The case is expected to resolve a fierce struggle for control of a small trust company, Nova Scotia Savings & Loan Co. (NSSL) of Halifax. But although the company is unknown to most Canadians, the trial unfolding in Halifax this month has revealed details of a battle pitting powerful members of the Nova Scotia business establishment against equally influential outsiders. The dispute dates from 1980, when Montreal lumber dealer Leonard Ellen and Moncton lawyer Reuben Cohen unsuccessfully tried to take control of NSSL. Ellen and Cohen already owned a financial empire that includes Halifaxbased Central Trust Co., Canada’s seventh-largest trust company. To oppose them, NSSL management enlisted the help of Halifax Developments Holdings Ltd. (HDHL), controlled by Nova Scotia’s powerful
Sobey and Jodrey families. Now before the Nova Scotia Supreme Court, their battle has been charged with emotion, including allegations and denials of anti-Semitism.
The trial, before Mr. Justice Peter Richard, opened in the high-ceilinged arena of Halifax’s courtroom No. 4 on Sept. 3. Since then, as many as 18 black-robed lawyers, armed with 20 volumes of evidence and acting for 40 plaintiffs and defendants named in five separate legal actions, have squared off almost daily. But last week the battle spilled into a corridor of Halifax’s Law Courts, where Cohen told Maclean's that he thought “redneck ethnic considerations” were behind NSSL’s stubborn resistance to a takeover attempt. Said Cohen: “If my name were Smith or Jones instead of what it is, it would have been a different ball game.” NSSL president and chief executive officer James Radford
dismissed the accusation as “patently ridiculous.”
Lawyers for NSSL have alleged that Cohen and Ellen improperly engaged in what is called a creeping takeover-accumulating shares without publicly announcing a takeover bid for the trust company. But for their part, legal counsel for Cohen and Ellen have argued that NSSL and its Ontario allies—led by Derek Buntain, a vicepresident of Toronto-based securities dealer Merrill Lynch Canada Inc.— went beyond the bounds of reasonable resistance to a takeover attempt.
At the centre of the fight is an extraordinary rule written into NSSL’s federally granted corporate charter. The passage prevents NSSL from directly issuing new shares that would give any stockholder or group of stockholders an interest in the company of 15 per cent or more. And while customary practice is to give stockholders one vote per share, NSSL’s charter prevents any stockholder with 15 per cent or more of existing shares from voting any of their shares.
The battle for the 136-year-old NSSL began in April, 1980, when Cohenand Ellen-controlled Central Trust proposed a merger with the smaller company. The two self-made millionaires, both the sons of Russian Jewish immigrants, have been partners for 35 years. In the 1960s they took control of three small trust companies which were eventually merged to create Central Trust, one of the largest regional financial insti-
tutions in the Maritime provinces.
But in bidding for NSSL, they found themselves facing the combined might of Nova Scotia’s Sobeys and Jodreys. The Sobey family’s two main operating companies, Empire Co. Ltd. and Sobeys Stores Ltd., had combined annual sales last year of $1.7 billion. The main interest of the Jodrey clan is a 17-per-cent stake in $709-million-a-year Crownx Inc., owner of such companies as Crown Life Insurance Co. and nursing home operator Extendicare Health Services Inc.
The two families entered the picture at NSSL after Radford rejected the initial bid from Cohen and Ellen as too low.
In November, 1980, NSSL sold
168.000 newly issued shares to HDHL, a holding company jointly owned by the Sobeys and the Jodreys, for $2.2 million. That transaction gave HDHL a 14.9-per-cent interest in the trust company. NSSL then planned to ask the federal government, through which amendments to the company’s charter must be made, to rescind the 15-per-cent rule. If Ottawa agreed, the company intended to make another
432.000 shares available to HDHL, which would have raised its interest in NSSL to 38.7 per cent. But the Toronto Stock Exchange (TSE) ruled that any issue of new shares beyond the initial 168,000 would require shareholder approval. As a result, in January, 1981, NSSL management dropped the plan.
