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Director finds no road map on route to disclosure

Diane Urquhart's journey through the securities system serves as a cautionary tale for whistle blowers, KAREN HOWLETT finds

Shortly after Diane Urquhart joined the board of Technovision Systems Inc., a small Internet service provider listed on the Canadian Venture Exchange, she expressed concerns that directors would be liable for company press releases she viewed as misleading.

Her phone call to Technovision chairman and chief executive officer Gordon Tremain back on Jan. 4, 2001, set her on a collision course with other directors. She had already requested an emergency board meeting to discuss what she later described in court documents as "serious issues" of corporate governance, including lucrative consulting fees for company executives and little progress on acquisitions.

Ms. Urquhart had every intention of being an active director. Her unsuccessful efforts to get fellow directors to address what she considered a hornet's nest of problems at the Aldergrove, B.C., company took her on an odyssey well beyond the boardroom.

She has spent the past two years writing innumerable letters, making phone calls and travelling back and forth from her home in Mississauga to British Columbia, navigating her way through the courts and Canada's patchwork securities regulatory system.

It seems that just about everyone wanted her to go away.

Ms. Urquhart, 49, is no neophyte in the investment industry. She has spent 25 years in the industry, including a decade as a top-ranked financial services analyst and head of equity research at brokerage firm Burns Fry Ltd., at one time Canada's premier research house.

She said she agreed to tell her story because directors are often accused of being asleep at the wheel. She tried to make a difference and ended up paying a big price.

Her out-of-pocket costs, including her investment in the company, total $1.45-million.

"As a director, I believe it's important to complete the job you begin and not to be bullied out of doing it," she said in an interview.

Governance experts and securities regulators expect corporate directors to protect the interests of shareholders, she said. But when she encountered problems at Technovision, there was no road map for her to follow. When her efforts were rebuffed by other directors, she appealed to securities regulators and then to the courts, where she tried but failed to recover her losses. Ultimately, her complaints about the press releases were corroborated by regulators.

Her unrelenting pursuit of the matter has only further strained her relations with Technovision officials. Technovision alleges in court documents that she "continually harassed and obstructed" the company and its directors. The fact that she met defeat in the courts not once but three times has given the company more ammunition to criticize her efforts.

She was not a champion for good corporate governance, Wade Simpson, the company's lawyer, said in a letter to The Globe and Mail. "Ms. Urquhart operated with regard to her personal interest first."

At a time when corporate governance issues are in the headlines, Ms. Urquhart's experience serves as a cautionary tale for directors. She confronted the worst of both worlds: regulators who talk a lot about the need to restore investor confidence but who can be reluctant to intervene; and a lack of clear securities rules that makes it difficult, if not impossible, for individuals to seek redress in the courts.

Neil Gross, a Toronto lawyer who often represents aggrieved investors, said there should be a process whereby boardroom disputes can be channelled toward a resolution without paralyzing the company.

"You'd like to think the law would recognize some avenue that [directors] should take other than just resigning and staying quiet and letting the chips fall where they may for the shareholders," he said, speaking generally.

Ontario Securities Commission chairman David Brown dismissed Ms. Urquhart's complaints to the regulator as a private dispute, and told her in a letter last February that the civil courts are the proper forum for dealing with such matters.

She fared better with B.C. regulators, however.

Former CEO Mr. Tremain, who is also Technovision's controlling shareholder, acknowledged in a settlement agreement with the B.C. Securities Commission last October that the company issued eight "incorrect and misleading" news releases in 2000 and that his trading in the shares may have resulted in an artificial price.

As part of the settlement, he resigned from Technovision, was banned from acting as a director or officer of a public company for three years and ordered to pay $30,000.

Ms. Urquhart could not sue Technovision over the misleading press releases -- under current Canadian securities rules, companies are only liable for what they say in a prospectus.

