1. List the key stakeholders and their interests in the proposed privatization of BCE. Who would be the winners and losers if the proposed privatization of BCE were to proceed?

In 2008, BCE Inc. (BCE), a Canadian integrated telecommunication company was planning to make “a $50-billion deal to privatize the firm” (Kunsch 1). One of the reasons for the decision to sell the company was its unlucky performance at the stock market for several months in a row.  Shareholders were willing to sell, and there easily appeared potential buyers. The rumors spread throughout the market that the BCE was going on sale.

An important prerogative for the board of directors was to increase the shareholder value. For that purpose, they initiated the auction process. 97, 93 per cent of the shareholders voted in favor of the deal. The decision was viewed as satisfying interests of all the parties involved.

The agreement was achieved with an investor group of Teachers’ Private Capital, Providence Equity Partners Inc. and Madison Dearborn Partners Inc. (Tory and Cameron 1). The agreement was made after the special committee decided that its main aim was to increase the shareholder value, which seemed the best interest for the company.

Thus, the first group of stakeholders in the given case was BCE shareholders, whose direct profit would be to get BCE privatized with the highest share value possible. Their interest was to make a lucrative deal.  “The investors proposed to acquire all the outstanding shares of BCE at a price of $42.75 per common share, a 40% premium for BCE’s common shareholders” (Tory and Cameron 1). The privatization would bring shareholders wealth and, thus, it was considered beneficial for everybody. Totally supported by the board of directors, shareholders were eager to make a great deal even at the expense of other people’s interests.

The second group of key stakeholders was bondholders of “Bell Canada, wholly owned subsidiary of BCE”, that partly made the whole privatization possible by being “willing to assume BCE’s $30 billion debt obligation” (Ben-Ishai 1). The debt from the leveraged buyout would significantly decrease the value of the bonds. For this reason, interests of the bondholders were contrary to the ones of shareholders. This bargain not only would bring them no profit, it would even be devastating for their investments.

 Thus, the key stakeholders in BCE included the board of directors, management, shareholders, and debenture holders. The interests of two main parties (shareholders and bondholders) were in a conflict with each other. The duty of the board of directors was to decide whose interests should be put first, and they chose to pursue the best interest for the shareholders. The conflict of interests brought the case through courts of different instances.

For the finalization of the agreement with potential buyers, the BCE needed to apply for the Court’s approval. Under Canadian legislation, the buyout was approved as a fair deal.    

Nonetheless, the bondholders did not agree with the decision, and the case went further to the Quebec Court of Appeal. The expectations of bondholders and the negligence of the board to meet these expectations were considered by the Court as sufficient grounds for refusing to approve the claims of the BCE shareholders.

In the long run, the Supreme Court let the project through, but it failed due to timeframe issues, as after signing the agreement with potential buyers, the BCE set June, 30 2008 as the deadline for the transaction. Due to all the court examinations, the BCE missed the closing date for the deal and failed to get the firm privatized.

If the proposed privatization of BCE were to proceed, the winners would include the management team, board of directors, and shareholders. The agreement would allow the shareholders to sell their stock at a 40% premium. The price was not only fine, it was very profitable. Letting down the bondholders, the shareholders got their money back with a great interest.

On the other hand, the losers would include the bondholders. Many bondholders were mainly “large, sophisticated pension plans and investment firms that were restricted to holding only investment grade bonds” (Kunsch 3). If the proposed privatization were to proceed, they would have to sell all of their bonds, which already at that time had dropped by 18 per cent. For bondholders, it is crucial that their bonds should remain at the “investment grade” during the whole period of investment, and they blamed the BCE board of directors for not protecting these expectations.

The privatization was obviously convenient and beneficial only for one of the stakeholders’ groups – the shareholders. For bondholders it was very disadvantageous, as it would cause the decrease in their bond value, which, by the requirements of the investment pension funds, would make the stakeholders sell bonds, even though at a big loss. The primacy of the shareholders’ interests was apparent. Nonetheless, the bondholders were ready to fight for their rights, as they realized the possible harm of the deal personally for them.

2. What were the major differences in the Revlon case and the Quebec Court of Appeal’s approaches to how the board should weigh the various stakeholder interests?

