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Time for Regulators to Take Major Look at Dual Class Shares

Article featuring Anita Anand on Dual-Class Shares - first published in The Financial Post -

By: Barry Critchley

Anita Anand is a law professor at the University of Toronto, was the inaugural Chair of the Ontario Securities Commission’s Investor Advisory Panel and is a frequent commentator on securities regulation.

And given the slew of companies with dual class of shares that have been created this year and the many that already exist, she has a message to the regulators: it’s time to examine this type of capital structure in the interests of the investing public.

“Securities regulators have an obligation to protect the investing public on a prospective basis,” she said on the same day the planned initial public offering for Montreal-based Stingray Digital Group was launched.

On that deal – with the plan to raise $120 million through the sale of subordinate voting shares – the new public shareholders will own 63.9% of the equity but have 15.1% of the votes – a ratio many politicians wish they could emulate.

“This is a huge matter. Management is entrenched in these structures and is insulated. How do shareholders address that issue given that they don’t have the voting power,” she asks, adding “there’s a remarkable inequality when you establish these share structures.”

And Anand argues the inequality and structure, are “not necessarily known” to shareholders when they invest in the IPO. And it’s not necessarily the case the new shareholders have read the necessary documentation, she said. Rather, it’s a case of shareholders “not turning their minds to the issue of the inequality.”

Anand has two suggestions:

  • abolish the inequality and don’t allow IPO issuers to implement them at the IPO stage; or,

  • as a less optimal solution, at the first annual meeting of the newly public company, put the matter to a vote of the subordinate voting shareholders. To stay in place, the vote to retain the multiple voting shares should receive approval from the majority of the minority. “This would turn the minds [of the new shareholders] to their issue and they could vote on that,” noted Anand, adding if shareholders vote down the proposed multiple voting structure, they “would remain in the company on an equal footing with every one else.”

The first annual meeting is a suitable time. “Let the shareholders at a meeting vote collectively on whether they want this share structure. Let’s not impose it from day one.”

Anand is not persuaded by the argument investors should avoid buying dual share class companies. “That’s what the opponents say,” noted Anand, adding when investors purchase IPO, “they are not necessarily turning their minds to the share structure.”

Anand has chosen to wade into a topic of discussion that’s been around for almost seven decades. Over that time the issue has been the subject numerous reports. Yet they persist — though a number of issuers over the past few years have collapsed the dual class structure – and the owners of the super voting shares have not collected a premium.

Then there is the Magna situation where the payment received by the Stronach family was about a billion dollars. “That transaction proceeded simply on the basis of a shareholder vote as part of the arrangement process,” noted Anand.

There is symmetry to her argument: if giving up the two classes of shares for a premium requires a vote, then a vote should be required to keep them in.

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

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