At the same time, Technovision was able to sue her because Canada has no rules to protect corporate whistle blowers. Technovision has accused Ms. Urquhart, her husband, Hugh, and seven others in the Internet sector of waging a "campaign of slander" against the company and making "unfounded" complaints about its management and directors.

"I'm pretty badly beaten up here," she said. "From my perspective, a director should not be sued for doing their job."

The Technovision board

The story, which is contained in court documents and regulatory filings, begins in early 2000 when Ms. Urquhart and six business associates launched an Internet service provider (ISP) called iTCANADA.com Inc. She invested $1.2-million in the company for a 33-per-cent, fully diluted interest.

In March, 2000, iTCANADA paid $860,000 for options to purchase up to 28 other ISPs as part of a plan to quickly consolidate industry players as consumers made the transition from dial-up to high-speed providers.

"We saw it as a once-in-a-lifetime transition opportunity," she said in the interview.

Mr. Tremain entered the picture in August, when iTCANADA was unable to raise the $35-million needed to exercise all 28 options. It ended up negotiating an agreement with Technovision, whereby Ms. Urquhart and her business associates exchanged their shares in iTCANADA for 9.1 million shares of Technovision, which were to be held in escrow under stock exchange rules. She received 2.9 million shares; the shares would be cancelled if Technovision failed to acquire a set number of Internet subscribers.

The two companies struck a definitive agreement in October, 2000. The options on the 28 ISPs were not yet exercised; doing so would have made Technovision the sixth-largest ISP in Canada with 240,000 customers and annual revenue of $50-million.

As of April that year, Technovision had 35,000 subscribers.

Ms. Urquhart joined Technovision's seven-member board on Dec. 6, 2000, as a non-management director. Shortly after, she became concerned about delays closing the deals to acquire the 28 ISPs. On Jan. 2, 2001, she wrote to other Technovision directors, requesting an emergency board meeting.

She took an active role in the hopes of persuading management directors to "fulfill their commitment" to acquire the ISPs, she said in a chambers brief filed in the Supreme Court of British Columbia.

The ISP owners who had signed the letters of intent were backing out because of delays closing the deals, her letter said. As of Jan. 2, only two of them had signed binding agreements.

At the same time, Technovision was boasting on its Web site that it had an "aggressive acquisition strategy," yet she saw no evidence of this, her court brief said.

Stephen Winters, the company's corporate counsel and a director, said in a lengthy memo to all directors on Jan. 5 that it is not "helpful or appropriate" for the board to attempt to manage operations, but it should be available to provide "constructive input on a periodic basis."

Her relations with Mr. Tremain and Mr. Winters became more difficult in the following weeks, to the point where she was denied information she was entitled to have about the company, Mr. Justice Peter Lowry of B.C. Supreme Court said in a decision. "Ultimately, her opportunity to speak at board meetings was rudely curtailed."

Things went from bad to worse for Ms. Urquhart. In March, 2001, Technovision bought out five of her six associates in iTCANADA. The group returned a total of 5.2 million shares to the company for cancellation in exchange for $610,000 to be paid over time. Bernard Borgmann, a member of the group, resigned as an officer and director of Technovision. In September, Ross Jepson, another member of the group, was paid $100,000 over time for reaching a similar agreement and resigned as an officer.

Ms. Urquhart was also offered $500,000 to cancel her agreement with the company, but declined. The 2.9 million Technovision shares she was to receive had a market value of $3.2-million at the time the deal between the company and iTCANADA was struck, she said.

"The effect of those agreements was to isolate Ms. Urquhart as the only remaining member of the Borgmann group in either management or on the board of Technovision," Judge Lowry's decision said.

She also ran into a brick wall when she asked for a copy of a report on Technovision's executive compensation prepared by KPMG LLC, the company's auditors. KPMG did the report in response to questions raised by the Venture Exchange about the company's related-party deals.

The exchange asked for the name of the director who owned a numbered company that received $734,626 in consulting fees in the fiscal year ended May 31, 2000, and $606,297 for the six months ended Nov. 30, 2000, and for a copy of the non-management directors' resolution approving the payments.

