Dump dual-class share structures, says research group

(May 5, 2004) Public companies should be forced to adopt a “one-share, one-vote” ownership structure, says a report from a Vancouver-based shareholder research group.

The not-for-profit Shareholder Association for Research and Education (SHARE) says dual-class and other similar share structures — which allow company founders to maintain control by permitting shares with multiple voting rights — deprive shareholders of rights, making it difficult for investors to push for change when problems arise.

“Dual-class share structures promote the practice of poor corporate governance, violate the standard that participation in a public company should be related to equity participation and deserve no significant place in modern and well-run capital markets,” says the report. “Their end would not be mourned.”

SHARE estimates that between 20% and 25% of TSX-listed companies have some form of restricted or subordinated voting structure, compared to just 2% in the U.S., where rules on dual-class shares are much more restrictive.

The Canadian list includes some of the country’s largest corporations, including Bombardier, Quebecor, Onex and Magna International, as well as smaller firms, including AGF and Dundee from the financial world.

Magna has generated headlines this week, with a number of investors indicating they will vote against Magna’s board of directors at a meeting in Toronto on Thursday, partly because of CEO Frank Stronach’s massive compensation package (estimated at more than $50 million in 2003), but also due to the dual-class share issue.

The structure allows Stronach to maintain control of the company, says Meritas Mutual Funds CEO Gary Hawton, even though Stronach owns just 3% of Magna’s equity. Meritas and Ethical Funds both plan to withhold their votes for the Magna board, as does the Ontario Teachers’ Pension Plan, with $75 million invested in the auto parts giant.

“We continue to be of the opinion that the dual-class share structure acts as an impediment to the independence of the board,” Teachers’ says in a notice posted on its Web site.

“Why should Frank Stronach get 500 votes for every one of his shares while another investor gets one vote?” SHARE asks.

The SHARE report, called “Second-Class Investors,” recommends that the TSX prohibit new dual-class share structures and introduce a “sunset” clause for companies with the structure, giving them three years to end the practice. The report also suggests limiting the voting strength of multiple shares to a maximum of 51% of total outstanding votes and no more than 10 votes per share.

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com