CCGG Stance on Dual-Class Shares Could Chill IPO Market

October 11 – The Canadian Coalition for Good Governance (CCGG) recently put out a statement on its “Dual Class Share Policy,” which lays out a series of governance principles that will guide its members when making decisions about investing in IPOs with dual-class share structures.


These “principles” — which read more like guidelines for new issuers wanting to stay in the good books of Canada’s top financial institutions — make it very clear that the CCGG frowns upon dual-class structures (which, in any event, are falling out of vogue as companies like Magna International, Gildan Activewear and TELUS have bowed to public pressure in doing away with their multiple-voting shares).

The CCGG’s guidelines would presumably give preferential status to companies that:

  • limit board influence for investors with multiple-voting shares;
  • cap the ratio of multiple-voting shares to common shares;
  • eliminate non-voting shares;
  • include “coattail” provisions that would, in the event of a takeover, offer common shareholders the same terms as controlling shareholders;
  • schedule regular votes on collapsing the dual-class structure;
  • deny any premium paid to superior vote-holders if the dual-class structure were to collapse.

The CCGG acknowledges that these principles are not held unanimously by members — some of whom undoubtedly see the benefits of allowing a company to be closely held by, say, a visionary founder … or a controlling family with a legacy to uphold.

That being said, the CCGG’s board of directors and a “large majority” of its members support these principles, which taken as a whole would eliminate much of the rationale for creating a dual-class structure in the first place.

To put it simply, entrepreneurs are less likely to sell their equity position if they run the risk of losing control of their company; investors, meanwhile, are less likely to buy into a prospectus that lacks the involvement of its visionary leader.

I contacted John Tuzyk, a securities and M&A practitioner at Blake, Cassels & Graydon LLP, (and also on the cover of Lexpert‘s September “Art of the Deal” issue) to get some of his thoughts on the policy and what it means for the future of dual-class structures in Canada.

First off, Tuzyk says that the guidelines will have little impact on issuers that already have a dual-class structure (besides drawing increased attention to the issue).

Existing companies have a much more limited ability to implement the principles, as many of the principles are within the shareholder’s control, not the company’s.

I don’t understand there to be any new regulatory initiative, and I don’t see CCGG as requesting one other than to standardize the coattail provisions now used by the TSX. … Perhaps those might be updated somewhat.

He does, however, allow that the CCGG’s campaign to discourage dual-class structures may put a chill on the IPO market, leaving fewer reasons for investors and entrepreneurs to strike a deal.

It may mean that currently controlled private companies will not go public because the existing shareholder thinks their continuing involvement in that way is necessary to the company’s success by providing a long-term investment proposition. … In some cases the investors may well find comforting the long-term value of an investment in a company with a dual-class structure with the appropriate controlling shareholder, which will not be subject to short-term market vicissitudes.

Tuzyk also points out that, while the principles clearly show a preference for single-class share structures, the resolve of CCGG members may be sorely tested by issuances that are too attractive to snub.

They made a point of saying the principles were endorsed by a majority of their members, [but] it will depend on how strongly the CCGG members individually are committed to these principles in refusing to  buy stock in an IPO when the economic proposition is compelling.

For a more detailed synopsis of the CCGG’s policy, read the bulletin penned by Tuzyk and his colleagues at Blakes right here.

David Dias

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