Source: The Canadian Press

Magna International founder Frank Stronach will receive an estimated $120 million in consulting fees over the next four years as part of a proposal that would see him give up his voting control of the company — bringing the total value of the deal to over $1 billion.

The fees Stronach receives from Magna’s subsidiaries currently amount to 3% of Magna’s pre-tax profits. He received nothing in 2009 because the company reported a loss, but was paid $8.2 million for his consulting services in 2008 and a hefty $37.8 million in 2007.

Under the controversial proposal to buy out Stronach’s special class of voting shares, these fees will be reduced by a quarter percentage point each year, down to 2% in 2014, before being eliminated entirely.

“The revised fee arrangements were expected to result in potential savings based on current management forecasts, as compared to the current fee arrangement,” Magna said in the document.

The auto parts giant issued the 200-page circular to comply with a request by the Ontario Securities Commission, which ruled that the company had to release more information before it could hold a shareholder vote on the proposal.


Magna’s shareholders are now set to vote July 23 on whether to give Stronach US$300 million in cash, nine million common shares and control over a joint venture that will develop components for electric vehicles, in exchange for which he will relinquish control over the company. The total value of the deal, based on Friday’s share price and including the consulting fees, is $1.07 billion.

The company had originally planned to conduct a vote on the plan in late June, but that was postponed after the OSC intervened.

The commission agreed shareholders should be allowed to vote, but disagreed with Magna’s assertion that it had disclosed enough information.

It called on Magna to provide shareholders with several previously undisclosed pieces of information, including an opinion on the fairness of the proposal from a special committee of directors that was set up to review it.

“The special committee believes that the choice made by holders of class A subordinate voting shares, whether it be the consummation of the proposal or the status quo, will produce a fair and reasonable result,” the company said in its circular. “The special committee therefore concludes that the arrangement … is fair and reasonable.”

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, as well as the 11.4% dilution of its common stock that would result.

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.

Neither the special committee nor the board of directors has provided a recommendation as to how shareholders should vote.

The circular says the benefits of the proposal to common shareholders “are not easily quantifiable as they are prospective in nature.”

It adds that any benefit to holders of the class A stock will depend on how much the share price appreciates, minus the amount of dilution that will result from the deal, and this is impossible to predict in advance.

The proposal will now go to a shareholder vote, which will then have to be approved by the court.

Andrew Fleming, a securities lawyer with Ogilvy Renault in Toronto, said the court’s role is to determine whether the transaction is fair to all stakeholders.

Whether the court will follow the OSC’s lead and take into consideration the effect of the precedent-setting transaction on the capital markets as a whole is unclear, although Fleming said it’s rare that a court would throw out a deal that’s already been approved by shareholders.

“If the shareholders say they’re going to go for it … the courts have traditionally been very influenced by that, but that doesn’t mean they are bound by that,” he said.

The Stronach Trust, consisting of Stronach and his family, indirectly owns all of 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 before the OSC completed its hearings and issued its decision.

Magna is Canada’s largest auto parts company, with 74,000 employees, 240 manufacturing plants and 76 product development, engineering and sales centres in 25 countries.

Shares in Magna (TSX:MG.A) added $2.43 or 2.5% to $71.48 in Friday trading on the Toronto Stock Exchange. The company’s stock has gained more than 11% since the deal was first announced in early May.