Dual Class Share Policy from the Canadian Coalition for Good Governance
|Area||Corporate Finance and Securities, Litigation, Mining and Natural Resources, Asia Practice|
Companies with, or considering, dual class share structures (DCSs) should take note of the new policy released by the Canadian Coalition for Good Governance (CCGG). Companies with DCSs generally divide their capital into subordinated voting shares (SVs) (one vote per share) and multiple voting shares (MVs) (many votes per share). The holder or holders of MVs can control the company, though only holding a small portion of its equity. The CCGG noted that there have been no material changes to the rules for DCSs in 25 years.
Not all stock exchanges allow DCSs, but prominent companies that have recently undertaken initial public offerings on the NYSE and NASDAQ, including Google, LinkedIn and Facebook, have DCSs. Alibaba, the large Chinese internet company, broke off discussions with the Hong Kong Stock Exchange and approached the NYSE because the former would not allow structures to preserve corporate control.
The CCGG notes that DCSs have arisen in Canada for various reasons, including for founders to preserve corporate control, as with Rogers Communications Inc. and Magna International Inc., and to ensure compliance with rules limiting foreign ownership (for example, in airlines). DCSs can exist for legitimate and justifiable reasons, but can also be subject to abuse.
The CCGG’s principles attempt to strike a balance. DCSs are discouraged in general. Companies using DCSs in exceptional circumstances will be expected to comply with the CCGG’s principles or explain in their public disclosure documents why they have not done so. In addition, companies that already have DCSs are encouraged to take the principles into account.
The following summarizes the CCGG’s principles:
- The number of directors nominated by a holder of MVs should be limited. The maximum number of directors that a holder of MVs should be entitled to nominate is the least of (i) two-thirds of the board, (ii) the number obtained when the board size is multiplied by the percentage of total voting rights held by the MV Shares (rounded up to the nearest whole number), and (iii) if the holders of MV Shares are related to management of the controlled corporation, then one-third of the board. In addition, when disclosing voting results, a DCS company should disclose separate results for the holders of SVs and MVs.
- Holders of MVs should be required to maintain a meaningful equity stake. While a “meaningful equity ownership stake” may vary between companies, the CCGG notes that a ratio of voting rights of an MV to an SV of no more than four to one would generally qualify (ensuring that a holder of MVs would need to hold 20% of the company’s equity to maintain control).
- Reporting issuers should not have non-voting common shares.
- DCS companies should have coattails, allowing all shareholders, regardless of class, to participate in a change of control on equal terms.
- DCSs should be subject to a sunset date. The structure should collapse at a time appropriate for the given company, with all MVs automatically converting into SVs at such time on a one-for-one basis.
- Derivative transactions with respect to MVs should be prohibited.
- MV holders should not be entitled to a premium on collapse of the DCS. The CCGG has been consistent on this principle since 2010, when members of the CCGG opposed Magna’s decision to pay an 1,800-per-cent premium to Frank Stronach, the company’s founder, upon the collapse of Magna’s DCS.
While the CCGG’s policies are not law, they are influential and indicate best practices for public issuers. Public issuers with DCSs, and those private issuers with DCSs considering a public offering, should consider whether they comply with these principles and, if not, how their disclosure will address any technical non-compliance.
For further information on the implications of this policy, please contact any member of our Corporate Securities Group.