Gluskin Sheff in fight with founders

Pair says it is owed $185M

The co- founders of Gluskin Sheff + Associates Inc. are locked in an ugly legal battle with the company, claiming it owes them a staggering $ 185 million in post- retirement entitlements.

The Toronto- based i nvestment firm revealed on Thursday that it is engaged in a “private arbitration” with Ira Gluskin and Gerald Sheff. Gluskin is seeking a payment of $ 75 million, while Sheff is demanding $ 110 million.

By contrast, t he company said its obligations to the two founders are worth just $ 12.2 million at most. It vowed to contest the claim for $ 185 million and noted that “no supporting evidence” for that amount has been provided to date.

The roots of the dispute date back to 2009, when Gluskin Sheff struck an agreement with its namesake founders that would pay them for the rest of their lives once they stepped down from executive roles. The deal entitled each of them to a lumpsum payment of $ 1.5 million (which was paid out last year), along with fixed annual payments of $ 250,000. The company described the agreement as effectively a defined-benefit pension plan. Gluskin and Sheff were on the board when the pact was struck.

A key aspect of the agreement is that it included a socalled “additional remedy.” If the founders felt the company is breaching the deal, they could require the company to pay out an amount equal to 90 per cent of the fair market value of the obligations.

Gluskin and Sheff decided to exercise the “additional remedy” as a way to collect the $185 million.

“Given that the pension payments are for a fixed amount of ($ 250,000 per year) for each of Mr. Gluskin and Mr. Sheff, plus other benefits, we find it challenging to reconcile to the ($185 million) claimed,” CIBC World Markets analyst Paul Holden said in a note.

On Thursday, an arbitrator — which has been working on the assignment for more than six months — ruled that the co-founders validly issued notices for the “additional remedy,” and that the two men “held the view” that the company breached its obligation.

However, the arbitrator did not find that the bonuses paid thus far have breached the agreement. The amount that should be paid to Gluskin and Sheff will be determined in the second phase of the arbitration, which has not yet been scheduled.

The company vowed to assert legal positions at that stage which would “substantially reduce, or eliminate” the co- founders’ claims if they are accepted.

“It is simply the amount of payment that is now in question,” Holden said, adding that a payment close to $185 million would be “financially challenging” for the company.

According to Gluskin Sheff, the arbitrator determined that the co- founders thought the company “was in breach of its obligation to pay bonuses in 2014 to certain of the service providers dedicated to them at a level commensurate with other similarly situated employees within the company.”

One source familiar with the arbitration process said that part of the dispute focuses on “the right” of the two founders “to free money management services for the rest of their lives.” The company, which charges clients a base fee plus a performance fee if certain rate of return objectives are obtained, has a different view.

Gluskin and Sheff founded the money management firm in 1984. It was taken public in May 2006, at which time it had $ 3.75 billion of assets under management. In that initial public offering, the company sold 7.2 million subordinate voting shares at $18.50 a share.

But the company received none of the proceeds. They all went to Gluskin and Sheff, who for many years remained the sole owners of the multiple voting shares. After the $ 133- million IPO, Sheff owned 5.6 million multiple voting shares while Gluskin owned 5.15 million.

In October 2013, the two, either directly or through charitable foundations, sold 6.4 million subordinate voting shares at $ 19 a share. When that secondary offering closed, all the company’s multiple voting shares were then converted into subordinate voting shares on a one-for-one basis.

Both Sheff and Gluskin retired from the board in 2013, but Gluskin continues to manage money for the company despite the legal battle.

A message left for Gluskin seeking a comment was not returned.