by Elaine Dewar
“Heritage Canada,” he replied. “I went to Ottawa myself. I think the issue was the sale of 25% to Random House.”
Again, I said I didn’t understand why that would be. Why would Ottawa have been concerned with this at all? Random House wasn’t buying control. And why did he go? He was the president of a Canadian institution getting the gift, he wasn’t the seller of the shares. And by the way, I added, there is no record of any application having been made, and Sheila Copps didn’t remember it coming to her.
“This was 15 years ago,” he muttered, annoyed.
Yes, I said, and I’m sorry to ask you about it now because I know if you asked me about something I did 15 years ago I’d be at sea. But please try to recall.
“I have a clear memory of discussions in Ottawa to ensure U of T had control though Random House had control or influence on parts of the business. I do a lot with Heritage Canada. I dealt with them and Penguin Canada. I may be conflating.”
Penguin Canada? What about Penguin Canada?
And then I remembered. He had been appointed Chairman of a brand new board of Penguin Canada three years before its merger with Random House.258 The Investment Canada Act required Penguin and Random House to get permission from the Minister of Canadian Heritage to merge their Canadian subsidiaries after the parents merged. Such permission was not guaranteed. So he seemed to be telling me he had helped escort two publishing companies through the thickets of the Department of Canadian Heritage’s Book Policy and the Investment Canada Act. Yet when he became chairman of Penguin’s board, he’d made much of being a Canadian nationalist. He had told John Barber of the Globe and Mail that “he sees his role as keeping the Maple Leaf flying with the company’s new internationalized operations.”259 That flag did not fly long. Later, when I wrote to Penguin Random House to inquire as to whether the independent Penguin Canada board still exists, no one bothered to reply.
I told him that the minutes of one of the University’s Governing Council meetings had referred to an undertaking to be made by the University to the Director of Investigations, Investment Canada. I explained that when I’d followed that up, I had been assured by officials that there had never been such a person as the Director of Investigations and there was nothing on file about any undertaking given by University of Toronto in this matter.
He listened to me carefully. He said he was pretty sure that the discussions he had were with Heritage Canada, and the issue had been this: though Random House had influence, U of T had control. The Investment Canada Act and the Income Tax Act are concerned with the difference between influence (a large say in how a company operates) versus control (the right by the majority shareholder to appoint directors who will have complete sway over corporate decisions). In other words, “that it was not a transfer of Avie indirectly to Random House.”
He seemed to be saying that he’d assured someone in Ottawa that the gift/sale was not the first step in a salami strategy devised to get around the Investment Canada Act.
How do I check this? I asked.
He suggested that I speak with Avie’s lawyer, but he could not remember the lawyer’s name. He seemed a bit uncertain about whether he went to Ottawa by himself or with others.
“I could be wrong,” he said. “Avie may well have come with me.”
I said I still didn’t understand why anyone had talked to Ottawa at all.
The issue, the question, was about control, he said again. On paper it looked as if U of T had control, but the bureaucrats wanted to know, was that real? The answer was yes, Prichard told me. On its face the gift/sale “does not require approval. But Heritage wanted to know that the ownership of U of T was real.”
And of course it didn’t hurt that he, the President of U of T, was the man giving the assurances. It would have helped too that he could say that he and John Evans, a former President of U of T, would be on the M&S board helping to safeguard U of T’s control.
And yet it was also specified that Random House would run the business. “We were clear we did not intend to invest in the business if a drain on the University’s resources,” he said.
Do you remember any of the terms of the agreement, how long the University undertook to hold on to the shares? I asked.
No, he did not recall any terms. But there had been no intention to receive the shares and then sell them. “But things change,” he continued. “Retail is difficult, ebooks are difficult, consolidation is a powerful force…”
How would I be able to find out what the terms were? I asked.
“Look at the contract,” he said.
How would I do that?
“Was it public?”
No, I said, it was not.
“If not, make a freedom of information request.”
I almost snickered. The federal government had long been notorious for failing to respond to such requests for months, even years, and then producing pages of blacked out material, along with an invitation to file an appeal. Besides, universities are not covered by the federal Access to Information Act.
File an access request with whom? I asked.
Ontario’s universities have been brought under the aegis of the provincial Freedom of Information and Protection of Privacy Act, known as FIPPA, he said. He advised me to make a provincial filing.
By the way, I asked. What did the University get out of this?
There was a pause. “The University’s interest was the promotion of writers published by M&S, like Margaret Atwood…” he said. Like Michael Ondaatje, he added.
I thought that was an odd response. Neither author needed help to promote their work. Neither would have been denied publication if control of M&S had not been given to U of T. Any publisher would have been thrilled to get them as they had been on bestseller lists and selling internationally for many years.
So, to reiterate, I said, how was the value of the M&S shares established?
“I believe the Random House sale was the valuation, a market transaction for a percentage of the company.”
And how large was the tax receipt?
“I don’t know the value of the tax receipt issued.”
Who would it have been issued by?
