by Elaine Dewar
I had asked for the names of the directors who had represented University of Toronto on the McClelland & Stewart board. She had replied with a list of people she characterized simply as “the board of directors.”
Avie Bennett, Chairman, Dr. John Evans, Chairman Torstar Corp., Mr. Brad Martin, COO and Executive V.P., director of sales and marketing Random House of Canada, John B. Neale, Chairman Random House of Canada, Ms. Catherine J. Riggall, Vice-President Business Affairs, University of Toronto, Ms. Arlene Perly Rae, Mr. Douglas J. Pepper, President and Publisher McClelland & Stewart Ltd.
This list did not distinguish Random House directors from U of T directors, and several names were missing, as I knew from reading the resolutions of the Governing Council appointing U of T directors. My list also included: Robert Prichard, former President of the U of T; Felix Chee, former Vice-President, Business Affairs at the U of T; Trina McQueen, former CBC public affairs executive, lately Adjunct Professor at the Shulich School of Business at York University and soon-to-be Vice-Chairman of TVO; Judith Wolfson, Vice-President International, Government and Institutional Relations at the U of T; and last but not least, Douglas Gibson, formerly Publisher and President of McClelland & Stewart Ltd. Yet when I asked about these missing names, I was told that “our records indicate that neither Felix Chee nor Rob Prichard were members of the board; they were not included on the board meeting membership or attendee lists.”
When I pressed her to check again, she replied that they had not come up with anything further and could not without “extensive archival work.”
I concluded that the University had decided to stonewall, or at least not to dig too deeply on my behalf. How else to explain its refusal to offer simple facts that should have been publicly known? When a charity like the University of Toronto’s Governing Council issues a tax credit receipt, it means that the University has asserted to the government that a gift given to it has a specific value and the government should forego tax revenue in that amount, or, if no tax is owed by the receipt holder, should remit money according to that taxpayer’s situation. The government uses charitable tax policy to advance charitable—as in public—purposes. And why on earth would the University fail to answer a basic question about the voting rights attached to the shares it owned? Why couldn’t it produce a complete list of its own representatives on the M&S board? Why didn’t it distinguish its own directors from those affiliated with Random House?
Yet Blackburn-Evans had managed to convey one bizarre fact. The University had decided that McClelland & Stewart, owner of the best Canadian backlist in the country, was without any value whatsoever when it re-gifted it after 11 years of “stewardship.”
When M&S was handed over to Random House, “The Canadian Publishers,” the point of origin for Canada’s cultural policy, the recipient of millions of dollars in grants and tax credits from the public purse, was, as my grandfather would have put it, not even worth a mark on the page.
4
About Canadian Control
On the surface, the University of Toronto seemed to have acquired control of M&S when Avie Bennett gave it 75% of the company’s shares—that’s certainly what the word “stewardship” implies. Yet the University had hidden most of the basic facts about the M&S gift and its subsequent transfer to Random House. Why? Was it because its stewardship was not the same as Canadian control? The meaning of Canadian control is as variable as summer weather in Saskatchewan. As any prairie person will tell you, one minute it can be blue sky and sunshine as bright as a nickel, and the next the thunder clouds are rolling in on a howling wind. Similarly, under one statute, Canadian control can mean ownership of 50% plus one of the voting shares of a company, while under another, it can mean ownership of 75% of those same shares. Some Acts require that those who own 51% of the shares of a Canadian company must not only be entitled to a Canadian passport, but that they must also be Canadian residents. Example: your Auntie who lives in California and owns 51% of the family business means that your company is not Canadian when it comes to qualifying for a certain kind of tax credit. In other words, just as the rules for who qualifies for grants differ, the same company can be Canadian under one rule, and non-Canadian under another. Then there’s the concept of de facto control (meaning control in fact) whose meaning has been articulated by various court decisions in various circumstances under various statutes. De facto control can be wielded by a minority shareholder in certain circumstances. That’s why, as any commercial lawyer will explain to you if you can bear to listen, questions and answers about Canadian control depend on who is asking and in what context.
