BCE’s Supreme Court issue is a specious one

By: Brent Fullard
Catalyst Asset Management Inc.

specious: adjective, superficially plausible, but actually wrong, misleading in appearance, misleadingly attractive

They are those who argue that the legal issue involving BCE and the Board’s relative obligations to BCE shareholders versus BCE bondholders is a matter that is of national interest that needs to be ruled upon by the Supreme Court of Canada.

Unfortunately the larger issue of the relative obligations of boards of directors to shareholders versus bondholders in the case of BCE is overshadowed by the specifics of the BCE situation. BCE’s Board was never placed in a situation where it had to compromise the outcome for bondholders in order to maximize the outcome for shareholders. No such tradeoff or moral dilemma existed for the BCE Board, since they were presented with the Catalyst Proposal that allowed them to achieve their stated goal of maximizing shareholder value on terms that were superior to those offered by Teachers’ all cash taxable offer of $42.75 (i.e.$42.50 to $52.00, with 70% tax free rollover), and were able to achieve this optimal outcome without imposing an adverse credit rating on existing bondholders.

So where is the Faustian tradeoff or moral dilemma that the BCE Board faced? There wasn’t one. Only by ignoring the Catalyst Proposal did the BCE Board of Directors force itself into a situation where bondholder rights had to be sacrificed for shareholders rights. The larger issue that many say is deserving of a Supreme Court ruling was never at play in the BCE matter. It was only at play because BCE sought the matter out of its own volition. It self-selected this outcome. As such, the Supreme Court should reject this matter out of hand, since BCE created the problem in the first place. The fact pattern, due to the existence of the Catalyst Proposal, means that the company itself had the means to resolve this matter on its own. It is demeaning to the highest court of the land and the other important cases that are before it, that a matter that was within the Board’s power to avert, are being brought to court for adjudication. On an expedited basis no less. The issue is a valid one. Unfortunately the issue was never at play in the case of BCE, except through BCE Board’s own self selection and self infliction.

As such BCE’s so called issue of great national importance is a wholly specious one. It is superficially plausible, but actually wrong. It is misleading attractiive. The issue of bondholders’ rights versus shareholders rights is going to have to wait for that case where the Faustian tradeoff actually existed. It clearly did not in the case of BCE. BCE’s oppression of bondholders was deliberate and premeditated. BCE had a choice, as I attempted to describe in court to Justice Joel Silcoff in February 2008.

Judge Silcoff clearly did not understand the pivotal significance of what I was telling him, which was to the effect: “You sir (BCE Board), had a choice:” As such the larger issue was never at play. As such, this was a matter that the Board could have dealt with. It is not the role of the Supreme Court of Canada to compensate or make amends for the poor business judgment of Boards of Directors or their chosen course of action. BCE brought this upon themselves.


THE COURT (THE HON. JOEL A. SILCOFF, JSC):
Anything else? Yes?

Mr. BRENT FULLARD:
We spoke last night and my name is Brent Fullard. I am with Catalyst Asset Management of Toronto.

THE COURT:
You're the gentleman who called me last night at home?

Mr. BRENT FULLARD:
Yes, I am. And you invited me to come here today, and I appreciate the offer.
One matter that could be, being overlooked by the Court, based on testimony that has been reported in the press, testimony given by the Teachers' Pension Plan to the effect that there was no other alternative and all alternatives on the table resulted in a downgrade in the creditworthiness of the outstanding bonds. That is factually incorrect.
Our organization did submit to BCE a proposal, the Catalyst proposal. We discussed it with the special committee, with their advisers. It was published in the press. There were articles written about it. And what you need to know about the proposal that we presented to the company is the fact that, yes, it does achieve the company's goal of maximizing shareholder value, but it does so in a way that's not oppressive to the bondholders. And that was the explicit intent of our proposal from the outset.
There are other stakeholder groups that are here today that are adversely affected by the BCE deal, but I won't get into that.
And so, I think the existence of a contemporaneous deal that was presented to the board, which achieved the stated goal of the company, which was to maximize the shareholders value, while at the same time is not oppressive to the bondholders, is I think, a central issue. Rather than having been an "either or" situation, this can be an "either and" situation
And this is not strictly my assertion that the bondholders' position was preserved, because shortly after we announced our proposal on June twenty-second (22nd) - it was presented to the board in a letter dated June twenty-fifth (25th) - I discussed the matter with one of the members of
the bondholders group, Jacques Prevost of CIBC World Markets, and he ran his analysis of our proposal and he confirmed that the credit rating would in fact remain investment-grade credit.
So, I think... I can give you a lot of details as to how we achieved...

THE COURT:
What are you asking now, sir?

Mr. BRENT FULLARD:
I'm asking that the fact that this proposal existed be something of record in resolving the matter before you.

THE COURT:
Well, I think, again, because again you... as a question of courtesy, obviously, I'm hearing your representations now, but if you have something to submit to the bondholders, by all means, do so. But certainly if they thought it was relevant, I would imagine they would have put it in evidence prior to the closing of proof.

Mr. BRENT FULLARD:
Well, had they been aware of it, because... the reason perhaps why the bondholders may not be aware of the existence of the Catalyst proposal was because the company failed to disclose it in its Bid Circular of August 7, 2007 .