On Friday, March 7, 2008, the Quebec Superior Court handed down five judgments approving BCE’s plan of arrangement for its privatization and dismissing all claims asserted by or on behalf of certain holders of Bell Canada debentures. In the interests of resolving the matter rapidly, the debentureholders have agreed that if they wish to appeal the judgments, they will do so by March 17, 2008. Meanwhile, the closing of the transaction still requires the approval of the Canadian Radio-television and Telecommunications Commission and of Industry Canada.
HIGHLIGHTS OF THE SUPERIOR COURT JUDGMENTS
- The debentureholders’ only right is to have the contractual rights set out in the trust indentures respected.
- The fact that the shareholders of BCE may receive a substantial premium on the value of their shares while the economic interests of the debentureholders may be adversely affected does not, in and of itself, give them the right to vote on the plan of arrangement.
- In interpreting complex corporate agreements such as the trust indentures, when faced with ambiguity, the courts must favour an interpretation that is commercially reasonable.
- In special circumstances (such as when a corporation is the subject of a hostile take-over bid or is involuntarily put in play by potential acquirers), the directors have the burden of maximizing the value of the corporation’s shares for the benefit of the shareholders, in addition to acting in the best interests of the corporation.
On June 30, 2007, after months of speculation about its future, an abandoned attempt to convert into an income trust and proposals from a number of suitors, BCE, the largest telecommunications company in Canada, announced that it had entered into a definitive agreement for the acquisition of all of its outstanding common and preferred shares by Teachers’ Private Capital, a corporation organized by Ontario Teachers’ Pension Plan Board and affiliates of Providence Equity Partners Inc. and Madison Dearborn Partners, LLC. The offer, priced at $42.75 per common share, represented a premium of about 40% over the average closing price of BCE’s common shares in the first quarter of 2007. The transaction, which is valued at $51.7 billion, is the largest leveraged buyout ever announced in Canada.
The transaction was designed to be carried out pursuant to a plan of arrangement under the Canada Business Corporations Act and requires the approval of the Quebec Superior Court as well as the approval of two thirds of the holders of common and preferred shares, voting together as a single class. In August 2007, Mr. Justice Silcoff issued an interim order allowing BCE to hold a special shareholder meeting so that shareholders could vote on the offer.
On September 19, 2007, some holders of debentures issued by Bell Canada (a wholly-owned subsidiary of BCE) pursuant to trust indentures signed in 1976, 1996 and 1997 announced their intention to contest the proposed acquisition. The contesting parties are among the largest financial institutions in Canada. They alleged among other things that the transaction was prejudicial to them because it would have a negative impact on the ratings of the debentures and would lead to a deterioration in the debentures’ value.
Meanwhile, on September 21, 2007, the arrangement was overwhelmingly approved by the shareholders of BCE, garnering over 97% of the votes cast by holders of common and preferred shares.
The contestations and the application for a final order approving BCE’s plan of arrangement were heard by the Superior Court from December 3, 2007 to January 28, 2008.
THE PARTIES’ POSITIONS
The contesting debentureholders alleged that:
- BCE had failed to discharge its burden of establishing that the plan of arrangement was fair and reasonable, not only to the shareholders, but also to the debentureholders.
- The transaction, as structured, triggered a provision in the 1976 and 1996 trust indentures according to which any transaction which constituted a “reorganization” of Bell Canada required Bell Canada to obtain the approval of the trustee appointed pursuant to the indentures as “being in no wise prejudicial to the interests of the debentureholders.” Without such approval (which in this case was not obtained), they claimed that the transaction could not be completed.
- They had standing to institute oppression proceedings.
- The plan of arrangement and the definitive agreement between BCE and the consortium of purchasers unduly prejudiced them and unfairly disregarded their interests in that the plan or arrangement and the definitive agreement fundamentally altered the characteristics of their securities, resulted in a significant downgrade in the rating and value of the debentures, materially increased the risk of default on the payment obligations, defeated their reasonable expectations and sacrificed their interests solely to further those of BCE’s shareholders, and were not carried out in the interests of Bell Canada and its stakeholders.
Consequently, the debentureholders argued that the plan of arrangement should not be approved. Subsidiarily, the 1976 and 1996 debentureholders sought an order forcing Bell Canada to redeem their securities.
In response BCE alleged that:
- The debentureholders did not have standing to contest the plan of arrangement and the plan of arrangement was fair and reasonable.
- The transaction, as structured, did not trigger the provisions of the trust indentures relied on by the debentureholders, since it did not constitute a reorganization of Bell Canada and nothing in the trust indentures prohibited or limited Bell Canada from taking on additional debt or otherwise giving its assets as security.
- BCE was “involuntarily put in play” by Teachers’ regulatory filing with the United States Securities and Exchange Commission informing the market that it had changed its investment intentions with respect to BCE from passive to active. As a consequence, the overriding duty of BCE’s directors became one of maximizing shareholder value while respecting the corporation’s obligations to other stakeholders, including the debentureholders. The reasonable expectations of the contesting debentureholders were protected and the trust indentures did not contain covenants preventing a change of control of BCE.
