Why we took a stand for Corus minority shareholders

A few weeks back, Catalyst Capital Group Inc publicly opposed Corus Entertainment Inc’s acquisition of Shaw Media. The story was important primarily because of the issues it raised for Canadian capital markets and also because of its news value.

Why did Catalyst oppose the transaction and persuade others to do so? First, we were concerned about the process that we asserted was unfair and its implications for future transactions. Second, we believed the transaction price was too high, potentially jeopardizing Corus’s medium-to long-term health. Third, we said minority shareholders were deprived of the economic benefits the Shaw family and advisers unfairly steered to themselves. That is why we pursued actions regarding fairness and integrity, even though we held a profitable position in Corus.

While Catalyst is Canada’s second-largest independent private equity fund, we intentionally shun the spotlight. We have made our reputation for world-class returns via active distressed investing. Although somewhat esoteric, distressed investing is critical to the efficiency of capital markets and especially corporate credit markets. Our philosophy is to “buy what we can build.”

The intrinsically adversarial nature of what we do makes us forceful in requiring that all market participants play by the rules and makes us disciplined in our valuations while focused on an asset’s strategic value. Our job is to rehabilitate insolvent companies, restore jobs, provide needed liquidity in a difficult part of the credit markets and deliver other public benefits. The same commitment has inspired our philanthropy, including Catalyst’s most recent $10-million program to improve insolvency and restructuring education, including at Canadian universities.

This discipline must apply in related-party transactions, such as Corus-Shaw, in this case due to the Shaw family’s control of both companies, its multiple voting shares, and what we say is its disproportionate economic and strategic interest in the seller. Catalyst knows the Shaw Media assets well, as we had sold them to Shaw. Since then, performance and regulatory changes have reduced their value. Our position is that not only is the price excessive, but the disclosure was also horribly inadequate, the process problematic and the deal structure unfair, all making a mockery of the shareholders’ vote.

Furthermore, we say the Shaw family’s unique gains – financial and otherwise – were not properly disclosed, nor shared equally with minority shareholders, and worst of all, the Shaws and their advisers intentionally avoided, without disclosing, the mergers and acquisitions best practice of a third-party auction to objectively confirm the company’s fair value.

The valuations and fairness opinions from Shaw and related parties’ paid advisers relied on the vendor’s projections, but we raised concerns about our belief that the advisers also had serious inadequately managed conflicts. We believe that Royal Bank of Canada’s engagement was specifically structured to maximize RBC’s compensation by maximizing the price paid by Corus – its client, to whom it owes a legal duty to minimize the price. We believe this is akin to the Delaware Supreme Court’s recent ruling against RBC for more than US$76-million in damages for aiding and abetting a breach of fiduciary duty by the Rural/Metro board in a similar transaction.

Our concern is that this deal and process, including the adviser’s behaviour, show how Canada has fallen behind the United States in the regulation of capital market transactions. This is particularly bad for minority investors.

Catalyst’s concerns were shared by other large minority shareholders and validated by leading academics. For example, Anita Anand, a University of Toronto law professor and expert in shareholder protection, who has no relationship to Catalyst, wrote to the Ontario Securities Commission to allege that Corus did not properly disclose benefits that may accrue to the Shaw family. She called it “a stark omission” that “arguably constitutes a misrepresentation” and could be “in violation of the disclosure requirements.”

The market will not address the adequacy of process and disclosure, or its threat to our capital markets. The Ontario Securities Commission vice-chair commented that Catalyst’s efforts had “cleansed” Corus’s disclosures. However, the true responsibility for disclosure lies with the company – not with minority shareholders. This is not an intellectually defensible position under a “closed” system. In the U.S., this principle has been long upheld by the courts.

Ultimately, the capital markets will establish who was right about the price paid for Shaw Media and the sustainability of Corus’s borrowings. It’s worth noting that Catalyst’s concerns appear to have been confirmed by the downgrade of Corus by both debt and equity analysts. Catalyst will take its 20-per-cent gross profit (over 173 per cent annualized) on its stake in Corus. Unfortunately, we believe there is a high probability that Corus will be a distressed company in the future. We genuinely hope we are wrong.

For Catalyst, the Corus-Shaw transaction represented an intersection of opportunity and responsibility. We took a stand not because it would make us popular or incrementally improve our returns, but because we believe it was the right thing to do – for our investors, and for the integrity of Canadian capital markets. Not only would more effective governance protect minority shareholders, but it would also enhance value for everyone. And Canada needs to evolve in this area if we expect to have a “world-class” capital market system.

Newton Glassman is the founder, managing partner and acts as CEO of Catalyst Capital Group Inc. He wrote this article in collaboration with Gabriel de Alba, a Catalyst managing director and partner, and Jim Riley, a Catalyst managing director and COO.

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