The empire strikes back
In Canadian business circles, Trevor Eyton, the president and chief executive officer of giant Brascan Ltd., is known for his easygoing style. But in recent
months events have visibly eroded the composure of the man who helps to run the empire created by brothers Peter and Edward Bronfman-a commercial colossus that currently has an estimated $50 billion in assets and control over a clutch of Canada's biggest companies. Increasingly, the usually cool, urbane Eyton is under attack for the methods that he has used to con struct that far-flung conglomerate, and in particular for a number of con troversial transactions involving Brascan's financial and nonfinancial arms. Next week Eyton is to answer a sum mons to appear before the powerful Commons standing committee on fi nance and economics to explain his group's actions, in a climate of mount ing concern over the power and influ ence of the Brascan empire.
Brascan and Eyton, as its well-connected, dynamic chief spokesman, have become the focus of the public debate on a business practice known as selfdealing. That occurs when two companies controlled by a common share-
holder do business together. The practice becomes controversial when a financial institution controlled by a single owner is forced to do business with other companies also owned by the same firm. Such transactions are legal, but they have become the subject of heated debate in the business community and they are one of the chief concerns of the finance committee, which is investigating possible abuses
of corporate concentration. Maclean’s has learned that Bernard Ghert, chief executive officer of the real estate giant Cadillac Fairview Corp. Ltd.—and a critic of corporate concentration—recently gave committee members the names of two leading business figures who he said could provide examples of self-dealing.
Ghert named Richard Thomson, chairman of the Toronto Dominion
Bank, and Austin Taylor, chairman of the Toronto brokerage firm McLeod Young Weir Ltd. Maclean’s has also learned that some of the deals the two men will be asked to discuss with the committee involve Brascan. Last week Taylor confirmed that the committee had attempted to contact him, but he said that he had not yet spoken to any of the MPs. He added that he would have little to tell the committee. Thomson refused to comment on his contacts with the finance com-
mittee or make any statements about Brascan because it is a major client of the bank. He said: “Self-dealing is a problem. We’re all worried about it.” He added that when a conglomerate controls a financial institution, “it’s so tempting” to indulge in self-dealing.
In his office on the 48th floor of the Commerce Court West building in downtown Toronto, the 51-year-old Eyton last week defended the actions of Brascan. He also upheld the activities of its sprawling network of about 50 affiliated companies, including a trust company and a merchant bank. He attacked critics, including some finance committee members, who have taken up a crusade against corporate concentration. “You mustn’t look at somebody and say, ‘You’re bad because you’re big,’ ” said Eyton. “What you’ve got to do is demonstrate harm.”
Eyton added that Canadians have a tendency to be suspicious of companies and people who gain prominence. “Canadians tend to be invidious people,” Eyton said, adding that they “look at somebody and say he’s too rich or he’s too powerful and you’ve got to knock that down.”
Under the leadership of Eyton and executive vice-president and chief operating officer Jack Cockwell, a South African-born accountant, Brascan has stood out as an innovative firm ready to take risks in its search for better profits. In the seven years since Eyton, a Toronto corporate lawyer, first told
the Bronfman brothers that Brascan would make a good acquisition and then engineered the purchase, the firm has grown from a Brazil-based electricity and transportation company with assets of $1 billion to a conglomerate generating $5.8 billion in revenues last year. Thomas Kierans, president of McLeod Young Weir, describes Cockwell as the company’s undisputed “financial genius.”
Cockwell is credited with revolutionizing Bay Street’s use of complicated stock issues that rely on the private placement of preferred shares. One attraction of that new method of financing is that, because the shares are not sold to the general public, the transactions avoid many of the Ontario Securities Commission’s regulations. In many cases the transactions were conducted between Brascan-affiliated
companies. But Brascan companies also often bypassed the major underwriting firms by making the placements through their own subsidiaries.
Executives at traditional underwriting firms agreed that Brascan forced them to take more risks—including buying an entire stock issue from the issuing client and then trying to sell it to investors—in order to earn their commissions. Said Kierans: “Brascan was at the cutting edge of those changes and made a positive impact on the competitiveness and risk-taking of my industry.”
The failure of several major finan-
cial institutions and the now-famous Greymac affair have drawn attention to the ways in which large corporations deal with financial affiliates. In 1983 Greymac Trust Co., owned by Leonard Rosenberg, was at the centre of a web of several transactions among related companies that led to the collapse of three financial institutions. And last year two Alberta-based banks collapsed partly because of high-risk lending—some of it to associates. More recently, the federal government demanded commitments of a strict noself-dealing code before allowing Montreal based Imasco Ltd. to take over Canada Trustco Mortgage Co.
