Three-month trading in BCE stock on the TSX

A Supreme Court of Canada ruling Friday will allow the $52-billion buyout of BCE Inc. by a group of investors headed by the Ontario Teachers' Pension Plan to go ahead.

By 6 p.m. ET on Friday, BCE stock had jumped 9.8 per cent, or $3.35 US, to $37.45 in after-hours trading in New York.

The court's decision overturned a May 21 Quebec Court of Appeal ruling that effectively killed the deal by ordering the company to consider the interests of bondholders.

The legal case pitted the company, buyers and stockholders, who were enthusiastic about the $42.75-a-share (Cdn) offer, against owners of BCE debentures, whose holdings fell in value because the deal would load BCE with $34 billion in debt.

The ruling, another step in determining the fate of what has been called the largest leveraged buyout in Canadian history, is also expected to clarify the legal rules directors must follow in considering the needs of stockholders and bondholders in a takeover.

But the court has not yet released its reasons. The judgment, a unanimous ruling from the seven judges who heard the case, simply said the Appeal Court's decision was overturned and the Quebec Superior Court ruling approving the deal is affirmed.

Even with the Supreme Court's decision, the deal is not yet out of the woods because the bankers who agreed to provide financing last year may be rethinking their position in light of the turmoil in credit markets.

There is a June 30 deadline facing Teachers and its U.S. partners, private equity firms Providence Equity Partners Inc., Madison Dearborn Partners, and Merrill Lynch Global Private Equity. After that date, the buyout consortium is free to walk away without paying any penalty.

BCE stock has been trading far below the bid price, partly because of the legal uncertainty, and partly because of concern that the terms of the deal could end up being amended in the bankers' favour.

The four banks that are providing the debt for the takeover said after the court ruling that they "continue to negotiate the financing documents in good faith with the sponsors," Teachers and its partners.

The buyers are pleased with the ruling and will continue to work on the takeover, Teachers CEO Jim Leech said in a short note posted on the pension fund's website.

BCE closed Friday at $34.60, up 13 cents, in regular TSX trading. The Supreme Court issued its decision after markets closed.

Maximize value

The legal dispute is about whose interests a board has to consider in a takeover. The U.S. rule, backed by some Canadian court decisions, requires boards to maximize shareholder value.

The BCE board did that, accepting an offer that gave shareholders $10 billion more than the market price when the company was put in play last year. And the bondholders were still protected by their contract with the company, which requires BCE to pay interest and redeem the bonds when they come due.

But the bondholders, including TD Asset Management, CIBC Asset Management, Sun Life Financial, the Manitoba Civil Service Superannuation Board, the Alberta Finance Department and Aegon Capital Management Inc./Transamerica, went to court because they believed the deal treated them unfairly.

The transaction, a leveraged buyout, would load $34 billion in new debt onto the company, hurting the market for their bonds, they said. They took their argument to the Quebec Superior Court, which approved the deal in March.

The bondholders then went to the Quebec Court of Appeal, which in May overturned the Superior Court ruling and held that the board should have considered the bondholders' interests, too.

The Appeal Court said that "BCE never attempted to justify the fairness and reasonableness of an arrangement that results in a significant adverse economic impact on the debenture holders."

Lawyers for the bondholders said they expected the decision.

"What the Supreme Court said was basically boards of directors have to take care of making money, looking after shareholders and this is not a surprising decision," said lawyer James Morton.

Matthew Stewart, a BCE shareholder who was granted intervener status in the court case, praised the decision.

"I think it's a constructive outcome for retail investors, institutional investors and any investor that takes the risk of investing in the public markets."