Monday, March 3, 2008

By its own admission, Ontario Teachers’ lacked “the capacity to contract” to purchase BCE

Note to BCE Bondholders and others negatively affected:

In order to enter into a legally binding contract, one needs to have “the capacity to contract”. For example, in certain jurisdictions, a person has to be over the age if 18 to enter into a legally binding contract.

When it comes to corporations, the following definition applies:

“The extent of “capacity to contract” depends on the law of the place of incorporation and the enabling provisions included in the constitutive documents of incorporation. The general rule is that anything not included in the corporation's capacity, whether expressly or by implication, is ultra vires, i.e. "beyond the power" of the corporation, and so may be unenforceable by the corporation, but the rights and interests of innocent third parties dealing with the corporations are usually protected."

Much like the Ontario Government was ruled by the courts to have lacked the capacity to contract for the multi-billion IPO of Hydro One, the same is true for the arrangement that BCE and Teachers’ entered into in which Teachers’ is clearly attempting to do indirectly what it is precluded from its own regulations from doing directly, namely own more than 30% of BCE. Unfortunately, Teachers’ own pension regulations explicitly preclude it from doing so indirectly either, as follows:

“the administration of a plan shall not, directly or indirectly, invest the moneys of the plan in the securities of a corporation to which are attached more than 30% of the votes that may be cast to elect the directors of the corporation”.

It is also clear from Teachers’ testimony a week ago before the CRTC that it is simply “assuming” that it has the capacity to contract to acquire more than 30% of BCE based on the following passages. Note that Teachers’ has never received formal approval for this ownership structure upon which it based its purchase proposal. How can Teachers’ claimed to have had “the capacity to contract” with BCE in such a manner, since it has no proof of “it’s capacity to contract”, apart from mere assumption and self-satisfaction?

138 THE CHAIRPERSON: Okay. Now, we all know the specific reading ‑‑ reference that I read out, it says "directly or indirectly".

139 Why isn't this a means of Teachers doing indirectly what it can't do directly? Clearly can't vote more than 30 per cent.

140 Here 67 per cent are being held by Mr. McCague, Morcague has undertaken in writing to vote it in the way that Teachers directs or else at Teachers request transfer to another designee.

141 Why doesn't this amount to doing indirectly what you can't do directly?

142 MR. LAMPE: Mr. Chairman, the language in the legislation provides that Teachers can't invest the monies of the Plan in voting shares to which are attached more than 30 per cent of the votes for election of directors.

143 And as Mr. Leech has indicated, a structure along these lines in which Teachers has not invested any of its monies in those shares has been used in the context of other investments.

144 So, the situation that we have is there is no investment of Plan monies in voting shares here, although you're absolutely right that Teachers does retain the ability to vote those shares.

145 That's a structure the Teachers has used previously and that the pension regulators are aware of in the context of other transactions that have been undertaken by Teachers and they're also aware of it being used in the context of this transaction.

146 THE CHAIRPERSON: I'm not so much interested in other transactions, I'm interested in the one that you just mentioned, that the pension authorities are ‑‑ I'm obviously not a pension expert and it is, therefore, them to decide not for me.

147 Do you have a ‑‑ whatever, a clearance certificate, an opinion or something from the Ontario Pension people saying that this arrangement for this transaction in their view meets the requirements of the Ontario Pension legislation?

148 MR. LAMPE: Mr. Chairman, we don't have any such form of certificate, and I'm not a pension expert either, but I'm told that the Pension authorities do not provide written opinions or clearance certificates in that form.

149 THE CHAIRPERSON: Well, I can advise you they do. Our counsel has told me that if you make an application to the Deputy Superintendent for a ruling he will give such a ruling.

150 And if there's no issue ‑‑ I mean, I take your word for it, I just want the proof, not from you but from the regulator that, in effect, this is in accordance with the pension regulation.

So, why did BCE not more fully research the “capacity to contract” of the various bidders like Teachers’?

Failing which, the "capacity to contract" test simply devolved into one of “assumption to contract” or “heightened desire to contract”.

It is clear that at the time Teachers’ entered into this agreement to acquire BCE, it failed to meet the test of “the capacity to contract”. Perhaps someone should let Judge Silcoff of the Quebec Superior Court know. The shareholders’ vote is null and void.

This same cavalier approach to Teachers’ “capacity to contract” was reiterated in the National Post Financial Post article, that read:

“Mr. von Finckenstein asked for a letter from the Financial Services Commission of Ontario endorsing the arrangement.

"We want to hear from [FSCO], not from you, not from [your] counsel," the chairman said.

That may not be so easy, Mr. Leech told reporters: "My understanding is they don't have the legislative authority to give opinions. But we'll be working with them to satisfy the CRTC."

All of which begs the question. "Do you hunt for elephants, before or after you get the requisite hunting license?"

After. Thank you.

To do otherwise, would mean that you can backdate approvals the way some people conveniently thought they could back date stock options.

The fact that Teachers' acted on this ownership scheme involving Morgan McCague without any pension regulatory approval to so, meant that there was a hidden condition in the transaction that was not revealed to shareholders to consider when they voted, in the same way that the Catalyst Proposal was hidden from shareholders when they voted.

Whose interest does any of this serve? Who was so blinded by the light? Where are the securities regulators?

By: Brent Fullard
Catalyst Asset Management Inc.

1 comment:

Anonymous said...

Mickey Mouse comes to mind.

Does this mean Teachers' will be slapped over the wrist with $1 billion break fee?

Who pays that? Ontario Government? Jim Leech? Morgan McCague?