Not all shares are created equal

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It is not just Magna Int'l. $860-million sendoff to controlling shareholder Frank Stronach that will be on trial when the Ontario Securities Commission opens its hearing on Wednesday.

Nor is the conduct of Magna's directors - who are getting heat for not making a recommendation either way on the matter - the sole sore point. The real point of contention in the OSC hearing, arguably, is a long-standing skeleton in the closet of Corporate Canada: dual-class shares.

The concept of giving some shareholders more power than others dates back to a time in Canadian business when the country was dominated by family-owned companies, whose founders wanted to raise cash to build their businesses without ceding control. The solution was dual-class stock structures, which allowed families to keep control by owning multiple-voting shares, while single-vote or non-voting shares were sold to Joe Mainstreet.

According to a federal study in 2005, public companies with dual-class shares accounted for more than 20 per cent of all companies listed on the Toronto Stock Exchange, compared with just 2 per cent of listed companies in the United States.

Owners of supercharged stock sometimes enjoy the right to pocket enormous premiums over what other shareholders are paid during takeovers and other transactions that trigger changes of control. That is the case at Magna. Mr. Stronach's $860-million farewell package of cash and stock amounts to a premium of nearly 1,800 per cent over the value of Magna's regular shares the day before the deal was announced. Although Mr. Stronach owns less than 1 per cent of the company's equity, his holding of Magna stock with multiple-voting privileges gives him substantial leverage to demand special treatment.

The TSX tried in 1987 to push Canada into the modern era by requiring all newly listed companies to effectively attach protections, known as "coattail provisions," to multiple-voting shares. These provisions ensured that all classes of shareholders would receive equal terms and compensation when control of public companies changed hands.

There was, however, a footnote to the TSX's blueprint: All companies with dual-class shares in 1987 were exempted from the obligation to protect shareholders with coattail provisions. In other words, investors in dozens of companies continued to face the risk that they would be treated as second-class citizens when controlling shareholders were bought out.

More than two decades and several takeovers and corporate bankruptcies later, about a dozen grandfathered companies remain on the TSX, experts say. The group includes Power Corp., Rogers Communications Inc., Astral Media Inc. and Shaw Communications Inc. (A spokeswoman for the TSX said the exchange does not keep track of how many grandfathered companies remain.)

In recent years, shareholders have balked at a number of special deals for owners of multiple-voting stock. In 2006, the Waters family faced shareholder complaints after it demanded a richer premium for its voting stake in CHUM Ltd. The deal, which was approved despite the complaints, saw acquirer Bell Globemedia pay a 12-per-cent premium for each of the Waters' family's voting shares.

Now that Mr. Stronach has entered the record books by landing such a huge premium for his stake in Magna, investors fear that other multiple-voting share owners will be tempted to seek similar payouts.

Ermanno Pascutto, executive director of the Canadian Foundation for Advancement of Investor Rights (FAIR), which filed a complaint to the OSC about the proposed Magna deal, said the transaction makes "a  mockery of corporate governance in this country." He said FAIR has asked provincial securities regulators across Canada to review whether dual-class shares should be allowed to continue.

"If dual-class shares are going to be used to abuse public shareholders, then we have to revisit whether we permit these shares any longer," Mr. Pascutto said.

Foreign investors tend to steer away from Canadian companies with dual-class shares, a legacy that John Coffee, of Columbia University's law school in New York, warns could handicap Canada's capital markets.

"It is not a way to encourage economic growth," Mr. Coffee said. "Over the long run, dual-class capitalization at least chills the ability of companies to raise capital at the lowest cost."

The OSC's hearing into the Magna arrangement is expected to be completed within two days. The commission has the power to overturn the deal with Mr. Stronach. But early indications that a majority of Magna shareholders favour a deal that would eliminate Mr. Stronach's control might make such a reversal challenging.

Instead, some observers said, the regulator may demand that the June 28 shareholder vote on the deal be delayed, and that the company and its board give investors more information.