Smoothwater Capital Partners LP I ("Smoothwater") today responded to the failure
of the Board of Directors of Equity Financial Holdings Inc. ("Equity" or the
"Company") to call the requisitioned meeting of shareholders to change the Board
in a timely fashion. Equity announced that it was delaying the special
shareholders' meeting to March 28, 2014 and has now engaged financial advisors,
its fifth advisory firm in three weeks.
"Smoothwater requisitioned a meeting of shareholders on November 15 because we
have serious concerns about Equity's lack of relevant management expertise,
bloated cost structure and poor governance practices," said Stephen Griggs, CEO
of Smoothwater Capital Partners Inc., the general partner of Smoothwater. "We
believe the value of the Company is at risk and immediate shareholder action is
required. We urged the Board to take the actions that we outlined in our letter
dated November 11, 2013 or to call a meeting for no later than January 14, 2014.
This would have allowed shareholders to vote on their investment in Equity
without undue delay." A copy of the November 11 letter is reproduced below.
Griggs continued: "In response, Equity's Board set a meeting date for more than
four months after our requisition and two months later than the date we had
requested. This action is not consistent with those of a Board that feels
confident about its prospects in a shareholder vote."
"We are equally dismayed to learn that Equity has now hired a fifth advisor, TD
Securities, to explore an alternative path for the business. This is a wasteful
use of shareholder resources. Shareholders invested in a pure play alternative
mortgage lender not for the Board to consider adventures in diversification or
alternative transactions, especially when faced with a confidence vote by
shareholders. The Company already had the right strategy. In fact, the incumbent
Board and management approved the divestment of other assets and the pure play
strategy less than a year ago."
Letter to Equity's Board Outlines Shareholder Concerns
Smoothwater previously expressed its concern that the Company's precarious
position could seriously damage the prospects for Equity to deliver value to all
shareholders in a letter that was delivered to Equity's Board on November 11,
2013. Smoothwater urges all shareholders to read the letter in full to
understand the gravity of the situation and the urgency of a meeting of
shareholders.
The full version of the letter follows and is also available, along with other
relevant background materials, at www.smoothwatercapital.ca. Smoothwater will
file and mail a proxy circular to shareholders in due course.
November 11, 2013
To:
Board of Directors
Equity Financial Holdings Inc.
C/O
Mr. Donald Wright
Chairman of the Board
- and-
Mr. Michael Eccelstone, Corporate Secretary
200 University Avenue
Suite 400
Toronto ON
M5H 4H1
Re: Changes Required at Equity Financial Holdings Inc. and Equity Financial
Trust Company
Smoothwater Capital Partners LP I ("Smoothwater") has acquired 876,700 shares of
Equity Financial Holdings Inc. ("EQI"), representing 9.45% of the outstanding
shares of EQI, based upon your most recent public filings. The general partner
of Smoothwater is our subsidiary, Smoothwater Capital Partners Inc.
As disclosed in our press release today, we have entered into support agreements
with Nick Kyprianou and Darryl Ivan. Our collective shareholdings represent
12.35% of the outstanding shares of EQI, and we are the largest shareholder
group of EQI.
We have had discussions with a number of other significant shareholders of EQI,
and there is a consensus that the Board made a fundamental error in terminating
Mr. Kyprianou and Mr. Ivan as the Chief Executive Officer ("CEO") and Chief Risk
Officer ("CRO"), respectively, of Equity Financial Trust Company (the "Trust
Company"), and replacing them with unproven and unqualified management.
Requests from Shareholders
Smoothwater requests that the Board undertake the following changes intended to
resolve our concerns, which we believe are shared by many shareholders:
1. The following changes to the Board:
a. Five current directors will resign and the following individuals
will be appointed by the Board as directors: Mr. Stephen Griggs, Mr.
Nick Kyprianou, and three other shareholder representatives
independent of Smoothwater or Mr. Kyprianou with relevant financial
institution and capital markets experience.
b. Mr. Griggs will be appointed Chair of the Board and Chair of the
Governance and Compensation Committee.
c. The Governance and Compensation Committee will undertake a skills
based assessment of the Board and make recommendations for the 2014
AGM.
d. The Board will undertake a comprehensive review of its governance
practices.
