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OPINION A victory for sanity, capitalism and common sense DEREK DECLDET) PUBLISHED JUNE 21, 2003 PUELISHED JUNE 11, 1008 This article was published more than 10 years ago. Some information in it may no longer be current. - 0 COMMENTS 4N SHARE _ A A+ TEXT SIZE At 1:31 pm. Pacic time yesterday, with the nancial markets closed for the weekend, Wade Burton let out a yelp from his home in the Vancouver suburbs. "Holy Mary, Mother of God," he said. As a man who controls one of the largest blocks of BCE shares, Mr. Burton, who manages funds for Mackenzie Financial, had more riding on yesterday's Supreme Court decision than most people: money, reputation, pride. Was he nervous? "Are you kidding me? [ can't breathe right now," he said. And this was after the court gave a ruling that clears the path for Ontario Teachers' Pension Plan and its partners to buy Canada's largest phone company for $35- billion. 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A win for the bondholders would have knocked Canada out of step with other industrialized democracies, oyerturned years of corporate practice and caused temporary chaos in the nation's boardrooms. it didn't happen. The crux of the this case was quite simple: Whose interests should the board of directors look after? The law says "the corporation's" - but what does that mean? Owners, employees, suppliers, lenders? Most companies took it to mean: Owners come first. Eyeryone else has [or can negotiate) a contract to protect themselyes. But shareholders can't. The Quebec appeal court threw this question wide open. By ruling in fayour of BCE's aggrieved bondholders, it said the telecom company's board had a duty to consider all stakeholders, the bondholders being just one. Beyond that, it left a lot of confusion. What if, in the case of a full-scale auction like 3125's, the board considered the bondholders, then decided to put the screws to them anyway? Would that be good enough? Or would "considering" the yiews of stakeholders actually mean nding some sort of balance among them? And how would they go about that, anyway? Suppose, a few years from now, ECE receiyes a lucrau'ye takeover bid from Telus that would lead to thousands of layoffs at Bell Canada. Could the board say yes, even though the deal would harm the staff? Employees are stakeholders, after all. But even if it falls apart at the 11th hour, the Supreme Court has done its job. It prevented the Quebec appeal court from toppling a central principle of capitalism - that the owners of a companv, who take the biggest risks, ought to keep the rewards when things go well. Because of the Sn premes, it's safe to make deals - and to invest - in Canada again. Report on Business Cmpny Snapshot is available for: BCE INC. The QCA ruling invited corporate paralysis. At its extreme, the "stakeholder" rule might have been used as a weapon by a board ghting a hostile acquirer - a made- in-Canada poison pill. (Oh, so you want to pay a LID-percent premium for my company? Sorry, don't think my stakeholders will go for that. Go away.) Since the court didn't release its reasons, we won't know for months what it has to say about all this. But it's a good bet the judges will cast the "stakeholder" argument aside, and confirm what most investors have long believed - that in a takeover, the bondholders' rights are set by contract, said Anita Anand, associate clean at the University of Toronto's faculty of law. Period. "l'm relieved that the court got it right," she said. The potential implications of the QCA ruling were, in her words, "crazy." Crazy, because what did the bondholders lose, really, when BCE decided to sell itself in a leveraged buyout? Their bonds lost market value. But they haven't lost a single interest payment, nor is there a high risk that they won't get their principal back. Most indications are ECE's credit rating will settle in somewhere around double-B, which implies a low likelihood of default. Cin paper, the bondholders were poorer. But there was never any change to their rights as creditors. The bondholders argued that the damage was worse than that, of course. Some can't wait until the debt they own matures; now, they will be forced to sell at a loss because they're not allowed to hold junk-rated debt. But this is an articial constraint, imposed by their clients, or self-imposed. "l'm going to lose money" does not a legal argument make. And the Supreme Court judges saw through it. So the economic pecking order has been restored - good. All is not lost for bond investors, though. They've learned something valuable: if they want protection from the ravages of a leveraged buyout, they must to negotiate it in advance [as they did in the Telus bond issue this spring, which requires the company to repay the debt in the event of an LBCJ). But for BCE shareholders like Mr. Burton, a giddy afternoon just kept getting better. Within SCI minutes of the Supreme Court ruling, the four banks financing the deal delivered a peace offering, saying they expect it to close and they're negotiating final lending terms. it's a long, long way from the cock-your-guns approach the banks took to the buyout of Clear Channel Communications. The odds of the deal closing have just gone up substantially