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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.

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.


Julius Melnitzer

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