Canada: BCE Bondholders Claims Rejected By Quebec Court

Copyright 2008, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Mergers & Acquisitions, April 2008

On March 7, 2008, the Quebec Superior Court rendered five judgments rejecting claims of oppression and lack of fairness made by certain bondholders of Bell Canada, a wholly-owned subsidiary of BCE Inc. (BCE). Subject to their pending appeal, these judgments cleared one of the final remaining hurdles to completion of the acquisition of BCE by Ontario Teachers Pension Plan (Teachers), Providence Equity Partners and Madison Dearborn Partners. This bulletin reviews a number of interesting holdings of the Court expected to be of general application to M&A transactions.


Following BCEs rejection of approaches made by the Canada Pension Plan (CPP) and Kohlberg Kravis Roberts & Co. (KKR) as well as Teachers (BCEs largest shareholder), on April 3, 2008, Teachers filed a Schedule 13D with the SEC reflecting a change in investment intent from passive to active, and indicating that it would encourage BCE to explore extraordinary transactions. Following this filing, there was heavy trading in BCE shares and heightened speculation that BCE would be taken private. These circumstances, combined with significant private equity activity and strong debt markets, led the BCE board to conclude that there was a real prospect of an unsolicited offer for BCE, and that the corporation was in play. As a result, it established a sale process resulting in bids by the Teachers consortium as well as bids by a CPP/KKR consortium and Cerberus. A proposal by Telus was abandoned following BCEs assessment that it carried a significantly higher degree of completion risk than the other bids.

On June 30, 2007, BCE announced that it had entered into a definitive agreement with the Teachers consortium to be acquired pursuant to a plan of arrangement under the Canada Business Corporations Act (CBCA) for all-cash consideration valued at C$51.7-billion (including C$16.9-billion of debt, preferred equity and minority interests). This represented an approximate 40% premium over the average trading price of BCE common shares in the first quarter of 2007, prior to the possibility of a privatization transaction surfacing publicly.

The arrangement was approved in September 2007 at a special meeting of BCE common and preferred shareholders by more than 97% of the votes cast.


As a result of the acquisition, BCE would have C$38.5-billion in debt, some of which Bell Canada would be obliged to guarantee on a basis ranking equally with certain Bell Canada bonds. As a result of a significant downgrade in the rating and price of Bell Canadas bonds, certain bondholders commenced proceedings to:

  1. seek a declaration that the proposed transaction was oppressive to bondholders and require Bell Canada to redeem the bonds;

  2. oppose BCEs motion to obtain the Courts final order required to complete the arrangement on the basis of lack of fairness; and

  3. seek a declaration that the arrangement not be completed without approval of each trustee on the basis that the arrangement constituted a "reorganization" and was therefore subject to such an approval requirement under the relevant trust indenture.

The Courts holdings on each of these claims is discussed in turn below.


In order for the bondholders to succeed in an oppression claim under the CBCA, it was necessary for them to establish whether:

  • any act or omission of BCE or any of its affiliates effects a result,

  • the business or affairs of BCE or any of its affiliates are or have been carried on or conducted in a manner, or

  • the powers of the directors of BCE or any of its affiliates are or have been exercised in a manner,

that was oppressive or unfairly prejudicial to, or unfairly disregards the interests of, the bondholders. The bondholders asserted four principal grounds to support their oppression claims:

I. Bell Canada Guarantee The bondholders asserted that the guarantee of debt by Bell Canada as part of the arrangement served no valid business purpose, relying on the conclusion of the Court in Palmer v. Carling OKeefe. In that case, the Court found that a proposed leveraged buy-out that would force holders of preferred shares into preferred shares of a corporation with substantially greater debt served no valid business purpose, and was therefore oppressive. Rejecting the bondholders position that there was no "principled reason" that preferred shareholders and bondholders should be treated differently, the Court held that there is fundamental difference between shares and bonds in that bondholders have the opportunity to negotiate clear rights and remedies, while shareholders have no remedy other than an oppression action against the issuer. Based on this, the Court held that the Palmer case was not relevant.

The Court further deferred to the BCE boards judgment that the privatization could benefit Bell Canada as well as BCE, including the opportunity of receiving investment in new technology and a potential restructuring. In deferring to the board, the Court cited with approval the Supreme Court of Canadas decision in Kerr v. Danier in which it held: "[i]n order to maximize return for shareholders, managers should be free to take reasonable risks without having to worry that their business choices will be second-guessed by judges."

II. Reasonable Expectations of Bondholders Citing various public statements by BCE and Bell Canada including those indicating BCEs commitment to maintain investment grade ratings, the bondholders contended that by approving the plan of arrangement, BCE and Bell Canada had breached their reasonable expectations, including the expectation that Bell Canada would maintain investment grade ratings for the bonds, and that this conduct resulted in unfairness that was oppressive. The Court again distinguished between bondholders and shareholders, stressing that the formers relationship with the corporation is entirely contractual while the latters is generally governed by statute. Following U.S. caselaw, the Court concluded that, absent compelling reasons, the bondholders reasonable expectations must be assessed from the terms of their respective trust indentures and the related prospectuses. The absence of change of control or credit ratings covenants in those indentures such as that contained in other trust indentures meant that bondholders willingly assumed or were complacent with respect to the risk of a change of control transaction. On this basis, the Court declined to imply any such covenants based on public statements of management of BCE and Bell Canada.

