Harry Koza on Bell bonds
May 30, 2008
|Revenge of the bond nerds |
12:38 EST Thursday, May 29, 2008
The BCE deal has been all over the news the last week or so and now the big kerfuffle is about whether the Quebec Court of Appeal did the right thing in overturning a lower court decision and ruling in favour of the holders of Bell Canada bonds.
The financial press has been full of opinion this week about how the QCA's decision must be over-ruled, since the main principle in the case is "the primacy of shareholders," and "what's the point of a contract if one side is automatically forced to go beyond it?"
Wednesday's Globe pointed out that BCE's lawyers were relying on the "Revlon rule," a U.S. precedent that also speaks to the primacy of shareholders and the board's duty to maximize shareholder wealth, since the bondholders are "protected by the terms of their bond contracts."
To rephrase that question above, "what's the point of a contract if one side doesn't have to live up to their end of it?" Because, make no mistake, that's what is going on here. The primacy of shareholders is running roughshod over the contractual rights of the Bell debenture holders.
Now, as I have said before in this space, I ain't no lawyer. Nonetheless, I think that the QCA made the correct decision, and I'll tell you why, thereby potentially saving everybody involved in this thing a ton of legal fees.
When the Bell Canada bondholders - individuals, pension funds, insurance companies, money managers - lent Bell money by buying its bonds, Bell and its parent BCE Inc. agreed to certain terms, these being specifically spelled out in a document called a trust indenture, which is really a contract. You know, like the ones the Revlon rule says protect the bondholders' interests.
Being a bond geek, I am something of a trust indenture fan-boy. Indentures are almost as much fun as prospectuses and annual reports, though, admittedly, they are invariably written in an orotund, sesquipedalian boilerplate that makes reading them rather a lot like reading something by Conrad Black or Rex Murphy. They're worth a look, though, and I direct the interested reader to Google "Bell Canada + trust indenture."
Article 8 of the Bell bonds trust indentures deals with consolidation and amalgamation. It says that the company can reorganize, restructure, consolidate, merge, amalgamate, sell itself to another company or group of investors - pretty much anything, really - provided that the company or its successors continue to make the payments on the bonds and "observe and perform each and every covenant, stipulation, promise, undertaking, condition and agreement of the company herein contained."
As long as those terms are met, a deal can be done. Oh, there is just one more little thing: such a deal can only be done as long as it is "being in no wise prejudicial to the interests of the debenture holders."
Now, maybe I'm missing some legal nuance here, but I'd say that taking publicly-traded BCE private is definitely some kind of reorganization, and thus falls under Article 8. Further, the bond investors, who bought investment grade bonds issued by an oligopoly utility company, only to see them morph into low level junk bonds, are being treated contrary to BCE's contractual undertakings in Article 8. Presto-change-o, from investment grade to junk, and faster than you can say Ohio Mattress, too. If that's not prejudicial, I don't know what is. The Quebec Court of Appeal correctly found that Article 8 applied, and, since the purchasers are in default or breach of Article 8, the debenture holders are being oppressed under Section 241 of the Canada Business Corporations Act, and entitled to the oppression remedy. "Oppression remedy," of course, being legal parlance for "Cut us a great big fat cheque, dudes."
By the way, it is worth noting that there are many retirees who own Bell bonds, as well as many working Canadians whose RRSPs and pension plans also hold them, and Canadian courts have historically been very sympathetic to the plight of "widows and orphans" in oppression cases, and thus, very generous with remedies.
I called a learned legalist of my acquaintance at his island lair in the Caribbean to ask him about all this. Fortunately, I caught him during mojito hour, when he was at the bar, rather than at the Bar, so he had time to give me the benefit of his wisdom. He had already read the trust indentures and other relevant documents - the guy would have made a great bond geek - and so didn't even hesitate. "The case law," he intoned mellifluously, using his $1,000-an-hour courtroom voice, "supports the Quebec Court of Appeal on this issue. The Supremes will confirm that decision - that Diana Ross ain't no fool. Now quit bugging me, it's time for my massage."
So forget the Revlon rule and the primacy of the shareholders - they aren't what the QCA decision is really about. The BCE deal violates the company's contract with its bondholders, as spelled out in the trust indenture. That by itself will justify the Supreme Court upholding the QCA decision.
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