Monday, October 30, 2006
Published in Magazine:
Sunday, April 01, 2007
Mr. Justice John Ground of the Ontario Superior Court of Justice dismissed an application on October 30, 2006, which was brought by New York-based hedge fund Greenlight Capital and contained allegations of oppressive conduct of respondents relating to the business affairs of MI Developments (MID) and of its affiliate Magna Entertainment Corporation: Greenlight Capital Inc. v. Frank Stronach et al.,  O.J. No. 4353 (S.C.J.).
Greenlight Capital invested in MID, a company that had been spun out of Magna International in August 2003. MID owns real estate that is leased to Magna entities, among others, and also holds a controlling interest in Magna Entertainment Corp. (MEC). MEC owns and operates horse racing and gaming facilities. Both MID and MEC have dual-class share structures composed of single and multiple-voting shares. Greenlight held 10 per cent of the single-vote Class A shares of MID. The majority of the multiple-voting Class B shares were owned by a holding company controlled by a Stronach family trust.
MID grew its real estate business in 2004 and 2005, but it also engaged in transactions related to MEC. MID convened a special committee of its board of directors to consider and assess such transactions. Greenlight complained about these transactions and instead proposed that MEC be spun out and MID be converted into a real estate investment trust. After Greenlight's proposals were defeated by the Stronach Trust in a vote of MID's shareholders, Greenlight sought an oppression remedy under s. 248 of the OBCA. Greenlight alleged that Stronach had unduly influenced MID and used it to fund his personal plans for MEC, the special committee lacked independence, and MID's corporate governance practices were poor.
Justice Ground dismissed Greenlight's application, finding no evidence of undue influence by Stronach personally on MID regarding MEC to the detriment of minority shareholders. As a director, he had, in fact, scrupulously abstained from voting on the proposed transactions, after declaring his interest. It was not improper for the Stronach Trust to vote down the Greenlight proposals where (as appeared to be the case here) there was an honest belief that they were not in the best interests of the corporation or shareholders generally. The special committee was found to be truly independent, and both the special committee and MID's board had acted independently, arriving at their decisions based on their own business judgment and appropriate outside advice.
Greenlight's contention that MID's decision to pursue racing and gaming investments was a marked departure from its stated industrial and commercial real estate business strategy and the reasonable expectations of its shareholders—and was therefore oppressive—was also rejected. On the evidence, MID had not acted contrary to any of its public statements or published business plans, and had never stated that it would not invest in racing and gaming assets.
Justice Ground also found that the creation of a special committee to examine the proposed transactions did fall within reasonable shareholder expectations, and that these expectations were “inextricably intertwined” with the business judgment rule. The fact that the proposed transactions were recommended by the special committee and approved by the board with the proper exercise of their business judgment was crucial to the determination that MID had not diverted its core business strategy beyond the reasonable expectations of minority shareholders. Further, Greenlight bought its Class A shares knowing that there was a dual class voting structure and that the Stronach Trust controlled the Class B shares (and therefore the direction of the company). The implementation of the Greenlight proposals could not have been within Greenlight's reasonable expectations. The decision is under appeal by Greenlight.
Greenlight was represented by McCarthy Tétrault LLP with a team comprised of Paul Steep, Rene Sorrell and Jeff Feiner. Frank Stronach was represented by Peter Howard, Eliot Kolers, Shanin Lott and Ed Waitzer of Stikeman Elliott LLP.
MID's counsel was Richard Crofts and Doug Nathanson of MID and Davies Ward Phillips & Vineberg LLP with a team comprised of Kent Thomson, James Doris, Sean Campbell and Vincent Mercier. Special committee counsel were Ben Zarnett, Tom Friedland, Rebecca Burrows and Jonathan Lampe of Goodmans LLP.