BCE Inc. v. 1976 Debentureholders

BCE Inc. v. 1976 Debentureholders
Collection
Supreme Court Judgments
Date
2008-06-20
Neutral citation
2008 SCC 69
Report
[2008] 3 SCR 560
Case number
32647
Judges
McLachlin, Beverley; Bastarache, Michel; Binnie, William Ian Corneil; LeBel, Louis; Deschamps, Marie; Abella, Rosalie Silberman; Charron, Louise
On appeal from
Quebec
Subjects
Commercial law
Notes
SCC Case Information: 32647
Decision Content
SUPREME COURT OF CANADA
Citation: BCE Inc. v. 1976 Debentureholders,
[2008] 3 S.C.R. 560, 2008 SCC 69
Date of Judgment:
20080620
Reasons Delivered: 20081219
Docket: 32647
Between:
BCE Inc. and Bell Canada
Appellants / Respondents on cross‑appeals
and
A Group of 1976 Debentureholders composed of: Aegon Capital Management Inc., Addenda Capital Inc., Phillips, Hager & North Investment Management Ltd., Sun Life Assurance Company of Canada, CIBC Global Asset Management Inc., Her Majesty the Queen in Right of Alberta, as represented by the Minister of Finance, Manitoba Civil Service Superannuation Board, TD Asset Management Inc. and Manulife Financial Corporation
A Group of 1996 Debentureholders composed of: Aegon Capital Management Inc., Addenda Capital Inc., Phillips, Hager & North Investment Management Ltd., Sun Life Insurance (Canada) Limited, CIBC Global Asset Management Inc., Manitoba Civil Service Superannuation Board and TD Asset Management Inc.
A Group of 1997 Debentureholders composed of: Addenda Capital Management Inc., Manulife Financial Corporation, Phillips, Hager & North Investment Management Ltd., Sun Life Assurance Company of Canada, CIBC Global Asset Management Inc., Her Majesty the Queen in Right of Alberta, as represented by the Minister of Finance, Wawanesa Life Insurance Company, TD Asset Management Inc., Franklin Templeton Investments Corp. and Barclays Global Investors Canada Limited
Respondents / Appellants on cross‑appeals
and
Computershare Trust Company of Canada
and CIBC Mellon Trust Company
Respondents
- and -
Director Appointed Pursuant to the CBCA, Catalyst Asset
Management Inc. and Matthew Stewart
Interveners
AND BETWEEN:
6796508 Canada Inc.
Appellant / Respondent on cross‑appeals
and
A Group of 1976 Debentureholders composed of: Aegon Capital Management Inc., Addenda Capital Inc., Phillips, Hager & North Investment Management Ltd., Sun Life Assurance Company of Canada, CIBC Global Asset Management Inc., Her Majesty the Queen in Right of Alberta, as represented by the Minister of Finance, Manitoba Civil Service Superannuation Board, TD Asset Management Inc. and Manulife Financial Corporation
A Group of 1996 Debentureholders composed of: Aegon Capital Management Inc., Addenda Capital Inc., Phillips, Hager & North Investment Management Ltd., Sun Life Insurance (Canada) Limited, CIBC Global Asset Management Inc., Manitoba Civil Service Superannuation Board and TD Asset Management Inc.
A Group of 1997 Debentureholders composed of: Addenda Capital Management Inc., Manulife Financial Corporation, Phillips, Hager & North Investment Management Ltd., Sun Life Assurance Company of Canada, CIBC Global Asset Management Inc., Her Majesty the Queen in Right of Alberta, as represented by the Minister of Finance, Wawanesa Life Insurance Company, TD Asset Management Inc., Franklin Templeton Investments Corp. and Barclays Global Investors Canada Limited
Respondents / Appellants on cross‑appeals
and
Computershare Trust Company of Canada
and CIBC Mellon Trust Company
Respondents
‑ and ‑
Director Appointed Pursuant to the CBCA, Catalyst Asset
Management Inc. and Matthew Stewart
Interveners
Coram: McLachlin C.J. and Bastarache,* Binnie, LeBel, Deschamps, Abella and Charron JJ.
Reasons for Judgment:
(paras. 1 to 167)
The Court
* Bastarache J. joined in the judgment of June 20, 2008, but took no part in these reasons for judgment.
______________________________
BCE Inc. v. 1976 Debentureholders, [2008] 3 S.C.R. 560, 2008 SCC 69
BCE Inc. and Bell Canada Appellants/Respondents on cross‑appeals
v.
