OTTAWA (Reuters) - Canada’s top court delayed a ruling on Tuesday on whether to approve or reject the buyout of the country’s largest telecom company, BCE Inc, a decision that could elevate the rights of bondholders and make takeovers more difficult.
The Supreme Court could add billions of dollars to BCE’s market value if it approves the C$34.8 billion ($34.1 billion) transaction to take BCE private in what would be the world’s largest leveraged buyout.
But shares could plunge if the court sides with bondholders who want the deal blocked on the grounds that it would saddle BCE with too much debt. Such a ruling would have far-reaching implications, forcing companies to consider more than the interests of shareholders when weighing buyout proposals.
Seven of the nine judges heard the arguments in Tuesday’s hearing, where the Supreme Court is weighing BCE’s appeal of a decision by a Quebec court that supported the bondholders.
Justice Ian Binnie set the tone of the questioning when he said to BCE lawyer Guy Du Pont: ”You seem to be saying that the outgoing directors can load up the company with as much debt as banks are prepared to finance.
“And quite apart from the duties to the debenture holders , is that discharging the duties to the corporation if you cripple it with that much debt?”
Du Pont said the buyout made sense for BCE, its Bell Canada subsidiary and its shareholders -- whose interests companies traditionally give first priority in their decision-making.
“This transaction was indeed in the best interest of Bell Canada and BCE,” he told the court.
The court heard three hours of testimony, but declined to render a decision on Tuesday. It did not name a day -- it will alert the media ahead of time -- but it was keenly aware of the June 30 deadline for court approval of the deal.
But investors seemed to be betting that BCE would win, as the stock rose during the hearing and afterwards to close on the Toronto Stock Exchange at C$35.05, up C$1.52 from Monday.
That is still well below the C$42.75 a share offered by the buyout group led by Ontario Teachers’ Pension Plan, and below May 21’s C$37.12 close, just before the Quebec Court of Appeal ruled against the deal.
“I think investors should be pretty cautious at this point making bets based on comments that were made during the case,” said Troy Crandall, an analyst at MacDougall, MacDougall & MacTier. “These are senior judges and they’re not going to show their hand prior to their final decision.”
“TREATED AS THE ENEMY”
Several of the judges, including Chief Justice Beverley McLachlin, asked about overall debt loads and whether bondholders’ interests shouldn’t be looked after.
“Aren’t there situations in which you need to consider the overall debt load?” McLachlin asked.
The bondholders contended that BCE had not even considered the interests of Bell Canada and its debenture holders, whose bonds were downgraded and lost 18 percent of their value.
“BCE adopted the maxim that all is fair in love and war. This was war and the debenture holders were treated as the enemy,” argued one of their lawyers, Avram Fishman.
Another lawyer, John Finnigan, insisted the bondholders “don’t want a piece of the C$42.75 a share,” but wanted their interests to be considered so any damage might be mitigated.
That prompted Justice Rosalie Abella to ask, “Why would they have to mitigate unless they have a duty to mitigate?”
Justice Michel Bastarache focused on legal obligations, suggesting that if directors meet those, they have done right.
“Once you’ve determined if that is right, that the bondholders have the right to whatever is promised legally and whatever would come from representations, then aren’t they (directors) acting fairly if they are respecting those criteria?” Bastarache asked.
MacDougall analyst Crandall said the market had judged that the questions were weighted in favor of BCE, but that was a hard bet to take. Questions posed by the appeal court judges also appeared to favor BCE, yet the bondholders won, he said.
He said that even if the court rules in favor of BCE, the risk relating to the financing of the deal lingers and could still prevent the buyout from closing at the offer price.
Columbia University Law School Professor John Coffee said the court’s reserving of judgment was not a surprise.
“This isn’t something you can just snap judgment on,” he said. “If the decision (against BCE) gets reversed, Wall Street goes back to its existing expectations.”
Additional reporting by Louise Egan, Megan Davies and Wojtek Dabrowski; Editing by Janet Guttsman