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Courts Rule Stronach Didn\'t Oppress Greenlight

Date: Friday, July 18, 2008
Author: Christopher Faille, HedgeWorld

New Page 1 An Ontario-based real estate development company has defeated claims brought in Canada's courts by the hedge fund Greenlight Capital to the effect that the development company's founder, Frank Stronach, exercised excessive influence over the rest of MI Developments Inc.'s board to the detriment of non-controlling shareholders such as Greenlight.

MI Developments is traded on both the Toronto and the New York Stock Exchanges. Greenlight has contended that MID falsely held itself out to investors as a conventional real estate company, while turning itself into something a good deal more speculative. Specifically, it entered into challenged transactions with Magna Entertainment Corp., a Delaware chartered company that owns and manages horse racing and gambling facilities in North America and Austria.

A trial judge ruled against Greenlight's complaint (or, in the language of Canadian law, denied Greenlight's application for a finding of oppression) in October 2006. The appellate court confirmed that judgment this month.

The case sheds some light on the rules of evidence that apply in such lawsuits. The trial court drew an inference from an affidavit that Greenlight didn't file, and rejected what it considered hearsay evidence offered in an affidavit that Greenlight did file, signed by David Einhorn, Greenlight's principal.

The Corporate Entities

MID was spun off from its parent company, auto parts concern Magna International Inc., in the summer of 2003. In the process it acquired Magna's controlling interest in Magna Entertainment. In the prospectus for its own initial public offering issued in August 2003, MID described MEC as a strategic investment, and spelled out the risk factors its relation with MEC entailed.

At the time of the IPO, Greenlight bought approximately $94 million in class A shares, or roughly 10% of that class.

Mr. Stronach is the founder of Magna and the chairman of all three boards—Magna, MID and MEC. He's also a trustee of the Stronach Family Trust, which owns all the equity in 445327 Ontario Ltd., or "445." This entity, 445, is in-turn the controlling shareholder of MID, owning 66.3% of its class B shares. Each class B share carries 500 votes, whereas a class A share carries only one vote. So 445 has 56.5% of the votes.

From 2003 to 2005, MID and MEC engaged in four controversial transactions with one another:


  • In October 2003, MEC sold MID an option to purchase certain lands in Romulus, Mich., and MID subsequently bought the land.
  • In July 2004, MID proposed a deal in which it would purchase 100% of MEC and combine the two companies—it withdrew this proposal two months later.
  • In December 2004, MID loaned MEC $192 million to assist it in the development of two of its racing properties—one in Florida and one in Pennsylvania.
  • In July 2005, MID lent MEC another $100 million.


  • Frustrated with such decisions, which in its view each represented harm done to the interests of MID by a conflicted board, Greenlight proposed in 2005 that MID sell its interest in MEC. This proposal failed, but in forcing Mr. Stronach to make use of his abundance of votes under the dual-share structure, Greenlight was preparing its case for oppression.


    Subsequently, in making that case, Greenlight's attorneys relied in part upon an affidavit by Mr. Einhorn, in which he referred to conversations between an officer of Greenlight, Vinit Sethi, and two representatives of MID that took place in August 2003. During those conversations, the MID representatives allegedly confirmed Greenlight's expectations that MID was to be run as a real estate concern, one in which the gaming interests of MEC would play a relatively minor role.

    The trial court judge noted that Mr. Sethi himself didn't sign or submit any affidavit saying that MID representatives had told him this. It was Mr. Einhorn, who hadn't been in the room at the time, who submitted that affidavit.

    "The Respondents [Mr. Stronach and his various corporate entities] submit that I should draw an adverse inference from the failure to file an affidavit from Sethi," the judge wrote. "I agree."

    The appellate court also agreed: "Given the importance to Greenlight's case of the Sethi evidence concerning the private conversations, the application judge made no error in drawing an adverse inference from Greenlight's failure to file an affidavit for Mr. Sethi. Nor did he err in rejecting the hearsay evidence of Mr. Einhorn respecting statements contrary to MID's public statements at the time of the spin-out transaction."

    Greenlight was represented in this litigation by R. Paul Steep, of the Toronto law firm McCarthy Tetrault. Mr. Steep couldn't be reached for comment Thursday.