A Group of 1976 Debentureholders composed of: Aegon Capital Management Inc., Addenda Capital Inc., Phillips, Hager & North Investment Management Ltd., Sun Life Assurance Company of Canada, CIBC Global Asset Management Inc., Her Majesty the Queen in Right of Alberta, as represented by the Minister of Finance, Manitoba Civil Service Superannuation Board, TD Asset Management Inc. and Manulife Financial Corporation
A Group of 1996 Debentureholders composed of: Aegon Capital Management Inc., Addenda Capital Inc., Phillips, Hager & North Investment Management Ltd., Sun Life Insurance (Canada) Limited, CIBC Global Asset Management Inc., Manitoba Civil Service Superannuation Board and TD Asset Management Inc.
A Group of 1997 Debentureholders composed of: Addenda Capital Management Inc., Manulife Financial Corporation, Phillips, Hager & North Investment Management Ltd., Sun Life Assurance Company of Canada, CIBC Global Asset Management Inc., Her Majesty the Queen in Right of Alberta, as represented by the Minister of Finance, Wawanesa Life Insurance Company, TD Asset Management Inc., Franklin Templeton Investments Corp. and Barclays Global Investors Canada Limited Respondents/Appellants on cross‑appeals
and
Computershare Trust Company of Canada
and CIBC Mellon Trust Company Respondents
and
Director Appointed Pursuant to the CBCA, Catalyst Asset
Management Inc. and Matthew Stewart Interveners
- and -
6796508 Canada Inc. Appellant/Respondent on cross‑appeals
v.
A Group of 1976 Debentureholders composed of: Aegon Capital Management Inc., Addenda Capital Inc., Phillips, Hager & North Investment Management Ltd., Sun Life Assurance Company of Canada, CIBC Global Asset Management Inc., Her Majesty the Queen in Right of Alberta, as represented by the Minister of Finance, Manitoba Civil Service Superannuation Board, TD Asset Management Inc. and Manulife Financial Corporation
A Group of 1996 Debentureholders composed of: Aegon Capital Management Inc., Addenda Capital Inc., Phillips, Hager & North Investment Management Ltd., Sun Life Insurance (Canada) Limited, CIBC Global Asset Management Inc., Manitoba Civil Service Superannuation Board and TD Asset Management Inc.
A Group of 1997 Debentureholders composed of: Addenda Capital Management Inc., Manulife Financial Corporation, Phillips, Hager & North Investment Management Ltd., Sun Life Assurance Company of Canada, CIBC Global Asset Management Inc., Her Majesty the Queen in Right of Alberta, as represented by the Minister of Finance, Wawanesa Life Insurance Company, TD Asset Management Inc., Franklin Templeton Investments Corp. and Barclays Global Investors Canada Limited Respondents/Appellants on cross‑appeals
and
Computershare Trust Company of Canada
and CIBC Mellon Trust Company Respondents
and
Director Appointed Pursuant to the CBCA, Catalyst Asset
Management Inc. and Matthew Stewart Interveners
Indexed as: BCE Inc. v. 1976 Debentureholders
Neutral citation: 2008 SCC 69.
File No.: 32647.
2008: June 17; 2008: June 20.
Reasons delivered: December 19, 2008.
Present: McLachlin C.J. and Bastarache,* Binnie, LeBel, Deschamps, Abella and Charron JJ.
on appeal from the court of appeal for quebec
Commercial law — Corporations — Oppression — Fiduciary duty of directors of corporation to act in accordance with best interests of corporation — Reasonable expectation of security holders of fair treatment — Directors approving change of control transaction which would affect economic interests of security holders — Whether evidence supported reasonable expectations asserted by security holders — Whether reasonable expectation was violated by conduct found to be oppressive, unfairly prejudicial or that unfairly disregards a relevant interest — Canada Business Corporations Act, R.S.C. 1985, c. C‑44, ss. 122(1) (a), 241 .
Commercial law — Corporations — Plan of arrangement — Proposed plan of arrangement not arranging rights of security holders but affecting their economic interests — Whether plan of arrangement was fair and reasonable — Canada Business Corporations Act, R.S.C. 1985, c. C‑44, s. 192 .
At issue is a plan of arrangement that contemplates the purchase of the shares of BCE Inc. (“BCE”) by a consortium of purchasers (the “Purchaser”) by way of a leveraged buyout. After BCE was put “in play”, an auction process was held and offers were submitted by three groups. All three offers contemplated the addition of a substantial amount of new debt for which Bell Canada, a wholly owned subsidiary of BCE, would be liable. BCE’s board of directors found that the Purchaser’s offer was in the best interests of BCE and BCE’s shareholders. Essentially, the arrangement provides for the compulsory acquisition of all of BCE’s outstanding shares. The price to be paid by the Purchaser represents a premium of approximately 40 percent over the market price of BCE shares at the relevant time. The total capital required for the transaction is approximately $52 billion, $38.5 billion of which will be supported by BCE. Bell Canada will guarantee approximately $30 billion of BCE’s debt. The Purchaser will invest nearly $8 billion of new equity capital in BCE.
