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Bell Canada International Inc. - MRRS Decision
Headnote
Rule 61-501 - related party transactions -- applicant operating under a plan of arrangement under section 192 of Canada Business Corporations Act -- plan of arrangement approved by Ontario Superior Court of Justice and applicant's security holders -- plan of arrangement also approved by majority of minority shareholders - pursuant to plan of arrangement, applicant to monetize its assets in an orderly manner under the supervision of a court-appointed monitor and the Court -- purpose of plan of arrangement is to distribute net proceeds to applicant's shareholders and thereafter dissolve applicant -- applicant has monetized a substantial portion of its assets -- applicant intending to sell non-capital tax losses to its controlling shareholder -- independent committee of applicant recommended transaction on basis that the compensation paid by its controlling shareholder will be significantly greater than that which would be received from a transaction with an arm's length party -- valuation of transaction provided to independent committee and to be provided to applicant's shareholders -- transaction must also be approved by the Monitor and the Court -- Monitor is independent of the applicant and its controlling shareholder -- transaction is exempt from requirement to prepare obtain minority approval.
Ontario Rules Cited
Rule 61-501 - Insider Bids, Issuer Bids, Going Private Transactions and Related Party Transactions, ss. 5.6, 5.7(1) and 9.1.
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
THE PROVINCES OF QUÉBEC
AND ONTARIO
IN THE MATTER OF
THE MUTUAL RELIANCE REVIEW SYSTEM
FOR EXEMPTIVE RELIEF APPLICATIONS
AND
IN THE MATTER OF
BELL CANADA INTERNATIONAL INC.
MRRS DECISION DOCUMENT
WHEREAS the local securities regulatory authority or regulator (the "Decision Maker") in each of the provinces of Ontario and Québec (the "Jurisdictions") has received an application (the "Application") from Bell Canada International Inc. ("BCI"), for a decision under the securities legislation of the Jurisdictions (the "Legislation"), in connection with a proposed transaction, to be implemented through a series of steps (collectively, the "Proposed Transaction"), the purpose of which is to monetize the non-capital tax losses accumulated by BCI in order to maximize the distributions to be made to its shareholders under its Plan of Arrangement (as defined below), that the Proposed Transaction be exempted from the minority approval requirement set forth in the Legislation;
AND WHEREAS pursuant to the Mutual Reliance Review System for Exemptive Relief Applications (the "System"), the Autorité des marchés financiers is the principal regulator for this application;
AND WHEREAS BCI has represented to the Decision Makers that:
1. BCI is a corporation incorporated under the laws of Canada and is a reporting issuer in each of the provinces of Canada in which such concept exists. To the best of its knowledge, BCI is not in default of any of the requirements of the securities legislation in each of the provinces of Canada.
2. The authorized capital of BCI consists of an unlimited number of common shares, an unlimited number of first preferred shares issuable in series and an unlimited number of second preferred shares issuable in series. As of the date of the Application, there are 40 million common shares issued and outstanding.
3. The common shares of BCI are currently listed on the Toronto Stock Exchange ("TSX") under the symbol "BI".
4. As of the date of the Application, BCE Inc. ("BCE"), a corporation incorporated under the laws of Canada and a reporting issuer in each of the provinces of Canada in which such concept exists, holds directly and indirectly 62.2% of the common shares of BCI. The balance of the common shares of BCI is held by the public.
5. Since July 17, 2002, BCI has been operating under a Plan of Arrangement (the "Plan of Arrangement") under section 192 of the Canada Business Corporations Act ("CBCA").
6. BCI's Plan of Arrangement was approved by the Ontario Superior Court of Justice (the "Court") on July 17, 2002, following the approval of the Plan of Arrangement by BCI's shareholders and the holders of BCI's 11% senior unsecured notes at special meetings held for that purpose on July 12, 2002.
7. Pursuant to the Plan of Arrangement, BCI is to monetize its assets in an orderly fashion and resolve outstanding claims against it in an expeditious manner, with the assistance of Ernst & Young Inc. as court-appointed monitor for BCI (the "Monitor") and under the supervision of the Court. The ultimate objective of the Plan of Arrangement is to distribute to BCI's shareholders the net proceeds realized under its asset monetizations and thereafter to dissolve BCI.
8. In adopting a special resolution (the "Special Resolution") approving the Plan of Arrangement at the July 2002 special meeting of shareholders (the "Special Meeting"), BCI's shareholders approved a process under which BCI would continue to manage its remaining assets for purposes of disposing of them in an orderly manner, all with the assistance of the Monitor, the supervision of the Court and pursuant to specific orders of the Court as required from time to time.