Then, in 1981 Ellen and Cohen quietly began buying NSSL shares. Last week the trust company’s lawyers argued that Ellen and Cohen were engaged in a creeping takeover because companies they controlled lent money to third parties to purchase large blocks of NSSL shares, which, the lawyers alleged, gave the two men control over more shares than they acknowledged. Ontario securities law states that a takeover bid must be publicly announced once 20 per cent or more of the target firms’ shares have been accumulated.
By June, 1981, Ellen and Cohen had personally bought 14.8 per cent of NSSL’s stock. According to evidence presented at the trial, Ellen wrote to former Royal Bank of Canada director John Coleman on June 10, 1981, offering to cover his costs should he buy and hold NSSL stock. Coleman borrowed $1.2 million and purchased 107,703 shares, a 9.6-per-cent stake, from Atlantic Trust Co. of Canada
Ltd. He later refinanced his loan through Standard Investments Ltd., another Cohen and Ellen firm.
Then, in December, 1982, Joseph Potter, president of Atlantic Trust, and his brother, Daniel, acquired a block of 163,005 NSSL shares also held by Atlantic. The brothers bought the
6.9-per-cent block with a loan obtained from Standard.
On July 13, 1983, Cohen and Ellen filed an offering with the TSE, launching a takeover bid for NSSL. The partners’ personal holding company, Exco Corp. Ltd., already owned 49.5 per cent of NSSL’s shares. The Potter brothers, John Coleman and other parties had all sold their NSSL shares to Exco Corp. Exco then bid $21.50 a share for the remaining NSSL stock.
But NSSL’s top executives, led by Merrill Lynch’s Buntain, who acted as a key financial adviser, moved quickly to block the bid. By July 19 management had formulated a plan to dilute Cohen and Ellen’s holdings to 34.4 per cent from 49.5 per cent by issuing
494,000 new NSSL shares—most of
which would eventually be purchased by HDHL, the firm owned by the Sobeys and Jodreys.
But NSSL faced a dilemma, according to its own rules. It could not sell shares directly to HDHL without pushing that company’s holdings in NSSL beyond the 15-per-cent level cited in the charter. As a result, NSSL strategists developed a plan to grant options on 201,000 shares—the maximum allowed under TSE bylaws—to five NSSL officers, who would in turn immediately sell them to HDHL. Another 293,000—the maximum allowed to be issued without a shareholder vote— would be sold to four parties friendly to HDHL. Most of those shares were later resold to HDHL.
The next day, on July 20, NSSL’s board of directors met to consider the hastily formulated takeover defence. After nearly six hours of heated debate the board unanimously approved the strategy and issued the 494,000 new shares. After exercising their stock options, Radford and four other NSSL officers that same evening sold the 201,000 shares at $23 each to HDHL. Of the 293,000 shares sold to friendly parties, 100,000 were purchased by Extendicare Ltd., later renamed Crownx Inc. Crownx’s chairman, David Hennigar, is also a director of Halifax Developments Ltd., HDHL’S parent.
Then, over several weeks in July and August the rivals raised their bids for the remaining NSSL shares. But when both offers expired in mid-September, HDHL had 51.1 per cent of the trust company, while Cohen and Ellen’s Exco fell short with 47.4 per cent. During last week’s court proceedings, Alan Lenczner, a lawyer for Cohen and Ellen, accused NSSL adviser Buntain of devising a plan to bypass NSSL’s 15per-cent rule. Replied Buntain: “What the company did was legal. What the company did was in the best interests of the shareholders.”
Lawyers last week predicted that there would be four more weeks of testimony and legal arguments, after which it would likely take some time for the judge to resolve the tangle of legal issues. If Judge Richard rules that NSSL management acted improperly when it issued new shares on the evening of July 20, 1983, Cohen and Ellen could end up with about 60 per cent of NSSL. Still, unless the 15-per-cent rule is revoked, they could not vote any of their stock. The same provision prevents HDHL from exercising its sizable stock holding. Indeed, until the fate of that extraordinary clause is decided, control of a venerable Maritime financial institution remains in the control of a determined local management.
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