The Hand-over

by Elaine Dewar

  This email also confirmed that Avie had told me the truth, that there had been no prior discussion with him or the M&S board about the U of T’s decision to transfer its shares, or even about Riggall’s letter of July to the Department of Canadian Heritage. Communications had gone direct from Random House to the U of T, from the U of T to Canadian Heritage.

  Riggall snapped back at her boss, Naylor, copy to Wolfson, making it quite clear that by 2011, some people at the U of T were very unhappy about Avie Bennett’s gift.

  Avie seems to forget that we have had a 75% ownership of what is effectively a shell company for over 11 years.

  Random House do [sic] not wish to continue with anything less than 100% ownership.

  And as I mentioned, they could just pull the plug and walk away, leaving us with the mess.

  This does not mean I will not talk to Avie, but you do need to know the reality.

  The Board will be discussing this at the next meeting on the 23rd, and the two Random House officials will naturally be there.

  Cathy.310

  I was surprised at her very blunt use of the word shell. Yet I should not have been. After all, only six months after it accepted Bennett’s gift, the University had declared to itself that it did not control M&S. It had made that decision as a consequence of Bennett’s request to withhold from public view the value of his tax credit receipt. Then the University had failed to exercise the ‘put,’ the only means by which the University could have wrung value out of its ownership of the shares. It made sense that an official of the University and member of the M&S board would characterize the University as the owner of a ‘shell.’ A shell company is a flow-through device. The University’s ownership of the M&S shares had been waved before the world like a Maple Leaf flag, though M&S was a husk through which millions of dollars in grants and tax credits flowed as Random House managed its finances: none of that money had benefited the U of T in any way.

  Catherine Riggall got a one-word reply to her sharp note from David Naylor, her boss.

  Understood.311

  Other emails revealed that on September 26, 2011, Avie Bennett, Naylor and Brad Martin of Random House had had a meeting. Apparently, by then, Bennett had bowed to the inevitable. They agreed on the PR posture all three would take in public. These were the emails I had been sent earlier, but they read very differently in this new context.

  Naylor wrote to Brad Martin, CEO of Random House, an email labelled “confidential.”

  Dear Brad,

  It was good to meet you this morning and understand more about the plans involving a shift to full ownership of M&S by Random House.

  Avie Bennett and I both came away reassured that the path ahead includes many safeguards, not least, maintaining the M&S brand within the Random House family, sustaining Tundra as an imprint, and ensuring continuity in a variety of the uniquely Canadian activities of M&S. This is obviously very much preferable to possible bankruptcy and disappearance of M&S.

  I am glad we agreed to work together on communications in this transitional period. Avie clearly would like to have a say, as is only appropriate given his pivotal role in saving M&S years ago. I am therefore copying not only the U of T executives on the Board (Cathy Riggall and Judith Wolfson) but Michael Kurts, AVP Strategic Communications, and Laurie Stephens, Director of Media Relations and Stakeholder Communications for the University.

  Best wishes

  David312

  Martin replied:

  David

  I think the meeting this morning was very constructive and I am glad that you and Avie are comfortable with our course of action. Tracey Turriff our person in charge of corporate communications will contact Laurie this week. She will also contact Avie for his input. The theme will be much as we discussed this morning. The timeline I gave Tracey dovetails with this timing. Please do not hesitate to call if there are any questions.

  It was a pleasure to finally meet you.

  Brad313

  I didn’t need to look far to discover what Martin meant by “theme.” The theme was the burial of the distasteful under yards of lavish praise. This theme was also displayed in Howard Jones’ cover letter to me, the one that accompanied these documents.

  Jones wrote:

  From 2000 to 2011, the University preserved McClelland & Stewart during a time of decline for Canadian publishers. The Corporation was overseen by the Board on behalf of the shareholders. It was operated using expertise provided by Random House to give it the best opportunity of success. This useful arrangement, providing for control by the University, [italics mine] is what was colloquially referred to as a shell in Catherine Riggall’s email of September 11 [sic] 2011. Regrettably, the hoped-for income to support a charitable endowment never materialized.

  The University remains pleased that through its stewardship of the Corporation, it was able to sustain and preserve as much as possible an important element of Canadian publishing culture. The University remains grateful for the generosity of Mr. Bennett in thinking of the University and its educational mission when he made his original donation of the McClelland & Stewart shares.314

  Note to the PR person who penned this nonsense for Howard Jones. In the future, first read the material already sent out in response to a FIPPA so as to avoid making spurious claims, such as the one above about control. This claim was disowned by your own officials 15 years earlier at the request of the donor praised here. And if you’re going to praise that donor, extol him for what he did do—devise a plan of remarkable cleverness and foresight to deal with a law and a policy that damaged the value of his investment, an investment made to promote the public good and redeem earlier failings. The only reason your organization failed to get any benefit is that it failed to exercise its right to make that donor cough up $5 million. And most of all: don’t second guess a former Vice-President of Business Affairs in her use of the word ‘shell.’ As a former member of the M&S board, she is better able than you to describe exactly how the new M&S functioned.

