On June 20, 2008, the Supreme Court of Canada (the "S.C.C.") released its highly anticipated decision in the landmark case involving the proposed $51.7 billion privatization of BCE Inc. ("BCE") and the attempt by certain holders of debentures of Bell Canada (BCE's subsidiary) to prevent court approval of the transaction. In a unanimous decision, the S.C.C. reversed the previous decision from the Quebec Court of Appeal (the "Q.C.A."), rejected the claims made by the debentureholders, and granted approval of the transaction.

Davies is representing BCE on the negotiation of the transaction and represented BCE and Bell Canada in the related court proceedings. The successful litigation team was led by Kent E. Thomson, William Brock and Guy Du Pont with a team comprised of Lorne Morphy, James Doris, Louis-Martin O’Neill, Matthew Milne-Smith, Nick Rodrigo, Sandra Mastrogiuseppe, Davit Akman, Sean Campbell, Jordan Vaeth, Nevena Lalic, Jonathan Gottlieb and Cinthia Duclos (litigation), and Steven Harris and Alex Moore (mergers and acquisitions).

The case was followed closely by the Canadian business and legal communities due to the significance of the outcome for future M&A transactions in Canada and the unprecedented size of the transaction. The outcome of the appeal supports the process conducted by BCE's board of directors (the "Board") to maximize shareholder value, while respecting the contractual rights and reasonable expectations of Bell Canada's debentureholders. While the S.C.C. has not issued the detailed reasons for the decision at this time, the decision also appears to support the generally established view that in the context of a change of control, directors of a public company are required to discharge their fiduciary duties by taking reasonable steps to maximize shareholder value.

The issues at the heart of this case can be traced back to April 2007, when BCE was put "in play" after the Ontario Teachers' Pension Plan ("Teachers'"), BCE's largest shareholder, publicly changed its investment status with respect to BCE from passive to active. Following this announcement, a strategic review and auction process was carried out by the Board, which led to an offer by a group led by Teachers', Providence Equity Partners and Madison Dearborn Partners (the "Teachers' Consortium") representing a premium of approximately 40%, or $10 billion, over the undisturbed price of BCE's shares. BCE and the Teachers' Consortium entered into a definitive agreement for the transaction on June 29, 2007 and BCE subsequently commenced a proceeding before the Quebec Superior Court to implement the transaction by way of a court-supervised plan of arrangement. Certain debentureholders of Bell Canada opposed the approval of the plan of arrangement by the court on the basis that it adversely affected their rights.

In the Quebec Superior Court, the trial judge ruled in favour of BCE and Bell Canada on all proceedings and rejected the claims of the debentureholders. He found that the proposed transaction would maximize shareholder value, respect the contractual rights and reasonable expectations of the debentureholders, and be in the best interests of BCE and Bell Canada. In its May 21, 2008 ruling, the Q.C.A. did not disturb the trial judge's finding that the plan of arrangement is in the best interests of BCE and Bell Canada. However, the Q.C.A. overturned the trial judge's finding that the plan of arrangement is fair and reasonable, regarding the interests of the debentureholders. In its decision, the Q.C.A. imposed a duty upon the Board to go beyond respecting the contractual rights and reasonable expectations of the debentureholders and to attempt to alleviate or attenuate any economic harm suffered by them as a consequence of the transaction.

BCE's application for leave to appeal to the S.C.C. was granted on an expedited basis in recognition of the national importance and urgency of the case. Two main issues were brought before the S.C.C. First, BCE and Bell Canada addressed the question of whether directors are required to provide benefits to debentureholders that exceed their contractual rights and reasonable expectations, as held by the Q.C.A. Davies argued on behalf of BCE and Bell Canada that in the context of a change of control, directors of public companies discharge their fiduciary duties and act in their company's best interests by taking reasonable steps to maximize shareholder value while respecting contractual rights and other legal obligations. Davies submitted that the discretion of the Board to consider diverse interests should not be converted into a mandatory obligation to seek to protect those interests, as imposed by the Q.C.A. Furthermore, Davies also argued that the Board did in fact consider the interests of the debentureholders, yet ultimately concluded that it would have been inappropriate and unfair to protect their interests at the expense of shareholders in the context of the privatization transaction.

The second issue addressed by BCE was the question of whether, in determining if a proposed plan of arrangement is fair and reasonable, courts are required to consider the economic interests of debentureholders whose legal rights are not altered or arranged by the plan. Davies submitted on behalf of BCE that the proper approach for the court to take is to consider the fairness of the plan from the perspective of those parties whose legal rights are altered or arranged by the plan, and that even if this were not the case, that the plan of arrangement effecting the transaction is fair and reasonable to the debentureholders.

The S.C.C. unanimously set aside the decision of the Q.C.A. and affirmed the trial judge's approval of the plan of arrangement. The court reserved its detailed reasons which will be released at a later date. The S.C.C.'s decision will be of fundamental importance to public and private companies, to directors of those companies, as well as to shareholders, creditors and to other corporate stakeholders. It is expected that the decision will generally provide comfort to boards of directors of Canadian public companies that, in the context of change of control transactions, the duty to act in the best interests of the corporation may be fulfilled by taking reasonable steps to maximize shareholder value, while respecting the legal rights of other stakeholders. Decisions made by boards on this basis, with the assistance of adequate legal and financial advice, will generally be protected by the business judgment rule, absent unusual circumstances.

If you would like further information about the litigation, please contact Kent E. Thomson (416.863.5566) or James W.E. Doris (416.367.6919) in Toronto or Guy Du Pont (514.841.6406) or William Brock (514.841.6438) in Montréal.  For further information on the transaction, please contact William M. Ainley (416.863.5509) in Toronto or Maryse Bertrand, Ad.E. (514.841.6460) in Montréal.

Davies Ward Phillips & Vineberg LLP, with over 235 lawyers, practises nationally and internationally from offices in Toronto, Montréal, New York and an affiliate in Paris and is consistently at the heart of the largest and most complex commercial and financial matters on behalf of its North American and overseas clients.

The information and comments herein are for the general information of the reader and are not intended as advice or opinions to be relied upon in relation to any particular circumstance. For particular applications of the law to specific situations, the reader should seek professional advice.

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June 24, 2008