Frank StronachFRANK GUNN
Magna International Inc is one court ruling away from completing a controversial transformation that will see Frank Stronach collect a huge payout of more than $1-billion as he steps away from control of the auto parts giant he founded more than five decades ago.
At a brief meeting Friday in a Toronto hotel, Magna's shareholders approved a plan under which the company will eliminate Mr. Stronach's multiple voting shares, which have long provided him control over Magna even though he owns less than 1 per cent of the company's equity. More than 75 per cent of class A shareholders who voted said they were in favour, despite vocal opposition from several large institutional shareholders.
The battle will now move to Ontario Superior Court, which must approve the transaction at a hearing next month before it is finalized.
Opposing institutional shareholders promise to fight the deal to the bitter end.
David Denison, chief executive officer of the Canada Pension Plan Investment Board, said he has two key objections to the deal. First, the fact that the Magna board decided not to make a recommendation on the deal showed it "abdicated its fiduciary responsibilities," he said. "They should not be permitted to do that."
Second, the premium paid to Mr. Stronach is "absolutely unreasonable," and a bad precedent, Mr. Denison said.
Magna is paying Mr. Stronach about 17 times the market value for his multiple voting shares. Under the deal, Mr. Stronach will receive $300-million (U.S.) plus nine million common shares in return for his controlling block of multiple voting shares. He will also get $120-million in consulting fees over four years. After the change, Magna will have only one class of shares and Mr. Stronach will hold 7.44 per cent of the total. He will remain chairman.
CPPIB has been joined by a number of other big investors in opposing the deal, including the Ontario Teachers' Pension Plan and the Ontario Municipal Employees Retirement System. Teachers and OMERS both said yesterday they will join CPPIB in court. "It ain't over till it's over," said Teachers spokeswoman Deborah Allan.
Still, the fact that more than three-quarters of shareholders approved the arrangement will make it an uphill fight.
"It would be highly unlikely that a court would interfere, given that 75 per cent" voted for the deal, said securities lawyer Peter Greene of Affleck Greene McMurtry in Toronto.
He also noted that the Ontario Securities Commission, which made Magna delay its vote and provide much more detailed information than it originally disclosed, did not oppose the Stronach deal in principle. "The courts are very reluctant to interfere with bodies that … have been given the power to regulate the [securities]industry," Mr. Greene said.
Even though it forced improved disclosure, in its ruling the OSC said "a transaction such as this is not abusive simply because the price proposed to be paid is considered by certain investors to be outrageous."
A separate arrangement will see Mr. Stronach lead and own 27 per cent of Magna's electric car business.
For Mr. Stronach, the successful shareholder vote is another sign of his power over Magna.
He has the negotiating leverage because he holds the control block of shares, and was able to use that to influence how the share reorganization would work, said Tasneem Azim, an analyst who covers Magna at UBS Securities Canada Inc.
She said most shareholders were in favour of the controversial payout to Mr. Stronach because they wanted to see the end of the dual-class share structure and the price discount that comes with it.
"What shareholders are seeking is the opportunity to remove the valuation discount on the shares, which has traditionally been in the range of 30 per cent," she said. "That's what shareholders who are in favour of this deal are latching on to [even though]the optics of the deal are not idyllic."
Magna shares are now trading about 20 per cent above their value the day before the arrangement was first announced in May.
MAGNA INT'L (MG.A)
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