Legal News

Canada High Court Hears Arguments in BCE Buyout; Stock Responds

By Dan Slater

By no means do we pretend to know the Market Beat, but when a company’s stock gains on the apparent strength of its lawyers’ oral arguments, the LB takes notice. That’s what happened yesterday in Ottawa, when lawyers went before Canada’s Supreme Court to settle the highly-litigious planned buyout of telecom BCE by Ontario Teachers’ Pension Plan.

Last month, in a surprise ruling by a Quebec appeals court, the $51.8 billion deal was scuttled under the protestations of BCE’s bondholders, who argued that the deal’s $34 billion loan package would saddle the company with too much debt, depressing the price of their debentures. The ruling underscored a major break between Canadian and U.S. corporate law: In the U.S., when a company is for sale, the board must maximize shareholder value, while its duties to the bondholders are merely contractual. But in reversing the lower court’s decision in the BCE case, the Quebec appeals court cited bondholders rights that are not granted in the U.S.

Yesterday, reports the Toronto Globe and Mail, BCE’s lawyer, Guy Du Pont, went before Canada’s high court — watched by more than 250 spectators — to argue that BCE’s board properly exercised their duties and had not trampled bondholders in approving the deal.

Chief Justice Beverley McLachlin challenged Du Pont: “Don’t you have to look at the long-term interests and [impact] of the overall debt load? Isn’t it a little more complex than the picture you are putting to us in law?”

Du Pont responded that bondholders were not entitled to any expectation that the board would do anything other than ensure that it honored the terms of contracts negotiated by large institutional investors when they purchased the debt securities. The bondholders didn’t seek contractual protections to shield them from LBO’s, he said.

And the market seemed to think that argument was persuasive, despite the adverse lower court ruling. By the close of the hearing at noon, when the justices said they would reserve judgment, the stock was heading up, finishing the day at $35.09, up almost 5%.

Markus Koehnen, representing one class of the bondholders, responded that BCE breached its legal duties by failing to properly consider what effect the leveraged buyout would have on Bell and its stakeholders, which include the bondholders.

Full post as published by Law Blog - WSJ.com on June 18, 2008 (boomark / email).