BUSINESS

A CAUTIOUS VICTORY

A SURPRISING BACKROOM ACCORD AVOIDED REFERENCE TO SOUTHAM MINORITY STOCKHOLDERS

JOHN DeMONT October 3 1988
BUSINESS

A CAUTIOUS VICTORY

A SURPRISING BACKROOM ACCORD AVOIDED REFERENCE TO SOUTHAM MINORITY STOCKHOLDERS

JOHN DeMONT October 3 1988

A CAUTIOUS VICTORY

BUSINESS

A SURPRISING BACKROOM ACCORD AVOIDED REFERENCE TO SOUTHAM MINORITY STOCKHOLDERS

Shareholders criticized the deal as a clubby corporate move to snub investors. Concerned about a takeover bid in 1985, communications giant Southam Inc. struck a $222-million agreement with Torstar Corp., publisher of The Toronto Star, making it its largest shareholder and almost eliminating any possibility that Southam would fall into a rival’s hands. Company officers sealed the bargain without the approval of either the Toronto Stock Exchange (TSE) or Southam’s shareholders. Then, after a series of hearings in 1986, the Ontario Securities Commission (OSC) suspended the stock-trading rights of both companies’ directors for six months—but refused to let shareholders vote on the issue. And, last week, many investors expressed anger after Southam and Torstar reached a lastminute arrangement with the federal government that did not involve the shareholders.

Last week’s agreement leaves the 1985 share exchange intact but modifies a number of the key terms of the agreement. As a result, Southam, which publishes 15 daily newspapers in Canada, could become a takeover candidate in less than two years. Officials for Southam and Torstar say that the settlement, if accepted by the courts, clears them from minority shareholders’ charges that they acted in bad faith when making the deal. But some shareholders, including such institutional investors as Montreal investment manager Stephen Jarislowsky, say that they gain little from the out-of-court settlement. And some investment industry officials say that they are concerned the government’s decision not to continue the case is a blow to individual shareholders. Said Henry Knowles, president of United Funds Management Ltd. and a former OSC chairman: “This decision is apt to be interpreted by the general public to mean that those that belong to the privileged class are treated differently than the average investor.”

Following the death of Southam chief executive Gordon Fisher in August, 1985, rumors surfaced that a mystery buyer— thought to be either Paul Desmarais’s Power Corp. of Canada, Conrad Black’s Hollinger Inc. or George Mann’s Unicorp Canada

Corp.—was accumulating Southam shares.

Searching for protection against a hostile takeover, Southam turned to Torstar. The companies agreed to a complex exchange of newly issued treasury shares, which ultimately gave Southam a 30-per-cent nonvoting interest in Torstar. In return, Torstar got 22.4 per cent of Southam. With Torstar and more

than 200 members of the Southam family holding nearly 45 per cent of Southam’s 64 million voting shares, the pact effectively made Southam takeover-proof. Torstar also agreed to a clause that prevented it from increasing its stake in Southam until August, 1995.

But because the two companies made the arrangement without consulting either Southam’s minority shareholders or the TSE, exchange officials complained and the OSC launched a series of hearings. Throughout, Torstar and Southam said they had not sought TSE approval because they had been concerned the details of the protective share-exchange pact would reach the potential corporate raider. But the OSC declared that the action by Southam and Torstar had amounted to “an unacceptable arrogation to directors of unlimited power to do with a company as they deem appropriate,” and suspended the stock trading privileges of the 23 directors of both firms.

After a lengthy review of the 1985 events, Frederick Sparling, the director of the corporations branch of the federal department of consumer and corporate affairs, decided to launch a 1987 action on behalf of the minority shareholders. The share exchange, some investors said, prevented them from profiting on an increase in the price of Southam shares, which would have occurred if a takeover had moved ahead. In fact, the protective pact was blamed when Southam share prices fell from $17.75 the day before the exchange to $14.50 three days later.

But last week, only days before the trial was set to begin, officials from the companies and Sparling reached a tentative agreement. Although the new deal leaves the share exchange intact, it calls for the 10-year standstill agreement between Southam and Torstar to end on June 30, 1990, rather than Aug. 26, 1995. And it also ends Torstar’s obligation to support Southam nominees for election to the Southam board of directors and the Southam family’s commitment to vote as a group. Members of the Southam family group also agreed to pay Southam $1.25 million in connection with options they received to buy Southam shares from Torstar. Said John Craig, Southam’s senior vice-president of finance: “The settlement vindicates the companies and confirms that the board was entitled to perform the share exchange.”

Still, Jarislowsky, for one, said that he was not certain why the government, with what seemed to be a strong case, decided to settle so quickly. For his part, Sparling said that his

main priority was to change the original to “get the company back into the hands of the shareholders.” The minority shareholders, who hold 35 million of the 64 million Southam voting shares, will have a chance to make their case when the Supreme Court of Ontario reconvenes on Oct. 27 to consider the proposed settlement. But Jarislowsky said last week that he was not sure he would intervene at the hearing because there is little chance of a judge overturning the settlement or even altering it significantly.

Other investment analysts say that the accord means Southam could be a takeover target again within 21 months. Tor star

officials will not say whether they will consider increasing their interest. But some analysts say that Torstar’s balance sheet is strong and that the company is interested in acquisitions. Meanwhile, Southam officials say that they will be working hard to improve their earnings per share—and, consequently, their share prices—in an effort to discourage corporate raiders hunting for companies selling at bargain prices. But a takeover might be welcomed by some minority shareholders who have been waiting a long time to cash in on their Southam shares.

JOHN DeMONT with JOHN DALY in Toronto

JOHN DALY