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Stronach defeats hedge fund bid

Date: Wednesday, November 1, 2006
Author: Greg Keenan, Globe and Mail

Magna boss wins one for management as Greenlight loses legal effort to intervene

Frank Stronach has defeated a bid by Greenlight Capital Inc. to force him to overhaul his real estate and gambling operations in one of the few victories North American corporate managers have won in the battle against hedge funds.

Mr. Stronach's real estate company will be able to continue financing racetrack and gambling company Magna Entertainment Corp. after Mr. Justice John Ground tossed out Greenlight's controversial lawsuit against the entrepreneur, company management and a special committee of directors of MI Developments Inc.

The lawsuit in the Ontario Superior Court was the culmination of an 18-month effort by Greenlight to force radical changes in the way the companies are operated and Mr. Stronach's role in them. He is chairman of both and controls them through his ownership of a majority of multiple-vote shares in MI Developments, which owns 59 per cent of Magna Entertainment (MEC).

Greenlight asked the court to force MI Developments to sell the MEC stake, turn the real estate company into an investment trust, convert Mr. Stronach's multiple-vote shares into single shares and order him to compensate MI Developments for expenses incurred during a failed bid to take MEC private.

"There is ample evidence before this court of a continuing effort on the part of Greenlight to persuade or intimidate MID to undertake a major buyback of shares or the payment of a substantial one-time dividend," Judge Ground wrote in a 43-page decision.

He noted that Greenlight owned shares of MEC before selling them and later purchasing its majority stake in the real estate company.

"The degree of control by Stronach could not have come as any surprise to Greenlight in view of Stronach's publicly expressed views and business philosophy and in view of the fact that Greenlight from 2000 to 2002 was a large investor in MEC having held approximately 20 per cent of the public float of MEC and was familiar with all aspect of MEC's business and with the control position of Stronach, Stronach's business philosophy and the Magna culture," Judge Ground wrote.

The victory comes at a key time for MEC, which has warned twice this year amid financial losses that its future as a going concern is in doubt.

That doubt should be alleviated when the sale of a racetrack in Pennsylvania goes through. The racetrack and gambling company is being backstopped by MI Developments, which has provided financing for redevelopment of Gulfstream Park in Florida and other financial aid for MEC.

Greenlight argued that corporate governance practices at the two companies were inadequate, but Judge Ground responded that ". . . Greenlight is proposing a gold standard of corporate governance and that its criticisms in this regard concentrate on form and process . . ."

A spokesman for Greenlight said the hedge fund is disappointed and is reviewing its options.

Judge Ground may have left the door open for an appeal by Greenlight by acknowledging that he was unable to examine thoroughly what he called "the mountains of material" filed in the case, so he focused on evidence directly discussed in court and on what he saw as particularly significant evidence.

Real estate analyst Himalaya Jain, who follows MI Developments for Bank of Nova Scotia, said he had been expecting the decision to go against the hedge fund because the relationship between MI Developments and MEC was disclosed in the prospectus for the initial public offering of the real estate company.

Shares in MI Developments fell 91 cents or 2.2 per cent on the Toronto Stock Exchange to $40.47 yesterday.Shares of MEC fell 4 cents to $5.84, also in TSX trading.

"We hope that the court's decision puts this matter behind us so that we can continue to focus on both our core real estate business and strategic investment in Magna Entertainment," John Simonetti, chief executive officer of MI Developments, said in a statement.