Quebec Panel Bars Bid for Big Block of Cineplex Stock

The Quebec Securities Commission on Tuesday turned down Cineplex Odeon Chairman Garth H. Drabinsky’s bid to buy--with other investors--a 30% stake in his company from the Charles R. Bronfman family. The ruling dealt a serious blow to Drabinsky’s hopes of seizing control of the movie theater concern without making a tender offer to other shareholders.

On another front, however, the regulators’ decision gave no clue as to how several other thorny issues affecting the Toronto company will be resolved. The company has been in turmoil ever since its largest shareholder, MCA Inc., told a Canadian court last week that MCA and Bronfman representatives on the Cineplex board had been “extremely critical” of management’s financial reporting practices.

The MCA allegation has potentially embarrassed the powerful Bronfman clan as it attempted to get out of its Cineplex holdings. The Bronfmans have three representatives on Cineplex’s 16-member board and, like MCA, have a seat on the audit committee. If the sale to Drabinsky collapses, analysts privately ask whether the Bronfmans can sell to another group or in the open market if the family has inside information of an adverse nature about Cineplex’s accounting.

The upshot could be a long battle for control, creating a situation that invites a change in management or ownership of the 10-year-old company.

Some analysts have even speculated that the Bronfmans and MCA might band together to call for Drabinsky’s resignation or try to unseat him at Cineplex’s annual shareholders meeting scheduled next month. But under the terms of its standstill agreement with Cineplex, MCA must use its 33% voting stake to fill its own five seats on the Cineplex board and has no role in electing the other directors.

Neither the Bronfmans nor Drabinsky provided any clues Tuesday about their next actions, but they are expected to meet with other Cineplex directors on Thursday at a board meeting that could prove crucial to Cineplex’s future.

Could Match Offer

MCA has urged the board to form a committee of independent directors to weigh Drabinsky’s plan to seize control. Interestingly, in a letter made public at the Securities and Exchange Commission, MCA also urged the Cineplex board to find out whether other parties might be interested in making a bid for the company--and took pains to express its own lack of interest in acquiring control.

If, however, another party makes an “acceptable” bid for Cineplex or any of its U.S. movie theaters, MCA appears to have the right, under its standstill agreement, to match the offer and acquire the U.S. theaters in question.

The Cineplex board was scheduled to meet last Thursday, but the meeting was canceled by Drabinsky, sources said. That same day, MCA Vice President Charles S. Paul went into a Canadian court and submitted his affidavit that disclosed MCA’s criticisms of Cineplex management, winning an injunction against the Drabinsky group to prevent its purchase of the Bronfman stake.

Cineplex had the injunction set aside early this week, but the Quebec Securities Commission ruling has effectively granted MCA’s wish to halt the deal. MCA won’t appeal the ruling that set aside the injunction, said Ian Currie, a Toronto attorney who represents MCA. According to Currie, his client is now “waiting to see what happens, the ball being in (Drabinsky’s) court.”

Neither Drabinsky nor Bronfman attorney Michael Vineberg of Montreal returned a reporter’s phone calls.

Mark Hayes, a Toronto attorney who is representing Drabinsky, said his client is not expected to appeal Tuesday’s decision by Quebec regulators. “The QSC ruling is fairly clear. As far as I know, our clients are going to abide by it,” Hayes said.

In the ruling, the Quebec regulatory agency said it rejected the Drabinsky group’s request to acquire the Bronfman stake because, in its opinion, it “would be detrimental to the protection of investors and to the proper functioning of the securities market.” The commission also refused to grant an alternative proposal put forth by the Drabinsky group that would have allowed it to acquire a smaller stake of 5 million shares. The commission ordered the group to resubmit any new proposed agreement related to the Bronfman holdings.

Cineplex stock closed Tuesday at $13.125 a share, down 25 cents, in composite trading on the New York Stock Exchange.