A subsidiary of a shareholder rights law firm has been accused of “mercenary motivations” in a messy fight over the future of the Economical Mutual Insurance Co.
VC & Co. Advisory Ltd., a company controlled by Toronto law firm 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.
The current board has fought back with its own demutualization proposals. Gerald Hooper, chairman of the board of directors, alleges VC & Co. has a “clear conflict of interest” and is motivated only by money.
But VC & Co. insists the current board has failed to act in the best interests of the policyholders who own the company. It also alleges the company has intimidated dissident policyholders and that it may never follow through on its promise to demutualize without changes to the board.
“The 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 demutualization was taken out of expediency and self-preservation and was entirely due to the pressure of the policyholder proposals to replace the board.”
In their own letter to policyholders that accompanies a proxy circular in advance of the company’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 experience 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 fight directly to policyholders after a Superior Court ruling earlier this month allowed VC & Co.’s proposal to replace the board to appear on the agenda for the meeting.
Since November, the firm has been recruiting dissident policyholders to back its proposals to change the board through newspaper advertisements. By the end of December, it had the 100 signatures it needed to get them on the agenda at the company’s annual meeting.
Each policyholder who has signed on with VC & Co. has promised to pay the firm 12.5 per cent of any amount received in the event the company demutualizes.
VC & Co. has said it will ask a new board to consider having all policyholders indirectly share the costs of the 100 dissidents “as a matter of fairness” 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. That 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 find 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 prevent mutual policyholders from exercising their fundamental ownership right to elect a board of their choosing,” Woollcombe said in a statement.
The 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.
“This surplus has made it a tempting target,” Cavarzan wrote in his decision.
Economical’s mutual structure dates back to the founding of the company. Under it, mutual policyholders who pay an annual premium of around $1,000 and who elect the board of directors own the company.
However, mutual policyholders 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, according to Cavarzan’s decision.
In July, Westaim Corp. hired the firm’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 Uppal, then Economical’s chief financial officer.
Uppal told them the current board was uninterested 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 soliciting policyholders to join its proposal. In its letter to policyholders, Economical accuses VC & Co. of a conflict.
“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.
This 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 conflict claims are “scare tactics” and that his firm’s aims are fully aligned with mutual policyholders.
“While an entity related to VC & Co. provided legal advice for a period of time to Westaim related to Economical, that involvement with Westaim ended,” he wrote in his letter to policyholders.
“There simply is no continuing relationship or involvement of any nature between VC & Co. and Westaim related to Economical.”