Brascan has diversified interests that range from breweries (John Labatt Ltd.) to mining (Noranda Inc.) and oil and natural gas (Westmin Resources Ltd., Canadian Hunter Exploration Ltd.). At the same time, the group controls some powerful financial services firms, including Royal Trustco Ltd.—Canada’s second-largest trust company—the Continental Bank of Canada, London Life Insurance Co., Wellington Insurance Co. and real estate giant Royal LePage Ltd.
But as Brascan has grown with remarkable success and speed, it has also created antagonism and criticism in some quarters. Members of Brascan’s management team, said Thomas Bradley, a financial analyst with the Toronto investment firm of Richardson Greenshields Ltd., “are certainly nervy; that’s how they built an empire. These guys are the sharpest in the business, and their sheer size means they can do deals within the group more times than not. They have so much scope and control that it has got to raise some questions.”
Three months ago Brascan’s style attracted the attention of the finance committee. Armed with new powers to summon witnesses and determined to investigate self-dealing, the finance committee decided to investigate Brascan. The specific transaction under scrutiny was an initiative undertaken in March by Trilon Financial Corp.—a sprawling Brascan-controlled giant which in turn controls Royal Trustco. Trilon issued 3.4 million shares of common stock at $30 a share. The sale was unusual because half of the issue was placed by Great Lakes Group Inc., a Toronto-based financial service arm of Brascan. Great Lakes then received a $2-million commission for selling the stocks to Trilon’s controlling shareholders—Brascan and the Reichmann family’s Olympia & York Developments Ltd.
The arrangement was legal, but it appeared to ignore the rights of Trilon’s minority shareholders, because funds invested in publicly traded Tri-
Ion had been transferred in the form of a fee to privately owned Great Lakes. A similar transaction took place in April when 10 million Brascan shares priced at $25 were issued, with half of the shares being taken by Great Lakes for resale to Brascan’s parent company, Brascan Holdings Ltd. Great Lakes’ commission for that sale: $5 million.
At the Brascan annual meeting in late April, some shareholders complained openly about the practice. They said that paying fees to one Bronfman company for placing the
stock with a third Bronfman company effectively reduced the potential dividend income available to minority shareholders. Eyton said that the internal financing method enables Brascan to raise money quickly and at the share price it wants. By using Great Lakes, which guarantees that it will buy unsold portions of the issue at the asking price, a Brascan company can issue its shares at a stable and higher price. Eyton told Maclean's: “That’s why we get prices of $24 and $25 a share. The old way, I have no doubt the price would be $21 or $22. And then you tell me who’s been hurt by that.”
Some finance committee members say they are interested in Brascan’s activities because of the firm’s pervasive presence across a broad spectrum. The company’s financial and political reach is reflected in the membership of its board of directors, which this
year added former Alberta premier Peter Lougheed and Toronto financier Conrad Black.
Brascan and its affiliates also have amicable links with Prime Minister Brian Mulroney’s government. In 1984 former industry minister Sinclair Stevens named Eyton to the board of the Canadian Development and Investment Corp. (CDIC). Another Brascan executive, Paul Marshall, the president of Westmin Resources, became the CDlC’s chief executive officer. Those connections caused some concern in the financial community last year
when Brascan’s Noranda Inc. decided to buy a 10-per-cent interest in the Canada Development Corp. The CDC is a holding company in which the federal government owns shares, although it is committed to selling its holdings. Eyton declared that he had no advance knowledge of Noranda’s intentions and that he played no part in arranging the deal. Eyton also pointed out that public service is a tradition at Brascan. His and Marshall’s involvement with CDIC is on a volunteer basis—they act as the traditional “dollar-a-year men.” Eyton was also chairman of the committee that raised private funding for Toronto’s new domed stadium. Said Marshall, whose salary while he is with the CDIC is paid by Westmin: “We’re not trying to run the country. We’re not trying to further our own interest in any way.”
On Bay Street, Kierans is one of the few executives willing to discuss
his disagreements with Brascan. The problems in the Brascan—MYW relationship arose about two years ago when, according to Kierans, the investment broker was dropped as lead underwriter for Brascan-controlled Royal Trustco. More difficulties occurred last year during the hotly contested takeover of Union Enterprises Ltd. by Toronto-based Unicorp Inc. Some Brascan companies had assisted Unicorp in the successful acquisition, which Kierans had actively opposed in his role as adviser to Union.
After the Unicorp takeover, Kierans
said that he and Taylor, MYW’S chairman, met with Eyton and Cockwell to start again with what he called a “fresh slate.” Kierans said that Brascan was not purposely cutting MYW out of its business, but he added that “in all honesty we haven’t seen any great evidence” of an improvement in relations between the two companies. Said Taylor: “I would prefer that we had better relations with Brascan.”
