MONTREAL - The purchase of BCE Inc. by a group led by the Ontario Teachers' Pension Plan hit a snag Wednesday after the Quebec Court of Appeal overturned a lower court's decision to allow the largest corporate takeover in Canadian history.
The appeal court sided with the company's bondholders in reversing Quebec Superior Court Justice Joel Silcoff's decision to allow the takeover of the company in a deal worth $52 billion.
The bondholders had sought to block the proposed leveraged buyout of Canada's largest telecom company that they say treats them unfairly because it loads the telecom giant up with debt and makes their bonds a much riskier investment.
"BCE never attempted to justify the fairness and reasonableness of an arrangement that results in a significant adverse economic impact on the debentureholders while at that same time it accords a substantial premium to the shareholders,'' the five-judge panel ruled.
"Once there is, as in this case, a significant adverse effect on a class of securityholder (debentureholders), while other securityholders (shareholders) derive substantial benefits by an arrangement, the corporation has the burden of demonstrating that the arrangement is, nonetheless, fair and reasonable.''
Shareholders overwhelmingly approved the takeout price of $42.75 per share last September.
But the debentureholders said the board of directors of Bell Canada never met to consider whether Bell's assumption of responsibility to repay the $34 billion in acquisition debt was in the best interests of the company.
Despite the ruling, Teachers' remained committed to the deal Wednesday.
"We're reviewing the ruling and evaluating our options with respect to the bondholder claims,'' Teachers' spokeswoman Deborah Allan said in an email.
Mark Meland, one of the lead lawyers for the bondholders, said his clients were pleased by the court's decision that was widely expected to side with the company.
"The chattering classes were virtually unanimous in stating incorrectly that we had no chance in being successful, but our group, the bondholders that I represent, we always believed we had a good case,'' Meland said.
"We consider this to be a very important judgment, in fact, a landmark commercial judgment in Canada. It confirms that a company and its board of directors have a duty not only to enhance shareholder value, but also have to consider the rights and interests of other stakeholders.''
The ruling in favour of the bondholders could add costs and possibly threatens the deal. BCE said it will try to appeal the case to the Supreme Court.
"The judgment overturning the Quebec Superior Court decision rewrites Canadian law relating to the duty of Canadian boards of directors to maximize value for shareholders in the context of a change of control transaction, as well as to the entitlements of bondholders in those circumstances,'' Martine Turcotte, chief legal officer of BCE and Bell Canada, said in a statement.
"Both the transaction and the issues of law involved are of public importance in Canada. We believe the Supreme Court of Canada should reverse this decision, and allow the transaction to proceed.''
The company said the expected closing of the takeover will be contingent on the Supreme Court granting leave and the timing of the appeal.
Earlier this week, shares of BCE traded lower over uncertainty over the future of the deal after a report in the New York Times that said banks funding the deal were looking to amend the terms of the financing.
That fuelled investor speculation that the value of the deal could drop, especially after the price to take U.S. radio industry giant Clear Channel Communications Inc. private was reduced last week by about eight per cent to US$17.9 billion.
Putting additional pressure on BCE's stock was the fact that the Clear Channel settlement involved some lenders also linked the BCE deal.
BCE shares closed down 28 cents at $37.12 on the Toronto Stock Exchange on Wednesday.
