13 February 2017

He haunts us still...


It can be a blessing or a curse to have a distant relative who was rather famous. Take, for example, J.R. Booth, shown above, who died in 1925. To put it briefly, he was my paternal grandmother's maternal grandmother's half-uncle, and probably the richest man in Canada when he passed on. Sadly, none of that wealth came our way, although my grandmother used to brag about receiving a gold coin at Christmas from him. As she was born in 1910, there would not have been that many, and none were found in her estate when she passed away in 1997. This was another of the mysteries she took to her grave. But I digress.

His name came up in an English court case this month, because of his involvement in a company that mined for nickel. His main interests were in the  lumber industry, and he also controlled the largest railway in the world owned by a single person, the Canada Atlantic Railway. He also owned a cement company, which became part of Canada Cement in 1910. Nickel mining, however, was a completely different business. In 1915, the Ontario Nickel Commission was appointed to inquire into the province's nickel industry, and its 1917 report gives some fascinating background to what was going on. A report by the Canadian Department of Mines in 1912 also provides useful information.

Involvement with Dominion Nickel-Copper

In 1904, the Dominion Nickel-Copper Company was formed to take over ownership of the Whistle Mine, which can be seen here:

Booth, together with M.J. O'Brien and other associates,took over Dominion Nickel-Copper in 1907, as reported here. O'Brien is not mentioned in the original report, as the acquisition was attributed to the Booth and McFadden Syndicate. McFadden appears to be J.J. McFadden of Renfrew, where O'Brien also lived, so it appears one was the agent for the other. McFadden would later make his fortune after the war through lumber mills in Blind River and Thessalon.

That company bought the Murray Mine, the site of the first nickel find in the Sudbury Basin, in 1912, and sought  to revive the operation and make it a viable competitor against International Nickel, controlled by J.P. Morgan.

 Acquisition  by British America Nickel

Their reach probably exceeded their grasp, as in 1912 they later granted an option to the British America Nickel Company, formed by F.S. Pearson and controlled by the British Government and Kristiansand Nikkelraffineringsverk A/S of Norway, to take over the company. British America also controlled other copper-nickel interests in the Sudbury region, including the later-famous Falconbridge properties. That option was exercised in 1913. The extent of the deal was detailed in a report in the Canadian Mining Journal:

Note the significant players mentioned here. William Mackenzie was involved in the successful deal with Pearson—understandable, as the two were already associated together in Brazilian Traction, Light and Power—but the Guggenheims of New York wanted to get in instead. This was quite the rarified atmosphere, even back then. The original name "Canadian Nickel Corporation" was not used, as the actual incorporation papers were in the name of "British America Nickel Corporation, Limited" as reported here.

What made British America's business model unique was that they aimed to be the only nickel miner in Ontario that would also smelt and refine on site, instead of sending the ore for further treatment outside the Province. It would also have exclusive North American rights to the Hybinette smelting process developed by its Norwegian investor.

As a result of the 1913 disposition, J.R. Booth became the second-largest bondholder in British America, second only to the British Government itself. O'Brien, with some others, had much smaller amounts. There was also an issue of debenture stock secured by a floating charge, which was held by the British Government and the Norwegian company. It was that whole arrangement that would cause some awkward circumstances later on.

In 1916, the British Government signed a ten-year contract to purchase all the nickel output of British America, and the bonds were replaced by a new issue of mortgage bonds, secured by the assets of the company. The terms of the underlying deed of trust could be altered at any time by a vote of the bondholders, representing at least ¾ of the bonds' value.

The dispute

At the end of the war, the nickel market took a real beating, and the Canadian Bank of Commerce was granted a prior lien bond in 1920 which had priority over the mortgage bonds. British America then defaulted on an interest payment in 1921, and a reorganization was proposed, in which the mortgage bonds would be replaced by 'A' Income Bonds, which would have a lower priority to First Income Bonds having a first charge on the property of the corporation. 'B' Income Bonds could be issued later on which would rank pari passu with the 'A' Income Bonds, but the latter could be converted into other securities at any time through extraordinary resolution. The remainder of the supply contract with the British Government would also be cancelled. A committee of four people would be appointed to make the decision, thus bypassing any requirement of an extraordinary resolution by the bondholders.

In order to make this work, J.R. Booth had to give his support, because of the significant holding of bonds he had. He was induced to approve, after being promised a gift of shares bearing a par value of CAD 2 million in British America.

O'Brien, to put it mildly, was not a happy camper. This move would strip any real security from the bonds he held, and the possibility of later conversion into other securities could effectively make them worthless if any other adverse developments in the nickel industry were to happen. He took the matter to the Supreme Court of Ontario to get the result overturned. He won, and the result was later upheld at the Appellate Division of the court. Both rulings can be found here.

