Two of Canada's largest institutional shareholders have launched a public battle against an $863-million (U.S.) deal for Frank Stronach to give up control of auto parts giant Magna , arguing the deal is "offensive" and "horrible."
The Canadian Pension Plan Investment Board and the Ontario Teachers' Pension Plan said Thursday they will vote against Magna's offer to Mr. Stronach, complaining it pays him an excessive premium to give up his 726,829 multiple-voting shares. The shares give him 66 per cent voting control of the company even though he owns just 0.6 per cent of the total equity.
Magna has offered to pay Mr. Stronach $300-million (U.S.) in cash plus grant him nine million new subordinate-voting shares of the company for a total value of $863-million. The deal values each of his multiple-voting shares at $1,187, a massive premium over Magna's share price. Magna's widely held subordinate voting shares closed 62 cents higher at $69.86 (U.S.) Thursday.
"In our minds, it is an entirely excessive, inappropriate and egregious price that we're being asked to pay, so that's why we're reacting so quickly and so strongly to what this proposal lays out," CPPIB chief executive officer David Denison said Thursday in an interview.
He said it also sets a "terrible" precedent if other companies choose to collapse their dual-share structures.
"We haven't seen too many situations which are as offensive, quite honestly, as this," Mr. Denison added.
A Magna spokeswoman said the company has no comment on the pension fund opposition to the deal.
While prominent investors in Canada, Teachers and CPPIB do not directly own enough shares of Magna to sway a vote at the company's special meeting on June 28. In its latest disclosure, the CPPIB said it owns 1,093,424 shares of Magna, which represents 0.98 per cent of the company's subordinate-voting shares.
Wayne Kozun, senior vice-president of public equities at Teachers, said the pension plan owns just one share, which it bought recently so Teachers could vote against the deal. He said the deal raises numerous corporate governance issues, and Teachers wanted to be able to express its concerns.
"All shareholders in Canada should be concerned about this, whether they're significant shareholders in Magna or not, because the precedent it sets is a horrible one," Mr. Kozun said in an interview. Both pension plans said they endorse eliminating dual-class share structures, but cannot support the terms of the Magna deal.
Magna has had a long history of disputes with shareholders, especially over the large compensation payments granted to Mr. Stronach over the years in the form of consulting payments. In 2004, Teachers was among a group of institutional shareholders that opposed a $54-million (Canadian) package for the Magna founder and chairman.
Holders of Magna's subordinate-voting shares also mounted opposition to a controversial 2007 deal that saw Russian investor Oleg Deripaska buy shares in Magna and receive equal voting control to Mr. Stronach. He received a $150-million payment from the deal.
Several other large Magna shareholders contacted Thursday said they would not comment on the offer.
Magna also plans to move its electric car division into a new joint venture company that Mr. Stronach would co-own and run.
Teachers said the terms of the proposed joint venture on the electric car division are of particular concern, even beyond the fact Mr. Stronach would have control of the venture and appoint a majority of its board after making an $80-million investment for a 27-per-cent ownership interest. Teachers said there has been no valuation provided to shareholders of the value of the assets being transferred to the joint venture, so there is no way to assess the fairness of Mr. Stronach's investment and ownership stake.
Magna also proposes to create a dual-class share structure for the E-Car joint venture when it is converted into a corporation down the road, which would cement Mr. Stronach's control of the company, Teachers said. The pension fund said it is possible he could demand those shares be bought out in the future at the same sort of premium as his Magna shares.
Teachers also questioned whether Mr. Stronach would have the same lucrative compensation deal at the E-Car venture that he has had at Magna for many years, and said it is also concerned that E-Car would be allowed to invest up to 20 per cent of its equity in unrelated businesses.
"Will this involve horse racing tracks? Real estate investments?" Teachers asked in a statement Thursday, referring to unpopular alternative investments Magna has made in the past.
Mr. Kozun said he doesn't believe other shareholders should support the deal simply because Magna's share price has risen 13 per cent since it was announced in May. He said the price would have risen even more if Magna weren't paying $863-million to Mr. Stronach - which represents almost a 10th of Magna's total market value.
Mr. Denison said it is especially disturbing that a special committee of independent directors would offer no recommendation on whether to vote for or against the proposal. The special committee also did not release a fairness report by an independent valuator, which Mr. Denison said suggests no one was prepared to give one.
He said directors have a fiduciary responsibility to the company and "should come back with a sensible proposal to eliminate this dual-class share structure, one that they're prepared to recommend, and one that can have a fairness opinion associated with it as well."