by Elaine Dewar
This was the agreement that transferred to the new M&S most of the rights and ongoing business carried on by First Plazas Inc. under the names McClelland & Stewart Inc., Tundra Books Inc., Tundra Books of New York, and Macfarlane, Walter & Ross Ltd. This agreement noted that First Plazas was not selling to the new M&S: The Canadian Encyclopedia, the agency business and “the shares held by Vendor [First Plazas Inc.] in Canbook Distribution Corp,” as well as something called First University Corporation Ltd., refundable taxes, and “Vendor’s rights to royalties and to Book Publishing Industry Development Program payments such rights to be set forth in a transitional services agreement…” etc.301
I flipped right to the clause labelled Purchase Price. It said: “The purchase price for the Vendor Assets is the fair market value thereof as of the date hereof which the parties have determined to be $22,250,000.” The parties meant the parties to this Agreement, First Plazas Inc.and the new M&S. Exactly 9,999 shares were to be issued by the new M&S to First Plazas Inc. with an “attributed value of $21,250,000” on closing, “such shares to be issued as fully paid and non-assessable.” The Purchaser (new M&S) would also hand over a promissory note to First Plazas Inc. to pay $1,000,000302 on the first anniversary of this Agreement, with interest payable at 6% on that date.
This may be what an accountant could call a fair market transaction, but you and I might take a different view as Avie Bennett was on both sides of the deal. This Agreement recorded how one very brilliant and creative businessman transferred assets between his right hand and his left. The right hand, First Plazas Inc., said these assets were worth $22,250,000. The left hand, the new M&S responded: absolutely, thanks very much, that is exactly what these assets are worth, please take these 9,999 shares in exchange as if they are worth $21,250,000 and keep them in a safe place until you sell some and give the rest away!
This was the weird meat from which the value of the new M&S was made—weird, as in magical. Capitalism can be magical: those who truly understand their business, or have excellent tax lawyers, are able to distill value out of very thin air. It was this Agreement that created the framework for the gift to the U of T and sale to Random House, which followed a few minutes later. It positioned the salami for the knife.
There were of course implications regarding the taxes that would be owed by First Plazas Inc. as soon as this transaction was complete, even though $21,500,00 had not actually found its way to First Plazas Inc.’s bank account. Since First Plazas had not paid $22 million to acquire M&S in 1986 (First Plazas had paid about $1 million to the other debenture holders, and about the same again to Jack McClelland for his shares of the old M&S), a lot of capital gains tax would be owed. Unless…
This is where an interesting aspect of the Income Tax Act came in. Further down in the agreement, it said:
The Vendor and Purchaser agree to report the purchase price of the Vendor Assets in any returns required to be filed under the Income Tax Act and other taxation statutes in accordance with this Section 2.3 and Sections 8.1 and 8.2.
These sections of the Agreement referred to what is called an election under Section 85.1 of the Income Tax Act. When assets are transferred in return for shares between related parties (for example, when a new holding company is created so that the originating company can avoid paying a lot of tax on a capital gain), an election permits the buyer and seller to agree on a price which is not the same as fair market value and to be taxed accordingly. It can be higher than fair market value, or lower, in this case the parties agreed to an election “whereby the aggregate proceeds of the disposition to the Vendor of the Vendor Assets and the aggregate cost thereof to the Purchaser shall, to the extent required by the Vendor, be the aggregate adjusted cost base of the Vendor Assets to the Vendor for the purposes of the Act.” How much was recorded for tax purposes? I have no idea.
This Agreement was signed by Avie Bennett for First Plazas Inc. It was signed for the new M&S by Bennett’s employee, Doug Gibson, who had just been appointed by Bennett as the President of new M&S. Though Gibson had denied knowing what Random House paid for its 25%, or the amount of Avie Bennett’s tax credit, he certainly knew what the company was worth at the time of these transactions—$22,250,000. His signature was right there, on the last page of this Agreement.