Now, Brascan faces scrutiny by the finance committee and three of its most influential members—chairman Donald Blenkarn, William Attewell and Paul McCrossan, three Ontario Tory MPs. The committee has objected to proposed new regulations for financial institutions contained in a government green paper. Those rules would permit industrial companies to broaden their ownership of financial institutions. As well, the committee strongly objected to the paper’s position that
individuals or companies should be allowed to control trust or insurance firms. Instead, the committee recommended that the government restrict ownership of all large financial institutions, much as it currently restricts ownership in major Canadian banks to 10 per cent by any one shareholder.
The committee first began focusing on self-dealing during hearings in late April into Imasco’s takeover of Canada Trustco Mortgage Co. MPs heard testimony that in 1981 Genstar had arranged deals with a subsidiary, Canada Permanent Mortgage Co., and with a third party, Bank of Montreal Leasing Corp., in which funds in the trust company were indirectly used to benefit the parent’s operations. The committee called on Angus MacNaughton and Ross Turner, the chairman and president of Genstar, to explain.
This week MacNaughton and Turner, as well as present and past officials of the leasing company, will make another appearance to clarify MacNaughton’s earlier testimony. MacNaughton said in April that he did not know of any other deals resembling the 1981 transaction. Since then, Maclean's has learned, the committee claims to have uncovered other similar transactions within Genstar.
When that hearing is completed, the committee will turn to Brascan. Next week it intends to question Eyton, who angered some MPs when he did not show up for a scheduled appearance in April. The committee, which has already questioned a number of other executives of Brascan-affiliated companies, plans to ask Eyton about a transaction involving a subsidiary of London Life Insurance and a subsidiary of cash-poor Noranda.
Brascan has attempted to head off other legislation that threatens to limit its activities. When Ontario’s Liberal government introduced amendments to the provincial Loan and Trust Corporations Act late last year, Royal Trust officials strongly opposed the bill. The legislation would prohibit self-dealing within related companies. And it could force Royal Trust to operate a separate company in Ontario that would not be able to participate in Brascan group deals.
Before the bill was to be tabled in the legislature, a high-powered Brascan delegation appeared unannounced at Premier David Peterson’s office to argue against the measures. A senior Ontario government official said that Peterson was so annoyed by the pressure that he ordered the bill to be introduced the next day—24 hours ahead of schedule.
Meanwhile, representatives from Brascan and Royal Trust have continued to press Ottawa for a speedy intro-
duction of new legislation that would enshrine the right of industrial companies to control financial institutions. If that happens, Ontario would likely have to change its draft amendments to conform to the federal law. But the committee may provide strong opposition to the proposed federal action. Said Attewell: “I am firmer than ever on the idea that prohibiting industrial conglomerates from owning financial institutions is the only way to stop self-dealing.”
Brascan has become the lightning rod for an enormously complex issue. Last week an angry Eyton attacked the “adversarial media” and some “pipsqueaks” who were leading the attack on the company. Westmin’s Marshall also defended
Brascan, stating that companies within the corporate family frequently acted to help one another. He told Maclean's'. “Let’s make one thing very clear. This is basic to our philosophy. I will do business as I have with any member of our group and would prefer to and will attempt to—provided it doesn’t cost me a penny more.”
When the committee turns its attention to the controversial Great Lakes commissions, Eyton will likely argue that all transactions among related companies within the group are sub-
ject to examination by internal business conduct review committees. Made up of outside directors, the committees are designed to ensure that there is no impropriety. But Donald Byers, the retired lawyer who is chairman of Royal Trust’s business conduct review committee, told Maclean's that Brascan itself did not yet have a similar review committee. He added that his own committee could only review proposed transactions if they were referred by an investment review committee on which Eyton and Michael Cornelissen, president of Royal Trust, sit.
Kierans said that the debate has become too emotional. He added: “I’ve never seen it happen that they [Brascan] profited at the expense of the minority.” But he added, “What is being done is defensible, it’s permissible, but I’m not so sure that it’s wise.”
As he prepared to question Eyton, McCrossan said that the committee has no intention of starting a witch-hunt. Said the MP: “No one’s suggesting there’s anything illegal involved in any of these cases. But even the green paper pointed out that there are some gaping loopholes regarding regulation of financial institutions.” But Mervyn Lahn, the chief executive officer of Canada Trust, says that there should be a “complete ban on transactions involving the shares of related companies.”
Eyton himself declared that the spirit of free enterprise will overcome any political objections 9 to Brascan’s methods of ! operation. “We don’t I save souls, we don’t z promise a better tomori row with equality for everybody,” he declared. “If I can sell $250 million worth of shares, it means that I have a record and a reputation and that people are prepared to bet on that.”
Brascan may only have broken some Bay Street conventions, some traditional ways of doing business. And in the end the debate may have less to do with legality than with what Canadians think is the proper conduct for a businessman and a gentleman.