2. The following changes to management:
a. The Board will appoint Mr. Kyprianou as President and CEO of EQI and
of the Trust Company.
b. The Board will terminate Mr. Smith and Mr. Jones without cause in
accordance with the publicly disclosed terms of their employment
arrangements.
c. Mr. Ivan will be reappointed CRO of the Trust Company, replacing Ms.
Sharpe, the acting CRO.
3. EQI will agree to pay the out-of-pocket costs incurred by Smoothwater in
connection with requesting these changes.
Fundamental Error in Terminating CEO and CRO of Equity Financial Trust
The recent actions of the Board have, or may well, seriously damage the
prospects of EQI as evidenced by the precipitous drop in the share price
immediately after the announcement of the termination of Mr. Kyprianou.
The primary concerns we have are as follows:
-- Kyprianou is the Architect of Alternative Mortgage Business: Mr.
Kyprianou is the architect of the Trust Company's alternative lender
business plan and is one of the few experienced executives in Canada
with the unique expertise needed for its complex alternative mortgage
business. We believe that many institutional shareholders acquired
shares in EQI on the basis of Mr. Kyprianou's track record and expertise
and would strongly agree that it is essential that Mr. Kyprianou return
to run the sole business of EQI.
-- No Operating Expertise in Current Management: There are no executives at
the Trust Company today with expertise in operating an OSFI supervised
loan and trust company in the alternative mortgage business:
a. While Mr. Jones has experience in the mortgage brokerage business
and the securitization of mortgages, he has not been an officer of
an OSFI supervised trust company. We note that his most recent
employer, Xceed Mortgage, was registered as a simple mortgage broker
and was not an OSFI supervised trust company. While he may be a
competent business executive, he clearly does not have the
background required to operate the Trust Company.
b. Mr. Smith has no relevant expertise or experience operating a trust
company or being the CEO of an alternative mortgage lending
business.
-- Need to Eliminate an Unnecessary Level of Management: There is no
apparent role for Mr. Smith at EQI as it has a single line of business
in which he has no expertise. This unnecessary layer of management we
estimate adds approximately $1,000,000 of costs to EQI, or over $0.10
per share. This is an excessive expense for a company that has not yet
been profitable from its continuing business.
-- EQI should be a "Pure Play": Investors expect EQI to be a "pure play"
investment in the alternative mortgage lending business. We have been
informed that management intends to diversify EQI and perpetuate the
expensive holding company structure by entering into new lines of
business. Returning to a "conglomerate" structure is likely only
designed to justify the significant duplicate costs of the holding
company and improve the "optics" of having two CEOs in the business.
-- Serious Governance Issues: There appear to be serious lapses in the
governance of EQI. In particular:
a. Mr. Smith, the CEO, is also the chair of two other major entities,
including VIA Rail, and is on a total of three outside boards. We
question how a sitting CEO could have the time to devote to such
outside interests by spending a large part of his working day on
non-EQI matters.
b. Mr. Smith's role as chair of VIA Rail precludes him from being a
director or CEO of the Trust Company. We find it difficult to
understand how Mr. Smith could put his own personal interests ahead
of those of EQI to this extent.
c. Mr. Wright, Chair of the Board of EQI and the Trust Company, is also
the chair of the board of four other significant companies, is a
director or trustee of sixteen entities (including seven public
companies) and is the chief executive officer of an active
investment business. We understand that the chair of a trust company
is expected to devote significant time to this role and it is
unlikely that an "over-boarded" Mr. Wright could be devoting the
required time and attention to the business of EQI.
d. It appears that Mr. Wright and Mr. Smith have numerous ties and are
close associates. We note that they have served together on the
board of VIA Rail, and that Mr. Smith succeeded Mr. Wright as chair
of the VIA Rail board. It is highly unusual and generally
inappropriate for the Chair of the Board and the CEO of a financial
institution to have such close ties.