The plan of arrangement was approved by 97.93 percent of BCE’s shareholders, but was opposed by a group of financial and other institutions that hold debentures issued by Bell Canada. These debentureholders sought relief under the oppression remedy under s. 241 of the Canada Business Corporations Act (“CBCA ”). They also alleged that the arrangement was not “fair and reasonable” and opposed court approval of the arrangement under s. 192 of the CBCA . The crux of their complaints is that, upon the completion of the arrangement, the short‑term trading value of the debentures would decline by an average of 20 percent and could lose investment grade status.
The Quebec Superior Court approved the arrangement as fair and dismissed the claim for oppression. The Court of Appeal set aside that decision, finding the arrangement had not been shown to be fair and held that it should not have been approved. It held that the directors had not only the duty to ensure that the debentureholders’ contractual rights would be respected, but also to consider their reasonable expectations which, in its view, required directors to consider whether the adverse impact on debentureholders’ economic interests could be alleviated. Since the requirements of s. 192 of the CBCA were not met, the court found it unnecessary to consider the oppression claim. BCE and Bell Canada appealed the overturning of the trial judge’s approval of the plan of arrangement, and the debentureholders cross‑appealed the dismissal of the claims for oppression.
Held: The appeals should be allowed and the cross‑appeals dismissed.
The s. 241 oppression action and the s. 192 requirement for court approval of a change to the corporate structure are different types of proceedings, engaging different inquiries. The Court of Appeal’s decision rested on an approach that erroneously combined the substance of the s. 241 oppression remedy with the onus of the s. 192 arrangement approval process, resulting in a conclusion that could not have been sustained under either provision, read on its own terms. [47] [165]
1. The Section 241 Oppression Remedy
The oppression remedy focuses on harm to the legal and equitable interests of a wide range of stakeholders affected by oppressive acts of a corporation or its directors. This remedy gives a court a broad jurisdiction to enforce not just what is legal but what is fair. Oppression is also fact specific: what is just and equitable is judged by the reasonable expectations of the stakeholders in the context and in regard to the relationships at play. [45] [58‑59]
In assessing a claim of oppression, a court must answer two questions: (1) Does the evidence support the reasonable expectation asserted by the claimant? and (2) Does the evidence establish that the reasonable expectation was violated by conduct falling within the terms “oppression”, “unfair prejudice” or “unfair disregard” of a relevant interest? For the first question, useful factors from the case law in determining whether a reasonable expectation exists include: general commercial practice; the nature of the corporation; the relationship between the parties; past practice; steps the claimant could have taken to protect itself; representations and agreements; and the fair resolution of conflicting interests between corporate stakeholders. For the second question, a claimant must show that the failure to meet the reasonable expectation involved unfair conduct and prejudicial consequences under s. 241 . [68] [72] [89] [95]
Where conflicting interests arise, it falls to the directors of the corporation to resolve them in accordance with their fiduciary duty to act in the best interests of the corporation. The cases on oppression, taken as a whole, confirm that this duty comprehends a duty to treat individual stakeholders affected by corporate actions equitably and fairly. There are no absolute rules and no principle that one set of interests should prevail over another. In each case, the question is whether, in all the circumstances, the directors acted in the best interests of the corporation, having regard to all relevant considerations, including — but not confined to — the need to treat affected stakeholders in a fair manner, commensurate with the corporation’s duties as a responsible corporate citizen. Where it is impossible to please all stakeholders, it will be irrelevant that the directors rejected alternative transactions that were no more beneficial than the chosen one. [81‑83]
Here, the debentureholders did not establish that they had a reasonable expectation that the directors of BCE would protect their economic interests by putting forth a plan of arrangement that would maintain the investment grade trading value of their debentures. The trial judge concluded that this expectation was not made out on the evidence, given the overall context of the relationship, the nature of the corporation, its situation as the target of a bidding war, the fact that the claimants could have protected themselves against reductions in market value by negotiating appropriate contractual terms, and that any statements by Bell Canada suggesting a commitment to retain investment grade ratings for the debentures were accompanied by warnings precluding such expectations. The trial judge recognized that the content of the directors’ fiduciary duty to act in the best interests of the corporation was affected by the various interests at stake in the context of the auction process, and that they might have to approve transactions that were in the best interests of the corporation but which benefited some groups at the expense of others. All three competing bids required Bell Canada to assume additional debt. Under the business judgment rule, deference should be accorded to the business decisions of directors acting in good faith in performing the functions they were elected to perform. In this case, there was no error in the principles applied by the trial judge nor in his findings of fact. [96‑100]
