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Troubling Transaction

When a consortium that included three U.S. private equity firms announced an all-cash, $51 billion transaction to buy Canadian telecommunications giant BCE Inc. in June 2007, the buyers--or at least the American buyers--probably had no reason to believe that the deal was susceptible to a concerted legal assault that would jeopardize the largest leveraged buyout in history.

Indeed, the offered price of $42.75 per share was a 20 percent premium to the share's trading range, a solid indication that the directors who had approved the deal had maximized shareholder value. And since the 1986 decision by the Delaware Supreme Court in Revlon Inc. v. MacAndrews & Forbes Holdings Inc., U.S. courts had been clear that maximizing shareholder value involved an overriding duty to act only in the best interests
of shareholders.

But Canadian law, which requires directors to act "in the best interests of the corporation," turned out to be not quite as clear. Although Canadian courts have confirmed directors' obligations to maximize value, they have never decided whether that obligation invokes consideration of the interest of stakeholders other than shareholders.

In its 2004 decision in Peoples Department Stores Inc. v. Wise, the Supreme Court of Canada suggested that determining the best interests of the corporation may from time to time involve consideration of the impact on a broad range of stakeholders, including shareholders, bondholders, employees, suppliers, creditors, consumers, governments and even the environment.

Peoples, however, has been much criticized. "Peoples is vague and unhelpful because ultimately it talks about a fiduciary duty to the corporation, which says no more than what is already in the statute," says Jon Levin, partner at Fasken Martineau Dumoulin.


Bondholders Balk

Just how unhelpful the decision was quickly became apparent in the BCE deal. Needless to say, BCE's shareholders were thrilled by the premium offered by the consortium. In September 2007, they approved the deal by a 97 percent margin. Despite the looming credit crunch that had intervened between the offer and the vote, the consortium partners--Ontario Teachers Pension Plan, Providence Equity Partners Inc., Madison Dearborn Partners and Merrill Lynch Global Private Equity--felt confident about a timely closing.

It was not to be. A powerful group of bondholders made up of major investment managers, pension funds and insurance companies were as unhappy as the shareholders were pleased. From their perspective, the transaction was unfair because it would saddle BCE with $34 billion in new debt, negatively impacting the market for their bonds.

Unable to negotiate a resolution, the bondholders sought an injunction to stop the deal. But the Quebec Superior Court dismissed their complaint in March. It concluded the bondholders were sophisticated investors who should have known that a buyout might hurt them.

Two months later, however, a unanimous five-judge panel of the Court of Appeal of Quebec overturned the ruling, shocking the financial community and stopping the transaction in its tracks. The court said the sale process was flawed because the directors considered only the impact on shareholders while ignoring the bondholders. Undaunted, BCE appealed to the Supreme Court.


Moving Forward
On June 20, the court released a unanimous decision reversing the Court of Appeal: The transaction could proceed. But because the Court withheld its reasons until a future date, the law remains uncertain. Indeed, it may remain so even after the reasoning is revealed, which is expected sometime after the court commences its fall session in October.

That's because the Supreme Court could decide that even if such stakeholders' rights existed in principle, the BCE bondholders didn't have any reasonable expectations in this case beyond what existed in their contractual rights. By doing that, the Supreme Court could leave the general scope of such rights to a future case. It's also open to the Supreme Court to entrench directors' overriding duty to shareholders--as Revlon did--and rule out any obligation on directors to consider the interests of others. But many observers believe this would be a repudiation of Peoples.

"Even if the court concludes that the bondholders in this case had no reasonable expectations beyond what was in their contracts, that doesn't mean the court might not look at other stakeholders' expectations more broadly, especially if the stakeholders were a group that didn't have the kind of bargaining power relative to the company that the bondholders did in this case," says Professor Poonam Puri of Osgoode Hall Law School.


Peoples Power
Others believe the Supreme Court will jump at the opportunity to clarify the jurisprudence. "In Peoples, the court came across so generally that it left the impression it had no idea what it was doing," says Clay Horner, a partner at Osler, Hoskin & Harcourt. "So I think the court will take this opportunity to explain what Peoples means."

The ruminations over the eventual content of the reasons, however, have done little to mute the elation emanating from Canada's financial community at the news that the $51 billion transaction can proceed.

"The elation came from the fact that the transaction can proceed, the positive impact on Bell shares, the
ideological belief in the corporation's purpose of maximizing shareholder value above all else, and the relief that Canadian law on directors' duties isn't going to head off in a weird or different direction from the rest of the world," Horner says.

There's no doubt that the ruling has been a huge catalyst to a successful closing. Barely two weeks after the Supreme Court's decision, BCE announced that the uncertainties about financing arising from the credit crunch had been resolved with the lenders, and that the deal would close in December.

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Julius Melnitzer

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