The Hand-over

by Elaine Dewar

  Prichard’s promise immediately begat the requested Letter of Opinion. It was signed only two days later, June 23, 2000. This is amazing speed as anyone who has ever requested a Ministerial Opinion will attest. While the Investment Canada Act requires the Minister to issue such an Opinion within 45 days after receiving sufficient information to form it, there is no time limit in the Act saying how long the Department may take to investigate the facts behind such an application. It took the Department just 23 days from receipt of the letter from Ross to put the Minister’s signature on the Letter of Opinion. It was labelled “Protected—Inv-Act,” meaning it should not be released for any access requests because the Investment Canada Act forbids such revelations. And yet here it was in my hands, written proof that if you have friends in high places in this country, the law will be adapted to fit your facts at warp speed, and no outsider will be the wiser (but also that if you follow the advice of Robert Prichard to file a FIPPA, such secret acts may be revealed). The Letter was sent to N. William C. Ross, Bennett’s lawyer at Weir & Foulds, via mail messenger.

  Sheila Copps, who signed herself Minister Responsible for the Investment Canada Act, wrote:

  I acknowledge receipt on behalf of your client, First Plazas Inc., of your letter dated June 2, 2000 requesting an opinion pursuant to subsection 37(1) of the Investment Canada Act (the “Act”) as to whether the proposed investment regarding First Plazas Inc. gift of 75% of McClelland & Stewart Ltd to the University of Toronto and sale of the remaining 25% to Random House of Canada Ltd would result in the acquisition of control of a Canadian business by a non-Canadian. Documentation relating to this proposal was received on June 2, 5, 8, 12, 13, 15, 16, and 19, 2000.

  Pursuant to subsections 37(1) and 26(2.1) of the Act, it is my opinion, and I determine and declare, based on your representations and all the agreements and documents that you have submitted to date on behalf of your client, that McClelland & Stewart Ltd would be a Canadian entity following the proposed transaction.

  This opinion is conditional on the accuracy of the material facts submitted by you on behalf of your client and shall remain binding on the Minister of Canadian Heritage and the Director of Investments for so long as the material facts on which this opinion is based remain substantially unchanged.

  So: contrary to what Sheila Copps had told me, the McClelland & Stewart handover had not only happened on her watch, it had been approved by her. (Or at least it appeared to have been approved by her. Section 37(4) of the Investment Canada Act gives the Department’s Director and designated officials the right to issue such Opinions in the Minister’s name.)275 It is definitely Copps’ signature on the Opinion permitting the transfer of de facto control of a Canadian publishing company to a foreigner, Random House of Canada. She waved a wand over the transaction and said, regardless of the meaning of its agreements, that the new M&S would be a Canadian entity. Due to the secrecy provisions of the Investment Canada Act, she could rest assured that this Letter of Opinion and its underlying agreements would remain cloaked from public view, never to cause a political uproar. Only the parties, a few bureaucrats, and a lot of lawyers would know what really happened and why would they tell?

  So many lawyers had been involved in this remarkable adaptation of the Investment Canada Act that I looked up the collective noun for lawyers on Google. It coughed up a whole list: a disputation; an eloquence; an Escheat: a greed; a huddle; a quarrel. The lawyers involved included: an eloquence at Torys; a disputation at Weir & Foulds; just one at Macmillan Binch; a quarrel at University of Toronto: a huddle from the Department of Justice; a greed at Canadian Heritage.

  And how was this portrayed in public? The next document in my pile was a University of Toronto and McClelland & Stewart joint press release dated June 26, 2000, three days after Sheila Copps’ Letter of Opinion was issued, but before the parties had signed the relevant Agreements, and even before the University’s Governing Council had passed a resolution to accept the gift.

  The title read: “McClelland & Stewart Owner Donates Canadian Publishing House to University of Toronto.” Bennett was quoted to the effect that after 15 years in the publishing business, it was time for him to find a way “of ensuring McClelland & Stewart’s future and preserving its past.” He said the gift and sale was the culmination “of more than five years of planning with the University of Toronto. What better way can there be to safeguard a great Canadian institution, a vital part of Canada’s cultural heritage, than by giving it to the careful stewardship of another great Canadian institution.”

  All very well, except the deal required U of T to be the steward of nothing except 7500 share certificates and profits unlikely to accrue. Prichard made the U of T’s hands-off-the-wheel position quite clear in this release.

  Stressing that McClelland & Stewart will be run completely independently of the University of Toronto and will have no relationship with the University of Toronto Press, Prichard added that all income received by the university from its ownership interest in McClelland & Stewart will fund an endowment at the university in support of Canadian writing, poetry and culture.276

  It also said that M&S would maintain its Canadian publishing programs “intact,” including Tundra Books, Macfarlane, Walter & Ross and the New Canadian Library. That promise would be ignored when Macfarlane, Walter & Ross was shut down only three years later. The services agreement with Random House was mentioned, but its scope was downplayed. It was described as “a contract to provide some services under an administrative services agreement, including accounting, computer support and, ultimately, marketing and sales.” No mention was made of Random House’s contractual obligation to provide loans and run M&S’s finances, its capacity to encumber M&S with debt within the first year, its negative control of the company due to its negative control of the budget process, its right of first refusal should any Canadian try to buy U of T’s shares, and its entitlement to refuse to permit the issue of dividends to U of T. Nor did the press release refer to the sale price of the shares bought by Random House, the put, or the tax credit First Plazas Inc. would earn.

