill that a reasonable prudent personwould exercise. In relation to the skill demanded of targetdirectors in responding to a takeover bid see Iacobucci,supra, note 7 at 162-3. But see generally Christy, supra, note26; L. C. B. Gower, Modern Company Law 4th ed. (London:Stevens & Sons, 1979) at 603, & note 22.24business realities the former rather than the ltter is morelikely the case. It has be suggested that "...the boards ofdirectors of most large and medium-sized companies do notestablish objectives, strategies and policies, howeverdefined. These roles are perfotmed by company managements." 46Professor Welling lauds the decision of the Supreme Court ofCanada in Canadian Aero Service Ltd. v. O'Malley 47 as abreakthrough in judicial recognition of the actual role theexecutive management branch of a company plays in developingcorporate policies and business strategies. 48 In eithercase, both directors and officers are charged similarly in theperformance of their duties and obligations attached to theiroffice.It is in the execution of their duties and obligationsthat the law has attempted to circumvent any exculpatoryprovisions that a director or officer may seek to rely upon inan effort to avoid statutory liability. Generally stated,directors and officer are liable for any breach of the Act or" Welling, supra, note 42 at 299 and footnote 6 at 299,referring to M. L. Mace's article, Directors - Myth andReality.47 [1974] S.C.R. 592, (1973),40 D.L.R. (3rd) 371." Welling, supra, note 42 at 325 & note 93. But see(Dec. 1983), Continuing Legal Education, Law Society of UpperCanada, Shareholders and Directors Rights, Responsibilitiesand Obligations, (Osgoode Hall, Toronto, 1983); J. Conger,"Impotent directors last to shout fire" The Globe & Mail (9July 1990) Book review of J. Conger, Pawns or Potentates (Toronto: McGraw-Hill Ryerson).25its regulations, and they cannot contract out of suchliability or seek exclusion from liability through provisionsmade to the company's articles, by-laws or resolutions. 49However, there are generally provisions in the corporatestatutes in Canada that recognize that where directorshonestly rely on reports prepared by persons "whose professionlends credibility to statements made by them in the report",for example the company's auditors, lawyers, accountants,engineers, etc., directors will not be held liable for abreach of his or her duties should the information containedin the reports be incorrect. 50Where a professional report only "flags" a potentialproblem that may affect the interests of a company, or wherethe results of a report are themselves open to interpretation,it is another matter entirely as to what extent, beyond makingthe contents of the report known, that the authors of thereport must go in advising the directors. Or conversely, towhat extent the board of directors should go in satisfyingthemselves whether or not to act on the information containedin the report. If a company incurs losses that mightotherwise have been avoided had the information disclosed in49 See C.B.C.A. s. 122(3); 0.B.C.A. s. 134(2) (3); B.C.C.A.s. 143.50 See C.B.C.A. s. 123(4); O.B.C.A, s. 135(4); orB.C.C.A.'s arguably less encompassing provision, s.151(9)(a)(b).26a report been acted upon differently, is it the fault of thedirectors for failing to grasp the seriousness of the problem,or are the authors of the report to blame for not advisingtheir clients properly? The point is well illustrated in therecent Standard Trusco Ltd. affair, where the OntarioSecurities Commission accused Standard Trusco's directors of• releasing a misleading press release with respect to thecompany's fiscal integrity prior to its collapse. Thedirectors of Standard Trustco countered that theresponsibility for the debacle lay with their auditors whothey alledged were negligent in their business practices andhad failed to impress.upon the board the seriousness of theircompany's financial position. Placer Dome executives alsorecently admitted that their company had incurred heavy lossesin their acquisition of Mount Miligan because they had reliedtoo heavily on inadequate geological analysis. 51(a)The inclusion of the words, "with a view" in thestatutory requirement that directors endeavour in theexecution of their duties to promote "the best interests ofthe company", suggests a legislative initiative to broaden therange of potential factors directors may properly consider asrelating to a company's interests. To illustrate this pointby contrast, take for example, the case of Parke v. Daily News Ltd., where the directors of a company which had substantiallysold off its business interests, tried to give the redundant27employees the proceeds from the sale as a gesture of goodfaith. The court held that regardless of how meritorious thedirectors motives were, such conduct did nothing to directlypromote the interests of the company, nor could it be shown tobe, "reasonably incidental to the carrying on of the company'sbusiness." 51In the American case of Dodge v. Ford Motor Co., HenryFord, founder and president of the Ford Motor Company, wasenjoined from carrying out his plan to share some of hiscompany's enormous profits with members of the general publicby reducing the sale price of his cars by ,eighty dollars.Ostrander, C. J. stated that despite Mr. Ford's philanthropicand altruistic sentiments, "[a) business corporation isorganized and carried on primarily for the profit of thestockholders. The powers of the directors are to be employedfor that end. ...it is not within the lawful powers of a boardof directors to shape and conduct the affairs of a corporation50(a) See re: Standard Trustco K. Howlett, "Standarddirectors breached securities laws, OSC alleges" The Golobe & Mail (17 April 1992) B 1; A. Robinson, "OSC says Standardignored warning signals" The Globe & Mail (2 June 1992) B 10;A Robinson "OSC hears tale of turf battle" The Globe & Mail (4June 1992) B 9; K. Howlett & M. Wood, "Standard directors suePeat Marwick: Auditors accused of negligence" The Golobe & Mail ( 5 June 1992) B 1, B 10; A. Robinson, "Palcer Domeshakes its " (8 May 1992) C 1.51 [1962] Ch. D. 927 at 928.28for the merely incidental benefit of shareholders and for theprimary purpose of benefiting others..." 52It is still the case today that directors cannot carry onthe business and affairs of the company totally oblivious tothe legitimate concerns and interests of the shareholders.However, it is generally acknowledged that directors mayconsider any number of factors that do not necessarily ordirectly result in some immediate or tangible benefit for thecompany, so long as there is some reasonable nexus to theinterests of the company as a going concern. 53 Despite thisincrease of judicial and societal acceptance that directorsshould be permitted to consider interests outside thosedirectly connected to the company and its shareholders, the"established case law holds to that directors' conduct mustrelated back to wealth maximization for the company. 54Today's company directors may do well to pay heed to the wordsof Bowen L. J., in Hutton v. West Cork R.R. Co., who advisedthat:52 (1919) 204 Mich. 459, 170 N.W. 668 at 684.53 Although s. 142(2)(a) of the B.C.C.A. may lack thedirect inclusion of the words that the directors may act "witha view to the best interests of the company", one would behard press to say that as a consequence of this ommission therole of B.C. directors is statutorially more restrictive. SeeBerger J.'s comments in Teck Corporation Ltd. V. Millar [1973]2 W.W.R. 385, 33 D.L.R. (3d) 288 (B.C.S.C.) "Teck" at W.W.R.412-13, at D.L.R. 314.54 Iacobucci, Canadian Business Corporations, supra, note14 at 295.29Most businesses require liberal dealings. The testthere again is not whether it is bona fide, butwhether, as well as being bona fide, it is donewithin the ordinary scope of the company'sbusiness, and whether it is reasonably incidentalto the carrying on of the company's business forthe company's benefit.... The law does not say thatthere are to be no cakes and ale, but there are tobe no cakes and ale except such as are required forthe benefit of the company. 55The comments once made by Professor Dodd seem to aptlydescribe the relative balance that has so far made this anissue more for academics than for the courts. Professor Doddstated that:Judicial willingness - which has increased of late- to allow corporate directors a wide range ofdiscretion as to what policies will best promotethe interests of the stockholders, together withmanagerial disinclination to indulge a sense ofsocial responsibility to a point where it is likelyto injure the stockholders, has thus far preventedthe issue from being frepently raised in clear-cutfashion in litigation.The term "directors" generally denotes those individuals55 (1883), 23 Ch. D. 654 (C.A.) at 672-73. See generallyIacobucci, supra, note 7, at 163; L. Getz, "Discretion ofCorporate Management To Do Good at the Expense ofShareholders' Gain - Canadian Corporate Law" (1987-88) 13Can.- U.S. L. J. 1; L. C. B. Gower, "Corporate Control: TheBattle For The Berkeley" (1955), 68 Harv. L. Rev. 1176 at1191-93; A. A. Sommer, "Whom Should The Corporation Serve? TheBerle-Dodd Debate Revisited Sixty Years Later" (1991), 16 Del.J. of Corp. L. 33; A. A. Berle, supra, note 37; Dodd, supra,note 37 at 1153ff; Easterbrook & Fischel, supra, note 30 at1191-92. See also infra, notes 300-03 and accompanying text.56 Dodd, supra, note, 37 at 1157.30who have been formally elected or appointed to a company'sboard of directors. Where however, a person possesses in .substance de facto powers of a director through his or herability to influence or direct company policy, for example, inhow a company might respond to an unsolicited takeover bid,then regardless of the absence of an official title, theindividual can be deemed under the prevailing corporatestatute to be a director. The intent of such a provision isto ensure that those who have the power to affect themanagement of the business or affairs of a company will beheld accountable for the proper exercise of such powers. 57Although now prescribed by statute, Anglo-Canadianjurisprudence has traditionally maintained that it is theresponsibility of the directors and not the shareholders, torun the company. The courts have ardently and consistentlyarticulated a general policy of judicial non-intervention whenit comes to questions relating to internal management policiesof a company. 58 Such judicial deference can be traced as57 See C.B.C.A., s. 2(1), which states that a "director"means a person occupying the position of director by whatevernamed called...".See also 0.B.C.A., at s. 1(16), and B.C.C.A.,s. 1.58 See Iacobucci, supra, note 7 at p. 162. B. Cheff ins,"The Oppression Remedy In Corporate Law: The CanadianExperience" (1988), 10 U. Pa. J. Int'l Bus. L. 305 at 307.In the United States, judicial deference to director'smanagement decisions found expression in the legal doctrineknown as the, Business Judgment Rule, see J. L. Howard,"Fiduciary Obligations Directors And Officers" in FiduciaryObligations, Materials prepared for a Continuing Legal31far back to at least 1797, with the case of CharitableCorporation v. Sutton. 59Underpinning the courts' reluctance to become involved inthe management decisions of directors, may in part be based onwhat was then a prevalence within the judiciary ofmajoritarianism. 60 Majoritarianism is the notion that thedirectors would represent the interests of the majority of theshareholders who had elected them to office, and it was theinterests of the majority that was to be considered paramountin forging company policy.Generally this judicial restraint was premised on avariety of beliefs. In part the courts maintained that theylacked the jurisdiction to intervene into the internal affairsEducation seminar (Vancouver: The Continuing Legal EducationSociety of British Columbia, April, 1989) at 26 E.R. 642, per Spector, supra, note 11 at 143. Seehowever Fraser v. Whalley (1864) 71 E.R. 361 at 369, where thecourt found that the directors had breached their fiduciaryduties by attempting to issue shares on the basis of anobsolete shareholders' resolution. What is interesting in thisdecision was that the court's determined that what is in theinterest of the company was best left to be decided by theshareholders. Vice-Chancellor Sir W. Page Wood stated, "I saynothing on the question whether the policy advocated by thedirectors,...is the more for the interest of the company. Thatis a matter wholly for the shareholders."60 J. G. MacIntosh, "Minority Shareholder Rights In CanadaAnd England: 1860-1987" (1989), 27 Osgoode Hall L. J. 561 atparticularly 597-605. See also P. Anisman, "Majority -Minority Relations in Canadian Corporate Law: An Overview"(1987-88), 12-13 Can - U.S. L. J. 85 at 60 86, 92.32of the company and that the directors, not the courts,possessed the business acumen and intimate knowledge of theparticular needs of the company to determine what was in itsbest interests. 61 Professor R. W. Parsons stated once, inrespect to directors' duty of care that:Judges, we are told, are equipped to assess goodfaith but generally they lack the commercialexperience on which to found the fine distinctionswhich would be called for if the law imposedsomething more than a relaxed standard of care.Reassuring observation is offered to the effectthat so long as the law ensures that directors'hearts are pure, it may not matter that somedirectors are incompetent. 62Additionally, it was also felt that it would be unethicaland counterproductive in persuading qualified individuals tocome forth to act as directors if the courts were, with thebenefit of hindsight, to second guess the decisions made ingood faith by the directors. 63 To this end, actions broughtImpugning the management decisions of a board of directorstypically received curt dispatch by the judiciary.The following three cases of, Automatic Self-Cleansing61 See Welling, supra, note 42 at 346-47 & note 148.62 "The Director's Duty of Good Faith" (1966), 5 Melb. U.L. Rev. 395, cited in J. B. Harper, and A. A. Browne, "TheDuties and Liabilities of a Director in 1973" (1973), 47 Aust.L. J. 447 at 447-48.See Farrar, supra, note 1 at 19; Spector, supra, note11 at 135-37.33LiatelcEte Co. Ltd. v. Cuninghame 64 , Re Smith v.Fawcett Ltd. 65 , and Harlowe's Nominees Pty. Ltd. v. WoodsideLakes Entrance)  Oil Co. N. L. 66 , will suffice to brieflyillustrate the point of the continual judicial reaffirmationof the import of the board of directors' role in managing thebusiness and affairs of a company.In Automatic Self-Cleansing Filter Syndicate Co. Ltd. v.Cuningham, one dominant shareholder, in his determination tohave the assets and undertaking of the company sold off,orchestrated the passing of a shareholder's resolution, (witha bare majority) to affect the sale. The directors refused toact on the resolution out of their convictions that the salewould not be in the best interests of the company. At trialand at appeal the courts declined to intervene to force thedirectors to adopt the said resolution. It was the opinion ofthe courts that the directors had been duly delegated theauthority to manage the affairs of the company. It wastherefore, up to the directors and not the shareholders todecide how best that authority would be executed. The onlyway for the shareholders to properly "challenge" the authorityof the directors prior to the expiration of their slated64 [1906] 2 Ch. D. 34.65 Supra, note 40.66 (1969/70), 121 C.L.R. 483, (1968), 42 A.L.J.R. 123(H.C. Aust.).34tenure in office, would be to :cemoye them in accordF, ,:ce with .the prescribed articles of the company. This required passinga special shareholders' resolution with a three-forthsmajority, not merely a simple majority. Warrington J., attrial stated that:It seems to me that if a majority of theshareholders can, on a matter which is vested inthe directors, overrule the discretion of thedirectors, there might just as well be no provisionat all in the articles as to the removal of thedirectors by special resolution. Moreover, pressedto its logical conclusion, the result would be thatwhen a majority of the shareholders disagree withthe policy of the directors, though they cannotremove the directors expect by special resolution,they might carry on the whole of the business ofthe company as they please, and thus, though notable tc•remove the directors, overrule every actwhich the board might otherwise do. 67In Smith v. Fawcett Ltd., the Court of Appeal refused tointervene on the behalf of an executor's petition to force adirector of a company to register a testator's shares of thecompany, in the name of the executor. The director hadoffered to register only half of the shares, the other half heoffered to purchase at a fixed price. The reason given by thedirector was that this arrangement would be in the bestinterests of the company. Lord Greene M.R. stated:67 Supra, note 64 at 38.35In the present case the principal sfirector hassworn an affidavit which, if accepted, makes itclear that, whether rightly or wrongly, thedirectors have bona fide considered the interestsof the company and come to the conclusion that itwould be undesirable to register the transfer ofthe totality of these shares. [The directors) must exercise their discretion bona fidein what they consider - not what a court may consider -is in the interests of the company, and not for anycollateral purpose. 69Harlowe's Nominees Pty Ltd, v. Woodside (Lakes EntrancqlOil Co. N. L. is a case where in essence, the plaintiffHarlowe, challenged the issuance of new shares in the companyon the grounds that the company had no need for additional.funds and that the only reason the shares were issued was tostop Harlowe from increasing its influence within the companythrough open market purchases of the company's shares. TheCourt of Appeal upheld the decision at trial that there was norule at law that says shares may only be issued when there isa capital need. The directors could consider the future needsof the company as well, so long as the directors exercisedtheir powers bona fide in the interests of the company. 70The High Court held that:Supra, note 40 at 309.69 Ibid. at 306.Supra, note 66 at C.L.R. 493.36Directors in whom are vested the right and duty e7)fdeciding where the company's interests lie and howthey are to be served may be concerned with a widerange of practical considerations, and theirjudgment, if exercised in good faith and not forirrelevant purposes, is not open to review in theCourt. 71Notwithstanding a traditional disinclination on the partof courts to become involved in questions relating to theinternal management of a company, courts were and remain, verymuch inclined to intervene in the internal affairs of acompany where there are substantiated allegations that thedirectors have been abusing their powers. 72 Judicialintervention has been traditionally swift where the directorsattempted to use their power over the allotting and issuing ofshares in a company without initially offering such shares toexisting shareholders on a proportionate basis to theiroriginal share holdings in the company. 7371 Ibid. The question is what will the courts consider tobe an irrelevant purpose? See Harper supra note 62 at 448.Iacobucci, supra, note 7 at 163.m See the comments of Buckley J. in Hogg v. Cramphorn,[1967] 1 Ch. 254, [1966] 3 All E.R. 420 at C.h. 270-71. Butsee Teck, supra, note 53 at D.L.R. 315, 328, at W.W.R.413,427-28. See generally Berle, supra, note 37 at 1056-60.CHAPTER TWO - PART IIDIRECTORS AS FIDUCIARIESThat certain situations can evoke special obligations,obligations that we today describe as being fiduciary innature, is a concept centuries old. 74 Over the years anumber of various types of relationships have been recognizedand categorized as typically eminating fiduciary-likequalities. Presently the field of fiduciary law is enjoyinga "tremendous surge in academic interests". 75What is important to note with respect to theestablishment of fiduciary obligations is that, despite thefact that there are generally recognized and acceptedcategories of fiduciary relationships, whether a fiduciaryduty exists or not is highly dependent on the particularcircumstances of any given case. J. C. Shepherd remarkedthat, "[s)implistically put, the law of fiduciaries is abouthow the legal system decides which ...relationships...will be74 The basic concept behind today's modern theory offiduciary law, "...can be traced in the civil law through theCode Napoleon of 1803, to the Institutes of Justinian enactedin the sixth century, and from there to the Twelve Tables ofRome of 450 B.C., ...", J. L. Howard, supra, note 58 at3.1.01-02.75 Craig Orr, "The Changing Nature Of Fiduciary Oligations[sic]: Part I [1987] 1 Cnd. Corp. L. Reporter at C 1. See alsoD.W. M. Waters, "Lac Minerals Ltd. v. International CoronaResources Ltd." [1990] Can. Bar Rev. 454 at 456.38a^treated as fiduciary and enforced in. law." 76 (emphasiesShepherd's) Despite what the parties in a relationshipperceive to be their legal obligations, where in substancesthe relationship is fiduciary in character, the lawautomatically deems the requisite duties, obligations andinterests upon the participants involved. In essence then,fiduciary relationships are fact based determinative. T7Correspondingly, relationships that are typically consideredfiduciary in nature may on further investigation, not befiduciary after all. 78 Laskin J. (as he was then) stated inCanadian Aero Service Ltd. v. O'Malley that, "[a]s in othercases in this developing branch of the law, the particularfacts may determine the shape of the principle of decisionwithout setting fixed limits to it." 79Three questions typically evolve around potentialfiduciary relationships:76 Book review of Fiduciary Duties in Canada, by MarkVincent Ellis (1990), 69 Can. Bar Rev. 398 at p. 399.77 J. L. Howard, supra, note 58 at 3.1.02, 3.1.08. InFarnham v. Fingold [1972] 3 O.R. 688 (Ont. H.C.J.) at 696,Morand, J. commented (after he had reviewed some of theleading cases on point) that whether or not a fiduciary dutywas owing and to whom it was owed, is a matter of fact to bedetermined at by the courts.78 J. C. Shepherd, The Law Of Fiduciaries (Toronto: TheCarswell Company Ltd., 1981) at 21. J. L. Howard, supra, note58 at 3.08.Supra, note 47 at S.C.R. 619.391. In the particuldr circumstances does a fiduciaryrelationship exist?2. If yes, what is the scope of that duty?3. Did the fiduciary act within the scope of his duty incircumstances where his interest or duty to a thirdperson might be in conflict? 80Fiduciary^relationships^share^certain^commoncharacteristics involving notions of trust and confidence.Specifically, fiduciary duties consist of loyalty, good faith,and avoidance of a conflict of duty, and self-interest. 81Of all demands placed upon fiduciaries over the years, none isso strictly enforced by the courts than the duty of goodfaith. 82 Professor Berle once said that, [t]he moment,however, that "good faith" is introduced into the picture thefiduciary principle is raised." 83 Fiduciaries must neverplace their own interests ahead of, or derive personal gainfrom, those whom they are to serve. Nor must a fiduciary letso J. L. Howard, supra, note 58 at 3.1.04-05.81 See Canadian Aero Service Limited v. O'Malley supra,note 47 at S.C.R. 610. J. L. Howard, ibid. at 3.1.04; P. S.Glennie, "Fiduciary Duty Doctrine Extended by Courts" (Apr.1987) 4 Bus. & Law 25.82 I. Feltham & W. R Rauenbusch, "Directors' And Officers'Liablities In Canada" (1975-76) Can. Bus. L. J. 321 at 324.83 Supra, note 37 at 1054.40himself or herself be placed in a position that couldcompromise his or her obligations with a third party. 84The role of a director in a company, barring anyextraordinary circumstances, falls squarely within theconstruct of a fiduciary. 85 John L. Howard commented that,"for centuries there has been no doubt that corporatedirectors and officers are fiduciaries." m J. B. Harper andA. A. Brown once stated, "...the law has consistently treateda director as standing in a fiduciary relationship to hiscompany. The courts may not have been consistent as to theprecise fiduciary category to which a director belongs. Butthere is a unanimous view that he is a fiduciary of somekind." . 87It may be said that directors are fiduciary, not onlybecause they act in an agency capacity, 88 ^also becauseSee the commentsv. International Corona(1989) 61 D.L.R. (4th)(2d) 1, 44 D.L.R. (4th)(4th) 504 (H.C.J.), atof La Forest J. in Lac Minerals Ltd. Resources Ltd,.., [1989) 2 S.C.R. 574,14., 69 O.R. (2d) 287; affg 62 O.R.592; affg 53 O.R. (2d) 737, 25 D.L.R.S.C.R. 646-47.85 See Welling, supra, note 42 at 380-81. Other examplesof fiduciary relationship would be, trustee-beneficiary,solicitor-client, partnership, see generally the decision ofSopinka J., in Lac Minerals Ltd., v. International CoronaResources Ltd., ibid. at 586-629.86 Supra, note 58 at Supra, note 62 at 448.8s ^will be said about directors as agents below.41the powers afforded directors to manage the business andaffairs of the company are quintessentially fiduciary innature. Craig Orr succinctly put it:There is no doubt that a company director is afiduciary vis-a-vis the company. There are cogentreasons for that. The director has tremendous powerto affect the interests of the company, and theusual contract and tort remedies do notsufficiently protect the company's interests. Thecompany is therefore vulnerable and at the mercy ofthe directors. This vulnerability is increasedbecause the directors are entrusted with suchextensive powers...The company has no directcontrol over how the directors exercise theirdiscretion in these areas and that is why the lawsteps in and imposes on the directors a duty toexercise their power only in what they honestlyconsider to be [in) the interest of the company. 