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BCE’s board of directors in order to proceed with the buyout needed the approval of the court. Justice Silcoff of the Quebec Superior Court approved the deal “as fair and reasonable under s. 192 of the Canada Business Corporations Act, R.S.C. 1985, c. C-44 (“CBCA”), which is generally applicable to change of control transactions where the arrangement is sponsored by the directors of the target company, and the goal is to require some or all shareholders to surrender their shares” (Ben-Ishai 1).

At this first stage, the request of the board of directors was acknowledged fair and legal, while the bondholders’ claims for oppression were dropped. This decision was widely-expected and not at all surprising. In cases similar to the BCE case, judges often invoke the precedent of the Revlon case. Canadian judges tend to admit the reasoning used in this case. Kunsch gives us the following description of the Revlon case:

The judge in the Revlon case concluded that the normal fiduciary obligations of U.S. boards were to act in the best interests of the corporation. However, when a public company was “in play” as a potential takeover target, then the board’s duty changed from doing what was in the best interests of the corporation to one of maximizing shareholder value by getting the best deal possible for shareholders. In other words, in such a case the best interests of the firm merged with the best interests of the shareholders. (Kunsch 2)

“The rule originated as the result of a court case involving the sale of Revlon Inc. in 1985. The court ruled that the directors of the company improperly resisted a hostile takeover and accepted a lower bid from another company” (Investorwords.com).

However, the Quebec Court of Appeal’s decision May 21, 2008 conflicted and rejected the Revlon duty, holding that, in a take over or acquisition the board of directors must take into consideration the interest of all the stakeholders. The stakeholder in definition includes anyone who is affected by the decisions of the business as a whole, which include bondholders.

According to this approach, pursuing “the best interests of the corporation” requires the board to take into consideration “the interests of all the stakeholders and not to equate the interests of the corporation with the interests of the shareholders alone” (Tory and Cameron 2).

By supporting bondholders’ position, the Court refused to accept the Delaware shareholder model, where the chief goal of the board of directors is that they are to get the highest possible share rate for the shareholders.

In this case, we see these two approaches – the one of the Revlon case and the one used by the Quebec Court of Appeal.  The difference lies in the vision of what the duties of the board of directors in a takeover situation are and to whom their fiduciary duties are really owed.

The Quebec Court of Appeal claimed that the duty of directors is not owed exclusively by any of the stakeholder parties. Shareholders and bondholders have no primacy in such cases. The decision-making and the court’s final choice should depend solely on the details of the situation and objective facts, as for whether or not the deal involved is fair and reasonable in its particular circumstances.

In Court’s words:

The corporation and shareholders are entitled to maximize profit and share value, to be sure, but not by treating individual stakeholders unfairly.  Fair treatment – the central theme running through the oppression jurisprudence – is most fundamentally what stakeholders are entitled to ‘reasonably forget’. (Tory and Cameron 3)

The Court argued that besides key stakeholders, such as shareholders and bondholders, the board should consider the interests of employees and customers, as well. Another important point is that “balancing competing interests must be done in light of the surrounding circumstances” (Pakrul 1).

This decision of the Quebec Court of Appeal distinguishes Canadian legislation and position from the ones generally accepted in the U.S.A., where the Revlon case is still a model solution for decision-making in change-of-control cases. The U.S. popular view is still supporting shareholders as key stakeholders; it also reaffirms the primacy of their interests and the reasonability of maximizing the share value.

According to the Quebec Court of Appeal:

Canadian directors duty, while permitting more flexibility, imposes a significant

obligation on directors to diligently identify, assess and weigh a variety of competing interests in any particular circumstance, using their best business judgment. (Pakrul 1)

In conclusion, the Quebec Court of Appeal’s decision, on the one hand, represents the point of view, in which the duty of the board of directors in a potential takeover situation is to consider the best interests of the corporation, namely the best interests of its every stakeholder. Concomitant circumstances are also considered as an important criterion for the final decision.

On the other hand, we see the Revlon case’s position, where the best interests of the corporation are equated to the best interests of the shareholders. The main duty of the board in this approach is to get the highest possible shareholder value.

Despite the fact that the Supreme Court eventually supported the shareholders, and they were allowed to privatize the firm, the decision of the Quebec Court of Appeal stands out and shows the evolving Canadian position as for cases similar to the BCE case.

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