The more I thought about it, the more the M&S gift/sale began to remind me of business stories I’d covered in the 1980s and 1990s. One familiar theme was the suspicion that a minority shareholder actually controlled the company. Another was the sudden transmutation of valuable assets to worthlessness. For those readers too young to remember, or who were not yet born, let me sketch that raucous, big-haired epoch in which only business seemed to matter and old truths no longer seemed to apply.
Take money.
Money, if newly made, once interfered with social standing. But by the 1980s, new money had become the more interesting kind and those who made it acquired celebrity status. In Canada, and elsewhere in the Western world, political power was moving from the centre-left (those who thought power should be wielded by the State), to the hard right (those who wanted all power, along with profits, to remain in private hands). It was the age of Margaret Thatcher. (There is no such thing as Society.) It was the age of Ronald Reagan. (It’s morning in America, so let’s help the Contras take back Nicaragua from those Commie Sandinistas. Who cares if Congress said no? We don’t need Congress’s money: we’ll use “friends” to trade illegal drugs for arms, and route and sell some of those arms to Iran, which is at war with Iraq and sponsors terror, and with whom we have no relations and we’ll just dang well lie to Congress about all of it.)
The Cold War was fading away. Dictators in Latin America were losing their grip. Chinese officials were getting set to fly business class. Gorbachev’s restructuring of the Soviet Union had transformed its creaky Communist kleptocracy into an oligarchic kleptocracy running a smaller state named Russia. One political scientist had the nerve to declare that we had arrived at the end of history. Switzerland’s private banks bulged with stolen money—old Nazi loot as well as to up-to-the minute transfers from developing States into the private accounts of their leaders. Oil-producing nations were awash in riches. Canada opened its doors to those seeking safe haven for such gains. Come hither with your money, cried Canadian traders, you have to put it somewhere. Don’t leave it in jurisdictions where there is no rule of law, where currencies can’t be traded or where their values fluctuate with glorious Leaders’ moods. Put it into reliable currencies, commodities, commercial real estate, or into companies with head offices in places more stable than Beirut, Cairo, Riyadh, or Moscow, companies whose shares can be publicly traded without too much scrutiny. Bring it to Canada!167
And they did.
By the early 1990s, the new Russian oligarchs and their Mafiya friends were buying Canadian mansions, listing Canadian publicly traded companies (one with former Ontario Premier David Peterson on its board),168 giving generously to Canadian politicians (one of whom, Paul Martin, was the Minister of Finance and would later become Prime Minister).169 One night in Toronto’s posh Bridle Path neighbourhood, shots were fired through a mansion’s gates, an escalation of the war in Moscow for control of the new Russia.170 Yet for the most part, the thing that made Canada such a fine haven for dubious wealth was that few outside this country paid attention to who did what and with whom behind that veil known as the Canadian border.
In the same period, control of Canada’s widely held, publicly traded corporations was being pried from the hands of an old guard by a new one—by land developers, investment bankers, and media moguls. Peopl
e who might not have had much to do with each other in an earlier period began to do all kinds of business together. For example: Onex Capital Corporation was set up in Toronto in 1983. Gerry Pencer’s Financial Trust Company was the second-largest investor in Onex’s first $50 million private placement. The largest investor was the public/private Canada Development Corporation, started by the federal government many years before to buy up foreign-owned resource companies active in Canada.171
Financial Trustco raised money through Drexel Burnham Lambert which sold its junk bonds to the unwary. The Lambert name in Drexel Burnham Lambert derived from a Belgian holding company known as Groupe Bruxelles Lambert. The Groupe’s American subsidiary had merged with Drexel Burnham, a long-established American brokerage house, in 1976.172 Drexel Burnham Lambert soon acquired Canadian connections. For example: Groupe Bruxelles Lambert controlled an oil company called Petrofina S.A. Maurice Strong, formerly founding chairman of Petro-Canada, stickhandled the sale of Petrofina’s Canadian subsidiary to Petro-Canada in 1981. The directors of Petrofina’s Canadian subsidiary sold their shares into a market rising on rumours that Petro-Canada would make an offer (the correct price appeared in the newspapers long before that offer materialized).173 There were accusations of insider trading, followed by investigations by three Canadian provincial regulators which went nowhere. Some time after that deal was completed, Power