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Auto parts maker Martinrea’s proxy fight a battle of industry veterans

Rob Wildeboer, Martinrea International Inc. Executive Chairman and co-founder.

Fernando Morales/The Globe and Mail

The proxy fight roiling auto parts maker Martinrea International Inc. is the culmination of years of disputes among the executives who came together to create the company in 2002 and ran it for a decade.

The fight for control of what is now Canada's third-largest auto parts maker by revenue follows a court battle launched last fall by Nat Rea, former vice-chairman of Martinrea – and whose family name is the "rea" in the company's name – who joined with a trio of ex-Magna International Inc. executives in 2002 to form the company.

Over the next 12 years, an acquisition spree quadrupled the size of the metal basher and expanded its customer base, but the relationship between the former Magna executives and Mr. Rea deteriorated amid accusations of incompetence, improper transactions, conflicts of interest and payoffs. Those accusations are contained in a lawsuit filed by Mr. Rea last year and a countersuit filed against him by the company and the three executives.

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Mr. Rea has now put forward a new slate of directors, and hopes to install them at the company's annual meeting later this month.

It's the splintering of what was once thought to be a dream partnership of automotive industry veterans. In the beginning, the alliance of Mr. Rea with former Magna executives Fred Jaekel, Nick Orlando and Rob Wildeboer was heralded as the creation of a juggernaut.

"This transaction is, in our view, a wonderful coming together of complementary operations," Mr. Jaekel and Mr. Wildeboer said in the final annual report of Royal Laser Tech Corp., the company that joined with Mr. Rea's Rea International to form Martinrea. The men were president and chairman, respectively, of Royal Laser.

Today, the men are hurling fighting words at each other in lawsuits, and the legal battles continue to multiply.

Mr. Rea's lawsuit has led in turn to a class-action suit filed by an aggrieved shareholder on behalf of fellow investors. What's more, another legal fight between Mr. Jaekel – who died earlier this month – the company and an individual named Enzo Cirillo, has been expanded to include Martinrea and a now-shuttered division called Steelmatic Wire Inc.

None of the allegations in any of the lawsuits has been tested in court.

After Martinrea was formed, the company's revenue increased steadily, except for the recession years of 2008-2009, which battered all parts makers. But the company has been unable to wring a steady profit improvement out of those revenues.

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In 2007, before the recession, profit hit $60.1-million on revenue of $2-billion. Revenue has more than bounced back, growing by 61 per cent to $3.22-billion in 2013. Profit, however, fell to $16.9-million.

Mr. Wildeboer said on the company's first-quarter financial results conference call earlier this month that, after one-time adjustments, 2013 represented the best performance in the company's history.

"Our company is improving from a financial point of view," he said on the call. "It is growing. It is increasing in value."

The harmony between the executives who created Martinrea began to dissipate quickly. By 2006, Mr. Rea was vice-chairman of the board, but was no longer responsible for any operations.

Senior executives believed he was "a very poor operator," according to a counterclaim filed against him by Mr. Wildeboer, Martinrea's executive chairman, Mr. Jaekel, its former chief executive officer, and others.

"It is fair to say that Nat did not appreciate or agree with this view and it led to a deterioration in the relationship between Nat and the defendants and in addition and in particular as between Nat and Fred," the court filing says.

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Mr. Rea, in his statement of claim, which sparked the counterclaim, alleges that, starting in 2002, Mr. Wildeboer and Mr. Jaekel were part of a group that "caused or permitted" the company to be part of "corrupt and/or improper transactions."

Among his allegations are that the company bought used equipment at inflated prices, and that "improper and/or secret commissions and payments" came back to company officials, and that the company paid $150,000 on behalf of Mr. Jaekel to settle "a personal obligation of his."

Martinrea's court filings deny the accusations.

Mr. Rea says he confronted Mr. Orlando, who by then was chief executive officer, replacing Mr. Jaekel, in September, 2011, "directly with allegations of corruption." His court filing says he and Mr. Orlando agreed that "Orlando would resign and sever all ties with Martinrea if the allegations were not pursued further by Rea." Mr. Rea alleges that Mr. Orlando tendered his resignation but "Mr. Wildeboer refused to accept it."

In the counterclaim, Mr. Wildeboer and the others responded that Mr. Orlando advised them that "no such conversation or agreement ever took place." They also say that the meeting at which Mr. Orlando was supposed to have offered to resign did not take place. "Nat used the opportunity to get into a confrontation with RW [Rob Wildeboer] but all present say there was no discussion whatsoever of Nick resigning."

In June, 2012, Mr. Rea stepped down from his remaining roles at Martinrea.

Mr. Orlando announced his retirement earlier this year, but he is staying on as chief executive officer until the company finds a replacement for him.

The auto parts maker said in issuing its fourth-quarter and year-end financial results in March that a special committee of the board hired accounting firm PricewaterhouseCoopers LLP to undertake a forensic investigation into the issues raised by Mr. Rea in his court filings.

That investigation led to the termination of a controller at one Martinrea plant, but the company said it saw no need to change its position in its court battle against Mr. Rea.

It added that it will recover $246,100 plus interest in payments that Martinrea made that it is treating as the responsibility of Mr. Jaekel.

The proxy fight is scheduled to come to a head at Martinrea's annual meeting June 19 in Toronto.

It will be up to shareholders to decide whom to support in the proxy battle, Mr. Wildeboer said in an e-mailed message.

"We believe in shareholder democracy and the rights of our owners, whom we all serve, to select their representatives," he said. "We believe our company board is strong and experienced, is representative of the interests of our shareholders and has their support."

The group led by Mr. Rea includes Fred Gingl, a former Magna chief executive officer. It said in filings with securities regulators that the group is committed to "bottom-line performance, rather than the top-line growth that appears to have come at the expense of the company's balance sheet."

Mr. Gingl would be nominated as chief executive officer if the group is successful.

Mr. Wildeboer noted that Martinrea has already revamped its board this year by adding four new independent directors and is proposing to add Sandra Pupatello, former Ontario Economic Development Minister.

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