While the above conclusion was sufficient to dismiss the bondholders claim, the Court focused on the public statements, commenting that while representations made by BCE and Bell Canada may be of assistance in determining fairness, they "cannot be assessed in a vacuum and in assessing fairness, it is necessary to examine the context in which these representations were made and any caveats attaching thereto." The Court found that virtually all of these statements were accompanied with "safe harbour" notices or other warnings expressly precluding investors from relying on these statements in the manner sought by the bondholders. In some cases, the safe harbours specifically qualified the public statements by indicating that they did not reflect the impact of acquisition or mergers. Bell prospectuses also included express risk factors indicating that the credit ratings of the debentures might fall below investment grade or even be withdrawn entirely. In a strongly worded dismissal of the bondholders claim of reliance on BCE and Bell Canadas public statements, the Court stated:

The Contesting bondholders are among the most sophisticated investors in Canada. They knew or should have known that BCE and Bell Canada were at all times subject to this form of event risk. It is untenable for them to now assert that these prior statements by representatives of BCE and Bell Canada created the reasonable expectations to which they refer.

III. Arrangement Exposes Bondholders to Oppressive Degree of Risk The bondholders argued that the plan of arrangement exposed them to a material increased risk of payment default, as reflected by the significant rating downgrade on the bonds, which was oppressive. While the Court agreed that there was some increased risk of default, it determined that the risk of non-recovery of principal was still minimal. Given this, and the fact that the bondholders were aware of the risk of a leveraged buy-out and had the opportunity to negotiate protective covenants at the time of issue of the bonds, the Court found that the prejudice suffered by virtue of the plan of arrangement was not oppressive.

IV. Bondholders Interests Unfairly Disregarded The bondholders contended that the BCE directors entirely and unfairly disregarded their interests in approving the privatization. The bondholders cited the holding of the Supreme Court of Canada in Peoples Department Stores v. Wise, which established that the directors fiduciary duties were owed to the corporation and its various stakeholders, including its creditors (such as bondholders). The bondholders argued that the directors Revlon duty to maximize shareholder value could not override their obligation not to act in a manner that was oppressive to the bondholders.

The Court upheld the applicability of the Revlon duty in Canada when a corporation is in play, stating that it was not necessarily incompatible with the directors fiduciary duties. Having regard to all of the circumstances, the Court concluded the arrangement was in the best interests of BCE and Bell Canada, stating that:

The sole fact that the shareholders stand to benefit from the transaction while the debentureholders are prejudiced, in and of itself, does not give rise to a conclusion that the directors have not performed their fiduciary duties to the corporation in an appropriate manner.

The Court determined that BCE had complied with the terms of the trust indentures, and that notwithstanding the prejudice resulting to the bondholders from the arrangement, the bondholders interests had not been disregarded by the BCE board.

In dismissing the bondholders oppression claims, the Court gave significant weight to the need for commercial certainty. The Court concurred with the view of a fund manager that, if accepted, the bondholders position "could undermine commercial certainty which is one of the bedrock principles that underlies the efficient operation of the capital markets in Canada", and that investment decisions are made "on a daily basis on the firm expectation that public companies are free to operate their businesses as they see fit provided that their contractual obligations to their debtholders and other contracting parties are complied with".


A plan of arrangement must be approved by the Court pursuant to what is known as a fairness hearing. At this hearing, the Court must be satisfied that the arrangement is both procedurally and substantially fair to the corporation and its stakeholders. Accordingly, in addition to their oppression claims, the bondholders argued that the Court should not approve the plan of arrangement on the basis that it was unfair to the bondholders. Accepting that the test for establishing lack of fairness of an arrangement was not as high as proving oppression, the Court concluded that, given the arrangement complied with the terms of the trust indentures, it was not unfair to the bondholders.

In seeking a vote on the arrangement, the bondholders cited the policy of the Director under the CBCA concerning plans of arrangement. While the Court recognized that the policy did not have the force of law, it did indicate that it was instructive. The policy indicates that economic factors, such as a credit rating, should be considered in addition to legal rights in determining if a class of securityholders should be entitled to a class vote. The policy also indicates that the entitlement of debtholders to voting and approval rights should ordinarily be determined by reference to the provisions of the trust indenture. Noting that the Director had determined not to intervene, the Court declined to provide bondholders a vote on the arrangement following its review of the policy.

The bondholders also sought a class vote on the arrangement, which the Court recognized would give them a veto that would be exercised to defeat the transaction. Citing past caselaw, the Court held that legal rights that are not compromised or altered by a plan of arrangement are not relevant to a determination of fairness. In the absence of oppression or contractual limitations under the trust indentures, the Court held that the adverse effect of the arrangement on the bondholders economic interests did not justify a class vote for the bondholders.


The bondholders argued that the plan of arrangement constituted a "reorganization" and accordingly, was subject to a requirement to obtain the approval of the trustee under the applicable trust indentures. In the bondholders view, through a series of transactions, the arrangement resulted in a "profound metamorphosis" of Bell Canada with a dramatic change in its debt structure accompanied by a significant downgrade in its credit ratings. In the absence of a definition of the term "reorganization" in the trust indenture, and a resulting ambiguity as to whether it encompassed the transactions contemplated by the arrangement, the Court held that the indenture should be interpreted so as to give effect to the parties intentions and promote a sensible commercial result. Based on this, the Court concluded that had the parties intended to preclude Bell Canada from undertaking a transaction such as the plan of arrangement that impacted the financial risk of the bondholders, they would have done so directly by the use of financial or ratings covenants, and not relied on a broad and ambiguous interpretation of the term "reorganization" that resulted in uncertainty. The Court held that a reorganization should be confined so as to refer to the transfer of all or part of a corporations undertaking to a new entity that is intended to carry on substantially the same business and is owned by substantially the same shareholders, and that the plan of arrangement involved no such transfer of Bell Canadas assets.

The full text of the Quebec Superior Court decisions, together with a copy of this bulletin, is available on Blakes Web site at in our "Publications - Mergers & Acquisitions" section.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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