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May 29, 2008 6:45 PM

Canadian Boutiques Score Big Win for Bell Canada Bondholders

Posted by Brian Baxter

UPDATE: Lawyers for BCE Inc., the parent company of Bell Canada, have officially petitioned the Supreme Court of Canada to hear its case seeking to overturn a Quebec appellate court's decision that could threaten the company's billion-dollar buyout. Canada's highest court had previously notified both BCE and a plaintiffs group of bondholders that it was available on June 17 to hear expedited arguments should the need arise. Bell Canada apparently feels that time has come.

The long awaited buyout of Canada's largest telecommunications company took another turn on May 21. A five-judge panel of the Quebec Court of Appeal in Montreal ruled in favor of a group of bondholders seeking to stop a proposed $51.8 billion deal for BCE Inc., the parent of Bell Canada. The decision has the potential to kill the largest buyout in Canadian history.

"The Court of Appeal concluded that the interest and rights of the bondholders were not considered by the board of directors of BCE and Bell Canada," says Mark Meland, a lawyer for the bondholders and a name partner at Montreal boutique Fishman Flanz Meland Paquin.

The Quebec Court of Appeal also concluded that BCE's plan of arrangement--the mechanism by which the buyout is structured and which requires Canadian court approval--was not fair and reasonable. "Because the plan of arrangement has not been approved, the current transaction cannot proceed in its current state," Meland says. "So we either need a new plan or this may well be the end [of the BCE buyout]."

Along with John Finnigan, a founding partner of Toronto boutique Thornton Grout Finnigan, Meland represents two of three groups of bondholders that brought litigation in Canadian courts trying to scuttle the current terms of the buyout announced in June 2007, claiming the deal would saddle Bell Canada with debt and thus increase its risk of default. Meland serves as Quebec counsel and Finnigan as Ontario counsel to two bondholder groups, which own bonds with longer maturities that are more affected by downgrades in the credit markets. (Toronto firm McMillan Binch Mendelsohn represents the third bondholder group; Meland and Finnigan say all three firms worked closely together, mostly advancing the same arguments.)

A trial in Quebec Superior Court before Justice Joel Silcoff occurred throughout December 2007 and into January of this year, Finnigan says, with Silcoff ruling against the bondholders on March 7. "We lost at the trial level when Justice Silcoff approved the plan of arrangement, which BCE is using to facilitate this LBO," Finnigan says. "We then expedited an appeal to the Quebec Court of Appeal and we had oral arguments in the case over four days at the end of April."

The Quebec appellate court, which normally sits in three-judge panels, convened a five-judge panel because of the importance of the case. The panel issued its ruling yesterday, which Meland says impacts all bondholder groups in the same fashion. It was a stunning development for BCE, which was already reeling from rumors that the four banks backing its buyout--Citigroup, Deutsche Bank, The Royal Bank of Scotland, and Toronto-Dominion Bank--were seeking to renegotiate some of their original financing commitments given the condition of the credit markets. (Lead BCE lawyer William Brock, a litigation partner with Toronto firm Davies Ward Phillips & Vineberg, declined to comment. BCE's proposed primary acquirer, the Ontario Teachers' Pension Plan, is represented by Toronto firm Goodmans and Montreal-based litigation boutique Woods.)

The banks were not a party to the legal dispute but eagerly monitored the proceedings, says Finnigan. "The legal and commercial disputes are separate but I think the banks were silently sending us happy thoughts," he says, noting that the lenders can walk away from the deal if BCE fails to obtain proper regulatory approvals.

BCE has stated publicly that it intends to appeal the judgment to the Supreme Court of Canada. But that, too, presents complications. The company has no formal right of appeal and must file a written application with the court, which may or may not be approved. "I also expect that [BCE] will ask for an oral hearing, which would be unusual," says Finnigan, noting that with a June 30 closing date for the LBO looming on the horizon, he expects the company to ask for an expedited appeal.

Meland thinks that might be difficult. "It's very hard to see a scenario whereby [an application] would be granted and an appeal pleaded and disposed of by June 30," he says. "It would really be an unprecedented timeline."

But unprecedented wouldn't be a first for Bell Canada.

Download the Bell Canada Quebec Court of Appeal ruling.pdf

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