The BCE deal: many questions, few clear answers

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National Post, Friday, June 13, 2008

The fate of the Ontario Teachers' Pension Plan's attempt to buy BCE, Canada's largest telecom provider, now lies in the hands of the Supreme Court of Canada, which will hear arguments next Tuesday in the most momentous commercial case ever to be brought before Canada's top court.

The basic question of law to be determined is whether stakeholders -- namely bondholders -- should receive the same consideration as shareholders in the sale of a publicly held company. The court's decision will determine whether the $52-billion deal to take Bell Canada private closes or craters.

If it closes, shareholders will receive $42.75 a share. If it craters, the stock price could revisit a low near $30, to which the stock fell after the Quebec Court of Appeal reversed a lower court judgment rejecting debenture holders' claims that they had not received fair treatment at the hands of the OTPP.

BCE is Canada's most widely held company with 615,000 shareholders. I own BCE stock in my RRSP. So does my daughter in her college trust fund. So does my 92-year-old mother in her retirement portfolio. And so, quite probably, do you, if not individually, then institutionally through your company pension plan.

Shareholder rights are a sacrosanct principle of corporate governance. Maximizing shareholder value is the responsibility of a board of directors when considering whether to approve any transaction in which a publicly listed company changes hands.

Bondholders are different. Their investments, and their returns, are contractually guaranteed. But maximizing stakeholder value is a new concept in law, introduced by the Quebec Court of Appeal's reversal of the lower court's decision that the deal to take Bell private was fair to all concerned.

BCE will seek an answer from the Supreme Court, regarding the following question: "Are directors of public companies in Canada, in the context of a change of control transaction, entitled to seek to maximize shareholder value while respecting the contractual rights and reasonable expectations of debenture holders? Or are the directors also required, as held by the Quebec Court of Appeal, to seek to provide benefits to debenture holders that exceed their contractual rights and reasonable expectations?"

Moreover, if bondholders are to receive special consideration, what about other stakeholders? What about employee concerns over potential layoffs? Unions worried about losing members? Suppliers concerned about losing contracts? A community wondering about a head office move? Must all these vested interests be considered when a publicly traded company changes hands?

Here's another thing -- BCE is one of hundreds of Canadian companies inter-listed on the Toronto and New York stock exchanges. How can a stock be traded under one set of governance and legal rules in Canada, and another in the United States? No American investors would dispute Canadian sovereignty, but they wouldn't be very happy about the uncertainty built in to such an arrangement.

Consider the potential political and economic aftershocks: If the Quebec court ruling is upheld, why would any public company locate its head office in Montreal if doing so meant it could not be sold at a later date?

And why, for that matter, would any company selling itself file a plan of arrangement in Montreal, when it could end up in this kind of legal wrangle? Better to be safe than sorry and file the documents in Toronto.

The Quebec court's ruling was a very bad day for mergers and acquisitions law practices in Quebec. If the Supreme Court upholds its decision, it will mean a new and very frightening landscape for Canadian businesses.

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