BCE Bondholder Litigation: Decision of Supreme Court of Canada. William Ainley Maryse Bertrand Alex Moore

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1 BCE Bondholder Litigation: Decision of Supreme Court of Canada William Ainley Maryse Bertrand Alex Moore

2 Lawyer Profiles William M. Ainley Senior partner in mergers & acquisitions and member of the firm s Management Committee Cited in the highest categories of mergers & acquisitions lawyers by numerous organizations, including Chambers Global, Practical Law Company, IFLR, Euromoney and LEXPERT and recently voted Best Mergers & Acquisitions Lawyer in Canada by World Finance Legal Awards

Lawyer Profiles Maryse Bertrand Senior partner specializing in mergers & acquisitions and corporate & securities law Selected by LEXPERT Magazine as one

3 Lawyer Profiles Maryse Bertrand Senior partner specializing in mergers & acquisitions and corporate & securities law Selected by LEXPERT Magazine as one of Canada s Top 30 Corporate Dealmakers Awarded Advocatus Emeritus distinction by Quebec Bar in recognition of exceptional contribution to legal profession 2

4 Lawyer Profiles Alex Moore Partner in mergers & acquisitions and corporate & securities law Experienced in public and private mergers & acquisitions, private equity transactions and contested transactions 3

5 Background The Auction for BCE BCE "put in play" in spring of 2007 Special Committee established and ran auction Special Committee also evaluated other strategic alternatives LBO provided greater value than alternatives Teachers' consortium bid won out over two other private equity bids Transaction was structured as a plan of arrangement 4

6 Reaction of Bell Canada Bondholders BCE subsidiary, Bell Canada, is one of Canada s largest investment grade bond issuers Bell Canada bond prices declined significantly on speculation of an LBO In late April through May, bondholders conducted a letter writing campaign, asking that BCE consider the "best interests of the bondholders" and respect their rights under the trust indentures Bondholders were clearly coordinating efforts and planning an opposition Bondholders rights were not altered by the plan of arrangement 5

7 Litigation Commenced by Bondholders Claims under Trust Indentures Claimed that the transaction was a "reorganization" that required the consent of the Trustee pursuant to the terms of indentures Oppression remedy claims under the CBCA Claimed that the LBO was oppressive and that their interests were unfairly disregarded by BCE's directors Cited BCE's publicly declared commitment to maintain "balanced" financial structure Claimed the Bell Canada guaranty of the acquisition debt was not in the best interests of Bell Canada Stated the amount of additional debt was unreasonably large Opposed court approval of plan arrangement Claimed that the transaction was not "fair and reasonable" to bondholders: complaints similar to claims of oppression 6

8 Trial Decision All claims rejected by the trial judge Trial judge found that The LBO complied with the Trust Indentures which did not include covenant protection All prior statements about credit ratings were qualified by cautionary "safe harbour" notices The transaction is in the best interests of BCE, its shareholders and Bell Canada 7

9 Trial Decision Trial judge also stated that Bondholders Were aware that covenant protection was available in the market Knew that there was a risk that BCE could be the subject of an LBO Knew that they would be unprotected and that bond prices would decline following an LBO as a result of increased leverage Could not reasonably expect to be protected from an LBO at the expense of shareholders As a result, the court found that the transaction was not oppressive and approved the plan of arrangement as "fair and reasonable" 8

10 Quebec Court of Appeal Decision QCA reversed trial judge's approval of the plan of arrangement as fair and reasonable Stated that the BCE board had a duty to consider and take steps to alleviate the impact of the transaction on Bell Canada's bondholders Based decision on the SCC s Peoples decision Faulted the board for following a flawed process QCA made factual findings/observations at odds with trial judge s findings and the evidence 9

11 The Supreme Court Responds to Urgency Trial Trial Decision Decision March 7 March 7 QCA QCA Hearing Hearing April April May 1 May 1 SCC SCC Expedites Expedites Appeal Appeal May May SCC SCC Decision Decision June 20 June 20 Outside Outside Date Date June 30 June 30 QCA QCA Appeal Appeal Filed Filed March March QCA QCA Decision Decision May May SCC SCC Hearing Hearing June June QCA Phase SCC Phase 10

12 The Supreme Court of Canada Reasons The Plan of Arrangement: Fair and Reasonable Test Oppression Remedy and the test for approval of the Plan of Arrangement are two different proceedings that require different inquiries Analysis of the reviewing court should be limited, in general, to parties whose legal rights are modified In extraordinary circumstances, the interests of persons whose legal rights are unaltered by the plan may need to be taken into account Possible reduction in the market value of the bonds did not constitute such extraordinary circumstances Because their rights under the indentures were not being compromised, it was appropriate that the bondholders not have a vote on the plan of arrangement 11

