Clarington seeks binding offer from CI

The board of Clarington has responded to criticism from CI Financial, saying that if CI wants its takeover bid to be considered, it should submit a binding offer.

“CI has reiterated that any offer would be made by way of a take-over bid circular,” the Clarington board said in a statement issued this morning. So far, CI has not mailed out any such offer, but has instead made public a bid of $14.75 a share for Clarington, topping an offer of $14.25 from Industrial Alliance, which was accepted by the Clarington board.

The Clarington board says both of the bids require “substantially the same representations, conditions,” including a lock-up period for Clarington shareholders who accept shares of the winning bidder, as well as retention and non-compete clauses for the management of Clarington.

“As a result, Clarington’s board of directors does not presently consider this non-binding, highly conditional proposal to be a competing transaction under its support agreement with Industrial Alliance,” the statement continued.

Clarington has agreed to a $7 million break fee, should shareholders decline the Industrial Alliance offer, which was mailed out on November 21.

But one of the biggest bones of contention in the takeover battle has become the question of who the board represents: Clarington shareholders or unitholders of Clarington funds — essentially pitting the interests of the owners against its customers.

The CI bid promises to reduce management fees on Clarington funds, many of which could be merged into substantially similar offerings from CI. Chairman Bill Holland said this amounts to about $50 million in value for the unitholders.

Holland initially criticized the acceptance of the Industrial Alliance offer as benefiting the shareholders, at the expense of the unitholders.

This caught the attention of Stephen Erlichman, the author of a report published in 2000, entitled Making it Mutual: Aligning the Interests of Investors and Managers — Recommendations for a Mutual Fund Governance Regime for Canada, but more commonly known as the Erlichman Report. One of his recommendations was the creation of an independent board whose duty would be to look out for the fund investors, rather than the shareholders.

“I found it very interesting to read that the chief executive officer of one of Canada’s largest mutual fund managers was lamenting that an independent governance body did not exist at another mutual fund group, thus at least implicitly endorsing a role for independent governance bodies at mutual funds,” Erlichman wrote in a commentary on the website of Faskin Martineau.

In fact, CI does have an independent board of governors, the duties of which are described on the firm’s website:

“The board of governors recommends the best course of action to achieve a fair and reasonable result on any conflict of interest issues, and CI takes into account its recommendation in accordance with its fiduciary duty to the CI Funds.”

In his original report, Erlichman pointed to Australia, where rules place the interests of the fund security-holders above those of the management’s shareholders, should a conflict arise.

“In the absence of an independent governing body…are the directors of an investment fund manager placing themselves straight in the line of sight of class action lawyers?” he asks.

Under a Canadian Securities Administrators’ proposal, all mutual funds would be required to create independent review committees to oversee fund managers and monitor potential conflicts of interest.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com

(11/23/05)

Steven Lamb