  Instead, high praise of Avie Bennett was sung by John Neale, Chairman of Random House. (Why not? Bennett had crafted a great deal for Random House.) A list of important Canadian authors past and present published by M&S was hauled out like lipstick for the pig: Lucy Maud Montgomery, Stephen Leacock, Farley Mowat, Pierre Berton, Margaret Laurence, Margaret Atwood, Peter Gzowksi and Michael Ondaatje. “Since Avie Bennett bought the company from Jack McClelland in 1986, numerous other acclaimed authors, including Robertson Davies, Mavis Gallant, Anne Michaels, Rohinton Mistry, W.O. Mitchell, Jane Urquhart and Guy Vanderhaeghe have joined the M&S family,” said the release, making it seem as if these writers were Avie’s Picks, though everyone in the business knew they had been brought to M&S by Doug Gibson or fiction editor and newly named Publisher Ellen Seligman.

  And then there was a quote from Michael Ondaatje: “This is a truly remarkable gift on the part of Avie Bennett—to ensure a great Canadian publishing house and its excellent publishing program will continue to flourish in the best way possible,” he said.

  Having just read the summaries of the transactions that permitted the gift and sale, as well as the Minister’s Opinion, it seemed to me that Ondaatje’s ambiguous adjective—remarkable—seemed apt.

  Beneath the press release lay a letter of June 29, 2000, from the Governing Council’s Secretary to President Robert Prichard notifying him that resolutions to accept the gift had been passed by the Governing Council that same day. (The details, referred to as confidential, were not recorded in the resolutions.) Beneath that lay the actual undertaking made to the Director of Investments, Canadian Heritage and signed by Prichard and the Council’s Secretary. This document was also labelled privileged and confidential under the Investment Canada Act and exempt from disclosure under the Access to Information Act. It was a very lawyerly text. In it, Prichard, as Pres
ident, promised that in regard to the M&S shares, the U of T would not say it was a crown agent and entitled to sell its shares to anyone, nor would it let anyone else do so. But as to whether it actually was or was not a crown agent, the letter said:

  “…the University expresses no view as to its status as an agent of Her Majesty in right of Canada or a province.”

  It was signed and sent to Ottawa on June 30, the last day Prichard was President of the U of T.

  The Donor Agreement was next in the pile. It was signed by Prichard and Bennett on behalf of First Plazas Inc. and the U of T and also dated June 30, 2000. There was nothing on the document or in it requiring that it be kept confidential. It laid out the terms of the gift. It permitted the University to sell any or all of its shares without the permission of First Plazas Inc. only after three years had elapsed. It set up the rules for the appointment of five U of T directors to the M&S board. It established who the first directors would be (Bennett, Gibson, Prichard, Evans, and Arlene Perly Rae). The U of T President would recommend future directors to the Executive Committee of the Governing Council and there would be consultation over such names with existing U of T-appointed members of the board. Once again, it was clearly stated that decisions to sell any or all of its M&S shares could be made only on the recommendation of the U of T President with the approval of the Business Board.

  Most of the document detailed what the University would do with any profits that flowed from M&S or from the sale of its shares.

  Dreaming in Technicolor, I thought. They’d have had to call the put to see a nickel.

  So why hadn’t they?

  I got up and went out for a walk. I was muttering to myself over what I’d read. Nobody in authority could argue that they didn’t know the terms of this transaction. All of the agreements surrounding the gift and sale had been put in front of the responsible civil servants by very competent lawyers. The lawyers involved must have turned the Investment Canada Act inside out and upside down to find an acceptable undertaking for the Minister to demand. The fact that an undertaking was given had allowed the Department of Canadian Heritage folks to cover political derrières and it had also permitted Bennett to say don’t worry, folks, we got Ottawa’s approval. Most people wrongly assumed that Random House had given an undertaking when in fact it was the University of Toronto. In fact, the Minister’s Opinion had given foreign-owned Random House indirect but open-ended permission to exercise control-in-fact over M&S. In return for this, Random House had given the government nothing.

  I could see how all the parties got what they wanted from these deals. Random House got to control its competition. The University got to hold itself out as a steward of Canadian culture with the prospect of at least $5 million to pour its coffers one day. Avie Bennett got his exit strategy without having to give up the M&S glamour, as well as $6.3 million ($5.3 million from Random House, $1 million from the new M&S), a tax credit, and a lovely prize from the Governor General.

  But what did Canada get?

  Sometimes it’s better not to find out what you thought you wanted to know. Knowledge can make you sad.

  11

  And One More Thing…

  I opened the FIPPA file where I’d left off and turned the page. There it was, the share purchase agreement between First Plazas Inc. and Random House of Canada. The Administrative Services and Financial Support Agreement was attached to it. Like all the written records of these transactions, both were labelled privileged and confidential under the Investment Canada Act and exempt from disclosure under the federal Access to Information Act.

