Canada: Québec Court Of Appeal BCE Decision: The Largest Leveraged Buyout In Canadian History Imperilled

Last Updated: June 2 2008
Article by Réda Saad
Most Read Contributor in Canada, September 2016

On May 21, 2008, the Québec Court of Appeal released its highly anticipated decision regarding BCE's proposed plan of arrangement. In a unanimous decision by five judges, the Court of Appeal held that the board of directors of BCE (the BCE Board) overlooked the interests of holders of certain debentures (Debentures) issued by Bell Canada Inc. (Bell), a wholly-owned subsidiary of BCE, as it did not take into account the adverse financial impact of the BCE leveraged buyout (LBO) on the debentureholders (Debentureholders), and denied approval of the transaction.


In April 2007, BCE announced that it was " ... reviewing its strategic alternatives with a view to further enhancing shareholder value." Following that announcement, several Debentureholders sent letters to the BCE Board seeking assurances that their best interests would be considered as part of the BCE Board's deliberations and offered to meet with the BCE Board. BCE responded with a letter confirming only its intention to respect the terms of the applicable trust indentures governing the Debentures.

In June 2007, BCE announced that it had entered into an agreement with an investor consortium (the Purchasers) led by Teachers' Private Capital, Providence Equity Partners Inc. and Madison Dearborn Partners Inc., whereby the Purchasers proposed to acquire, by way of a plan of arrangement under the Canada Business Corporations Act (the Plan), all the outstanding common shares of BCE. For the agreement to be reached, the Purchasers had to modify, at the request of BCE's advisors, the proposed transaction structure in order to avoid the risk of triggering the protection mechanisms for the Debentureholders under the relevant trust indentures. The agreement contemplated an additional debt of approximately $30 billion for which Bell would be providing guarantees. Following the announcement of the LBO, the Debentures' market value dropped by approximately 18% and they lost their investment-grade rating status.

The Debentureholders opposed the LBO, alleging that it adversely affected their interests. In March 2008, the Québec Superior Court dismissed the Debentureholders' allegations and approved the Plan. The Debentureholders promptly appealed that decision.


The BCE Board's Fiduciary Duty

While reaffirming the Debentureholders' standing to contest the Plan, as it affected their legal rights and economic interests, the Court of Appeal stated that in order for the Plan to be approved, BCE had to show, among other things, that the Plan was fair and reasonable given all the circumstances. The burden of this proof rested "... squarely on BCE". In its analysis, the Court of Appeal found, on the basis of the principles enunciated in 2004 by the Supreme Court of Canada in the Peoples' Department Stores case, that "... at no time do the directors have an overriding duty to act only in the best interests of the shareholders and to ignore the adverse effect on the interests of the debentureholders" (emphasis added by the Court of Appeal).

The Court of Appeal found that the BCE Board's statutory duty of care encompassed giving consideration to the interests of all stakeholders, which included the Debentureholders. The Court of Appeal added that BCE should have considered the reasonable expectations of the Debentureholders and not only their contractual rights under the trust indentures. Even though the Court of Appeal acknowledged that it was not unreasonable to expect that BCE would proceed with the transaction by way of an LBO, it accepted the Debentureholders' complaint that the BCE Board did not give any consideration to their interests in negotiating the terms of the LBO. The Court of Appeal determined that it was reasonable for the Debentureholders to expect such a consideration. In its review of the relevant facts, the Court of Appeal also considered assurances given from time to time by BCE to the investment community as to its commitment to maintaining the investment-grade status of the Debentures.

As a result, the Court of Appeal determined that the process followed by the BCE Board was flawed and that the BCE Board's decisions could not be protected by the business judgment rule. The Court of Appeal found that the trial judge erred in not assessing the issues according to what the Court of Appeal viewed as the principles established by the Supreme Court of Canada in the Peoples' Department Stores case and therefore failed to conduct a proper evaluation of the fairness and reasonableness of the Plan. The Court of Appeal then undertook its own assessment of the Plan.

The Fairness And Reasonableness Of The Plan

The Court of Appeal found that BCE did not discharge its burden of proving that the Plan was fair and reasonable, given all the circumstances, as it "& never attempted to justify the fairness and reasonableness of an arrangement that results in a significant adverse economic impact on the debentureholders while at the same time it accords a substantial premium to the shareholders." The Court of Appeal added: "If it was possible to structure an arrangement so that a satisfactory price could be obtained for the shares, while attenuating the adverse effect to the debentureholders, then the Board had a duty to examine it."

However, according to the Court of Appeal, BCE did not conduct such an exercise. Rather, the Court of Appeal determined that BCE structured the transaction to avoid seeking the approval of the Debentureholders and ignored initiatives from the Debentureholders to discuss ideas on how to reduce the adverse effect on the value of the Debentures.

Finally, the Court of Appeal stated that: "It is up to the Board to consider the relative weight and importance of the various interests and in its best business judgment to structure an arrangement that takes into account, and to the extent reasonably possible, satisfies the interests of the various securityholders."


The legal battle surrounding the BCE LBO, which, according to the terms of the agreement with the Purchasers, must close by June 30, 2008, is far from over. On May 26, 2008, the Supreme Court of Canada decided that, if it grants leave to appeal, it would agree to hear the appeal on June 17, 2008. It is expected that a decision on the application for leave to appeal will come during the week of June 2.

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