6vProfessor Welling too has commented on this issue,stating that:It has long been recognized that corporatedirectors owe fiduciary obligations to theircorporations. Varying reasons for this have beenadvanced, but the most simple remains the mostcompelling: the board of directors, as thetheoretical and sometimes practical "brain" of thecorporate organism, exercises enormous power overcorporate de9°stiny. Each member of the board is afiduciary. It is because there exists within the purview of89 "The Changing Nature Of Fiduciary Obligations: Part II"(Jan. 1988) 1 Cnd. Corp. L. Reporter C 13 at C 15. See also J.L. Howard, "Fiduciary Relations In Corporate Law", supra, note42 at 14.90 Supra, note 42 at 381.42director's authority to manage the company, such a wide rangeof powers, that there exists the potential threat of abuse atthe hands of unscrupulous directors, or officers. Over theyears the courts have intervened to enforce fiduciarystandards on wayward directors, ensuring that the powers givento them are executed in the interests of the company only, andfor no collateral or extraneous purpose. 91When a company is confronted with a takeover bid, the lawprimarily wants to ensure that whatever the directors decideto do in response to the bid, they act "properly". Which isto say that they act bona fide and legally in attempting topromote the interests of the company. The focal point ofdirectors' responsibilities in any corporate control contestmust be that they act, and be seen to act, with the utmostgood faith towards the company. As Professor Gower pointsout, "[t]he general principle upon which these duties arebased is clear and simple. Directors, once their appointmentstake effect, are fiduciaries and must therefore display theutmost good faith towards the company in their dealings with91 Feltham, supra, note 82 at 324. Brian Cheffins in hisarticle "Law, Economics And Morality: Contracting Out OfCorporate Law Fiduciary Duties" (1991) 19 Can. Bus. L. J. 28,said in reference to J. L. Howard's article, "FiduciaryRelations In Corporate Law", supra, note 427, "that fiduciaryduties are primarily a moral concept which courts must applyto constrain potentially abusive exercise of discretion bydirectors and officers."43it or on its behalf." 92In the decision of the Privy Council in Cook v. Deeks (onappeal from the Supreme Court of Ontario), the Court heldthat, where the directors used their position as managers andthe reputation of their company to secure for themselves, tothe exclusion of the company, a contract, they must hold thebenefits of that contract on behalf of the company. Theimportant point to take away from the Privy Council judgmentwas the fact that the Court did not accept that the directors,who were in a position of control over the company, had theabsolute right to decide as a question of policy, that theircompany was not in a position to act on the contract. 93In Regal  (Hastings) Ltd. v. Gulliver, 94 the directorsof the defendant company had used their personal funds toassist in the financing of the company's purchase of shares inits subsidiary. The Court held that upon the sale of suchshares any profit made belonged to the company and not to the92 Supra, note 45 at 575. In Ivanhoe Partners v. NewmontMining Corn., 535 A 2d (Del. 1987) 1334 at 1345, the courtdescribed directors' obligation in part, to be "...anaffirmative duty to protect the interests of the corporation,but also an obligation to refrain from conduct which wouldinjure the corporation and its stockholders or deprive themfrom profit or advantage. In short, directors must eschew anyconflict between duty and self-interests."[1916) 1 A.C. 554 (P.C.) at 563.94 [1942] 1 All E.R. 378 at 389. (H.L.).44directors. - This case demonstrates how important it is fordirectors to clearly distinguish between dealings or eventsthat arise as a result of their connection with the company asdirectors, and those that are totally unconnected with thecompany or their office as directors. With respect to theformer, the directors will be found to be in a fiduciaryposition vis-a-vis the company and any benefits incurred bythem will be deemed to be held in trust for the benefit of thecompany.The Supreme Court of Canada's decision in Canadian AeroService Ltd. v. O'Malley, found that the duty of good faith isa composite of two important factors. One, that directors actbona fide for the benefit of the company. And, two, eventhough the directors may in fact have acted bona fide for thebenefit of the company, they must not allow themselves to fallinto a situation in which their interests may possiblyconflict with those of the company. 9s  as waspointed out by Montgomery J. in Olympia & York EnterprisesLtd. v. Hiram Wallker Resources Ltd., "[i]t matters not whenthe directors act in the best interests of the company and ingood faith that they also benefit as a result." 96 Incontrast, see Elmo Corporation Ltd. v. Nova Scotia Savings & Loan, where Richard J. held, (in respect to directors' powers95 Supra, note 47 at S.C.R. 606-07.96 (1987), 59 O.R. (2d) 254 at 271.45to issue shares in the context of an unsolicited takeover bid)that for the directors to discharge the burden that they hadacted bona fide, "...the directors must be able to show thatthe considerations upon which the decision to issue [shares]was based are consistent only with the best interests of thecompany and inconsistent with any other interests." 97Richard J.'s test, it has been argued, places an untenableburden for target directors to discharge if taken to itslogical conclusion. This is because any successful defence ofa takeover bid, regardless of how inadequate the bid may haveactually have been, would never be completely inconsistentwith the possibility of self-interests. 98Despite the prodigious development of jurisprudenceconcerning fiduciary laws generally, there still existsambivalence as to what exactly target directors should bedoing in the proper execution of the dutiec of their officewhen they are responding to an unsolicited takeover bid. Ithas been said that, "[n)owhere are fiduciary principlesapplied in a more complex or difficult context than the moderncorporation". 99 La Forest J., in Lac Minerals Ltd. v.97 (1987), 78 N.S.R.(2d) 91, (1987) 35 B.L.R. 149 at 261(S.C.); aff'g 79 N.S.R. (2d) 29 (C.A.).98 See Howard, supra, note 7 at 67; St. Patrick Baxter,supra, note 33 at 88. But see Orr,"Part II" sum-a, note 89 atC-16.99 Shepherd, supra, note 78 at 347.46International Corona Resorces Ltc  t,teelared that, "ft3herewere few legal concepts more frequently invoked but lessconceptually certain than that of the fiduciary relationship. " 104Gore-Browne On Companies can be seen to concurred with thisgeneral sentiment with respect to the present state of the lawas it applies to directors as fiduciaries, where it is statedthat, "[t]he form in which director's fiduciary duties areexpressed is that of a number of general laws and statutoryrules, varying greatly in their range of application and atmany points overlapping with each other. The lack of anyprecise and logical pattern makes orderly exposition of theserules difficult...." 101Richard J. succinctly summed of his feelings on thismatter in Exco Corp. v. Nova Scotia Savings & Loan Companysaying that, "[t]he question of the [fiduciary) duty of adirector and the considerations which are deemed proper in theexecution of that duty have been the subject of myriaddecisions. There appears to be no line of authority which .clearly delineates the scope of the duty. Indeed, this areaof the law seems to be a morass of conflicts andloo Supra, note 84, at S.C.R. 643-44. See also La Forest'scomments at S.C.R. 644ff.101 (Bristol: Jordan & Sons Ltd., 1984) 43rd ed. vol 2, at27-28.47inconsistenc ies" . 102Acknowledging that a director is a fiduciary is only astart to a far more complex question. It was once espousedthat, "...to say that a man is a fiduciary only beginsanalysis; it gives direction to further inquiry. To whom ishe a fiduciary? What obligations does he owe as a fiduciary?In what respect has he failed to discharge these obligations?"And what are the consequences of his deviation from duty? 103Finally, Michael St. Patrick Baxter referred to thestatus of a director as fiduciaries as lacking in meaning andwas simply an amorphous concept. 104 In support of thisproposition, Mr. St. Patrick Baxter cites the comments made byP.D. Finn that, "the term "fiduciaries" is itself one of themost ill-defined, if not misleading terms in our law." 105102 Supra, note 97 at B.L.R. 255-56, at A.P.R. 161.See also Orr,"Part I" supra, note 75 at C-3.103 Per Mr. Justice Frankfurter, Securities and Exch.Comm'n v. Chenery Corp., (1942) 318 U.S. 80, at 85-6.104 Supra, note 33 at 66.105 Ibid. at note 17.48CHAPTER THREETHE  "PROPER" EXERCISE OF DIRECTORS' POWERS THE  TECK TEST APPROACHOne question that has pre-occupied the courts over theyears, is how to ensure that unscrupulous directors are noteasily able to pervert the use of their authority for theirown personal welfare or for the interests of person or personsunconnected with the company and the legitimate rights ofshareholders.As a general rule, it has not been practical for thecourts to try and set out with any real degree of specificity,how, when and where the powers afforded directors are to beused. 106 However, when called upon to adjudicate caseswhere it has been alleged that directors were abusing theirpowers, the Anglo-Canadian judiciary has maintained anapproach encompassing not only traditional fiduciary notions,but also, it has sought to limit the ambit of the impugnedpower within defined limits. This was done by the courtsattempting to assess the use of the power within a rigidanalytical framework which seeks firstly, to categorize106 See Howard Smith Ltd. v. Ampol Petroleum Ltd., supra,note 41 at A.C. 835; at 1 All E.R. 1134.49whether the type of power exerc1t4ed was a power conferred uponthe directors, and if so, whether the it was utilized for thepurpose for which it was granted. 107 Under this approach,regardless of whether the directors acted in a manner whichthey honestly considered to be in the best interests of thecompany, if they exercise their powers outside of theseperceived limits, their actions would be struck down as beingimproper. 108 This juridical approach to assessing thepropriety of directors conduct is generally referred to as the"proper purpose test" or "proper purpose rule". 109In one way, the "proper purpose test" would appear to bea rather convenient and manageable approach for the j ,Ad:ciaryto take in attempting to keep the exercise of dire;.;'Lors'107 See generally, Haddon, supra, note 14, at 587-89;Welling, supra, note 42 at 336-356; Farrar, supra. note 1 at27ff; St. Patrick Baxter, supra, note 33 at 77-88; B. V.Slutsky, "Canadian Rejection Of The Hogg v. Cramphorn"Improper Purpose" Principle - A Step Forward?" (1974) 37 Mod.L. Rev. 457.108 Whether or not the company's shareholders can vote to"approve" a so-called improper exercise of directors' powersis a matter of some debate and will not be further addressedhere. See generally S. M. Beck, "The Shareholders' DerivativeAction" [1974) Can. Bar Rev. 159 at 175; Iacobucci, "CanadianBusiness" supra, note, 14, at 298 & note 302; Iacobucci,supra, note 7 at 163- 64; Welling, supra, note 42 at 430 &note 416.109 It has also been referred to as the proper purposedoctrine, and the collateral purpose rule, see F.Iacobucci,"The Exercise of Directors' Powers: - The Battle of AftonMines", (1973) 11 Osgoode Hall L. J. 353 at 364.50powers in check. No doubt, directors must be required inthe execution of their duties to act properly, however one canquestion whether the "proper purpose test" is an appropriate,or probative means of trying to assess the propriety ofdirectors' conduct when responding to a corporate controlsituation such as an unsolicited takeover bid. 111 BergerJ., in deciding the now famous case of Teck Corporation Ltd. v. Millar, felt that it was not. 112Tegk marked a major turning point, at least in Canadianjurisprudence, in considering the role of directors inmanaging the business and affairs of a company in corporatecontrol contests. In rejecting the more restrictive "properpurpose test" approach, Berger J. argued that deciding whetheror not the actions taken by a director were "proper" or"improper", was better understood within the construct oftraditional considerations of the directors' duty of goodfaith. Under this approach, directors will act for an improperpurpose only if they are not genuinely, "bona fide" motivated110 See Slutsky, supra, note, 107 at 460.See Welling, supra, note 42 at 338-39 & note 126.112 Supra, note, 42 at D.L.R. 307-317, at W.W.R. 404-416Professor Welling strongly concurs with the rejection of the"proper purpose test", see supra, note, 42 at 355. See alsoSlutsky, supra, note 107 at 460. But see Orr,"part II", supra,note 89 at C-17. Interestingly, the approach taken by BergerJ. in Teck had been addressed previously in Canada by HarveyC. J. A. in Spooner v. Spooner Oils Ltd., [1936] 2 D.L.R. 634at 636, [1936] 1 W.W.R. 561 at 562 (Alta. S.C.A.D.).51in taking the course of action they did, for primarypurpose of advancing the best interests of the company. 113Briefly, the facts in Teck are that a company calledAfton Mines, "a junior" mining resource company, was in theprocess of developing its Kamloops copper mining property. Inorder to do this, it had to eventually enter into anarrangement with a more established mining company, "a major",which possessed the financial and technical wherewithalnecessary to bring their property into production. (Such anarrangement is referred to in the industry as the "ultimatedeal".) After considering Bethlehem Copper Ltd., Aftoneventually began negotiations with Placer Developments Ltd.,as its best option, thereby rebuffing Teck's,for the "ultimate deal".^Undeterred, Teck continued to113 Although broadly embraced as a progressive judgment,there is one particular aspect of the Teck decision whichgives occasion to some criticism. This being that Berger J.found it appropriate that the initial burden of proof that thedirectors did not act bona fide, be first discharged by theplaintiff. An alternative approach would be to shift onto theshoulders of the target directors the initial burden of proofthat they acted properly in employing the defensive tacticsthey did. This approach has a certain intuitive and logicalappeal to it as it recognizes the inherent potential for self-dealing on the part of unscrupulous directors when respondingto an unwelcome takeover bid, and removes the potentialinequities of establishing too onerous a burden for acomplainant shareholder that could bar any effective remedy.This approach has in the context of defensive tacticsimplemented in the context of an unsolicited takeover bid bythe target directors, generally gained acceptance in a numberof states in the U.S., and was advanced here in Canada in Exco Corporation Ltd. v. Nova Scotia Savings & Loan, supra, note97.52purchase shares of Afton on the open market in order to obtaineffective control of the company, after which Teck would electindividuals of its choosing onto Afton's board of directors.The issue at trial was, that before Teck could make goodon its plans at the upcoming special shareholders' meeting ithad called, the directors of Afton entered into the "ultimatedeal" with Placer. In order to ensure that Teck could notinterfere with these arrangements, a block of Afton's shareswere issued to Canadian Exploration Ltd. ("Canex") a wholly-owned subsidiary of Placer, thereby rendering Teck into aminority position. Teck brought a derivative suit againstAfton's board of directors to have the share issuance to Canexrendered null and void, 114 on the grounds that Afton'sdirectors had acted for the improper purpose of attempting toaffect control within the company. Given the Anglo-Canadiancase law precedent up to this point, Teck's position wascompletely tenable. 115 Based on prevailing case law itshould not have mattered that Afton's directors bona fidebelieved that the Placer deal would be better for theircompany than a similar deal with Teck. 116(a)114 On this point see the comments of Professor Slutsky,supra, note 107 at 458.115 See Welling, supra, note 42 at 343.53Instead, Berger J. found that Afton's directors had theresponsibility to manage the business and affairs of thecompany as they saw fit until such time as they were removedfrom office, 116 therefore Afton's directors were,...entitled to consider the reputation, experience andpolicies of anyone seeking to take over the company. If theydecide, on reasonable grounds, that a take-over will causesubstantial damage to the company's interest, they areentitled to use their power to protect the company." 117Berger J. derived support for his conclusion from the judgmentrendered in Smith v. Fawcett Ltd. 118 stating that:The impropriety lies in the directors' purpose. Iftheir purpose is not to serve the company'sinterest, then it is an improper purpose.Impropriety depends upon proof that the directorswere actuated by a collateral purpose; it does notdepend upon the nature of any shareholders' rightthat may be affected by the exercise of thedirectors' powers. 119116(a) Despite Afton's preceptions of Teck 's businessaccumen in the mining industry, Teck's corproate performancehas been favourable over the years since, doubling its assetsto $1 billion between 1980 -89 and tripling its profits. E.Clifford "Teck shares not in bargain territory yet" The Globe& Mail (26 feb. 1992) B 7.116 Teck,supra, note 53 at D.L.R. 330, at W.W.R. 429-30.117 Ibid. at D.L.R. 317, at W.W.R. 415-16.118 Supra, note 40 at 306.119 Teck, supra, note 53 at D.L.R. at 312, W.W.R. 410-11.54Berger J. also determined that within the miningindustry, "ultimate deals" inevitable involve a junior issuingto a major, a significant proportionate percentage of itsshares, and that the dilution of Teck's position was onlyincidental to Afton's board of directors' primary objective tosecure the best possible deal for the company. 120In determining whether the directors acted bona fide inthe actions they took, Berger J. required that there bedemonstrable evidence - reasonable grounds, that the perceivedthreat posed to the company would cause substantial damage toits interests. 121Based on the approach taken by Berger J. in Teck, onemight expect that an argument could be fashioned, that whenfaced with an unsolicited takeover bid which, on reasonable120 Ibid. at D.L.R. 329-331, at W.W.R. 429-31. Berger J.'sreference to "primary purpose" was necessary to distinguishTeck from cases like Hoag v. Cramphorn, AMPtra, note 73, whereit was found the directors had issued shares in theircompanies primarily for the purpose of altering control. SeeHoward, supra, note 7 at 64-65.121 With respect to Berger J.'s "reasonable grounds" test,Professor Slutsky, supra, note 107 at 460-61, advocates whathe describes as a more flexible judicial approach fordetermining the propriety of director's conduct in respondingto certain corporate control events. In particular, ProfessorSlutsky argues that the implementation of the equitableprinciple of "conflict of interest and duty" may, because itsobjective qualities, be a superior test to use. This howeverraises the question - what about those corporate incidentswhere the company's best interests would only be served if itsdirectors took steps necessarily placing them in a conflict ofinterests and duty-type situation?55grounds, has been determined would cause sulo-Aantial dco!!=qe tothe interests of the company, the board of directors of thetarget company should be able, in the proper execution of thepowers of their office, to take whatever means are reasonablynecessary to repel the perceived harm from materializing.Whether at present such an argument would prevail in Canada isa matter of some doubt. Although Teck has been referred to orapplied in a number of cases, 122 the Privy Council in thecase of Howard Smith Ltd. v. Ampol Petroleum Ltd. while itapproved of Teck, seemed to indicate that the decision wasunique to the special facts of the case, and that the properpurpose test, albeit a somewhat attenuated version to thatapplied in cases like Hogq v. Cramphorn Ltd., or Bamford v.Bamford, 123 was still a viable judicial doctrine. 124 Aswell, in the fairly recent Canadian case of Exco Corporation 122 Applied in: Shield Development Co. v. Sndyer [1976] 3W.W.R. 44 at 62-4; Olson v. Phoenix Industrial Supply Ltd.(1984) 27 Man. R. (2d) 205 at 209 (Man. C.A.); Re Olympia &York Enterprises ltd. v. Hiram Walker Resources Ltd. (1986) 59O.R. (2d) 254 at 268, 271-2, 37 D.L.R. (4th) 193 at 207, 210-11(Ont.Div. Ct.), aff'd (1986) 59 OR (2d) 280, 37 D.L.R. (4th)219 (Div.Ct.) Referred with approval in: Re Royal Trustco Ltd(No. 3) (1981) 14 B.L.R. 307 at 314-15 (Ont. H.C.); Dixon v.Mereland Exploration Ltd. (1984) 50 A.R. 353 at 361-2;Northern & General Gas Co. v. Hillcrest Collieries Ltd. (59D.L.R. (3d) 533, [1976] 1 W.W.R. 481 at 551; and First CityFinancial Corp. Ltd. v. Genstar Corp. (1981) 125 D.L.R. (3d)30, 33 O.R. (2d) 631 (H.C.).123 Supra, note 73; [1968] 2 All E.R. 655 aff'd [1969] 1All E.R. 969 (C.A.), respectfuly.124 See the comments of Lord Wilberforce, in Howard Smithv. Ampol Petroleum Ltd., supra, note 41, at All E.R. 1135, atA.C. 836-37.36Ltd. v. Nova Scotia  Savings & Loan Co., Richard J., inapproving of Howard Smith v. Ampol Petroleum Ltd.,distinguished Teck and stated that, "I am of the view,however, that the pronouncements in Teck go beyond what wasrequired to decide that case. On a careful review of thefacts it appears tome that what was under consideration therewas a very unusual set of facts which must be somewhat uniqueto the mining industry." 125J. Geoffrey Howard, in his article, "Takeover Defences:A Reappraisal", argues that the decision reached in Exco was"totally inconsistent" with the judgment rendered in Teck. 126 J. Geoffrey Howard maintains that there exists in Canadaa vacuum of authoritative precedent as to what is theappropriate role for directors in responding to takeover bidsgenerally. 127 John H. Farrar in his article, "BusinessJudgment And Defensive Tactics" also points out that, "BergerJ. in Teck had referred to the inconsistency in earlierCanadian authority. Exco casts doubt on Teck and emphasizesthe lack of coherence in the Canadian authorities." 128Frank Iacobucci concluded his article, "The Exercise Of125 Supra, note 97 at B.L.R. 263-64, and see the commentsof Richard J. at B.L.R. 258-259.126 Supra, note 7 at 63.127 Ibid. at 74.128 Supra, note 1 at 34. See also St. Patrick Baxter,supra, note 33 at 86-87.57Directors' Powers: - The Battle Of Afton Mines" advising thereader that the issuance of shares to thwart a takeover bid,outside of a factual situation similar to that in Teck, wouldbe exceptional. The validity of such a share issuance wouldhave to be grounded in the existence of unequivocal evidencethat the best interests of the corporation would be served.129It is to this issue - "the best interests of thecompany", and to what may be said to be the "appropriate" roleof target directors in endeavouring to promote the bestinterests of the company when responding to an unsolicitedtakeover bid, that will be discussed next.129 Supra, note 109 at 372.58CHAPTER FOUR - PART ITHE "APPROPRIATE" ROLE OF A BOARD OF DIRECTORSIN RESPONDING TO AN UNSOLICITED TAKEOVER BIDWith respect to publicly traded companies in Canada, whatis, it may be asked, the "appropriate" role of a board ofdirectors in responding to an unsolicited takeover bid?Better, it may be queried whether there is such a thing as an"appropriate" role which directors are obliged to conform towhen confronted with an any corporate control situation. Isit more reasonable to conclude that because of the variedcomplexities of corporate management, a discussion of how aboard of directors ought to respond to an unsolicited takeoverbid must by necessity, be limited to broad generalities ofduties and obligations?The role of corporate directors is typically prescribedin law expansively. With limited exceptions when it comesprocedural matter, 130 little changes when a company becomesthe subject of an unsolicited takeover bid. Notwithstandingthe diversity of character with respect to a corporation's130 In particular disclosure requirements, early warningdevices, minimum bid period, withdrawal rights, pro rate take-up, increased consideration, control block purchase, and stockexchange rule where applicable.59interests, or the vagaries of directors' duties andobligations, it is proposed that in the context of anunsolicited takeover bid, both the interests of a company andthe "appropriate" role of the company's board of directors inresponding to the takeover bid are amenable to a certaindegree of specificity.At the outset of chapter two, it is proposed that despitethe alienability of shares generally, a board of directors inthe proper execution of their duties to manage the businessand affairs of the company, should have the ability to respondto an unsolicited takeover bid where in the opinion of theboard, it would be in the interests of the company to do so.There are a number of intriguing questions that presentthemselves when one begins to address the various incidentalmatters associated with the concept of target directorsresponding to an unsolicited takeover bid they perceive not tobe in the interests of the company. What are these "bestinterests" that the directors are charged with having topromote? How are they defined? To whom are they owed? What,if any, are the confining business principles or parameters ofrelevancy that should be applied in determining what is in theinterests of the company?Of all the possible questions one might encounter in the60discussion of this topic, none appears to be more relevantthan the consideration of what is properly understood by thephrase, "the best interests of the company". It is preciselyhow we interpret the phrase, "the best interests of thecompany" that is central to how we perceive what the role ofdirectors should be in responding to an unsolicited takeoverbid. 