Stronach ruling expected Monday

TORONTO -- LAW REPORTER

An Ontario judge was wrong to approve Magna International Inc.'s proposed billion-dollar buyout for founder Frank Stronach, lawyers for the country's largest pension funds argued on Thursday, calling the deal unfair and overpriced.

The controversial deal is now in the hands of a three-judge panel of the Ontario Divisional Court. The panel's Mr. Justice Peter Cumming said Magna and its critics should expect a ruling on Monday, after the markets close - a day before the deal's Aug. 31 deadline.

The Canada Pension Plan Investment Board (CPPIB) and other major pension funds have waged a campaign against the plan, saying it sets an expensive precedent for other controlling shareholders in companies with dual-class share structures.

They also argue the deal is unfair because the main benefit for common shareholders is inherently speculative: a promised sustained boost in Magna's share price.

In an Aug. 17 decision, Mr. Justice Herman Wilton-Siegel of the Ontario Superior Court declared the transaction fair and balanced, citing the fact that Magna's common shareholders voted 75 per cent in favour. He also cited the stock market's apparent positive reaction to the plan.

It was this ruling that the pension funds challenged in Divisional Court on Thursday. Lawyer Benjamin Zarnett, acting for the CPPIB, argued that Judge Wilton-Siegel was wrong to avoid objectively determining whether the deal's benefits are offset by its price tag.

The decision "could have been the same even if Magna was paying $8-billion for Mr. Stronach's controlling shares, instead of $800-million," Mr. Zarnett said.

He argued the judge was obligated by the 2008 Supreme Court of Canada decision in the BCE case to go beyond the shareholder vote and actually evaluate the costs and benefits of the deal, since it would be imposed on a minority of shareholders who disagree.

"This is a purchase of control by class A shareholders, but not negotiated by them, and, more importantly, crammed down on every one who didn't vote for it," Mr. Zarnett told the court. "This is forced on people who aren't for it. And that's where the court steps in."

Lawyer Jim Douglas, acting for the Ontario Teachers' Pension Plan Board and two other pension funds, dismissed the reliance of Judge Siegel and Magna on the endorsement of the deal by financial analysts, calling them nothing more than "palm readers."

"I go to my doctor and I ask for a prediction and a guarantee as to my future health and he will not give it to me," Mr. Douglas said, comparing his doctor to CIBC, which refused to give Magna an opinion on the deal's fairness because of its speculative nature.

"I go to a palm reader ... and I get it," he said. "They always tell me I am going to lead a long and healthy life. That's what analysts are. They're the palm readers of the financial services world."

Taking aim at comments by Peter Howard, a lawyer for the Stronach Trust, that Mr. Stronach's controlling shares were like a Van Gogh painting, Mr. Douglas said it was clear Magna's other shareholders were overpaying for this particular piece of art.

"If you're in the market for Van Goghs, you're overpaying for this Van Gogh," he said.

Magna lawyer Mark Gelowitz argued that Judge Wilton-Siegel was not obligated to dig into the financial details of the deal to assess its fairness. And he pointed out that not even his opponents disputed that the deal would benefit Magna.

"The opposition is about price, pure and simple," Mr. Gelowitz said.

He argued the judge was right to put a lot of weight on the shareholder vote: "When purchasers are asked, this is the price, do you want to buy it? The most important thing is their answer."

Magna's plan, announced in May, would see Mr. Stronach receive $300-million cash and nine million new class A shares in Magna, in return for his multiple voting class B shares. Based on the class A share price the day before the deal was announced, the payout is a 1,800-per-cent premium for Mr. Stronach's controlling shares, with a total value of $863-million.

Mr. Stronach would remain chairman, and also receive an estimated $120-million in consulting fees over the next four years.

Aurora, Ont.-based Magna, an auto parts giant founded by Mr. Stronach in 1957, has vowed to "vigorously defend" its deal, which was approved by shareholders after the pension funds first challenged it before the Ontario Securities Commission. The OSC delayed the vote and ordered Magna to provide more information about the deal to shareholders.

Magna (MG.A)

Close: $80.17, down $1.01