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INTRODUCTION

On May 21, 2008, the Quebec Court of Appeal (the "Court") delivered its judgments in the matter of the proposed arrangement concerning BCE Inc. ("BCE"). In a surprise ruling, the Court partially allowed the debentureholders' appeal and set aside the Superior Court's approval of the plan of arrangement, casting a great deal of doubt on the likelihood that the transaction can be completed as planned.

In a press release issued after markets closed, BCE indicated that, together with the purchaser, it would seek leave to appeal the Court's ruling to the Supreme Court of Canada. While the parties had agreed that the time for seeking leave to the Supreme Court be shortened (from 60 to 30 days), BCE indicated in its press release that the expected timing for the closing of the transaction will be contingent on the Supreme Court granting leave to appeal and the timing related to any such appeal.

EXECUTIVE SUMMARY

• Based on a reading of the Supreme Court of Canada decision in Peoples, the Court held that directors' duties never shift from the best interests of the corporation to the best interests of the shareholders. In other words, Revlon duties, until now applied when a company was "in play", are said not to apply to Canadian corporations.
• Reasonable expectations of debentureholders, often alleged to have been thwarted giving rise to a remedy under the CBCA, cannot run contrary to the express terms of trust indentures, but can be derived not only from the trust indentures themselves but also from public statements of the company made over time.
• When asked to approve a plan of arrangement, the court will consider those securityholders whose legal rights are being affected as well as those whose economic interests are being affected even if the latter have no voting rights.
• Failure by the BCE board to consider the debentureholders' economic interests vitiated their process and, despite having been made in good faith, the directors' decision was not entitled to the deference flowing from the business judgment rule.
• Standard "no action" clauses in trust indentures do not cover oppression remedies.
• The Court did uphold that in interpreting complex corporate agreements such as trust indentures, when faced with ambiguity, the courts must favour an interpretation that is commercially reasonable.

PRACTICAL IMPLICATIONS FOR DEBT ISSUERS

This judgment in no way recognizes implicit contractual obligations to submit a transaction to debentureholders for their approval, or to repurchase notes, when the transaction has an adverse effect on the credit ratings of debentures. No change of control put or early redemption right should thus be implied as a result of this ruling.

However, in the context of a plan of arrangement and not of a statutory merger or amalgamation or takeover bid, directors may have a duty to consider whether the transaction is fair and reasonable to noteholders depending on the wording of the trust indenture and on the various representations made by the issuer to noteholders in the past. The board may also have a duty to consider whether there are ways of structuring a transaction that would more adequately preserve their interests, along with those of other stakeholders.

This being said, a transaction that has an adverse effect on credit ratings may very well be in the best interests of the corporation and, insofar as the directors have put their minds to the issue of fairness to all stakeholders, including noteholders, their decision to enter into the transaction should not be second-guessed.

HISTORY OF THE MATTER

On June 30, 2007, after months of speculation about its future, an abandoned attempt to convert into an income trust and proposals from a number of suitors, BCE, the largest telecommunications company in Canada, announced that it had entered into a definitive agreement for the acquisition of all of its outstanding common and preferred shares by Teachers' Private Capital, a corporation organized by Ontario Teachers' Pension Plan Board and affiliates of Providence Equity Partners Inc. and Madison Dearborn Partners, LLC. The offer, priced at $42.75 per common share, represented a premium of about 40% over the average closing price of BCE's common shares in the first quarter of 2007. The transaction, which is valued at $51.7 billion, is the largest leveraged buyout ever announced in Canada.

The transaction was designed to be carried out pursuant to a plan of arrangement under the Canada Business Corporations Act (the "CBCA") and requires the approval of the Quebec Superior Court as well as the approval of two thirds of the holders of common and preferred shares, voting together as a single class. In August 2007, Mr. Justice Silcoff issued an interim order allowing BCE to hold a special shareholder meeting so that shareholders could vote on the offer.

On September 19, 2007, some holders of debentures issued by Bell Canada (a wholly-owned subsidiary of BCE) pursuant to trust indentures signed in 1976, 1996 and 1997 announced their intention to contest the proposed acquisition. The contesting parties are among the largest financial institutions in Canada. They alleged, among other things, that the transaction was prejudicial to them because it would have a negative impact on the ratings of the debentures and would lead to deterioration in the debentures' value.

Meanwhile, on September 21, 2007, the arrangement was overwhelmingly approved by the shareholders of BCE, garnering over 97% of the votes cast by holders of common and preferred shares.

The contestations and the application for a final order approving BCE's plan of arrangement were heard by the Superior Court from December 3, 2007 to January 28, 2008.

The debentureholders sought: (i) to attack the fairness of the plan of arrangement claiming it did not consider their interests, (ii) to qualify the arrangement as a reorganization of BCE and thus have the trustee vote on its approval, and (iii) a remedy in oppression claiming that their legitimate expectations with regard to their treatment had been thwarted.