The fair market value of the new M&S, as set by Bennett at $22,250,000, was high for a Canadian publishing company shorn of its agency business. But the only real money that changed hands in this deal came from Random House—the $5.3 million paid to First Plazas Inc. for 25% of the new M&S shares, plus the $1 million it would loan to the new M&S so it could pay that sum to First Plazas one year later. It was hard to say how much—if any—real money First Plazas would receive thanks to the tax credit receipt for $15,900,000. That amount would be determined according to a formula related to the income of First Plazas. It would either reduce First Plazas Inc.’s tax owing, or, if no tax was owed, a cheque would be forthcoming from the Canada Revenue Agency.
In other words: though the claimed value of the new M&S was $22,250,000, Random House acquired control of a competitor for $5.3 million in cash plus $1 million loaned to the new M&S. What Bennett got due to the tax credit receipt remained hidden in the murky deeps of Canada’s tax rules.
I wrote again to Howard Jones and asked again for any notes or emails about the University’s decision to transfer its shares to Random House in 2011, any responses from the federal government, and any minutes showing that the Governing Council’s Business Board had decided to hand over the University’s shares. Since he had not said such documents did not exist, I had to assume they did and I said so.
He wrote back to say the University had decided to send me some more emails as well as the actual Share Purchase Agreement with Random House.
This whole process had begun to feel like a striptease. If I whistled and hooted, a glove came off and was flung toward me. If I hollered and stomped, off came the blouse…
But this time, when I opened the new documents, I was sure the show was over, that the University had stripped to its skin.
The Share Purchase Agreement between the U of T’s Governing Council, McClelland & Stewart, and Random House had absolutely nothing stamped on it declaring it to be exempt from disclosure. The Agreement was dated December 30, 2011. By then, the political situation in Ottawa had shifted once more. The Conservative government had been re-elected with a small majority the previous May. The Minister of Canadian Heritage had allowed the U of T to give its McClelland & Stewart shares to Random House for $1.
An opening background section of the Agreement recounted the pertinent facts. It spelled out that the buyer (Random House) and the Company (McClelland & Stewart) were parties to an Administrative Services and Financial Support Agreement dated July 2, 2002, and amended on April 1, 2004. That was a surprise: the University had only produced the original version of this Agreement, which was dated July 1, 2000. Clearly, the Agreement had been renegotiated twice. What had changed? But I forgot that question as soon as I got to Point E in this Agreement. It was so shocking, I dropped the papers on the floor.
It said:
As of November 30, 2011, the Company was in arrears to the Buyer under the Administrative Services Agreement for approximately $16,274,170 (including current accounts) which debt is secured by a General Security Agreement dated October 25, 2005, granted by the Company in favour of the Buyer and registered under the Personal Property Security Act (file no: 619229727, reg. no: 20050927 1511 1590 4705).303
How could that debt have grown so huge?
M&S must have done extremely poorly over the previous 11 years, in spite of the millions in public money it received as grants and tax credits, in spite of the synergies that were supposed to result from having marketing, administration, distribution, and finance taken over by the much larger Random House of Canada. Bennett had asserted that these services offered by Random House would be cheaper tha
n the ones M&S had incurred when operating independently. While its revenues must certainly have dropped, and dropped again—it had published far fewer books each year after Macfarlane, Walter & Ross was shut down—its costs should have gone down as well. Doug Gibson had said there was no large debt owing when he was moved sideways in 2004. So could it have been incurred in the subsequent years? I did a rough calculation: if I added the debt of $16,274,170 to what Random House paid for its 25% of the company—$5,300,000 plus a loan of $1 million for that promissory note—it came out to $22, 574,170, about $374,000 more than the “fair market value” First Plazas had attributed to the new M&S in 2000.
