BCE Court Decision Taking Canada In A New Direction?

Ok, what I am about to say will look biased since I would have profitted from the closing of the BCE deal; but even if I had no economic interest, I would say the same thing.

The BCE court decision, handed down by the Quebec Appeals court, sets a bad precedent in my eyes. If it is upheld, it will take Canada in a new direction, away from established principles of other countries like USA. An opinion piece from Al Hudec, a lawyer at Farris, Vaughan, Wills & Murphy, summarizes the situation and questions the merits of the decision:

On what the court is saying...

In the course of its decision, the Quebec Court of Appeal ruled that the BCE board should have considered the interests, including the reasonable expectations, of the Bell Canada bond holders.

The court held that the BCE special committee's process was fatally flawed because the committee had not made a detailed analysis of the costs and benefits of the leveraged buyout -- not just for shareholders, but for other stakeholders too. In essence, the court found that BCE had not properly taken into consideration the adverse impact of the potential transaction on bond holders.

On how this can adversely impact future transactions...
If the Quebec decision is upheld, and this is indeed the law, then it is hard to imagine the board of a Canadian public company ever approving a share bid structured as a plan of arrangement, absent a concurrent bid for the company's outstanding bonds...

Until this decision, the common view would have been that Canadian law was similar to U.S. law as expressed in the seminal U.S. Revlon case of 1986.

The widely cited Revlon ruling established the basic deal principle that once a company is put in play, boards of public companies have a duty to achieve the highest price for shareholders.

The Quebec court held that this view was mistaken and that in Canada, the directors of a corporation have a more extensive duty.

On how bondholders vary from shareholders...
Unlike common shareholders, who generally do not enjoy the ability to negotiate their terms, debt holders have the ability to negotiate a panoply of rights and remedies to protect their interests. These extensive rights are protected by detailed contracts, known as trust indentures, which set out the reasonable expectations of the parties to the bargain, and a court should not readily extend the rights of bond holders beyond those for which they have bargained.

Sophisticated participants in bond markets have understood, since the multiple ratings downgrades of the leveraged buyout boom of the 1980's, that if they are worried about a rating downgrade as the result of a leveraged buyout, they can protect themselves in the covenants of a trust indenture.

Regardless of what happens to the BCE takeover, this is a bad ruling in my opinion. It will make future takeovers, particularly LBOs, extremely difficult.

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