“By the Department of Development. The lawyers and accountants there would insist it conform to the CRA [Canada Revenue Agency] requirements.” And, Prichard said, all of this would have been handled correctly. There could never be a hint or suggestion that the valuation was inappropriate. It was a “very public transaction much commented on by many interests.”
I told him I found it amazing that I could find no mention of the subsequent transfer of the University’s shares to Random House in the University’s annual reports. I told him I’d been trying to reach Dr. Naylor, who was President of the University at that time, in order to ask about it. Did he have advice on that?
He said Dr. Naylor might not talk about it and I should write instead to the current president, Dr. Meric Gertler. And by the way, he added, he still considered Avie Bennett’s gift to the U of T to be a “wonderfully generous act of philanthropy and Canadian nationalism.” He was still “happy to be a part of that. It was a second way that U of T could be involved in Canadian publishing. [My] view hasn’t changed.”
Did you know that the M&S shares were transferred to Random House at a cost of zero? I asked him. M&S owned the best Canadian backlist in the country, the best part of the Canadian literary canon, which should have had spectacular value. So how could it have been worth nothing?
“I can’t help on that,” he said, after another pause. “Write to Meric Gertler and inquire as to who to speak to. He may answer. Or not.”
9
The Gift that Kept Not Giving
I hung up the phone, checked over my notes, threw up my hands.
How on earth could I find out what had really happened when two of the people who did t
he deed—both of whom enjoyed spectacular business experience and public honours—contradicted each other? Was the tax receipt issued by U of T based on the sale of 25% of M&S to Random House? Or was it based on Avie Bennett’s say so?
Who had spoken with Heritage Canada, Prichard or Bennett? And if one or both had done so, why did Sheila Copps, the Minister at the time, have no recollection of it coming before her? Why did the University’s records refer to an undertaking given to an office that never existed in a Department with no record of any undertaking asked for or given? It still made little sense to me that the federal government would have been asked for its opinion. The University of Toronto, already the owner of one Canadian publishing company, had been given 75% of another. The Investment Canada Act does not forbid the transfer of control of Canadian publishing companies to other Canadian entities. Yet Prichard’s statement on that point had been instructive. He said he’d gone to Ottawa to give assurances that the University would have actual control of M&S, whereas Random House would have influence. These are lawyer words for concepts deeply embedded in the Income Tax Act as well as the Investment Canada Act. In a general way, actual control means that a shareholder has the ability to enforce decisions to direct a company’s operations. Influence is a more complex notion: it means that a minority shareholder has sufficient clout, gained by means other than the votes attached to its shares, to steer decisions made by a company. These words have been construed and stretched in myriad ways to suit all sorts of creative business arrangements dreamed up by lawyers earning $750 an hour, and their practical implications have been parsed differently according to particular facts in particular cases heard by the courts.
Bennett had said the tax credit receipt was important to him, but not vital, and the sale of shares to Random House had nothing to do with its value. However, I was willing to bet that the ins and outs of tax law, as well as the rules of the Investment Canada Act, had played a lead role in how his gift was made.
A visit to the Canada Revenue Agency website (followed by help from its media people) made it clear (as clear as the mud-like prose of the Income Tax Act permits) that when the gift of a private company’s shares is made to a registered charity, if those shares are sold by that charity to some other party within 60 months of receiving the gift, the CRA can revisit the original estimate of their value.260 If they are sold for less than the tax credit receipted value, the CRA can revise that tax credit downwards, affecting the tax situation of the original donor. On the other hand, nobody even has to file a report to the CRA if a charity sells its shares after 60 months (and for less than $50). So I was willing to bet that the University had been required by some provision in the Unanimous Shareholder Agreement to hold its M&S shares for 60 months plus one day. Bennett had said he stayed on the M&S board for the glamour and to make sure that promises were kept. He’d assured me that U of T and Random House had lived up to their obligations. I was willing to bet that some of those obligations had to do with how long U of T had to hold its shares.
But there was even more intriguing information on the CRA website that suggested my lawyer friend who’d wondered if such a gift could be made, had a point. While it has always been legal to give a charity the non-trading shares of a private company, there can be a problem when it comes to issuing a tax credit receipt. A share issued by a private company is called a non-qualifying security. A tax credit receipt may only be issued by a charity for a non-qualifying security if that security is also what is called an “excepted” gift. To be an excepted gift, all of a list of legal criteria must be met. A key requirement is that the donor (in this case, First Plazas Inc., controlled by Avie Bennett) must be at arm’s length to the donee (University of Toronto) and all its directors and officers. There have been many legal cases concerning the meaning of arm’s length. But: since Bennett, who controlled First Plazas, the donor, had been a member of the Governing Council of U of T, and of its Business Board, and represented U of T on the new M&S board, and Prichard was an officer of U of T when the gift was accepted and became President Emeritus as well as a representative of U of T on the new M&S board, from the Income Tax Act point of view, the gift of M&S shares may not have met the arm’s length criteria sufficiently to be “excepted.”
