However, BCE must now uphold its bargains too.
By: Brent Fullard
Catalyst Asset Management Inc.
At various points throughout its sale process, BCE has attempted to have its cake and eat it too. For example, it went through the pretense of a “public auction process” and all the perceived benefits of doing so, only to act in a way that thwarted its two best bids, that of Telus (by the process known as frustration, in the legal sense) and that of Catalyst Asset Mangement (by the process known as deliberate non-disclosure).
Another example whereby BCE sought to have its cake and eat it too was choosing to implement the deal by opting to go the Plan of Arrangement route as opposed to the Takeover Bid route, thereby garnering all the attendant advantages to BCE (i.e. lower vote threshold for approval, ability to co-mingle preferred share vote with common vote, absolution from post deal law suits, etc. etc.), without assuming the negative trade-offs associated with a Plan of Arrangement, namely convincing a court that it conducted itself in a manner that was “fair and reasonable” to affected securityholders.
However the Supreme Court has now ruled and their ruling is what all must abide by. BCE included. It was BCE/Teachers’ lawyer Benjamin Zarnett who successfully and succinctly argued before the Supreme Court on Tuesday that the bondholders were seeking provisions that were not originally “bargained for” in the indenture. The Supreme Court’s ruling means that subsequent representations made by BCE that served to extend, in the minds of the bondholders, what was originally bargained for with bondholders obviously did not hold and did not sway the court.
Who am I to argue? Meanwhile who am I to argue with the Supreme Court that BCE made an explicit bargain with its bondholders and that the bondholders will be held to that bargain.
This is the point where BCE’s attempts to have its cake and eat it too must end, since BCE also made an explicit bargain with its common shareholders as contained in the Bid Circular dated August 7, 2007 by which common shareholders approved the deal. The explicit bargain contained therein is BCE’s unequivocal and unambiguous statement that dividends would be paid on the common shares until the deal closes. It appears that BCE, by suspending the declaration of its recent quarter’s $0.365 dividend is planning on reneging on that explicit and implicit “bargain” it made with its common shareholders when they approved this deal (assuming the deal even proceeds, which may not occur due to lack of financing).
This is too cute by half, if not too cute by quarter. Not paying the $0.365 dividend is the economic equivalent of lowering the takeover price from $42.75 to $42.385. It only adversely affects common shareholders, not employee stock option holders and not preferred shareholders who BCE co-mingled with the common for purposes of enhancing the probability of a successful vote. What’s with that? Why the disparity in treatment? Why the unilateral change in deal terms? Who’s on first?
The relevant sections of BCE’s bid circular read:
Q: WILL BCE CONTINUE TO PAY DIVIDENDS ON ITS SHARES UNTIL THE
EFFECTIVE DATE OF THE ARRANGEMENT?
A: Yes. Subject to Board approval, we will continue to pay dividends until the Effective Date. The Definitive Agreement allows us to pay a dividend of up to $0.365 per Common
Share per quarter in accordance with customary record and payment dates.
CONDUCT OF BUSINESS PRIOR TO THE EFFECTIVE TIME
BCE has agreed that prior to the Effective Time (outside date of June 30 now that all regulatory approvals have been granted) it will conduct its business and cause its Subsidiaries to conduct their business in the ordinary course consistent with past practice.
So where’s the dividend paid in a manner that's "consistent with past practice"? BCE can’t have its cake and eat it too. It can’t have the Supreme Court enforcing the “bargain” it made with bondholders in the Indenture one minute and the next minute conduct itself in a manner whereby BCE does not feel bound by the “bargain” it made with shareholders to pay the dividend as explicitly and implicitly provided for in the Bid Circular.
Bottom line: What do you suppose the “reasonable expectations” of common shareholders was with respect to the regular payment of dividends prior to closing? To forego them in order to heighten the probability that Management’s Stock Options would continue to be be fully “in the money” at $42.75? Is that what they "bargained" for? Methinks not.
Saturday, June 21, 2008
Posted by Fillibluster at 10:55 AM