FAIR Canada calls on OSC to quash Magna share proposal

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

Investor advocate FAIR Canada is calling on securities regulators to cease trade a transaction proposed by Magna International Inc., and for a policy review of dual class share structures generally.

FAIR announced Tuesday that it will make a submission to the Ontario Securities Commission calling on the OSC to convene a public hearing to consider the proposed transactions between Magna and the Stronach Trusts “with a view to issuing a cease trade order prohibiting the consummation of the transactions”. It says that it believes that the proposed transactions “are contrary to both the public interest and the best interests of investors generally, as well as an abuse of the Canadian capital markets.”

Tuesday evening, the OSC said it has scheduled a hearing on June 23 into the proposed Magna transactions.

The OSC’s hearing will consider whether to: cease trade the Class B shares of Magna held by the Stronach Trust for a specified period; issue an order indicating that the exemptions contained in a regarding the protection of minority shareholders in special transactions do not apply in this case; and, require the firm to amend its proxy circular.

In a statement of allegations, OSC staff contend that the holders of the firm’s subordinate voting shares are being asked to pay an unprecedented premium to collapse Magna’s dual class structure; that the circular “fails to provide sufficient information concerning the desirability or fairness” of the transaction; and that the board “has not made useful recommendations” regarding the proposed deal. It maintains that the circular should contain more information, including a valuation of the deal, a detailed discussion of its fairness, a fairness opinion, and adequate disclosure concerning the transaction’s negotiations.

The OSC also alleges that the issuance subordinate voting shares as part of the deal, “in these novel and unprecedented circumstances”, is contrary to the public interest and should be cease traded because: shareholders are being asked to approve the deal without enough information, and the approval and review process followed by the board in negotiating the deal and proposing it to shareholders was also inadequate.

It claims that this conduct is “contrary to the public interest and harmful to the integrity of the Ontario capital markets”.

Magna board has failed to discharge its fiduciary responsibility to shareholders: FAIR Canada

Magna is slated to hold a shareholders’ meeting on June 28 to consider the proposed transactions, that would, among other things, see it pay a large premium for the multiple voting shares held by the Stronach Trust.

“FAIR Canada is of the view that by entering into these transactions, the board of directors of Magna has failed to discharge its fiduciary responsibility to shareholders, in particular by failing to obtain a valuation and fairness opinion and failing to give a recommendation on the Magna transactions to shareholders,” it says, adding that it believes that the “disclosure in the shareholders’ circular is inadequate, the transactions are unfair and that the premium to be paid to the Stronach Trust is unjustified and excessive.”

“If the Magna transactions are permitted to proceed, FAIR Canada believes that it will strike at the heart of the fairness and the integrity of the Canadian securities markets. It will be open season on the public shareholders of the many Canadian listed companies with dual class share structures,” it says. “The message to controlling shareholders of Canadian listed companies with a dual class share structure will be clear: the more your company’s shares are depressed due to a perception that you oppress your shareholders, the greater the premium the shareholders will be willing to pay to get rid of you. This case creates perverse incentives for controlling shareholders to oppress public shareholders.”

FAIR Canada is calling on the OSC to hold a hearing to determine if it is in the public interest to: cease trade the proposed transactions; and, to consider bringing an oppression action under corporate law. It also calls on institutional investors to join the CPP Investment Board and Ontario Teachers’ Pension Plan in opposing the transactions.

Magna said today that Glass Lewis & Co, a proxy advisor that is a wholly-owned subsidiary of Teachers recommends to its institutional clients that they vote against a proposed transaction. It points out that yesterday the proxy advisor, RiskMetrics, recommended that shareholders vote in favour of the proposal on the basis that the potential benefits outweigh the costs.

“We respect the right of shareholders and their advisors to debate the merits of the proposed transaction and we encourage all shareholders to read the proxy circular in its entirety and vote their shares at the special meeting. We continue to receive strong expressions of support for the transaction from significant class A shareholders who have the most at stake,” said Vincent Galifi, executive vice president and CFO of Magna, in a statement.

FAIR also asks that controlling shareholders of other TSX-listed companies with dual class share structures go public with their views on the transactions. And, it asks that the regulators review dual-class share structures generally. “Dual class shares are inconsistent with the concept of corporate democracy,” it says. “The Canadian Securities Administrators should make it a priority to undertake a policy review of dual class share structures with a view to considering amending the regulation of dual class shares in Canada to enhance investor protection and shareholders’ rights.”