Kevin M. Sullivan Releases Information Circular Opposing Unfair Richardson GMP Transaction and Proposing New Directors for GMP Capital Inc.

• Compelling Reasons to Reject Richardson GMP Transaction
  
  
• Changes Required for Transaction to Obtain GMP Shareholder Support
  
  
• New Director Nominees are Strong Leaders to Revitalize GMP
  
  
• Shareholders Should Vote AGAINST the Richardson GMP Transaction and FOR the Election of the New Shareholder Nominees using only the YELLOW Form of Proxy

TORONTO, Sept. 15, 2020 /CNW/ - Kevin M. Sullivan announced that he has today filed his information circular in connection with the upcoming annual and special meeting of the shareholders of GMP Capital Inc. ("GMP") to be held on October 6, 2020. The circular and related documents are available at www.astrongergmp.com.

The circular urges all shareholders to vote AGAINST the proposed transaction (the "RGMP Transaction") to consolidate 100% of the shares of Richardson GMP Limited ("RGMP") under GMP.  The circular details the many ways that the RGMP Transaction is financially unfair to GMP's shareholders and prefers the interests of Richardson Financial Group Limited over the interests of GMP's other shareholders (the "Independent GMP Shareholders").

The circular also urges all shareholders to vote FOR the election of five new highly qualified and experienced directors (the "Shareholder Nominees") who will provide GMP with the leadership and strategic direction it requires at this critical juncture:

John S. Chambers
Edward J. (Ted) Goldthorpe
David J. Goodman
J. Cameron MacDonald
E. Cynthia A. (Cindy) Tripp

Full biographies for the Shareholder Nominees are included in the circular and are highlighted below.  

Mr. Sullivan stated: "While the concept of the RGMP Transaction is a good one, the terms negotiated by GMP's existing board are not. Those terms are financially unfair to GMP's shareholders and should be rejected by them. I have always believed in and vocally supported the concept of consolidating the ownership of RGMP under GMP and that doing so is in the best interests of all parties, but it must be done on fair terms." 

Mr. Sullivan continued: "The existing board continues to press a transaction that is not financially fair to GMP's shareholders. The new Shareholder Nominees will either negotiate and complete the consolidation of RGMP on terms that are fair to all shareholders, or they will quickly move to build shareholder value through other strategies.  While my hope remains that we can find a transaction to consolidate GMP's ownership of RGMP that can reasonably be supported by all GMP shareholders, the Shareholder Nominees have a plan and vision to create shareholder value at GMP whether or not such a transaction can be achieved. They also have the skills, expertise and reputations for shareholders to be confident that they will deliver.  We can all very much look forward to a revitalized GMP under their stewardship."

For additional up to date information regarding the meeting and ease of voting, shareholders are encouraged to visit www.astrongergmp.com and click on the "Vote Now" button to cast your vote.  

The full text of the letter to shareholders included in Mr. Sullivan's circular is appended below.

For more information, please contact:

Kevin M. Sullivan
416-543-1573
[email protected]

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AN IMPORTANT MESSAGE TO GMP'S SHAREHOLDERS

September 14, 2020

Dear Fellow GMP Shareholder:

I am pleased to provide you with my information circular (the "Circular") in connection with the annual and special meeting of the shareholders of GMP Capital Inc. ("GMP") to be held on October 6, 2020.  

This is an important meeting for GMP's shareholders as the future success of the business is at stake.

For the reasons I have set out in the Circular, I am asking for your vote against the proposed transaction (the "RGMP Transaction") to consolidate 100% of the shares of Richardson GMP Limited ("RGMP") under GMP.  The terms of that transaction are financially unfair to GMP's shareholders and unduly prefer the interests of Richardson Financial Group Limited ("RFGL") over the interests of GMP's other shareholders (the "Independent GMP Shareholders").  

