Corporate Finance & Securities

DUAL CLASS SHARE OFFERINGS RE-EMERGE

As the slumbering IPO market began to stir in 2015, Cara Operations, Shopify and Spin Master all came to market with IPOs offering shares that had different votes and powers than the private owners and management did. These IPOs, and a close shareholder vote at Fairfax Financial,  renewed the debate about dual class shares. As it turns out, the dual class shares have been controversial ever since they came on the scene more than 60 years ago. Still, dual class shares have historically been unusually popular in Canada: the 1980s saw some 130 such companies listed on the Toronto Stock Exchange, and as recently as 2005, they accounted for more than 20 per cent of all companies listed on the TSX compared with just 2 per cent in the United States.

The emergence of shareholder activism in Canada in the last decade, however, appears to have slowed the train, with only some 80 dual share companies currently listed on the TSX.

Indeed, it hasn’t been that long since TELUS Corporation won a year-long proxy battle to collapse its dual share structure. Pitting management against US hedge fund Mason Capital Management LLC, the dispute has earned a place among the most bitter and high-profile fights in Canadian corporate governance annals.

Since 1987 — not long after the OSC ruled that the attempted take-over of Canadian Tire by the owners of its heavily weighted class of voting shares was abusive — the TSX instituted mandatory “coattail” provisions for new dual class share listings. Coattail provisions, using a number of mechanisms, ensure that takeover bids offer the same terms to holders of subordinate shares as they do to multiple voting shareholders.

Historically, the justification for dual share structures is that they allow owner-managers to concentrate on enhancing value. But if that’s the case, some observers say, the prerequisite should be that the holders of the multiple voting shares hold a significant portion of the equity. Indeed, when Magna paid founder Frank Stronach an 1800 per cent premium by way of collapsing the company’s dual share structure in 2010, many of the objections to the controversial transaction centred on the fact that Stronach held less than 1 per cent of the company’s equity at the time.

Compensation limits for multiple voting shareholders who are involved in management, some observers say, should also be a key feature of dual class structures. When the shareholders of Fairfax Financial Holdings narrowly voted in August 2015 to let co-founder and chief executive Prem Watsa fix his voting stake at 41.8 per cent for the next 10 years regardless of his actual holdings, a key part of the arrangement was Watsa’s agreement to freeze his salary at some $600,000 annually — an implicit recognition that Watsa, who had substantial equity holdings,  would take his value out through the creation of value for all shareholders.

Regardless of whether any renewed trend toward dual class structures exists, however, it seems that the markets have come a long way since the Canadian Tire debacle in realizing that  even dual class share structures which have been created for good reason can exhaust their usefulness in terms of the benefits they confer on the company. This, it appears, is what may have prompted, Alimentation Couche-Tard’s desire to change the terms of its multiple voting shares: at press time, shareholders will decide whether to alter the termination trigger for its dual class structure from its current termination date of 2021, when the youngest of the founder reaches age 65, to the date when there are no longer any founders on the company’s board.

ECONOMIC DOWNTURN COULD DRIVE ASSET-BASED LENDING

The very economic conditions that do not bode well for large sectors of the Canadian economy could prove to be a catalyst for asset-based lending. After all, business doesn’t come to a full stop just because things are rough. Indeed, ABL proponents insist that the notion that ABL is a product of last resort meant primarily for distressed businesses is a misconception.

Which is not to suggest that ABL is the panacea for the hardest-hit sectors, like commodities. For example, even ABL lenders have to think carefully about clients whose survival is dependent on the price of oil, which may or may not return to previous levels. ABL lenders are also wary of lending against equipment.

To be sure, ABL has matured  to the point where each of the Big 5 Canadian banks have an ABL group. Their focus, however, is quite narrow, seen not so much as a growth product but more as a vehicle to avoid losing their existing clients to asset-based lenders.

What has evolved in Canada, then, is an alternative ABL lending sector composed largely of non-deposit taking, unregulated entities. To some, the alternative end of the ABL market represents a vibrant and wide-ranging group of companies. Nonetheless, the stigma of “last resort lender” remains a challenge for the sector, which some observers still regard as the “Wild West.”

The fact remains, however, that the future of the ABL sector is very much in the hands of the banks and what they will or won’t do. These days, many banks have come to the conclusion that it’s in their interest to rehabilitate and support clients through the down periods because they know that the outcomes will either be an industry consolidation or a rebound.

The upshot is that the greater the downturn in the economy, the greater the likelihood the alternative portion of the ABL market will flourish. 

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