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Why Tom Dodds quit as a director of Essar Steel Algoma

Since India's Essar Group bought the Sault's steel mill in 2007, at least six directors of Essar Steel Algoma have resigned in frustration. They include EDC boss Tom Dodds. Did the parent company keep its Canadian directors in the dark about critical issues?
20160411 EDC Tom Dodds City Council Chambers KA
FILE PHOTO: Tom Dodds, CEO of the Sault Ste. Marie Economic Development Corporation. Kenneth Armstrong/SooToday

In early 2014, Essar Steel Algoma was a billion dollars in the red with creditors howling up and down Wallace Terrace.

Tom Dodds was getting antsy.

Chief executive officer at Sault Ste. Marie Economic Development Corp., Dodds was an independent director on the Essar Algoma board.

As the Sault steelmaker's short-term liquidity and long-term debt problems became increasingly worrisome, Dodds figured he'd be kept in the loop and involved in making critical decisions, just like the non-independent directors with closer ties to Essar Algoma and its corporate parent, Essar Global Fund Ltd.

On that point, he was disappointed.

Dodds began to suspect he wasn't getting the same timely information as other directors.

He discussed the issue with two former independent directors, Hans H. Jacobsen and Navin Dave.

Both had similar concerns.

Dodds then communicated his thoughts in writing to Prashant Ruia, a fellow director of Essar Steel Algoma, group CEO of Essar Global and scion of one of India's wealthiest families.

His response wasn't satisfactory to Dodds.

Dodds resigned from the Essar Algoma board.

"The fundamental reason for the decision to resign was my conclusion that as an independent director, that I lacked confidence that I was receiving information and engaged in decision-making in the same manner as those board members who are directly affiliated with the company and/or its parent," Dodds said in a subsequent letter to Prashant Ruia.

"The role I had envisioned is that what I and the former independent directors (Dave and Jacobsen) have described to you verbally and in writing. I wrote to you on February 18 expressing the concerns of the current and independent directors noted."

"I do want to be clear," Dodds said. "My resignation is not a reflection of the decisions made by the board or the actions taken by the company to date. I am resigning based on what I see as an ongoing misalignment of the role of an independent director on the Essar Steel Algoma board, particularly under the company's current circumstances."

Tom Dodds is just one of nine Essar Algoma directors who resigned during the five years from 2009 to 2014.

Six of them expressed serious concerns about the ESA board.

Resignation letters from the disgruntled directors will be considered today in Toronto by Justice Frank Newbould of the Superior Court of Justice, as part of a request for a sweeping investigation into alleged oppressive conduct by Essar Global and its subsidiaries.

The debtor-in-possession lenders whose cash has kept Essar Steel Algoma afloat over the past 10 months are asking that Ernst & Young, the court-appointed monitor, be allowed to question directors, employees and officers of Essar Global, the Port of Algoma and other companies to determine whether minority shareholders were oppressed in violation of the Canada Business Corporations Act.

Three representatives of the United Steelworkers - John Kallio, Murray Nott and Marie Kelly - all resigned during the same week in 2009.

They submitted identical resignation letters.

"I regret the need to take this action at this point in time," all three letters said.

"Nevertheless, I have concluded, as have my fellow USW directors on the board, that the board is not functioning properly, and has not done so for some time."

"I have regrettably come to the conclusion that I am no longer able to make a meaningful contribution to the board or to discharge properly the full range of my duties and responsibilities to the corporation."

Three lawyers jumped ship in 2013, all with nothing bad to say:

  • Manoj Pundit, a partner at the national law firm Borden Ladner Gervais LLP, cited only time restraints when he resigned on December 2, 2013.

  • John Ciardullo, a merger and acquisitions specialist and partner in the Toronto office of Stikeman Elliott LLP, had no concerns when he left on June 4, 2013. 

  • Philip Brown, partner at Torys LLP,  similarly expressed no concerns in his resignation letter dated October 29, 2013.

Hans H. Jacobsen, former manager of sales and marketing, corporate planning at Quebec Cartier Mining Co. (now ArcelorMittal Mines), included no complaints in his February 11, 2014 resignation letter, but he's known from Tom Dodds' written account to have been concerned.

"We have not heard back from Prashant Ruia on the email sent by fellow director Tom Dodds," said Navin Dave in his resignation letter dated February 21, 2014.

Dave, a former managing partner, Canadian regions; managing partner, India; and managing partner in New York for global resource leveraging at KPMG LLP, commented that "I am presuming that there is no interest in having directors who are independent in name and substance as well."

Even more concerning to the debtor-in-possession lenders are issues related to the Port of Algoma and Algoma Energy LP, the local power cogeneration facility.

Lawyers for the DIP lenders are critical of Essar Algoma's decision to lease its aging local dock two years ago to Port of Algoma Inc., a company 99 percent owned by a subsidiary of Essar Steel Algoma's parent company, Essar Global Fund Ltd.

It's a complicated and odd arrangement.

The lease is for 50 years.

The port agreed to prepay to Essar Algoma all amounts due as rent, totaling US$154.8 million.
This obligation was then transferred to the parent company in India, which has not honoured it.

Essar Algoma must pay the port for cargo handling and other services.

Under a shared services agreement, Essar Algoma also provides employees and other support to the port, allowing it to fufill its cargo-handling obligations.

The term of the cargo-handling agreement is just 20 years.

After that time, Port of Algoma would be able to deny Essar Algoma access to the critical port for the 30 years remaining in its lease, the DIP lenders point out.

The port leasing transaction, in the opinion of the court-appointed monitor, has effectively transferred control of one of Essar Algoma’s most critical assets, the port facilities, to the parent company Essar Global.
Port of Algoma has essentially acquired "a functional veto over any transaction in respect of [Essar Steel] Algoma, both at present and subsequent to any transaction or plan in these Companies' Creditors Arrangement Act proceedings," the monitor argues.

The DIP lenders use stronger language, accusing the port, and ultimately its parent company, of using "oppressive arrangements to hold the company and its stakeholders hostage in this proceeding."

"Access to the port facility is essential to the company's ability to receive shipments of raw materials by boat and to ship finished goods and byproducts by boat to third-party purchasers in a cost-efficient manner," the lenders say.

Alternatively, the port could use its leverage to force substantially higher fees from Essar Algoma.

Today, lawyers representing Port of Algoma will ask the court to force Essar Algoma to pay all money due under its cargo-handling agreement.

Alternatively, the port is asking to be allowed to stop performing obligations that Essar Algoma isn't paying for.