To bring the change that is needed, I am also asking for your vote to elect five new highly qualified, experienced and independent nominees (the "Shareholder Nominees") as directors of GMP.  The Shareholder Nominees will bring the leadership, strategic direction and independent board oversight that GMP requires at this critical juncture.  They will also better serve the interests of all GMP shareholders, including by ensuring that the RGMP Transaction is only undertaken on terms that are fair to both the Independent GMP Shareholders and the investment advisors who are the bedrock of RGMP.

GMP and RGMP are very important to me.  I have devoted much of my professional life to GMP's success.  I am a passionate believer in the future of RGMP, as well as a client personally.  I served as a senior executive of GMP for almost 25 years and as a director of GMP for over 15 years.  During that time, I oversaw the creation and growth of RGMP.  I understand the value of both GMP and RGMP.

I am also a significant shareholder of GMP, owning approximately 4% of its outstanding common shares.  My interests are fully aligned with the Independent GMP Shareholders.

GMP's board portrays me as trying to "disrupt" the RGMP Transaction. The opposite is true, as anyone who looks at my record will know.  I have a record of creating value, not disruption.  

My opposition to the RGMP Transaction, both as it was originally announced in February 2020, and as now being proposed, is not, and has never been, to the concept of the transaction.  I continue to believe that consolidating the ownership of RGMP under GMP is in the best interests of GMP, provided it is done on fair terms.  My actions are not an effort to disrupt the RGMP Transaction.  Instead, they are intended to protect the interests of GMP and all its Shareholders, as well as RGMP, by either causing the terms of the RGMP Transaction to be changed so that it is fair to all constituents and will be approved by the Independent GMP Shareholders, or ensuring the GMP has the board leadership it needs going forward to create shareholder value through other means and strategies. A deal that is not approved by the Independent GMP Shareholders is no deal at all.

The principal reasons that you should vote against the RGMP Transaction, and vote to elect the Shareholder Nominees as directors, are outlined below.

The RGMP Transaction is NOT Fair to GMP's Shareholders

The RGMP Transaction Destroys Value

The RGMP Transaction as proposed is value destructive to the Independent GMP Shareholders.  Viewed through any objective lens, the value of what Independent GMP Shareholders will own after completion of the RGMP Transaction is less than the value of what they own today.

The unfairness of the RGMP Transaction is amplified by the fact that it delivers effective control of both GMP and RGMP to the Richardson family, the owner of RFGL.  The Richardson family is paying no control premium – in fact it seeks a control discount from the Independent GMP Shareholders – for that significant benefit.

None of this is fair to the Independent GMP Shareholders.

The RGMP Transaction is Structurally Unfair

In addition to being value destructive, the RGMP Transaction is also structurally unfair to the Independent GMP Shareholders and to the RGMP investment advisors who will become minority shareholders of GMP.

RFGL is currently bound by an Investor Agreement that protects GMP's other shareholders with respect to GMP's board composition, change of control transactions and other matters. The RGMP Transaction will see the Richardson family's ownership of GMP increase from 24.1% to 40.1%.  At that level of ownership, the Richardson family will effectively control GMP, including the composition of GMP's board.

Inexplicably, as part of the RGMP Transaction, GMP's board has agreed to terminate the Investor Agreement, and has not replaced it with any protections for the benefit of GMP's minority shareholders. 

This also is unfair to the Independent GMP Shareholders.  

RFGL had Significant Control Over GMP during Negotiations

It is not surprising that the terms of the RGMP Transaction are overly favourable to RFGL. These terms were negotiated by a board that had already handed significant control over the affairs of GMP to representatives of the Richardson family.

RGMP was supposed to have two of nine directors of GMP.  Instead, it has two of five.

GMP's board also allowed one of RFGL's director nominees, Kishore Kapoor, to serve as GMP's President and Chief Executive Officer throughout the negotiation of the RGMP Transaction.  This removed any possibility of GMP's CEO developing or supporting any transaction or strategic alternative other than the RGMP Transaction on terms supported by RFGL.

