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Multiple Voting Shares a Canadian Specialty that Dump Disproportionate Risk onto Outside Shareholder

Article featuring Anita Anand on Multiple Voting Shares - first published in The Financial Post -

By: Barry Critchley

Anita Anand, a law professor at the University of Toronto and a frequent commentator of capital markets matters is a critic of multiple of multiple voting shares, a corporate structure that seems to be a Canadian specialty.

While the number of Canadian issuers with such a structure has declined over time — there are now more than 80 compared with about 130 three decades back — they have made something of a comeback this year with a handful of issuers opting for a structure that gives the insiders control through votes even if they don’t own the bulk of the equity.

“MVS allow insiders to retain control despite the fact that they do not retain economic ownership in the firm,” she said at a recent conference. In Anand’s view, “MVS undermine corporate governance standards because outside shareholders carry a disproportionate share of economic risk relative to their ability to influence the affairs of the corporation.”

And in some cases, Anand claims the “disenfranchised” public shareholders “are totally unable to effect change in the corporation.” In other words the outside shareholders are unable to exercise rights that give them “the ability to elect directors, approve financial statements, appoint auditors and affect change through their vote.”

Anand clearly prefers an arrangement where all shareholders are treated equally: in other words in return for taking cash from the investors, the issuer has to be prepared to give all investors a say. And if the founders and/or insiders don’t accept that arrangement, then the argument runs they should stay private and away from public markets.

It’s an ongoing issue. The problems at Bombardier, a dual class share company, were laid bare yesterday when the Quebec government anted up US$1 billion.

Over the summer, at least two MVS companies were involved in proposals to entrench the control of the insiders.

  • At Fairfax Financial, shareholders supported (narrowly) a proposal to maintain the voting power of Prem Watsa (its founder and chief executive) for 10 years irrespective of his actual voting power. In return, Watsa agreed to certain conditions including his ability to sell his stake. The proposal was controversial, took more than a year of behind the scenes negotiation and succeeded because of Watsa’s track record.

  • At Alimentation Couche-Tard, a proposal to alter its articles to allow for the continuation of its dual class of shares past their originally planned end date ended up not being put to shareholders because of opposition from the public owners. As part of that proposal, the public shareholders were offered a bone: support it and you can elect 30% of the directors.

Anand has little time for the argument that investors should accept caveat emptor, or buying at your own risk – provided all the information has been disclosed. She argues investors don’t get a free ride because of the “monitoring done by the founding /controlling shareholders,’ because “MVS insulate management, the board and the controlling shareholder.”

So what to do?

Anand doesn’t mince words: because of her belief that MVS “undermine corporate governance” such structures “should be further regulated and perhaps prohibited in Canadian markets.”

MVS is a much-studied matter in Canada. While they haven’t been banned the only major change resulting from those studies is that MVS issuers are now required to offer the public shareholders coattail provisions that kick in in the event of a takeover.

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First published in The Globe and Mail - Since 1995, Ontario’s Securities Act has contained

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