When major Canadian companies with large numbers of shareholders disappear, their corporate autopsies usually raise more questions than they answer. Never has this been more true than for Royal Trustco Ltd., a blue-chip financial institution that underwent a traumatic reorganization in the spring of 1993. Now, its former minority shareholders have initiated legal action to probe its downfall.
Raymond Budd, a former civil servant who lost a bundle ($250,000) in Royal Trustco stock holdings, now heads a litigation committee of 1,200 disgruntled public shareholders. The committee is demanding a “full airing of the circumstances that led to Royal Trustco’s collapse,” according to Budd. In a court notice of application to launch a classaction suit, the minority shareholders allege that the company didn’t fulfil its disclosure obligations to public investors because they were not granted access to its books in the same intimate way as was the company’s controlling shareholder, the Hees-Edper group, then headed by Peter Bronfman. Former officials of Royal Trustco have yet to formally reply to the allegations.
For the shareholders, much of their case rests on a statement by Michael Comelissen, then Royal Trustco’s CEO. On the Sept. 12, 1992, edition of Newsworld’s daily Business World, Comelissen said: “The difference between Royal Tmstco and some other companies is that we started working on the restructuring that was necessary three years ago. That job’s been completed. The positive effects of those actions will shine through the company’s financial results in the next couple of years. I’ve always accepted responsibility for bringing the company from the storm back to safe harbor. And I’ve done that. The company is on an extremely strong financial footing.” Three months later, Royal Tmstco had gone from a $227-million loss (reported on Sept. 30) for the first three quarters of 1992, to an $852million loss for the entire year. By this time,
The events around the Royal Trustco crisis, particularly the reason for its former CEO’s inconsistent statements, deserve to be aired
Comelissen was no longer the boss and James Miller, his successor, publicly declared that Royal Tmstco was unsalvageable.
This was not just a baffling corporate disaster. It could have had serious national consequences. One of the oldest and largest tmst companies in the country, Royal Trustco owned and managed assets of $140 billion, and if Royal Tmst, its operating subsidiary, hadn’t eventually been bought by the Royal Bank, the country’s entire financial system would have been severely shaken. But in the windup process, Royal Trustco’s minority shareholders claim they lost $1 billion.
The Royal Tmstco dossier is full of serious allegations. In his 1991 annual report, for example, Comelissen claimed that his firm had “planned and achieved an improvement in the quality of our deposit base by reducing levels of wholesale funding.” Yet, in his annual report a year later, he acknowledged that “access to the wholesale debt market has been effectively denied for the past two years, due to the corporation’s poor financial performance and weak credit ratings.”
What bothers the minority shareholders most, says Budd, is their suspicion that the Hees-Edper group didn’t play fair with them. They allege in their court documents that the Bronfman managers, who dominated Royal’s board, deliberately withheld a $l-billion standby facility they had pledged to the tmst company, and they further allege that they withdrew earnings through dividends into the group’s corporate kitties long after Royal was clearly in crisis.
These are serious charges which people in the Hees-Edper group privately—and emphatically—deny. Meanwhile, Senator Trevor Eyton, who as chairman of Brascan Ltd., then and now, is the group’s most credible voice, vigorously defends what happened. “These minority shareholders lost some money, and they want us to finance a giant fishing expedition,” he told me last week. “I’d be very surprised if any judge would look at that. All their suggestions of impropriety were previously made and previously disregarded by an Ontario court.”
Eyton’s version of the story is that it was the negative publicity about Royal Tmstco’s operating practices that caused many of the problems. “There was a feeding frenzy by the media at the time,” he maintains. ‘Two or three writers decided that we had been successful for a long time and took it on themselves to write alarming articles about Royal Tmstco on an almost daily basis. They engendered a tremendous sense of unease, even though the company was in the middle of the pack in terms of the values of its real estate investments—not at the top, but certainly not at the bottom.”
He adds: “We kept our heads down and thought we could ride out the storm with a change of leadership. We offered another $200 million in equity and sold off the American operation, but the crisis just grew. What killed us was when the Office of the Superintendent of Financial Institutions issued the urgent demand in February, 1993, that all banks and trust companies provide his department with details of their exposure to the Edper/Brascan group. That confirmed the fears and sense of crisis built up by the press, which redoubled its frenzy. At that point we could have poured any amount into Royal Tmstco and it would have disappeared the next day.”
As deposits continued to gush out, the only option remaining was to sell Royal Tmst to a large financial institution able to maintain its cross-country chain of branches. That was what happened, and the ironic ending of the unhappy story is that Royal Tmstco today has regained its former reputation. Still, the events around the Royal Tmstco crisis, particularly the reason for Comelissen’s inconsistent statements, deserve to be aired. It’s one thing for controlling shareholders to act in what they consider to be the national interest, to prevent becoming a burden to the federal treasury. But it’s quite another issue not to keep your minority shareholders accurately informed of what’s going on.
Only the courts can issue a final verdict. In terms of revealing the inside workings of big business, a trial could turn into the O.J. Simpson case of corporate Canada.
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