Court should save BCE deal - T. CorcoranI would add to Terry's analysis (see below) by saying that the Québec Superior Court decision, if upheld by the SCC, will negatively impact the pace of innovation, productivity and growth of real incomes in Canada.
deanmartin: This is hugely important and I hope you are right. This is turning out to be a fascinating policy issue. I'm clearly on the wrong side of this trade as I'm spending far too much time and effort following and trying to understand this dossier. -The Red
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Saturday, May 24, 2008
Court should save BCE deal
Terence Corcoran, National Post
Published: Saturday, May 24, 2008
It would be a spectacular long-term Canadian shareholder disaster, and possibly a corporate governance disaster, if the BCE takeover were to crash over the short-term interests of a relatively small group of bondholders. The bondholders themselves like to play down their demands. Easy to fix, they say. Could have been done for peanuts. All they want, according to one lawyer representing their interests, is to shave a little off the takeover price paid to shareholders and move it over to the bondholders. "If you take one or two dollars away from [the $42.75 per share price] and give that to bondholders, shareholders are still getting a very good deal."
Simple enough. If this legal wrangle were just a matter of a dollar here and a dollar there, the BCE takeover would not now be heading to the Supreme Court. There are more than a few dollars at stake. Important principles, including the primacy of shareholders, are at the heart of the legal battle over the $52-billion equity-plus-debt BCE takeover -- the largest buyout in history.
The role of the Supreme Court, if it accepts the appeal, would be to uphold shareholder rights and reverse Wednesday's Quebec Court of Appeal decision. That decision against BCE appears to significantly expand the subversive idea -- long a shadow over Canadian corporate law -- that shareholders are just another group of interested parties in a long list of "stakeholders."
As the appeal court put it, the BCE board of directors, and a special independent committee of the board, made a "mistake" in deciding not to make special arrangements with the owners of about $5-billion in Bell Canada long-term debt, the debenture holders. "In Canada, the directors of a corporation have a more extensive duty" than to maximize value to shareholders. This more extensive duty means the board "must have regard, among other things, to the reasonable expectations of the debenture holders, and those may be more extensive than merely respecting their contractual legal rights."
What's the point of a contract if one side is automatically forced to go beyond it? The appeal court's main support for its argument is a 2004 Supreme Court decision known as the Peoples Department Stores case. The Quebec judges quote from the Peoples decision to back up their conclusion that BCE's board made a legal error. "The Supreme Court of Canada in Peoples stated at paragraph 47 that 'In resolving competing interests, it is incumbent upon the directors to act honestly and in good faith with a view to the best interests of the corporation ... and not to favour the interests of one group of stakeholders.' "
This looks, however, to be a selective reading of the Peoples decision, which was actually about a company on the brink of bankruptcy. It's an insolvency case, not a corporate takeover or transaction. Indeed, the full quotation from paragraph 47 of the Peoples decision makes specific reference to the insolvency circumstances. "In resolving competing interests, it is incumbent upon the directors to act honestly and in good faith with a view to the best interests of the corporation when it is in troubled waters financially and not to favour the interests of one group of stakeholders." Journalists get their knuckles rapped for that kind of context dropping.
The 2004 Peoples case makes it clear on numerous occasions that the rights of shareholders are consistent with the rights of creditors "if the corporation is profitable and well capitalized and has strong
prospects." But this can change as a corporation starts to struggle financially. "As the corporation approaches what has been described as the vicinity of insolvency" the claims of shareholders start to disappear and become "exhausted." While shareholders might well prefer to maximize shareholder values in an insolvency situation, creditors deserve to have their claims maximized, too.
The Quebec appeal court decision in effect takes creditors in the Peoples insolvency case and stretches their plight to apply to bondholders of BCE, which is not insolvent nor on the brink of bankruptcy. This merging of BCE's reorganization with insolvency is repeated a couple of times. A 100-year-old bit of English jurisprudence, raising the spectre of "confiscation" and things that are "forced" on creditors, comes from the bankruptcy of the Alabama, New Orleans, Texas & Pacific Junction Railway Co.
The holders of BCE debentures, however, are not holding debt of a bankrupt firm. They are not stuck with near-worthless paper of an insolvent company that will never recover beyond some breakup value. The interest rate on the bonds ranges from 7% to more than 9%. As a result of the takeover, there is no doubt that the market value of the bonds will fall. They will now rank behind a large pile of debt BCE is taking on to fund the takeover and renew its corporate strategy. Rating agencies say the investment grade rating on the bonds will likely crash to junk status, reducing their market value by as much as 20%.
But junk ratings -- like all ratings, as we know -- are not infallible or permanent. In years to come, if BCE is successful, the same bonds will recover in value. The bondholders cannot have it both ways, collecting "one or two dollars" out of shareholders' pockets today to cover their current loss in market value, and at the same time expect to cash in on the increase in value as the bonds recover from junk status in the future.
Nobody can deny the bondholders value loss as the result of new business and corporate events at BCE. Nothing new in that. Bondholders take market baths routinely as corporations change strategies, owners, market conditions, whatever. If every corporate reorganization, arrangement or major investment initiative had to keep bondholders and other "stakeholders" from suffering declines in their market fortunes, the rules of corporate behaviour in Canada will have been turned upside down. The Supreme Court could -- and should -- stop that from happening.
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https://www.nationalpost.com/opinion/columnists/story.html?id=536985