Ms. Urquhart says in court documents she never saw copies of the consulting agreements, let alone approved them. Technovision posted revenue of $6.4-million and profit of $583,000 in fiscal 2000.

After management directors refused to give the compensation report to her, she asked KPMG for a copy. Don Matthew, a partner at the firm, responded in an e-mail on June 27, 2001, that it discusses requests from board members with management. "This is the way we communicate with our clients."

A KPMG spokeswoman declined to comment, citing client confidentiality.

Ms. Urquhart did not get a copy of the report until December, 2001, a few days before she went to court in British Columbia, seeking to recover the value of her shares.

The KPMG report revealed that Mr. Tremain was the sole shareholder of the numbered company and that he was to receive an annual salary of $495,000 under a consulting agreement. Denise Page, Mr. Tremain's common-law spouse and a director and executive vice-president of Technovision, was to be paid $300,000.

Gordon Tremain's stock trades

Ms. Urquhart also learned in March, 2001, that officials at the Venture Exchange had been investigating Mr. Tremain's trading of the company's shares for the past nine months.

On July 3, 2001, a surveillance official at the exchange said in a letter to Technovision board members that its review did not substantiate any violation of exchange policies and it considered the case closed. But the exchange then as a matter of routine practice referred the case to the B.C. Securities Commission, which opened its own file.

Initially, staff at the BCSC were not prepared to do much. On Oct. 22, 2001, an investigator wrote to Ms. Urquhart, who had also alerted the commission about Mr. Tremain's trading, informing her that its staff had determined there was insufficient evidence to conclude whether he did any illegal insider trading.

"However," the letter continued, "we did find that Tremain's trading appears to have had an undue influence on the market for the company's shares and may have been contrary to the principles of fair trading. As a result, the staff has issued a strong caution letter to Tremain regarding his trading activities."

The caution letter did little to satisfy Ms. Urquhart. At her prodding, staff at the BCSC eventually launched an investigation into Mr. Tremain's trading, which ultimately led to the settlement agreement in October, 2002.

"Diane was adamant," Sasha Angus, head of enforcement at the BCSC, said in an interview. "She provided us with further information, and that was of assistance to us. In all these matters, it's a matter of resource allocation, trying to figure out what we're going to pursue and what we're not. Mr. Tremain's behaviour was such that he required further investigation."

On eight occasions in August and September, 2001, Technovision announced that it had exercised specific option agreements with ISPs, whereas only letters of intent had been signed, the settlement said. Mr. Tremain acknowledges that the news releases were "incorrect and misleading," it said.

He bought 408,900 shares from Aug. 15 to Dec. 28, 2000, at prices ranging between $1.10 and $1.52. Some of the purchases were "high closes," meaning he bought just before one of the misleading news releases, the settlement says.

When Mr. Tremain resigned from the company last October as part of the settlement, Ms. Page, his spouse, went back on the board but resigned as executive vice-president. (She had stepped down from the board in May, 2002.)

The courts

Ms. Urquhart took her fight with Technovision to court in July, 2001, when it became obvious to her that the company was not going to exercise its options to acquire the remaining 26 ISPs with which it had signed letters of intent. At that point, it had struck deals with two of them.

She filed an oppression suit in B.C. Supreme Court, alleging that the situation was both oppressive and unfairly prejudicial to her because most, if not all, of the 2.9 million Technovision shares she was to receive in exchange for her stake in iTCANADA would be cancelled if the options were not exercised, and she would lose her investment.

In September, Technovision fired back with its own lawsuit against Ms. Urquhart, her husband and seven others in the ISP industry. In documents filed in the B.C. courts, it accuses Ms. Urquhart of damaging the company's reputation by secretly contacting stock market regulators and initiating "unfounded complaints" about management and other directors and of sabotaging its bank funding by contacting the bank.