Approval of the Plan of Arrangement
While confirming that the plan of arrangement does not in any way alter the legal rights of the debentureholders—as they have the same right to be paid principal and interest by Bell Canada after the plan of arrangement is implemented as they did before—the Court confirmed that, in exceptional circumstances such as these, it could nonetheless take into account the legitimate concerns of third parties in relation to a proposed scheme.
The Court found that the statutory requirements for approval of a plan of arrangement were fulfilled, that the plan of arrangement was put forward in good faith—in this respect, the Court said it was particularly impressed by the fact that the shareholders approved the plan of arrangement by a majority of some 97.93%, results that Mr. Justice Silcoff said were indicative of acceptance by the shareholders of the wisdom, sincerity and good faith of BCE’s board of directors and strategic oversight committee in recommending the approval of the plan of arrangement—and that BCE had complied with the interim order.
On the last requirement that the plan of arrangement be fair and reasonable, the Court found that it was fair from the perspective of BCE’s shareholders, among other things because of: (i) the premium to be paid to them, (ii) the fact that the arrangement is the culmination of an “exhaustive, robust strategic review and auction process”, (iii) the unanimous recommendation of BCE’s board of directors, (iv) the fairness opinions provided by five leading financial advisors and (v) the absence of any superior proposal.
As regards fairness to the debentureholders, the Court found that the contesting debentureholders’ only right is the right to have respected the contractual rights contained in the trust indentures and their reasonable expectations, as sophisticated investors, resulting from the trust indentures. The fact that BCE’s shareholders may receive a substantial premium on the value of their shares while the economic interests of the contesting debentureholders may be adversely affected does not, in and of itself, give them the right to vote on the plan of arrangement.
Interpretation of the Trust Indentures and their Covenants
Mr. Justice Silcoff held that in interpreting complex corporate agreements such as the trust indentures, when faced with ambiguity, the courts must favour an interpretation that is commercially reasonable and that gives effect to the intentions and reasonable expectations of the parties at the time the agreements were negotiated.
According to their ordinary meaning in the corporate context in Canada, the UK and elsewhere, (with the possible exception of the United States), the words reorganization and reconstruction used in the 1976 and 1996 trust indentures refer to the transfer of the whole or part of a corporation’s undertaking to a new entity that is intended to carry on substantially the same business and that will ultimately be owned by substantially the same shareholders. Neither the plan of arrangement nor the definitive agreement between BCE and the consortium of purchasers contemplate this type of transaction.
Moreover, consideration of other provisions of the trust indentures, namely, those placing limitations on the assumption of additional debt by Bell Canada, confirmed that the intention of the reorganization covenant was not to restrict Bell Canada from incurring additional indebtedness.
Finally, the Court considered evidence of the prior conduct of the parties, be it Bell Canada or the trustees appointed under the trust indentures, in interpreting the reorganization covenant, and found that every time the trustee’s approval was sought or given, the transaction at issue involved a successor to Bell Canada, which is not the case under the plan of arrangement or the definitive agreement.
The specific conditions for commencing an oppression remedy pursuant to the “no action” clauses found in the trust indentures were found not to have been met by the 1976 and 1997 debentureholders and they were denied standing.
Notwithstanding this conclusion, the Court addressed the issue of whether, by approving the plan of arrangement and the definitive agreement, BCE and Bell Canada had acted in a manner that was oppressive and unfairly prejudicial to the interests of the debentureholders.
The Court confirmed the rule that under normal circumstances, directors owe their fiduciary duty to the corporation and the interests of the corporation are not to be confused with the interests of the shareholders or other stakeholders. In special circumstances (such as when a corporation is the subject of a hostile take-over bid or is involuntarily “put in play” by potential acquirers), the directors’ obligations to act in the best interests of the corporation could require them to approve transactions which, while in the interests of the corporation, might also benefit some or all shareholders at the expense of other stakeholders. When a corporation is “put in play”, the directors have the added burden of maximizing the value of the corporation’s shares for the benefit of its shareholders.
On the facts, the Court indicated that the debentureholders were among the most sophisticated investors in Canada and knew or should have known that BCE and Bell Canada were at all times subject to the possibility of a change of control transaction or a downgrade in its credit ratings, that the representations of BCE and Bell Canada on which the debentureholders relied in support of their alleged reasonable expectations were accompanied by explicit “safe harbour” notices and warnings which the debentureholders ignored, that the reasonable expectations of the debentureholders must derive from the trust indentures themselves, and that the trust indentures contained no change of control or credit rating covenants.
In short, when the debentureholders purchased their debentures, they either willingly assumed the risk that the value might be adversely impacted in the event of a change of control transaction, made unfounded assumptions that such a transaction could not or would not occur, or were complacent with respect to the risks associated with a transaction of this nature. The Court held that neither BCE nor Bell Canada can be held accountable.