The Quebec Superior Court recently released five related judgments approving the proposed privatization of BCE Inc. and dismissing various challenges by Bell Canada bondholders. The judgments provide a higher degree of commercial certainty than previously available for company directors, debt issuers and other capital market participants.
In June 2007, BCE announced that it had entered into an agreement with an investor group led by Teachers' Private Capital, Providence Equity Partners Inc. and Madison Dearborn Partners Inc.1 Under the agreement, the investors proposed to acquire all the outstanding shares of BCE at a price of C$42.75 per common share, a 40% premium for BCE's common shareholders. The parties agreed that the acquisition – the largest leveraged buyout in Canadian history – would proceed as a plan of arrangement under the Canada Business Corporations Act.
The agreement contemplates the addition of a substantial amount of new debt for which Bell Canada, BCE's wholly owned subsidiary, would be liable as guarantor. In anticipation of this transaction, the market value of Bell Canada's bonds fell about 20%, or C$1 billion. The Bell Canada bondholders opposed the transaction, asserting that the proposed plan of arrangement breached their trust indentures, was oppressive and unfairly prejudicial to their rights and should not be approved by the Court at the fairness hearing that was part of the arrangement process. The Court dismissed the bondholders' claims.
Significance of the Decision
The BCE judgments provide helpful guidance in some important areas:
- If a company's directors reasonably believe that a transaction respects their creditors' contractual rights, the directors are not required to do more for creditors.
- The reasonable expectations of creditors that will be protected by the oppression remedy are measured by their contracts and related offering documents. The courts will not use the oppression remedy to impose material restrictions on corporate borrowers that creditors did not bargain for.
- Courts will not lightly infer binding promises on the basis of remarks to analysts or statements made in presentations to institutional investors or in similar contexts.
Duties of Directors
The fiduciary duty of directors to maximize shareholder value when a company is "in play" has been well settled in Canada. This duty is known as the Revlon duty after the seminal case of the Supreme Court of Delaware in Revlon, Inc. v. Mac Andrew & Forbes Holdings, Inc. The Supreme Court of Canada's 2004 decision in Peoples Department Stores v. Wise departed (perhaps unintentionally) from traditional corporate law principles that measure a director's duty to act in the best interest of the corporation by reference to the interests of the shareholders as a whole, at least where a corporation is solvent. The Supreme Court said that the interests of the corporation were not to be measured by reference to the interests of any particular stakeholder group and that the interests of all stakeholders, including creditors, had to be considered. The Supreme Court provided no guidance on how directors should balance the interests of shareholders and creditors where (as in an LBO situation) their interests conflict.
In the BCE case, the bondholders argued – relying on Peoples – that the duty of the directors to act in the best interests of a corporation that is in play requires the directors to protect and enhance the interests of creditors in addition to those of shareholders (contrary to the Revlon duty, which contemplates maximization of shareholder value alone). The bondholders maintained that maximizing shareholder value at the expense of creditors was a breach of the directors' duties.
The BCE decisions reconcile the Revlon duty with the Peoples decision. The Court confirmed that where a corporation is in play, directors should, in addition to maximizing shareholder value, consider the contractual interests of creditors in determining whether a transaction is in the best interests of the company. However, the directors are not required to do more for creditors in that connection than to ensure that the creditors' contractual rights are respected.
Rights of Bondholders
The bondholders asserted that the BCE transaction is oppressive or unfairly prejudicial to them, arguing that BCE and Bell Canada breached the bondholders reasonable expectations that Bell Canada (i) would respect representations it had made to investors regarding its intention to maintain investment grade credit ratings for the debentures and (ii) would not incur C$30 billion of debt without the bondholders' receiving a corresponding benefit. The Court rejected these arguments.
The Court distinguished the rights of bondholders from those of preferred and other shareholders. Shareholders' rights are largely governed by the share conditions in the corporation's articles and by statute. In contrast, the rights and obligations of bondholders are defined by the trust indentures and related offering documents. The trust indentures under which the Bell Canada bonds were issued contained no change-of-control or credit rating covenants. The Court refused to use the oppression remedy to create an implied promise that the bondholders had not bargained for in the indentures. Relying heavily on the decision of the Southern District of New York in Metropolitan Life Ins. v. RJR Nabisco Inc., the Court held that the reasonable expectations of the bondholders must derive from the trust indentures that created them and the related offering documents. As sophisticated investors, the bondholders assumed the risk that the value of their investments might be adversely affected by a change- of-control transaction, including a leveraged buyout. The BCE decisions clarify that the benefits of a transaction need not be shared with creditors as long as the directors determine that a transaction will benefit all classes of shareholders and will otherwise comply with the corporation's contractual obligations.
Legal Effect of Remarks to Analysts and Others
The bondholders argued that they could rely on statements made on behalf of BCE and Bell Canada in conference calls with analysts, presentations to institutional investors and elsewhere about Bell Canada's intention to maintain its investment grade ratings. The Court held that these statements were not promises to maintain an investment grade rating in the future. Bondholders could not reasonably rely on those statements given the context in which they were made and the safe harbour notices or other warnings in Bell Canada's public disclosure documents.
While market participants should take some comfort that a court will not readily infer that statements made in these contexts are binding promises, they should still exercise caution because of the potential to unwittingly create liability in these more informal settings. Even if an issuer ultimately prevails against claims based on those statements, the expense and uncertainty associated with a lengthy trial to decide those questions could be significant.
The BCE bondholders have filed notices of appeal. The Quebec Court of Appeal is expected to hear and decide the appeals over the next few months.
1. Merrill Lynch Global Private Equity later acquired part of Providence's interest in the transaction. Torys LLP represents Merrill Lynch in this matter.
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