Catalyst questions independence of HBC special committee at OSC hearing

Catalyst questions independence of HBC special committee at OSC hearing


Catalyst Capital Group Inc. spent part of Thursday’s hearing at the Ontario Securities Commission grilling a Hudson’s Bay Co. director about why the department store chain turned down Catalyst’s recent takeover offer.

David Leith, head of the special committee tasked by HBC’s board to review take-private offers, appeared at the OSC Thursday as HBC’s witness in the case. In the two-day hearing, Catalyst is seeking an order to block or stall a takeover deal led by HBC Chairman Richard Baker and his group of shareholders.

In his cross-examination Thursday, Catalyst lawyer Brett Harrison asked Leith to describe the special committee’s refusal to support Catalyst’s bid last month, despite the fact that the private equity firm’s offer of $11 per share was better than the $10.30 currently on offer from the Baker group.

The special committee has maintained that, since the Baker group shareholders refuse to sell their 57 per cent stake, any competing offer is a non-starter.

“So it was out of your hands as to whether Catalyst could prepare a superior proposal?” Harrison asked, suggesting that it was actually the Baker group’s decision to deny Catalyst, not that of the special committee.

“I think I disagree with the comment, ‘Out of your hands,’” Leith said. “Being bound by the terms of a legal agreement (with the Baker group) … should (not) be referred to as, ‘Out of your hands.’”

Harrison interjected: “You’re hands are bound.”

“It’s a matter of nomenclature, I would say,” Leith replied.

“Fair enough,” Harrison said.

In its closing arguments on Thursday, Catalyst argued that HBC didn’t apprise shareholders of crucial details about the deal until a late-night press release last Friday. In that release, HBC updated its official account of how the deal came together with new information about how the special committee waived a standstill provision to allow shareholder Fabric Luxembourg Holdings S.a.r.l. to join the Baker group’s bid.

In closing remarks Thursday, Catalyst lawyer Adam Chisholm said HBC released the extra information late Friday after the proxy advisory Institutional Shareholder Services revealed it first, in a report hours earlier recommending that minority shareholders vote against the Baker offer in a vote next week.

“The form of special committee used in this case is actually in some ways worse than no special committee,” Chisholm said, “because shareholders can be misled into thinking there’s a layer of independence to the process.”

Chisholm also noted that as chairman, Baker was involved in a deal earlier this year to sell its remaining stake in its European real estate joint venture to Signa Holding for $1.5 billion. Two news releases, announcing the Signa sale and Baker’s initial take-private proposal, were released within minutes of each other on June 10.

“There is the old story and there is the new story,” Chisholm said, adding that the so-called old story, laid out in last month’s management circular, didn’t deal with the “comingling” between the Signa sale and the take-private.

“The old story, in the circular, does not mention negotiations with Mr. Baker until June 10,” Chisholm said. “In the new story, the special committee discusses the initial proposal with Mr. Baker from April to June.”

In cross-examination Thursday, Leith confirmed that Baker informed the special committee he was considering a take-private in the spring, but a concrete proposal didn’t emerge until June.

He described the Signa sale and the take-private offer as two separate, but attractive opportunities as the stock price plummeted for HBC.

“We were desperately trying to find ways to find a value-enhancing opportunity for shareholders,” Leith said.

HBC wanted out of its European operations, Leith said. There were also issues with the joint venture arrangement, which involved HBC working with the Signa-owned German department store chain, Karstadt.

“There were tensions. It wasn’t working quite as well as we would have liked,” he said.

The special committee would have preferred to stagger the news releases, to give the market time to understand the Signa deal before the take-private proposal came out, Leith said. “But the decision ultimately resided with those who were making the proposal.”

Catalyst said Baker was working on the Signa sale while simultaneously considering a take-private offer using the proceeds of that sale.

“They’re able to complete the initial proposal without putting a single penny up towards their offer,” he said. “It’s based on the Signa sale and debt financing. And they’re able to do that by receiving information from the company about a transaction that Mr. Baker was working on.”

But vice-chairman Grant Vingoe, part of the OSC’s three-person panel, questioned Chisholm on the Signa deal.

“Is it really a valid complaint to say that the two press releases came out within minutes on the same day? What harm flows from that?” Vingoe asked.

“The interrelationship may not be a problem because the privatization was in flux and Signa was going forward regardless.”

The hearing is expected to conclude Friday.



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