Law Times

lAw Times • April 18, 2011 NEWS PAGE 5 Insurance company spat ensnares Toronto firm But court rules in favour of effort to hold vote on replacing board of directors BY MICHAEL McKIERNAN Law Times nary motivations" in a messy fi ght over the future of the Economical Mutual Insurance Co. VC & Co. Advisory Ltd., a A company controlled by Toronto law fi rm Voorheis & Co. LLP, has led the charge of dissident policyholders aiming to replace the insurance company's board and potentially demutualize it in a deal that could be worth $1 billion. Th e current board has fought back with its own demutualiza- tion proposals. Gerald Hooper, chairman of the board of direc- tors, alleges VC & Co. has a "clear confl ict of interest" and is motivated only by money. But VC & Co. insists the cur- rent board has failed to act in the best interests of the policyholders who own the company. It also alleges the company has intimi- dated dissident policyholders and that it may never follow through on its promise to demutualize without changes to the board. "Th e current board has long opposed demutualization and for years worked hard to avoid it," VC & Co. executive vice president Michael Woollcombe wrote in an April 13 letter to policyholders. "We believe the current board's recent conversion to demutual- ization was taken out of expedi- ency and self-preservation and was entirely due to the pressure of the policyholder proposals to replace the board." In their own letter to policy- holders that accompanies a proxy circular in advance of the com- pany's annual general meeting on May 26, Hooper and Economical CEO Katherine Mabe called on members to elect their nominees to the board rather than the rival slate proposed by VC & Co. "A new board will lack expe- rience in Economical's business and will lack the strong track record of the current board with the company. VC & Co. is motivated by their fees, and its nominated board may pursue a transaction that delivers its fees but does not provide fair value to you," they wrote. Economical has been forced to take its fi ght directly to poli- cyholders after a Superior Court ruling earlier this month allowed VC & Co.'s proposal to replace the board to appear on the agen- da for the meeting. Since November, the fi rm has been recruiting dissident policy- holders to back its proposals to change the board through news- paper advertisements. By the end of December, it had the 100 sig- natures it needed to get them on the agenda at the company's an- nual meeting. Each policyholder who has signed on with VC & Co. has promised to pay the fi rm 12.5 per cent of any amount re- ceived in the event the company demutualizes. Untitled-3 1 subsidiary of a share- holder rights law fi rm has been accused of "merce- VC & Co. has said it will ask a new board to consider having all policyholders indi- rectly share the costs of the 100 dissidents "as a matter of fair- ness" in the event its nominees are successful. Economical had attempted to block the proposals, arguing a special meeting was necessary to make the changes envisioned by VC & Co. Th at would have required the signatures of 500 policyholders, according to the Insurance Companies Act. Following three days of argument, Ontario Superior Court Justice John Cavarzan ruled with the dissidents in a decision released on April 6. He found that requiring the policyholders to fi nd 400 more signatures was "antithetical to the policy and the purposes of the act" to promote corporate democracy. "By commencing these legal proceedings, the current board was clearly attempting to avoid a vote on its leadership and to pre- vent mutual policyholders from exercising their fundamental ownership right to elect a board of their choosing," Woollcombe said in a statement. Th e 140-year-old property and casualty insurer has built up a $1.2-billion surplus over its years of operation, more than any other similar company in Ontario. "Th is surplus has made it a tempting target," Cavarzan wrote in his decision. Economical's mutual struc- ture dates back to the founding of the company. Under it, mutu- al policyholders who pay an an- nual premium of around $1,000 and who elect the board of direc- tors own the company. However, mutual policyhold- ers are unable to sell or transfer the policy and lose their interest when the insurance terminates. Demutualization would unlock the value, which VC & Co. puts at about $1 million per policy, ac- cording to Cavarzan's decision. In July, Westaim Corp. hired the fi rm's owners, Voorheis & Co., when it made an approach to acquire Economical with a view to a sponsored demutualization. According to Cavarzan's ruling, Westaim met with Sandeep Up- pal, then Economical's chief fi - nancial offi cer. Uppal told them the current board was uninter- ested in demutualization but raised the idea that policyholders could vote to replace the board. But following unproductive talks with Economical, the deal withered. Soon after, VC & Co. was incorporated and began so- liciting policyholders to join its proposal. In its letter to policy- holders, Economical accuses VC & Co. of a confl ict. "VC & Co.'s principals were advising Westaim on how to gain control of Economical at the lowest price," wrote Hooper and Mabe. "Yet, within days of purportedly severing ties with Westaim, VC & Co.'s principals were soliciting members with a promise of maximizing value for the members. Th is sudden switch in loyalties should be cause for concern, particularly since Westaim has continued to express an interest in acquiring Economical or its assets." But Woollcombe, who is one of VC & Co.'s nominees for a spot on the board, says Economical's confl ict claims are "scare tactics" and that his fi rm's aims are fully aligned with mu- tual policyholders. "While an entity related to VC & Co. pro- vided legal advice for a period of time to Westaim related to Economical, that involvement with Westaim ended," he wrote in his letter to policyholders. "Th ere simply is no continu- ing relationship or involvement of any nature between VC & Co. and Westaim related to Economical." www.ERAssure.com Estate trustees need good counsel – and risk protection. New ERAssure is the only errors and omissions insurance available for estate trustees. ERAssure is a trademark of Estate Risk Protection Plan Inc. 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