  Both agreements took effect on Canada Day.

  The agreement by which 25% of the shares of the new M&S were purchased by Random House at first seemed simple and to the point. Random House agreed to pay First Plazas Inc. $5.3 million. But then I got to the part about the Promissory Note. It said that on the first anniversary of this transaction, “the Purchaser [Random House] shall cause New M&S to pay the Vendor [First Plazas Inc.], and if necessary fund, the principal amount of the Promissory Note together with interest owing thereunder.” In other words, New M&S had to pay that sum to First Plazas out of its earnings or borrow it from Random House.277

  As I thought about the way money was being made to flow, I suddenly became confused. I couldn’t understand why the new M&S had to pay $1 million to First Plazas at all.

  Gradually clarity returned: because, I told myself, before 75% of new M&S could be given away, and 25% sold, new M&S first had to acquire the publishing assets of First Plazas Inc.—assets such as the backlist—all those books already published by M&S and still controlled by M&S for the duration of their copyrights, which extend for fifty years after the death of the author—plus all ongoing projects, all grant dollars owing, etc.

  Yet that number, $1 million, nagged at me. How could all the publishing assets being transferred to the new M&S only be worth $1 million when, according to the lawyers’ summary of the transaction, the value of new M&S had been set at $21 million? If 100% of the assets transferred were only worth $1 million (the amount new M&S promised to pay for them within the year) how could 25% of the same company, on the same day, be worth $5.3 million?

  I went around and around that question until I decided that it probably had something to do with taxation rules: don’t go there, I said to myself, that is a rabbit hole from which the sane may not emerge. Yet this was clearly important because it was step two—okay, slice two—of the salami strategy.

  I looked at the agreement again and was struck by this phrase: “Purchaser shall cause New M&S to pay.” How could a minority shareholder promise to make a company it does not control pay anything to anyone?

  Answer: if the minority shareholder has actual not just negative control.

  The means by which Random House acquired actual control of new M&S were detailed in the Financial Services and Support Agreement.

  These terms had not been fully reflected by the memos and summaries given to various parties. For one thing, the initial ten-year term of this Financial Services and Support Agreement would be automatically extended for another five years, unless M&S failed to realize a net profit every year for three years after June 30, 2002. More important, though Random House was supposed to perform its duties of management, marketing and administration of M&S as an “independent contractor” (while being one of M&S’s owners, giving new meaning to the word “independent”), M&S could not rid itself of Random House’s services during that first five-year period—even if it failed to make a profit for four of those years.278

  And, as my informant had alleged, this agreement gave Random House control of M&S’s bank accounts. It said that Random House shall handle “all banking necessary for the due performance of the accounting and administrative functions of M&S and for the receipt and disbursement of all moneys of M&S pertaining to its operations required to be attended to by Random House under this Agreement. Random House shall have signing authority and shall deal with such cash, cheques and negotiable instruments in accordance with sound business practices so that M&S is adequately protected and receives reasonable income thereon.” This allowed Random House to arrange matters so that McClelland & Stewart did not show profits, or did show them, as it saw fit. Random House could also make secured loans to M&S, starting with the loan that might be required for that promissory note payment to First Plazas Inc., and to “register its security under the Personal Property Security Act.”279

  This ability for Random House to register debt M&S owed to it was slice three of the salami strategy. He who controls the bank account can create a debtor. A secured lender can force a debtor into bankruptcy. The bankruptcy, or impending bankruptcy, of a Canadian publisher is one of the requirements for a Canadian publisher to get permission, under the Investment Canada Act and Book Policy, to sell itself to a foreigner. The other is that no Canadians want to buy it. A big secured debt would guarant
ee that prospective buyers would beware.

  While this document asserted that Random House and McClelland & Stewart would compete vigorously, it also stipulated that there could be no poaching of authors or staff between the new M&S and Random House unless permission was granted in writing—on penalty of termination of the Agreement. In addition, neither side was to try and have the Publisher or any person working in either publishing department to “cease being so retained” without prior written consent.280

  The rights and duties of M&S as publisher, and Random House as “independent” contractor, were further defined in Schedule A.

  Schedule A turned out to be a magnificent display of sucking and blowing at the same time (an act most lawyers are familiar with) as well as being a document that would be of interest to the Competition Bureau. It demonstrated utter entanglement while professing arm’s-length distance between the two parties. On the one hand, they agreed that M&S shall “be committed to being a publisher of works that are predominantly written by Canadians or about Canadian subjects.” Yet there was no definition of predominant. They agreed that the Publisher and President of M&S would be determined by the Board, “acting in accordance with the Unanimous Shareholder Agreement” (which I had still not come upon) and “each will be a Canadian citizen ordinarily resident in Canada.” Then it said that “in the event that the proposed President or Publisher is not dealing at arm’s length with Random House, the directors who are nominees of Random House will not vote on the question, but will support the decision of the other directors.” This meant that if Random House wanted to replace Doug Gibson with a Random House employee, then Random House would go along with the U of T members of the Board on that issue. And of course, in a few years, it did replace Doug Gibson with Douglas Pepper.281