On March 27, 2008, the Canadian Radio-television and Telecommunications Commission (CRTC) granted conditional approval of the deal to privatize Bell Canada Enterprises (BCE), Canada's largest telecommunications company.
Under the transaction, BCE, which is also Canada's most widely held publicly traded company, would become owned by a small group of investors that includes the Ontario Teachers' Pension Plan (Teachers') and three American private-equity firms, Providence Equity Partners International VI L.P. and its affiliated investment funds (Providence), Madison Dearborn Capital Partners V L.P. and its affiliated investment funds (Madison) and Merrill Lynch Global Partners, Inc. (Merrill Lynch). The transaction, valued at $51.7 billion, is the largest corporate acquisition in Canadian history and reputedly the largest private equity transaction in the world to date.
The transaction was subject to approval by several Canadian regulators, including CRTC approval under the Broadcasting Act. Although BCE's main business unit, Bell Canada, is a telecommunications carrier, it has interests in several broadcasting licensees, leading to the requirement for Broadcasting Act approval. The CRTC review was primarily aimed at ensuring that BCE will remain "Canadian owned and controlled" within the meaning of Canadian communications laws1. These laws restrict the number of voting shares that can be held by non-Canadians in regulated Canadian communications businesses2 and the number of board members that can be non-Canadian3. More significantly, they require the regulators to ensure that non-Canadians cannot exercise "control in fact" over the business, through any shareholder agreements or other arrangements.
The CRTC's approval and the conditions it imposed on BCE are generally consistent with recent regulatory precedents, applied to the specific circumstances of the BCE transaction.
The CRTC reiterated the legal test for control that it approved when it reviewed the sale of Alliance Atlantis Broadcasting Inc.'s broadcasting companies4. According to that test, "control in fact generally can be viewed as the ongoing power or ability, whether exercised or not, to determine the strategic decision-making activities of an enterprise. It can also be viewed as the ability to manage and run the day-to-day operations of an enterprise."
Applying this test to the facts of the BCE transaction, the CRTC required:
- changes to ensure that the majority of BCE's
Board of Directors would always comprise directors who are
both (i) Canadian by citizenship or residency and (ii) whose
appointments are not directly or indirectly controlled by
- increases in the thresholds for future BCE transactions
that non-Canadian shareholders could veto (e.g. incurring
debt, selling assets and making investments) to at least
5 per cent of the value of the broadcasting
- changes to the proposed Independent Programming Committee
to ensure broadcast programming decisions were made by
- other changes to the corporate governance structure,
including the makeup of the executive committee and the
quorums for board meetings, to satisfy itself that BCE would
not be effectively controlled by non-Canadians.
The CRTC also expressed concerns about whether the structure of the transaction complied with Ontario pension legislation, but, as discussed below, deferred to an opinion from the Ontario pension regulator that the deal was compliant.
The BCE transaction remains subject to regulatory approval by Industry Canada under the Radiocommunication Act. In addition, the transaction has been the subject of litigation by certain Bell Canada bondholders. On March 7, 2008, the Québec Superior Court approved BCE's plan of arrangement for the transaction and dismissed all claims of the bondholders. The decisions dismissing these claims are currently under appeal. The transaction is also subject to the successful completion of financing arrangements made by Teachers' and its private equity co-investors.
Background Of The Proposed Transaction
BCE Inc. is the incumbent telecom service provider in most of Ontario and much of Québec and the Maritimes. Its subsidiaries include Bell Canada, Bell Mobility Inc., Bell Aliant Regional Communications Income Fund and Bell ExpressVu Inc. The companies provide telecom services including local and long distance phone service, wireless voice and data, and wireline Internet access. They are also involved in the distribution of broadcast services by satellite and terrestrial networks, as well as pay-per-view and video-on-demand services.
The CRTC received an application by BCE and some of its affiliates (the applicant) for authority to transfer effective control of the applicant to a corporation to be incorporated (BCE Holdco). BCE Holdco would hold the shares of BCE through its subsidiary 6796508 Canada Inc. (Bidco).
BCE and Bidco entered into a definitive agreement, effective June 29, 2007, pursuant to which Bidco agreed to purchase all of BCE's issued and outstanding common and preferred shares (BCE proposal). The BCE proposal was approved by a majority of BCE shareholders at a special shareholder meeting that took place on September 21, 2007 in Montréal.
The proposed transaction is to be effected by way of a Plan of Arrangement under Section 192 of the Canada Business Corporations Act. The estimated value of the transaction is $51.7 billion.
Following the completion of the transaction, BCE Holdco would be privately owned, with share capital consisting of Class A voting, non-participating shares (Class A shares); Class B non-voting, participating shares (Class B shares) and Class C non-voting, participating shares (Class C shares). The Class B and Class C shares would be economically equivalent and would together represent the total equity value of BCE Holdco.