Need for Urgent Change
Given the experience and discipline required to underwrite and administer
alternative mortgages without creating material short term or long term risks,
for the benefit of the business of EQI we urge the Board to immediately make the
changes set out above. We also believe that the Board should avoid the very high
costs of a lengthy public shareholder dispute which will be significant for a
company of this size.
We do not intend to make this letter public at this time in an effort to
cooperate with the Board to resolve these matters.
Request a Meeting
We request that the Board meet with Smoothwater to discuss these matters within
the next two business days.
Advisors to Smoothwater
We have retained Mr. Walied Soliman of Norton Rose Fulbright Canada LLP and Mr.
Wes Hall of Kingsdale Shareholder Services Inc., to advise us in connection with
these matters. Please feel free to contact either of them directly if you wish
to discuss aspects of this matter with them.
We are available to discuss these matters with you at any time. I may be reached
at (phone number) or sgriggs@smoothwatercapital.com at any time.
Yours truly,
Stephen J. Griggs, Chief Executive Officer
Proxy Solicitation
Smoothwater is publicly soliciting proxies for the meeting of shareholders in
reliance upon the public broadcast exemption to the solicitation requirements
under section 9.2(4) of National Instrument 51-102 - Continuous Disclosure
Obligations ("NI 51-102") and applicable Canadian corporate laws. The
information that follows in this section is provided in accordance with
corporate and securities laws applicable to public broadcast solicitations.
This solicitation is being made by or on behalf of Smoothwater and not by or on
behalf of the management of Equity. Based on public filings, Smoothwater is the
largest shareholder of Equity, with ownership and control over 1,162,400 shares
or approximately 12.5% of the outstanding shares of Equity. Nick Kyprianou and
Darryl Ivan, the former CEO and Chief Risk Officer of Equity's wholly-owned
subsidiary Equity Financial Trust Company ("Equity Trust"), entered into support
and non-disclosure agreements with Smoothwater and may be considered "joint
actors" with Smoothwater. In the aggregate, Smoothwater, Mr. Kyprianou and Mr.
Ivan, have ownership and control over 1,423,517 shares or approximately 15.3% of
the outstanding shares of Equity. Smoothwater will bear all costs and expenses
associated with this solicitation and will seek reimbursement from Equity for
expenses reasonably incurred in connection with the requisitioning and
solicitation of proxies for the meeting.
Smoothwater may solicit proxies by way of public broadcast, including through
press releases, speeches or publications and by any other manner permitted under
applicable laws. Smoothwater has also retained Kingsdale Shareholder Services
Inc. ("Kingsdale") as its shareholder and proxy advisors. Kingsdale will receive
a fee of up to $500,000 for its services plus disbursements on the successful
completion of Smoothwater's solicitation. Kingsdale's responsibilities will
principally include advising Smoothwater on governance best practices, where
applicable, liaising with proxy advisory firms, developing and implementing
shareholder communication and engagement strategies, and advising with respect
to meeting and proxy protocol. Shareholders appointing Smoothwater as their
proxyholder for the meeting may subsequently revoke such appointment in any
manner permitted by law.
The address of Equity is 200 University Avenue, Suite 400, Toronto, Ontario, M5H
4H1.
Smoothwater's Nominees
As set out in Smoothwater's requisition, Smoothwater's nominees (the
"Smoothwater Nominees") are Stephen J. Griggs, Nick Kyprianou and Glen
Silvestri. The table below sets out, in respect of each Smoothwater Nominee, his
name, province and country of residence, his principal occupation, business or
employment within the five preceding years, and the number of Equity shares
beneficially owned, or controlled or directed, directly or indirectly, by such
nominee.
----------------------------------------------------------------------------
Name, Province Present Principal Occupation and Number of
and Country of Residence Positions During Last Five Years Common Shares
Beneficially
Owned or
Controlled(1)
----------------------------------------------------------------------------
Stephen J. Griggs CEO, Smoothwater Capital 1,162,400(2)
Ontario, Canada Corporation and Smoothwater
Capital Partners Inc.
CEO and director, Smoothwater
(April 2013 to present); Chief
Executive, Underwood Capital
Partners Inc. (May 2012 to March
2013); President and Chief
Executive Officer, OPSEU Pension
Trust (June 2011 to April 2012);
Executive Director, Canadian
Coalition for Good Governance
(November 2007 to June 2011).
