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Brookfield fights legal battle in Canada over asset transfer

Guardian Business Editor

Published: Jan 26, 2012

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An ongoing legal battle being waged against Brookfield Asset Management bears similarities to the now defunct action taken against the firm by Kerzner International’s senior lenders.

According to Canadian court documents obtained by Guardian Business, Birch Mountain Resources Ltd., an Alberta corporation, is suing Brookfield for allegedly using its debt position to transfer assets worth $1.6 billion to one of its holding companies for less than $50 million.

Birch Mountain is accusing Brookfield of engaging in “death spiral stock trading”.  The plaintiffs claim a Brookfield affiliate, holding $31.5 million in debt, leveraged its powers to make the company appear bankrupt and insolvent.  Birch Mountain common shares from May 2006 to November 2008 plummeted from $7.99 to $0.01 on the Toronto Stock Exchange.

The company owns a portion of land in mineral-rich Alberta believed to contain a lucrative limestone deposit.  The Birch Mountain shareholders further allege the Brookfield affiliate was aware of the deposit’s potential and failed to act in the interests of shareholders to keep the company’s head above water during a critical time.

“The end result of the above conduct is that the original Birch Mountain common shareholders, who worked so long and hard to develop an asset worth an estimated $1.6 billion, received nothing and the hedge fund will now develop the resource in a private company,” the court document stated.

The plaintiffs are claiming Brookfield was oppressive, unfairly prejudicial and unfairly disregarded the interests of shareholders.

Brookfield will not comment on any legal action that is before the courts.

The plaintiffs further allege that shareholder power and approval was avoided by suspending the operation of the firm’s shareholder rights plan, while public disclosures were often “selective and confusing and often filed so late as to be of no assistance”.

The original motion was filed back in September 2010.  The two sides spent much of 2011 fighting about whether the trial should be held in Ontario, where Brookfield’s head office resides, or in Alberta, the location of the assets.

In March 2011, Brookfield filed a motion in the Superior Court of Justice claiming the plaintiff lacked jurisdiction in Ontario.  Months later, this motion was upheld by the courts.  Birch Mountain is now filing for certification in Alberta for the class action lawsuit.

Birch Mountain first discovered the major limestone deposit on its extensive Alberta oil sands property back in 2002, according to the court document.  In December 2007, Birch Mountain announced the issuance of a $31.5 million “convertible senior secured debenture” with Tricap, a Brookfield affiliate, designed to provide “long-term patient capital to companies with the potential for value creation and a need to recapitalize”.

Seven months later, the document stated Birch Mountain did not make a scheduled interest payment on its liabilities.

In August 2008, Brookfield issued a press release to the public.

“Tricap is in discussions with the management and directors of the corporation (Birch Mountain) and its financial advisors regarding the event of default under the debenture and the loan agreement,” it read.  “The corporation also announced that in the event an immediate sales process does not achieve an acceptable price, the corporation intends to work with its stakeholders to recapitalize the balance sheet to improve liquidity and permit delivery of the business plan.”

Tricap appointed PriceWaterhouseCoopers as receiver of Birch Mountain, at which point it transfered the company’s assets to 1439442, a private wholly-owned subsidiary of the Brookfield affiliate.

By December of 2008, Tricap filed with the Security Exchange Commission “stating that it may be deemed to be the sole beneficial owner of 3,458,872,727 Birch Mountain common shares” upon conversion of the debenture.

The offer was accepted by PriceWaterhouseCoopers one day later.

“After the death spiral stock trading was completed Brookfield and/or Tricap owned, if the various convertible debentures were exercised, approximately 97.6 percent of the outstanding Birch Mountain common shares, leaving the original Birch Mountain common shareholders with approximately 2.4 percent of the outstanding Birch Mountain common shares,” the document read.

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