The debentureholders had also argued that they had a reasonable expectation that the directors would consider their economic interests in maintaining the trading value of the debentures. While the evidence, objectively viewed, supports a reasonable expectation that the directors would consider the position of the debentureholders in making their decisions on the various offers under consideration, it is apparent that the directors considered the interests of debentureholders, and concluded that while the contractual terms of the debentures would be honoured, no further commitments could be made. This fulfilled the duty of the directors to consider the debentureholders’ interests and did not amount to “unfair disregard” of the interests of debentureholders. What the claimants contend is, in reality, an expectation that the directors would take positive steps to restructure the purchase in a way that would provide a satisfactory price to shareholders and preserve the high market value of the debentures. There was no evidence that it was reasonable to suppose this could be achieved, since all three bids involved a substantial increase in Bell Canada’s debt. Commercial practice and reality also undermine their claim. Leveraged buyouts are not unusual or unforeseeable, and the debentureholders could have negotiated protections in their contracts. Given the nature and the corporate history of Bell Canada, it should not have been outside the contemplation of debentureholders that plans of arrangements could occur in the future. While the debentureholders rely on the past practice of maintaining the investment grade rating of the debentures, the events precipitating the leveraged buyout transaction were market realities affecting what were reasonable practices. No representations had been made to debentureholders upon which they could reasonably rely. [96] [102] [104‑106] [108‑110]
With respect to the duty on directors to resolve the conflicting interests of stakeholders in a fair manner that reflected the best interests of the corporation, the corporation’s best interests arguably favoured acceptance of the offer at the time. The trial judge accepted the evidence that Bell Canada needed to undertake significant changes to be successful, and the momentum of the market made a buyout inevitable. Considering all the relevant factors, the debentureholders failed to establish a reasonable expectation that could give rise to a claim for oppression. [111‑113]
2. The Section 192 Approval Process
The s. 192 approval process 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. The approval process focuses on whether the arrangement, viewed objectively, is fair and reasonable. Its purpose is to permit major changes in corporate structure to be made while ensuring that individuals whose rights may be affected are treated fairly, and its spirit is to achieve a fair balance between conflicting interests. In seeking court approval of an arrangement, the onus is on the corporation to establish that (1) the statutory procedures have been met; (2) the application has been put forth in good faith; and (3) the arrangement is “fair and reasonable”. [119] [126] [128] [137]
To approve a plan of arrangement as fair and reasonable, courts must be satisfied that (a) the arrangement has a valid business purpose, and (b) the objections of those whose legal rights are being arranged are being resolved in a fair and balanced way. Whether these requirements are met is determined by taking into account a variety of relevant factors, including the necessity of the arrangement to the corporation’s continued existence, the approval, if any, of a majority of shareholders and other security holders entitled to vote, and the proportionality of the impact on affected groups. Where there has been no vote, courts may consider whether an intelligent and honest business person, as a member of the class concerned and acting in his or her own interest, might reasonably approve of the plan. Courts must focus on the terms and impact of the arrangement itself, rather than the process by which it was reached, and must be satisfied that the burden imposed by the arrangement on security holders is justified by the interests of the corporation. Courts on a s. 192 application should refrain from substituting their views of the “best” arrangement, but should not surrender their duty to scrutinize the arrangement. [136] [138] [145] [151] [154‑155]
