An influential shareholder-advisory firm is recommending that shareholders of Power Financial Corp. reject the privatization bid by parent Power Corp. of Canada, saying the economic benefits of the deal are outweighed by the problems posed by the Desmarais family’s control of the company.
Institutional Shareholder Services Inc. (ISS) said Power Financial stockholders would receive Power Corp. subordinate voting shares with inferior rights and without the same “coattail” protections that are afforded shareholders in other Toronto Stock Exchange-listed companies.
ISS said it recommended against the deal because, “ultimately, we believe that the longer-term risks associated with [Power’s dual-class structure] outweigh the purported economic benefits of the reorganization."
Power Corp. and Power Financial announced the privatization deal in December. It offered to pay Power Financial’s minority shareholders 1.05 shares of Power Corp. for each share of Power Financial they hold. Power Corp. already owned 64 per cent of Power Financial, which has a single class of voting shares.
Power Corp. has a preferred share class that gives its holders – primarily a Desmarais family trust – 10 votes on most corporate matters, including election of the board of directors. The shares listed on the TSX are called “subordinate” because they have just one vote. The Desmarais family’s ownership of preferred shares and some subordinate shares allows them to control 59.1 per cent of the voting power while owning 20.8 per cent of its equity.
The company has had a dual-class share structure since 1920, prior to the family’s control.
ISS said it is also concerned about Power Corp.'s lack of “coattail provisions,” meaning the multiple-voting shares may be sold in a takeover or retired in a restructuring for better terms than those given to subordinate shareholders. Dual-class companies listed on the TSX after 1987 must have coattail provisions, but the exchange grandfathered Power Corp.'s rules when it introduced the changes.
Stéphane Lemay, Power Financial’s general counsel, said Friday that the company “disagree[s] with the conclusions of ISS – the reorganization will deliver numerous benefits to Power Financial shareholders.”
He added that two other proxy advisory firms, Glass Lewis and Egan Jones, have recommended “yes” votes and that the Power Financial board’s recommendation that shareholders approve the transaction was “the result of a robust process, including the receipt of a fairness opinion from RBC.” Both Power Financial and Power Corp. share prices have outperformed the market since the reorganization was announced, he said.
Power Corp. has argued that Power Financial stockholders would benefit from a simplified corporate structure, a focus on the parent company’s financial businesses and related cost savings. Also, in December, co-chief executives Paul Desmarais Jr., 65, and André Desmarais, 63 – sons of the man who built the company – announced plans to retire from their executive roles while remaining as chairman and deputy chairman, respectively.
Shareholders are scheduled to vote Tuesday. A majority of the votes cast by the minority shareholders – those unaffiliated with the Desmarais family – must approve of the reorganization for it to go forward.
The ISS report also noted that Power Corp. has no “sunset provision” that would terminate the dual-class structure after a certain amount of time or if the holders of the preferred shares reduced their ownership.
The circular that discloses the background of the transaction said Power Financial’s special committee of directors asked Power Corp. both to adopt coattail provisions and a sunset clause. Paul Desmarais Jr. told the special committee “he did not believe [the Desmarais family] would support any changes to the capital structure of Power Corp. in connection with the reorganization.”
ISS says that if Power Financial shareholders rebuff Power Corp. in the transaction Tuesday, it “may provide the special committee … with the backing needed to renegotiate” Power Corp.'s share structure, “ensuring future protections.”
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