June 21, 2008

Canada Supreme Court Sides With BCE Over Bondholders

By Christopher Faille, Senior Financial Correspondent

OTTAWA, Ontario (HedgeWorld.com) - The Supreme Court of Canada on Friday [June 20] set aside an appeals court decision in a much- watched case pitting bond-holders against the owners of equity in the proposed leveraged buyout of BCE Inc., which stands to become the largest buyout in Canadian business history.

A consortium led by the Ontario Teachers' Pension Plan will now proceed with its buyout plans, which were threatened on May 21 when a five-judge panel of the Qubec Court of Appeal refused to approve the C$52 billion buyout on a theory that would have had far- reaching consequences, perhaps upsetting many settled expectations about the respective rights and obligations of owners of equity and debt, and members of a corporate board in Canada.

After the close of the Toronto Stock Exchange, Canada's highest court announced, without explanation beyond the terse phrase "reasons to follow," that the decision of the Court of Appeals "is set aside."

The Qubec appeals court had said that directorial duties are not merely to stockholders but to "stakeholders" generally, and that satisfying the duty to bondholders requires more than compliance with their contractual rights - it requires concern as well for their reasonable expectations.

BCE is the holding company that owns all the equity of Bell Canada. The holders of debentures issued by Bell Canada claimed that conflicts of interest are inherent in the fact that BCE and Bell Canada have identical board memberships. They claimed the leveraging inherent in the deal makes their instruments more risky, and that they had a reasonable expectation that the directors would set up an "independent process" for dealing with this conflict.

Wearing the Hats

Michael Sabia, the president of BCE, testified at the trial court level that the members don't distinguish "Bell Canada" board meetings from "BCE" board meetings. Every meeting of one is a meeting of the other, and the "particular hat that is being worn at the time depends on the issue in front of the board."

The consortium that is seeking to buy BCE includes, in addition to the Ontario Teachers, Providence Equity Partners Inc., Madison Dearborn Partners LLC, Merrill Lynch Global Private Equity and Toronto-Dominion Bank Financial Group. BEC shareholders approved the sale in September.

This OTP-led consortium submitted the winning bid in an auction last summer. The other chief participant in that auction was a consortium led by Cerberus Capital Management LP.

If upheld, the Qubec decision might have done more than derail one large deal, and unsettle the old common-law notion of the significance of equity. It might have created a considerable difference in the legal theories operative on opposite sides of the U.S./Canada border. According to the Supreme Court in Delaware, which has the leading role on such issues in the U.S., the board of a corporation in process of sale is to act in the manner designed to achieve the best result for the owners of equity. The Delaware high court was explicit about this point in a 1986 decision, Revlon v. MAC Andrew & Orbes Holdings Inc.

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