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Caisse head supportive of businesses driven to use dual-class shares

Michael Sabia, CEO of Caisse de dépôt et placement du Québec, speaks in Toronto on Tuesday.


Companies listing on stock markets for the first time are increasingly driven to use unequal voting shares because investors are making it hard for entrepreneurs to grow a new business without fear of takeover, said Quebec pension fund head Michael Sabia.

Mr. Sabia, chief executive officer of the Caisse de dépôt et placement du Québec, told a Toronto audience Tuesday that he has grown increasingly sympathetic toward companies that use dual-class shares appropriately because markets are becoming more impatient and more short-term oriented.

"It's about trading, not building, in the capital markets," he said. "And I think a lot of these companies want the time to build, and they want the ability to invest. And a founder wants to be able to continue to drive the strategy of the business."

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A growing number of technology companies – including Alphabet Inc., Facebook Inc., Alibaba Group Holding Ltd. and Shopify Inc. – have gone public on stock markets with two classes of shares, with one class held by insiders that gives them additional voting rights so they can retain control over the company. In the United States, 14 per cent of initial public offerings in 2015 had dual-class shares, Mr. Sabia said, a shift from just 1 per cent in 2005.

While major pension funds and institutional investors have traditionally been opponents of shares that give company insiders voting control that is out of proportion to their level of share ownership, Mr. Sabia told the annual meeting of the Canadian Coalition for Good Governance that he has grown more supportive as he has watched capital markets become more focused on short-term returns at the expense of long-term growth.

While he acknowledged there are risks with dual-class shares – including entrenchment of management or boards – they can be managed with good policies, he said. Alluding to financially troubled Bombardier Inc., Mr. Sabia said his support for unequal voting shares ends when performance is poor.

"It's performance that counts, and when the performance isn't there, that creates issues," he said.

Mark Wiseman, who recently stepped down as CEO of the Canada Pension Plan Investment Board, also spoke at the Canadian Coalition for Good Governance event, and said dual-class shares carry higher risks and he prefers companies not use them at all.

Where they exist, he said, companies should have sunset clauses laying out how and when the unequal voting shares will expire, and should adopt provisions to ensure minority shareholders will be treated fairly in takeover bids and their rights will be protected.

"I believe the risk of what happens in dual-class share companies is high enough that if I had a preference I'd say we shouldn't be creating new ones," Mr. Wiseman said. "But if we do create them, let's make sure we have the types of rules in place to absolutely mitigate the best we can the abuses we've seen time and time again when these things start to unravel."

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Ron Mock, CEO of the Ontario Teachers' Pension Plan, said his fund looks at companies with dual-class shares "on a case-by-case basis" and will invest only where there are provisions in place, such as sunset clauses.

"While you don't want to throw the baby out with the bathwater in the early days, you don't want to find yourself not being able to unravel a disproportionate voting circumstance that you can find yourself in if there are substantial changes down the road," he said.

Mr. Sabia, however, said one of Canada's biggest economic challenges is encouraging entrepreneurship and the creation of the new businesses, and acceptance of dual-class shares could help more people seek financing in the capital markets.

"Done well, this is a vehicle that could fit into a broader set of things required to help create new businesses, and that's good for us in the long term," he said. "God knows in Canada we need new businesses to invest in – there aren't enough. We need to think flexibly around some of these issues."

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