The Hand-over

by Elaine Dewar

  Housekeeping, I thought, as I turned the pages. Trivial. Why did the University send this to me?

  But then I came to the page labelled McClelland & Stewart Ltd. bylaw No. 1 and marked “adopted on amalgamation on July 1, 2004.”323 This bylaw had been passed originally by the old M&S when it was still owned by First Plazas, and before the new M&S was brought into existence, its shares given to the U of T and sold to Random House. This bylaw had been passed in preparation for that gift/sale, because it referred to a unanimous shareholder agreement featuring Random House and the U of T. It set out the voting rules for meetings of the board of directors of M&S and for meetings of the shareholders of McClelland & Stewart Ltd. It said the chairman of any meeting of the directors had to be selected by “directors nominated by U of T.” “Subject to any unanimous shareholder agreement, each question at a meeting of the directors shall be decided by a majority vote, and, upon an equality of votes, the chairman shall not have a second or casting vote.” In other words, Avie Bennett could not push things through if there was an even split on any issue, which was interesting. But the important clause referred to the rules governing meetings of shareholders, not directors. It is the shareholders who ultimately control the fate of a company. The shareholders can overrule directors’ and officers’ actions taken or not taken. This clause said:

  A Quorum for transaction of business at any meeting of shareholders is present if there are at least two persons present in person or by proxy holding at least 90% of the shares entitled to vote at the meeting. No meeting shall continue with the transaction of business in the absence of a quorum.

  In other words, in order for a meeting of the shareholders to decide on M&S business, only two people were required, one representing the U of T, one representing Random House. The way I read this, after Doug Pepper became President and Publisher of M&S, representing the U of T on the board of directors, he and one other representative of Random House could hold a meeting of the shareholders in the Random House offices without Avie Bennett being present. This explained how Avie Bennett could have been kept out of the loop until the last minute after Random House decided it wanted to acquire 100% of the M&S shares. Yet Bennett must have understood that such a day could come because this bylaw had been passed by M&S when it was under Bennett’s complete control. It was signed by Doug Gibson, as president of M&S on June 8, 2000, one week after Bennett’s lawyer wrote his letter to the Department of Canadian Heritage asking for a Letter of Opinion, and the same day a telephone meeting was held by the members of the U of T’s Business Board during which the terms of the gift were first outlined. It was adopted two weeks before the Board approved the gift, three weeks before the new M&S came into existence.

  What difference did it make? In effect, after this bylaw was adopted by the amalgamated M&S on July 1, 2004, the takeover of M&S by Random House, a foreign entity, was final and complete—confirming Avie Bennett and Doug Gibson’s recollections—long before the University’s shares were actually transferred.

  I turned back to the amendment to the Unanimous Shareholder Agreement adopted on April Fool’s Day of 2004. It was signed by John Neale for Random House, Avie Bennett for First Plazas, Douglas Pepper for McClelland & Stewart, and Catherine Riggall, on behalf of the University of Toronto’s Governing Council.

  Why Catherine Riggall? I wondered. Riggall had just been appointed interim Vice-President, Business Affairs six weeks before, filling in for Felix Chee who had moved on to another assignment within the University. In January, 2004, Chee had been appointed the CEO of the University’s Asset Management Corporation, though he remained a director of M&S.324 At that point, Riggall had only worked at the University for two years and in another department, so she must not have had much knowledge of the M&S file325 and her confirmation in Chee’s old job was by no means assured. A search committee had been struck to find a new Vice-President, Business Affairs.326 Why would an interim official sign such an amendment on behalf of the Governing Council? It arose out of a decision to postpone asking Random House or First Plazas to buy its M&S shares for $5 million: the gift had produced nothing for the University, so that decision must have been taken with some care. I would have expected the Governing Council’s Chairman and Secretary, or the President, to sign. The President was certainly available. The Governing Council held a meeting on March 29, 2004, only three days earlier, and the President had been present.327 So far as I could tell from the Council minutes, if this amendment had been shown to the Governing Council, it was done in camera and there was no resolution. I could find nothing about it on the public record.

  Which made me ask: who was the President of U of T at the time?

  It was Robert Birgeneau. Thanks to Birgeneau, the University of Toronto’s administration was then in turmoil. Its Provost, lured from Michigan to help President Birgeneau make the U of T into a more diverse and research-driven school, had quit in early February, just before President Birgeneau presented his plan to elevate the University to a higher place in the world.328 The Governing Council replaced the Provost with an interim official, Vivek Goel, and set out to find a new number two.329 Rumours soon began to circulate that President Birgeneau was seeking a job elsewhere, too. These rumours surfaced in the San Francisco Chronicle, the Varsity, and then in the Globe and Mail in July.330 By then, President Birgeneau had interviewed for the position of Chancellor of the University of California, Berkeley, though he’d insisted on a seven-year term when he took the job at the U of T in 2000. By the end of July, 2004, Birgeneau had taken that California job. By then, too, both the Chairman of the Governing Council and the Vice-Chairman were about to step down.331

  The Honourable Frank Iacobucci, who had just retired from the Supreme Court of Canada, and had served as Dean of Law and Provost at the U of T, was appointed interim President at a special meeting of the Governing Council held in August.332 Iacobucci became Senior Counsel at Torys the following month. He had also just been appointed to the Torstar board. (The following spring it was announced that Iacobucci would replace John Evans as Chairman of the Board of Torstar where Iacobucci’s former gold medal law student and good friend, Robert Prichard, was still President and CEO.)333

  Had Riggall signed this amendment because someone told her to? Who? How could I find out? She had not responded to my attempts to interview her, nor had Felix Chee, John Neale, or Brad Martin. Doug Gibson and Arlene Perly Rae had said they knew nothing about this ‘put.’ I emailed Iacobucci through his assistant at Torys. I wanted to know if he’d been informed of the decision to move back the ‘put’ for three years.