----------------------------------------------------------------------------
Nick Kyprianou Financial institution executive 256,724(3)
Ontario, Canada Former CEO of Equity Trust from
March 2011 to October 2013;
President, Mortgage Operations of
Equity Trust from February 2010 to
March 2011; various executive
positions at President and
Director of Home Trust Company
from 2008 to 2010; also acted as
Director of Regency Finance
Corporation, Payment Services
Interactive Gateway Corp. and as
Member of the Advisory Board of
First Canadian Title and Stewart
Title.
----------------------------------------------------------------------------
Glen Silvestri Professional investor Nil
Ontario, Canada Former Vice President of Teachers'
Private Capital from January 2001
to July 2013, including as Chair
of its Investment Committee from
2008 to 2010; also acted as
Director of various entities
including Maple Leaf Sports and
Entertainment, CTVglobemedia, Q9
Networks, Flexera Software, Kanata
Energy Group, Doane Pet Care
Company and Big Brothers and
Sisters of Toronto.
----------------------------------------------------------------------------
(1)As at December 4, 2013.
(2) The shares are held by Smoothwater Capital Partners LP I, and Mr. Griggs
is the CEO of its general partner Smoothwater Capital Partners Inc.
(3) Includes convertible securities exercisable into shares.
If elected, each Smoothwater Nominee will hold office until the next annual
general meeting of Equity shareholders, or until his successor is duly elected
or appointed. Each of the Smoothwater Nominees is qualified to be a director
under the Business Corporations Act (Canada) and has consented to act as a
director of Equity. Additional biographical information of each Smoothwater
Nominee is provided below.
Stephen J. Griggs is the CEO, General Counsel and Secretary of Smoothwater
Capital Corporation. He is also one of Canada's leading corporate governance
experts with extensive senior executive experience in the investment management
industry and is also a corporate lawyer. He was most recently the President and
CEO of OPTrust, a major Ontario public sector pension plan, leading OPTrust's
integrated investment and administrative operations. Prior to joining OPTrust in
mid-2011, Mr. Griggs served for three years as Executive Director of the
Canadian Coalition for Good Governance, representing the interests of leading
Canadian pension plans and other institutional shareholders. As Executive
Director, Mr. Griggs was instrumental in developing and implementing the
Coalition's guidelines on board engagement, proxy circular disclosure, majority
voting, executive compensation and "say on pay". He also served during this time
as Chairman and Partner of Investeco Capital Corp., Canada's first environmental
investment company. Mr. Griggs was the President and CEO of Legg Mason Canada
Inc. from January 2003 to June 2007, with responsibility for the Canadian
operations of Legg Mason, Inc., one of the world's largest global investment
management firms, and has been Chief Operating Officer of two leading Canadian
mutual fund companies (AIC and BPI). Mr. Griggs is an active corporate director
and is on the board of Genesis Land Development Corp. and the Greater Toronto
Airports Authority, which operates Toronto Pearson International Airport.
Nick Kyprianou is a seasoned financial institution executive and is recognized
as a strategic thinker with proven expertise in strategy, finance, marketing and
people leadership. With over 25 years' experience in the mortgage industry, Mr.
Kyprianou was most recently the CEO of Equity Financial Trust Company, a
federally chartered trust company providing alternative mortgage and deposit
services. At Equity Trust, he was responsible for building and managing Equity's
mortgage and deposit operations, which included the implementation of a
technology platform, hiring staff, building a marketing plan and liaising with
OSFI. Prior to joining Equity Trust in 2010, Mr. Kyprianou was the President of
Home Trust Company where he worked for 18 years. Mr. Kyprianou attended McMaster
University and is also a graduate of the Institute of Corporate Directors and
the Queen's Executive Program. Mr. Kyprianou has served on the boards of Regency
Finance Corporation, Payment Services Interactive Gateway Corp. and Home Trust
Company. He was also a member of the advisory board at First Canadian Title and
Stewart Title.
