Canada's Top Court to Hear BCE Appeal on Buyout

The Supreme Court of Canada agreed on Monday to hear an appeal by BCE of a lower court decision that threatens to derail its $34.8 billion (C$34.8 billion) buyout.

Canada's biggest telecom company, parent of Bell Canada, will now be allowed to contest the lower court decision, which said BCE did not take the interest of its bondholders into account when it backed what would be the world's largest leveraged buyout.

The Supreme Court set June 17 as the date for BCE and the bondholders to make their oral arguments, ahead of the buyout plan's June 30 deadline for court approval.

The price of BCE's U.S.-listed shares jumped more than 2 percent to $35.30 in after-hours trading in New York immediately after the announcement. They had closed at $34.53 in consolidated U.S. trade.

In Toronto, BCE shares closed at C$34.65 before the court announced its decision.

This is well below the C$42.75 a share price offered in the buyout plan as markets have been uncertain over whether the buyout will be completed.

If the court had declined to hear the appeal, the bondholders automatically would have won and could then have hoped for some concessions from Bell Canada to bring them on side.

But even though its decision to hear the appeal was a tactical victory for BCE, this was not a reliable indicator of which way the court might rule.

If, for example, the court agrees with the bondholders, it still might want to hear the case so it can write clear principles to guide corporate boards in the future.

Chief Justice Beverley McLachlin and Justices Louis LeBel and Louise Charron constituted the three-judge panel which decided on hearing the appeal.

As is usual, they gave no reasons.

The Quebec Court of Appeal ruled last month that the deal was unfair to bondholders, and said companies had a responsibility to such creditors that goes beyond their contractual obligations.

At stake are billions of dollars in shareholder value, the status of BCE's debt, as well as rules that will govern future mergers in Canada.

The Ontario Teachers' Pension Plan is leading the attempt to privatize BCE.

Its partners are U.S.-based private equity firms Providence Equity Partners, Madison Dearborn Partners and Merrill Lynch Global Private Equity.

Ratings Downgrade

One group of bondholders noted in their submission to the Supreme Court late on Friday that two rating agencies had already downgraded debentures issued by BCE unit Bell Canada from investment grade to junk status, with an 18 percent decline in market value.

"It is unprecedented for a company to go from an A-level investment grade credit rating to junk status in an LBO (leveraged buyout). It is also the first time in Bell's history that its debt has been ranked below investment grade," they submitted.

The bondholders said the default rate for BB grade debentures was 11.9 times higher than those with an A grade.

The bondholders recruited governance expert and investor Stephen Jarislowsky, who manages investment funds with C$55 billion in assets, to their side.

He submitted an affidavit with the bondholders contesting BCE's contention that the Quebec court decision creates commercial uncertainty by requiring boards to consider all stakeholders' interests and not just shareholders'.

"The requirement to consider the interests of affected stakeholders is one of the cornerstones of good governance practice as I know it and enables boards to make decisions in the best interests of the corporation," Jarislowsky said.

The Supreme Court is aware of the high profile and ramifications of the case, evidenced partly by the fact that the chief justice headed the panel that examined the request to hear the appeal.

Hearings will begin at 9 a.m. New York time on June 17, with one hour for each side plus 10 minutes for any interveners.

The appellants' initial written arguments must be submitted by June 6.

A decision can be rendered from the bench immediately on June 17 or reserved for a later date.