  I sent an application under the Access to Information Act to the Department of Canadian Heritage, asking it to produce any notes and memoranda with regard to the purchase of 75% of McClelland & Stewart from the U of T by Random House of Canada. Eventually, I was sent briefing notes for the Minister providing answers to probable questions about his review and decision. One of the notes was prepared in the middle of November, 2011, far in advance of the public announcement. It said that the Minister, if asked about Random House’s acquisition of McClelland & Stewart, should say: “this investment is compliant with the Book Policy and will secure the future of one of Canada’s most important publishers.” Another advisory dated January 10, 2012, added that the Minister should say that it was compliant with the Investment Canada Act as well as with Canada’s “longstanding policy on investment in the book sector” and that any further questions should “be directed to the investor or Canadian business.”

  A similar document with similar answers was prepared January 20, 2012, after the announcement of the sale to Random House was finally made public. It offered the same suggested phrases as to how this acquisition was fully compliant with the Investment Canada Act and fit within the Book Policy. But it added that not only was the Book Policy still in place, the Minister was advised to say “ this investment is compliant with the Book Policy and it will secure the future of one of Canada’s most important publishers.”315

  The Minister was advised to say something quite ambiguous after the National Post reported on the merger between Doubleday and M&S six months later. The Post story appeared on June 20, 2012. If asked if Random House was allowed to combine M&S with its other operations, the Minister was advised to say: “Random House of Canada is aware of its obligations under the Investment Canada Act. I have no reason to believe these obligations will not be met. Any further questions should be directed to the investor or Canadian Business.”
316

  The Department of Canadian Heritage also sent me an undated document labelled only as Q and A. Though there was no indication as to who was asking and who was answering the questions set out, or who had prepared the document, the answers given permitted Canadian Heritage to brag about the $39.1 million it spends on 230 Canadian-owned publishers, helping them to publish 6500 Canadian books by 4000 Canadian authors every year, and to suggest that this Canadian cultural industry is both protected and yet open for sale so long as there are net benefits to Canada. But the answers to the first three questions on this sheet were withheld due to provisions of the Access to Information Act.

  Q: How could the Minister allow the publisher that was the birthplace of Canadian literature to be bought by a foreign company?

  A: This answer was withheld under section 24(1)

  Q: Doesn’t this decision violate the Foreign Investment Policy in Book Publishing and Distribution?

  A: This answer was withheld under section 24(1)

  Q: What is the status of the Department’s ongoing review of this policy?

  A: This answer was withheld under section 21(1)(a).

  The last page in this thin pile of documents had nothing on it at all except this: “Pages 14–439 are withheld in their entirety under subsection 24(1) of the Access to Information Act.” These 425 missing pages were not identified in any way, but they likely included all the correspondence and memos between federal civil servants in the Department of Canadian Heritage and the U of T and Random House over the final fate of M&S. That’s right, the brand new federal government, committed to openness and transparency according to the Prime Minister’s ministerial mandate letters, kept secret 425 pages of documents related to the final handover of M&S to Random House.317

  Your tax dollars at work.

  13

  The Accountant

  I went to see Ron Scott, the retired business valuator from Ernst & Young, on the first bone-chillingly cold day of 2016. The sky was the colour of a wet hockey sock and a minor snowfall had evoked bumper-to-bumper traffic all over Toronto. Scott had warned me via email that he could remember next to nothing about his opinion on the value of Bennett’s gift, but I was welcome to come and see him anyway. I had decided I needed to give him the opportunity to explain what he’d done.

  Because: I thought his opinion on the value of the tax credit receipt for First Plazas Inc. was absurd. Basic facts had been ignored, others glossed over. I was prepared to confront and accuse. Long experience has taught me that it is best to do that in person.

  Scott lives in Leaside, close to a gorgeous park overlooking the Don Valley. For those who have only seen Leaside on home reno TV shows, I can tell you that it was once a Sunday-is-for-family-dinners suburb where kids played softball on winding, tree-blessed streets. Now Toronto has a bylaw forbidding street play. The renos of Leaside sport kitchen counters in marble too beautiful to mess up with food, greatrooms with fireplaces that do not burn wood, master retreats, six-piece baths, dressing rooms. If a renoed Leaside home is sold to an unrelated party, the vendor will earn enough to buy two Canadian publishing companies, with plenty left over for glamour lunches at Il Posto. Of course, if the Leaside home vendor is so stupid as to actually do that, said vendor deserves to end up homeless.

