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.
\u201cThis is a situation in which one can clearly see that multiple-vote shares can benefit minority shareholders,\u201d says Allaire, chairman of Montreal-based Institute for Governance of Private and Public Organizations<\/b>, 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 d\u00e9p\u00f4t et placement du Qu\u00e9bec, notes that \u201ccoattail\u201d provisions adopted by DundeeWealth ensure that any benefits the Goodman family gains will be shared among minority shareholders. Dundee patriarch Ned Goodman is \u201cdoing a great job\u201d 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\u2019s 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\u2019t 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 \u2014 if there is \u201cthe appropriate legal framework for protecting minority shareholders.\u201d
The IGPPO \u2014 whose board includes dual-class share opponents Stephen Jarislowsky and Claude Lamoureux, the latter the recently retired president and CEO of the Ontario Teachers\u2019 Pension Plan Board, as well as prominent Quebec-based business figures \u2014 lists those benefits as \u201ccommitted, 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.\u201d
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\u2019s five-point list of reforms, he wants \u201ccoattail\u201d provisions tightened to ensure that offers \u201cto buy control from a controlling shareholder must be broadened to include an offer on the same terms and conditions to all other shareholders.\u201d
Next on Allaire\u2019s 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 \u201ccontrolling 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.\u201d
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\u2019s 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 \u201cdual-class companies sell at a significant discount compared to loosely held single-class companies,\u201d all is not negative with this structure.
Amoaka-Adu\u2019s endorsement is not unqualified, however. \u201cRegulatory rules should require every company to have coattail provisions,\u201d he says, \u201ceven retroactively.\u201d
The Toronto Stock Exchange\u2019s requirements are neither legally binding nor retroactive.
Amoaka-Adu also queries Allaire\u2019s 4:1 ratio. Allaire bases his ratio on the assumption that forcing controlling shareholders to own at least 20% of equity creates \u201can alignment with the rest of shareholders.\u201d 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\u2019s 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 \u201csunsetting\u201d of dual-class structures. \u201cWe should not forecast elimination,\u201d Amoaka-Adu argues.
So far, Allaire\u2019s recommendations have failed to sway critics of dual-class share structures, including Laura O\u2019Neill, director of law and policy at the Shareholder Association for Research and Education<\/b> in Vancouver: \u201cSHARE has demonstrated a much lower tolerance for dual-class capital structures in the public-company context.\u201d
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 \u201cto identify issues that have multiple votes or no votes at all.\u201d
The 340,000-member National Union of Public and Government Employees<\/b> in Nepean, Ont., has consistently opposed dual-class structures. \u201cDual-class share companies want the best of both worlds,\u201d says secretary-treasurer Larry Brown. \u201cThey want public investment combined with private control.\u201d
At the Toronto-based Canadian Coalition for Good Governance<\/b>, Bill Mackenzie, who spearheads the coalition\u2019s work on majority voting issues, says reform is required. But he doesn\u2019t think reform that encourages companies to float new dual-class shares are appropriate: \u201cIf this was going to be adopted as the minimum standard for new dual-class equity, we\u2019d be supportive. But we much prefer \u2018one vote, one share\u2019.\u201d
While recognizing that sunset provisions and other efforts to bridge the dual-class divide are steps in the right direction, Mackenzie says, \u201cIt\u2019s very hard to change what\u2019s already there.\u201d
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.\tIE<\/b>
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