131If there were an emerging consensus of opinions as towhat is meant by this phrase, that consensus would be that thedirectors owe their fiduciary obligations in law to thecompany, and "the company" is best understood to mean theinterest of the shareholders as a whole. In turn, theinterests of the shareholders as a whole has been interpretedto mean maximizing shareholder value. 132 Whether or not itcan be said that there is a developing consensus being reachedin respect of this issue, the fact remains that there is aperceptible measure of confusion in Canada surrounding thisissue. Much of the difficulty springs from ambivalenceassociated with the expression "the best interests of the131 See St. Patrick Baxter, supra, note 33 at 69, whoechoed these same sentiments in his article where he stated,11 ... in the determination of whether target directors havedischarged their fiduciary obligations, the defensive measuresof target directors should be judged in light of both theinterests that the directors are required to protect and theinterests that they in fact sought to protect."132 See Iacobucci,"The Exercise of Directors' Powers:- TheBattle of Afton Mines", supra, note 109 at 353-54.61company". 133 Michael St, Patrick Baxter commented that thisissue, more than any other in this field of law, remainsshrouded in an astonishing array of vague judicial andtheoretical generalities. St. Patrick Baxter states that,"[u]nlike the American experience, there are not many Canadiancases dealing with directors' fiduciary obligations inresisting an unsolicited takeover bid. Of those few cases onpoint, even fewer of them have thoughtfully addressed theissue." 134Charles R. Spector, pointed out that:One striking factor in examining Directors'responsibilities in the context of a hostiletakeover in Canada is the paucity of appropriatecase law. ...While there is no shortage ofliterature outlining the duties of Directors ofCanadian corporations in general, the developmentof governing principles in evaluating anddetermining Directors' duties in the context of ahostile takeover is still in its embryonic stage.135In their text Canadian Business Corporations An AnalysisOf Recent Legislative Developments, Frank Iacobucci, MarilynL. Pilkington, J. Robert S. Prichard, have remarked that,"[t]here is some difficulty in determining what are the bestinterests of the company or, in other words, what kinds of133 Harper, supra, note 62 at 449.134 St. Patrick Baxter, supra, note 33 at 76.135 Supra, note 11 at 143.62considerations directors are entitled to take into account inreaching a decision." 136136 Supra, note 14 at 295. See also Sommer, supra 56 at46-56; Shepherd, Supra, note 78 at 347.63CHAPTER POUR - PART IIWHOSE BEST INTERESTS? TO WHOM ARE DIRECTORS OBLIGATIONS OWED? It has become an axiom to say that a director must actbona fide in the best interests of the company. However,where directors are called upon to respond to an unsolicitedtakeover bid, to say that he or she must act bona fide in thebast interests of the company without further exposition iswoefully inadequate and unlikely to instill much in the way ofunderstanding as to what this responsibility exactly entails.What is meant, one might query, by the phrase "the bestinterests of the company". What are these "best interests" ofthe company that directors are charged with the obligation ofhaving to promote? Should directors construe what is meant bythe "best interests of the company", solely from theperspective of how a particular decision on their part islikely to affect the company as a commercial entity separateand apart from any concerns as to what affect such a decisionmay have on the shareholders? Alternatively, should directorsconsider the corporation and its shareholders as separate butequally deserving entities of their consideration? Or is itbetter understood that "the company" and "the shareholders"are one and the same, and that reference to one automatically64subsumes the other? 137In discussing the proper execution of directors'fiduciary obligations, Michael St. Patrick Baxter was of theopinion that, "...the root of the difficulty lies in the factthat the Canadian case law has not articulated the duties ofa director in evaluating and responding to a takeover bid.Consequently, it is difficult to determine what targetdirectors have to do in order to satisfy their fiduciaryobligations." 138When discussing the appropriate role of a board ofdirectors in responding to an unsolicited takeover bid, thenotion that directors are fiduciaries is not per se, theprominent issue, but rather, how as fiduciaries are directorsto properly execute their duties and obligations. Onequestion that is likely to be forthcoming from any directorwhose company has become the target of an unsolicited takeoverbid is, to whom does his or her obligations as a director lie?u7 Other considerations directors may have, may be:- what are the parameters of their authority when consideringwhat may or may not be in the best interests of the company- must the interests of the company be identifiable with theinterests of the shareholders ,- can the interest of a company be distinct from itsshareholders- if the interests of the company and the shareholders are atodds, which of the two conflicting interests should prevail- is the preservation of the corporation's existing charactera legitimate concern of the directors138 Supra, note 33 at 105.65That is, in attempting to determine what is in the bestinterests of the company, to whom is it appropriate for thedirectors to look in evaluating the efficacy of a potentialresponse? Put another way, "[i]f I am a trustee, [of acorporation] who are the beneficiaries of the trust? To whomdo I owe my obligations?" 139Despite criticism to the contrary, 140 it has been said,that the judgment rendered in the case of Percival v. Wright 141stands as authority that directors owe no fiduciary obligationto the shareholders as a general rule of law. Mahon J. statedin the case of Colemen v. Myers, that, "[i]n every ordinaryaspect of the administration of the affairs of a limitedcompany it is essential that the directors be fiduciary agentsof the company alone. The concept of corporate managementwould collapse if there was any general rule that thedirectors were also fiduciary agents of the shareholders. 142In the case of Percival v. Wright, the directors of a139 Dodd, supra, note 37 at 1154, quoting from the text ofa speech given by a Mr. Owen D. Young.140 See generally the comments of Mahon J. in Coleman v.Myers, [1977] 2 N.Z.L.R. 225 (N.Z.S.C.) at 268-274; Gower,supra, note 45 at 573-74. Shepherd, supra, note 78 at 355-56& note 31.141 [1902] 2 Ch. D. 421, 18 T.L.R. 697.142 Supra, note 140 at 273. See also infra note 253 &accompanying text.66company, (Nixon's Navigation Company, Ltd.) at the initiationof certain executors of a deceased shareholder, entered intoan arrangement whereby the executors sold shares of thecompany back to the directors. The directors howeverneglected to inform the executors that they weresimultaneously negotiating a possible deal to sell thecompany, which as the executives later argued, was a breach ofthe directors' fiduciary obligations owed to them. SwinfenEady J., held that:It was strenuously urged that, though incorporationaffected the relations of the shareholders to theexternal world, the company thereby becoming adistinct entity, the position of the shareholdersinter se was not affected, and was the same as thatof partners or shareholders in an unincorporatedcompany. I am unable to adopt that view. I amtherefore of the opinion that the purchasingdirectors were under no obligation to disclose totheir vendor shareholders the negotiations whichultimately proved abortive. The contrary viewwould place directors in a most invidious position,as they could not buy or sell shares withoutdisclosing negotiations....There is no question of unfair dealing in this case. Thedirectors did not approach the shareholders with the viewof obtaining their shares. The shareholders approachedthe directors, and named the price at which they weredesirous of selling. 143A brief review of some of the leading academiccommentators, and of various articles makes the point made bySwinfen Eady J. unmistakably clear:143 Supra, note 141 at 426. See also the comments made byLord Atkin in Bell v. Lever Bros. Ltd. [1932) A.C. 161, at 228(H.L.).67Professor Gower points .out that, "...the fiduciary duties[of directors] are owed to the company and to the companyalone. ...Here it is suffice to emphasise that, in general,the directors owe no duties to the individual members as such,or, a fortiori, to a person who has not yet become a member-such as a potential purchaser of shares in it. This principleis regarded as firmly established by the much-criticiseddecision in Percival v. Wright." 144Professor Welling has stated that, "...legal theory haspersonified the economic enterprise within which corporatemanagers work. This has the effect of making directors andofficers responsible for the funds contributed by, and thebusiness aspirations of, shareholders and creditors withoutmaking them directly responsible to these people as a matterof legal obligation." 145Gore-Browne On Companies similarly states that, "[i]t isan established general rule that, in so far as a director ofa company is bound by fiduciary duties at general law, theseduties are owed to the company only. ...they are not owed to144 Supra, note 45 at 573. With regarded to ProfessorsGower's statement that their is no duty owed to "potentialpurchaser of shares" see Gower, "Corporate Control: The BattleFor The Berkeley supra, note, 55 at 1188-89.145 Welling, supra, note, 42 at 297-98.68the individual shareholders of the company. . .." 144In the article, "The Oppression Remedy In Corporate Law:The Canadian Experience", author Brian Cheffins remarked that,"the general rule was, and continues to be, that directors owefiduciary duties to the corporation and not to shareholdersdirectly." 147Charles C. Spector in his article, "Takeovers And TheDuties Of The Board Of Directors: Comparative Aspects OfAmerican And Canadian Standards", commented that, "[t]here isalso a fundamental difference between Canadian and Americancorporate statute in that in Canada the fiduciary duty ofDirectors is owed to the Corporation and not expressly to itsshareholders. " 148The notion of the directors owing their fiduciary dutiessolely to the company is, at least in part, premised upon twointer-related propositions of law, the first of which is the•agency principle. A company is by obvious necessity, onlyable to act within the world and to conduct its business andaffairs through individuals. Those who act on the behalf of144 A. J. Boyle & R. Sykes, Gore-Browne on Companies,(Bristol: Jordan & Sons Ltd., 1984) at para. 27-8.147 Supra, note 58 at 307.148 Supra, note, 11 at 150.69the company are in law, agents of the conpany. BothProfessors Gower and Welling speak of the necessary roleplayed by a board of directors in transacting corporateaffairs. 149 "[The company] remains an artificial person andcan of necessity act only through the agency of naturalpersons." 150 Traditionally a company's board of directorsis its primary agent. In law agents owe their legalobligations to their principle - translating this into thecorporate scenario, a company's board of directors owes itsduties as agent to the corporate entity as its principal, afortoria, not to the shareholders.The concept of directors as mere agents or servants ofthe company is itself, if taken literally, somewhatmisleading. It has been argued that directors are not simplymere agents for their company, but more so, the board ofdirectors should be seen as the embodiment of the company'swill, making, not simply carrying out, company policy. JohnL. Howard would argue that, "... directors of a corporationare in fact and at law a decision-making organ of thecorporate body. They clearly are not agents and only inextraordinary circumstances could a director bind the149 See generally, supra, note 42; supra, note 45.150 Supra, note 45 at 139. See also the statement of LordSelbourne in Gt. Eastern R. R. Co. v. Turner, (1872/3) 8 Ch.App., 149. at 152; "The directors are the mere trustees oragents of the company..."70corporation to a contract othRr than through the board'scollegiate process." 151"Nor are directors to be construed as simple agents ofthe legally personified corporate entity", Professor Wellingonce commented. 152 "They will from time to time operate asagents of the corporation, in the sense that most corporateactivity is perceived by the outside world as having beenaccomplished through the mechanism of human intervention.They are, however, not simply agents doing the bidding of anomnipotent, though absent, principal. They must exercisetheir powers for the benefit of the corporation, but it isthey who determine what the corporation wished to be done".153Coupled with the agency principle, is the fact that thecourts had traditionally perceived the duties and obligationsof directors as being derived from traditional trust law151 Supra, note 42 at 9.152 Supra, note 42 at 299.153 Ibid. See also the remarks of Sir Richard Collins,M.R. in Automatic Self-Cleansing Filter Syndicate Co.,Ltd. v.Cunninghame, supra, note 64 at 41-42, "It has been suggestedthat this is a mere question of principal and agent, and thatit would be an absurd thing if a principal in appointing anagent should in effect appoint a dictator who is to manage himinstead of his managing the agent."71jurisprudanCe. 154 As such, courts were apt to see directorsas owing their duties to a single beneficiary, that being thecorporation. Professor Gower points out however, that:It is often stated that directors are trustees andthat the nature of their duties can be explained onthis basis. It is easy to see how this idea arose.Prior to 1844 most joint stock companies wereunincorporated and depended for their validity on adeed of settlement vesting the property of thecompany in trustees. Often the directors werethemselves the trustees... .With directors of incorporated companies thedescription "trustees" was less apposite but it wasnot unnatural that the courts should extend it tothem by analogy. ... courts of equity always tendto apply the label "trustees" to anyone in afiduciary position. Nevertheless, to describedirectors as trustees seems today to be neitherstrictly correct nor invariably helpful. In truth,directors are agents of the company rather thantrustees of it or its property. 15'The second proposition as to why in law directors owetheir duties to the corporate entity and not to theshareholders, can be said to be the historical preoccupationof the courts to reaffirm what was an emerging doctrine oflimited liability and the notion that an incorporated company154 See J .L. Howard, "Fiduciary Obligations", supra,note, 58 at 3.1.07-08; Dodd, supra, note 37 at 1146 & note 1referring to Hohfeld's article, "The Individual Liability ofStockholders and the Conflict of Laws" (1909) Col. L. Rev.492, "The laws that today attempt to regulate the duties andresponsibilities of corporate directors were derived fromtrust law."; Shareholders' and Directors' Right, The LawSociety Upper Canada, Dec 10, 1983.155 Supra, note 45 at 571-72.72was in law a distinct person, separate and apart from itsincorporators. 156 Consequently the law refused to considerdirectors as owing any kind of fiduciary obligations toshareholders; the corporation stood between the shareholdersand the directors as the proper recipient of directors' dutiesand obligation. It was the corporation that was the one whocould legitimately complain to the courts for alleged abusesor breaches of directors' duties.Gerald Gillerman surmised that, the establishment of thenotion that the directors owe their obligations to the"corporate entity" and not to the shareholders, may lie in thefact that we have placed so much emphasis in the past on thecorporation being perceived "...as a distinct person inlaw...The corporation was viewed as an ideal body, subsistingonly in contemplation of law:.,." 157Strictly from an etymological perspective, the statutoryrequirement that directors are to discharge their duties witha view to the best interests of the company is intriguing.The operative words being, "the company". Intuitively, theplain meaning of this phrase in the context of an unsolicited156 See Shepherd, supra, note 78 at 350 & note 9, 355-56.See e.g. Salomon v. Salomon [1897] A. C. 22; Pratt v. Bacon 10Pick 123, 125-126 (1830), Smith v. Hurd 12 Met. 371, 384(1847).157 "The Corporate Fiduciary Under State Law" (1980) 3 TheCorp. L. Rev. 299 at 300-01.73takeover bid is that that directorS of 'the target company are"to consider the implications of the bid solely on the basis ofhow it would affect the interests of the company as acommercially viable going concern independent fromconsiderations as to how such an event might impact on theinterests of the shareholders. 158 This however, is not theequitable understanding that this phrase has been given. Toaccept that directors can ignore the interests of theirshareholders to perpetuate some variant interest of thecompany appears to fly against common sense, disregarding thelogical nexus between a company and its shareholders.Professor Louis Loss, described such an interpretation ofdirectors obligations as "a monument to the ability of lawyersto hypnotise themselves with their own creation." 159The reality of the situation is that the company issimply the embodiment of its shareholders through the use oflegal fiction. The corporation is in essence, merely theaggregate of all of its shareholders. "The classical theoryis that the directors' duty is to the company. The company's158 Harper, supra, note 62 at 449.159 "The Fiduciary Concept as applied to Trading byCorporate "Insiders" in the United States" (1970) 33 Mod. L.Rev. 34 at 40-41, as cited in St. Patrick Baxter's article,supra, note 33 at 71 & note 42.74shareholders are the company:. G0 16°^Directors are notsimply seen as the guardians of the corporation's purse, inconsidering the best interests of the company, the directorsare required to consider the interests of the shareholders.It is suggested that it is the interests of the shareholdersthat both confines and defines the duties of directors. Morespecifically, as will be discussed below, it is the legitimateinterests of the shareholders that can be said to be thedeterminative factor in establishing the appropriate role ofdirectors in responding to an unsolicited takeover bid, or toany corporate control situation for that matter. A. A. Sommerput it succinctly when he stated:The best interests of the corporation would be adifficult measure by which to judge the conduct ofdirectors, and the enforcement of such a responsibilitywould be nigh impossible. Virtually any action could insome fashion be justified as in the interests of thecorporation, unlessshareholder interests were aconfining principle. 161If the best interests of company is properly understoodto mean the best interests of the shareholders, is it aninterest that is shared by the shareholders as a whole? Ifso, what is this singular interest unique to all theshareholders? Alternatively, should the directors be160 Per Berger J., in Teck, supra, note 53 at 313,referring to the decision of Boyd C., in Martin v Gibson(1907), 15 O.L.R. 623 at 632. See however Richard J.'scomments in Exco, supra, note 97 at 261.161 Supra, note, 55 at p. 54.75considering the interests of each shareholders individually?If this is the case, what are directors to do if individualinterests of the shareholders conflict? Should the directorsendeavour to strike a balance between conflicting interests,responding to a takeover bid in a manner that they determineto be the most equitable? Arguably, it is the interests ofthe shareholders as a whole, that is the relevant issue forthe directors to attend to when considering how to respond toan unsolicited takeover bid.The principle that it is the welfare of the shareholdersas a whole that should legitimately be the concern ofdirectors In determining corporate policy was well establishedin the case of Al] en v. Gold Reefs of West Africa Ltd, 162In this case, the English Court of Appeal sanctioned theappellate company's passing of a special resolution. Theimpugned resolution altered the articles of the company sothat a lien could attach against a shareholders' fully paidshares, for shares held that were not paid in full. The Courtheld that where such alterations of a company's articles wasmade in good faith, it was not open for shareholders (in thiscase the executors of a deceased shareholder) having purchasedtheir shares knowing of the company's powers to alter itsarticles, to complain if such an alteration was later made.With respect to the company's power to alter its articles, and162 [1900] 1 Ch. D. 656 (C.A.) at 671.76Indeed of all company's powers, Lindley. M.R., stated:The power thus conferred on companies to alter theregulations contained in their articles is limitedonly by the provisions contained in the statute andthe conditions contained in the company'smemorandum of association. ...the powerconferred... must, like all other powers, beexercised subject to those general principles oflaw and equity which are applicable to all powersconferred on majorities and enabling them to bindminorities. It must be exercised, not only in themanner required by law, but also bona fide for thebenefit of the company as a whole, and it must notbe exceeded." (emphasis mine.) 163Byrne J., reaffirmed the above noted statement of LordLindely in Punt v. Symons & Co., Ltd.. 1/4Greenhalgh v. Arderne Cinemas, Ltd., 165 a caseinvolving the sale by the majority of their interests in acompany (Arderne Cinemas), the minority shareholders sought tostop the transaction on the grounds the terms of the saleresulted in the perpetration of fraud upon them, in that a feewas to be payable out of the company's own resources tocertain departing management recipients as a consequence ofthe sale. Further it was argued that the planned sale wouldnot advance the interests of the company, rather it would onlyhurt the interests of the minority shareholders. Lord163 Ibid. at 671.164 [1903] 2 Ch. D. 506 at 512.165 [1950] 2 All E.R. 1120; [1951] Ch. D. 286. (C.A.).77Evershed M.R., disagreeing with the findings at trial that theterms of the sale amounted to fraud upon the minority, turnedhis attention to the authority of the board of directors toalter the articles of the company in the bona fide exercise oftheir powers. Evershed M.R., stated that, "...'bona fide forthe benefit of the company as a whole' ...the phrase, 'thecompany as a whole', does not (at any rate in such a case asthe present) mean the company as a commercial entity asdistinct from the corporators. It means the corporators as ageneral body." 166Plowman J., in Parke v. Daily News Ltd., also recognizedthat, as in the case of Greenhalqh v. Arderne Cinemas Ltd.,that what is meant by the benefit of the company is, thebenefit of the shareholders as a general body. 167In Martin v Gibson, Boyd, C. stated, "[n]ow, the personsto be considered and to be benefitted are the whole body ofshareholders ...all in fact who, being shareholders,constitute the very substance (so to speak) of theincorporated body." 168Academics and commentators have reaffirmed that the166 Ibid., at p. 1126.167 Supra, note 51 at W.L.R. 594.168 Supra, note 160 at 632.78directors are to strive to promote.the interests of theshareholders as a whole. In Palmer's  Company Law text, itstates that:Directors are under a duty to act bona fide in thebest interests of the company. Although directors'duties are owed primarily to, and are enforceableby, the company and not to individual shareholders,the company is defined in equity usually byreference to the shareholders as a whole and not byreference to the company as an entity distinct fromits members. 