The results of RFGL's influence led to a proposed transaction that favours RFGL at the expense of the Independent GMP Shareholders.

The RBC Valuation and Fairness Opinion is Flawed

The valuation and fairness opinion of RBC relied upon by the incumbent board to justify the RGMP Transaction neglects key data points and is flawed.  

RBC's valuation analysis overstated the fair market value of RGMP's common shares and understated the fair market value of GMP's shares, resulting in an artificially high exchange ratio to the benefit of RFGL and the detriment of the Independent GMP Shareholders.  Most significantly, RBC:

• in valuing RGMP's common shares: (i) largely ignored the lower trading multiples of comparable public companies, (ii) did not properly take into consideration the impact of the $36 million cost of retention payments to be paid by RGMP to its investment advisors, and (iii) made unduly optimistic assumptions about RGMP's EBITDA growth and applied an unreasonably low discount rate; and
  
  
• in valuing GMP's Shares, artificially discounted the cash in GMP by making unwarranted non-cash adjustments.

Details of the flaws in RBC's analysis are outlined in the Circular.

The ability of GMP's shareholders to rely upon RBC's analysis is further undermined by RBC's lack of independence from the Richardson family.  GMP's shareholders should rightly ask themselves why, in light of the close historical ties between RBC and the Richardson family, GMP's board selected RBC as its independent financial advisor and valuator.

Despite the flaws in the valuation, I am willing to work with those values to ensure shareholders are treated fairly, as I have outlined in the Circular.

The RGMP Transaction Over-Capitalizes the Combined Business

The RGMP Transaction over-capitalizes the combined GMP/RGMP business at the expense of the Independent GMP Shareholders.  Contrary to the claims of GMP's board, the Circular shows that the combined business will have net working capital of approximately $149.8 million, far in excess of what is reasonably required to fund growth initiatives.

RGMP's business has operated successfully throughout its existence with less than $30 million of capital on its balance sheet.  RGMP has done so for more than 10 years, with no growth initiative or desire to hire additional investment advisors being missed because of capital constraints.  Further, RBC has forecast that the combined GMP/RGMP business will generate an additional $95 million of free cash flow over the 2022 to 2024 period, which can be re-invested into growth initiatives as appropriate.

The reasons given by GMP's board to resist returning more of GMP's excess capital to GMP's shareholders simply do not add up. 

Review of Independent Financial Expert

I retained a truly independent financial expert, Professor Eric Kirzner, the John H. Watson Chair Emeritus in Value Investing at the Rotman School of Management at the University of Toronto (the "Independent Financial Expert"), to independently review and assess the RGMP Transaction. No part of the fees payable to the Independent Financial Expert were dependent upon his findings or conclusions.

On the basis of his review, the Independent Financial Expert concluded that the RGMP Transaction is not fair to the Independent GMP Shareholders.  The reasons for the conclusions of the Independent Financial Expert, together with his report, are included in the Circular.

The RGMP Transaction Can be Changed to Make it Fair and Reasonable

The benefits of the RGMP Transaction must be fairly apportioned among the relevant constituencies – the Independent GMP Shareholders, RGMP's investment advisors and RFGL. Currently, they are not.

I believe that two principal changes are required to make the RGMP Transaction fair and balanced and to obtain the support of the Independent GMP Shareholders:

• In addition to the $0.15 per share dividend (approximately $11.3 million) currently contemplated to be paid to GMP's pre-closing shareholders, a further $40 million ($0.53 per share) should be returned to GMP's pre-closing shareholders by way of a share buy-back at $2.42 per share ($50 million if the Richardson family wishes to participate).
  
  
• A suitable and customary governance agreement is required at GMP to ensure that RFGL does not use its 40.1% post-closing share ownership to take actions that are contrary to the interests of GMP's post-closing minority shareholders.

The position of GMP's board that returning anything more than the $0.15 special dividend would compromise future growth is not reasonable.  Not only is that position inconsistent with the facts, the board provides no details regarding any specific plans to deploy growth capital.

