by Elaine Dewar
$1 million. And how, after having read all the interlocked agreements, could he say that “control of the business resides with the University as the owner of 75% of the shares…” While Random House has some rights as a shareholder and contract provider of administrative and financial support services under the various agreements as described above, such rights are far from an ability to control the business or to affect the independence of the publisher in carrying on the key operations of the undertaking.296 When does control of bank accounts, control of debt, negative control of decisions to sell or borrow or vote, not count as control of a company?
As far as Scott was concerned: the “overall valuation of the new M&S company that is implied by the Random House price is understood to represent 1.25 times the most recent year’s net sales of the business—an approach to interpreting values for businesses of this sort which is widely employed.”
He used the word “understood.” That suggested to me that someone had told him verbally what M&S net sales were in 1999, but he hadn’t actually seen a financial statement. The use in the agreements of 1.0 time net sales to establish fair value in future he referred to as a minority holding discount because the other businesses he’d looked at had sold at higher multiples of net sales. As examples he mentioned the purchase of a company in the UK, and the purchase by W.H. Smith of Hodder Headline in the US. The only Canadian comparison he used was the purchase by Canadian animation company Nelvana of a US company called Klutz. Yet none of these transactions fell under the Investment Canada Act: because only Canadians may buy Canadian publishing companies, the value of Canadian companies is diminished, and was the reason for this gift and sale.
In fact, he didn’t refer to the Act at all, he referred instead to the book policy. He pointed out there are “cultural policy constraints on transactions in Canadian publishing companies…” He acknowledged these “policies impose a perceived constraint on both value and resale value for any investment of this sort.” Yet he went on to say: “While prospects exist that some relaxation of the Canadian culture policies could take place at some point in the future as a form of response to the increased globalization of commerce and an increasing willingness of the country to compete fully with the world on the basis of its merits rather than market access controls, any attempt to predict the potential timing and dimensions of such a change is fraught with uncertainty.”
Having speculated on the future, he drew back to more familiar ground, the dampening effect on English Canadian publishers’ values due to the power of the US market next door.
In the end, his argument became a circle. The business was worth what Avie Bennett and Random House had said it was worth. “The fact that the sale transaction between First Plazas and the new McClelland & Stewart company—a transaction involving the whole business and hence a control basis of transfer—also took place on a basis reflective of the Random House share purchase values, tends to suggest that the latter were effectively viewed as a reasonable index of total value for the business at the time.”
The tax credit receipt was duly issued to First Plazas Inc. on September 12, 2000 and sent to Avie Bennett by courier. In his cover letter, Tad Brown, of Finance and Development at U of T said: “Please find enclosed a charitable tax receipt in the amount of $15,900,000 for your gift of 7500 common shares of McClelland & Stewart Ltd. Thank you again for this extraordinary act of philanthropy. As you requested last week, the University will continue not to list your name as a donor in its publications such as the National Report.”297
Well, well, I thought. Now you know why there was no public mention of the value of the gift in any U of T publications. Bennett had asked that it be kept quiet.
This note had been blind copied to two officials, including—aha!—Jon Dellandrea. He’d told me he had no knowledge of the tax receipt issued.
I found nothing in the FIPPA file explaining why the University of Toronto had failed to exercise the put until I came upon a memo near the bottom sent by Helen Choy, U of T’s Manager, Accounting Services, to Pierre Piché, Controller & Director, Financial Services Department. It was dated April 26, 2006. At that point, the University’s representatives on the M&S board were: Avie Bennett, chairman, John Evans, Douglas Pepper, Arlene Perly Rae, and Catherine Riggall. David Naylor was the University’s President. The subject line said: Investment Write-Down for McClelland & Stewart Ltd.
The first paragraph recounted the facts of the gift and how Ernst & Young had valued U of T’s shares in M&S in 2000 at $15,900,000.
As I read the second paragraph I thought my head would explode. Ms. Choy wrote:
On January 21, 2001 [only six months after the gift was accepted], after careful review of the accounting implications, it was determined that the University does not control M&S, but it has the ability to exercise significant influence.298
Wait a minute, wait a minute! I shouted into the silence of my office. You can’t do that! You can’t tell the world that you have been given control of this company as a gift, and get a valuator to affirm that you have control and advise you to issue a tax credit receipt for $15,900,000 in part premised on that control, only to turn around a few months later and say actually, you don’t have it!
But apparently if you are U of T, you can do exactly that.
As the memo went on to say:
…It was further agreed with Ernst & Young that the University would record 75% share of M&S’s income at April 30 and disclose the basis of valuation of the long-term investments, without disclosing the value of the investment separately due to confidentiality restrictions stipulation in the agreement with the donor.299
What restrictions? I shouted. Where? I went back through the FIPPA file to find the agreement between U of T and First Plazas. There was no stipulation of confidentiality. There was a confidentiality provision in the Unanimous Shareholder Agreement, but not in the donor agreement.
Is anything wrong? yelled clever husband from his own office down the hall.