169Professor Robert Pennington, commented that, "Directors'powers are given to them to be used for the benefit of thecompany, that is the benefit of the shareholders as a whole1, 170• • .Professor Berle wrote that, "[b]ut where powers areconceded to the management...to act for the corporation as awhole, the obvious, if tacit, assumption is that these powersare intended to be used only on behalf of all. They aredistinctly not intended to be granted for the purpose ofbenefiting one set of participants against another. To do sowould be to violate every intendment of the whole corporatesituation." 171169 (Sweet & Maxwell: London, 1992) Vol. No. 1, at 8104.170 R. Pennington, Company Law, as cited in A. A. Sommer'sarticle, "Whom Should The Corporations Serve? supra, note 55at 48.171 Supra, note 37 at 1073.79Although Professor Gower is nct as adamant .that theinterests of the company strictly equates to the interests ofthe shareholders as a whole, he generally expresses similarsentiments on this point stating, "[b]ut what exactly is meantby saying that they [directors] must act in the interests ofthe company? Despite the separate personality of the companyit is clear that directors are not expected to act on thebasis of what is for the economic advantage of the corporateentity, disregarding the interests of the members". 172(emphasis Gower's)In the context of a takeover bid, it is advanced that thestatus quo remains constant, that is, the best interests ofthe company continues to properly be understood to mean theinterests of the shareholders as a whole. John Stransman andAnthony A. Greenwood, have stated the best interests of thecorporation means, [i]n the context of take-over bidscenarios, ... the best interest of all its shareholders."173172 Supra, note 45 at 577. See also Gower, "CorporateControl: The Battle For The Berkeley", supra, note 55 at 1188-89.in "Appropriate Actions for Directors", supra, note, 43at 62.80CHAPTER FOUR - PART IIIPOTENTIAL CONFLICT OF DIRECTORS' DUTIES At the outset of Part II of this chapter, it wassuggested that to simply state that the duty of a director wasto act bona fide in the best interests of the company, was atbest an illusive statement of a director's role in serving hisor her company. It was suggested that one question a directorwould likely want to determine, especially when consideringhow to respond to an unsolicited takeover bid, was, whatproperly constitutes "the company". That is, to whom aredirectors' duties and obligations owed? Michael St. PatrickBaxter was of the opinion that it is of some import todetermine to whom directors owe their fiduciary obligations,arguing that if the board of directors's fiduciary duties areowed to the company, or even primarily to the company, thenthe propriety of any action taken by the directors in thecontext of responding to an unsolicited takeover bid would bejudged by the effects such action had on the welfare of thecorporate entity far more than the peripheral effects that maybe incurred by the shareholders. If on the other hand,shareholders' welfare was the primary concern of the directorsthen just the opposite would result; the conduct of thedirectors in how they responded to an unsolicited takeover bid81would be judged on how it affected the immediate interests ofthe shareholders and far less concern would be paid withrespect of the corporate entity and its welfare. 174It has been suggested in this chapter, that the properinterpretation of the requirement that directors act bona fidein the best interests of the company, is that at law directorsowe their duties to the corporate entity, which has beengenerally interpreted to mean the shareholders of the companyas a whole.Professor Welling however, has advised that the questionto whom do directors owe their obligations, is a matterbetter left unasked. Professor Welling argues that, "[t]hisquestion has been inconsistently dealt with in the English-based jurisprudence copied in Canada over the past 100 years." 175Professor Welling is of the opinion that under the presentstatutory regime set-up to govern corporate affairs in Canada,the issue of to whom directors owe their obligations to hasbecome a moot point. 176Despite Professor Welling's counsel, the fact of the174 St Patrick Baxter, supra, note, 33 at 69.175 Supra, note 42 at 300.176 Ibid.82matter is that other academics are discuzsing this issue whenconsidering what is the appropriate role of a board ofdirectors in responding to an unsolicited takeover bid. Assuch, this issue cannot and should not as a matter of policy,be ignored completely.J. C. Shepherd, and Michael St. Patrick Baxter are twoexamples of academics who have ventured to examine theappropriate role of directors in responding to an unsolicitedtakeover bid, and the question of to whom directors'obligations are owed.J. C. Shepherd validly makes the point that whendirectors decide to issue shares in their company, they mustexercise such power bona fide in the interests of the company. "7Mr. Shepherd also advances by way of case law illustration,that there are two prevailing yet opposing theories in law inrespect to this issue: One being that directors can neverissue shares in the company for the purpose of affectingcontrol, the other being, that directors can issue shares evenif the purpose is to affect control, 178 if such conduct177 Supra, note, 78 at 363.178 In light of the rather tentative Canadianjurisprudence in respect to this issue, and in light of theBerger J.'s judgment in Teck, supra, note, 53, it may be moreapt to say that directors may issue shares even if control isaffected, so long as the primary purpose of the directors wasto advance the best interests of the company.83would be in the best interests of the company. 179 On thisbasis J. C. Shepherd proposes that, "...the two positionsreflects the doubt as to whether the directors' duty is solelyto the corporation, or is to the shareholders as well." 180With respect, the cases cited by Mr. Shepherd do notnecessarily stand for the proposition he has advanced, thatis, that the courts perceive that directors either owe theirduties solely to the corporation, or to both the company andits shareholders. Arguably, the cases cited are simplyillustrative of two opposing judicial views concerned with anumber of inter-related company law matter, primarily withrespect to a shareholders' proprietary rights and power withina company, as well as the vesting of, and perceived limits to,the board of directors' powers to manage a company under the"proper purpose doctrine". In all the cases advanced by Mr.Shepherd, the underlying premise for the decisions reached maymore aptly be described as serving judicial policypredilection rather than, as Mr. Shepherd proposes, areflection of doubts by the courts as to whether directorsduty is owed solely to the company or also to itsshareholders.Briefly, those cases cited by Mr. Shepherd which hebelieves demonstrates that directors' obligations are owed to179 Supra, note, 78 at 363.180 Ibid. 84the shareholders as well as to the company, being: Martin v.Gibson, 181 Bonisteel v. Collis Leather, 182 Horg v.Cramphorn Ltd., 183 and Bernard v. Valentini 184, may bealternatively interpreted, and which was briefly discussedabove, to be illustrative of an Anglo-Canadian judicialtradition which tried to confine directors' powers to aperceived proper purpose for which the power was so conferredand beyond which the directors could not go. The casesproffered by Mr. Shepherd to support the proposition that thedirectors owe their duties solely to the company, were: TeckCorp. Ltd. v. Millar, 185 Bamford v. Bamford, 186 SavoyCorp. Ltd. v. Development Underwriting Ltd.,  187 Kors v.Carey, 188 and Cheff v. Mathes 189 . It may in the alternativebe said that these cases can be seen to be illustrative of anemerging judicial approach, (at least in Canada, Australia andin the United States) that requires that directors endeavourat all times to promote the interests of the company, which is181182183Supra, note 123.O.L.R. 195.note 73.(1917)Supra,184 (1978), 18 O.R. (2d)^656^(Ont.^H.C.).185 alara, note 53.186 Supra, note 126.187 [1963] N.S.W.R. 138^(S.C.N.S.W.).188 (1960), 158 A. 2d 136.189 (1964) 199 A. 2d 548.85under food to mean the interests of the shareholders as awhole. As such, directors may in the bona fide execution oftheir duties, take whatever steps that are reasonablynecessary to prevent perceived threats to the company'sinterests from occurring.Michael St. Patrick Baxter, in his article, "TheFiduciary Obligations Of Directors Of A Target Company InResisting An Unsolicited Takeover Bid", 190 goes on andbroaches the topic of directors owing a bifurcated fiduciaryobligation. 191 Under this theory Michael St. PatrickBaxter's argues that directors owe a fiduciary duty to thecompany and separately, as well as simultaneously, to the1 92company's shareholders. It is Mr. St Patrick Baxter'scontention that by requiring directors to consider theinterests of the company, while at the same time requiringthem to consider the interests of the shareholders, sets up aduality of fiduciary duties which, if ever a company was tobecome subject to an unsolicited takeover bid, would be bound190 Supra, note 33.191 Ibid. at 66.192 See also Dodd, supra. note 37 at 1147 & note 6, whereit states, "[t]hat many of their powers, such as the power ofdeclaring or passing dividends and the power of issuing newstock, may affect the individual interests of the stockholdersrather than the corporate enterprise as a whole is obvious andhas led to a growing tendency to treat directors asfiduciaries for stockholders as well as for the corporateentity."86to conflict. This conflict of interests, .consequently placesthe target directors in a very precarious, if not impossibleposition, of trying to honour opposing fiduciary obligations. 193It is Mr. St. Patrick Baxter's contention that thisconcept of directors owing a bifurcated duty to the companyand shareholders, is an emerging trend within the Canadianjudiciary. 194 Citing for support of his proposition St.Patrick Baxter refers to the cases of Olympia & YorkEnterprises Ltd. v. Hiram Walker Resources Ltd.  195 and,First City Financial Corp. Ltd. v. Genstar Corp.  196In Olympia &  York Enterprises Ltd. v. Hiram WalkerResources Ltd., Montgomery J. found that the target board ofdirectors acting on the sound advice of their financialadvisors, and on the realization that the takeover offer didnot adequately represent the true and intrinsic value of theshares being sought in the takeover bid, were correct intaking the steps they did to thwart the bid. Montgomery J.193 Supra, note 33 at 71.194 Ibid, at 71: "It appears that Canadian courts haverecently moved towards -acceptance of the proposition thatdirectors owe a fiduciary duty to the shareholders as well asto the corporation."195 Supra, note, 96.196 (1981) , 33 O.R.^(2d) 631, 125 D.L.R.^(3d) 303(H.C.J.).87stated that directors wculd have been in breach cf the duty tothe shareholders otherwise. 197 In this case, it isdifficult to see how Mr. St. Patrick Baxter extrapolates thatthe Court was necessarily advocating that the directors ofHiram Walker owed a bifurcated fiduciary duty, more than thatthe court was simply referring to the directors' "duty to theshareholders" as one and the same thing as the directors' dutyto the company.In First City Financial Corp. v. Genstar Corp. we see asomewhat stronger reference to directors' duties being owed tothe company as well as separately to the shareholders. ReidJ. stated in this case that, "[t]he right and indeed theobligation of directors to take steps that they honestly andreasonably believe are in the interests of the company and itsshareholders in a take-over contest or in respect of a take-over bid, is perfectly clear and unchallenged. mHowever, what is not so clear is whether Reid J., (inmaking this statement during the course of his judgmentdenying an application for an interlocutory injunction on thebasis that the subject matter at bar was better left for theexpertise of the Ontario Securities Commission) was merelyreferring to the shareholders and the company as analogous, or197 Supra, note 96 at 210.Supra, note 196 at 646.88as. Mr. St. Patrick Baxter suggests, that the judge was tryingto establish that there existed a duty to both theshareholders and the company. It is relevant to note thatReid J. refers with approval to Teck Corporation Ltd. v.mil lax 199 , a judgment which tends not to support St. PatrickBaxter's theory. 200Like Olympia & York and First City Financial Corp., thereare other cases in which the decisions rendered could beconstrued to support a bifurcated theory as proposed by St.Patrick Baxter. Take for example the case of Goldhar v. Ouebec Manitou Mines Ltd. 201 particularly Reid J.'s commentsthat, "[i]ts [s. 122 (1) of the C.B.C.A., R.S.C. 1985, c. C-44] is a broad statement of obligations of directors. Itsunderlying concept is not new; the obligations owed bydirectors to corporations, and through them to14.^202shareholders...".^Alternatively, •44 in Farnham v. Fingold,Morand J. commented, in determining whether a group ofminority shareholders could, under the rules of civilprocedure in Ontario, bring a class action suit against themajority shareholders, that there was a "general duty" owed to"9 Ibid.am Berger J., in Teck, makes no reference to their beinga separate duty owed by the directors to the company and tothe company's shareholders.201 (1976), 61 D.L.R. (3d) 612.202 Ibid. at 614.89the shareholders by the d 203.directors In tile Australiancase of Richard Brady Franks Ltd. v. Eric_Q, Dixon J. statedthat, "[i]n considering such a question, it is important toascertain what are the purposes for which powers are given andto remember that the fiduciary duty of the directors is to thecompany and the shareholders." 204 In Goldex Mines Ltd. v.Revill, 205 the court discusses in part, Stanley M. Beck'sarticle, "The Shareholders' Derivative Action", stating that:To cause the company to act to serve personalobjectives of the directors would clearly be abreach of the directors' fiduciary duty to thecompany. Beck suggests that it is also a breach ofthe directors' fiduciary duty to shareholders as awhole - the duty 'to act with an even hand and ingood faith'; he also asserts that this principlehas been indicated (if not always clearlyexpressed) in the decided cases. 206Finally, in Exco v. Nova Scotia Savings & Loan, Richard3. described the actions of the directors in resisting atakeover bid as being motivated more by self-interest than bycompany interest and in so doing the directors breached theirfiduciary duty to the general shareholders. 207203 Supra, note 77 at 696.204 ^58 C.L.R. 112 at 143.205 (1975), 54 D.L.R. 672 at 677-78.206 52 Can. Bar Rev. 159 (1974) at 185-86.207 Supra, note 97 at ?.90Although thase.cases may be amenable to an interpretationthat there exists a growing acceptance that as a matter of lawdirectors owe their fiduciary duties to the company and itsshareholders, an alternative interpretation may simply be thatthe fine legal distinction between "the company" and "theshareholders" can in the course of a judgment become somewhatblurred, or is in fact preceived as not being relevant to thejusticiability or fairness of a decision reached in theparticular case.St. Patrick. Baxter presents two intriguing but arguablyflawed theoretical propositions as to what should be theappropriate role of a target director in responding to anunsolicited takeover bid. The first proposition is premisedon notions of what constitutes "a company". Mr. St. PatrickBaxter argues, (and I would say correctly) that a company isbest interpreted to mean a composite of two primary factors;one being the commercial entity side of the company that isseparate and apart from the shareholders, and the second beingthe shareholders of the company themselves. However Mr. St.Patrick Baxter's maintains that the "commercial side" of acompany has a valid interest to exist as an entity separateand apart from the interests of the shareholders. As such,the board of directors of a company that has become thesubject of an unsolicited takeover bid has a duty to considerthe company's interests to continue its commercial existence91unmolested, even where a takeover bid viculd otherwise be inthe interest of the shareholders as a whole. By necessaryimplication, a takeover bid could be properly defended bytarget directors in the execution of the fiduciary duties ifthe threat to the company's continual existence would warrantsuch an undertaking despite the better interests of theshareholders. This is the potential conflict of interest thatMichael St. Patrick Baxter refers to, and is the premise forhis bifurcated duty theory.St. Patrick Baxter suggests that to equate the interestsof the company to mean the interests of the shareholders as awhole, 208 is simply a way for the judiciary to "sidestep"the real issue of conflicting interests amongst the variousconstituencies that make-up "the company" 209The probity of equating the interests of the company tomean the interests of the shareholders as a whole is rejectedby Mr. St. Patrick Baxter, as he argues, the chances of theshareholders ever having a common interest in the context ofan unsolicited takeover bid is highly improbable, and even inthe unlikely event that the shareholders have a commoninterest, what may be in the interests of the shareholders as208 Supra, note 33 at 71-72, referring to the judgement ofBoyd C. in, Martin v. Gibson, supra, note 160.209 Supra, note 33 at 71-72.92a whole, may not necessarily be in the interests of thecompany. 2t0St. Patrick Baxter's first point is well made.^Hequestions whether it is possible for there ever to be aninterest that can validly be said to be commonly sharedamongst all the shareholders. 211 With respect to his latterpoint however, the premise for this is tenuous in law and intheory. Although it is not clear whether St. Patrick Baxteris referring to interests generally associated with the so-called "long-term" or the "short-term" shareholders, 212 itwould seem that in any event, the outcome would be nodifferent. The interests of the shareholders as a whole, evenif those interests were to be properly characterized as thosetypically associated with long-term shareholders, areaccording to Mt. St. Patrick Baxter's analysis, subject tobeing subsumed to those interests of the company. This begs210 Ibid. 211 This issues will be discussed in more detail below.212 In corporate control situations like that of a hostiletakeover bid, shareholders' interests tends to fall within twoopposing camps: One group of shareholders will want to tendertheir shares at the price being offered. The other group ofshareholders will not want to tender their shares, havingdetermined that their best interests will be better served ifthe bid is thwarted. The former group of shareholders aretraditionally referred to as the "short-term" shareholders,the latter group, the long-term" shareholders. It is said thatthe interests of the company are usually aligned with those ofthe long-term shareholders. This topic will be addressed belowin more detail.93the question, what are the interests of a. company if they arenot those of the long7term shareholders?A. A. Sommer is of the opinion that the interests of thecompany and those of the shareholders, at least the long-termshareholders, are one and the same. According to Sommer'sposition, Mr. St. Patrick Baxter would have to, in trying todefine the interests of the company, come up with a definitionthat in substance is materially different from simplyrestating what are typically associated with the long-terminterests of the shareholders. 213Sommer makes an interesting observation when he suggestthat if a corporation's interests were not seen as theembodiment of the interests of the shareholders then thepresent development of other constituencies legislation in theUnited States would be redundant. 214 Sommer argues that ifa corporation were in deed considered to have separate213 Supra, note 55 at 47.214 Other constituencies are basically various non-shareholder interests that do not fall as of right, within the"corporate sphere" of concerns, (i.e. the maximizing profitfor shareholder gain) but nonetheless may be affected bycorporate behaviour. Other constituency legislation can bedescribed as an attempt to recognize the legitimacy ofdirectors considering, or being required to consider, theseother constituency interests when determining companyobjectives and policies. Other constituents are for example acompany's shareholders, its customers, the community in whichthe company operates out of, national concern such as theeconomy or patriotism.94interests from its shareholders than by necessary implicationit could consider a wide range of factors not necessarilyconnected to the interests of shareholders, in its attempt tocontinue to exist. Mr. Sommer's point is that there would beno need to legislate or even consider other constituency laws.Professor Gower, in his commentary of Mr Holland'sreport, The Savoy Hotel Limited And The Berkeley Hotel CompanyLtd., stated:It is true that here and elsewhere Mr. Hollandappears to draw a distinction between the companyand its members, but unless one is a fiercepartisan of the realist theory of corporatepersonality it is difficult to see how thisdistinction can be drawn unless the interests ofhuman beings other than the stockholders can beconsidered. Having ruled out employees it seemsunlikely that Mr. Holland would have admittedcustomers or, a fortiori, management, and if theseare excluded, what remains? 215(a)Charles R. Spector pointedly discusses the argument thattechnically, because Canadian corporate statutes explicitlystate that the fiduciary duty of directors is owed to thecompany and not expressly to its shareholders, that directorscould conceivably "consider factors other than themaximization of shareholder value in evaluating and developingstrategy in defending against a hostile takeover, this view95was not accepted in the recent Olympia York case." 215With respect to directors owing a fiduciary duty to theshareholders, Lord Cullen in Dawson Int'l v. Coats Plc. & Orsstated that:I think it is important to emphasise that what I am beingasked to consider is the alleged fiduciary duty ofdirectors to current shareholders as sellers of theirshares. This must not be confused with their duty toconsider the interests of shareholders in the dischargeof their duty to the company. What is in the interestsof current shareholders as sellers of their shares maynot necessarily coincide with what is in the interests ofthe company. The creation of parallel duties could leadto conflict. Directors have but one master, the company.216In an attempt to re-enforce his argument of the emergenceof a bifurcated theory of director's duties and obligations,Michael St. Patrick Baxter refers 217 to the following215(a) "Corporate Control: The Battle For The Berkeley",supra, note 55 at 1189.215 Spector, supra, note 11 at 150.216 (1988) 4 B.C.C. 305 at 313, see Farrar, supra, note 1at 2, 30-31.217 Supra, note 33 at 71 & note 44.96statement paade by J. C. Shepherd, from that author's text, TheLaw of FiOuciaries "[w]hat is clear is that Anglo-Canadianjurisprudence is rapidly following the path trod by the UnitedStates courts on this issue and, if it is still arguable thatthe directors are not the shareholders' fiduciaries, the trendis decidedly against that argument. I, 218It is debatable whether this statement accuratelyreflects authority for the proposition advocated by St.Patrick Baxter that directors owe separate fiduciaryobligations to the company and the shareholders.Mr Shepherd limited his discussion of a potentialsituation in which directors could owe dual fiduciaryobligations to the company and to its shareholders, tocircumstances where the director knowingly entered into aspecial relationship with a certain shareholder, or group ofshareholders. Shepherd uses the example of a group or classof shareholders who, with the concurrence of the nomineedirector, use their combined influence to elect the nominee tothe board of directors. Mr. Shepherd theorizes that under a218 Supra, note 78. See also Dodd, supra, note 37 at 1146-47 & note 6, where Dodd states, "[t)hat directors arefiduciaries for their corporations is indisputable. That manyof their powers, such as the power of declaring or passingdividends and the power of issuing new stock, may affect theindividual interests of the stockholders rather than thecorporate enterprise as a whole is obvious and has led to agrowing tendency to treat directors as fiduciaries forstockholders as well as for the corporate entity."97scenario like this, a director may b.= subject to conflictingfiduciary obligations to the company and to that group ofshareholders who had arranged for his or her election.Shepherd argued that these shareholders might well expect thattheir particular interests will be represented by thatdirector. The possibility of conflict arises if at some pointthe interests of the company, which all directors are sworn toserve, and the particular interests of that group ofshareholders who elected the director are different. 