Minority shareholders in Power Financial Corp. did not exactly strike a blow for corporate democracy in voting Tuesday to exchange their common shares for subordinated voting stock in parent Power Corp. of Canada.
But, in the end, what choice did they have?
Montreal-based Power Corp. already held about two-thirds of Power Financial’s shares, so there was no prospect of a better offer coming forward in the way of an outsider takeover bid. And the Desmarais family, which controls Power through its multiple voting stock, had rejected an “alternative structure” proposed by a special committee of three independent directors of Power Financial that would have involved a reverse takeover of the parent.
Power’s subordinated voting shares carry one vote for each share. The Desmarais family controls the company through a lock on its participating preferred shares, also known as multiple voting shares, which carry 10 votes each.
Power Corp. advisers BMO Nesbitt Burns and Blake, Cassels & Graydon had warned that the alternative structure “raised a number of regulatory, tax, contractual, business, governance, timing issues and other risks that made it inadvisable” to proceed with a reverse takeover.
Power Corp. chairman Paul Desmarais Jr. also dismissed a request made by the head of the Power Financial special committee, director Siim Vanaselja, that the parent company undertake to eventually do away with its-dual-class share structure. Mr. Desmarais countered that the dual-class structure had existed since Power Corp.’s founding in 1925 as an electrical utility.
No matter that the concept of shareholder democracy was non-existent a century ago. Or that, since Paul Desmarais Sr. took control of Power in 1967, the parent has evolved into a financial-services behemoth with extensive holdings in North America, Europe and China.
Mr. Vanaselja, a former BCE Inc. chief financial officer who only joined Power Financial’s board in 2018, had nevertheless told Mr. Desmarais that, while the elimination of the dual-holding company structure offered a “clear benefit” to Power Corp., the value proposition for Power Financial’s minority shareholders was “more complicated.”
In the end, according to the management proxy circular issued in advance of Tuesday’s vote, Power Corp. agreed to increase its original offer of 1.0002 subordinated voting shares in exchange for each common share held by minority shareholders in Power Financial to 1.05 subordinated voting shares and $0.01 in cash. That was enough to seal the deal.
So much for the warning issued last week by Institutional Shareholder Services, a corporate governance advisory firm, that “the longer-term risks associated with [Power Corp.’s dual-class share structure] outweigh the purported economic benefits of the reorganization.”
Enough minority shareholders ultimately decided to put their faith in the ability of the Desmarais family and their chosen managers to steer the ship in the right direction amid wholesale disruption in the financial-services industry rather than take ISS’s advice and reject the parent’s offer.
In the short term, not much will change for Power Financial’s minority shareholders. The chief executive of Power Financial, Jeffrey Orr, becomes chief executive of Power Corp. The current co-CEOs of the parent, Paul Desmarais Jr. and André Desmarais, are retiring from their executive roles, but will remain on the board as chairman and deputy chairman, respectively.
The elimination of the dual-holding company structure is projected to yield savings of about $50-million annually in administrative expenses and $15-million in financing costs, according to the circular, which is not that much considering the size and scope of Power’s operations. So while the reorganization is projected to be accretive to Power Financial’s minority shareholders on an earnings-per-share basis, it remains to be seen by how much.
The real question going forward is whether Power Corp., with a simpler corporate structure, will be able to reinvent itself during its second century in business as much as it did during its first. Under Paul Desmarais Sr., who died in 2013, Power transformed itself several times over, moving from an industrial and media conglomerate into an financial-services giant.
Great West Life and IGM Financial in Canada, along with portfolio investments in European-based companies such as cement giant LafargeHolcim, still account for the core of Power’s business. Power’s future, however, may be riding more on fintech ventures such as Wealthsimple, in which it and its subsidiaries own a fully diluted equity interest of 70 per cent.
The fintech investments are overseen by Paul Desmarais III, the executive chairman of Power investment fund Portag3 Ventures, which has been pushing Ottawa to embrace “open banking.” The latter would facilitate access to consumer data by third-party financial-services providers such as Wealthsimple, a robo-adviser that offers low-fee investment services.
Last month, Finance Minister Bill Morneau announced that the federal Advisory Committee on Open Banking would continue stakeholder consultations “to examine the merits of open banking with a particular focus on data security in financial services.”
In its report after an initial round of consultations last year, the committee said it “heard that, with the strength of its financial-services sector, ambitious innovators and top talent, Canada has the potential to be a leader in the development of [open banking] – but that it risks falling behind if it does not take timely and concrete action.”
That pretty much sums up the message being advanced by Wealthsimple. And as Wealthsimple and its ilk go, so may go Power itself.