The Quebec Court of Appeal has decided that the proposed privatization of BCE Inc. is not fair and reasonable to Bell Canada bondholders. The Court's decision has potential implications for the process company directors must follow in making decisions about significant corporate transactions. The decision also underscores the need for officers and others speaking on behalf of public issuers to be cautious about the messages communicated to investors in all settings, including oral statements made during meetings with institutional investors and analysts' calls.


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. The agreement was reached following a process led by a special committee of BCE's board that defined its objective as maximizing shareholder value while respecting bondholders' contractual rights.

Under the agreement between BCE and the investor group, 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, among other things, that the proposed plan of arrangement should not be approved by the Court at the fairness hearing that was part of the arrangement process because the plan was not fair and reasonable in light of its adverse effect on their interests. The trial Court dismissed all of the bondholders' claims and approved the plan. The Court of Appeal reversed this decision, holding that BCE had failed to establish that the plan was fair and reasonable.

Key Elements Of The Decision

The decision in this case turned on the scope of the BCE directors' duties in the context of this LBO transaction in which the shareholders' interests obtaining the highest price possible for their shares conflicted with the bondholders' interests maintaining the credit rating and value of their bonds. Were the directors' duties limited to maximizing value for shareholders while respecting the contractual rights of the bondholders, as BCE submitted? Or were the directors required to consider the broader economic interests of the bondholders and to give those interests some weight, as the bondholders submitted?

The Court ruled in favour of the bondholders, finding that the approach taken by the BCE board to its duties was mistaken:

  • Even where the corporation is "in play," the directors' duties are not limited to maximizing value for shareholders. The directors are obliged to act with a view to the best interests of the corporation. The corporation's interests can never be equated with the interests of shareholders alone. The interests and reasonable expectations of all stakeholders, including creditors, must be considered.

  • In the case of debt issued by a public company, bondholders' reasonable expectations are primarily derived from their contract and the company's offering documents. However, reasonable expectations can also be derived from public statements of the company, including oral statements to institutional investors and analysts in informal settings. Accordingly, the reasonable expectations of bondholders may require more than merely respecting their contractual rights.

  • According to the Court of Appeal, the BCE board should have considered the economic interests of the bondholders –not merely their contractual rights–and should have examined whether it was possible to alleviate the adverse effects on bondholders of a transaction that created value for shareholders. In this connection, the Court considered it noteworthy that the BCE board declined requests from bondholders to meet to discuss bondholder suggestions as to how bondholder interests could be accommodated within a value-enhancing transaction.

  • The board's duty to consider the interests of all securityholders, including bondholders, does not mean that the interests of each constituency must be given the same weight or that the benefits of a change-of-control transaction must be equally distributed among them. In the Court's words, "It is up to the Board to consider the relative weight and importance of the various interests and in its best judgment to structure an arrangement that takes into account, and to the extent reasonably possible, satisfies the interests of the various securityholders."

  • In this case, according to the Court of Appeal, the BCE board did not consider whether it would be possible to structure an arrangement so that a satisfactory price could be obtained for the shares, while attenuating the adverse effect on the bondholders. Because of this failure and the absence of evidence as to whether such an arrangement could be structured, the Court held that BCE failed to discharge its burden of proving that the plan of arrangement was fair and reasonable.

Although the Court of Appeal was considering whether to approve BCE's plan of arrangement, these legal principles potentially apply to board decisions about other types of significant corporate transactions, including support agreements regarding takeover bids.

A Difficult Balance

The Court of Appeal's message is clear, but the practical implications of the decision are not. The message is that directors must ask themselves the right question: not "What is best for the shareholders?" but rather "What is best for the company?" To answer this question, the board must consider the interests of all of the company's stakeholders. However, where the interests of shareholders and bondholders conflict, as in an LBO transaction, the Court of Appeal provides no guidance to directors on how they are to reconcile those conflicting interests.

In practice, when required to find an appropriate balance between common and preferred shareholders, companies often offer to repurchase the preferred shares at fair market value, which is determined without regard to the proposed transaction. In a case like this BCE transaction, in which the company was careful to ensure that the transaction adhered to the bondholders' contractual rights, is the company required to offer to repurchase the bonds to establish that the transaction was fair and reasonable to the Bell Canada bondholders? Or is it sufficient for the board to meet with the bondholders and to consider their ideas, without necessarily alleviating the adverse economic effects for the bondholders? The latter approach leaves open the risk that a court might second-guess the board's decision. At the same time, as a result of the BCE decision, there may be less room for shareholders to challenge board decisions in the context of change-of-control transactions, when those decisions have been made after a careful consideration of all interests (including adverse economic effects) and reasonable alternatives.

Investor Communications

Finally, without analyzing BCE's oral statements to institutional investors and analysts and without discussing the jurisprudence on this topic that was canvassed by the trial judgment, the Court of Appeal stated that BCE's numerous representations had created a reasonable expectation that the board of directors would have concern for the bondholders' interests in the investment-grade quality of the credit ratings on the bonds. This aspect of the decision highlights the importance for a company to exercise caution in all of its statements (whether written or oral) to avoid unwittingly creating liability or reasonable expectations on which investors will be entitled to rely.

BCE has announced that it and the investor group intend to seek leave to appeal the decision to the Supreme Court of Canada.

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