Quebec Premiere Jean Charest, in the midst of an election campaign he’s 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.
When a similar law was enacted in Pennsylvania, to preserve local employment, disgorge profits and ward off unsolicited takeovers, stock prices declined by $4 billion in the six-month period between the announcement and enactment of the law, according to a study by researchers at Drexel University. Pennsylvanian companies that chose to opt out of some or all of the law experienced “significant positive stock price returns,” while those that adopted the law performed “significantly worse” than firms outside the state, said Stanford researchers commenting on the study.
While many U.S. 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. But Pennsylvania’s law is not only mandatory, obligating certain stakeholders to be considered, it 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 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.” Charest’s proposal, if it unfairly treats shareholders (and this is almost certainly the case if it denies them a vote), may be challenged on the basis of its constitutionality.
Politicians should not be in the business of picking winners and losers. It cannot competently do so. Government is not governance. Nor do judges have the 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, biased against shareholders, immunizes a firm from competition, in essence saying a board can “just say no” to a takeover, full stop. Takeovers 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 that 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 votes are respected, as they did in Pennsylvania. Quebec will lose.