  A week later, Iacobucci called back. When my associate asked if she could tell me who was calling, he told her to say “Frank.” (It’s not every day a former Supreme Court Justice calls back using his first name to identify himself.) He told me he certainly knew of Avie Bennett’s gift. Like Prichard, he called it “a great act of generosity.” I told him I’d seen a legal opinion that referred to the ‘put,’ and had read the amendment that put it off until 2008. I asked if he had been made aware of that.

  He said he had been briefed on the agreements and on the ‘put’ at some point. But the amendment “never came to me when I was interim President,” he said. Then he asked me how I had come to see a legal opinion, since legal opinions are covered by solicitor-client privilege.

  Through a FIPPA, I said. Robert Prichard suggested I should file one.

  By then I was pretty sure I’d found the pattern of a familiar mind at work. Timing is everything in business: Avie Bennett, a master of business timing, would have understood early in 2004 that upheaval in the University’s administration presented an opportunity to arrange matters to suit First Plazas and Random House. Neither would have wanted to pay the U of T $5 million if they could avoid it. Besides, a federal election was coming at the end of June, 2004. If the University called that ‘put’ on schedule in July 2005, Random House would have had to go to the govern
ment to get permission to acquire the U of T’s shares, and that permission might have been denied by a new Paul Martin minority government. That Martin would only win a minority had been predicted by pollsters since the Liberal Sponsorship Scandal began to unfurl in front of Mr. Justice Gomery in 2003. Even if Martin wanted to say yes to the sale, it might have been too dangerous politically. And if his government said no, then Bennett would have been forced to spend $5 million himself to buy U of T’s shares, while Random House got stuck with unpaid debt. Worst of all, control of M&S would have landed back in Bennett’s lap. His exit would become no exit, which would engender huge embarrassment all around.

  And so, the amendment had been agreed to more than a year before it was needed, just after Doug Gibson was moved sideways in favour of Doug Pepper, a novice in the affairs of M&S. If there had been a vote on the M&S board about this extension, Bennett and Neale could have tweaked its outcome without difficulty, but since Perly Rae could not remember having heard the word ‘put,’ ever, it is likely that the amendment was simply agreed to between the shareholders—Neale and Riggall. (If you read this book, Ms. Riggall, please tell me who asked you to sign the amendment for the Governing Council. I’m dying to know.)

  But this still left me with the question—why, after agreeing to this extension, had the University still failed to exercise the ‘put’ in 2008?

  I ploughed through the financial documents the U of T had included in the package, hoping to find some answer there. But I was disappointed. First, the University had not given me a single complete financial statement. It had handed me instead one non-consolidated statement of income and retained earnings, one statement of operations and retained earnings (deficit), three statements of operations and deficit, and a draft—labelled number seven—of one financial statement for the year ended December 31, 2005, the most recent information in the envelope. Only one statement carried the imprimatur of an accounting firm—Price Waterhouse Coopers. The rest had no author at all.

  I realized after going through these documents that I simply did not understand enough about the publishing business to make sense of them. I needed to show them to experts. But several numbers did jump out. For one thing, in the report detailing revenues for the last half of 2000, net sales had been $8 million, providing net income of $200,000. Oddly, Doug Gibson had thought net sales for the whole year were only about $5 million, yet if these figures were correct, they may have been about three times higher. The other documents showed that for each year after 2000, there were losses. In the draft financial statement for the year ending December 31, 2005, loans made by Random House to M&S had risen to $10,639,928 (a figure not referred to in Helen Choy’s write-down memo of the following year. She had referred only to a shareholder deficit of $3 million). Yet Arlene Perly Rae said she had no recollection of deficits or debts in the millions and Gibson had been shocked to hear that the debt reached $16 million by the time Random House took possession of the U of T’s shares. Apparently, by October, 2005, these debts had been officially registered and secured by the assets of M&S, including, among other things, all its contracts and intellectual property—the backlist.334

  I went downtown and got a copy of that debt registration. I wanted to see if the debt figure registered was the same as the debt actually owed. The registration was dated September 27, 2005, but no dollar amount was listed. When I complained to the clerk, I was told that that information did not need to be filed. Even if it had been filed originally, there was no record of it any longer. The whole file had been erased when the debt registration expired on the 27th of September, 2012.