Morcague Holdings Corp. (Morcague) would hold 66.7 per cent of the Class A shares of BCE Holdco, with the balance of 33.3 per cent held by non-Canadians, namely Providence, Madison and Merrill Lynch. The Class A shares would be subject to a voting agreement between Morcague and Teachers' Private Capital, a division of Teachers'.
The majority of the Class B shares and all of the Class C shares of BCE Holdco would be held by Canadians, with Teachers' holding the largest equity stake in the company at 51.6 per cent. Non-Canadians would hold approximately 42 per cent of the equity of BCE Holdco, with Providence (17.3 per cent), Madison (9.0 per cent) and Merrill Lynch (6.1 per cent) being the largest non-Canadian shareholders.
Bidco and BCE would have Class A and Class B shares issued and outstanding. BCE Holdco would own 100 per cent of the Class B shares and 58.1 per cent of the Class A shares of Bidco, with the balance of 41.9 per cent of the Class A shares held by Morcague. Similarly, Bidco would own 100 per cent of the Class B shares and 58.1 per cent of the Class A shares of BCE, with the balance of 41.9 per cent of the Class A shares held by Morcague. A summary of the proposed equity structure can be found on the CRTC's website.
The transaction required approvals from a number of regulatory agencies, including the CRTC, Industry Canada, Investment Canada and the Competition Bureau.
The CRTC must approve the proposed transaction under the Broadcasting Act, as a result of the proposed transfer of BCE's broadcasting assets (the subject of today's decision). The CRTC also reviews ownership of telecommunications carriers under the Telecommunications Act on a periodic basis. Industry Canada, which acts as Canada's spectrum regulator, must also review the proposed transaction under the Radiocommunication Act.
The tests for Canadian ownership and control are similar under all three acts, and stricter than those under the Investment Canada Act, which is therefore unlikely to pose a significant hurdle for the transaction. The fact that the investors acquiring BCE do not directly compete with it simplifies the Competition Act review.
Ownership And Control Review Under The Broadcasting Act
The CRTC has authority under the Broadcasting Act to regulate the broadcasting system in Canada to implement identified policy objectives, including the requirement that the Canadian broadcasting system be effectively owned and controlled by Canadians5.
The Governor-in-Council6 has issued a direction to the CRTC, pursuant to subsection 26(1) of the Act, respecting the classes of applicants to whom licences may not be issued or to whom amendments or renewals thereof may not be granted (the Direction)7. Pursuant to the Direction, no broadcasting licence may be issued, and no amendment or renewals thereof may be granted, to an applicant that is a "non-Canadian." A "Canadian" is defined to include a "qualified corporation."
The Direction defines a qualified corporation as a corporation that is incorporated or continued under the laws of Canada or a province, and that meets the following conditions:
- the CEO and 80 per cent of the directors are
- Canadians beneficially own and control, directly or
indirectly, in the aggregate and otherwise than by way of
security only, at least 80 per cent of all votes and all
voting shares, both issued and outstanding.
In the case of a corporation that is a subsidiary corporation,
- the parent corporation must be incorporated or continued
under the laws of Canada or a province; and
- Canadians must beneficially own and control, directly or
indirectly, in the aggregate and otherwise than by way of
security only, not less than 662/3 per
cent of all votes and all voting shares, both issued and
Further, if a corporation does not meet the criteria set out above (i.e., the CEO or more than 20 per cent of directors are not Canadian, or Canadians do not own and control 80 per cent of all votes or of all issued or outstanding voting shares), then neither that corporation nor its directors may exercise control or influence over any programming decisions of a subsidiary that is a broadcasting licensee. Instead, an "independent programming committee" must be established, with responsibility for the programming decisions of the subsidiary corporation.
"Control" is an important aspect of the test. Under the Direction, the CRTC is to determine whether an applicant is controlled by a non-Canadian, on the basis of personal, financial, contractual or business relations, or any other considerations relevant to determining control in fact.
An important factor in determining whether non-Canadians exercise effective control over a broadcasting licensee is the degree of influence that non-Canadian investors can exercise through the board of directors and its committees. In that respect, the CRTC examines such elements as the number of board and committee members appointed by Canadian investors and by non-Canadian investors, respectively, and whether directors designated by Canadian investors are adequately represented at all board and committee meetings.
Specific Rulings On Canadian Control
After considering the issues related to Canadian control, the CRTC made its approval of the transaction conditional on specific amendments to the "Principal Investor Agreement" between the investors. The CRTC's conditions were aimed at achieving the following objectives:
- to fix the membership of the Board of Directors at 13
including, within the total membership, six designees of
Teachers', one Independent Director and the CEO, all
of whom must be Canadians;
- to provide that the Chair of the Board will have a
tie-breaking vote over the appointment and dismissal of the
- to provide that a Chair will be appointed to the Board at
all times, that the Chair will be a member of the Board but
will not be a designee of a non-Canadian shareholder, will be
a Canadian, and will not also serve as the CEO;
- to include a requirement that any vacancy on the Board or
on a committee of the Board caused by Teachers'
losing the right to designate a member be filled by the
designee of the Canadian investor who acquires the largest
number of shares from Teachers', and that any such
designee must be a Canadian;
- to require BCE Holdco to maintain the same quorum
requirements for the committees of the boards of Bidco and
BCE as those that apply to BCE Holdco;
- to deem members of the Board designated by the
non-Canadian principal investors to be non-Canadian for
purposes of determining whether a quorum is present at any
meeting of the Board;
- to add a second Teachers' designee to the
- to increase the threshold for transactions requiring
investor approval to $110 million (so satisfying the 5 per
cent of undertaking value adopted by the CRTC in its
CanWest/Alliance Atlantis decision); and
- to incorporate specific definitions of
"independent" (in the context of "independent
directors") and "ordinary course" (in the
context of shareholder approval of transactions not in the
ordinary course of business).
