Directors and Corporate Control Contests: Reconciling Frank Iacobucci's Views from the Academy and the Bench

Directors and Corporate Control Contests:

Reconciling Frank Iacobucci's Views from the Academy and the Bench

I Introduction

Frank Iacobucci has made a number of contributions to Canadian corporate law over the years, first as a scholar and then as a judge. In this essay, I review two of these contributions, one from the academy and one from the bench, that involve the role of directors when confronting a control contest. One of the purposes of this essay is to evaluate whether the passage of time, or appointment to the bench, affected his perspective on the conduct of directors in the context of a contest for control. Aside from discussing the internal merits of his analyses, the essay concludes that Iacobucci demonstrates consistency in his treatment of the cases: in both cases the outcome depends, in large part, on an understanding of the limitations on courts' expertise in evaluating directorial conduct.

Part ii of this essay discusses Iacobucci's article, 'The Exercise of Directors' Powers: The Battle of Afton Mines,'¹ in which he demonstrated an admirable feel for the issues surrounding one of the most contentious debates in corporate law: how directors should respond to a hostile takeover bid for control. Aside from its content, the article was ahead of its time by about a decade, with most contributions on the subject emerging in the 1980s and discussion continuing seemingly unabated to this day.² Part III considers a Supreme Court of Canada case, Blair v. Enfield Consolidated Corp.³, in which Iacobucci J. considered a director's role in resisting a dissident seeking control through a proxy contest. Iacobucci J. displayed an understanding of the costs and benefits of different legal approaches and, in addition, an appropriate deference to the decisions of corporate actors on how they themselves wished to be governed.

Part iv turns to the matter of reconciling Iacobucci's analyses in the two cases. His approach to directors' duties in the face of a takeover bid reveals concern about conflicts of interest facing the directors, while in Enfield he did not show significant concern about conflicts of interest facing directors in a proxy contest. Given that control was at stake in both settings, was Iacobucci inconsistent in his attitudes? While he might be forgiven for inconsistency, given that the cases arose twenty-two years apart, I argue in Part iv that there is good reason for the differing attitudes. First, courts should defer to signals of acceptance of conflicts of interest by the parties themselves, which signals existed in the Enfield case but not in the takeover case. Second, courts should be modest about their capacity to evaluate accurately particular decisions by corporate directors in particular circumstances and should, as a consequence, rely significantly on the average effects of a given kind of action – they should be Bayesians. For reasons that Part iv develops, the average net benefits of defensive actions are lower in a takeover contest than in a proxy contest; thus, deference to defensive measures is more appropriate in the latter than the former. Iacobucci's analyses both implicitly and explicitly recognize these distinctions, which both reflect an understanding of the limits of judicial expertise: the parties are better placed than courts to decide on trade-offs in corporate law, and, moreover, when forced to decide matters, courts should have a healthy understanding of their inability to measure precisely the effects of a specific action in a specific factual setting. To his credit, the scepticism of judicial capacity in the corporate setting that he held as a scholar lasted beyond his appointment to the bench.⁴

II the Battle of Afton Mines

Hostile takeover bids present a dilemma for corporate law.⁵ Takeover bids can be welcome, wealth-increasing propositions for shareholders. They may result in...