BCE legacy is certainty for boards of directors

The lasting legacy of the failed leveraged buy-out of BCE Inc. is a certainty for boards of directors on their obligations during buy-outs, following the Supreme Court of Canada’s reasons for the decision released last week.

In June the court allowed the attempted buy-out to proceed after a court challenge by bondholders. However, the court did not release its reasons for the decision until Friday, Dec. 19. In allowing the takeover to move forward the court ruled that the sell-off of BCE to the Teachers’ Pension Plan of Ontario did “not fundamentally alter the debentureholders’ rights.”

Michael Gans of Blakes Cassels and Graydon LLP New York, co-head of the firm’s private equity group, says the ruling “is a good decision for corporate Canada and corporate directors.” And that it means “greater certainty for boards of directors.

“This is a very important case for [mergers and acquisitions] lawyers and corporate directors going forward.”
The SCC ruled “fluctuation in the trading value of debentures with alteration in debt load is a well-known commercial phenomenon. The debentureholders had not contracted against this contingency.

The fact that the trading value of the debentures stood to diminish as a result of the arrangement involving new debt was a foreseeable risk, not an exceptional circumstance,” says the ruling in BCE Inc. v. 1976 Debentureholders.

The takeover of BCE officially failed on Dec. 11after auditing firm KPMG refused to give an opinion that the company would remain solvent following the leveraged buy-out. The debentureholders had hoped to block the deal under two sections of the Canada Business Corporations Act, sections 241 and 192.

Section 241 of the CBCA requires directors of a corporation to act in the best interest of the corporation, and calls for a reasonable expectation of security holders of fair treatment.

Also, directors approving change of control transaction which would affect economic interests of security holders, whether evidence supported reasonable expectations asserted by security holders and whether reasonable expectation was violated by conduct found to be oppressive, would be unfairly prejudicial or that unfairly disregards a relevant interest.

Section 192 ensures a proposed plan of arrangement, not arranging rights of security holders but affecting their economic interests - whether plan of arrangement was fair and reasonable.

The Quebec Superior Court approved the arrangement as fair and dismissed the claim for oppression. The ruling was set aside by the Court of Appeal in Quebec.

According to the Dec. 19 ruling the appeal court “held that the directors had not only the duty to ensure that the debentureholders’ contractual rights would be respected, but also to consider their reasonable expectations which, in its view, required directors to consider whether the adverse impact on debentureholders’ economic interests could be alleviated.”

However, the SCC set aside the Court of Appeal ruling agreeing with the trial judge saying, “It was clear to the judge that the continuance of the corporation required acceptance of an arrangement that would entail increased debt and debt guarantees by Bell Canada: necessity was established.

No superior arrangement had been put forward, and BCE had been assisted throughout by expert legal and financial adviseors, suggesting that the proposed arrangement had a valid business purpose.”

Neither lawyers for the bondholders or BCE were available for comment following the ruling.

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