The purpose of s. 192 suggests that only security holders whose legal rights stand to be affected by the proposal are envisioned. It is the fact that the corporation is permitted to alter individual rights that places the matter beyond the power of the directors and creates the need for shareholder and court approval. However, in some circumstances, interests that are not strictly legal could be considered. The fact that a group whose legal rights are left intact faces a reduction in the trading value of its securities generally does not, without more, constitute a circumstance where non‑legal interests should be considered on a s. 192 application. [133‑135]
Here, the debentureholders no longer argue that the arrangement lacks a valid business purpose. The debate focuses on whether the objections of those whose rights are being arranged were resolved in a fair and balanced way. Since only their economic interests were affected by the proposed transaction, not their legal rights, and since they did not fall within an exceptional situation where non‑legal interests should be considered under s. 192 , the debentureholders did not constitute an affected class under s. 192 , and the trial judge was correct in concluding that they should not be permitted to veto almost 98 percent of the shareholders simply because the trading value of their securities would be affected. Although not required, it remained open to the trial judge to consider the debentureholders’ economic interests, and he did not err in concluding that the arrangement addressed the debentureholders’ interests in a fair and balanced way. The arrangement did not fundamentally alter the debentureholders’ rights, as the investment and return they contracted for remained intact. It was well known that alteration in debt load could cause fluctuations in the trading value of the debentures, and yet the debentureholders had not contracted against this contingency. It was clear to the judge that the continuance of the corporation required acceptance of an arrangement that would entail increased debt and debt guarantees by Bell Canada. No superior arrangement had been put forward and BCE had been assisted throughout by expert legal and financial advisors. Recognizing that there is no such thing as a perfect arrangement, the trial judge correctly concluded that the arrangement had been shown to be fair and reasonable. [157] [161] [163‑164]
Cases Cited
Referred to: Peoples Department Stores Inc. (Trustee of) v. Wise, [2004] 3 S.C.R. 461, 2004 SCC 68; Bradbury v. English Sewing Cotton Co., [1923] A.C. 744; Zwicker v. Stanbury, [1953] 2 S.C.R. 438; Sparling v. Quebec (Caisse de dépôt et placement du Québec), [1988] 2 S.C.R. 1015; Maple Leaf Foods Inc. v. Schneider Corp. (1998), 42 O.R. (3d) 177; Kerr v. Danier Leather Inc., [2007] 3 S.C.R. 331, 2007 SCC 44; The Queen in right of Canada v. Saskatchewan Wheat Pool, [1983] 1 S.C.R. 205; Scottish Co‑operative Wholesale Society Ltd. v. Meyer, [1959] A.C. 324; Diligenti v. RWMD Operations Kelowna Ltd. (1976), 1 B.C.L.R. 36; Stech v. Davies, [1987] 5 W.W.R. 563; First Edmonton Place Ltd. v. 315888 Alberta Ltd. (1988), 40 B.L.R. 28, var’d (1989), 45 B.L.R. 110; 820099 Ontario Inc. v. Harold E. Ballard Ltd. (1991), 3 B.L.R. (2d) 113; Westfair Foods Ltd. v. Watt (1991), 79 D.L.R. (4th) 48; Wright v. Donald S. Montgomery Holdings Ltd. (1998), 39 B.L.R. (2d) 266; Re Keho Holdings Ltd. and Noble (1987), 38 D.L.R. (4th) 368; Ebrahimi v. Westbourne Galleries Ltd., [1973] A.C. 360; Main v. Delcan Group Inc. (1999), 47 B.L.R. (2d) 200; GATX Corp. v. Hawker Siddeley Canada Inc. (1996), 27 B.L.R. (2d) 251; Adecco Canada Inc. v. J. Ward Broome Ltd. (2001), 12 B.L.R. (3d) 275; SCI Systems Inc. v. Gornitzki Thompson & Little Co. (1997), 147 D.L.R. (4th) 300, var’d (1998), 110 O.A.C. 160; Downtown Eatery (1993) Ltd. v. Ontario (2001), 200 D.L.R. (4th) 289, leave to appeal refused, [2002] 1 S.C.R. vi; Re Ferguson and Imax Systems Corp. (1983), 150 D.L.R. (3d) 718; Gibbons v. Medical Carriers Ltd. (2001), 17 B.L.R. (3d) 280, 2001 MBQB 229; Alberta Treasury Branches v. SevenWay Capital Corp. (1999), 50 B.L.R. (2d) 294, aff’d (2000), 8 B.L.R. (3d) 1, 2000 ABCA 194; Lyall v. 147250 Canada Ltd. (1993), 106 D.L.R. (4th) 304; Tsui v. International Capital Corp., [1993] 4 W.W.R. 613, aff’d (1993), 113 Sask. R. 3; Deutsche Bank Canada v. Oxford Properties Group Inc. (1998), 40 B.L.R. (2d) 302; Themadel Foundation v. Third Canadian Investment Trust Ltd. (1995), 23 O.R. (3d) 7, var’d (1998), 38 O.R. (3d) 749; Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (1986); Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (1985); Trizec Corp., Re (1994), 21 Alta. L.R. (3d) 435; Pacifica Papers Inc. v. Johnstone (2001), 15 B.L.R. (3d) 249, 2001 BCSC 1069; Abitibi‑Consolidated Inc. (Arrangement relatif à), [2007] Q.J. No. 16158 (QL), 2007 QCCS 6830; Canadian Pacific Ltd. (Re) (1990), 73 O.R. (2d) 212; Cinar Corp. v. Shareholders of Cinar Corp. (2004), 4 C.B.R. (5th) 163; PetroKazakhstan Inc. v. Lukoil Overseas Kumkol B.V. (2005), 12 B.L.R. (4th) 128, 2005 ABQB 789; St. Lawrence & Hudson Railway Co. (Re), [1998] O.J. No. 3934 (QL); Re Alabama, New Orleans, Texas and Pacific Junction Railway Co., [1891] 1 Ch. 213; Stelco Inc., Re (2006), 18 C.B.R. (5th) 173; UPM‑Kymmene Corp. v. UPM‑Kymmene Miramichi Inc. (2002), 214 D.L.R. (4th) 496, aff’d (2004), 42 B.L.R. (3d) 34.
