Is this any way to run a railroad? The courts will decide
ALAST AIR DOWJanuary91978
Is this any way to run a railroad? The courts will decide
Few Canadians have heard of the Ontario and Quebec Railway Company, even though, for the past 90 years or so, many if not most of the people traveling by train in the country’s busiest transportation corridor—between Montreal and Windsor, Ont.—have been traveling on the O & Q. Shareholders are scarce at its annual meetings, because there’s seldom been much to talk about. The Ontario and Quebec Railway Company has never reported any earnings, and its balance sheet has remained the same year after year, listing the company’s sole asset as: “Properties at cost: road and equipment—$19,502,591.”
In the past few years, and more resoundingly in the past three months, the initials O&Q have come to be associated with one of the fastest-rising common stocks that has ever traded on Canadian markets and accompanied by a court case as intricate and no less fascinating than a Gordian knot. The stakes are huge—perhaps in the hundreds of millions of dollars—and the outcome could alter the profile of downtown Toronto, Montreal and other Canadian cities.
The almost ghostlike identity of the o&Q is due to a series of unusual leases which, starting in 1884, gave the Canadian Pacific Railway the right, in perpetuity, to run the o&Q railway almost as if it were its own. Ever since, traveling on the o&Q has looked and felt just like traveling on the CPR. That arrangement suited shareholders of o&Q until just a few years ago, when some of them began to wonder whether Canadian Pacific was getting the best of the bargain. True, Canadian Pacific has been entitled “to enjoy all the franchises and powers” of o&Q for all time, and parliament had passed laws to confirm that understanding. But in those days, the days of Louis Riel and the Saskatchewan Rebellion, the Ontario and Quebec Railway Company was just a railway. Had it not become something much more than that in the intervening years, something infinitely more valuable?
Some time early this year, Mr. Justice Sam Hughes of the Ontario Supreme Court will decide whether all the shareholders of o&Q, and not just Canadian Pacific, should benefit directly from the enormous growth in value of O&Q’S assets. Hughes is presiding over a case rare in Canadian courtroom annals, a case that has attracted some of the country’s highestpriced legal minds and has stoked stock market speculation so that the price of o&Q shares rose from $600 to $1,700 in the last three months of 1977. At issue is ownership
of some of the choicest urban real estate in Canada, land which used to be the site of O&Q’S stations, freight houses and the like. Whatever the outcome, the o&Q case will be one of the most expensive in the history of Canadian civil litigation, and the combatants will pay legal fees of truly boxcar proportions.
The o&Q case is interesting not only for its finely constructed legal arguments but because the company had its origins in Canada’s sometimes murky transportation history, those critical years following Confederation, when there was an explosion of railway charters and when Sir John A. Macdonald was trying to juggle his com-
mitment to a Pacific railroad with the support he needed from the British-controlled Grand Trunk Railway.
The Ontario and Quebec Railway Company was incorporated in 1871, 10 years before the birth of Canadian Pacific, but its charter lay dormant during that depression decade. The company was revived in 1881 by a group led by Toronto financier Ed-
ward B. Osler and including, conspicuously, George Stephen, president of Canadian Pacific. While the CPR was maintaining the pretense that its ambitions lay only in the west, the Ontario and Quebec Railway went about building and acquiring a 600-mile network of roadbed and track in the country’s highly populated central region. This consolidated railway line—which ran from Montreal, through Ottawa, Peterborough, Toronto and, eventually, to the Detroit River—promised CPR escape from the continuing threat of insolvency and at the same time presented an opportunity to settle some scores with the Grand Trunk Railway, which held a virtual monopoly in Ontario and Quebec.
The leases that gave Canadian Pacific control over the o&Q had a once-and-forall quality about them, and they certainly provided for a very intimate relationship between the two companies. No one quibbled with these rather special arrangements until after it had occurred to Canadian Pacific—and more especially other shareholders of o&q—that this was more than a railroad, it was potentially a real estate colossus.
For 45 days almost until the eve of Christmas, five ranks of lawyers arrayed themselves before Mr. Justice Hughes, sometimes speculating about the intent of 19th-century legislation, more often addressing contemporary issues such as the responsibilities of corporate directors. There was an easy informality shared by the usually punctilious Hughes, perhaps in part because of his avocation as an amateur historian. (His grandfather, Sir Sam Hughes, was militia minister during World War I.)