The original terms of the RGMP Transaction announced in February 2020 contemplated the immediate redemption of RFGL's preferred shares and purchase of certain indebtedness owed to RFGL. This was an incremental $38 million ($0.52 per share) immediate cash outflow that is no longer required.

GMP's own Special Committee recognized the appropriateness of a larger return of capital in seeking payment of a $0.67 special dividend to GMP's shareholders, representing an aggregate return of capital of over $50 million, as recently as July 1, 2020.  This was an acknowledgment by GMP's Special Committee and RBC, as its financial advisor, that GMP has adequate excess capital to make such a distribution, which is the unquestionable reality.

GMP has the financial capacity and flexibility to return $51.3 million ($0.68 per share) of capital to its shareholders as part of the RGMP Transaction.

The return of capital to GMP's Shareholders through a GMP share buy-back will also enhance the position of RGMP's investment advisors, who are critical to the success of the combined business.  By reducing the number of post-closing shares that will be outstanding, the percentage ownership of RGMP's investment advisors in the combined business of GMP and RGMP will increase, providing the RGMP investment advisors with more exposure to the upside from future growth of the business.

I believe that, with the two changes articulated above, the RGMP Transaction would be fair and balanced and in the best interests of GMP and all relevant stakeholders.

Don't be Influenced by Scare Tactics

GMP's circular includes claims regarding the potential fallout from a decision by the Independent GMP Shareholders to reject the RGMP Transaction.  For the reasons set out in the Circular, none of these claims should be believed by shareholders, who should disregard these scare tactics. Shareholders should instead be concerned about a board that engages in them.

The RGMP Transaction has already been renegotiated once, after it became clear that it would not be approved by the Independent GMP Shareholders.  The RGMP Shareholders' Agreement provides a framework that can be varied.

As a result of a confluence of negative factors, including RFGL's influence over the existing board and RFGL's control over GMP's CEO, there has never to date been a realistic prospect that GMP would proceed in a different strategic direction and seek to create shareholder value through other alternatives.  The election of the Shareholder Nominees will allow that to occur for the first time.

The Necessity for Significant Change on GMP's Board

Fundamental to the outcome of any negotiation is a party's alternatives.  GMP's circular makes clear that the existing board has no alternative strategy, and no plan, if the RGMP Transaction is rejected.

It was incumbent on the existing board to put forward in GMP's circular its alternative strategy, and a Plan B, in the event of a failed transaction.  It is not enough, as the existing board did, to simply say: "[i]n the event that the RGMP Transaction is not approved, the Board will take actions that are in the best interests of the Company."  That is not a strategy.  It is an acknowledgement that one does not exist.

The failure of the existing board to have any alternative strategy underscores the compelling need for change in the composition of GMP's board.  The current board is out of ideas and has effectively turned decision-making over to RFGL.

In contrast, the Shareholder Nominees are an exceptionally qualified group with a can-do attitude.  They are deeply experienced in the executive leadership, strategic direction and board oversight of investment management and financial services businesses. As importantly, they have earned the trust and respect of shareholders and capital markets participants through proven track records of honest leadership, building businesses and creating shareholder value:  They are:

• John S. Chambers: A deeply experienced investment industry professional and former Chair of the Investment Industry Association of Canada, Mr. Chambers is a former Vice Chairman and President of GMP FirstEnergy and a former Chief Executive Officer of FirstEnergy Capital Corp.
  
  
• Edward J. (Ted) Goldthorpe: Currently a Partner of BC Partners, an international investment firm with approximately €23 billion of assets under management across private equity, credit and real estate in Europe and North America; formerly President at Apollo Investment Corporation and Chief Investment Officer at Apollo Investment Management, and before that with Goldman Sachs for 13 years.
  
