Battle for control of HBC becomes more focused

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A battle over the future of Canada's oldest company looks to be entering its final rounds.

Hedge-fund boss Jonathan Litt's aim of installing his own directors at Hudson's Bay Co. rests on a legal gambit that includes persuading Canadian securities regulators to reject a $632-million purchase of the department store's shares by a U.S. private-equity firm, legal experts say.

Under pressure amid a big shakeout in the traditional retail industry, HBC announced a deal last month to sell its flagship Lord & Taylor building in Manhattan to office-sharing start-up WeWork and its financial backer, New York-based private-equity firm Rhône Capital LLC.

The deal gives Rhône a significant stake in the Canadian company. It also gives Rhône and WeWork two board seats. Mr. Litt's hedge fund, Land & Buildings Investment Management LLC, contends that the deal discriminates against minority investors and wants it put to a vote among "non-insider shareholders."

"The board has engineered the Rhône transaction such that existing insider shareholders, who have the right to board representation amongst other things, have contractually agreed to support the transaction, which will act to entrench future nominees of the board," Land & Buildings said in a statement.

The company is trying to improve its prospects and take advantage of its prime real-estate properties in Canada, the United States and Germany.

Land & Buildings, which purportedly owns 5 per cent of HBC stock, has launched a public campaign to persuade the company to squeeze more value out of its extensive real-estate holdings. In October, Mr. Litt said he would call for a special meeting of shareholders in which he would seek removal of directors, but there has yet to be a formal request made.

HBC, led by executive chairman and real estate tycoon Richard Baker, said the deal with Rhône Capital is in the best interest of all shareholders, as it bolsters the finances, and was not undertaken to thwart Mr. Litt's proxy fight.

Still, by giving Rhône a substantial stake as well as a seat on the board, the private-equity firm will have a direct say in the company's strategy. If regulators approve the deal, HBC management and its allies such as Rhône will effectively be able to block Land & Buildings in any effort to try to install its own board nominees.

Land & Buildings has said it has expressed its concerns to regulators. It is unknown if it filed a formal complaint to the Ontario Securities Commission and the Toronto Stock Exchange. The regulators declined comment. Land & Buildings and its lawyers did not respond to a request for comment. There are no limits to how long a review can take.

Earlier this year, the OSC overturned a TSX ruling approving a similar deal by Eco Oro Minerals Corp., arguing that the TSX had apparently not been aware that the company was the target of a proxy battle and an imminent shareholder meeting requisitioned by dissidents.

As part of the HBC deal – which has the support of four major investors holding more than 50 per cent of the stock – Rhône will get preferred shares convertible into common shares equalling 21.8 per cent of the stock when the transaction closes and its preferred shares are converted. Company documents show that could increase over eight years.

HBC said it has not sold a controlling interest to Rhône.

The Stamford, Conn.-based activist investor said HBC should have sought approval from minority shareholders for the dilutive share issue, rather than just from a four-institution group holding more than 50 per cent of the stock. Land & Buildings said the deal serves to keep the company's director nominees in place.

Indeed, given the overwhelming support for the share issue, to be successful in a proxy battle Land & Buildings would need regulators to reject the transaction with Rhône, on the basis that it was undertaken to thwart a proxy battle.

HBC is adamant that the deal had long been in the works, improves its balance sheet and adds value to its retail offerings. "With previous approval of more than 50 per cent of our shareholder base, we are able to pursue these agreements in an expedited and cost-effective manner so we can focus fully on the all-important holiday season," it said in a statement.

The retailer said it would disclose additional details of its transaction with WeWork and Rhône before midnight on Friday.

The current major shareholders are: L&T B (Cayman) Inc., which is Mr. Baker's firm; Hanover Investments (Luxembourg) SA, an arm of Abu Dhabi Investment Council; Ontario Teachers Pension Plan Board; and Abrams Capital Management LP.