219J. C. Shepherd does discuss the existence of a generalfiduciary obligation of directors to the shareholders, butonly in very broad terms, and prefaces his remarks with thecaveat that such a concept was based in theory only, stating,"[a)gain limiting ourselves here to theory, there is afiduciary relationship created between directors andshareholders based on a conditional transfer of powers." mShepherd theorizes that, based on what he calls "an indirectand conditional transfer of powers" from the shareholders tothe directors, directors would owe a general fiduciaryobligation to the shareholders. Shepherd argues that "thepower" which originated in the shareholders, is transferredindirectly to a director upon their election to office. 221219 Supra, note 78 at 352-53.220 Ibid. at 353.221 Ibid. at 352.98This "transfer of power"^conditional because after theshareholders elect their directors they, "...will naturallyexpect that, in the exercise of these powers, the directors,as well as considering the interests of the corporation, willalso direct their minds to the interests of the shareholders."222The notion that the directors' power to manage thebusiness and affairs of the company are somehow "transferred"to the directors from the shareholders, as the basis forestablishing the existence of a general fiduciary relationshipis somewhat curious, especially in those jurisdictions wheredirectors derive authority to manage the business and affairsof the company through statutory mandate. Under suchconditions it is difficult to see how one can read into thelegislation that this authority on the part of the directorsto manage the company is somehow initially belonging to theshareholders, who later on "indirectly" vested it in thedirectors. 223(a)J. C. Shepherd does, in discussing the case of Percival v. Wright, 4n state that this case has been replaced in most222 Ibid. at 353.223(a) See Welling, supra, note 42 at 338-39 & note 125,343-44 & note 142.223 Supra, note 141.99of the United States with a rule making directors fiduciaries224of the shareholders. However, again it is not clear thatMr. Shepherd is saying that in the United States directorslegally and generally owe separate fiduciary duties to theshareholders as well as to the company. Nor could it be saidthat the cases Shepherd referred to on this point must betaken to support such a conclusion. It is arguable thatstrict rule of law in Percival v. Wright which Shepherd speaksof as being replaced in the U.S., is in fact being replacednot by a judicial doctrine that interprets the interests ofcompany and shareholder as separate, but rather, that theinterests of the company is properly understood to mean theshareholders as a whole, and vice versa.Shepherd refers in part, to the cases of Schaffhauser v.Arnholt & Schaefer Brewing Z5 , Weisbecker v. HosieryPatents. Inc. et al, 226 and Selheimer v. Manganese Corp. ofAmerica. 2In Schaffhauser  v. Arnholt & Schaefer Brewing, thepresident of Schaefer Brewing company, who was also one of theat 355-56. See also Gower, supra, note22445 at 573.Supra, note 78Z5 (1907) 67 A. 417.226 (1947) 51 A. 2d 811.n7 (1967) 224 A. 2d 634.100company's five directors, managed through his influence overtwo other directors, to get a motion passed at a meeting ofthe board of directors giving himself as president, a 50%increase in salary. The two remaining directors who were alsoshareholders, voted against the motion, and challenged thesalary increase in court. On appeal, the court held thatthough one could not in law say that a director was a trusteefor shareholders that, 11 ...there can be no doubt he doesoccupy such a fiduciary relation as to imperatively demand,both in good morals and sound law, that he shall manage thebusiness of the company in such a manner as to promote, nothis own interests, but the common interests of all theshareholder . 91 228 The court in Selheimer v. Manganese  Coro. of America, came to the same conclusion in determining theoutcome of a shareholders' derivative suit, in which thedirectors had caused the bankruptcy of their company due totheir gross incompetence. 229 In Weisbecker v. Hosiery Patents. Inc., the court, after a thorough review of the lawas it relates to majority shareholders' obligations tominority shareholders, found that the majority shareholders ofthe company at the case at bar, took steps in dissolving thecompany that were technically in law legal, but in equity weresolely used as a device to commit fraud against a minority228 Supra, note 225 at 417.229 Supra, note 227 at 642.101shareholder. 23°In all these cases, the judgments seem to suggest thatthe courts were interpreting the duties of the directors beingat law owed to the company, but were in fact better understoodas being owed to the shareholders as a whole, and as such thedirectors must act in utmost good faith when dealing withtheir shareholders.It has been proposed that what is occurring in the UnitedStates is that the courts there have simply blurred themeaning between company and shareholders. That reference toeither, "the company", or "the shareholders" is not meant toconvey distinction between the two that would support, as Mr.St. Patrick Baxter would suggest, the notion that directorsowe a bifurcated fiduciary duty. Rather, reference to oneautomatically subsumes the other. That is, each are analogousterms. A. A. Sommer clearly advocates that the prevailingunderstanding of the meaning of the interests of the"corporation" is synonymous with the concept of the interestsof the "shareholders as a whole". Sommer states that, "[i]nthe United states the equivalence of "corporation" and"shareholders" (or at least the long-term interests ofshareholders) is most clearly seen in the manner in whichcourts and writers have used these terms, and that usage tendsSupra, note 226 at 816-17.102to show that they use them as equivalents. 2251 Sommerillustrates his argument with reference to the case of Unocal Corp. v. Mesa Petroleum Co. n2 , in which case Sommer citesthat the court, "...in the course of two pages, descried thedirectors' fundamental duty and obligations' as running to"the corporate enterprise, which includes stockholders", laterto "the corporation and its shareholders", and finally, tojust "the corporation's stockholders.""It was summed up in John L. Warden's article, "TheBoardroom as a War Room: The Real World Application of theDuty of Care and the Duty of Loyalty", that the consensus inthe U.S. is that the directors' obligations are to theshareholders as a whole, mirroring the obligations thedirectors have to the company. 223In concluding his article, St. Patrick Baxter felt thatnotwithstanding the various conceptual difficulties, thebifurcated approach as he suggested was the correct approachto take, however, Mr. St. Parick Baxter left as an openquestion, how in law this would be established. n4231 Supra, note 55 at 48.232 493 A 2d 946 (Del. 1985).233 (1985) 40 Bus. Lawyer 143.Supra, note 33 at 72 & note 49.103St. Patrick Baxter's second proposition advocates thatdirectors should, as a general rule, owe a fiduciary duty toeach shareholder individually. He states that:It has also been asserted in support of thebifurcated duty that 'the interests which should beweighed against those of the company are those ofthe shareholders collectively and not theindividual interests of any one or moreshareholders.' This argument has immediate appeal.To be sure, shareholders have common interests (forexample, the financial success of the corporation)and their common interests usually tend to alignwith the interests of the corporation. In thisregard a separate duty to the shareholders may wellbe duplicative of the duty to the corporation. Butshareholders also have different interests and thisis dramatized in the context of an unsolicitedtakeover bid. Surely a director, as a fiduciary,must consider those interest that are not incommon. To do otherwise would not be consistentwith the duty of a fiduciary to treat beneficiariesof the same class equally. 235Arguably, such an interpretation of directors' dutiesseeks to extend fiduciary obligations beyond reasonablelimits. Strictly from a practically preceptive (disregardingfor the moment how in law this duty would be established),such a proposition would be logistically impractical to putinto effect save for small, closely held companies. Directorsof companies with a large number of registered shareholderscould not possibly canvass, let alone reconcile, theinevitable sundry of their shareholders' concerns andinterests. Apparently St. Patrick Baxter has uncritically235 Ibid. at 72.104accepted fundamental principles of trust law, and projectedthose exacting standards of behaviour onto company directors.Company directors are often referred to as trustees, howeverdirectors are anything but trustees in the true sense of theword. In the execution of their management role directors arein many ways the antithesis of trustees, the latter areappointed to preserve property, while the former are appointedto risk the loss of property and resources with a view toearning a profit. 236This proposition that directors should owe a fiduciaryobligations to the shareholders individually is not generallysupported within the legal community. On the contrary, sucha finding would be an exception to the norm. As was discussedabove, Professor Gower points out that the fiduciary duties ofthe directors are owed to the company and to the companyalone. 417 In Palmer's Company Law, it is stated that,"[t]he fiduciary relationship of a director exists with thecompany: the director is not usually a trustee for individualshareholders." 418 Finally, Christopher L. Ryan, arguedthat, "[t]he directors duties are owed collectively to the236 See J. L. Howard, "Fiduciary Obligations" supra, note58 at 3.1.06;n7 Supra,Berle,notenotesupra, note 37 at 1074.573.8101.169 at169 at238 Supra,105company's members rather than the individual member."It may be suggested that to establish a fiduciary dutybetween a shareholder individually and a director certainfundamental requirements need to exist, such as:(1) a transfer of authority from the shareholder to thedirector, to act on the behalf of the shareholder, 240(2) a corresponding acceptance by the director of thisauthority and from which authority arises an opportunity toaffect the interests of the shareholder, and(3) a corresponding vulnerability on the part of theshareholder because of the authority transfer to the director.John L. Howard suggested that, "[a]lthough there havebeen some judges who appear to prefer to treat every fiduciaryas an analogue of a trustee...the evolving case law, ...hasproduced a non-contractual, reliance doctrine...a fiduciaryduty ... might be found to exist in any circumstance where a239 Company Directors Liabilities, Rights and Duties 2ded. (Oxfordshire: CCH Ed. Ltd., 1987).240 However it does not necessarily follow that absent anyovert or explicit transfer of authority from a shareholder toa director to act on his or her behalf would be a bar toestblishing on the facts that a fiduciary relationship didexist.106principal delegates authority to a fiduciary and justifiablyrelies on that fiduciary to represent his interests in acompletely unbiased manner". 241 J. C. Shepherd alsoadvanced a similar notion in presenting a theory whichencompassed shareholders and directors stating that:We have presented a theory that a fiduciaryrelationship is created whenever one persontransfers power to another on a condition, known tothe transferee, that the powers be used for thebenefit of the transferor or his nominee. Suchpowers may be legal or practical, they may resultfrom a conscious or de facto transfer, and they maybe affixed with a duty either expressly or byimplication. 242In referring to Gibbs C. J.'s decision in HospitalProducts Ltd. v. United States Surgical Corporation, 243Craig Orr probably best illustrated the basic requisiteelements required to determining a fiduciary, stating:B owes a fiduciary duty to A if: (1) B has beenentrusted with the power to affect A's interests ina legal or practical sense, so that A is in aposition of vulnerability; and (2) B has undertakento act in relation to a particular matter in theinterests of A, or of A and B jointly, and notsolely in his own interests. 244241 "Fiduciary Obligations", supra, note 58 at Supra, note 78 at 351-52.243 (1984) 58 A.L.J.R. 587 (H.C.A.) at 596-97.244 Part I, supra, note 75 at C-3.107Generally, these requisite elements that are necessaryfor establishing an individual fiduciary obligation between ashareholder and a director are not part of the typicalshareholder - director relationship. This is especially so incompanies with a large number of shareholders. In the contextof an unsolicited takeover bid, although some targetshareholders may feel vulnerable that their directors may denythem the opportunity to tender their shares to the offeror,where directors are statutorily empowered to manage thebusiness and affairs of a company there is, as a general rule,no "transferring of authority" by shareholders to thedirectors to act on their individual behalf.It has also been advanced that, "[ijn order to found afiduciary obligation, the nature of the situation must be suchthat the party who is implicitly dependent is required to beso because his legal remedies are insufficient." 245 Basedon this test, one could argued that target shareholders wouldnot generally be classified as being owed fiduciaryobligations by the directors because as shareholders they haveavailable to them sufficient statutory protection from, andrecourse to, arrant directors for alleged breaches of theirobligations when responding to an unsolicited takeover bid.245 D. S. K. Ong, "Fiduciaries: Identification andRemedies" (1986) 8 U. of Tasmania L. Rev. 310, as cited in S.A. Romano, "Fiduciary Duties After Lac. v. Corona" (1990) 4Can. Corp. L. Reporter C 135 at C 142.108This point I.& well made, whey, one thinks that shareholders'derivative rights are in fact derived from the obligationsowed to the company by the directors. 246Finally, it can be said that there are no fiduciaryduties owe by directors to the shareholders generally, becausesuch is not the expectation of the shareholder. A shareholderdoes not anticipate that he or she will be receivingindividual representation from their directors in the day-to-day management of the company, nor would a shareholder expectsuch treatment in those extraordinary corporate events such aswhen an unsolicited takeover bid is announced. 247It cannot, however, be dismissed out of hand thatdirectors can never owe a fiduciary obligation to theirshareholders individually. There are times where, usuallybecause of the particular special relationship and/orcircumstances that exists between director(s) andshareholder(s), that a court may deem that fiduciaryobligation between the two parties has properly beenestablished. "[The courts have]...extended the fiduciaryconcept to relationships that did not fit into anypreconceived technical or legal category, depending on the246 See Re Goldhar v. Quebec Manitou Mines Ltd., supra,note 201 at 616-17.247 The notion of shareholders' expectations will beaddreessed in greater detail below.109extent to which a beneficiary places trust in, and, as acorollary, justifiably relied on the honesty, integrity, andfairness of the fiduciary. Thus a fiduciary duty may be foundto exist even though it might not be superficially inferredfrom the legal or technical relationship between the parties." 248A relationship sufficient in its nature to establish fiduciaryduties between a director and a shareholder(s), is likely tobe found in closely held companies. It is in these types ofcompanies where often can exist special intimacy between thetwo parties having many of the earmarks for the creation offiduciary obligations. 249Courts have been willing to impose a fiduciary obligationon directors whose course of conduct vis-a-vis theshareholders would so warrant such a finding. Take forexample, Allen v. Hyatt, m a case eventually determined inthe Privy Council. In Allen v. Hyatt the directors of anOntario company called Lakeside Canning Co. Ltd., werenegotiating the sale of the business to an amalgamated companycalled, The Dominion Canners Ltd. The directors told theirshareholders that in order to negotiate effectively with The248 J. L. Howard, "Fiduciary Obligations" supra, note 58at A closed corporation is one typically owned andmanaged by a small number of shareholders. The shares arerestricted, and often the shareholders depend on theremunerations received through employment in the company.250 (1914) 17 D.L.R. 7 (P.C.).110Dominion Canners Ltd. they required the consent or themajority of the shareholders. On this basis the directorssomehow managed to induce a number of shareholders to givethem an option on their shares. The directors had basicallylied to the shareholders. After the deal with The DominionCanners went through, the directors exercised the options,sold the shares and kept the profits for themselves. Therewere certain issue of procedure and proper standing addressedthroughout the various appeals, however the basic finding ofthe courts was that though in law the directors owe afiduciary duty to the company and not the shareholders, whendirectors hold themselves out to the shareholders in theregard that they will be acting on their behalf, they becomethe agents of the shareholders and as such owe theshareholders a fiduciary duty. Lord Haldane stated that:The appellants [the defendant directors at trial]appear to have been under the impression that thedirectors of a company are entitled under allcircumstances to act as though they owed no duty toindividual shareholders. No doubt the duty of thedirectors is primarily one to the company itself....the directors must here be taken to have heldthemselves out to the individual shareholders asacting for them on the same footing as they wereacting for the company itself, that is as agents.The court in Allen v. Hyatt distinguished Percival v.Wright on the basis that the directors of the Lakeside Canning259 Ibid. at 11-12.111Company had gone out of their way to solicit the trust oftheir shareholders and had held themselves out to theshareholders that they were going to act on their behalf, alsoin Percival v. Wright there was no finding the directors hadacted in any way improperly or mala fide.Gadsden v. Bennetto (No.2) is another case where thecourts have extended fiduciary obligations from the directorsto the shareholders. This is a straight forward case of thedirectors committing fraud against a shareholder. Thedirectors had arranged the sale of the company's principleasset, (a piece of land) for a sizable profit. The directorsthen induced the plaintiff-shareholder to sell his two sharesto them without disclosing that the property had been sold,and without disclosing that as a consequence of the sale hisshares in the company were worth significantly more. TheCourt of Appeal reversing the trial decision, did not thinkthat Percival v. Wright was applicable in this case because offlagrant fraud committed by the directors; the Court citedAllen v. Hyatt to support their position. Perdue J., alsoattempted to mould a fiduciary duty on the basis that thedirectors had acted extraordinarily in their role as membersof a "special sale committee" to seek out a purchaser for thecompany's property and create a sale which included thedisposition of the shareholders' shares because once the land(the only asset of the company) was sold, their shares would112be worthless.^Therefore, Perdue -r••■ • contended. that theshareholders had a legitimate and immediate interest withrespect to the terms of any proposed sale of the property, andthe directors of the "special committee" owed both the companyand the shareholders a fiduciary duty to disclose all relevantinformation in respect of the sale. 252In the case of Coleman v. Myers. 253 the directors ofa family run business were held to be in breach of theirfiduciary duties to the shareholders (not to mention beingfound guilty of fraud). In this case the directors usedinsider information of a pending takeover bid for theircompany to take advantage of the shareholders, who were alsoconsanguineously related. The directors were found to be inbreach of their fiduciary duties in recommending that theshareholders accept the takeover bid at a price they knew wasnot reflective of the company's true value. What isimportant to note about this case is that at trial, Mahon J.was unable to distinguish on the facts Percival v. Wright, orto find helpful the decision reached in Allen v. Hyatt. 254Mahon J. therefore, declined to follow Percival v. Wright asbeing good law, 255 and determined that there is an inherent252 (1913) 9 D.L.R. 719 at 720 (Man. C.A.).253 Supra, note 140.254 Ibid. at 274 & 273 respectfully.255 Ibid. at 278.113fiduciary duty on the part of directors in negotiating thesale of a company to disclose to the shareholders all relevantinformation. 256 (However in the end, Mahon J. did find infavour of the defendant directors) The Court of Appeal didnot see the necessity of jettisoning Percival v. Wright, andmaintained that a director may owe a duty to the shareholders,but not as a general rule of law, but rather, depending on thespecial circumstances of any particualr case. In the case atbar the familial nature of the relationship between thedirectors and the shareholders was sufficient to establishthat the directors owed a fiduciary duty to the shareholdersindividually. 257In Goldex Mines Ltd. v. Revill, m the court held thatwhether in accordance with prevailing statutory provisions orwhether the director chose voluntarily, directors must indisseminating information to the shareholders act bona fide atall time. Brightman J. echoed similar sentiments in Gethinqv. Vlner, 259 saying, "...that the directors of an offereecompany have a duty towards their own shareholders,which... clearly includes a duty to be honest and a duty not to256 Ibid. at 278.37 See the remarks of Woodhouse J. ibid. at 324-25. Seealso Gore-Browne On Companies, supra, note 146 at 27-8.258 Supra, note 205 at 679.259 [1972] 1 W.L.R. 337 at 341.114mislead". In Re A Company, 260 Hoffmann J. expressed that'directors will owe shareholders an obligation if not afiduciary duty, where they give advice to the shareholders inrespect to the merits of a takeover bid.260 [1986] B.C.L.C. 382 at 389.115CHAPTER FIVEWHAT ARE THE INTERESTS OF THE SHAREHOLDERS AS A WHOLE? REASONABLE SHAREHOLDERS' EXPECTATIONS ESTABLISHING LEGITIMATESHAREHOLDERS' INTERESTS If we accept that the directors' equitable obligationsare to the shareholders as a whole, we are that much closer tounderstanding what the appropriate role of target directorsmay be in responding to an unsolicited takeover bid. That is,directors must determine what response (if any), would mostlikely succeed in advancing the interests of all theshareholders of the company. Once that has been determined,directors must implement that course of action reasonablynecessary to bring this determined "interests of theshareholders" to fruition.Is it not however, somewhat equivocal to simply statethat the proper interpretation of the phrase, "the bestinterests of the company" means, "the best interest of theshareholders as a whole"? Are we not left searching for aninterpretation of an interpretation? A. A. Sommer commentedon this issue by querying:116If one accepts that when one speaks of the "bestinterests of the corporation" he or she in factspeaks of the best interests of its shareholders,the question then is how one identifies the bestinterests of the shareholders. Shareholders andtheir interests come in shapes and sizes as variedas their numbers...Accepting the equivalence of"corporate best interests" with "shareholder bestinterests " appears to simply substitute onequagmire for another. 261What is this so-called best interest of the shareholdersas a whole? Is there in fact some overall commonly sharedinterest amongst the shareholders capable of being identifiedand promoted by directors? If not, if there are a number ofcompeting interests that are held by shareholders, how thenare the directors of a company that has become the subject ofan unsolicited takeover bid, to determine which of the variousshareholders' interests or combinations thereof, reflects thebest interests of the shareholders as a whole? Are thedirectors to somehow try and balance the competingshareholders' interests on some kind of sliding-like scale ofrelative importance, choosing to respond to the takeover bidso as to advance some overall interest that the directorsdetermined to be the most meritorious, or the most fair? Ifso, on what basis do they decide questions of importance ofinterests?Berger J. recognized the problem in his decision in Teck,261 Supra, note 55 at 50-51.117stating that:The classical theory is that the directors' duty isto the company. The company's shareholders are thecompany...and therefore no interests outside thoseof the shareholders can legitimately be consideredby the directors. But even accepting that, whatcomes within the definition of the interests of theshareholders? By what standards are theshareholders' interests to be measured? 