I’m fine, I growled, and kept reading.
M&S has reported deficits from December 2000 to December 2005 and has not made any dividend payment to the University. Therefore, the University has never reported any income in relation to M&S. The University has been reporting the value of these investments using the receipted value since these shares are not traded in the open market and their market values are not readily available.
Choy explained that the original estimate of their value relied on the price paid by Random House, but also “the fact that the University had an option to sell these shares within the first five years for $5 million. The five years’ period ended June 30, 2005, but was extended to June 30, 2008.”
Ah, I said to myself. Though she did not use the word ‘put’ and misdescribed its terms, it was clear that the ‘put’ had been put off until 2008 by the U of T. By then, the Conservatives were in power, with a minority. The Conservatives were friendlier to the idea of letting Canadian publishers be owned by foreigners.
She mentioned that she had five years’ worth of revenue statements and that there had been no profits in any of those years (but these statements were not attached to this memo). She performed a calculation of 1.25 times 2005 net sales to get the value of 75% of M&S in 2006: $7.6 million. From this number, she said she had to subtract 75% of the amounts owing to Random House for what she referred to as the net shareholders’ deficit as of the end of 2005. That brought the value of the University’s shares down to $5.3 million. She wanted to further reduce the shares’ value to $5 million “since that is the lowest possible price the University can get for the shares.” She recommended a write down of $10.9 million.
But how to report this? Her suggestion: “…we will net this item and report it under the category: ‘preservation of capital on externally restricted endowments.’”
And so it was done. And no one was the wiser.
In 2007, t
he issue of the ‘put’ came up again. By then, the U of T was represented on the M&S board by Bennett, Douglas Pepper, Trina McQueen and two U of T officials, Catherine Riggall and Judith Wolfson.
I clearly had not been given the first memo that set off the next chain of emails about the ‘put’ and a further write down, but it appeared that at some point, Pierre Piché had asked again about writing down the value of the M&S shares.
On October 23, 2007, Catherine Riggall wrote to Piché and said: “Unless there is a good reason to write it down, we think it should be left at $5 mm [sic] since the put does not expire until July 2008 and it is possible that it could be renewed.”
The next item in the email chain was Piché’s response: “Since June 30 is close to our year-end, the financial statements must reflect our intentions. These companies are in a deficit and therefore there is not a lot of value. The only reason we did not right [sic] it down to zero in 2006 was because of the put. If we let it expire, if that is our intention, then we need to write the investment down close to zero…”
Riggall responded with “we are not sure yet what we will do—.”
She then mentioned discussions with a potential buyer but she offered no names.
On May 1, 2008, Pierre Piché asked Riggall once more about the write down. “Has the put option been extended or will we let it lapse requiring a write-down to zero for this investment?”
Riggall responded: “We will let it lapse in July this year.”
At which point Piché told Helen Choy to write off the whole investment to zero. In an accountant’s view of the world, since the backlist had no independent value from the time the gift/sale transaction closed in 2000, that almost made sense.
There was nothing more in the file explaining the University’s failure to extend the ‘put’ or to call it. In fact, there was nothing much left in the file at all. There was a copy of that July 4, 2011 letter sent to me by the University before I filed the FIPPA. In it, Catherine Riggall, U of T’s Vice-president of Business Affairs as well as a member of the M&S board, asked Missy Marston-Shmelzer, Director of Cultural Sector Investment Review, Canadian Heritage, for permission to transfer the University’s M&S shares to Random House. There was another almost identical letter underneath dated two days later. There was no indication as to which version was actually sent. This time, Riggall’s words about the University’s “stewardship” of McClelland & Stewart took on a very different meaning.
Riggall wrote: “Over the past eleven years, M&S has accrued significant debts and has earned a small profit in only two years.”
Wait a minute, I thought. In Helen Choy’s memo on the first write down, she said no profit had been earned in any of the first five years. Who was right?
Due to the lack of profits and accrual of debt, Riggall continued, “U of T’s ownership interest in M&S has not resulted in any financial benefits to the University. In fact, U of T concluded some years ago that there was no hope of making a return on the shares it held in the company and wrote off the value of its holdings.”
That was not what the University had concluded in 2007. At that point, it had still been possible for the University to call the ‘put’ and get $5 million from First Plazas. But this letter did not mention the ‘put’ or say why it had not been called or extended. Neither did this letter mention that right from the start, the U of T had decided that it did not control M&S which meant Random House did. Instead, this letter positioned the proposed handover of its M&S shares to Random House within the exemption requirements of the Investment Canada Act and the Book Policy as if control would only pass to Random House in 2012. Dire financial straits and the University’s failure to find a Canadian buyer were both invoked.
U of T has been interested in divesting its ownership interest in M&S for several years, however, no purchasers, viable or otherwise, have emerged. The current proposed transaction is the only viable plan that has emerged for the termination of U of T’s ownership interest in M&S. The proposed transaction will allow U of T to exit the investment, while also ensuring that M&S continues with an owner which is experienced in the Canadian publishing industry and committed to the ongoing development of the M&S business.
