Fairfax Financial Holdings Ltd. Chairman and Chief Executive Officer Prem Watsa speaks during the company's annual meeting in Toronto April 11, 2013.Aaron Harris/Reuters
Prem Watsa, chief executive of Fairfax Financial Holdings Ltd., wants investors to lock in his voting power, and is renewing a pledge never to sell multiple-voting shares at the company he founded.
The Toronto-based insurance and investment firm drafted a new proposal that would allow Mr. Watsa and his family to maintain their current 41.8 per cent voting power even as the firm issues more equity over time, a move Fairfax said will protect its culture and deter takeover attempts.
Fairfax has operated on a dual-class structure – where one class of shares gets more voting power than the other subordinated group – for decades. Mr. Watsa controlled about 85 per cent of votes when the company had just $8-million (U.S.) of common shareholder equity in 1986. As that equity swelled to $8.8-billion, the percentage of votes Mr. Watsa controlled dwindled.
Mr. Watsa also agreed to stay on as CEO until the end of 2025 and to freeze his annual salary at $600,000, which has stayed consistent since 2000. He renounced any bonus, equity incentive or pension entitlement. Mr. Watsa also has more than 85 per cent of his assets tied up in the company.
Mr. Watsa is also sending a message that Farifax will be kept a family business. The proposal states that the multiple-voting shares cannot be sold, and may only be transferred to other family members. As long as these rules are kept in place the Watsa clan will be forced to maintain their economic interest in the business.
Dual-class share structures have been in the spotlight recently, with tech companies such as Alibaba Group Holding Ltd., Facebook Inc., Google Inc. and even Ottawa's darling Shopify Inc. going public this way. Proponents of the strategy argue that dual-class shares allow management to focus on long-term performance, rather than short-term returns. Those in favour of one-share-one-vote systems, however, take issue with management's desire to control the company without having to risk as much capital, and warn such decisions can shield ineffective managers from challenges to their leadership.
Fairfax's plan is to increase the number of votes per share attached to each multiple-voting share from 10 up to to 50, while maintaining the voting power limit of 41.8 per cent. There are more than 21.5 million subordinate shares outstanding, while Mr. Watsa controls all of the more than 1.5 million multiple voting shares through Sixty Two Investment Company Ltd.
Other key elements to the proposal include a pledge that Mr. Watsa and his family will be limited to 49.9 per cent of the votes overall, through both multiple-voting and subordinate shares.
The move follows the election of Mr. Watsa's son Ben to the board of directors as a way to familiarize the next generation with Fairfax's management. Ben Watsa is a fund manager at wealth management firm Lissom Investment Management Inc. At that time, Mr. Watsa said the appointment would help ensure the company's "fair and friendly culture," which is a message he echoed on a statement on Friday.
The new vote plan had roots in early 2014 when Fairfax was mulling a major acquisition that would significantly dilute Mr. Watsa's holdings. While the deal fell through, Fairfax noted that if it kept to its intended acquisition path, equity financing would further dilute Mr. Watsa's stake. Mr. Watsa said he would not support that.
Fairfax formed a special committee and hired advisers to find a solutions. After considering forming a new class of non-voting shares, the company looked instead to increase the votes on each multiple-voting share. This led to months of back-and-forth on what should be modified and included in the proposal. At one point, negotiations were put on hold and Fairfax acquired specialty insurer and reinsurer Brit PLC. The deal required an equity issue that further diluted Mr. Watsa's holdings. Fairfax then developed the new proposal.
Despite shareholders' recent enthusiasm for companies with dual-class shares, Fairfax consulted with several shareholders to gauge their response to the plan before proceeding.
"While it is rare for us to support a multiple share voting structure — because it generally doesn't help the minority holders of the shares — we make an exception in this case because it is value-enhancing," said Ed Lugo, a New York based portfolio manager with Franklin Equity Group, part of Franklin Templeton Investments, who holds Fairfax shares in two funds. He said that maintianing the "culture of trust" that Mr. Watsa cultivated would likely drive future returns.
The Canadian Coalition for Good Governance (CCGG) says its members are divided on governance principles that should apply to dual-class companies. One suggestion is that holders of multiple-voting shares have a "meaningful equity stake" in the company, and recommends a voting rights ratio of no more than 4 to 1. But Fairfax does follow other principles advised by the CCGG, such as all shares being worth the same amount in the event the dual structure were collapsed or the business was sold.
So far, the proposal was unanimously supported by both a special committee and the directors of the company. If it gets approved, there will be periodic ratification votes to increase the votes attached to Mr. Watsa's shares as the company's total shares are increased over time.
Shareholders will meet to vote on the proposal on July 21.