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Pyramidal Control Structure

Brookfield bears a pyramidal control structure, a design that U.S. regulators have frowned on since the 1930s. Simply stated, this type of structure lets a small group of shareholders exercise control of a business without putting a proportionate amount of capital at risk.(This kind of corporate structure is often depicted by a pyramid; hence the name. It is legal and to varying degrees common in Europe, Asia and Canada. But it should not be confused with a pyramid scheme.)

Pyramidal control structures are either tremendously efficient or very worrisome, depending on one’s vantage point. Those in the founding group can leverage their capital to effectively control a broad network of assets or investments; often members of this group do so by creating a holding company with the right to appoint half or more of the board of directors of the parent company.

In turn, these directors can oversee a series of acquisitions using the company’s capital, most of which belongs to other people. For the shareholders outside of the control group—even if their capital is doing most of the buying—their influence upon the board of directors is perpetually limited, no matter how much they have invested. Here’s how Brookfield’s pyramidal control structure works: Partners Limited, a private holding company with 45 equity holders (a mix of current and former Brookfield officers, with just eight publicly named) owns slightly more than 20 percent of Brookfield’s Class A shares via a combination of trusts and direct holdings valued at more than $4.7 billion. Partners Limited also owns 100 percent of Brookfield’s 85,120 Class B shares, allowing it to elect 50 percent of Brookfield’s board of directors. Owning just 20 percent of the Class A shares but electing half of Brookfield’s board, those who run the almost invisible Partners Limited end up with effective control over all Brookfield’s operations and governance, and anyone else who happens to be a Brookfield shareholder with a gripe cannot do much but grin and bear it.

In response to a U.S. Securities and Enforcement Commission comment, Brookfield recently came close to acknowledging that it has a pyramidal control structure in the “Risk Factors” section of a prelaunch filing for its Brookfield Property Partners unit: “The company at the top of the chain may control the company at the bottom of the chain even if its effective equity position in the bottom company is less than such controlling interest,” the document states.

Brookfield Class Action Lawsuit

The Brookfield class action lawsuit arose out of a Brookfield affiliate allegedly using it's $31.5 million debt position issued in December 2007 to transfer the assets from Birch Mountain Resources. PricewaterhouseCoopers(PwC) was appointed receiver of Birch Mountain Resources in November 2008 at the request of Tricap Partners Ltd., after Birch Mountain had defaulted on it's debts. The assets included nearly 1 billion tonnes of limestone reserves, along with permits and leases for limestone and other minerals covering over 700,000 additional acres. The assets were transferred to Tricap Partners Ltd, now operating under the Hammerstone Corporation, a subsidiary of Brookfield Special Situations Group, for approximately $50 million. The assets from the Hammerstone Project were valued at over $1.6 Billion dollars in an independent NI 43-101 Technical Report conducted by AMEC in 2006. The study also looked at market demand and supply in the area. The Birch Mountain common stock traded as high as $7.99 in 2006 and went to less than .01 cent a share by November 2008. The Birch Mountain Shareholders for Justice began their fact finding and filed a lawsuit against Brookfield Asset Management on September 22, 2010 with the Superior Court of Justice in Ontario, Canada. The lawsuit challenges the acquisition and transfer of the approximately $2 billion asset from a public company, Birch Mountain Resources, to a private company, the Hammerstone Corporation, a subsidiary of Brookfield Special Situations Group (formerly Tricap Partners LTD).

Recent History
Both Brookfield and the plaintiff spent much of 2011 arguing on whether the trial should be held in Ontario, where Brookfield Asset Management is incorporated, or in Alberta, where the assets are located. The defendant, Brookfield, filed a motion that the plaintiff lacked jurisdiction in Ontario with the Superior Court of Justice and was upheld by the courts. The lawsuit against Brookfield Asset Management is still on-going as of July 2012 and currently has a pending proceeding with the Supreme Court of Canada to decide jurisdiction.

The Hammerstone Corporation is currently operating the quarry which recently announced a new business contract.

History
The Hammerstone Project was an expansion of Birch Mountain Resources' Muskeg Valley Quarry in Northern Alberta, near Fort McMurray, where Birch Mountain owned mineral rights on nearly one million acres in the heart of the oil sands region. The Hammerstone Project had approximately 1 billion tonnes of proven and probable limestone reserves for use to meet the projected demands for limestone and limestone products in the Athabasca region to the year 2060, where there is a known shortage of quality aggregate and limestone materials. Limestone products were to include construction aggregate for concrete and asphalt, as well as limestone-based products for cement and flue-gas desulphurization(FGD) for the oil sands extraction process.