9. BCE, which held directly and indirectly approximately 2,983.9 million common shares as of the date of the Special Meeting, voted all such shares in favour of the Special Resolution. The balance of BCI's common shares voted at the Special Meeting, representing approximately 103.5 million common shares, were voted by shareholders other than BCE, that is, the minority shareholders of BCI. Of the total shares voted by the minority shareholders, 79.3 million common shares were voted in favour of the Special Resolution, that is, 76.6% of the shares voted by the minority shareholders were voted in favour of the Special Resolution.
10. Since July 2002, the operations of BCI have been limited to the execution of the Plan of Arrangement including, inter alia, the sale in July 2002 of its interest in Telecom Américas Ltd., which at the time constituted the sale of substantially all of the assets of BCI.
11. During 2003, as part of the continuing disposition of its assets, BCI concluded a number of additional transactions. As a result, as at June 30, 2004, BCI had monetized substantially all of its assets, such that approximately 96% of its assets were comprised of cash and temporary investments.
12. At December 31, 2003, BCI had non-capital losses carry forward that will expire at various dates to the year 2010. BCI estimates that it will realize a loss in its 2004 taxation year. BCI is not expected to utilize any of such losses, absent a monetization transaction, such as the Proposed Transaction.
13. The implementation of the Proposed Transaction will also involve BCE and Bell Canada. Bell Canada is incorporated under the laws of Canada and a reporting issuer in each of the provinces of Canada in which such concept exists. Through its wholly-owned subsidiary Bell Canada Holdings Inc. ("BCH"), BCE owns all of the common shares of Bell Canada.
14. Bell Canada also has outstanding preference shares, all of which are non-voting, fixed value, non-participating and not convertible into common shares. All the preference shares are held by persons who are not related to BCE.
15. Bell Canada and BCI are each affiliates of BCE and as such are part of the same corporate group. Bell Canada generates sufficient taxable income against which the non-capital losses of BCI could be deducted.
16. Pursuant to the Proposed Transaction (a) Bell Canada will be able to apply losses generated under the Proposed Transaction against its taxable income, and (b) BCI will be compensated for the consolidation of its non-capital tax losses within the BCE group, thus furthering BCI's objective under the Plan of Arrangement to maximize distributions to its shareholders.
17. The Proposed Transaction will be structured in a series of related steps, which are summarized below:
17.1 Each of BCI and Bell Canada will incorporate new sole purpose subsidiaries ("BCI Subco" and "Bell Subco", respectively);
17.2 Bell Subco will borrow, on a daylight basis from an arm's-length financial institution, up to $17 billion and subscribe for preferred shares of BCI Subco;
17.3 BCI Subco will make a non-interest bearing loan to BCI (the "BCI Demand Loan");
17.4 BCI will make an interest bearing loan to Bell Subco (the "Bell Subco Demand Loan"), which will repay the daylight loan;
17.5 On a regular basis, BCI will make capital contributions to BCI Subco, which will use the cash to pay dividends on its preferred shares to Bell Subco; Bell Subco will then pay the interest on the Bell Subco Demand Loan to BCI -- thus creating tax losses in Bell Subco;
17.6 Once BCI has earned enough interest income to utilize its non-capital losses, the structure will be unwound: (a) the BCI Subco preferred shares will be redeemed and the amount owing on redemption to Bell Subco will be settled by the assignment by BCI Subco to Bell Subco of the BCI Demand Loan; (b) the Bell Subco Demand Loan and the BCI Subco Demand Loan will be offset against each other and cancelled, and (c) Bell Subco will then be wound-up into Bell Canada;
17.7 Bell Canada will use the losses of Bell Subco in the year following the year of the windup; and
17.8 Bell Canada will dividend a portion of the tax savings resulting from the use of the Bell Subco losses to BCH, which will in turn dividend the amount to BCE; BCE will use the cash to make a capital contribution to a new sole purpose subsidiary of BCI and that subsidiary will then be wound up into BCI -- thus compensating BCI for the use of its losses.
18. As BCI's ultimate goal under the Plan of Arrangement is to maximize distributions to its shareholders prior to its dissolution, the Proposed Transaction represents an opportunity for BCI to distribute additional cash to its shareholders, no portion of which would otherwise be available for distribution to shareholders if the Proposed Transaction is not implemented. As a result, all of BCI's shareholders would derive a substantial benefit from the implementation of the Proposed Transaction.