Ms. Urquhart counters in an affidavit that the actions of management directors caused the loss of the financing. Her affidavit also said her complaints to the regulators were reasonable and made to the appropriate entities.

Technovision also accuses her of "self-dealing" in her attempts to allegedly take over the company. She says her attempts to raise money in mid-2001 to buy the remaining ISPs were conditional on her not resolving matters with Technovision and the company not acquiring the ISPs.

On Dec. 17, 2001, the first day of her oppression hearing, Ms. Urquhart learned that she had been voted off Technovision's board three days earlier, she said in the interview.

This was not the only surprising news. She also learned in court that only three of the 28 ISPs met financial tests that Technovision had set as conditions for proceeding with an acquisition. This information was contained in a due diligence report prepared in the fall of 2000. But Judge Lowry said in his decision it appeared the iTCANADA associates were never informed of the report, nor was it discussed at any Technovision board meeting.

Ms. Urquhart lost the suit. Judge Lowry said the oppression remedy is limited to instances where an individual is affected in his or her capacity as a shareholder, not a director. He also said the ISPs were not acquired for a variety of reasons, including the withdrawal of bank funding, all of which were within the reasonable expectations of the parties involved at the time they entered into the share agreement with Technovision.

She appealed but lost again. Representing herself, she attempted to provide the court with what she characterized as new evidence not submitted in the oppression hearing. Some of it was not available during her original court hearing.

In a unanimous ruling on Jan. 23, three judges in the Court of Appeal for British Columbia said it appeared Technovision's management was "lacking in talent and honesty," but said she should have outlined her entire case at the beginning.

Ms. Urquhart fared no better in the Ontario Superior Court where, once again representing herself, she argued that the buyout agreements between Technovision and her former associates amounted to an illegal issuer bid under the Ontario Securities Act.

Her former partners argued in court that her loss of the oppression suit in the B.C. courts was a final decision on that matter.

They argued in a factum filed in court that her action was an abuse of process because it was her third legal proceeding based on "virtually identical" facts.

Mr. Justice Romain Pitt agreed. In his February decision, he dismissed the "unorthodox nature" of her complaint as "frivolous and vexatious."

Last month, Ms. Urquhart failed to persuade a B.C. judge to dismiss the company's lawsuit against her.

As things stand, there is also a dispute before an arbitrator over how many Technovision shares Ms. Urquhart owns.

Technovision, meanwhile, announced this month that it has signed a letter of intent to merge with another Internet service provider, PCNet, a Victoria-based company listed on the TSX Venture Exchange. It said the new nine-member board will include five independent directors.

The OSC

Ms. Urquhart was also forced to deal with regulators in two provinces. B.C. regulators were responsible for probing Mr. Tremain's trading because Technovision is based in the province. Ontario regulators handled her complaint about the buyout agreements Technovision struck with her former business associates because the individuals involved all live in the province.

Ms. Urquhart has alleged that the buyout was an illegal issuer bid because the same offer was not made to other shareholders.

While OSC staff noted in a letter to her that components of the settlement agreements "appear to have constituted an issuer bid," they said a breach of the securities act was "largely technical in nature" and that there is no evidence that investors suffered any harm from not having an opportunity to participate.

The fact that regulators in another province had already dealt with the company was also a factor. "Enforcement resources are very thinly spread, and we are loath to expend resources on the same matter as another regulator," OSC enforcement director Michael Watson said in an e-mail to her.

OSC officials declined to comment for this story. Mr. Borgmann also declined to comment. His lawyer, Cynthia Amsterdam, said there is no judicial finding anywhere that her client was involved in any impropriety.

"She has been trying every possible means to do something because the courts do not agree that she's been wronged. That's the bottom line," she said.

As for Ms. Urquhart, she now knows that it would have been much easier had she just turned a blind eye as a director and walked away.

"It's not a job anyone can do with how we're structured," she said. "What backing do you get?"

© The Globe and Mail

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