On June 20, 2008, the Supreme Court of Canada (the "Supreme Court") handed down a decision, without written reasons (which will be released at a later date), that removes all currently known legal impediments to the completion of the $35 billion leveraged buy-out of BCE (the "Transaction") by a group lead by Ontario Teachers' Pension Plan ("Teachers"). The Supreme Court's decision affirmed the decision of the Quebec trial judge and set aside the decision of Quebec Court of Appeal (the "Court of Appeal").
Due to the lack of written reasons, at this time it is not known what legal principles or policies led the Supreme Court to its decision. Accordingly, based on educated guesses (and some may suggest wishful thinking – which may change when the Supreme Court's written reasons are issued), Friday's decision could be interpreted as supporting the "Revlon" standard, meaning that the directors of an entity that is the subject matter of a change of control, however structured, have a primary duty to enhance shareholder value while not breaching any existing contractual relations. The "Peoples" decision of the Supreme Court, to which reference has been made in the press and in the various court filings, could be limited to applying primarily in the context of an insolvency situation. On the other hand, the BCE decision of the Supreme Court may be based on the factual situation that was being adjudicated. Until the reasons of the Supreme Court are issued, this area of Canadian law remains unclear.
The BCE litigation has forced Canadian courts to examine the duties of directors and the rights of creditors in the context of a change of control.
Summary Of Facts
Stripped to their essentials, the facts are that BCE was put "in play" in April 2007. On April 14, 2007, the board of directors of BCE (the "Board") appointed a "Strategic Oversight Committee" (the "Committee"). The Committee sought advice from both prominent financial advisers and law firms. In the end, an auction was created and three bids were forthcoming. The Committee and the Board met frequently before the final decision was made to accept the Transaction in the form put forward by a consortium of bidders lead by Teachers. That offer was to acquire the common shares of BCE for $42.75, a 40% premium on the market price. The Definitive Agreement was signed as of June 29, 2007.
The principal asset of BCE was and is its operating subsidiary, Bell Canada. The Transaction contemplated a high degree of leverage, i.e., the Transaction was a leveraged buy-out, with the payment obligations for the debt to be incurred by BCE (the "New Debt") being guaranteed by Bell Canada. Bell Canada had previously issued a number of series of debentures. The debentureholders were creditors of Bell Canada and were not creditors of BCE. The guarantee of the payment obligations of the New Debt to be given by Bell Canada would have the effect of depressing trading value of the Bell Canada debentures.
The Transaction was to be accomplished, not by a simple tender for the common shares of BCE, but by way of a "plan of arrangement" under section 192 of the Canada Business Corporations Act ("CBCA").
The CBCA requires a plan of arrangement to be approved by a court. Under the CBCA, a plan of arrangement does not have to meet any explicit test of fairness to any corporate constituency. The court is authorized to make any order "it sees fit." While the process of obtaining court approval was the principal focus of the BCE litigation, other actions were started by debentureholders under the "oppression remedy" provisions of the CBCA. The oppression remedy provisions are available to virtually any class of corporate stakeholders, including shareholders and creditors, in cases where something has been done to that stakeholder that is oppressive or unfairly prejudicial to or that unfairly disregards its interests.
The Transaction was approved by holders of 97.93% of the shares of BCE voted at the shareholder meeting.
Summary Of Lower Court Decisions
The trial judge approved the plan of arrangement and held that the Board and the Committee had behaved properly and appropriately in coming to the conclusion that the terms of the Transaction were the best that could be obtained. The trial judge found that the debentureholders had not shown any reason that would justify denying approval of the plan of arrangement or any basis to conclude that the debentureholders had been the subject of any unfair treatment.
The debentureholders appealed to the Court of Appeal. In a unanimous decision, the Court of Appeal held that neither the Board nor the Committee had properly considered the position of the debentureholders in light of the fact that the market value of the Bell Canada debentures would be diminished because of the guarantee of the payment obligations of the New Debt to be given by Bell Canada. The Court of Appeal in finding for the debentureholders stated that:
The Court of Appeal also relied upon earlier Supreme Court jurisprudence, including "Peoples," which held that directors owe a duty of care to a constituency of stakeholders, including employees, suppliers, creditors and the environment, and not just shareholders. "Peoples," however was an insolvency matter.
BCE, Bell Canada and Teachers (collectively the "Appellants") appealed to the Supreme Court. The Supreme Court agreed to an expedited appeal and oral arguments were heard on Tuesday, June 17, 2008.
Summary Of Arguments At The Supreme Court Of Canada
The principal argument of the Appellants before the Supreme Court was that the trial judge made the correct decision; the debentureholders received what they were entitled to under their contracts, i.e., the trust indentures, with Bell Canada and were entitled to nothing further. In that circumstance, after having considered the existing contractual relations, it was the duty of the Board to maximize the return to the shareholders.
The principal argument of the debentureholders before the Supreme Court was that the Court of Appeal, having considered (in the context of the oppression remedy but not the plan of arrangement) the fairness of the Transaction, was correct in holding that the fairness of the Transaction from the point of view of the debentureholders should have been considered. The factum of one of the classes of debentureholders submitted that:
Until written reasons for the BCE decision are issued by the Supreme Court, one will not have any greater clarity as to the position of the Canadian law regarding the duties of directors of an entity that is the subject matter of a change of control outside of an insolvency situation. The only conclusion that one may draw at this time is that all currently known legal impediments to the completion of the Transaction have been removed.
It remains to be seen as to: whether the Supreme Court will provide more guidance as to the duties of directors of an entity that is the subject matter of a change of control; whether the Supreme Court will reconcile the "Peoples" decision with its findings in the BCE litigation; whether the "Peoples" decision will be stated by the Supreme Court to be limited to an insolvency context or expanded to apply to a broader range of situations; and whether the "Revlon" standard is the law in Canada. Once the reasons from the BCE litigation are issued by the Supreme Court, we are hopeful that we will have a clearer understanding of these issues.
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.