Magna to disclose more information to shareholders ahead of contentious vote

Two of the pension funds that had objected to Magna’s proposal said they welcomed the OSC’s decision but added they weren’t entirely satisfied. An analyst also noted that Magna isn’t required to certain information that its critics wanted.

After hearings this week, a OSC panel ruled on Thursday that Magna shareholders should be allowed to vote on the plan but disagreed with the company’s assertion that shareholders had been given sufficient information.

“We intend to work co-operatively with the OSC staff to address the commission’s concerns and comply with the OSC’s additional disclosure requirements,” Vincent Galifi, Magna’s chief financial officer, said in a statement Friday.

“We welcome the commission’s position that shareholders should decide the outcome of the transaction. We will work to bring the proposed transaction back to our shareholders for consideration in an expeditious manner.”

The company said it would not comment further on the ruling.

David Tyerman, an analyst at Genuity Capital Markets who follows Magna, said the OSC’s ruling gave some concessions to both sides, but wasn’t really a victory for anybody.

However, Tyerman noted Magna was not asked to provide a formal valuation or a formal fairness opinion of the deal, which some shareholders had requested.

“There’s a process they’re going to have to go through, there’s a bunch more information that’s going to have to come out, but some of the really big hurdles aren’t there,” Tyerman said.

“Unless there’s something in the new disclosure that is really problematic from a voter’s standpoint, then my assessment is that this is probably going through.”

The Ontario Teachers’ Pension Plan, one of a group of opposing shareholders that was granted limited standing at the OSC hearings held Wednesday and Thursday, applauded the commission for standing up for shareholders’ rights.

“It’s part of our job to be vigilant on corporate governance issues as we manage teachers’ retirement funds, but to do so, we need regulators to enforce strong standards when companies and boards fail to do so,” Teachers president and CEO Jim Leech said in a statement.

But Wayne Kozun, senior vice-president of public equities at Teachers, added that “we remain concerned that this transaction as it is currently structured could harm the integrity of Canadian capital markets.”

Aside from the insufficiency of information provided to shareholders, the deal is also controversial for the huge premium — approximately 1,800% — that Magna has proposed to pay Stronach in exchange for giving up his voting control.

Teachers maintained that controlling shareholders “should not be permitted to extract outrageous premiums from a company under the guise of normalizing its governance structure.”

The Canada Pension Plan Investment Board, another Magna shareholder that came out against the plan, went one step farther, calling on the company’s board to withdraw the proposal entirely and eliminate the millions in consulting fees based on pre-tax profits that are paid annually to Stronach by the company.

“While we had hoped that the Ontario Securities Commission would prohibit the transaction altogether, we are pleased that the OSC has called for further disclosure and a meaningful discussion of the implications of that additional information,” stated president and CEO David Denison.

“That said, we continue to believe that no amount of additional disclosure can justify the proposed transaction. We will vote against it and consider all measures available to us to ensure that shareholder interests are appropriately taken into consideration.”

Neither the CPP Investment Board nor Teachers has enough Magna shares to defeat the motion by themselves, although they are each influential in the Canadian financial industry because of the size of their capital pools.

The deal proposed by Magna would see Stronach receive US$300 million in cash, nine million common shares and control over a joint venture that will develop components for electric vehicles.

In exchange, Stronach would give up his special class of shares and Magna would also phase out his consulting fees by 2014.

Shareholders who support the deal say it will unlock a significant amount of value in Magna’s stock, which has traded lower than its peers because of the company’s dual-class share structure. Dual-class structures tend to scare away some investors because they don’t give common shareholders control over how the company is run.

Since the proposal was first announced on May 6, Magna’s shares have gained approximately 13%.

The Stronach Trust, consisting of Stronach and his family, indirectly owns all the 726,829 outstanding class B shares in the company. Each of the super-voting shares has 300 votes, giving the family-controlled trust about 66% of the voting rights at Magna with less than 1% of the equity.

Magna said a solid majority — 57.4% — of its total outstanding shares had already been voted in favour of the proposal as of Wednesday night before the OSC completed its hearings and issued its decision.

The OSC said late Thursday that it has “serious and substantive” concerns with the lack of information provided to Magna’s shareholders, but said it wasn’t persuaded by arguments that the premium to be paid to Stronach is “abusive” to the capital markets.

It called on Magna to provide a new information circular to shareholders containing several previously undisclosed pieces of information, including: how management and the board decided on the amount to be paid to Stronach and the potential economic benefit of the transaction to shareholders; a list of alternatives to the plan; and an opinion on the fairness of the proposal from a special committee of directors that was set up to review it.

The company hasn’t announced a new date for the vote but the proposal expires on Aug. 31.

Shares in Magna (TSX:MG.A) lost 43 cents to $72.57 in afternoon trading on the Toronto Stock Exchange.