Corporation of Montreal (which had employed Strong, future Prime Minister Paul Martin, and many other political actors) bought a significant position in Groupe Bruxelles Lambert and then Petrofina S.A. Through its position in the Groupe, Power Corporation, controlled by the Desmarais family, also became large shareholders in Drexel Burnham Lambert. Paul Desmarais pulled back from becoming Drexel Burnham Lambert’s controlling shareholder just before the company was charged with serious misbehaviour.174 Drexel Burnham Lambert later pleaded guilty to three counts of stock manipulation, three of stock parking, and its former chief rainmaker, Michael Milken, was indicted for racketeering and securities fraud, pleading guilty to lesser securities and reporting violations. He paid a $600 million fine, was sentenced to 10 years in jail, and was barred from any securities trading for the rest of his days. Drexel Burnham Lambert ended in bankruptcy. But thanks to Paul Desmarais’ decision not to invest another dime in Drexel, Group Bruxelles Lambert avoided disaster. The Groupe went on to buy a large chunk of Bertelsmann AG in 2001, shortly after 25% of M&S was purchased by Bertelsmann’s Canadian subsidiary, Random House of Canada. Andre Desmarais served on the Bertelsmann board until 2006. Thus, Canada’s most politically connected company came to enjoy significant influence over a European publishing company, which controlled an American publishing company, which controlled a Canadian subsidiary, which may have had effective control over Canada’s iconic publisher, M&S.
And then there was a Delaware-based company called Barrick Petroleum Corporation. It was founded in the early 1980s from the merger of small US oil companies owned by certain Saudi investors, among them Adnan Khashoggi. The same investors owned a large portion of a Canadian subsidiary called Barrick Resources. Barrick Resources was led by Peter Munk, who would later transform it into the global mining giant Barrick Gold. At that time, Munk had newly returned to Canada from London and Asia where he’d partnered in resorts with Khashoggi, also known as an arms dealer and fixer for the Saudi royals. Barrick’s investors included some of those Saudi royals, among them a former chief of Saudi intelligence.175 By 1984, Munk had acquired a listing for Barrick Resources Corporation on the Toronto Stock Exchange. It was trading at $1.39 per share when Adnan Khashoggi came to Toronto with a huge entourage. He was wined and dined by the province’s political and business elite, including former Premier William Davis, who hoped to interest him in other Canadian opportunities. As Marci McDonald hilariously recounts in Yankee Doodle Dandy, Khashoggi went to the Toronto Stock Exchange and made a public show of buying into the Barrick—on margin!—though he already owned a significant piece of it.176
Peter Munk was not Khashoggi’s first Canadian partner. In 1977, Maurice Strong, then still chairman of Petro-Canada and the Canadian government’s International Development Research Centre as well as a prospective candidate for the Liberal leadership, was invited to take over AZL, a US company Khashoggi controlled. AZL was a publicly traded conglomerate with African oil and gas interests, American cattle and land holdings, a commodity trading operation, and a bank. Khashoggi wanted Strong to take over because he was unable to be in the US at that time: he was avoiding a subpoena. Some US officials believed that the huge commissions Khashoggi had been paid by American manufacturers selling arms to Saudi Arabia amounted to illegal bribes paid to Saudi royals. The US Securities and Exchange Commission wanted to have a serious chat.177
With so much new money coming to Canada in search of safety and good returns, it is no surprise that several Canadian-based corporate raiders (Sam Belzburg, Israel Asper and Gerry Schwartz at Canwest, the Edper Brascan group, commercial real estate developers such as Robert Campeau and the Reichmann family’s Olympia & York Developments) began to strike terror in the hearts of CEOs everywhere. They bought publicly traded companies the way the rest of us might pick up a second-hand car. Toronto-based arbitrageur Andy Sarlos gathered blocks of shares for these clients as they went after mining giants, oil companies, distillers, utilities. So did Jimmy Connacher178 through a company called Gordon Capital. Gordon Capital bought and sold blocks of shares, or entire public offerings in what were called bought deals. Acquiring control of a publicly traded company through the careful accumulation of blocks of its shares is a salami strategy: what one can’t buy all at once can often be acquired piece by piece, especially if stealth is employed. Acting for groups of buyers cooperating with each other, Connacher’s traders pulled in shares sufficient to gain control of target companies. Successful raiders then demanded seats on the target company’s board commensurate with the shares (and votes) acquired. Old CEOs were dumped and new CEOs appointed to do their bidding.
