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Magna CFO says regulator shouldn’t deny shareholders chance to vote on stock restructuring

Date: Thursday, June 17, 2010
Author: Investment Executive

A senior executive at Magna International Inc. says the company will work with the Ontario regulator to address concerns about a proposal to eliminate the special class of stock that gives the founding Stronach family voting control.

But Vincent Galifi, Magna’s chief financial officer, said Wednesday that Canada’s largest auto parts manufacturer stands by its plan and the amount of information provided to shareholders, who he says should be able to decide for themselves whether or not they support the proposal.

The Ontario Securities Commission announced late Tuesday that it wants to block a plan that would see founder Frank Stronach and his family trust receive a premium of 1,800% to give up their multiple voting shares, which allow them to control the company while holding a minority equity interest.

In response to the OSC move, Magna’s shares (TSX:MG.A) lost $3.61 or nearly 5% to $69.75 in early afternoon trading Wednesday on the Toronto Stock Exchange.

In a statement, the provincial regulator said shareholders of the auto parts giant are being asked to approve the plan without a recommendation by the board and without sufficient information.

But Galifi responded Wednesday by disputing those allegations in a statement, saying Magna has acted properly and the “vast majority” of Magna’s shareholders have no difficulty understanding the proposed transaction.

“We strongly believe our existing disclosure is complete, that Magna’s board undertook a proper process, and that our shareholders should not be denied the opportunity to decide the outcome of the proposed transaction,” Galifi said.

“Nonetheless, we will work to address the OSC’s concerns though we do not believe any additional information we might disclose will change shareholders’ views of the value this transaction can unlock for holders of Magna’s class A shares.”

The OSC has scheduled a hearing for June 23 during which its enforcement staff will ask a commission panel to strike down the proposed transaction, scheduled for a Magna shareholder vote five days later.

Andrew Fleming, a securities lawyer with Ogilvy Renault in Toronto, said the OSC will probably ask Magna to provide more information to its shareholders before a vote is held.

However, he said it was odd the regulator would choose to intervene at all, given how positively shareholders have reacted to the proposal so far. Before the OSC said it would step in, Magna’s shares had gained more than 14% on the TSX since it first announced the proposal.

“The odd thing is, the market actually loves the deal, and the irony here is that the OSC seems to be talking about the public interest,” Fleming said.

“I don’t know whose public interest they’re trying to represent here. Certainly not people who are investors in Magna.”

Fleming also questioned why the OSC feels its involvement is necessary, given that proposals like Magna’s have to be reviewed for fairness by the courts before they can be implemented.

“When you add to the positive market reaction the fact that there will be a fairness hearing before a court as to whether this is fair or unfair, why isn’t the OSC simply going to court like everybody else and saying it’s unfair?” he asked.

The OSC called Magna’s proposal “contrary to the public interest and harmful to the integrity of the Ontario capital markets,” indicating it has a broader interest in mind than just that of Magna’s shareholders.

“Well, maybe that’s a condition that the court doesn’t have to take into account, but who wins?” Fleming said.

“If the shareholders want this deal and they’re willing to vote in favour of it and they’re willing to subject the vote to a fairness assessment by the court, it’s really hard to imagine how the integrity of the capital markets is being harmed.”

This would be the first time the OSC has intervened in a company’s plan to eliminate the controversial dual-class share structure, Fleming said.

Some investment firms, particularly in the U.S., have a practice of avoiding companies with dual-class voting structures because of the lack of say they give non-controlling shareholders. This can depress the companies’ stock price.

The proposal by Magna will see Stronach give up his special voting shares in exchange for US$863 million in cash and class A shares in return for his nearly 727,000 multiple voting B shares -- a premium of about 1,800%.

Stronach is being paid an “unprecedented” premium for his shares, the OSC said, and the proxy voting circular provided to shareholders does not provide enough information about whether the deal is fair financially.

Some of Magna’s shareholders, including the Ontario Teachers’ Pension Plan, which bought just one share so it could oppose the deal, and the Canada Pension Plan Investment Board, which holds just under 1% of Magna stock, say they intend to vote against the proposal because the payment to Stronach is excessive and the deal will dilute Magna’s share value.

Magna has responded that 24% of its Class A shares have been voted so far, with more than 99% approving the transaction.

Stronach, along with his family, has controlled the company through a special class of shares that gives them majority voting rights without a majority equity stake. Each of the family’s 750,000 class B shares has 300 votes, giving the Stronachs a 66% voting interest.