13 The Supreme Court of Canada Reasons The Plan of Arrangement: Fair and Reasonable Test The Court reformulated the fair and reasonable test and created a two-step inquiry Determine whether the Arrangement has a valid business purpose Evaluate whether it resolves the objections of those whose rights are being arranged in a fair and balanced way The Court concluded that the trial judge correctly concluded that the Arrangement was fair and reasonable 12

14 The Supreme Court of Canada Reasons The Oppression Remedy The Supreme Court confirmed existing case law that oppression requires a two prong inquiry Does the evidence support the reasonable expectation asserted by the claimant? Does the evidence establish that the reasonable expectation was violated by conduct falling within the terms "oppression", "unfair prejudice" or "unfair disregard" of a relevant interest? 13

15 The Supreme Court of Canada Reasons The Oppression Remedy Reasonable expectations can result from many factors: General commercial practice Nature of the corporation (e.g. public or private) Relationship between the parties Past practice Steps the claimant could have taken to protect against the conduct in question Representations and agreements Fair resolution of conflicting interests between stakeholders 14

16 The Supreme Court of Canada Reasons The Oppression Remedy Trial judge found that there was no reasonable expectation that investment grade status of debentures would be maintained Statements were accompanied by explicit warnings to the contrary Overall context of the relationship Nature of the corporation Corporation's situation as the target of a bidding war Claimants could have protected themselves by negotiating appropriate contractual terms Only reasonable expectation was that directors would consider the interests of bondholders which they did The Board's conclusion only to honour the contractual terms of debentures fulfilled the directors' duty to consider the bondholders' interests and did not amount to "unfair disregard" of their interests 15

17 The Supreme Court of Canada Reasons The Fiduciary Duty Supreme Court stated that the fiduciary duty of the Board of Directors is to act in the best interests of the corporation Separate duty from the Board s duty of care, unlike under US law Fiduciary duty of the Board of Directors is a mandatory duty owed to the corporation and not to the shareholders, or any other constituency Consequence is that shareholders cannot enforce the fiduciary duty directly because they are not the beneficiaries of the duty 16

18 The Supreme Court of Canada Reasons The Fiduciary Duty Supreme Court outlined the four alternate remedies available to shareholders under Canadian corporation law To bring a derivative action in the name of the corporation To bring a civil action for breach of the directors' duty of care to "exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances" To bring an action for oppression against the corporation In the case of an arrangement, which requires the court to conclude the arrangement is fair and reasonable, to intervene before the court and object 17

19 The Supreme Court of Canada Reasons The Fiduciary Duty In discussing the proper discharge of the directors fiduciary duties, the Supreme Court stated at paragraph 40: "In considering what is in the best interests of the corporation, directors may look to the interests of, inter alia, shareholders, employees, creditors, consumers, governments and the environment to inform their decisions. Courts should give appropriate deference to the business judgment of directors who take into account these ancillary interests, as reflected by the business judgment rule. The 'business judgment rule' accords deference to a business decision, so long as it lies within a range of reasonable alternatives It reflects the reality that directors are often better suited to determine what is in the best interests of the corporation. This applies to decisions on stakeholders' interests, as much as other directorial decisions." And at paragraph 82: "[I]t falls to the directors of the corporation to resolve [conflicts between the interests of stakeholders] in accordance with their fiduciary duty to act in the best interests of the corporation, viewed as a good corporate citizen." 18

20 The Supreme Court of Canada Reasons The Fiduciary Duty The Supreme Court makes clear that in considering a change of control transaction the decision of a board of directors to act in a manner that maximizes shareholder value will be accorded the protection of the business judgment rule, provided directors have discharged their duty of care and not acted in a manner that produces an oppressive result 19

21 Conclusions Sophisticated commercial parties should be held to their contractual agreements, barring exceptional circumstances giving rise to other rights Fair and reasonable test for a plan of arrangement is a separate analysis from oppression and is focused on the fairness of the plan to those whose legal rights are affected Supreme Court has established a two-step analysis for the purpose of the Oppression Remedy Fiduciary duty is owing only to the corporation and the interests of no one class of stakeholders prevails over other interests Business judgment rule will be given a broad application in resolving conflicts between the interests of different corporate stakeholders Courts will defer to decisions of directors to maximize shareholder, provided that they have exercised due care and not effected an oppressive result 20

22 Questions & Discussion William Ainley Maryse Bertrand Alex Moore

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