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Saturday, Feb. 4, 2006

Special share classes hard to give up

By ELIZABETH CHURCH
Globe and Mail
Thursday, Sep. 25, 2003

All shareholders are not created equal in Canada when it comes to casting their votes. Canada's corporate landscape is dotted with special deals and share structures that favour certain groups of shareholders or founding families -- arrangements that most of these firms are in no hurry to give up.

A Report on Business study of 207 companies on Toronto's S&P/TSX index found that more than one-quarter had some form of dual-class share structure or special voting rights that enables one group of shareholders to wield a disproportionate amount of clout over the company in relation to the amount of stock they hold.

These special powers ranged from the right to elect a certain number of board members, such as at Sherritt International Corp., to control over all votes in most circumstances, as is the case at Torstar Corp., Rogers Communications Inc. and Shaw Communications Inc. The structures also allow company leaders or founders to keep a lock on power after they have sold most of their equity stake in the firm, as is the case at Magna International Inc., where Frank Stronach gets 500 votes for the special shares he controls.

Talk to institutional investors, and they will tell you that lopsided share structures do not make sense.

"We should have no dual-class shares," declares Claude Lamoureux , chief executive officer of the influential Ontario Teachers Pension Plan Board. "You go public, everybody is treated the same. If you own 30 per cent of the company, you can vote 30 per cent. A lot of founders feel the company should respond to their every whim as if they own 100 per cent."

Paul Haggis, the new CEO of the Ontario Municipal Employees Retirement Board, also has little time for dual-share structures. "How do you have it that someone who has 5 or 7 per cent of the equity controls management?" he asks. "To me that's not fair."

Such opposition from powerful shareholders can create plenty of extra headaches for the person or group trying to hold on to their special shares. And on rare occasions the clamour can cause companies to rethink their structure. Just this spring, for instance, Hollinger International Inc.. chairman and CEO Conrad Black agreed to phase out the company's multiple voting structure, although there is some doubt the deal will be completed.

So far the critics are winning few converts even at companies that have made major changes in their governance practices.

Paul Tellier, CEO of Bombardier Inc. , who arrived last spring with a mandate for reform, says talk of scrapping the special class of shares controlled by the founding family is not on.

"The dual-share is there to stay," Mr. Tellier said recently after a speech in Toronto. "This company, since Day 1 when it became a publicly traded company, has had two classes of shares. The controlling shareholder intends to remain the controlling shareholder and therefore the dual classes of shares will remain."

At FirstService Corp. , which recently revamped its governance practices, founder Jay Hennick has declared the dual-share structure strictly out of bounds. "My perspective is everything is on the table, except changing the dual-voting shares." he said.

Mr. Hennick says introducing one common class of shares would threaten the company's long-term strategy and make it vulnerable to the whim of shareholders looking to make a quick profit. "We're trying to build long-term value for our shareholders," he said.

Onex Corp.,on the other hand, characterizes its dual-class structure as a way to ward off potential takeover bids by those looking for an inexpensive way to get at some of its holdings, such as electronics manufacturer Celestica Inc. or the Loews movie-theatre chain.

"Over time shareholders have gotten value for their shares," said Donald Lewtas, the firm's vice-president and managing director. "Our track record has been achieved because of the controlling shareholder."

Others such as Alliance Atlantis Communications Inc. say their dual-class structure is necessary to meet regulatory requirements for Canadian control of their firm. Change the licensing rules for broadcasters, and the firm would be happy to get rid of its non-voting shares, CEO Michael MacMillan said.

"It's not a personal thing that hangs on with me until the end of time," Mr. MacMillan said. "Each year the board has to review this and say are these rules still in place and is it still necessary for us to have this dual-class structure. At some point in the future that might change."

That said, not all dual-class structures are the same and some companies have made provisions to eliminate their superior class of shares under certain circumstances -- typically when the founding leader of the firm is no longer there to use the shares' super powers.

The ROB study found just 19 companies at which the dual-share structure gave holders of the superior shares all the votes or a number of votes that was more than five times the actual stake they hold in the company.

At Four Seasons Hotels Inc., for example, common shareholders have the chance to vote on the share structure of the luxury hotel operator every three years. The company received its first vote of approval from shareholders this May. At Sherritt, the multiple-voting shares held by chairman Ian Delaney have a life of 10 years and will expire earlier if Mr. Delaney leaves the firm.

That is also the case at Alimentation Couche-Tard Inc., where the dual-share structure will end when certain key executives reach the age of 65 or no longer control, as a group, 50 per cent of the votes of all outstanding shares.

Onex has a similar provision that its multiple-voting shares will no longer carry their special features when they are no longer owned by Gerald Schwartz or if Mr. Schwartz and his immediate family no longer own five million subordinate shares. Subordinate shareholders at Onex also get to elect the firm's auditor.

Mr. Lewtas notes that anyone investing in Onex does so knowing about the share structure. He says no one minds when things are going well, they just gripe about the special shares when they are unhappy with the results.

"When the company is doing well, no one questions the [multiple-voting structure]," he said.

Indeed, even strong opponents of dual-class shares say it is a sin that can be forgiven in some cases.

"If there's no abuse, I think you can live with them," said Mr. Lamoureux of Teachers. "It's a fact of life. But on occasion, the owner can do things that don't seem to make sense. You have one main shareholder who exerts more influence than he should. That 's when you have abuses. "

With files from reporter Richard Bloom


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