  
• David J. Goodman: An experienced executive with over 30 years experience building and operating a wide array of investment businesses, Mr. Goodman is the former Chief Executive Officer of Dundee Corporation, the former President and Chief Executive Officer of DundeeWealth Inc. and the former Head of Global Asset Management at Scotiabank leading the Dynamic Funds Family and Scotia Asset Management.
  
  
• J. Cameron MacDonald: Currently the President and Chief Executive Officer of The Westaim Corporation, Chairman of the Board of Arena Investors, LP, and Chairman of the Board and member of the Investment Committee of Houston International Insurance Group; formerly President and Chief Executive Officer of Goodwood Inc., a Toronto-based investment manager.
  
  
• E. Cynthia A. (Cindy) Tripp: An experienced senior financial services executive and corporate director, Ms. Tripp was one of the founding partners of GMP Securities and its predecessors, where she served for approximately 20 years; she is currently a member of the Ontario Government appointed five-person Capital Markets Modernization Taskforce with a mandate to review, modernize and streamline securities regulation in Ontario.

Full profiles of the Shareholder Nominees are included in the Circular and at www.astrongergmp.com.

The election of directors at the meeting will not be meaningful if the RGMP Transaction is approved, as once that is completed RFGL will own 40.1% of GMP's shares and be able to reconstitute GMP's board as it wishes.  The election of directors is, however, fundamentally important if the RGMP Transaction is rejected.  Shareholders should consider which board will better protect their interests and is prepared to lead in those circumstances.  In my view, the choice is clearly in favour of the Shareholder Nominees.

The Shareholder Nominees have a detailed strategic action plan as outlined in the Circular.  If elected, they will:

• Immediately engage with RFGL and RGMP's investment advisors and management to try to renegotiate the terms of the RGMP Transaction such that it is fair and balanced and in the best interests of GMP and all relevant stakeholders.  Recognizing that the reconstituted board cannot unilaterally deliver a successful consensual transaction, the reconstituted board will also, contemporaneously, immediately move forward with the other parts of its strategic action plan.
  
  
• Immediately engage with the entire group of RGMP investment advisors and RGMP's management to: (i) ensure RGMP's investment advisors expectations regarding the benefits that would accrue to them under a fair RGMP Transaction are met by the parties, and (ii) develop an executable plan for liquidity and value maximization for all of RGMP's investment advisors.
  
  
• Immediately implement a cost-reduction strategy to reduce and right-size GMP's cost structure to reflect its status as a small public holding company.
  
  
• As an alternative in the event that completion of the RGMP Transaction on reasonable terms proves unexecutable, immediately commence an investigation of the viability of an IPO of RGMP.
  
  
• Immediately engage with RGMP to renegotiate the terms under which GMP's Operations Clearing business provides carrying broker services to RGMP to reflect market terms.
  
  
• Implement an appropriately sized share and debt repurchase program, or alternatively design a special dividend, to return the unused excess capital on GMP's balance sheet to its shareholders and debtholders, as appropriate and consistent with the duties of GMP's directors.
  
  
• Re-establish appropriate dialogue and communications with GMP's shareholders such that the new board remains attuned and aware of shareholders' views.
  
  
• Embark on a full governance review to ensure that GMP's go-forward governance will be in line with best practices and that GMP benefits from true independent board oversight.

I am resolved to work tirelessly to do what is right for GMP and its shareholders.  This can be fixed.  With your support, I am confident that we can create value for GMP and all its shareholders.  Please read on to learn how you can vote with us to make this happen.

Yours sincerely,

"Kevin M. Sullivan"

(SIGNED) KEVIN M. SULLIVAN

For questions or assistance in completing or returning the enclosed YELLOW form of proxy or voting instruction form, please call:

Gryphon Advisors Inc.
1-833-266-0365 (toll-free in North America)
[email protected]

For up to date information and ease of voting, Shareholders are encouraged to visit www.astrongergmp.com and click on the "Vote Now" button to cast your vote.

SOURCE Kevin M. Sullivan