Now that's disclosure.
Many shareholders may not like what they read when they peruse the filing that lays out Magna decision to offer a sweet deal to founder Frank Stronach, but as circulars go, what a read it is.
The odds are that nobody has ever said this about Magna before, but this puts the company squarely at the forefront of where disclosure ought to be going.
Shareholders should apparently hope that every board doing a deal refuses to give a recommendation on how stock owners should vote and doesn't bother providing a fairness opinion. That's what it took to get the Ontario Securities Commission to demand the better disclosure from Magna's board, and the result is far better than what shareholders normally get.
After all, consider the alternatives of a board recommendation to vote for or against a deal and a fairness opinion.
A directors' recommendation is helpful, but the fact is few shareholders would rely on it. They want to do their own work. For that they need information and analysis.
As far as fairness opinions go, one wonders why anyone would care that there is no fairness opinion for any deal.
The standard fairness opinion in Canada is three or four pages of boilerplate on an investment bank's letterhead, laying out what the bankers looked at and what they didn't to determine the deal's merit. After that verbiage, there's the verdict, which inevitably says, "From a financial point of view, the deal is fair."
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(The reason nobody remembers seeing the opposite conclusion in a fairness opinion is that banks hew to the motherly principle of "if you can't say something nice, don't say anything at all.")
The conclusion is all there is for shareholders to go on. There is no proof. There are no figures to back it up. It's a trust-me statement from an investment bank that in many cases is being paid if the deal goes through, presenting a potential conflict of interest (even though the OSC has tried to discourage that practice).
Fairness opinions were never intended to help shareholders. As one senior merger lawyer puts it, they were invented by lawyers and ended up making bankers rich.
The opinions were designed to provide insurance for directors against being sued, giving the directors the ability to point at the bankers if challenged and to say, "they said the deal was okay." Such opinions are also useful in helping judges feel comfortable in blessing deals that are structured as plans of arrangement, where the notion of fairness is a legal requirement for letting a transaction proceed.
Wisecracks aside, many bankers would dispute the part about getting rich. The fee generally runs from $500,000 to $1-million, and for that the client company is expecting to get a fair bit of work, such as a look at comparable transactions and a presentation or two to the board.
The bankers that do the opinions also have to submit to a grilling from their own firm's fairness opinion committee, which is designed to make sure that the work has been done properly and that the bank isn't going to stamp a deal fair that isn't. The reputational risk of looking bad for giving an opinion on a deal that the market hates is big.
But shareholders get to see none of the real work and analysis, and they are the ones who are voting.
In the Magna circular, as it now stands, there's still no fairness opinion and no recommendation from the board. Yet, what shareholders will find is a lot of facts that will help them decide.
Shareholders get a look at some of the valuation work done by bankers at CIBC World Markets along with an explanation about why they declined to give a fairness opinion. There is further disclosure on the price.
There is a heap of detail on the genesis of the proposed transactions and the talks, such as they were, between the board and Mr. Stronach, along with his daughter Belinda Stronach. All of it goes beyond what readers are used to finding in the "background to the transaction" sections of filings.
Because of that, there is a feel for the deal. It's like the difference between reading a political platform and seeing the candidate on the hustings.
Of course, all of this is in the circular for all the wrong reasons, as regulators had to challenge the deal.
But now that it is, shareholders at other companies that get the formalities of a board recommendation and a fairness opinion can see what they have been missing.
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