Duncan Melville is a CFA charter holder and JD candidate at the University of Toronto law faculty. He holds Bombardier shares within his personal investment portfolio.
If the rhetoric of federal ministers is to be believed, the chances of Canadian taxpayers providing a financial bailout to Bombardier has increased significantly recently. Prime Minister Justin Trudeau insists any bailout would be in “the best interest of Canadians,” and other officials recently said they are looking at “creative” options, but the substance and details of these promises remain wholly undefined.
However they proceed, one obvious condition Ottawa ought to impose is a requirement that Bombardier’s controversial dual-class share structure be unwound. Such a move would place greater control in the hands of the Canadian public, increase the likelihood of Bombardier being able to raise additional private capital and minimize the need for additional government bailouts in the future.
The Bombardier/Beaudoin family holds almost 60 per cent of voting power in the company, despite an economic interest of just 15 per cent. A government bailout would therefore place millions, perhaps billions, of tax dollars in the control of a single family. This is troubling, not least in light of the company’s past investment decisions. Over the past five years, Bombardier’s stock price has declined more than 75 per cent, while industry rivals Boeing and Airbus have enjoyed a doubling and tripling of their respective stock prices. Bombardier has become a place “where money goes to die,” to quote investor and commentator Kevin O’Leary.
In recent years, the Canadian Coalition for Good Governance and the Institute for Governance of Private and Public Organizations have weighed in against dual-class share structures. The country’s largest pension plans – the Canada Pension Plan Investment Board, Caisse de dépôt et placement du Québec and Ontario Teachers’ Pension Plan – have opposed new issuances of dual-class shares and advocated for the unwinding of existing structures. And Canada’s most renowned legal academics spoke out against the structure at a University of Toronto roundtable late last year.
One might expect this unified message to prompt Bombardier’s board to negotiate an unwinding of the structure. It would unquestionably be in the best interests of the corporation. But the board has actually done the opposite, rejecting funding offers from private investors tied to a reduction of the dual-class structure.
In 2003, Teachers offered Bombardier more than $1-billion on the condition that the company unwind the structure. The company refused and raised additional capital from retail investors instead. This time last year, Bombardier also rejected an offer from the Caisse to purchase a significant block of shares providing the company reduce its dual-class share structure. Bombardier again refused, and has instead sought capital from investors less familiar with corporate governance practices, namely the federal and Quebec governments.
If used at all, government bailouts should come only as a last resort when a company, vital to the national interest, has been cut off from private capital. This was the case for many British and U.S. banks during the 2007-08 financial crisis, but it hasn’t been the case with Bombardier. Bombardier has significant assets and many profitable business units; many of its divisions currently operate in favourable economic environments. It could easily raise additional funding to support the company if it dismantled the dual-class share structure. It’s only the stubbornness of the controlling family and weakness of the board that have prevented Bombardier from raising that capital thus far.
Moreover, given that Canadian taxpayers are being asked to bear increased financial risk related to the company, greater public input into Bombardier’s direction would be just and fair.
The federal government must therefore stand firm, show leadership and demand an unwinding of family control. Failure to do so may result in Bombardier having to come back to public taxpayers in the future.Report Typo/Error
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