There was nothing in the FIPPA file recording the government’s response. However, the public record shows that the Minister conducted a review and agreed to the transfer of the shares, after having extracted certain net benefits which of course were kept secret. What I did have in the file were emails between the President of the University, David Naylor, and Brad Martin of Random House recording the fact that they’d had a meeting about the impending transfer which was deemed to be a better result than “the possible bankruptcy and disappearance” of M&S. They had apparently agreed on the PR words that would be uttered in public.
The University had also included in the FIPPA file a Toronto Star editorial of January 13, 2012. The editorial ran just after the transfer of M&S to Random House was announced. It called on everyone to celebrate a golden age of Canadian writing, brought to us by that good Canadian nationalist, Jack McClelland, and his company, McClelland & Stewart. Thanks to both, Canadian writing had taken its rightful place upon the front tables of Canada’s bookstores and Canadian authors’ names graced big prize lists in the rest of the world. “The takeover of M&S this week was mourned by many in the publishing world, and indeed it is the end of a long and honourable chapter in Canada’s literary life. Times are tough for publishers and booksellers, here and in other countries, as online sales and ebooks shake their traditional business model to its core. But for Canadian writing and Canadian readers, the outlook is overwhelmingly positive,” said the Star without explaining how both could be true. While it called for vigilance to be sure that M&S, now under Random House’s full ownership, would continue with its “unique programs” there was no call for an investigation as to how this all happened. Needless to say, no mention was made in this editorial that the Star’s owner, Torstar, had embarked on its own end run around the Investment Canada Act, which would soon bear fruit.
Finally, the file included a Letter to the Editor written by U of T President Naylor in response to that Star editorial. Naylor proposed that everyone should praise Avie Bennett for rescuing M&S from “the brink of bankruptcy” in 1986, a decision “driven by cultural nationalism, not a business investment,” sustaining it for 14 years, and then giving 75% of his ownership share of M&S to the University of Toronto, thereby “preserving Canadian ownership.”
Random House acquired the other quarter and loyally poured millions of dollars into underwriting M&S. Another dozen years passed with M&S promoting Canadian titles and authors. Bennett continued to serve as volunteer chair of the board… if Avie Bennett had not stepped up 25 years ago to rescue M&S and keep Jack McClelland’s dream alive, I am not sure there would be a “golden age” of Canadian writing to celebrate today.
As I closed the file, I realized I was hopping mad.
Reporters aren’t supposed to get mad.
And yet: I felt disrespected as a reader. Naylor had spread a thick layer of congratulatory rhetoric—glossy as fresh butter on stale bread—over a set of arrangements he knew to be less than laudatory. He implied that the University had been public-spirited when it took on the ownership of M&S (he did not use the word control, but unwary readers would think that’s what he meant). He quoted the Star to the effect that “ongoing changes in worldwide publishing” made it “impossible for M&S to carry on independently” though he must have known M&S had not been independent (as in, controlled by the U of T) for 12 years. He painted Random House as a splendidly generous organization by saying that it had poured millions into a losing cause, implying that its motive was sheer goodness, not the control and then absorption of a competitor. He announced himself “relieved that Random House has made firm commitments to preserve this iconic imprint and support its Canadian authors.”300
12
/> Unanswered Questions? Pester!
I closed the FIPPA file. When I went to bed that night, I thought that I understood what I’d read and that I’d seen all the documents that mattered. It’s always that way with me. I feel absurdly confident that I have mastered material I’ve just waded through once, though hard experience has taught me that all such convictions will vanish quickly, in the face of more questions.
The next morning, I rose wondering about things that had not been included in the University’s FIPPA file. Certainty faded like the literary cat’s grin.
For example: where were the follow-up questions that must have been engendered by the Minister’s review of the transfer? Where were the emails discussing why the ‘put’ had not been exercised in 2005, extended to 2008, but not exercised at that point? Where were the minutes of the Business Board which, according to the contract between the University and First Plazas, was the only entity within the University with the power to decide, on the recommendation of the President, to sell the M&S shares? Where was that first agreement, referred to by the business evaluator, Ron Scott, by which First Plazas sold the publishing assets of old M&S to the new M&S? Two transactions had convinced Scott that new M&S was worth $22 million, not just the sale of a quarter of the company to Random House.
I searched the FIPPA file over and over thinking I’d probably misarranged the documents, these things had to be in it somewhere. But no, they were not. I sent another email to Howard Jones at the FIPPA office at the U of T asking for what I was sure the University had in its possession but for reasons unknown had failed to share.
About a month later, Jones sent me back one more document, saying the University believed it had now been responsive to my FIPPA request—in other words, that was all it was willing to hand over. He’d sent the Asset Purchase Agreement between First Plazas Inc. and the new McClelland & Stewart Ltd. Stamped on the first page was the usual warning: Privileged and Confidential Under the Investment Canada Act and Exempt from Disclosure Under the Access to Information Act.
