The case against standardizing corporate law

One of the enduring benefits of Canadian federalism is the freedom it provides for provincial governments to innovate in law and policy. Unfortunately, we may be in danger of sacrificing this benefit in the area of corporate law.

Under the Canadian constitution, corporations may be formed under federal, provincial, or territorial statutes. For example, businesses seeking to incorporate may do so under the federal Canada Business Corporations Act (CBCA) or one of several corporations acts adopted in each province and territory. Despite this plurality of statutes, however, judicial application of corporate law has become increasingly standardized across Canada.

Following the lead of the Supreme Court of Canada, provincial courts routinely cite precedent from other provinces (as well as from the Supreme Court itself), even when interpreting their “domestic” corporations acts. Some of these acts are similar enough that this one-size-fits-all approach to statutory interpretation may be justified, but others are entirely distinct in language, structure, and legislative history.

Differences among provincial statutes have taken on new importance in the wake of recent amendments to the CBCA. These amendments codify key aspects of the Supreme Court’s rulings in Peoples Department Stores Inc and BCE Inc. Both decisions expanded the range of “stakeholder” interests that directors may consider in exercising their fiduciary duties to include employees, retirees and pensioners, creditors, consumers, governments, and the environment. These rulings—and the subsequent amendments to the CBCA—constitute a dramatic reversal of traditional conceptions of corporate law, under which shareholders’ interests were considered paramount. That said, since both Peoples and BCE were decided under the CBCA, and since no provincial legislatures have followed Parliament’s CBCA amendments, it is doubtful these changes apply to provincial corporations.

At least in theory. In practice, provincial courts often follow the direction of the Supreme Court, even when deciding cases under entirely different statutes. As a result, Canadian corporate law has become increasingly homogeneous, with little variation among provincial jurisdictions. It is therefore foreseeable that provincial courts will apply BCE’s novel fiduciary standards even when dealing with non-CBCA corporations. Indeed, some provincial courts already have.

This is unfortunate for several reasons. First, as a matter of judicial practice, courts should be precise in their construction of democratically enacted statutes. Words matter, and the absence of provincial amendments tracking those of the CBCA should be interpreted as just that—an absence of intention by provincial governments to legislate similar changes. Given the proper role of the legislature in determining regulatory policy, courts should refrain from changing the law absent democratic authorization.

Second, allowing for variation in the laws of the respective provinces gives clearer expression to local policy preferences. Like many things in Canada, political attitudes toward business corporations vary among the provinces. By supporting diversity in corporate law, courts can empower provinces to craft their own regulatory approaches, facilitating the “laboratories of democracy” that are a vital aspect of federalism.

Finally, and most importantly, the Supreme Court is not the institution that should be determining Canada’s corporate law. By practice and tradition, the Supreme Court of Canada is a specialized constitutional body, with limited expertise in corporate adjudication. Unlike trial-level provincial courts, which may hear dozens of corporate cases per year, the Supreme Court can go several years without a single corporate legal dispute. What’s more, since the retirement of Justice Frank Iacobucci, no justice of the court has had any background in corporate transactional law. Thus, while the Supreme Court is an immanent authority on Canadian public law, it is not a specialized commercial court by any stretch of the imagination.

This lack of expertise is reflected in the BCE decision itself, which leaves much to be desired in terms of clarity, coherence, and consistency with prior case law. The extension of fiduciary duties to “employees, creditors, consumers, governments and the environment” provides scant guidance to boards of directors as to how to appropriately balance these interests, which are often in conflict.

Worse, by providing directors an open-ended list of interests they “may” consider, the court has weakened the managerial discipline imposed by legal accountability to shareholders. Since directors can justify any decision by appealing to amorphous “stakeholder” interests, the court’s ruling amplifies the danger—pervasive in corporate governance—that directors will simply act in their own interests. Compounding this error, the court conflates the fiduciary duty under CBCA s 122(1)(a) with the statutorily distinct oppression remedy under CBCA s 241. By importing its broad conception of fiduciary duties into oppression remedy analysis, the court jeopardizes the original purpose of the oppression remedy itself, which was to protect minority shareholders. If directors may sacrifice shareholder interests to alleged stakeholder concerns, it may limit the ability of minority shareholders to bring successful oppression claims. Beyond these substantive issues, one could also criticize BCE for the court’s minimal engagement with academic scholarship, its misreading of Delaware case law, and its selective use of Canadian precedent. At some point, however, the criticisms become gratuitous. The important point is that while the Supreme Court is a standardizing force in Canadian corporate law, its influence is not necessarily for the better.

For these reasons, Canadian courts should think carefully about whether the Supreme Court’s interpretation of the CBCA—questionable on its own terms—should also be transposed onto provincial corporations acts, especially in the absence of legislative amendments. Given the complex legal and policy issues raised by expanding fiduciary duties, it would be more appropriate to wait and see whether provincial legislatures follow Parliament’s example.

In the meantime, there is nothing to fear from substantive diversity in Canadian corporate law. As a nation, Canada rightly prides itself on its legal pluralism, its distinct regional identities, and its unique system of democratic federalism. It would be ironic to impose uniform standards onto its multijurisdictional corporate law.