262Invariably shareholders will have their owninterpretations as to what is, or is not, in their bestinterests, no doubt reflective of their own personal agendaand circumstances at any given time. When an unsolicitedtakeover bid is made for a company one might well expect thatthe idiosyncratic interests of the shareholders will becomeeven more estranged. Be that as it may, it can be said thata typical concern, at least for a majority of shareholders whoare being solicited to tender their shares under a takeoverbid, is in respect of the "price" that is being offered inexchange for their shares. mA takeover bid will inevitably be made at a premium abovethe market price of the target shares. As discussedpreviously, this premium can be properly characterized as an262 Supra, note 53 at D.L.R. 313-14, W.W.R. 412.263 The "price" typically being all cash, or part cash andpart share exchange in the offeror's company.118attempt by the offeror to solicit the target shareholders intoreadily tendering their shares. As such, a takeover bid mayappear to the shareholders in the target company as anunexpected windfall. Many shareholders can be expected toassess the adequacy of a takeover bid purely on a comparativebasis of what they could receive for their shares under thebid, to that which they would otherwise likely be able to getin the current market place. Although a takeover bid made ata significant premium may appear to be in the interests of theshareholders, the offer may in fact be specious because itfails to adequately compensate the shareholders for the trueand intrinsic value of their company. There may be a numberof reasons not necessarily readily apparent to the targetshareholders, why this may be so. Richard C. Brown discussesin his article, "The Role of the Courts in Hostile Takeovers"some of the reasons why a takeover bid may in fact not be inthe best interests of the shareholders. Brown states:That a [takeover]...offer price merely contains asubstantial premium over market value, standingalone, does not provide an adequate basis uponwhich to assess the fairness of the offering price.The market may have undervalued a particularcorporation's stock for a variety of reasons...Forexample, internal market dynamics, the vagaries ofinvestors' perceptions, speculativeprognostications by currently in vogue analysts,governmental policies, political developments,general purchasing trends and rumours - all play arole in market pricing and may render the currentmarket value of a particular stock an unreliableyardstick for measuring the actual worth of the_business as- a continuing commercial entity.Richard Brown also makes the insightful observation that"...the market price of a publicly traded stock is solely ameasure of the value of a minority position in that stock;whereas, a [takeover bid)... offer is made for a controllingposition in the stock. Thus, the adequacy of a premium paidfor control cannot be assessed solely in terms of itsmagnitude in relation to a market price that merely reflectsthe value of a single share. II 265It can be said that an inadequate takeover bid offercannot be in the best interests of the targets of theshareholders as a whole because if it were to succeed, theintrinsic value of target company would accrue to the offerorrather than to the target shareholders. Regardless if atakeover bid is determined to be inadequate, there willinevitably be target shareholders who for whatever theparticular circumstance, (or more precisely, because of theirparticular circumstances) are motivated to tender their sharesat the price offered. Such shareholders desirous to tendertheir shares will perceive that their best interests will beserved if the takeover bid goes through. These shareholders264 Supra, note 24 at 212.265 Ibid. 119264120will not want their board of directors to take any overt stepsto block or otherwise impede the successful conclusion of thebid. In contrast, there will likely be shareholders withinthe target company who perceive that their interests will bebetter served by retaining their shares. These shareholderswill want the takeover bid (as offered) to be thwarted in somemanner. The former type of shareholders are often referred toas "short-term shareholders", the latter are generallyreferred to as "long-term shareholders". 266In the context of an unsolicited takeover bid there isobviously some equivocation to the adage that "the bestinterests of the company" means "the best interests of theshareholders as a whole". If the best interests ofshareholders is served by promoting shareholder value; 267 isit maximizing the long-term or short-term shareholders' valuethat should be of proper concern of the target directors indetermining how best to respond to an unsolicited takeoverbid? If it can be said that the best interests of the companyis better understood to mean the interests of the long-termshareholders, than on what basis is this so?In the U.S. case of TW Services Inc., v. SWT AcquisitionsCorp., Chancellor Allen, in reference to directors'266 See supra, note 212.267 See Stransman, supra, note 43 62.121obligations to promote the interests of their company andtheir shareholders stated:The knowledgeable reader will recognize that thisparticular phrase [the board's duty to thecorporation and its shareholders] masks the mostfundamental issue: to what interest does the boardlook in resolving conflicts between interests inthe corporation that may be characterized as"shareholder long[-]term interests" or "corporateentity interests" or "multi-constituency interests"on the one hand, and interests that may becharacterized as "shareholder short[-]terminterests" or "current share value interests" onthe other? 268Lamtham C.J., expressed in Mills v. Mills, that, "[t]hequestion which arises is sometimes not a question of theinterests of the company at all, but a question of what isfair between different classes of shareholders. Where such acase arises some other test than that of the "interests of thecompany" must be Applied..." 269In the context of an unsolicited takeover bid, the so-called test of the "interests of the company" may not be asinadequate as Lamtham C.J. suggested. Arguably, the entireapproach of discussing what may or may not be the appropriaterole of target directors in responding to an unsolicited268 Reprinted 14 Del. J. Corp. L. at 1182, as cited inSommer, supra, note 55 at 49-50.269 (1938) 60 C.L.R. 150 at 164. See also MacIntosh,"Minority Shareholders' Rights in Canada", supra,note 60 at613.122takeover bid to promote the best interests of the company hasbeen unnecessarily clouded by this notion of conflictingshareholders' interests, be it long-term versus short-termshareholders' interests, or any other interests held oneshareholder, or group of shareholders, that are notcorrespondingly held by other shareholders. In the decisionof the Supreme Court of Delaware in Paramount Communications. Inc. v. Time Inc., the Court addressed this issue stating:[A board of directorsj...mandate includes aconferred authority to set a corporate course ofaction, including time frame, designed to enhancecorporate profitability. Thus, the question of"long-term" versus "short-term" values is largelyirrelevant because directors, generally, areobliged to chart a course for a corporation whichis in its best interests without regard to fixedinvestment horizon. mIt may be valid to say that at the time a company isconfronted with an unsolicited takeover bid there are likelyto be shareholders whose perceived interests conflict. Whatis not valid however, is a presumption of attaching legitimacyto certain interests held by shareholders which do not warrantsuch treatment.If we accept that the proper understanding of thestatutory requirement that directors are to act in the best" (1989), 571 A. 2d. 1140 (revised written opinion mar.9 1990) at 1150.123interests of the company means, that which is in the bestinterests of the shareholders as a whole. And, if we acceptthat the duties and obligations of directors, as well as thedirectors' corporate capacity to fulfil their duties andobligations, continues even where a company has become thesubject of an unsolicited takeover bid; 271 then it wouldfollow that subsumed in this obligation on the part of thedirectors there exists some act that is capable of promotingan interest that is common to all the shareholders. In whichcase, there must exist some uniquely shared interest amongstthe shareholders. Based on the foregoing, it will be advancedthat it may be possible, utilizing the concept of reasonableshareholder expectations, to theorize as to what this commonlyshared interest might be. 272271 Whether the role of directors should remain constanteven when their company is faced with an unsolicited takeoverbid is of course at the crux of much of the debate.272 See Cheffins, supra, note 58 at 313, 317; BrianCheffins, "An Economic Analysis Of The Oppression Remedy:Working Towards A More Coherent Picture Of Corporate Law"(1990) 40 U. of T. L. J. 775, particularly at 781-83. Alsosee, as was referred to in Cheffins' article, "An EconomicAnalysis", D. F. Clifford, "Close Corporation ShareholderReasonable Expectation: The Larger Context" (1987) 22 WakeForest L. Rev. 41; R. B. Thompson, "Corporate Dissolution andShareholders' Reasonable Expectation" (1988) 66 Wash. U. L. Q.193; G Shapira Minority Shareholders' Protection - RecentDevelopments (1982) 10 N.Z.U.L. Rev. 134; A. B. Afterman,"Statutory Protection For Oppressed Minority Shareholders: AModel For Reform" (1969) 55 Va. L. Rev. 1043. See generallyWelling, supra, note 42 at 516-30, 557, 563-564;Maclntosh,"Minority Shareholder Rights", supra, note 60 at599, 615.124To this end, it is proposed that in determining how bestto respond to an unsolicited takeover bid, target directorsneed only consider legitimate shareholders' interests.Legitimately held shareholder interests are, it is furtherproposed, derived from reasonable held shareholderexpectations. Reasonable shareholder expectations it will beargued, are those expectations genuinely anticipated to occuras the predictable consequence of any given relationship thatexists between a company and its shareholders.With respect to the viability of a theory premised on thenotion of reasonable shareholders' expectations, thedetermination of what is a "reasonable" expectation for ashareholder to hold must at the outset, be amenable toobjective analysis. Brian Cheffins considered this point apotential limitation to any theory encompassing notions ofreasonable expectations of shareholders without first ensuringthe existence of preliminary guidelines as to how suchexpectations were to be objectively determined. 273 In thislight Brian Cheffins noted the favourable developmentsoccurring within the U.S. judiciary with respect to this issue 274and referred specifically to the case of Meiselman v.Meiselman, where the court held that:273 Cheffins, "An Economic Analysis", supra, note 272 at782, 793-94.274 Ibid. at 782.125...a complaining shareholder.'s "rights orinterests'...include the "reasonable expectations"the complaining shareholder has in the corporation.These "reasonable expectations" are to beascertained by examining the entire history of theparticipants' relationship. That history willinclude the "reasonable expectations" created atthe inception of the participants' relationship;those "reasonable expectations" as altered overtime; and the "reasonable expectations whichdevelop as the participants engage in a course ofdealing in conducting the affairs of thecorporation. ...The key is "reasonable."...Privately held expectations which are not madeknown to the other participants are not"reasonable". Only expectations embodied inunderstandings, express or implied, among theparticipants should be recognized by the court. 275Robert B. Thompson in his article "Corporate DissolutionAnd Shareholders' Reasonable Expectations", discusses theMeiselman case and concurred that expectations if they are tobe considered reasonable, can not be unfulfilled hopes anddesires. 276Professor Welling, in discussing shareholders'expectations, referred to the decision of Farley J., in 820099 Ontario Inc. v. Harold E. Ballard Ltd.  277 where the judgecommented that, "shareholders expectations [are not] thosethat a shareholder has as his individual 'wish list'. Theymust be expectations which could be said to have been (or275 (1983), 307 S.E. 2d 551 at 563.276 Sum-a, note 272 at 218.277 (Ont. H.C., not yet reported).126ought to have been considered as) part of the compact of theshareholders". 278 Professor Welling continues by nextreferring to the case of Westfair Food Ltd. v. Watt, wherethe court contrasts "reasonable expectations" with "wishfulthinking". 279What these cases illustrate is that, subjectiveexpectations of shareholders would not normally be relevant indetermining the reasonable shareholders' expectation. In thisvein, reasonable shareholders' expectations can be said to bethose expectations that a third party bystander, fully awareof the relationship between a shareholder and his or hercompany, and the particular business nature of the companyitself, would say are reasonable, or more aptly put, would sayare not unreasonable expectations that a shareholder couldhold. 280One way in which to attempt to objectively determine whatare reasonable shareholders' expectations may be to considerthe particular nature of the company in which the shareholder278 Welling, supra, note 42 at 520 & note 199.279 (1991, Alta. C.A., not yet reported),as cited inWelling, ibid. 280 See Cheffins, "An Economic Analysis" supra, note 272at 782-83, see also First Edmonton Place Ltd. v. 315888 Alberta Ltd.,(1988) 60 A.L.R. (2d) 122 at 146, with respect toan emerging view of an appropriate test being that which is...objectively in the eyes of a commercial bystander...".127has invested. One might have regard to the traditionalpractices and customs commonly associated with other companieswhich function in the same or similar type of business. Inrespect to establishing what is unfairly prejudicial inconsidering minority shareholders' statutory oppressionremedies, Professor Shapira in his article, "MinorityShareholders' Protection - Recent Developments" said that,"[t]he history, nature and structure of the company, theessential nature of the association, the type of rightsaffected and general practice should all be material." 28 1 . J. in First Edmonton Place Ltd. v. 315888 Alberta Ltd., in reference to a creditor's application for astatutory remedy against oppression under Alberta's BusinessCorporations Act, said:Assuming the absence of fraud, in what othercircumstances would a remedy under [the Act]...beavailable? In deciding what is unfair, the historyand nature of the corporation, the essential natureof the relationship between the corporation and thecreditor, the type of rights affected and generalcommercial practice should all be material. 282This approach was similarly adopted in the case of LacMinerals Ltd. "Lac" v. International Corona Resources Ltd.281 Supra, note 272 at 146. See Cheffins,"An EconomicAnalysis", supra, note 272 at 781.282 Supra, note 280 at 146.128"Corona". 283 In this case Lac (a senior mining company)together with Corona (a junior mining company), entered intoserious business negotiations concerning a possible jointventure deal. During the negotiations Corona sharedconfidential information of positive results on some of theirpreliminary test drill holes, and of their intent to purchasea certain adjacent track of land where similar positive testresult were expected to be located. Lac used this informationto purchase the said property from its present owner for theirown exclusive use. The case was finally decided in favour ofCorona on the basis that Lac had breached a duty ofconfidentiality owed to Corona, and that the property Lacsurreptitiously acquired was to be held in a constructivetrust for the benefit of Corona.Holland J., of the Ontario Supreme Court determined thatbased on principles of partnership law, (i.e. one partner owesthe other a fiduciary duty) that the seriousness of thenegotiations that were occurring between Lac and Corona withrespect to a possible joint venture, were sufficient toestablish that a fiduciary duty did exist between the twoparties. In one respect, what is interesting about thedecision was how, in determining the existence of a fiduciaryduty, Holland J. had referred to the traditional and customary283 Supra, note 84.129practices within the mining industry as evidenced at trial.'284 Based on this information Holland J. concluded, "...thatthere is a practice in the mining industry that imposes anobligation when parties are seriously negotiating not to actto the detriment of each other. 285 Craig Orr discusses inhis article, "The Changing Nature Of Fiduciary Oligations(sic): Part 1", that the two crucial findings of fact made byHolland J. that help to establish the existence of a pervasivecustomary way of doing business within the mining industrywere:First, there was the admissions by Lac's presidentthat when two geologists in the mining industry areseriously discussing a possible deal, theircompanies "would both have a duty towards eachother not to hurt each other as the result of anyinformation that was exchanged" Secondly, all theexpert witnesses called by both parties agreed withthat statement and Holland J. therefore concludedthat "there is a practice in the mining industrythat imposes an obligation when parties areseriously negotiating, not to act to the detrimentof each other". 286When this case was finally heard before the Supreme Courtof Canada, La Forest J. (in the minority on this point),reaffirmed the findings of the Court of Appeal, in statingthat the nature of the special relationship that had developed284 See International Corona Resources Ltd. v. Lac MineralLtd. (1986) 53 O.R. (2d) 737 (H.C.J.) at 765-770.285 Ibid. at 770.286 "Part One", supra, note 75 at C-2.130between Lac and Corona was sufficient_enough to establish theexistence of a fiduciary obligation owing by Lac to Corona.La Forest found this to be so even though fiduciaryobligations do not generally arise between commercial partiesnegotiating at arm's length. 2117 . However, in part based onindustrial practices as set out by the evidence adduced attrial, La Forest J., felt that Cornona had a legitimate rightto expect (reasonable expectations) that Lac would not useconfidential information disclosed during businessnegotiations to its detriment. La Forest stated:...I have the greatest hesitation in saying thatthe only circumstances in which a legal obligationcan arise out of a notorious business practice iswhen a contract results. ...It is clear to me thatthe practice in the industry is so well known thatat the very least Corona could reasonable expectLac to abide by it...The industry practicetherefore, while not conclusive, is entitled tosignificant weigh in determining the reasonableexpectations of Corona, and for that matter of Lacregarding how the latter should behave. 288(emphasis mine)287 Lac, supra, note 84 at S.C.R 643-68, particularly at656-62.288 Ibid. at 661-62.131CHAPTER FIVE - PART IIESTABLISHING REASONABLE SHAREHOLDERS' EXPECTATIONSIt is proposed that objectively discernable reasonableshareholder expectations are, generally speaking, thoseexpectations established at the time an individual subscribedfor and is allotted shares in, a company. 289 Althoughshareholders may legitimately form and hold reasonableexpectations throughout their association with a company as aconsequence of particular events that may transpire, subjectto any such overriding occurrences, it is maintained that theexpectations formed at the outset of a shareholders' tenurewith a company are those that can be said to form the basisfor determining legitimate shareholders' interests. It is atthis point in time that, again generally speaking, theshareholder's anticipatory expectations for investing in thecompany are seized. With respect to widely traded publiccompanies at least, it is advanced that the fundamentalexpectation common to all shareholders at the outset of theirrelationship with the company, is the expectation that aprofit can be made on their investment, wealth maximizationbeing the presumed goal of shareholders generally.289 See Thompson, 8 supra, note 272 at 213. referring toProfessor O'Neal's article "Oppression of MinorityShareholders"; Afterman,sunra, note 272 at 1063.132A shareholder investing in a large widely traded companywill also will have a variety of what may be termed secondaryinvestment expectations. By illustration, these may be saidto be, at least in part that:-the shareholder will not expect to participate in theaffairs of the company beyond that bundle of rights andprivileges attached to his or her ownership of shares.(Be those rights and privileges subscribed by thecompany's articles, by-laws, ordinary or specialresolutions, or through applicable statute law.)-the shareholder does not expect that the company'sdirectors owe a fiduciary obligation to him or herindividually, but rather to all shareholders collectively-the shareholder does not expect the directors to panderto the interests of any particular shareholder or groupof shareholders at the expense of the rest of the company-the shareholder (with the possible exception of anarbitrageur) does not buy shares with the expectationthat a takeover bid for their shares will be made.It would also be a reasonable expectation of ashareholder that the company's affairs will be (and have been133in the past) managed so as to secure continual prosperity forthe company. In this vein, shareholders should expect thatthe company may have to endure short-term costs for the long-term gain. The point is simply illustrated. Capital in theform of retained corporate earnings are expended towards avariety of intra-corporate concerns. Some of the company'sretained earnings may go towards research and developmentprojects, or for retooling a factory, hiring and training newemployees, advertising, defending or pursuing law suits, andthe like. All these are costs of doing business and are anecessity if the company wants to continue to prosper in theyears to come.Although it may well be in their immediate interests,shareholders cannot reasonably expect that upon acquiringshares in a company that corporate revenue normally set asidefor necessary corporate expenditures, would instead bediverted into some form of "shareholder payment", be it bydividends or otherwise. Conversely, shareholders do expectthat their directors will make "shareholder payments" whenthey are in a position to do so. Montgomery J. put it wellwhen he said in the case of Olympia & York Enterprises Ltd.  v.Hiram Walker Resources Ltd., that u[i]t is the directors' dutyto take all reasonable steps to maximize value for allshareholders. There is of course no legal requirement that acompany as a going concern, must pay out part of its revenue134to its sharehclders. It is however the tactical outccme if acompany wishes to retain its present shareholders and be ableto seduce new shareholders. mIn tangent with the shareholders' desire for individualwealth maximization, it is further proposed that there existsa "complimentary expectation" on the part of the investingshareholder. Though this latter expectation may not beexplicated defined within the minds of the shareholders at thepoint-in-time that they subscribe for their shares,nevertheless jt exists as a general notion, setting out theparameters within which the shareholder expects his or heranticipated desire for wealth maximization will be realizedwithin the corporate structure. This "complimentaryexpectation" though partly based on a composite of factorsunique to the company itself, (e.g. the company's pastbusiness record, the present and anticipated trading value ofits shares, publicly disclosed business plans, etc. 211 ) isprimarily grounded on the prevailing and collectiveperceptions associated with a public company and its corporatemanagement - that being, that a company's board of directorsno Supra, note 96 at 272.This type of information is general reflected inshareholders' expectations as the degree of risk associatedwith investing in shares of the particular company. Themeasure of the degree of risk is often reflected in the priceand conditions attached to the shares. See generallyMacIntosh, "The Shareholders' Appraisal Rights in Canada",supra, bote 34 at 326-27135will endeavour to promote the maximum prosperity of thecompany. 292If any singular interests can be said to exist among theshareholders it "...is the continuing sound management andprofitability of the corporate enterprise..." 293 To repeat,one leading Canadian corporate text commented:There is some difficulty in determining what arethe best interests of the company or, in otherwords, what kinds of considerations directors areentitled to take into account in reaching adecision...in determining what constitutes the bestinterests of the company, the established case lawfocuses on profit-maximization Though somecourts have demonstrated a willingness to broadenthe profit maximization objective, the classicalapproach remains firmly established. In this stateof the law, directors who depart from single-mindedprofit-seeking are at considerable risk. 294292 The terms "maximum profitability" and "maximumprosperity" are often used synonymously. Strictly speakinghowever, the term "maximum profitability" could be interpretedto mean a company, through a manipulation of intra-corporateevents, endeavouring to achieve a profit margin within a setperiod of time, that for it, would be its maximumprofitability. This "maximum profitability" could be at theexpense of the corporation attaining long-term maximumprosperity, which would not be in the company's best interest.For this reason the term "prosperity" is use instead of theterm "profitability" in the contest of a corporationsaspirations for sustained wealth maximization.m J. L. Warden, supra, note 233 at 1431.294 Canadian Business Corporations An Analysis Of RecentLegislative Developments, supra, note 14 at 295-296.136Seszion . One of the Paris Collequium on CorporateGovernance which discussed the appropriate role of the boardof directors in business corporations, was presented with adraft by the American Law Institute on the principles ofcorporate governance and structure, which stated that it wasthe shareholders general expectation that the basic corporatepurpose is maximizing corporate prosperity. 