The CRA website’s information on court decisions regarding the meaning of arm’s length shed light on Random House’s role too. The courts have held that parties are not dealing at arms’ length if: there is a common mind that directs the bargaining for both parties to a transaction; the parties to a transaction act in concert without separate interests; there is de facto control.261 De facto control essentially means control acquired in some manner not related to a shareholder’s voting power. De facto control has been defined by Canadian courts in the following way: “excessive or constant advantage, authority or influence can constitute de facto control (that is effective without legal control). This situation can bring parties into a non-arm’s-length relationship. It is important to note that this advantage need not be exercised to be a factor; the mere ability to do so is sufficient.” As a lawyer for the Department of Canadian Heritage, named Jeffrey Richstone, had explained to the Standing Committee on Canadian Heritage, the Department is very alert to the issue of de facto control, which can be measured by many things, including things like financial support.262
As Prichard had made clear, the U of T took no role in the business of M&S after the gift was made. As U of T did not operate M&S, and Random House did, it seemed to me that Random House may have acquired de facto control from the time it purchased its minority interest in M&S.
And there was an even more basic problem with the gift: I could see how Bennett benefited from this arrangement (he got a tax credit receipt and an exit plan while retaining association with a “glamour” business). I could see how Random House benefited (it may have acquired de facto control of former competitors). Yet in spite of Prichard’s claim that control of M&S was in the University’s interest, I couldn’t see how the University, the donee that issued the tax credit receipt, had actually benefited. Apparently, no dividends had been paid to U of T while it owned the M&S shares. It got nothing for its pains when it transferred those shares to Random House in 2011.
And most puzzling of all: why couldn’t these two men, whose brilliant careers were built on their business skills, remember the terms, or the value of the gift? Prichard had run a university that winkled great gobs of money from people with very deep pockets. Every big donor must have thought long and hard about how much money to give to U of T, and had probably paid for a lot of expensive advice on how to arrange things so as to maximize the ensuing tax credit. Woe to any university president who failed to remember exactly how much each big donor had given, and to treat that donor accordingly.
Prichard’s proven skills in this area were so obvious, and the public profile that came from leading Canada’s best university so high, that he had been elected as a director of many major publicly traded companies. Directors of large companies are paid large sums to oversee shareholders’ interests, to carefully watch what is spent and what is earned. Onex pays its directors an annual retainer of $240,000 US and expects them to own a significant number of shares. Prichard owns subordinate voting shares and deferred share units of Onex amounting to a value—as of May, 2016—of $7,582,502. (By comparison, Heather Reisman’s shares had a value of $105,997,207 and Gerald Schwartz’s shares were worth $1,056,273,307.)263 It was hard to believe that Prichard could not remember what those M&S shares were worth. Getting a donation of 75% of the shares of a private company was unusual: surely he would remember their stated value?
I was quite sure Bennett remembered how much he received in the form of a tax credit receipt in exchange for his generosity. By 2000, the normal exit strategy for the owners of Canadian publishing businesses did not include sizable tax credits. It involved a fire sale or bankruptcy. And besides, though he had made many other very generous gifts totalling man
y millions to many charitable institutions during the previous 17 years, it was this gift that had distinguished him sufficiently to raise him to the position of Companion in the Order of Canada, the highest level on offer. He was elevated on October 30, 2003. He was by then serving his second term as Chancellor of York University, and had been awarded an honourary doctorate from York, but this was the prick over the i as a Danish friend of mine would say. “A bold and unprecedented act of largesse” is how the Governor General Adrienne Clarkson characterized his gift to U of T. She went on to say: “This carefully crafted endowment will ensure that the company remains proudly Canadian and all income that the University receives will be used to secure a vibrant future for our artistic community.”264
Bennett had said the size of this receipt was none of my business. But since the gift itself had been made public, a major public honour had been bestowed, a tax credit receipt issued, and millions in grants paid out subsequently, I could not see why that value ought to remain hidden. So I asked Maclean’s Magazine to assign me to the story. I explained that the two leading figures who had run M&S had told me on the record that actual control passed to Random House of Canada in 2004–2005, yet M&S had continued to apply for and receive grants until 2011—grants that require Canadian control of the company asking for them. In other words, millions of taxpayers’ dollars had been paid out that possibly should not have been. I wanted to find out why. I had no idea—then—that the government had waved a magic wand over its own rules and made them disappear.
Too many unanswered questions, was the business editor’s reply.
Well yes, I said, but isn’t that what journalists are supposed to do, answer the unanswered questions?
I decided to pursue them myself and publish what I learned on my blog.
I kept badgering the communications people at U of T. Finally, in order to explain to me why the University had received nothing for its shares from Random House, I was given a letter written on July 4, 2011, by Catherine Riggall, then the Vice-president of Business Affairs for U of T, to Missy Marston-Shmelzer, Director of Cultural Sector Investment Review at Canadian Heritage. This letter asked for permission for U of T to transfer its shares to Random House. It had kicked off the favourable Ministerial review of the transaction under the Investment Canada Act.