That was not the end of it. The final court of appeal in those days was the Judicial Committee of the Privy Council, and they upheld the Ontario courts in 1927.  They described the whole affair thus:

At the trial in the Supreme Court of Ontario Kelly J. held that what was really done was that the majority at the meeting did not act in the bona fide exercise of the rights which the majority might exercise, but in consideration of what would benefit the Nickel Corporation and the personal interests of those whose votes were to be secured. The vote had been influenced by special negotiations in advance of the meeting. … There was an appeal to the Appellate Division, where Ferguson J.A. delivered the judgment. He agreed with Kelly J. in holding that the votes neither of Mr. Booth nor of the British Government would have been given for the scheme had they been influenced only by what was most in the interest of the bondholders. Both of these may, he thought, have acted honestly if mistakenly. But what really moved them was not a legitimate consideration of the improvement of their security, but that they felt that a refusal to approve the scheme would result in serious loss to other persons who had lent to or invested in the corporation. They wished to give these persons a chance, even if a risk to the bondholders had to be taken in doing it. This the Appellate Division held to have been improper.

The law that governs this type of decision-making has consequentially been expressed in these terms:

To give a power to modify the terms on which debentures in a company are secured is not uncommon in practice. The business interests of the company may render such a power expedient, even in the interests of the class of debenture holders as a whole. The provision is usually made in the form of a power, conferred by the instrument constituting the debenture security, upon the majority of the class of holders. It often enables them to modify, by resolution properly passed, the security itself. The provision of such a power to a majority bears some analogy to such a power as that conferred by s. 13 of the English Companies Act of 1908, which enables a majority of the shareholders by special resolution to alter the articles of association. There is, however, a restriction of such powers, when conferred on a majority of a special class in order to enable that majority to bind a minority. They must be exercised subject to a general principle, which is applicable to all authorities conferred on majorities of classes enabling them to bind minorities; namely, that the power given must be exercised for the purpose of benefiting the class as a whole, and not merely individual members only. Subject to this, the power may be unrestricted. It may be free from the general principle in question when the power arises not in connection with a class, but only under a general title which confers the vote as a right of property attaching to a share. The distinction does not arise in this case, and it is not necessary to express an opinion as to its ground. What does arise is the question whether there is such a restriction on the right to vote of a creditor or member of an analogous class on whom is conferred a power to vote for the alteration of the title of a minority of the class to which he himself belongs.

In other words, no dirty tricks are allowed in proceedings like these, and decisions must be taken in the best interests of the class of investors. But some people just can't help but try.

Consequences to this day

That is what happened in the English case this month. Two companies were seeking to merge under a scheme of arrangement, which under English law must receive the approval of a majority of investors, together representing ¾ of the value of the shares. In order to thwart the merger, one employee shareholder gave away one share each to 434 people, and registered the transfers immediately prior to the meeting taking place to approve the scheme, as sanctioned by the Court. All 434 intended to vote against the transaction, but the Chairman of the meeting disallowed their votes, resulting in the scheme's approval. The Court ruled that the Chairman acted properly, and what J.R. Booth did in the 1920s was quoted prominently to explain why this had to be so.

It was explained here that meetings that are sanctioned by the Court operate under slightly different principles than shareholders' general meetings that are governed by normal corporate legislation:

50. There was some debate also in the course of argument as to the powers of the chairman of a court meeting to reject votes cast of his own motion. It seems to me that the court must indeed have an inherent power to direct the mode in which meetings are to be held .... Moreover, once a court has directed that a meeting take place, I cannot see why the chairman should not conduct the meeting in accordance with normal principles. He may have many decisions to make in order to achieve the objective of the meeting. The court would normally, I think, only interfere with such decisions if they were perverse, made in bad faith, contrary to the court's directions, or on the basis of a mistaken understanding of the law .... It seems to me that the validity of votes cast at the court meeting is to be judged as at the time of that meeting and not with the benefit of hindsight that may be acquired after the meeting and before the sanction hearing. Conversely, the sanction of the court is to be evaluated as a matter of discretion on the basis of all the facts placed before the court at that hearing.

51. In directing the chairman to hold a court meeting, the court is effectively directing him to take all appropriate steps to hold a fair meeting for the purpose of ascertaining the votes of the class for or against the scheme. He must, for example, be able to reject proxies if they obviously do not emanate from the member in question. The court would, it seems to me, wish to respect the decisions made by its appointed chairman as to the proper conduct of the court meeting, unless one of the defaults mentioned above were established. 

I've known meetings in the past where such squeeze plays breezed through quite easily. It's obvious these days that such unfairness will not be tolerated, but it's taken some considerable time and effort to get there. Not just the lawyers, but all other parties, should be glad that's the case.