Statutes and Regulations Cited
Canada Business Corporations Act, R.S.C. 1985, c. C‑44, ss. 102(1) , 122 , 192 , 239 , 241 .
Companies Act Amending Act, 1923, S.C. 1923, c. 39, s. 4.
Authors Cited
Canada. Consumer and Corporate Affairs Canada. Detailed background paper for an Act to amend the Canada Business Corporations Act. Ottawa: Consumer and Corporate Affairs Canada, 1977.
Canada. Industry Canada. Corporations Canada. Policy concerning Arrangements Under Section 192 of the CBCA : Policy Statement 15.1. Ottawa: Industry Canada, November 7, 2003 (online: www.strategis.ic.gc.ca/epic/site/cd‑dgc.nsf/print‑en/cs01073e.html).
Dickerson, Robert W. V., John L. Howard and Leon Getz. Proposals for a New Business Corporations Law for Canada, vol. I. Ottawa: Information Canada, 1971.
Koehnen, Markus. Oppression and Related Remedies. Toronto: Thomson/Carswell, 2004.
Nicholls, Christopher C. Mergers, Acquisitions, and Other Changes of Corporate Control. Toronto: Irwin Law, 2007.
Shapira, G. “Minority Shareholders’ Protection — Recent Developments” (1982), 10 N.Z. Univ. L. Rev. 134.
Veasey, E. Norman, with Christine T. Di Guglielmo. “What Happened in Delaware Corporate Law and Governance from 1992‑2004? A Retrospective on Some Key Developments” (2005), 153 U. Pa. L. Rev. 1399.
APPEALS and CROSS‑APPEALS from judgments of the Quebec Court of Appeal (Robert C.J.Q. and Otis, Nuss, Pelletier and Dalphond JJ.A.), [2008] R.J.Q. 1298, 43 B.L.R. (4th) 157, [2008] Q.J. No. 4173 (QL), 2008 CarswellQue 4179, 2008 QCCA 935; [2008] Q.J. No. 4170 (QL), 2008 QCCA 930; [2008] Q.J. No. 4171 (QL), 2008 QCCA 931; [2008] Q.J. No. 4172 (QL), 2008 QCCA 932; [2008] Q.J. No. 4174 (QL), 2008 QCCA 933; [2008] Q.J. No. 4175 (QL), 2008 QCCA 934, setting aside decisions by Silcoff J., [2008] R.J.Q. 1029, 43 B.L.R. (4th) 39, [2008] Q.J. No. 4376 (QL), 2008 CarswellQue 1805, 2008 QCCS 898; (2008), 43 B.L.R. (4th) 69, [2008] Q.J. No. 1728 (QL), 2008 CarswellQue 2226, 2008 QCCS 899; [2008] R.J.Q. 1097, 43 B.L.R. (4th) 1, [2008] Q.J. No. 1788 (QL), 2008 CarswellQue 2227, 2008 QCCS 905; (2008), 43 B.L.R. (4th) 135, [2008] Q.J. No. 1789 (QL), 2008 CarswellQue 2228, 2008 QCCS 906; [2008] R.J.Q. 1119, 43 B.L.R. (4th) 79, [2008] Q.J. No. 1790 (QL), 2008 CarswellQue 2229, 2008 QCCS 907. Appeals allowed and cross‑appeals dismissed.
Guy Du Pont, Kent E. Thomson, William Brock, James Doris, Louis‑Martin O’Neill, Pierre Bienvenu and Steve Tenai, for the appellants/respondents on cross‑appeals BCE Inc. and Bell Canada.
Benjamin Zarnett, Jessica Kimmel, James A. Woods and Christopher L. Richter, for the appellant/respondent on cross‑appeals 6796508 Canada Inc.
John Finnigan, John Porter, Avram Fishman and Mark Meland, for the respondents/appellants on cross‑appeals Group of 1976 Debentureholders and Group of 1996 Debentureholders.
Markus Koehnen, Max Mendelsohn, Paul Macdonald, Julien Brazeau and Erin Cowling, for the respondent/appellant on cross‑appeals Group of 1997 Debentureholders.
Written submissions only by Robert Tessier and Ronald Auclair, for the respondent Computershare Trust Company of Canada.
Christian S. Tacit, for the intervener Catalyst Asset Management Inc.
Raynold Langlois, Q.C., and Gerald Apostolatos, for the intervener Matthew Stewart.