295 Incommenting on the Privy Council decision in Howard Smith v.Ampol Petroleum, John L. Howard suggested that although theCourt, "...declares that the directors' function is to managebusiness operations as distinct from maximizing the value ofits shares, that idea is so far removed from commercialreality it cannot be taken seriously in cases involvingdefences to takeover bids." 296Professors Easterbrook and Fischel referred in theirdiscussion of the perceived benefits of increased premiums fortarget shareholders in the context of a takeover bid in whichtarget directors are permitted to respond, that one theory ofcorporate self-interests is that, "[o]rdinary managers arecharged with the duty of maximizing the returns to the firm'sshareholders without regard to adverse consequences to other295 (1984) 6 J. of Comp. Bus. & Cap.'t Market L. 201 at203. See Easterbrook & Fischel, supra, note 30 at 1176, 1190-92.296 Supra, note 58 at' shareholders or to society at 1,,rge.” 297Wealth maximization solely for the sake of shareholders'benefit, has been considered by some as a less than admirablegoal, and beleive that companies should endeavour to play abroader role within society even if to do so may be at a costto corporate earnings. 298 No doubt in response to publicdemand today most large . corporations' boards of directors willset their company's agenda to incorporate (at least at aminimum) non-pecuniary considerations. 299 Such alterationsto a company's business strategy only makes good businesssense, as it recognizes the necessities of doing business inones community, public perception being so important toretaining customer loyalty. This however, it is advanced,does not abrogate the role of directors or the fundamentalexpectations of the company's shareholders - which is, thatthe company through it board of directors will endeavour tosecure increasing prosperity. 300 If profit maximization wasnot the primary goal of companies than it could be argued that25W Supra, note 30 at 1176.298 See Dodd supra, note 37 at 1148ff. See generallyGower, Corporate Control: The Battle For The Berkeley, supra,note 55 at 1191-93. But see, Easterbrook & Fischel supra, note30 at 1190-92.299 See Dodd, supra, note 37 at 1148-49, 1151.MCI Ibid. at 1152-53. See T. Corcoran, "Even anti-takeoverlaws can't thwart logical market pressure" The Globe & Mail (1May 1990) B 2.138potential corporate invetorswo , ad, instead of buying shares,seek other means of investing their money. This in turn couldresult in a reduction in the flow of capital within the marketplace, leading to a downturn in corporate growth, job lossesand ultimately a decline in the economy. 301To summarize, although actuated out of self-interestedmotives for maximizing personal gain when purchasing shares ina company, the reasonable expectation of shareholders is thathis or her interest in wealth maximization is necessarilycommensurate to, and inextricably linked with, the measure ofsuccess enjoyed by the company as a going concern. Afortiori, it is the legitimate interests of the shareholderthat a company's board of directors manages the business andaffairs of the company so as to promote corporate prosperity,which in turn translates into advancing shareholders'interests.Earl Sneed, in his article, "The Stockholder May Vote AsHe Pleases: Theory And Fact", discusses the notion ofshareholders' self-interests. Sneed commented thatshareholders want the welfare of the company to be promoted,for on its success depend their profits. "They [shareholders]301 See generally H. J. Glasbeek, "The Corporate SocialResponsibility Movement - The Latest in Maginot Lines to SaveCapitalism" (1987/88), 11 Dal. L. Rev. 363, at particularly381; Easterbrook & Fischel, supra, note 30 at 1191-92.139want the corporation to make the most profit possible....Since all stockholders have gathered together in thecorporate composite for the common purpose of seekingpecuniary gain..." 302302 (1960-61) 22 U. of Pitt. L. Rev. 23 at 25.140CHAPTER FIVE - PARTASSESSING THE ADEQUACY OF AN UNSOLICITED TAKEOVER BIDIf promoting corporate prosperity is the responsibilityof the directors, than achieving maximum prosperity for thecompany must (in this limited sense) be the directors'ultimate goal. Theoretically speaking, if a company was toactually achieve "maximum prosperity", thus having attainedits ultimate goal, its continued existence would be fruitless.The company could not hope to prosper beyond that point. Whenultimate corporate prosperity is obtained, the best inter-stof the shareholders will be satisfied and the company shouldbe wound-up, the shareholders enjoying the benefits of thedissolution of the company to the extent their rights asshareholders would entail. The company would owe noobligation to so-called future shareholders. 303The idea that a company as a going concern, can everdetermine its "maximum prosperity" is really a nebulousconcept and utterly academic in the day-to-day realities ofbusiness. An existing company's maximum prosperity iscontingent on a veritable plethora of unknown circumstancesand events. If a company is a going concern, it is not303 See Gower, supra, note 45 at 573.141possible to determine when it will attain, or for that matter,if it had already attained, "maximum prosperity" It isprecisely because of this fact and the fact that directorscannot know what the future holds for their company, that theymust seek to balance the "interests" of the present dayshareholders, with the "interests" of the future of thecompany. This is why directors invest in long-term businessplanning so as to ensure the company's continual ability tostrive for enhanced prosperity.It is, however, possible to argue that this notion ofmaximum prosperity is relevant when an unsolicited takeoverbid is made for a company. It is here that the directors ofthe target company must evaluate whether the bid is in thebest interests of the company. As was discussed above, thebest interest of the company is properly understood to meanthat which is in the best interest of the shareholders as awhole, which in turn can be properly described as maximizingshareholders' wealth through maximizing corporate prosperity.The role of the target directors and the legitimate interestsof the shareholders, it is maintained, does not change when acompany has become the subject of a takeover bid. 3°4 Whatdoes change as a consequence of a takeover bid being made, isSee Iacobucci, "Planning And Implementing Defences ToTake-over Bids: The Directors' Role",  supra, note 7 at 165,referring to M. Lipton, "Takeover Bids in the Target'sBoardroom" (1979) 35 Bus. Lawyer 101 at 113-20.142that there now exists a tangible figure, a "price tag" so tospeak, being proffered by the offeror as representative of thetarget company's true "value". In this context, the maximumprosperity of the company is no longer a nebulous or academicconcept contingent on unknown future factors. The actualitiesof a takeover bid being made "breathes life" into the conceptof determining a company's maximum prosperity.J. B. Harper and A. A. Browne, submitted, "...that underthe general law a directors' principal duty in relation to atakeover offer for shares in his company is to ensure to thebest of his ability that the shareholders are not inducedthrough ignorance of any material factor to accept a price fortheir shares which is not commensurate with their true value." 305Obviously target directors could not be allowed to rejectout of hand a takeover bid on unsubstantiated grounds thattheir company would be better off otherwise. Within thefinite parameters of the bid, the directors of the targetcompany must determine whether the value of what is beingoffered adequately reflects the worth of what is being sought.This perceived "worth of the target company" is, for thepurposes of determining the adequacy of the bid, the value ofthe target company's maximum prosperity.305 Supra, note 62 at 447.143Where a takeover bid involves some form of share exchanyein lieu of an all cash deal, or where only a partial bid forthe target company's shares is made, the range of potentialfactors that may properly be considered by the targetdirectors in considering the adequacy of the bid willnecessarily become far broader. The target directors mayproperly consider any number of contingent factors that mayforeseeably have a negative impact either upon the shares thatare being proffered under the bid; as this directly relates tovalue of the offer being made, or upon the legitimateinterests of those shareholders not targeted under the bid, asthis related to the target directors duty to serve theinterests of all the shareholders. 306 The target directorsmay consider such factors as, the offeror's generalreputation, its past dealings within the business community,the perceived business acumen of the offeror, the offeror'sproposed business plans, or the financing arrangement made bythe offeror in making its bid. 307 It is under this type ofa takeover bid scenario that notions of fairness and abalancing of interests may come into play if the best306 Gore-Browne supra, note 146 at 27-9(w), states that"[w]here a particular decision to be taken by the directorsbears differently upon different classes of shareholders,their duty is to act fairly having regard to the interests ofall classes.3" See Pitt, supra, note 4 at 874-75, A. J.Hudec,"Practical Rules for Directors of Takeover Targets"[Jan. 1991] Bus. & The Law 7. See the comments of Berger J. inTeck, supra, note 53 at D.L.R. 317, at W.W.R. 415-16.144interests of the target company would, but for a very smallminority shareholders, be advanced should the bid succeed.In attempting to determine the adequacy of the bid, thetarget directors should be permitted to consider the value oftheir company as a going concern. Clearly, in determining"value" the target directors should be allowed to consider awide variety of factors and events that can be said to impactpositively upon the prosperity of the company. In determiningthe "maximum prosperity value" of a company, target directorsshould also be permitted to take into considerationanticipatory factors or events that will impact positivelyupon the interests of their company even though such corporatebenefits will accrue ex post facto that point in time in whichthe adequacy of the takeover bid is being assessed. When suchconsiderations are legitimately factored into the analysisthey may demonstrate that the target shareholders would be ina superior position if the bid did not succeed. 308 RobertW. Hillman cautions that:308 Sommer, supra, note 55 at 51.145Further a court should not , grant relief for failureto achieve expectations within an unreasonableperiod of time...Obviously, an individual commits capital to aventure with the expectation that a return will beforthcoming.... The problem becomes one ofdetermining when it is reasonable to expect areturn on capital, and to a large extent thisshould depend upon the assumption and expectationsof the parties which formed the basis for theventure. 309The notion of determining a company's "maximum prosperityvalue", is of course a relative term, and requires a point ofreference. How far afield; how speculative, can targetdirectors reasonably project what the anticipated maximumprosperity of their company would be? It is said that,"[1]ong-term profitability is a very broad principle, onewhich allows management great flexibility. However, thisflexibility does not permit management to pursue every courseof action which it might believe the corporation should ingood conscience take." 310It is proposed that target directors ought to be limitedto considering only those factors or events that arereasonably foreseeable and genuinely anticipated to occur.309 "The Dissatisfied Participant in the Solvent BusinessVenture: A Consideration of the Relative Permanence ofPartnerships and Close Corporations" (1982/83) 67 Minn. L.Rev. 1 at 79 & note 248.310 "Session One", supra, note 295 at 203.146This implies that come kind of business strategy or plan forthe target company had been implemented prior to the takeoverbid being made. In this way, the target directors should bepermitted to calculate into their assessment of the adequacyof the takeover bid, the anticipated increase in prosperitythat their company would have enjoyed at the expiration of abusiness plan, as that increase in corporate prosperity can bedescribed as a current asset of the target company.What is a "reasonable business plan" in terms of what isassumed that can be achieved under the plan and the durationof time it would take to attain its goals, will undoubtedly bea matter of debate. One obvious problem with permittingtarget directors to consider anticipatory prosperity based onlong-term business or plans for their companies, is thepotential for abuse. An otherwise adequate takeover bid couldbe rejected by the board of directors of the target company asnot being in the best interests of the company and itsshareholders, under the guise of, or in the mistaken beliefthat, the target company and its shareholders would enjoysuperior benefits being offered under the long-term businessplan. 311311 See J. J. Lerner, "Did the Time Decision Torpedo theHostile Bid?" (Feb. 1990) Vol. 24, No. 4 Mergers &Acquisitions 41 at 42; R. E. Bull, "Directors'Responsibilities And Shareholders' Interests In The AftermathOf Paramount Communiciations v. Time,Inc." (1990) 65 Chicago-Kent L. Rev. at 915-16.147The propensity that when a takeover hid is made therewill be directors who are motivated out of self-interest toengage in defensive tactics regardless of the merits of thebid, is a very real problem. The necessity to establishchecks to counter such conduct is a legitimate concern for allwho participate within the financial market places of NorthAmerica. The question remains however, by what means is thisbest achieved?A major case out of the state of Delaware recently, wasthat of Paramount Communications, Inc. v. Time Inc.  312Briefly in this case, the Supreme Court of Delaware rejectedParamount's appeal for an injunction prohibiting the board ofdirectors of Time from completing a planned merger/acquisitionwith Warner Communications, Inc. Paramount and othershareholders of Time argued that the injunction should begranted because:(1) the original deal reached with Warner was tantamountto a sale of corporate control of Time, and therefore theso-called "Revlon mode" was triggered, and the directorsof Time were required to accept Paramount's higher bid.(The "Revlon mode", was named after the case in whichthis judicial test. was first articulated - Revlon. Inc. v. MacAndrews & Forbes Holdings. Inc. in which case the312 Supra, note 270.148court held that where the sale of the company isimminent, the target directors have a fiduciary duty toseek that highest possible price available so as tomaximize shareholders' value). 313(2) that the second deal struck between Time and Warnerwas an unreasonable response to any perceived threat thatthe Paramount offer could pose, and therefore, thedirectors of Time acted improperly. (The notion that aresponse to a takeover bid must be reasonable, that is,in proportion to the actual threat a takeover bid posedto the policies and affectiveness of the target company,was first articulated into a judicial test, in the caseof Unocal Corp. v. Mesa Petroleum Co.). 314Briefly the facts of Paramount Communications Inc. v.Time Inc. are that, in 1987 Time was considering expanding itsbusiness interests within the communication industry. Inparticular, Time was interested in some type of venture withone of the major movie producing/entertainment companies,(Paramount, Disney, Twentieth Century Fox, Universal, andWarner were all considered). In the end the Time directorsdecided to enter discussion with Warner, whom the Time boardfelt offered their company the best potential option for its313 506 A.2d 173 (Del. 1986) at 183.314 493 A.2d 946 (De1.1985) at 955.149required needs and aspirations for future growth andprosperity. Intial negotiations failed, primarily because ofdisagreements over who would retain effective managerialcontrol of the merged companies. Time's directors wantedcontrol to ensure the continuation of its perceived "corporateculture". 315 Eventually however, an agreement in principlebetween the two companies was reached, but because Time wasoffering Warner shares in its organization, Time's managementrequired their shareholders' approval, which was to be soughtat the upcoming annual meeting of shareholders. Prior to thismeeting taking place, Paramount made a takeover bid for Time.It was an all cash, all common share offer, that eventuallyreach $200 per share. Time's management rejected theParamount deal as not being in the best interest of thecompany, and thereafter altered the arrangements previouslymade with Warner to primarily an all cash deal, therebysuperseded the necessity to obtain shareholder approval.What is important to note about the Court's decisiondismissing Paramount's request for the injunction, was theiracceptance of the probity of the Time's directors taking into315 Ironically it was N. J. Nicholas, Time's formerpresident and co-chief executive officer of Time Warner Inc.,that recently resigned over what was termed a clash ofcorporate cultures within the board of directors. The helm ofthe company is now controlled by Steven Ross Warner's formerchairman. See Reuters, "Nicholas quits Time Warner" The Globe& Mail (21 Feb. 1992) B2, S. Wollenberg, "Lingering discord atTime Warner" The Globe & Mail (22 Feb. 1992) B 7.150consideration the company's long-tRrm business plans, whenevaluating the adequacy, of the takeover offer. 316 Thecourt made two key findings in this case. One determinationmade by the Court was the fact that the directors of Timecould demonstrate that there did indeed exist a long-termbusiness strategy for their company prior to Paramount'stakeover bid having been made. The court stated that, "[w]ehave purposely detailed the evidence of the Time board'sdeliberative approach, beginning in 1983-84, to expand itself.Time's decision in 1988 to combine with Warner was made onlyafter what could be fairly characterized as an exhaustiveappraisal of Time's future as a corporation." 317Secondly, it was determined that the directors of Time hadreasonably assessed that the projected prosperity for theirtarget company, (hence its shareholders) would be superior ifParamount's $200 per share offer was rebuffed and Time's long-term business strategies were allowed to proceed as planned. 318The Court rejected the notion that when confronted withParamount's bid, the board of directors of Time were limitedin evaluating the offer from the perspective of whether or not316 Specifically, in determining that the Time-Warneragreement was the product of a proper exercise of businessjudgment, supra, note 270 at 1151-52.317 Ibid. at 1151.318 Ibid. at 1149.151the bid adequately reflected the present value of the company.The Court acknowledged that Time's directors could considerthe implications of a takeover affecting the future prosperityof their company as set out in their long-term businessstrategy. The judicial deference paid to Time's commitment toretain its corporate culture was also another considerationaccepted by the Court in deciding in Time's favour. 319 Thewhole idea of a corporate culture is a new concept in companylaw. It appears that Time persuaded the court that its uniquebrand of management skills was an important factor in theoverall value of the company. (Implicit in Time's argument isthat Paramount lacked similar management skills that would beof equal value to the company should their bid succeed.) Whatis not clear from the court's decision is exactly how relevantthe notion of a company's perceived "corporate culture" is indetermining what is in the best interests of the shareholders.It is also important to note that the Delaware SupremeCourt would not entertain as relevant, arguments pertaining tothe notion of the time value of money. The Supreme Court ofDelaware rejected the idea that courts should be consideringsuch issues, stating that,"[t]he open-ended analysis mandatedby Unocal is not intended to lead to a simple mathematical319 Ibid. at 1149, 1152, 1154. See Bull, supra, note 311,at 915-16.152exercise: that is, of comparing the discounted value of-Time-Warner's expected trading price at some future date withParamount's offer and determining which is the higher." 320It would appear however, to be an important factor for eitherparty to address, but specially so from Paramount'sperspective in trying to discredit Time's assertion that theiroffer was inadequate. It would seem, at least in part, thatfor Time's directors to determine that their shareholderswould be in a superior position if the Warner deal wentthrough, they must have addressed their minds to the issue ofthe time value of money. That is, they must have, (or atleast, they should have) considered where their shareholderswould be in terms of an aggregate increase in the value oftheir shares at the end of the proposed business plan, towhere they would have been at the same point-in-time, had theParamount's bid succeeded."Time's advisor had projected long-term trading rangesafter the merger of $159-257 for 1991, $230-332 for 1992 and$204-402 for 1993. On the Paramount side, a $200 per shareoffer could have been invested, and at 12% would have beenworth by mid 1994, approximately $352." 321 It should benoted that despite Time's prediction, Time-Warner shares arecurrently trading on the New York Stock Exchange on the 10th320 Supra, note 270 at 1153.321 See Bull,supra, note 311 at 909.153of Decerber 1992 at U.S. $28 . 322Paramount might have also wanted to consider in theirargument, the "risk factors" that are always present in anylong-term business plan such as the one being relied upon byTime as the basis for rejecting their cash offer. Paramountcould have argued that any estimate of the future value of theTime-Warner shares should be proportionately discounted by afigure determined to reflect these "risk factors" that the-shareholders of Time-Warner would have to endure over thatperiod of time called for under the plan proposed by Time'smanagement to produce the results speculated.The court in the Paramount case made another importantobservation, and that was that it was up to the directors (notthe shareholders) to determine the time frame for achievingcorporate goals. The Court held that where there exists areasonable likelihood that the interests of a target companywill be advanced from business plans implemented by itsdirectors, the directors were under no obligation to abandonsuch plans for the sake of a short-term benefit. The courtposed the question; "Did Time's board, having developed astrategic plan of global expansion to be launched through abusiness combination with Warner, come under a fiduciary duty322 Ibid. See R. Lowenstein, "Time Warner anticipatesmerger" The Globe & Mail (24 June 1991) B 8. 154to jettison its plan and pui_ the corporation's future in thehands of its shareholders?" In Obviously in the opinion ofthe Supreme Court of Delaware, they did not.The decision in Paramount Communications. Inc. v. Time Inc. reaffirms the long standing opinion within the judiciary,(both the Anglo-Canadian and the American judiciaries) that itis up to the directors and not the shareholders to manage thebusiness affairs of a company. This case also confirms, forU.S. directors at least, the acceptability of considering thecompany's long-term business strategies when evaluating whatis in the best interests of the company and its shareholders.Jonathan J. Lerner, who discusses the decision ofParamount case in his article, "Did the Time Decision Torpedothe Hostile Bid?", had this to say about the right ofdirectors to consider long-term corporate planning; "[b)ecauseof the Time-Warner-Paramount decision, corporate boards canuse long-range strategies as rationales for rejectingacquisition offers. While increasing directors' flexibility,the Delaware court ruling stopped short of giving them a blankcheck to "just say no" in any case. 324 Robert E. Bull,similarly expresses his strong concerns that the ParamountSupra, note 270 at 1149-50.324 Supra, note 311 at 41.155'case gives targei. directors too much power if all they have toshow is there exist a long-term strategic plan, the pointbeing that long-term plans are too speculative. 325Interestingly, in the Paramount case, Time's directorswere permitted to alter the original deal with Warnerspecifically to avoid having to go to the shareholders fortheir approval. 