  16

  Stoddart’s Story

  I decided to show the M&S financial documents to someone who would understand them: Jack Stoddart. He was the former owner of General Publishing, Stoddart Publishing, General Distribution Services, Macfarlane, Walter & Ross, not to mention Boston Mills and House of Anansi, etc. He had agreed to meet. I hadn’t seen Stoddart for several years, so I wasn’t certain that the man who stood in front of the concierge’s desk in the appointed place at the appointed time was actually him.

  We’d last met about ten years before at a Christmas party given by a mutual friend, a party full of writers and editors for newspapers and magazines and books, people who made their livings by telling Canadian stories. Most in that room were reflexive Canadian nationalists. Most were inclined to believe that the world needs more Canada, and that Canada will not survive if Canadians don’t tell our own stories. Most of us had benefited from government support, either from the rules mandating Canadian ownership and control of publishing companies and newspapers, the grants and tax credits meant to encourage such endeavours, or direct grants for our own works.

  The party was held not long after Jack Stoddart’s publishing and distribution businesses collapsed into receivership/bankruptcy at the behest of his main creditor, Scotiabank (formerly the Bank of Nova Scotia).335 As Stoddart moved around the room that night, he’d stirred currents of anger, and wavelets of sympathy. Those with royalties outstanding or books that had no home were not kindly disposed. Those unhurt were more sympathetic. He was no longer seen as a hero of Canadian publishing though he, like Bennett (and so many others in this story) had been honoured as an Officer of the Order of Canada, elevated to that status in 1999 for his great contributions. Public failure changes the way people see us and there are few failures more public than bankruptcy. Avie Bennett understood that better than most.

  But we all should have been sympathetic because Stoddart had worked hard for the public good with a brave heart for a long time. Stoddart had lost a business started by his father, along with all his personal investment in it. He’d advocated for all the other Canadian independent publishers, serving for three terms as President of the Association of Canadian Publishers. He’d lobbied key players in the federal government (Sheila Copps, Herb Gray, and Paul Martin) to introduce a federal tax credit system like the one that funds the making of movies and television. He’d thought it would encourage Canadians to invest in publishing. He’d distributed large independents and small ones including the small literary outfits banded together as the Literary Press Group. He’d published, or helped publish, or helped finance, many important non-fiction books, which explained us to ourselves. He’d invested in or owned most of the leading independent publishers at one point or another, including Douglas & McIntyre, House of Anansi, Boston Mills, Key Porter, Macleod, Musson, New Press, Macfarlane, Walter & Ross, and Cormorant Books. In some companies, he owned a minority interest and got a board seat. In the case of Macfarlane, Walter & Ross, which he’d financed and distributed for the principals (Jan Walter, Gary Ross and John Macfarlane), he’d owned 51%. At a certain point, his total revenues were about $100 million a year, but at the end, General Distribution Services owed $16,983,460.16 that it was unable to pay to creditors and General Publishing Co. Limited was $20,357,590.94 in the hole. General Distribution Services and General Publishing Co. Ltd’s bankruptcies came close to taking down the whole shaky edifice of independent Canadian publishing. The lists of the unsecured creditors covered page after page of small type. The secured creditors included Bank of Nova Scotia, which alone was owed $14 million.336 When such a thriving industry is ended by the court, it is a scarring, life-altering experience for everyone.

  Stoddart got into trouble in that dark period between 2000 and 2002 when Bennett handed off M&S, and Chapters withheld payments to distributors and publishers for up to 160 days and then merged, under the terms ordered by the Competition Tribunal, with Indigo. Distributors had to pay their publisher clients within 60 days, so Stoddart’s distribution company needed a $22 million line of credit. He’d found an American bank, Finova, that was willing to lend on receivables instead of the Canadian practice of banking on assets. But then Finova went bankrupt. Berkshire (along with a company called Leucadia)337 bought its assets and decided to get rid of its Canadian clients. Stoddart had to find anot
her bank fast, but no Canadian bank wanted him. He was over-leveraged and overreliant on a government sanctioned monopsony, the Indigo-Chapters merged entity. In his capacity as President of the ACP, Stoddart had been prevailed upon to support that merger, and the ACP had done so.338 At a certain point, he told me, he called Heather Reisman to say how bad it would look if Indigo caused his companies to go under. The Bank of Nova Scotia became his banker. But then the Bank took fright as Indigo sent back palette after palette of books. The bank hired Deloitte & Touche Inc. to take a hard look at his business.339

  As Reisman told the Standing Committee on Canadian Heritage, Chapters’ warehouse/distribution/wholesale system, which she took over, was a disaster. This disaster was soon transferred to distributors: returned books came flooding back into the General Distribution warehouse. They had come into it first on consignment, as the property of their publishers: but as soon as Chapters or Indigo had placed an order for them, the books became the booksellers’ property—unless returned. Due to Indigo’s interpretation of the start date of the Competition Tribunal’s mandated Code of Conduct, returns suddenly went up three times higher than normal and this was so badly handled that whole palettes of books were returned to the General Distribution warehouse that had never been distributed by General Distribution. (One such palette contained 40 unopened boxes of Jonathan Franzen’s The Connections, a HarperCollins book.) Soon, no one was sure what anybody’s real receivables were.