The following is the judgment delivered by
The Court —
I. Introduction
[1] These appeals arise out of an offer to purchase all shares of BCE Inc. (“BCE”), a large telecommunications corporation, by a group headed by the Ontario Teachers Pension Plan Board (“Teachers”), financed in part by the assumption by Bell Canada, a wholly owned subsidiary of BCE, of a $30 billion debt. The leveraged buyout was opposed by debentureholders of Bell Canada on the ground that the increased debt contemplated by the purchase agreement would reduce the value of their bonds. Upon request for court approval of an arrangement under s. 192 of the Canada Business Corporations Act, R.S.C. 1985, c. C-44 (“CBCA ”), the debentureholders argued that it should not be found to be fair. They also opposed the arrangement under s. 241 of the CBCA on the ground that it was oppressive to them.
[2] The Quebec Superior Court, per Silcoff J., approved the arrangement as fair under the CBCA and dismissed the claims for oppression. The Quebec Court of Appeal found that the arrangement had not been shown to be fair and held that it should not have been approved. Thus, it found it unnecessary to consider the oppression claim.
[3] On June 20, 2008, this Court allowed the appeals from the Court of Appeal’s disapproval of the arrangement and dismissed two cross-appeals from the dismissal of the claims for oppression, with reasons to follow. These are those reasons.
II. Facts
[4] At issue is a plan of arrangement valued at approximately $52 billion, for the purchase of the shares of BCE by way of a leveraged buyout. The arrangement was opposed by a group, comprised mainly of financial institutions, that hold debentures issued by Bell Canada. The crux of their complaints is that the arrangement would diminish the trading value of their debentures by an average of 20 percent, while conferring a premium of approximately 40 percent on the market price of BCE shares.
[5] Bell Canada was incorporated in 1880 by a special Act of the Parliament of Canada. The corporation was subsequently continued under the CBCA . BCE, a management holding company, was incorporated in 1970 and continued under the CBCA in 1979. Bell Canada became a wholly owned subsidiary of BCE in 1983 pursuant to a plan of arrangement under which Bell Canada’s shareholders surrendered their shares in exchange for shares of BCE. BCE and Bell Canada are separate legal entities with separate charters, articles and bylaws. Since January 2003, however, they have shared a common set of directors and some senior officers.
[6] At the time relevant to these proceedings, Bell Canada had $7.2 billion in outstanding long-term debt comprised of debentures issued pursuant to three trust indentures: the 1976, the 1996 and the 1997 trust indentures. The trust indentures contain neither change of control nor credit rating covenants, and specifically allow Bell Canada to incur or guarantee additional debt subject to certain limitations.
[7] Bell Canada’s debentures were perceived by investors to be safe investments and, up to the time of the proposed leveraged buyout, had maintained an investment grade rating. The debentureholders are some of Canada’s largest and most reputable financial institutions, pension funds and insurance companies. They are major participants in the debt markets and possess an intimate and historic knowledge of the financial markets.
[8] A number of technological, regulatory and competitive changes have significantly altered the industry in which BCE operates. Traditionally highly regulated and focused on circuit-switch line telephone service, the telecommunication industry is now guided primarily by market forces and characterized by an ever-expanding group of market participants, substantial new competition and increasing expectations regarding customer service. In response to these changes, BCE developed a new business plan by which it would focus on its core business, telecommunications, and divest its interest in unrelated businesses. This new business plan, however, was not as successful as anticipated. As a result, the shareholder returns generated by BCE remained significantly less than the ones generated by its competitors.
[9] Meanwhile, by the end of 2006, BCE had large cash flows and strong financial indicators, characteristics perceived by market analysts to make it a suitable target for a buyout. In November 2006, BCE was made aware that Kohlberg Kravis Roberts & Co. (“KKR”), a United States private equity firm, might be interested in a transaction involving BCE. Mr. Michael Sabia, President and Chief Executive Officer of BCE, contacted KKR to inform them that BCE was not interested in pursuing such a transaction at that time.
[10] In February 2007, new rumours surfaced that KKR and the Canada Pension Plan Investment Board were arranging financing to initiate a bid for BCE. Shortly thereafter, additional rumours began to circulate that an investment banking firm was assisting Teachers with a potential transaction involving BCE. Mr. Sabia, after meeting with BCE’s board of directors (“Board”), contacted the representatives of both KKR and Teachers to reiterate that BCE was not interested in pursuing a “going-private” transaction at the time because it was set on creating shareholder value through the execution of its 2007 business plan.
[11] On March 29, 2007, after an article appeared on the front page of the Globe and Mail that inaccurately described BCE as being in discussions with a consortium comprised of KKR and Teachers, BCE issued a press release confirming that there were no ongoing discussions being held with private equity investors with respect to a “going-private” transaction for BCE.
