Hard bargaining over the acquisition of wealth-management firm DundeeWealth Inc. of Toronto is once again focusing attention on the long-festering issue of dual-class shares.
Canadian corporate governance activists want the increasingly controversial share structure phased out. Others, such as financial author Yvan Allaire, hail the structure as a valuable negotiating tool that ultimately benefits all shareholders.
“This is a situation in which one can clearly see that multiple-vote shares can benefit minority shareholders,” says Allaire, chairman of Montreal-based Institute for Governance of Private and Public Organizations, referring to competing bids from Montreal-based Power Financial Corp., CI Financial Income Fund and Bank of Nova Scotia, the latter two of Toronto, for DundeeWealth, which is controlled by the Goodman family in Toronto.
Allaire, a specialist in corporate governance and a member of the board of Montreal-based Caisse de dépôt et placement du Québec, notes that “coattail” provisions adopted by DundeeWealth ensure that any benefits the Goodman family gains will be shared among minority shareholders. Dundee patriarch Ned Goodman is “doing a great job” of driving up value for all shareholders, he says.
Controversy over the role play-ed by holders of multiple-vote shares in cases of alleged corporate malfeasance, as well as in conventional restructurings and buyouts, has inflamed recent calls for reform to Canada’s decades-old system of dual-class shares.
For its part, the IGPPO has strongly endorsed the vital role that dual-class share structures deliver to family-led controlling shareholders. An estimated one-third of all Canadian large-cap companies employ dual-class share structures, such as those in place at Dundee. But that is not to say the IGPPO isn’t advocating change.
A set of reform recommendations, authored by Allaire for the IGPPO and adopted by its board in December 2006, contend dual-class shares work to the benefit of all shareholders — if there is “the appropriate legal framework for protecting minority shareholders.”
The IGPPO — whose board includes dual-class share opponents Stephen Jarislowsky and Claude Lamoureux, the latter the recently retired president and CEO of the Ontario Teachers’ Pension Plan Board, as well as prominent Quebec-based business figures — lists those benefits as “committed, actively engaged, controlling shareholders closely monitoring management; a combination of independent board members and board members with their money and their reputation at stake; a long-term perspective and strategy; and maintenance and transmission of values, loyalty and stability of talented personnel.”
While underlining the positive aspects of multiple-vote shares, the IGPPO position highlights the importance of reform to introduce a new framework for protecting the rights and interests of minority shareholders. At the top of Allaire’s five-point list of reforms, he wants “coattail” provisions tightened to ensure that offers “to buy control from a controlling shareholder must be broadened to include an offer on the same terms and conditions to all other shareholders.”
Next on Allaire’s list comes a call for guidelines capping future issues of multiple-vote shares at a ratio of 4:1, alongside a call for the elimination of non-voting shares. Allaire also suggests “controlling shareholders should exercise their power to elect directors only for the fraction of the board equivalent to their percentage of total voting rights, with a cap of two-thirds of board members.”
Rounding out his reform package, Allaire recommends that independent board members carefully vet whether a descendant or kin of the controlling shareholder is a suitable candidate for the CEO position, and that in cases in which there is no family succession from the controlling shareholder, plans should be adopted for a transition to a single-class share structure.
Allaire’s ideas have received some backing. Scholars at Wilfrid Laurier University in Waterloo, Ont., agree with many of the recommendations, says professor Ben Amoaka-Adu, co-author of a new study that suggests that while “dual-class companies sell at a significant discount compared to loosely held single-class companies,” all is not negative with this structure.
Amoaka-Adu’s endorsement is not unqualified, however. “Regulatory rules should require every company to have coattail provisions,” he says, “even retroactively.”
The Toronto Stock Exchange’s requirements are neither legally binding nor retroactive.
Amoaka-Adu also queries Allaire’s 4:1 ratio. Allaire bases his ratio on the assumption that forcing controlling shareholders to own at least 20% of equity creates “an alignment with the rest of shareholders.” But according to Amoaka-Adu, the European experience suggests a 10:1 ratio would receive greater support from Canadian market participants.
@page_break@Amoaka-Adu also challenges Allaire’s call for the elimination of non-voting shares, and says the market is voluntarily moving to address the issue. He also rejects the suggestion that a lack of family succession should trigger the “sunsetting” of dual-class structures. “We should not forecast elimination,” Amoaka-Adu argues.
So far, Allaire’s recommendations have failed to sway critics of dual-class share structures, including Laura O’Neill, director of law and policy at the Shareholder Association for Research and Education in Vancouver: “SHARE has demonstrated a much lower tolerance for dual-class capital structures in the public-company context.”
SHARE has recommended seven reforms, including a prohibition on new dual-class share structures on the TSX and clear labelling of all dual-class shares and exchange ticker symbols “to identify issues that have multiple votes or no votes at all.”
The 340,000-member National Union of Public and Government Employees in Nepean, Ont., has consistently opposed dual-class structures. “Dual-class share companies want the best of both worlds,” says secretary-treasurer Larry Brown. “They want public investment combined with private control.”
At the Toronto-based Canadian Coalition for Good Governance, Bill Mackenzie, who spearheads the coalition’s work on majority voting issues, says reform is required. But he doesn’t think reform that encourages companies to float new dual-class shares are appropriate: “If this was going to be adopted as the minimum standard for new dual-class equity, we’d be supportive. But we much prefer ‘one vote, one share’.”
While recognizing that sunset provisions and other efforts to bridge the dual-class divide are steps in the right direction, Mackenzie says, “It’s very hard to change what’s already there.”
Seen from this perspective, the reform suggested by Allaire may represent the kind of gradualist approach that, along with market-based pressures on companies with lopsided shareholder structures, could slowly propel change with little friction. IE