Sometimes the point wasn’t to own the company, but to shake it down—to make the company buy back its own shares at a high price. This was known as greenmail. First a raider accumulated a nice chunk of shares on the open market or in private deals with institutional investors. Then the raider would make a well advertised offer to buy the majority of the company’s shares for a less-than-welcome price. The company’s executives would either pay a big premium to buy those shares back, or, find a “white knight” to make a higher offer. Either way, the raider made money. Some takeover artists went after companies that would be worth more broken up than as going concerns. Most used leverage (borrowed money) to acquire shares, using the shares as collateral for the loans. If they won the bid, they’d sell off company assets and use the gains or the company’s cash flow to pay off their lenders, often leaving wreckage in their wake. Those who got wind of planned takeovers could make fortunes if they were willing to ignore laws against trading on inside information. And they did. People working in places like Gordon Capital who knew that their company was about to execute a big trade could buy shares in advance at a lower price and make money selling their shares as their company’s purchase drove up the market price. This was called front-running.
From the early 1980s until the harsh recession of 1991/1992, hostile takeovers of publicly traded companies were often front-page stories. As narratives, they had it all: fear, greed, white knights, black hats, raiders who lived so grandly that Gatsby was put to shame. Former Winnipegger J. Ross Johnson, CEO of RJR Nabisco (who tried to take over his own company but lost out to KKR) was reputed to have asked his secretary to “get me an inch of fifties,”179 before heading out to shop in New York. He and his wife happened to be good friends with Prime Minister Brian Mulroney and his wife Mila who, according to author Stevie Cameron in her remarkable On the Take, also enjoyed shopping with thick envelopes of cash.180
Hostile takeovers were often adjudicated in the courts or by secur
ities regulators. Some journalists turned themselves into minor Boswells writing books about these business ‘warriors’ who found fame to be a useful business tool. Raiders and traders had the ears of those in power because they contributed extremely generously to political coffers. Some also took care of politicians by offering them seats on boards when they were no longer in office. They knew each other, worked with each other, became mortal enemies of each other, married and left each other, just like publishing people. Some of them became publishing people.
The M&S story brought to mind a particular takeover struggle I covered, one that indirectly dragged me into the book business. It unfolded in 1985—the same year Avie Bennett purchased his first chunk of McClelland & Stewart.181 It too was the by-product of insiders’ maneuvers to get around inconvenient government rules. It, too, involved suspicion about who was in control of whom.
In January, 1985, Union Gas, one of eastern Canada’s largest energy utilities, spun out a publicly traded holding company called Union Enterprises. Because utilities are essential, they have traditionally been granted geography-based monopolies. Because they are monopolies, they are overseen by regulators who allow them to earn reliable returns. In Ontario, by law, no shareholder was allowed to own more than 20% of a regulated energy utility. But the law was silent on whether or not the holding company of a utility could be majority owned by one entity. Because Union Gas enjoyed a steady stream of cash year after year, when Union Enterprises was publicly listed for trade, it immediately became the target of a takeover.
Union Gas was well connected to the ruling Ontario Progressive Conservative Party, which was about to lose power for the first time in 42 years. Within a few months of the takeover bid, the Conservatives would be replaced by a Liberal minority government led by David Peterson with the guaranteed support of Bob Rae’s NDP. The Union Gas takeover was a business war with cultural and political implications.