I noted too that Random House first registered this debt on October 25, 2005, a few months after the ‘put’ was extended for three years. From that point on, as a secured creditor, Random House had the right to put M&S into bankruptcy if Random House failed to cause M&S to pay it whatever M&S owed. Clearly Random House had decided shortly after the Conservatives won a majority in 2011 that the time had come to threaten to exercise that right.
How did I know that? The Agreement said so. “In light of the financial difficulties of the Company, and in lieu of exercising its rights as a secured creditor at this time, the Buyer proposed to buy the Seller’s shares with a view to continuing the operation of the company as a division of the Buyer.”304
In other words, Random House had demanded the U of T’s shares in exchange for not bankrupting M&S. How would the U of T’s stewardship look if the iconic Canadian publishing company it apparently controlled went bankrupt under its watch? No doubt this appalling debt had also enabled Random House to get government consent to “the acquisition of control of McClelland & Stewart Ltd… in accordance with the Investment Canada Act…”305
No wonder no Canadian buyer had been found. What prospective buyer would have been stupid enough to pay $16 million to a competitor, Random House, as it took possession of M&S, which it would have to do under the terms of the Unanimous Shareholder Agreement?
Attached as a schedule to this Agreement were copies of a letter to Missy Marston-Shmelzer of Canadian Heritage from Brad Martin, Random House CEO. It was dated October 11, 2011, and confirmed that Random House would live up to the undertakings listed on the next page in return for “the transfer of control of M&S to RHC,” (control Random House already had). This note had produced a letter of permission on November 14 from the Minister of Canadian Heritage, James Moore. It was of course marked Protected-Inv. Act, though Moore merely asserted in it that he was satisfied after review that “your investment is likely to be of net benefit to Canada.” After giving his approval, Moore went on to say: “I would like to take this opportunity to welcome your decision to invest in Canada and to express the hope that your investment will be successful.” He could have been writing about any generic investment in any company, not the takeover of the iconic McClelland & Stewart.
The Agreement showed how the 11-year-old arrangement had ended. Avie Bennett, Trina McQueen, Judith Wolfson, Catherine Riggall, and Douglas Pepper (a U of T director as well as being an officer of McClelland & Stewart and its subsidiaries), had all resigned from the M&S board and the boards of its subsidiaries. Thus, the Agreement that transferred the shares to Random House from the University was signed by the Random House directors, Brad Martin and Douglas Foot, on behalf of both Random House and McClelland & Stewart. Oddly, Catherine Riggall, the U of T’s Vice-President of Business Affairs, had signed on behalf of the Governing Council of the U of T. Usually the Chairman and the Secretary sign for the Council. More on that, later.
The Random House undertakings were also attached and were interesting. They had a five-year term ending December 30, 2016. Random House promised the government that it would: provide a written report on performance when asked by Heritage Canada; keep proper books, accounts and records at the “principal place of business of the M&S business division (the “Canadian Business”) of Random House. It promised to “maintain current staffing levels at the Canadian Business.” It promised to offer M&S employees Random House’s enhanced employment benefits. While M&S would be amalgamated with Random House, “it will be operated as a separate business division within RHC. The M&S name and the names of its imprints will be maintained, the M&S business division will continue to produce separate financial statements, and the executives in the M&S business will have the same level of autonomy as the executives of other RHC business divisions, namely the Doubleday Canada Publishing Group and the Knopf Random Canada Publishing Group.” In order to “ensure support for diverse Canadian authors, it would continue to support the existing imprints of the Canadian Business, including: McClelland & Stewart, Emblem Editions, Tundra Books, Fenn/McClelland & Stewart, New Canadian Library and Signal.” It would also ensure “that the Canadian Business maintains an active publishing list, commensurate with the current list, continue to promote the backlists of Canadian titles published by RHC and the Canadian Business, commensurate with backlist sales in 2010.” There were also guarantees about treating Canadian-based suppliers fairly and that “a majority of the management and staff positions in the Canadian Business will be held by Canadians. To ensure autonomy of the Canadian Business, the Canadian Business will designate a representative to participate as a full member of the RHC Executive Committee. This representative shall be an individual Canadian employed in a senior management role at the Canadian Business.”
