Although Royal Group Technologies Ltd. had deficient corporate governance, former officials were not trying to hide two insider deals, a judge has ruled.
The management structure provided former Chairman, President and CEO Vic De Zen “with virtually unfettered power to transact significant contracts on behalf of the corporation,” Justice Richard Blouin stated in his written decision on the trial, which lasted from April to November.
The written decision, released Dec. 24, explains Blouin's reasoning behind acquitting all the former Royal executives who were defendants in a major fraud trial in his Oshawa, Ontario, court. Blouin announced his verdict Dec. 10, after hearing closing arguments in the case. All charges were dismissed the same day.
De Zen held 80-90 percent of voting shares during the period in question. He was ousted in 2004 and the company was sold to Georgia Gulf Corp. for about $1.6 billion in 2006.
Woodridge, Ontario-based Royal Group's board did not provide sufficient oversight of management's decisions, the judge said. As well, there were no procedures to identify transactions involving related parties and potential conflicts of interest. The latter deficiency was especially problematic because Royal Group was a complex web with connections between subsidiaries and private companies.
“[Royal Group], during the late '90s, was evolving from a private company to a public entity, still intertwined with the private interests of senior management and significant shareholders,” Blouin said in his ruling.
De Zen and partners in a company bought a parcel of land next to Royal Group's headquarters in 1998 and soon sold it to Royal for a profit of about C$6.5 million. In 2002 De Zen and other officials cashed in warrants that allegedly belonged to Royal Group but formed part of the bonus given to the officials that year.
Witnesses at the trial supported the view that corporate governance changed significantly in North America about 2002 with the passage of the Sarbanes-Oxley Act in the United States. Royal Group would since be viewed as antiquated. For instance it had a C$60 million threshold before any oversight from the board of directors. Viewing Royal Group activity through a corporate governance lens several years later “distorts the historical record,” Blouin noted.
One witness, former board member Greg Sorbara, said at the trial that if Royal tried to become a public company 10 years later than its initial public offering in 1994, it would not have made it to the market.
Blouin said he thought Royal Group did not pay an inflated price for the land parcel adjacent to the firm's headquarters. Evidence suggested that De Zen and partners got a bargain when they bought it because the seller did not place it on the open market. Evidence indicated De Zen and partners bought the land because Royal Group might want to use it in the future.
“I conclude that the evidence suggests that De Zen did not dishonestly deprive [Royal Group] of the opportunity to acquire the land less expensively, and that he honestly believed [Royal Group] paid a fair price for the land. This alone requires an acquittal.”
The size of the land purchase — C$27 million — was below Royal Group's material threshold of C$60 million and therefore it wasn't flagged for the board. In 2004 the company instituted a threshold of C$100,000 for related-party transactions. Blouin said there was, in any event, informal disclosure of the land deal to the board.
Door manufacturer Premdor Inc. of Mississauga, Ontario, agreed to a joint venture and asset purchase with Royal Group in 1999. The deal included 100,000 warrants issued to Royal Group or its designees. De Zen and five other officials cashed in the warrants in 2002, which Blouin said constituted part of the officials' compensation in that year.
De Zen's philosophy “was to create generous incentives through equity interests in the operating companies, stock options and bonuses,” Blouin stated. “Mr. Sorbara's view, even today, was that he never felt that Mr. De Zen was interested in personal enrichment at the expense of the company.
“Accordingly, I am unable to conclude the defendants committed any dishonest acts, were deceitful, or employed any other fraudulent means to deprive, or put at risk of deprivation, the company. I also conclude the defendants did not intend to conceal either transaction, since, I find they were not concealed.”
Acquitted of both charges are De Zen, former general counsel and Executive Vice President Douglas Dunsmuir, former Chief Financial Officer Gary Brown, former Vice President of corporate finance Ronald Goegan, former Vice President and director of taxation Luciano Galasso, former director of accounting, and Vice President of business development Gordon Brocklehurst
About two years ago De Zen started another business, Vision Group of Woodbridge. It includes plastic extrusion firm Vision Extrusions as well as companies involved in metal components, transportation and compounding. In May Vision Extrusions announced a 180,000-square-foot addition to its Woodbridge plant.
According to a published report, Vision Group runs nine plants, has more than 1,000 employees and annual sales of about C$400 million (US$403 million).