Scotiabank, RBC to reap tax gain in Sears takeover

Date: Tuesday, July 4, 2006
Author: Janet McFafland, Globeandmail.com

Two Canadian banks will save $79-million in income tax under a deal they signed earlier this year to throw their support behind a bitter takeover bid for Sears Canada Inc., an Ontario Securities Commission hearing heard yesterday.

The OSC held the first of three days of hearings yesterday to consider an application from dissident shareholders of Sears Canada who oppose an $18-a-share offer tabled by U.S. parent Sears Holdings Corp. for the outstanding shares of the Canadian subsidiary.

The first day of testimony in the case pulled back the veil on some of the behind-the-scenes tactics used in contested takeover fights, including allegations that dissident shareholders were secretly acting together to manipulate the share price of Sears Canada, and were using an executive from Desjardins Securities Inc. to plant information with the media.

Three hedge funds -- Pershing Square Capital Management LP, Hawkeye Capital Management LP and Knott Partners Management LLC -- are seeking a ruling prohibiting Sears Holdings from counting shares owned by Bank of Nova Scotia and Royal Bank of Canada when calculating whether they have reached the required threshold for the bid to be completed.

Such a ruling would make it difficult for Sears Holdings to secure a majority of the 46 per cent of Sears Canada it does not already own.

The two banks signed support agreements with Sears Holdings on April 6, pledging to tender their 7.6 million shares to the takeover offer. In exchange, Sears Holdings agreed to greatly extend the deadline for the second stage of the bid until December.

The OSC was told yesterday that the extension means both banks will be eligible to take advantage of tax benefits available if they sold shares after owning them for at least a year, saving them a total of $79-million on their tax bills.

Lawyer Kent Thomson, who is acting for the dissident shareholders, argued yesterday Sears Holdings should have disclosed the details of the support agreements to investors prior to the launch of the OSC complaint.

He said Bank of Nova Scotia and subsidiary Scotia Capital should be considered "joint actors" with Sears Holdings, because they are the financial advisers to Sears Holdings on the takeover bid. As joint actors, their shares should not count toward the takeover threshold.

Mr. Thomson argued it is a "central feature" of the takeover regime in Ontario that all investors should be treated equally.

He also complained that shareholders have been pressured to accept an unappealing offer because Sears Holdings has threatened to no longer pay a dividend on the Sears Canada shares if the deal should fail.

"This is the quintessential coercive bid," Mr. Thomson said.

Sears Holdings lawyer Mark Gelowitz said all shareholders were offered the same bid with the same timing, so there is no special treatment granted to the banks under the support agreement.

He said the fact that the timing of the offer was changed to benefit the tax situation of two major shareholders is not relevant because the change will apply to all other investors as well.

It doesn't matter that "different shareholders may value different terms of an offer differently," he said.

The hearing is also considering a counterapplication from Sears Holdings asking the OSC to order the three dissident hedge funds not be allowed to vote their shares because of their alleged violations of securities rules.

Lawyers revealed transcripts of telephone calls between Ronald Mayers, head of alternative strategies at Desjardins, and William Ackman, who runs Pershing, in which they discuss strategies for acquiring more shares and analyze the share ownership situation of various investors.

The transcripts of the taped phone calls were provided by Desjardins Securities at the request of the OSC.

The phone calls, which occurred in early April, included an exchange in which Mr. Mayers offered to leak information to The Globe and Mail about undisclosed terms of a deposit agreement struck between Sears Holdings and Vornado Realty LP, a major shareholder.

Mr. Ackman had privately learned about the terms of the deal and felt they should be disclosed to all shareholders.

"I could have it on The Globe and Mail website in 10 minutes," Mr. Mayers offers.

After discussing it further, however, the two agreed that Mr. Mayers would get someone else to leak the information because it might be obvious it had come from Mr. Ackman.

Mr. Gelowitz said the transcript shows Mr. Ackman was acting in concert with other shareholders to block the bid and inflate the share price of Sears Canada, without disclosing their joint activities in violation of securities rules.

Mr. Ackman, who testified at the hearing yesterday, repeatedly insisted he had been speaking generally about like-minded investors who were dissatisfied with the Sears Holdings offer, and was not implying there was an organized group that was working together.