The rest of the undertakings were more general and related to things RHC would do for itself in the normal course of business. It promised to digitize M&S works, to continue to publish and seek out Canadian authors, etc., to continue to publish the winners of the Journey Prize and to publish two books of poetry a year, to keep up the internship program and also to establish a new annual lecture in conjunction with the University of Toronto on cultural subjects.
And then, at the bottom was a list of what the government was entitled to say about these undertakings, if, in its wisdom, it needed to justify its approval of this transfer of the University’s shares. It was a short form version of the longer version above. The lecture series was included while the promises about publishing Journey Prize winners and poetry books were not.
One of these undertakings had been abandoned within months of being accepted. For example: Random House promised to operate M&S as a “separate business division within RHC.” Yet M&S was merged with the Doubleday Canada Publishing Group only six months later: Doug Pepper then became Publisher of Signal/ McClelland & Stewart, while Ellen Seligman became M&S Publisher, both reporting to Kristin Cochrane, the new head of the Group (formerly the head of Doubleday).306
At the end of August, 2011, one month after Catherine Riggall wrote to Missy Marston-Shmelzer at Canadian Heritage to say that U of T wanted out of M&S, Avie Bennett had apparently gotten in touch with President David Naylor by phone. He had just learned of the University’s plan to transfer its shares. He objected. He wanted Naylor to make a suggestion about how to arrange things in a different fashion. Howard Jones had sent me a series of internal emails, which resulted from Bennett’s phone call.
Naylor wrote to Catherine Riggall and to Judith Wolfson, another U of T official on the M&S Board, on September 1, 2011.
Dear Cathy and Judith:
Avie Bennett called. As I expected, he felt [words withheld here under section 21 of FIPPA] the way the M&S deal unfolded. I was out of the loop as you know, and commiserated. He shares the view that there are benefits, and I underscored them. However, Avie notes that (a) government grants may not be accessible, so that Canadian content will be diluted, and (b) there will be a reputational hit—i.e. the University will be seen to be selling ‘Canadian family silver.’ I don’t know enough to opine on (a), but I agree on (b). He wondered if a ‘shell’ of some type might be constructed to mutual benefit. I think this is worth considering, and at the very least given that M&S was part of this great man’s life work, please give him a very careful hear
ing on the potential options.
Best wishes
David307
Riggall replied to Naylor, copy to Judith Wolfson, six days later:
I will give Avie a call and see what he has in mind. Judith and I spoke briefly on this and do not hold out great hope that there is a solution. This is the only way to keep the bradnd [sic] alive. Randon [sic] House could just call their loans and pull the plug on M&S, which would definitely be the worst result possible.
Cathy308
To which Naylor replied the next morning as follows:
Thanks Cathy
Avie argued today in a conversation at a Campaign Steering Committee that a ‘shell’ with a structure that gives U of T 51% ownership would maintain the grant and avoid any reputation issues. He does understand the vulnerabilities.
I don’t think he will easily let this go—he seems more sad than angry, but I believe he will not rest until there is a meeting with some of the decision-makers at Random House.
I understand his views.
D.309
This suggestion by Avie Bennett made it clear that he believed Random House was foolish to grab all of the U of T’s shares, that he wanted the situation to continue basically as before. He had certainly understood when he crafted this deal that Random House would eventually become the 100% owner of M&S’s shares. But he seemed to think that Random House didn’t understand its own interests as well as he did, that U of T didn’t understand its public relations peril at all. He seemed to think that if Random House limited itself to 49% ownership, then M&S could still qualify for some grants. M&S would certainly still qualify for Ontario tax credits. In other words, in Bennett’s view, Random House was throwing away its right to continue to milk the cow, and U of T would end up with a public relations black eye.