More BCE Excitement

Common shareholders of BCE Inc., the holding company of telecomm giant Bell Canada, have filed a class action lawsuit demanding the payment of a dividend they had expected this summer.

Black-letter law is that no one can claim a right to a dividend. If an investor wants regular payments as a matter of right, the instrument he wants isn't a stock, it's a bond. Dividend policy is a matter within the business judgment, i.e. the nearly-unlimited discretion, of the board of directors.

The real point of the lawsuit, it would seem, is to derail the underlying deal. What the owners of equity do get, instead of a guarantee of payments, is a right to have a say in the major corporate decisions. That right is the basis for the existence of this blog, after all. I'm not entirely clear on how, in the plaintiffs' view, they've been deprived of that right here, but it seems that "pay us the dividends" is more a measure of damages in their eyes than the alleged legal injury.

The privatization of BCE will be (if the teachers'-pension folk behind it manage to pull it off) the largest leveraged buy-out ever. The deal was signed more than a year ago, though the closing has had to be delayed because the prevailing buisness climate has hardly been conducive to such wheeling-dealing.

A bond rating agency has estimated that if the deal does go through this December as now scheduled, BCE's consolidated debt will be C$42 billion, which is more than twice last year's revenue.

The deal has already generated some fascinating litigation. If you follow that link, you'll get to my earlier discussion of a challenge to this same transaction by bondholders.

So it may yet generate more.

Martin Lipton

Martin Lipton is a founding partner of the prominent securities law firm Wachtell, Lipton, Rosen & Katz.

The May 2008 issue of the Virginia Law Review includes an essay of Mr. Lipton's with the confrontational title, "The Many Myths of Lucian Bebchuk." That's the kind of title you give to an article if you intend it to be what is nowadays known as a "fisking," a point-by-point take-down of a prominent author's fallacies.

(I'm told that the term "fisking" came about because Brit journalist Robert Fisk has been the recipient of such treatments. I've made a cursory search -- being too lazy to spend a lot of time on it -- but haven't yet found any example of an actual 'fisking of Fisk.' But, hey, who cares. The term means what it means.)

Lipton's target is, again, Lucian Bebchuk. Why? Because Bebchuk is the foremost academic defender of the shareholder franchise in corporate and securities law. Bebchuk, of Harvard Law, actually believes that shareholders own the company in a full-blooded sense of the verb "to own," that they should act like it, and that the law and regulations shouldn't be such as to discourage them from so acting.

This is what Lipton resents. He has made a career out of defending the sort of entrenched managements and boards that have the most to fear from an enraged body of shareholders, so he must discredit the Bebchuks.

"Case after leading case," Lipton writes, "confirms that directors—not shareholders—are vested with the right and independent obligation to direct the management of corporate affairs."

Well ... yes. I suppose one has to watch the adjective "independent" there. Did they acquire these rights and obligations from God? No, they acquired them from owners of equity, and the prospect of being replaced keeps them on their toes. But yes, caselaw supports the tautology that a director is supposed to direct. As a refutation of anyone's "myths," though, that's pretty lame.

Let's look to our north. The recent decision of the Supreme Court of Canada in the BCE matter speaks directly to the issues between Bebchuk and Lipton, and shares the ANglo-Saxon common law background. Accordingly, I'll say something about the BCE litigation tomorrow.