On Friday, March 7, 2008, the Quebec Superior Court handed down five judgments approving BCE's plan of arrangement for its privatization and dismissing all claims asserted by or on behalf of certain holders of Bell Canada debentures.

On May 21, 2008, the Quebec Court of Appeal partially allowed the debentureholders' appeal, reversing the lower court's decision approving the plan of arrangement, on the grounds that the plan of arrangement did not consider their interests.

The following highlights the Court's most important findings.

HIGHLIGHTS OF THE COURT'S JUDGMENTS

• Directors' duty to consider interests of all stakeholders
  The Court's most important conclusions concern the so-called Revlon duties (i.e., the shift in directors' duty to maximizing the value of the corporation's shares for the benefit of the shareholders when a corporation is in play). Based on a reading of the Supreme Court of Canada decision in Peoples Department Stores Inc. (Trustee of) v. Wise, [2004] 3 S.C.R. 461, the Court says that Revlon duties are not applicable in Canadian law. On the contrary, the Court affirms that at no time do directors have an overriding duty to act only in the best interests of the shareholders; rather that there is a more extensive duty, embodied in the statutory duty of care, to give consideration to the interests of all stakeholders at all times.
• Failure to consider such interests is not covered by the business judgment rule
  Evidence showed that the BCE board of directors determined that it had an overriding duty to maximize shareholder value and to obtain the highest value for the shareholders, while respecting the contractual obligations of the corporation and of its subsidiaries. The Court states that this approach by the BCE board was mistaken and that the process followed by the Board was flawed. As a result, the Board's decisions are no longer entitled to the deference otherwise due by virtue of the business judgment rule.
• Consideration of the debentureholders' interests goes beyond the trust indentures
  The Court asserts that the directors should not only have considered the debentureholders' legal rights under the indentures, but should have had regard for the reasonable expectations of the debentureholders - which may be more extensive than merely respecting their contractual legal rights.
• Failure on BCE's part to discharge its burden of demonstrating the fairness and reasonableness of the plan of arrangement
  The Court says that it was incumbent on the directors to examine whether it was possible to alleviate or attenuate all or some of the adverse effects on the debentureholders' interests. Given that the directors operated on the principle that Revlon duties applied, they did not examine this issue.
  
  The Court indicates that it may very well have been the case that there was no way the arrangement could have been structured to provide a satisfactory price for the shareholders while avoiding adverse effects on debentureholders.
  
  However, BCE had the burden of showing the Court that the arrangement as is (substantial premium to the shareholders with significant adverse effects on debentureholders, e.g., decline in market value of the debentures, burden of additional debt on the corporation's assets, greater risk of default, and loss of investment-grade status) was fair and reasonable, and failed to make that proof.
• Safe harbour provisions might not bar third-party reliance on corporations' statements
  The Court noted that various statements were made by BCE concerning its commitment to maintaining investment grade ratings and that, while such statements were accompanied by warnings and safe harbour provisions, they were designed to give comfort to investors.
  
  The Court recognizes that reasonable expectations of debentureholders cannot run contrary to legal rights spelled out in the indentures but holds that they are not limited to said legal rights, and can be derived from the indentures, the debentures themselves, prospectuses, public statements of the company and various other representations.
• Standard "no action" clause does not cover the oppression remedy
  The Court stated that the "no action" clause contained in the trust indentures concerned only recourses further to an event of default. As the issues invoked under the oppression remedy are not based on an event of default but rather on the debentureholders' status as securityholders under the CBCA (to which there was no express renunciation), they were authorized to bring a suit in oppression.
• Interpretation of indentures covenants
  The Court basically confirmed the trial judge's finding that in interpreting complex corporate agreements such as trust indentures, when faced with ambiguity, the courts must favour an interpretation that is commercially reasonable.
  
  The Court also confirmed that the terms "reorganization" and "reconstruction" found in some of the trust indentures under consideration refer to the transfer of a corporation's undertaking to a new entity that is intended to carry on substantially the same business and that will be ultimately owned by substantially the same shareholders.
  
  The Court also agreed with the trial judge that consideration of other provisions of the trust indentures, namely those placing limitations on the assumption of additional debt by Bell Canada, confirmed that the intention of the "reorganization" covenant was not to restrict Bell Canada from incurring additional indebtedness.
• Oppression remedy
  The Court deliberately refrained from dealing head-on with the oppression remedy, preferring to analyze the debentureholders' claim under the "fairness" component of the analysis of the plan of arrangement. The Court explains that if the plan of arrangement is found to be fair and reasonable, it cannot be oppressive, and that in most cases under section 192 CBCA, there will be no need for a securityholder to assert an oppression remedy, as the participation by such securityholder in the approval of the plan of arrangement will serve to protect its interests.

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The purpose of this document is to provide information as to developments in the law. It does not contain a full analysis of the law nor does it constitute an opinion of Ogilvy Renault LLP or any member of the firm on the points of law discussed.

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