In addition to requiring BCE to file the amended Principal Investor Agreement, the CRTC directed it to file:
- an executed amended bylaw establishing the Independent
Programming Committee, and providing that no member of the
committee will be a director, officer or employee of any
non-Canadian shareholder; and
- an executed amended Advisory Services Agreement,
including amendments providing that the services rendered
under that agreement by non-Canadian investors will not
relate to programming and that Teachers' will be
entitled to review and provide input with respect to the
Subject to compliance with these conditions, and its determinations regarding the tangible benefits package (summarized below), the CRTC approved the application.
Compliance With Ontario Pension Legislation
The CRTC also considered the issue of whether the structure of the transaction complied with Ontario pension legislation. The relevant law8 prevents a pension plan from investing directly or indirectly in securities of a corporation to which are attached more than 30 per cent of the votes that may be cast to elect the directors of the corporation (director-voting shares).
Under the proposed transaction, Teachers' would not own more than 30 per cent of the director voting shares, indeed it would own no voting shares at all. However, a company owned by a former Teachers' executive, Morgan McCague, would own 66.7 per cent of the Class A voting shares in BCE Holdco. An agreement between Teachers', Mr. McCague, Mr. McCague's company and related companies requires the shares to be voted in accordance with Teachers' instructions and gives Teachers the right to require Mr. McCague to transfer the shares.
The CRTC accepted this arrangement only after being provided with a letter from the Financial Services Commission of Ontario stating that the proposed structure complied with the 30 per cent restriction on Teachers' holding director-voting shares.
The broadcasting assets involved in this transaction include Bell ExpressVu, cable assets in the province of Québec and a minority stake in CTVglobemedia Inc. The CRTC generally expects applicants to commit to specific benefits to the broadcasting system representing a financial contribution of 10 per cent of the value of the broadcasting assets transferred in a transaction. However, no benefits are required for the transfer of control of broadcasting distribution undertakings (such as Bell ExpressVu or the Québec cable assets), but only broadcast programming undertakings.
BCE allocated $109.6 million of the transaction value to the applicable broadcasting assets for the purpose of calculating the associated tangible benefits.
The CRTC revised the value of BCE's applicable broadcasting assets from $109.6 million to $219.1 million, based largely on inclusion in the valuation of an identified acquisition premium, the value of BCE's "IPTV" service (Internet Protocol pay-per-view and video-on-demand) and the value of operating lease commitments. This higher valuation increased the tangible benefits package to $21.9 million. As part of this package, the CRTC has directed that $10.5 million be placed in a fund whose annual revenues will support new media initiatives.
The CRTC's decision is generally consistent with recent precedents involving other transactions reviewed by the CRTC and Industry Canada. However, the decision provides useful guidance on issues related to the specific circumstances of the BCE transaction.
The full text of the CRTC's decision is available on its website.
1. Principally the Broadcasting Act. However the Telecommunications Act and the Radiocommunication Act also regulate the ownership and control of Canadian telecommunications and broadcasting companies such as BCE.
2. It is often incorrectly reported in the media and elsewhere that Canadian law limits non-Canadians to owning no more than 46.7% of a telecommunications or broadcasting company. In fact, the rules limit the holding of voting shares by non-Canadians to 20% at the operating company (or broadcast licensee) level and 33.3% at the holding company level. Voting rights cannot be cumulated between two companies to total 46.7%. There is no specific limit on the percentage of non-voting shares that can be held by non-Canadians.
3. 20% at the level of a telecommunications carrier or broadcasting licensee.
4. CanWest MediaWorks Inc., on behalf of Alliance Atlantis Broadcasting Inc. Across Canada, Broadcasting Decision CRTC 2007-429 Ottawa, 20 December 2007.
5. Subsection 3(1)(a) of the Act.
6. Effectively the Federal Cabinet.
7. Order in Council P.C. 1997-486, Direction to the CRTC (Ineligibility of Non-Canadians), 8 April 1997; as amended by Order in Council P.C. 1998-1268, 15 July 1998.
8. The Ontario Pension Benefits Act, which incorporates, by reference, Schedule III to the federal Pension Benefits Standards Regulations, 1985, including the so-called 30% rule found in subsection 11(1) thereof.