Bell case will have sweeping implications
Supreme Court could redefine the rights of shareholders
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by L. IAN MacDONALD
The Gazette, Wednesday, June 18, 2008
The Supreme Court of Canada building is Ernest Cormier's art deco masterpiece, with its gleaming marble walls, sconces, hand-carved desks and red leather-backed chairs.
In this majestic setting yesterday, seven members of the high court sat to hear arguments on whether the $52-billion BCE buyout should close for the benefit of 615,000 shareholders, or be shut down for the benefit of bondholders.
The deal for the Ontario Teachers' Pension Fund to take BCE Inc. private is the largest leveraged buyout in history. Not just in Canadian history, but in the history of LBOs worldwide.
If the Supremes rule in favour of Teachers and Bell, the deal will close as scheduled on June 30 at $42.75 a share, a 40-per-cent premium to the stock's price when the company was put in play in the spring of 2007. If the court rules that the debenture holders deserve "more consideration," as the Quebec Court of Appeal did in its stunning reversal of a Superior Court judgment in favour of Bell, then the deal will crater, and the stock price will revisit the low 30s.
That's a $10 per share hit on the price of the deal. Stated another way, if your family owns 1,000 shares in your RSP, or your mother's pension fund, or your son's college trust, you would be looking at $10,000 that the Quebec Appeal Court and then the Supremes would be taking out of your pocket. With about 800 million shares in the float, BCE's market value would be reduced by about $8 billion from the price of the deal.
And you very likely do own BCE, either personally or in your company pension plan. It is the most widely held company in the country.
And everybody has a stake in the most important commercial case ever to be heard in the Supreme Court.
What it comes down to is shareholder rights versus stakeholder rights. The former is well established in law, the latter is a new concept posited by the Quebec Appeal Court, which if upheld by the Supremes will become the law of the land, forever changing the rules of business, investment and corporate governance. There's a lot more than $52 billion riding on this .
Shareholders and bondholders play by different rules. Shareholders take their chances in equity markets. Bondholders have their investments, and their returns, contractually guaranteed.
As Raynold Langlois put it in a brilliant intervention on behalf of a small shareholder: "They are at risk and totally dependent on management and the fluctuation of capital markets."
The two most sacred tenets of corporate governance are enhancing brand value and creating shareholder value. One leads to the other. I learned this years ago writing speeches for Purdy Crawford, when he was chairman of Imasco. Corporate governance, he used to say, was everything, and he is still the acknowledged master of it in Canada.
Stakeholders are widely defined. They certainly include bondholders, along with shareholders. But the notion of stakeholders also includes employees, trade unions, communities and environmental activists. If the argument of the bondholders is upheld by the Supreme Court, then it opens the door to employees opposing deals on the grounds of job losses, communities challenging them on fears of head-office moves, environmentalists claiming the new owners are irresponsible.
The mood of the Supremes is always hard to read in arguments, and yesterday the court was giving both sides a hard time. Rosalie Abella took them into the boards, and Ian Binnie took them into the corners.
Bell's lead counsel, Guy Du Pont, had barely begun his argument when Abella interrupted, in that dangerously sweet manner of hers, with a loaded question. "What are reasonable expectations?" she wondered. Du Pont stumbled and replied that bondholders had only contractual rights, and no reasonable expectations.
Binnie wondered, "how can it be in the interest of the corporation to load up on debt as is being done here?" Now, there's an interesting intervention by the court into open markets.
But in what might have been a bad day in court for bondholders, the defining moment came when Abella played the innocent in interrupting their counsel, John Finnigan.
"Stay with me," he replied.
Amid audible gasps, jaws dropped throughout the packed courtroom. Abella is a Charter judge, whose knowledge of commercial law is, to put it gently, a work in progress. But nobody talks to the court that way. Nobody.
"I'm not going anywhere," she replied.
It was a moment for the ages.