  Ronald Scott’s house was therefore a surprise. It has changed little since the 1970s. The kitchen floors are made of a practical material, there is broadloom elsewhere, there are pictures of children and grandchildren. There is a den with a lot of books though Scott has pruned his collection, sending 70 banker boxes to University of Toronto’s bookstore. He calls himself a book addict. He wears aviator-style glasses, his white hair is cut Roman style, he is neither tall nor short, he has a large square jaw. He said it wasn’t that cold out when I complained: he said he knew about cold because he grew up in Sudbury and “this is Canada.” He reminded me of a friend, the scion of one of Canada’s great newspaper families. There is nothing at all grand about my friend, either, which is where the resemblance lay.

  But I had expected someone slick and tricky, like that accountant whose bill collector appeared in biker garb at clever husband’s office one day to demand payment for services never rendered. This man was so clearly the sort of person most Canadians aspire to be that I knew right away what he would say about his opinion. He would stand behind it. And he would have a good argument.

  We sat down at the kitchen table. I handed him my copy of his letter of opinion. He read it with one hand over his mouth. The wife of the friend he reminded me of, a person of rare insight, has often told me that when people cover their mouths like that, they are trying to hide something. But he was just holding his hand over his mouth.

  “Reads like a rationalization,” he said after a few moments studying his own handiwork. “It’s an opinion, an expression of view.”

  Did you do this sort of valuation for the University before? I asked.

  He said he sometimes got involved in gift-based tax deals where someone was “trying to rip off the tax department.” The kind of work he had mainly done for the U of T involved estate problems, for example, getting the University out from under a requirement for the continuing use of a gift when that was at odds with the condition of markets. He figured this particular letter of opinion for the U of T had probably been a first for him, though he did valuation work for Ernst & Young for many years, back to when it was still Clarkson Gordon. This opinion, he said, had been written to explain how the fair market value of the gift was established because the shares were not publicly traded. “Someone had to say this thing is worth this number… It’s a list of rationalizations. The CRA could have said something else. So we gave a fairly conservative value.”

  He thought the request for his services came from Tad Brown, counsel in the U of T’s Finance and Development Department, but he had various connections to the U of T. He had worked on its audit back in the 1960s. He thought that it was likely that Tad Brown got to him by calling the audit partner at Ernst & Young.

  So, I said. I need to ask you. You listed the documents you studied, but you didn’t mention seeing M&S’s financial statements. Did you see them?

  “Not sure I did see financial statements for McClelland & Stewart,” he said. But if he hadn’t, that really didn’t matter because the value in this case had been based on market information and “the dominant thing here clusters on the transaction between Plazas and Random House.”

  I showed him the Agreement by which the U of T transferred its shares to Random House, which stated that M&S had run up over $16 million in registered debt by 2011. I told him the $5 million ‘put’ he’d also relied on to establish the gift’s basic value was never called. In fact, I explained, my alma mater had got nothing from this gift at all.

  He said he couldn’t say why M&S had run up such a debt, though he thought it would be fairly easy to do since it amounted to about $1.6 million per year for ten years. The only way to understand those ins and outs would be to look at the financial statements.

  Well Random House is not going to give them to me, I said. They won’t talk to me.

  “Ask U of T for the financials,” he said. “If you own 75% of a company, you want the annual financial statements. Ask them.”

  For some reason, the perfect sense of his suggestion went in one ear and right out the other. I was focused instead on the end result of the gift, the failure of the University to get anything from it.

  “Strange things go on,” he said.

  We went back to his opinion. I wanted to be sure I understood it. I wanted to know why he’d mentioned the government’s book policy as a constraint on the sale of Canadian publishing houses, but not the Investment Canada Act, and why he had suggested that a rule change could be coming. Why had he put that in? Where had that idea come from? Did someone tell him to do that?

  You couldn’t not say that, he said, beca
use “the nature of international markets of the time was, the barriers are coming down. You’ve got to allow for it. It would allow value [to be] added.” What he was concerned about was writing an opinion that would withstand any Canada Revenue Agency review. This was a “transaction framed by trading prices.”

  I told him that I had an informant who knew how gifts like this were treated by other universities. That informant had said that having only one opinion on the value of donated private shares was unusual. Was it unusual at U of T?

  “Getting multiple people to evaluate would not be common,” he said. “The CRA, if concerned, would have put their own people on it…” But if the CRA had wanted to challenge the opinion, he said, they’d have had to say they didn’t care about the price paid by Random House for 25% of the company, but were mainly interested in future prospects of the business. This was “an arm’s length transaction,” he said. “The first part of this deal has to be at fair market value.” By the first part, he did not mean when First Plazas sold assets to the new M&S in return for shares and a promissory note. He meant what Random House paid for its 25%.

  To his way of thinking, that $5.3 million was the most significant evidence (of value). “We looked at revenues and how this price related to revenues. There are rules of thumb. People trade businesses on multiples of revenues. Implicit is a return on sales of x percent, a return on investment of y percent. Transactions are done on that basis.”

  But the situation of Canadian publishing companies is unlike that of other book businesses in other countries, I said. So, why had he compared this sale to sales in the US and Britain?

  He said he’d looked at sales in the US because they were the only ones to look at. “It’s a disciplined guess,” he said.