Source: The Canadian Press

Two of Canada’s biggest pension fund managers are opposing Magna International’s plan to pay its founding family US$863 million in cash and shares to give up their special class of shares.

The Canada Pension Plan Investment Board and the Ontario Teachers’ Pension Plan said Thursday they will vote against the auto parts giant’s proposal to do away with the Stronach family’s absolute control over the company.

“While in the short term it would meet one of our objectives, which is eliminate dual class share structures, the price that we and other shareholders would be asked to pay, in our view, is excessive and unreasonable to do so,” said David Denison, the CPP Investment Board’s president and CEO.

Teachers’, one of the world’s largest private equity investors and the largest single-profession pension plan in Canada, called the plan “fundamentally unfair to the company’s subordinate voting shareholders.”

“It also raises a number of larger governance questions as to whether the board of directors has fulfilled its duty, as well as the purpose and benefits to shareholders of dual-class share structures,” Teachers’ said in a statement.

Magna (TSX:MG.A) is seeking shareholder approval for a plan that would see the Stronach Trust, comprised of the Stronach family, trade its 726,829 class B multiple voting shares for $300 million in cash and nine million class A shares — for a total value of $863 million.

The proposal, part of an effort to boost Magna’s share price, would see the company have a single class of shares, of which the Stronach Trust would hold 7.44 per cent.

Denison said the degree to which the new shares doled out to Stronach would dilute the value of Magna’s shares and the cash payment to the Stronach Trust is “so excessive that we find it totally offensive and unreasonable.”

“If this is allowed to go ahead, it becomes a precedent transaction, we think it would be a terrible precedent transaction for future situations to be able to refer back to,” Denison said.

The CPPIB — which invests money not required to pay benefits under the Canada Pension Plan — was responding to a circular issued by Magna late Wednesday, in which a special committee of board members declined to make any recommendation to shareholders on how to vote.

Denison said the lack of direction was disconcerting.

“(The board members) weren’t even willing to recommend this proposal to shareholders. We want them to come up with something that they can clearly recommend….and eliminate this dual class situation in a way that is equitable to shareholders,” Denison said.

Denison said it is clear that Magna’s dual class share structure is constraining the value of its stock, given the market’s positive response to the announcement that the current structure may be eliminated.

Shares in Magna closed up $1.04 at C$72.29 Thursday on the Toronto Stock Exchange, after reaching a 52-week high of $78.82 on May 6, the day it announced its new share structure plan.

Magna, which has scheduled a shareholders meeting on the issue for June 28, declined to comment Thursday on the CPPIB’s announcement.

Founder Frank Stronach, along with his family, have controlled the company through a special class of shares that gives them majority voting rights without a majority equity stake. Each of the family’s 750,000 class B shares has 300 votes, giving the Stronachs a 66 per cent voting interest.

Magna co-CEO Don Walker said in May the proposal to eliminate the Stronach family’s voting control is meant to address shareholders’ frustrations with what they view as an unreasonably low share price.

Some U.S. investment firms have a practice of avoiding companies with dual-class voting structures, and this may have depressed the market value of all Magna shares, which trade on both the Toronto Stock Exchange and the New York Stock Exchange.

Other major institutional investors, like the Ontario Teachers’ Pension Plan, also tend to stick to companies with a one-share, one-vote structure for governance reasons.