19. Among the various options BCI considered was the possibility of monetizing its non-capital tax losses with an arm's-length party. Based on its own analysis and the advice received from its professional advisors, BCI believes that the compensation to be paid by Bell Canada for BCI's tax losses will significantly exceed any amount BCI would receive from an arm's-length party.
20. An independent committee of the board of directors of BCI (the "Independent Committee") was formed to review the Proposed Transaction and make a recommendation regarding the Proposed Transaction to the BCI board.
21. The Independent Committee retained independent financial and legal advisors to assist it in fulfilling its mandate, which included its assessment of the fairness of the Proposed Transaction to BCI and its minority shareholders.
22. The financial advisors prepared a formal valuation of the subject matter of the Proposed Transaction (the "Formal Valuation") and advised the Independent Committee that the consideration under the Proposed Transaction is fair, from a financial point of view, to BCI and its minority shareholders. The Formal Valuation was mailed to BCI's shareholders and filed within the System for Electronic Document Analysis and Retrieval (SEDAR).
23. Based on the advice received from its independent financial and legal advisors and its own assessment of the Proposed Transaction, the Independent Committee determined that the Proposed Transaction is fair to BCI and BCI's minority shareholders and recommended that the board of directors of BCI approve the Proposed Transaction.
24. In early August 2004, BCI's board of directors approved the Proposed Transaction.
25. Having been approved by BCI's board of directors, the Proposed Transaction is now subject to the scrutiny of BCI's court-appointed Monitor. The Monitor will review the Proposed Transaction and, if satisfied that the Proposed Transaction in its entirety is in the best interests of BCI and its stakeholders, will recommend, in a written report filed with the Court and served on all parties that are on the service list for the proceeding, that the Court approve the Proposed Transaction.
26. The final step in the approval process consists of a hearing before the Court, at which time all interested parties will have an opportunity to voice any objections they might have to the Proposed Transaction. The Proposed Transaction will not be implemented unless the Court is satisfied that it is in the best interests of BCI and its stakeholders, and grants an order approving the Proposed Transaction.
27. BCI's Plan of Arrangement is a liquidation process governed by section 192 of the CBCA, which specifically permits an arrangement to be undertaken with respect to a liquidation. BCI's section 192 arrangement is specifically designed and limited to the monetization of all of its assets in an orderly fashion with the assistance of the Monitor and under the supervision of the Court, and the ultimate distribution of the net proceeds to shareholders, culminating in the dissolution of BCI.
28. The presence of the Monitor distinguishes BCI's Plan of Arrangement from most, if not all, other prior arrangements under section 192 of the CBCA. The Monitor's role as an independent officer of the Court specifically includes an obligation to ensure that the interests of all of BCI's stakeholders, including its minority shareholders, are considered, and the duty to review any proposed significant transaction and provide the Court with its recommendation.
29. The reports of the Monitor have been, and will continue to be, an important part of the evidence that allows the Court to rule on motions brought by BCI or its stakeholders in a manner that takes into consideration the interests, rights and respective priorities of the various stakeholders. To enable the Monitor to report to the Court in an informed manner, the Monitor has been given unrestricted access to BCI's books, records, management and advisors.
30. Due to the diversity in the types of stakeholders in the BCI proceeding, including majority and minority shareholders, holders of public debt instruments, securities class action litigants and other securities litigants, trade creditors and employees, BCI's section 192 arrangement has been adversarial. On several occasions, the Monitor's position on certain issues has been opposed by one or more stakeholders. On other occasions BCI has modified certain of its initiatives to take into account concerns expressed by the Monitor.
31. In the section 192 proceedings for BCI, the Court has consistently relied upon the impartiality and business judgment of the Monitor, and its rulings to date have been consistent with the Monitor's recommendations.
32. The Monitor's analysis and evaluation of the Proposed Transaction, and its planned report to the Court relating to such transaction, have been and will be undertaken with the same degree of care, and the same regard for the interests of all stakeholders, as its other duties under the Plan of Arrangement, and the Monitor will ensure that any concerns about the non arm's-length terms of the Proposed Transaction are brought to the attention of the Court.
33. The Monitor is independent of BCE and its affiliates or associates within the meaning of the Legislation.
AND WHEREAS under the System this MRRS Decision Document evidences the decision of each Decision Maker (collectively, the "Decision");
AND WHEREAS each of the Decision Makers is satisfied that the test contained in the Legislation that provides the Decision Maker with the jurisdiction to make the Decision has been met;
THE DECISION of the Decision Makers under the Legislation is that the Proposed Transaction is exempted from compliance with the minority approval requirement contained in the Legislation.
September 7, 2004.
"Josée Deslauriers"