Glen Silvestri is a self-employed professional investor. Formerly, he was a Vice
President of Teachers' Private Capital. Mr. Silvestri led Teachers' Private
Capital's private equity transaction activities in the telecom, media,
technology, and energy services sectors, as well as served as its Investment
Committee Chair for several years. With a background in mergers, acquisitions
and finance, Mr. Silvestri joined Teachers' Private Capital in 2001 where he
worked until July 2013. Mr. Silvestri has served on the boards of Maple Leaf
Sports and Entertainment, CTVglobemedia, Q9 Networks, Flexera Software, Kanata
Energy Group Ltd., Doane Pet Care Company and Big Brothers and Sisters of
Toronto. Mr. Silvestri is a Chartered Accountant and holds a Bachelor of Arts in
English Literature from the University of Western Ontario. He is also a graduate
of the Institute of Corporate Directors from the Rotman School of Business and
Ivey's Executive Education Program.
Except as noted below, to the knowledge of Smoothwater, no Smoothwater Nominee
is, at the date hereof, or has been, within 10 years before the date hereof: (a)
a director, chief executive officer or chief financial officer of any company
(including Equity) that was subject to a cease trade order, an order similar to
a cease trade order or an order that denied the relevant company access to any
exemption under securities legislation (each, an "order"), in each case that was
issued while the Smoothwater Nominee was acting in the capacity as director,
chief executive officer or chief financial officer, or was subject to an order
that was issued after the Smoothwater Nominee ceased to be a director, chief
executive officer or chief financial officer and which resulted from an event
that occurred while that person was acting in the capacity as director, chief
executive officer or chief financial officer; (b) a director, chief executive
officer or chief financial officer of any company (including Equity) that while
such Smoothwater Nominee was acting in that capacity, or within a year of such
Smoothwater Nominee ceasing to act in that capacity, became bankrupt, made a
proposal under any legislation relating to bankruptcy or insolvency or became
subject to or instituted any proceedings, arrangement or compromise with
creditors or had a receiver, receiver manager or trustee appointed to hold its
assets; or (c) someone who became bankrupt, made a proposal under any
legislation relating to bankruptcy or insolvency, or became subject to or
instituted any proceedings, arrangements or compromise with creditors, or had a
receiver, receiver manager or trustee appointed to hold the assets of such
Smoothwater Nominee.
Mr. Silvestri was, at the request and on behalf of the Ontario Teachers' Pension
Plan, a director of CFM Corporation. CFM Corporation was granted creditor
protection under the Companies' Creditors Arrangements Act and Chapter 11 of the
U.S. Bankruptcy Code on April 19, 2008 which resulted in the successful sale of
its assets on June 30 and July 3, 2008.
To the knowledge of Smoothwater, as at the date hereof, no Smoothwater Nominee
has been subject to: (a) any penalties or sanctions imposed by a court relating
to securities legislation, or by a securities regulatory authority, or has
entered into a settlement agreement with a securities regulatory authority; or
(b) any other penalties or sanctions imposed by a court or regulatory body that
would likely be considered important to a reasonable securityholder in deciding
whether to vote for a proposed director.
About Smoothwater Capital
Smoothwater Capital focuses on investing in small to midcap Canadian public
companies where there is an identifiable path to significantly improve
shareholder value. Smoothwater Capital Corporation works to effect change in
targeted companies, often collaboratively with institutional and other
like-minded investors who hold material positions but are not able to take on
the time consuming and costly activist role.
Smoothwater has filed this press release, which contains the information
required by NI 51-102 in respect of the proposed Smoothwater Nominees, under
Equity's company profile on SEDAR at http://www.sedar.com.
FOR FURTHER INFORMATION PLEASE CONTACT:
Smoothwater Capital Partners LP I
c/o Smoothwater Capital Corporation
Suite 2500, 120 Adelaide Street West
Toronto, Ontario M5H 1T1
Smoothwater Capital Partners LP I
Stephen J. Griggs
Chief Executive Officer
416.644.6582
sgriggs@smoothwatercapital.com
www.smoothwatercapital.ca
Longview Communications Inc.
Joel Shaffer
(416) 649-8006
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