326 The threat posed by the Paramount bid,according to Time's directors, was that though they haddetermined the bid to be inadequate, there existed apossibility that Time's shareholders would tender their sharesregardless, having been blinded as to what was truly in theirbest interests by the immediate allure of Paramount's cashoffer. The Court accepted that "Time shareholders might electto tender into Paramount's cash offer in ignorance ormistaken belief of the strategic benefits which a businesscombination with Warner might produce". 327M5 Supra, note 311 at 914-17. See however D. S. Cahill &S. P. Wink, "Time and Time Again the Board is Paramount: TheEvolution of the Unocal Standard and the Revlon TriggerThrough Paramount v. Time" (1990) 66 Notre Dame L. Rev. 159.See generally L. A. Duda, "Paramount Communications, Inc. v.Time Inc.: A Decision Of Paramount Significance?" (1991) 16The Delaware J. of Corp. L. 141.326 Supra, note 270 1153.327 Supra, note 270 at 1153. See T. M. Hackett, "ParamountCommunications, Inc. v. Time Inc.: Taking the Teeth Out ofProportionality Review" (1990) 22 Loyola U. of Chicago L. J.229 at 242-43.156Of the Australian case Dorvall v. North Sydney Brick & Tire Co. Ltd., 328 John Farrar discusses the decisionrendered by Hodgson J, and of Hodgson's acceptance that"...where directors are of the view that many shareholderswill accept a takeover offer and are also of the view that itwould be disadvantageous to them, they may cause the companyto enter into agreements with a third party to demonstrate tothe shareholders that it is not in their interests to acceptthe offer, provided that the agreements in question advancethe commercial interests of the company." 329Contrast the approach taken in Paramount, and referred toin the Darvall case, with our National Policy No. 38, Take-Over Bids - Defensive Tactics, as promulgated by the CanadianSecurities Administrators. I° National Policy 38 stronglysuggested that though target directors may, in responding toan unsolicited takeover bid, engage in defensive tactics, theactions taken must not deny their shareholders the opportunityto respond to the bid or to any competing bids. 331 FrankIacobucci, in his article "Planning And Implementing Defences328 (1988), 12 A.C.L.R. 537.329 Farrar, supra, note 1 at 35-36. Actions taken for thepurpose of "advancing the commercial interests of the company"can arguably be defended on a basis of anticipated futureprosperity for the company.no Supra, note 39.331 Ibid. 157To Take-over Bids: The Directors' Role", expressed similarsentiments, arguing that, "[s]hareholders should enjoy thefundamental rights of disposing of their shares and ofdeciding who shall run the affairs of the corporation, freefrom directors interference". 332A policy that restricts the role of target directors andencourages their passivity in the context of an unsolicitedtakeover bid, arguably contradict basic corporate law doctrinethat it is up to the directors, not the shareholders, todecide what is in the best interests of the company. It seemsthat under National Policy 38, the analysis is that the makingof a takeover bid fundamentally alters the role of the targetdirectors who must, once the bid is announced, abdicate theirobligations even where the better interests of the companycould be threatened by doing so. 133Even if one accepts, as is advanced by our Canadiansecurities regulators, that shareholders' interests are betterserved where a competitive auction for control occurs, 334 itdoes not necessarily follow that target shareholders ought tohave at all times, the ability to respond to a takeover bid or332 Supra, note 7 at 165-66. See also Harper supra, note62 at 449. See generally J. L. Howard, "Fiduciary Relations InCorporate Law"", supra, note 42 at 74-77.ma See St. Patrick Baxter, supra, note 33 at 100.334 For contrary view see Gillen, supra, note 1.153to a competing-bid. If we accept the chronclogy , of corporatemanagement as unchanged in the context of an unsolicitedtakeover bid; and if the target directors have already bonafide in the proper execution of their duties determined thatthe initial bid or a competing bid was inadequate andtherefore not in the best interests of the company; whatfurther interests are served by requiring as a general rule,that the target shareholders have the right to respond to thetakeover bid or any competing bid?It would appear, based on the recent decision of theOntario Securities Commission in re: Canadian Jorex Limited,released in January of this year, 335 that where targetdirectors implement defensive tactics of a shareholders'rights plan in response to a takeover bid without obtainingprior shareholder approval, 336 and where such action resultsin denying the target shareholders the ability to respond tothe initial bid or any subsequent competing bids, thedirectors must be able to demonstrate that the tactics15 (1992), 15 Ontario Securities Commission Bulletin 257,chpt. 3 at 1, see the commentary prepared by G.W. Voorheis,G.R.M. Hayden and P.D. Davis, of Davies, Ward & Beck, Toronto,January 28, 1992. Out of the 34 or so existing poison pillplan in Canada, Jorex's was the first to be disallowed by theOntario Securities Commission. see C. Motherwell, "OSC entersCanadian Jorex takeover battle" The Globe & Mail (19 Dec.1991) B 11, A. Robinson, "OSC ruling expected on Jorex poisonpill" The Globe & Mail (20 Dec. 1991) B 5.336 With respect to the board of directors obtaining priorapproval of the shareholders see generally, J. G. Howard,supra, note 7 at 76. But see Farrar,supra, note 1 at 40.159implemented served a "useful purpose". It would also appear,given the general tenor of National Policy 38, that the onlyuseful purpose served under such circumstances would be if nooffer made for a company which was the subject of a takeoverbid, came even remotely close to reflecting the true andintrinsic value of the company, and that despite this factbeing made known to the target shareholders, there was a realpossibility that the target shareholders would be induced toaccept such a bid nonetheless.Arguably the provisions of National Policy No. 38, iftaken to the their extreme, may unreasonably deprive targetdirectors of an option that would in fact be in the bestinterests of the shareholders. The Paramount case is anexample of how even a non-coercive takeover bid (as willtypically to be the case here in Canada under our morestringent takeover bid rules 337) may (albeit a rarity), bebona fide rejected by the target directors even where to do soencompassed a purposive plan to evade any involvement of thecompany's shareholders. Peter Dey and Robert Yalden pointedout in their article, "Keeping The Playing Field Level: Poison337 Since initial efforts to bring order and fairness totakeover bids in Canada began, (around the 1960s) numerousrules and regulations have been imposed in an effort to ensurethat the target shareholders are treated equally, fairly, andfree from most types of corecise tactics that an offeror maybe permitted to use in the U.S. See MacIntosh, "NoxiousNostrum" supra, note 33 at 301; Feltham,supra, note 82 at 321-23.160Pills And Directors' Fiduciary Duties In Canadian Take-OverLaw", that although securities laws are generally designed toremedy deficiencies in our corporate law, at times corporatelaw 'instead of securities rules may in fact be better forshareholders interests. 338 Peter Dey who acted on behalf ofJorex as legal counsel said that, "[t]he defensive tactics ofa company should be "left to the privacy of the board room.The OSC should not substitute its judgment for the board ofdirectors." 3259The securities regulators in Canada have mandated thatthe protection of the investing public in corporate controlsituations is paramount. The problem may be that in theirefforts to protect the public, overzealous initiative,undertaken to discourage unethical or irresponsible behaviouron the part of some target directors, may place too onerous aburden on the sedulous target directors who might otherwise beprepared to implement novel, innovative and necessarydefensive tactics in order to serve the best interests of thecompany and its shareholders. If one accepts the propositionthat a benefit may be incurred by target shareholders whentheir company's board of directors is actively involved in thetakeover bid process, then it can be argued that anyma Supra, note 6 at 252.A. Robinson, "Jorex told to dissolve poison pill" TheGlobe & mail (21 Dec. 1991) B 5.161unreasonable over-policing of target directorsAnay attenuatethe welfare of those interests for whom such policies wereimplemented in the first place. 34°NW See the comments of Professor Berle, supra, note 37 at1149-50.162CHAPTER SIXCONCLUSIONHow directors should or should not be managing theircompanies has been the focus of much discussion over the yearsto be sure. Wisely, however, the judiciary has alwaysretained its distance in considering such matters.Legislators too, trespass lightly into the domain of corporatemanagement. The reason of course is that the affairs ofbusiness are at best capricious, and more often volatile intheir nature. Correspondingly, it has been the prevailingwisdom that in order to react quickly and advantageouslywithin the business community, directors require a good dealof latitude. Such circumstances necessarily do not lendthemselves well to the dictates of strict dogma. Much thesame can be said about how directors should properly beresponding when an unsolicited takeover bid is made for theircompany. Although the law broadly states that directors areto act in the best interests of the company, in the context ofan unsolicited takeover bid, what is in the "best interests ofthe company" remains today a matter of some debate.In this thesis I proposed the notion of using legitimateshareholders' interests as a possible means for understanding163bath what is Ir7,ant by tne phrase "the best interests oT thecompany" and the role directors have to play in endeavouringto promote these interests. In theory it was argued thatreasonable shareholder expectations determine legitimateshareholder's interests, which in turn dictates the roledirectors play in the management of the company. Based onobjectively definable shareholders' expectations, ashareholder's primary concern is for wealth maximization,which it was argued, is understood by the shareholder as beingintricately paired with the fiscal wellbeing of their company.The common interest therefore of the shareholders as a wholeis the promotion of corporate prosperity. When confrontedwith a corporate control situation, such as that whichpresents itself when an unsolicited takeover bid for a companyis announced, the theory continues that, barring any unusualcircumstances that may have occurred throughout a shareholderassociation with the company, his or her legitimate interestsare that the board of directors will, in responding to thebid, endeavour to promote the corporate prosperity of thecompany.Within the confines of a takeover bid the prosperity ofthe company equates to the adequacy of the offer. Althoughsome target shareholders may wish to avail themselves to theunexpected windfall that a takeover bid might bring, theycannot justifiably maintain that position if the bid is164determined to be inadequate, because- it has never been withinthe shareholder's genuinely held expectations that their boardof directors would sacrifice corporate prosperity for short-term shareholder interests. Nor could shareholders maintainthat they have a right to the premiums offered. Richard Brownsaid that the, "[c]ourts, however, have found thatshareholders do not possess any absolute contractual right toreceive takeover bids. Rather, the shareholders' ability togain premiums from takeover activity is subject to theexercise of the good faith business judgments of the beard ofdirectors in structuring appropiate defensive tactic." 341While Mr. Brown was referring to the U.S. judiciary, similarsentiments can be said to apply here in Canada. 342While the company exists as an ongoing concern thedirectors' :agenda is set, they are required to orchestrate thebusiness and affairs of the company, which includes respondingto an unsolicited takeover bid, so as to promote the company'smaximum prosperity.In conclusion it is suggested that this singularity ofcharacter with respect to the board of directors' duty inresponding to an unsolicited takeover bid, affords us with a341 Supra, note 24 at 213.342 However National Policy No. 38 could considerablyalter the status quo in its present form.165more reliable means s-f assessing the propriety of directors'conduct.Dean Clark of the Harvard Law School, suggested that totry to analyze the appropriateness of how directors respondedto an unsolicited takeover bid based on some kind of"fairness" standard would be insufficient because the contentof "fairness" was too broad. Dean Clark felt that:A single goal like pi -ofit maximization is moreeasily monitored than a multiple, vaguely definedgoal like the fair and reasonable accommodation ofall affected interests.... Assuming shareholdershave some control mechanisms, better monitoringmeans that corporate managers will be kept moreaccountable. They are more likely to do what theyare suppose to do and do it efficiently. 343The idea of utilizing shareholder's expectation as ameans of inferring duties and obligations was discussed byLord Wilberforce, in Ebranhimi v. Westbourne Galleries Ltd.,where his Lordship stated that, "... a limited company is morethan a mere legal entity, with a personality in law of itsown: that there is room in company law for recognition of thefact that behind it, or amongst it, there are individuals,with rights, expectations and obligations inter se which areSee J. L. Howard, "Fiduciary Obligations", supra, note58 at 3.1.08 & note 30; Sommer, supra, note 55 at 54. But seeShapira, supra, note 272 at 145.not necessarily submerged in the ::ompany structure.The judicial use of the concept of shareholder'sexpectations is still however an emerging concept. This waspointed out by Donald F. Clifford in his article, "CloseCorporation Shareholders Reasonable Expectations: The LargerContext". Clifford states:There are not, however, enough cases to clarify thecontours of that doctrine. Such a stage isinevitable in the evolution of the law. As thecases increase, even more questions will arise. Is"disappointment" enough? What is reasonable?Whose expectations? When must the expectationshave arisen? Are the expectations born of contractor of status? Are they related to fiduciaryobligations? Can they be "limited" by contract?". 34°In the United States the notion of utilizingshareholder's expectations has, since about the early 1980s,been acquiring a good deal of consideration. 346 However, asBrian Cheffins pointed out, the same cannot as yet, be saidabout Canada. 347 Although Cheffins did note that the wideacceptance by the U.S. judiciary of the validity of usingshareholders' expectations, was likely indicia that this344 [1973] A.C. 360, [1972] 2 All E.R. 492 (Eng. H.L.) at500. See Macintosh, "Minority Shareholders' Rights in Canada",supra, note 60 at 618.Supra, note 272 at 41.3" Ibid. & note 2.347 "An Economic Analysis" supra, note 272 at 781-32.166344167concept would attain. increasing acceptance here in Canada.348 Like Brian Cheffins, Professor Welling has dealt withthe notion of shareholder expectation in Canada when dealingwith issues concerning the oppression remedy. ProfessorWelling commented that Canadian courts are beginning to usethe notion of shareholder expectations, and that our courts"have clearly seen that legitimate shareholder expectationscan arise in many different situations.... 349One of the earlier cases that dealt with the concept ofshareholders' expectations was Diligent v. R.W.M.D. OperationsKelowna Ltd., in which case, Fulton J., comments that theconcept of considering shareholder's expectations as anapproach that would, "rationalize what has been presented bysome as an equation with the shareholders on one side and thecompany on the other, with different interest". 350In the case of First Edmonton Place Ltd. v. 315888Alberta Ltd. 351 a small firm of lawyers from Edmonton hada management company, which acquired a business rental leasefor a suite of offices. The management company was controlledby the same group of lawyers, who were its shareholders and348 Ibid.349 Supra, note 42 at 520.350 (1976) 1 B.C.L.R. 36 at 51.351 (1988), 60 A.L.R. (2d)^122.168directors. The preglies were subsequently ,wibleased by themanagement company to the lawyers but without executing asubleasing agreement. The lease signed by the managementcompany was for ten years with an 18-month rent-free period,a leasehold improvement allowance of $115,900, and a signingbonus of $140,126 that was subsequently paid over to thelawyers. 352 The lawyers vacated the premises three monthsafter the free 18 month rent free period had elapsed.In part, MacDonald J. had to consider whether theplaintiff lessor (in fact, the subsequent lessor) had theproper status to bring a derivative action under theprovince's Business Corporations Act, in the name of themanagement company and against the defendant directors. TheCourt exercising its discretion under the Act, determined thatthe lessor should be allowed to bring a derivative action asbeing a "proper complainant". McDonald J., referring toDeligenti v. R.W.M.D. Operations Kelowna Ltd.  , and quotingfrom Professor Shapira's article, "Minority Shareholders'Protection - Recent Developments 353 that:352 See headnote, Ibid. at 122-24.353 (1982-83) 10 N.Z.U.L. Rev. 134.169Whereas in - the past good faith and theconstitutional power of the directors and themajority had been critical, the emphasis shifted tothe damaging effect on the interests set out in[the Act]. These interests include "equitablerights" based on legitimate expectations. The"underlying intentions, understandings, andexpectations of the participants provide ananalytical framework within which the concept ofunfair prejudice can be developed". Expectationswill vary considerably with the size, structure andnature of the corporation, as well as thecircumstances surrounding the applicant'sassociation with the corporation. 354MacDonald J. went on to say. that, "...the court mighthold that the applicant is a "proper person to make anapplication" for an order under [the Act] if the act orconduct of the directors or management of the corporationwhich is complained of constituted a breach of the underlyingexpectation of the applicant arising from the circumstances inwhich the applicant's relationship with the corporationarose". 355The concept of shareholders' expectations is, at least inpart, an extension of a broader economic based theory; atheory that sees the concept of "the company", its existencein society and the laws that have been built-up over the yearsto regulate it, as all being inter-connected to a widerunderlying and unifying idea based on economics. Very354 First Edmonton Place,supra, note 280 at 144.355 Ibid. at 152.170briefly, this economic theory tends to view a company a an.entity existing for the purpose of facilitating cost effectivetransactions between people which, sans the corporate entity,would otherwise have to take place at a higher transactioncost. Within this corporate entity (generally the discussionis in respect to closed corporations) the rights, duties andobligations that can exist vis-a-vis the shareholders,directors and the company, are frequently left unspoken andunwritten because to do otherwise would be too expensive andtherefore inefficient. Subsumed in this theory is the factthat courts should look not only to the explicit agreementsmade between the corporation and its shareholders, but also tothe implicit, (i.e., the unspoken and unwritten)understandings that may exist between the parties. 356introspective analysis can be achieved at least in part, byexamining shareholders' expectations.Even if one were to reject the economic analysisapproach, and instead rely on a more traditional analysis ofthe appropriate role of directors based on fiduciary lawprinciples, the concept and the viability of usingshareholders' reasonable expectations would not necessarilyalso have to be discounted. Shareholders' expectations may becomplementary to the fiduciary law jurisprudence. John A. C.356 See Cheffins, "An Economic Analysis", supra, 272 at783ff. See also K. Lehn,"Majority-Minority Relationships-AnEconomic View" (1988-87) 12-13 Can-U.S. L. J. 135.171hetherington has advnced thatThere can be no question that the purpose oflegally imposed fiduciary obligations is to inducemanagers to act in conformity with the expectationsand interests of the shareholders. It would seemto follow that the boundaries or limits ofmanagers' obligations should be sought in theexpress and implied contemplations of the parties,rather than in the immutable dogmas of judicialrhetoric invoking "inveterate" principles. 357In the U.S. case of Lowder v. All Star Mills, the courtexpressed its opinion that shareholder's reasonableexpectations can include ordinary obligations of corporatefiduciaries, stating that, ...some cases have explicitlyacknowledged that how the fiduciary performs obligations ispart and parcel of reasonable expectations..." 358Donald Clifford has postulated that, "[t]he more onelooks, the more the notions of 'reasonable expectations'appear to be near the centre of the legal universe." 359Clifford goes on to cite authority for his proposition statingthat:"Defining the Scope of Controlling Shareholders'Fiduciary Responsibilities" (1987-88) Can - U.S. L. J. 103 at110.3513 Inc. 75 N. C. App. 233, at 240-42, 330 S.E. 2d 649 at654 (1985) as cited in Clifford's article, "Close CorporationShareholder Reasonable Expectations", supra, note 272 at 52 &note 64.359 supra, note 272, at 42.172The firSt section of Corbin's clagsic treatise onContracts is entitled "The Main Purpose of ContractLaw is the Realization of Reasonable ExpectationsInduced by Promise. ...Tort law, of course, isthoroughly immersed in "reasonable expectations"....As the extraordinary English scholar P. S.Atiyah pointed out, the attributes of our propertylaw are grounded in expectations." 36°Clifford than quotes directly from text, The Rise AndFall Of Freedom Of Contract:The truth is that expectations are becoming moreand more divorced from promises. On the one hand,certain expectations are today accorded greaterrecognition, because they are more powerfully held.These expectations do not necessarily arise frompromises, still less from contract. They arisefrom the modern way of life. 361Philip Anisman discussed expectation of shareholders andthe growing acceptance within the Canadian judiciary ofdetermining fairness based on the expectation of the parties,at least in closely held companies. 362 So too doesProfessor Macintosh. 363The notion of shareholders' expectation has invariablybeen applied to situations involving minority shareholders in360 Ibid. at 42.361 Ibid. at 43.362 Supra, note 60 at 92-92.363 See "Minority Shareholders' Rights in Canada", supra,note 60 at 599, 615.173closed corporations. The reason for this may in part be theresult of the courts' acceptance over the years to intercedeon the behave of minority shareholders who were more or lesshelpless to stop abuses of power by majority shareholdersand/or directors. 364Brian Cheffins points out that the courts are reluctantto get involved in the affairs of shareholders of largecorporations because dissatisfied shareholders (minority ornot) generally have a market in which they can dispose oftheir shares if they so choose. Cheffins goes on to say that,"[f]urther, in widely held corporation, the shareholderexpectations and understanding relating to employment,management and other matters which are so often the componentsof shareholder dissatisfaction are unlikely to arise." 365Be that as it may, it should not be discounted thatshareholders in large publicly held companies are void ofexpectations. Robert B. Thompson, while focusing hisdiscussion of shareholders' expectations in closely heldcompanies nevertheless recognized that, "[t]he court[appellate court of New York] recognized that shareholders'expectations in a close corporation differ from shareholders'expectations in publicly held corporations ..."364 See Anisman,  supra, note 60; Thompson, supra, note 272at 196-98.365 Supra, note 58 at 317.174J. G. Macintosh points out that Dixon J. in, Peter'sAmerican Delicacy Ltd. v. Heath, while dealing with the issueof majority versus minority shareholders rights andobligations, "...recognized that, even for large publiccorporations, the exerc i se of apparently unrestricted powersmight be conditioned by legitimate shareholder expectations,a principle whose full import is only now in the process offull elaboration." 366Professor Welling has stated, that the, "...principle ofshareholder expectation is not restricted to small, closelyheld "partnership analogy" corporations, though it is morelikely to arise and to generate judicial sympathy in thosesituations." 3`7It is advanced that the concept of shareholders'expectations is an expansive approach, which, when theappropriate circumstances are present, can be applied to anycorporate situation. Its use need not be relegated within theconfines of closely held corporations. 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