Multiple Voting Shares: Don’t Call it a Comeback
September 2, 2015
- Requirements concerning the creation of, or conversion to, a dual class share structure, pursuant to OSC Rule 56-501 and part 12 of National Instrument 41-101 – General Prospectus Requirements
- Expanded continuous disclosure requirements imposed by part 10 of National Instrument 51 102 –Continuous Disclosure Obligations
- Detailed prospectus disclosure requirements imposed by item 10.6 of Form 41-101F1 – Information Required in a Prospectus and item 7.7 of Form 44-101F1 – Short Form Prospectus
- Increased participation of family-and entrepreneur-controlled firms in the public capital markets:Many company founders seeking sources of capital to finance growth place a premium on retaining control of the companies they have created and will access public equity markets only if structures are available that permit them to maintain such control. Accordingly, it is reasoned that dual class share structures provide investors the opportunity to purchase shares in companies that otherwise might not be available.
- Management and the board of directors are permitted to focus on long term success and profitability: It is contended that a dual class share structure permits long-term investment decisions to be made without the need to satisfy short-term financial expectations that can be detrimental and result in the incurrence of disproportionate risks (relative to expected rewards) for stakeholders. It has also been asserted that control through a dual class share structure is an effective measure for protecting a company’s stakeholders from opportunistic acquirers who seek to take advantage of negative short-term fluctuations resulting from a target company’s focus on long-term value creation.
- Interests of minority shareholders and controlling shareholder(s) with meaningful equity ownership are aligned: Widely-held companies with one-share-one-vote structures are vulnerable to agency costs resulting from potential conflicts that exist between managers and shareholders, given the separation of ownership from control. Further, with dispersed ownership, given the challenges to collective action by shareholders, it may be difficult for shareholders of widely-held companies to effectively monitor and discipline managers in the absence of committed, knowledgeable and active long-term shareholders. It has been argued that, in a dual class share company, the interests of a controlling multiple voting shareholder with meaningful equity ownership are closely aligned with the interests of minority shareholders with regard to the supervision and discipline of management, thereby minimizing agency costs, and that such a controlling multiple voting shareholder is well positioned, incentivized and able to supervise management’s conduct.
- Disproportionate economic exposure: It has been contended that, while holders of multiple voting shares can wield significant power as shareholders, the majority of the financial risk is borne by the public owners of the subordinate voting shares and this risk increases as the number of votes attached to each multiple voting share increases.
- Self-enrichment: It has also been reasoned that holders of multiple voting shares can exert significant influence on a company, causing themselves or family members to be awarded excessive compensation as executive officers of the company or syphoning off corporate value through the approval of self-dealing transactions on off-market terms.
- Management entrenchment: It has been argued that dual class share structures can entrench poorly performing management by insulating them from accountability for their actions.
- Passive boards: It has been suggested that the directors may be beholden to the views of the controlling multiple voting shareholders, or risk being replaced on the company’s board, despite the duty of each director to act with a view to the best interests of the company.
- A 2005 study produced by the Economics Division of Canada’s Library of Parliament discussing the prevalence of dual class share structures in Canada and the reason for their emergence, noting that “[u]ndeniably, some of the best-performing companies in their sectors in Canada have multiple-voting share structures”.
- A 2007 study issued by the Organisation for Economic Co-operation and Development Steering Group on Corporate Governance regarding the lack of proportionality between ownership and control in dual class share structures determined, among other conclusions, that “there is nothing a priori onerous about separating ownership and control” and that “[s]imply ruling out voting right differentiation on companies’ shares would neither be effective nor efficient.”
- In 2013, the Canadian Coalition for Good Governance (CCGG), an organization representing institutional shareholders and asset managers, released its “Dual Class Share Policy”, which sets out CCGG’s governance guidelines for companies with dual class share structures (see our October 2013 Blakes Bulletin: CCGG Releases Governance Guidelines for Dual Class Share Companies).
- Prior to 2014, the Shareholder Association for Research & Education (SHARE), an organization concerned with “responsible investment services, research and education for institutional investors”, advocated in its model proxy voting guidelines that Canadian stock exchanges should ban shares with unequal voting rights under most circumstances. However, since 2014, SHARE has softened its stance, recommending that while Canadian pension funds should oppose unequal voting rights in most cases, in exceptional circumstance “[d]ual class share structures may be appropriate for new companies that need protection from hostile takeovers or from pressure to produce short-term profits.”
- In May 2015, the Institute for Governance of Public and Private Organizations (IGOPP) reiterated the benefits of appropriately structured dual class share companies, echoing the “framework of safeguards that could enhance the benefits of dual share structures and minimize their potential downside” outlined in a policy paper published by IGOPP in 2006.
- Also in May 2015, it was reported that David Beatty, the Conway chair of the Clarkson Centre for Business Ethics and Board Effectiveness at the University of Toronto’s Rotman School of Management, once a vocal critic of dual class share structures, now believes they might be an effective response to the “menace” of “the short-term thinking that leads public companies to react an[d] plan quarter-to-quarter, rather than for the long term.”
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