[12] On April 9, 2007, Teachers filed a report (Schedule 13D) with the United States Securities and Exchange Commission reflecting a change from a passive to an active holding of BCE shares. This filing heightened press speculation concerning a potential privatization of BCE.
[13] Faced with renewed speculation and BCE having been put “in play” by the filing by Teachers of the Schedule 13D report, the Board met with its legal and financial advisors to assess strategic alternatives. It decided that it would be in the best interests of BCE and its shareholders to have competing bidding groups and to guard against the risk of a single bidding group assembling such a significant portion of available debt and equity that the group could preclude potential competing bidding groups from participating effectively in an auction process.
[14] In a press release dated April 17, 2007, BCE announced that it was reviewing its strategic alternatives with a view to further enhancing shareholder value. On the same day, a Strategic Oversight Committee (“SOC”) was created. None of its members had ever been part of management at BCE. Its mandate was, notably, to set up and supervise the auction process.
[15] Following the April 17 press release, several debentureholders sent letters to the Board voicing their concerns about a potential leveraged buyout transaction. They sought assurance that their interests would be considered by the Board. BCE replied in writing that it intended to honour the contractual terms of the trust indentures.
[16] On June 13, 2007, BCE provided the potential participants in the auction process with bidding rules and the general form of a definitive transaction agreement. The bidders were advised that, in evaluating the competitiveness of proposed bids, BCE would consider the impact that their proposed financing arrangements would have on BCE and on Bell Canada’s debentureholders and, in particular, whether their bids respected the debentureholders’ contractual rights under the trust indentures.
[17] Offers were submitted by three groups. All three offers contemplated the addition of a substantial amount of new debt for which Bell Canada would be liable. All would have likely resulted in a downgrade of the debentures below investment grade. The initial offer submitted by the appellant 6796508 Canada Inc. (the “Purchaser”), a corporation formed by Teachers and affiliates of Providence Equity Partners Inc. and Madison Dearborn Partners LLC, contemplated an amalgamation of Bell Canada that would have triggered the voting rights of the debentureholders under the trust indentures. The Board informed the Purchaser that such an amalgamation made its offer less competitive. The Purchaser submitted a revised offer with an alternative structure for the transaction that did not involve an amalgamation of Bell Canada. Also, the Purchaser’s revised offer increased the initial price per share from $42.25 to $42.75.
[18] The Board, after a review of the three offers and based on the recommendation of the SOC, found that the Purchaser’s revised offer was in the best interests of BCE and BCE’s shareholders. In evaluating the fairness of the consideration to be paid to the shareholders under the Purchaser’s offer, the Board and the SOC received opinions from several reputable financial advisors. In the meantime, the Purchaser agreed to cooperate with the Board in obtaining a solvency certificate stating that BCE would still be solvent (and hence in a position to meet its obligations after completion of the transaction). The Board did not seek a fairness opinion in respect of the debentureholders, taking the view that their rights were not being arranged.
[19] On June 30, 2007, the Purchaser and BCE entered into a definitive agreement. On September 21, 2007, BCE’s shareholders approved the arrangement by a majority of 97.93 percent.
[20] Essentially, the arrangement provides for the compulsory acquisition of all of BCE’s outstanding shares. The price to be paid by the Purchaser is $42.75 per common share, which represents a premium of approximately 40 percent to the closing price of the shares as of March 28, 2007. The total capital required for the transaction is approximately $52 billion, $38.5 billion of which will be supported by BCE. Bell Canada will guarantee approximately $30 billion of BCE’s debt. The Purchaser will invest nearly $8 billion of new equity capital in BCE.
[21] As a result of the announcement of the arrangement, the credit ratings of the debentures by the time of trial had been downgraded from investment grade to below investment grade. From the perspective of the debentureholders, this downgrade was problematic for two reasons. First, it caused the debentures to decrease in value by an average of approximately 20 percent. Second, the downgrade could oblige debentureholders with credit-rating restrictions on their holdings to sell their debentures at a loss.
[22] The debentureholders at trial opposed the arrangement on a number of grounds. First, the debentureholders sought relief under the oppression provision in s. 241 of the CBCA . Second, they opposed court approval of the arrangement, as required by s. 192 of the CBCA , alleging that the arrangement was not “fair and reasonable” because of the adverse effect on their economic interests. Finally, the debentureholders brought motions for declaratory relief under the terms of the trust indentures, which are not before us: (2008), 43 B.L.R. (4th) 39, 2008 QCCS 898; (2008), 43 B.L.R. (4th) 69, 2008 QCCS 899.
III. Judicial History
[23] The trial judge reviewed the s. 241 oppression claim as lying against both BCE and Bell Canada, since s. 241 refers to actions by the “corporation or any of its affiliates”. He dismissed t