It is impossible to do more than guess at the aggregate fees paid to lawyers in the O&Q case. J. F. (Jake) Howard, recently appointed counsel to the federal government’s inquiry into the RCMP, ensconced his team in a room in the nearby Hotel Toronto, the better to avoid distractions and to concentrate on the 398 exhibits which measure more than two feet in height. Of
course J. J. Robinette was there, acting for Canadian Pacific on behalf of the nominal defendants, directors of the O&Q. Aptly, a decade ago, Robinette spent a year and more arguing the only case in Canadian legal history that has cost clients, and the public, more than the o&Q litigation—the vain attempt by Leitch Gold Mines Ltd. to win ownership of the rich metals mine near Timmins, Ont., discovered by Texasgulf Inc.
Joe Pope is a precise and fastidious Toronto investment dealer who has always had an abiding interest in railroads, and more particularly railroad stocks and bonds. In the early 1960s, as often as not, he was the only non-management shareholder who turned up at the annual meetings of o&Q. As much as anything else, he subjected himself to the ritual of annual meetings because few others did. “It was my love of formality, my love of propriety.” As he learned more about the company and its relationship to Canadian Pacific, he says, “I became curiouser and curiouser.” Being a stockbroker, Pope has a special reverence for common stocks, and as time went on he began to wonder whether owners of the common shares of o&Q were not entitled to something more than a yearly dividend of six dollars.
Pope, along with trustees of the T. Eaton Co. Ltd. pension fund, is asking Mr. Justice Hughes to make Canadian Pacific accountable to the other shareholders of O&Q. In the alternative, the plaintiffs are asking damages in excess of $500 million. The suit is on behalf of all O&Q shareholders. Pope won’t reveal who’s financing his legal costs. “That’s private,” he says. But the T. Eaton Co. has issued a notice to its pensioners that the company, and not the pension fund, will bear the legal fees.
In cavernous Room 6 of Toronto’s Federal Court Building, Canadian Pacific argued last month that the 1880 leases gave it
a proprietary interest in the Ontario and Quebec Railway Company, and that as long as it continued to pay dividends to o&Q shareholders and meet its other obligations under the leases, it is entitled to behave much as if it owned the O&Q.
That argument might never have been tested were it not for the fact that some of O&Q’S real estate holdings have acquired a value that couldn’t have been contemplated 90 years ago. The O&Q lands include most of the site of Windsor Station in Montreal and the downtown site for Toronto’s proposed new Massey Hall. And
1 some of these o&Q properties have been £ transferred in the last few years to MaraS thon Realty Co. Ltd., Canadian Pacific’s
2 wholly owned real estate subsidiary. The £ location of the old CPR station in midtown js Toronto, now occupied by a government I liquor store among other tenants, was to be 8 the setting for a $40-million commercial-
residential development until Marathon indefinitely postponed its plans in 1974 because of the O&Q lawsuit.
When Canadian Pacific caused the transfer of hundreds of O&Q properties to its subsidiary Marathon, it relied on an 1891 act of parliament that empowered CPR to sell lands “surplus” to railway requirements as long as the proceeds of such sales were applied to improvements related to the railway. Canadian Pacific says it has done just that, and is prepared to go on doing so. The plaintiffs say that any such quid pro quo is illusory, because the CPR was obliged in any event to maintain the o&Q rail line. Argued Jake Howard: “Canadian Pacific had no real power to lease lands used for non-rail purposes, CPR acquired the use of these assets for a railroad and for no other purpose.”
If that is true—and much depends on Hughes’s interpretation of the leases— then the minority shareholders would get much more force from their argument that the directors of o&Q, who were all nominees of Canadian Pacific, should have consulted the minority shareholders when they were dealing in o&Q properties. Directors, after all, are accountable in normal circumstances to all shareholders.
One blue-suited spectator among the sparse audience, which averaged three, or at most four, a day, wondered who would share the spoils if Mr. Justice Hughes were to find entirely in favor of the plaintiffs. “What I want to know,” he said, “is who gets the spoils?” It’s not quite that simple: if the ruling goes in favor of the plaintiffs, the beneficiaries would be all the shareholders of Ontario and Quebec Railway Company, and the booty—if that’s the word—would go into the treasury of the company. That way, all shareholders would benefit. And the irony of it all just might be that Canadian Pacific, only a small shareholder until the 1960s and now the owner of 16,000 shares, or about 80%, of O&Q, is the biggest shareholder by far of the Ontario and Quebec Railway Company.
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