Quebec Premiere Charest’s Proposed Anti-Takeover Law is Misguided

Premiere Jean Charest, who is in the midst of an election campaign that he is losing, is promising a law that would give stakeholders at Quebec companies – such as employees, management, suppliers and local communities – superiority over the interests of shareholders. This potential law is misguided and would entrench ineffective boards, management teams and firms, to the detriment of shareholders, investment and the Quebec economy overall. See here also.

When a similar law PA-SB 1310 was enacted in Pennsylvania – to preserve local employment, disgorge profits and ward off unsolicited take-overs – stock prices declined by $4B in the six-month period between the announcement and enactment of the law, according to a study by researchers Szewczyk and Tsetsekos. Pennsylvanian companies that chose to opt out of some or all of the law experienced “significant positive stock price returns,” while Pennsylvania companies that adopted the law performed “significantly worse” than firms outside Pennsylvania, according to Stanford researchers Larcker and Tayan.

While many US states have enacted so-called “stakeholder statutes,” these laws enable – although do not require – boards to consider the interests of stakeholders other than shareholders in their deliberations. These laws are largely permissive in nature in other words, and good boards always consider stakeholder interests in any event. The Canadian Supreme Court has spoken on how to do this. Pennsylvania’s law is not only mandatory – obligating certain stakeholders to be considered – but also places the interests of non-shareholders above those of shareholders, as Quebec’s proposed law intends to do. Indeed, under Charest’s proposal, shareholders, remarkably, may not even have a vote on a proposed takeover. Our high court has stated, in BCE Inc. v. 1976 Debentureholders, that a board has a duty to treat stakeholders affected by corporate actions equitably and fairly, and that there is “no principle that one set of interests should prevail over another” (page 9). Charest’s proposal, if it unfairly treats shareholders (and prima facie this is almost certainly the case if it denies them a vote), may be challenged on the basis of its constitutionality.

In the market for corporate control, accountability to everyone is accountability to no one. From an investor’s perspective, shareholder rights plans, staggered boards, dual class shares and restrictions on shareholders to call meetings and vote on corporate changes by written consent are all efforts to entrench ineffective management and firms, and enable the extraction of private wealth by insiders, to the detriment of other shareholders.

Politicians should not be in the business of picking winners and losers as they do not have the competence to do this. Government is not governance. Nor do judges have this ability to second-guess managers and boards. There is a well enshrined “business judgment rule” holding that a judge may not second-guess corporate judgment providing proper process occurred. A law like what is being proposed by Charest, which is essentially a bias against shareholders, immunizes a firm from competition, in essence saying a board can “just say no” to a takeover, full stop. Takeovers – even Rona by US’s Lowe’s Cos. Inc. – occur because of weaknesses and inefficiencies in the marketplace. (I was in a Rona store the other day and walked out when I could not find someone to help me.) If a firm cannot compete on the basis of price, quality or service, it should be taken over or replaced by a firm and a management team who can.

The Supreme Court was clear in the BCE case that the duty is owed from the board to the corporation, but that a stakeholder cannot be unfairly treated. Stakeholders include shareholders, who cannot contract with the company like other stakeholders can. While the high court did not endorse shareholder wealth maximization, it certainly did not invalidate it either. Once shareholder wealth maximization is vitiated, as this Quebec law would do, shareholders will simply invest their money elsewhere, where their rights and vote are respected, as they did in Pennsylvania. Quebec will lose.

Politicians should be more concerned with creating the fiscal and economic climate to attract jobs and investment, not enacting protective barriers that will have the opposite effect in a global world.


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