Turkeys, forks and dual class shares

Dual class equity structures are a hot topic of discussion in Canada.  In simple terms dual class equity structures have more than one class of common shares.  These two (or more) classes may have similar cash flow rights (i.e. dividends) but always come with different voting rights.  Remember that voting rights refer to voting for particular members of the board of directors.  Some companies have shares with one-vote shares and no-vote shares or one-vote shares and multiple-vote shares.  In Canada, these dual class share companies are generally controlled by family dynasties – Magna International was controlled by the Stronach family for many years.  Other examples include Shaw Communications (controlled by the Shaw family), Power Corp (controlled by Paul Desmarais), and Rogers Communications (controlled by the Rogers family trust). In Magna’s case, those multi-vote shares provided 300 votes votes per share resulting in the Stronach’s only holding a 1% equity interest in the company but controlling 66% of the votes.  The purpose of such equity structures is that it allows the founding families to retain control while still raising equity on the open stock market from Joe Plumber or Jane Mainstreet.  The problem is that the holders of the less powerful shares take on a ton of the equity risk without getting the benefits of control.  That disparity usually results in the less powerful shares trading at a discount.

In recent years, some of these companies have tried to simplify or clean up their equity structure by consolidating all the shares into one single class with equal voting rights and equal cash flow rights.  Magna did that in 2010 and in my opinion paid dearly to convince the Stronachs to give up their super-voting shares.  Ultimately they were paid a 1800% premium and close to $1B to give up their family shares.

Telus is not a family-owned corporation but as a result of the merger of BC Tel and Telus in 1998, they ended up with no-vote and single-vote shares.  They are now trying to clean that up.  The problem they have run into is that an institutional shareholder that did control the company by holding a substantial number of the single-vote shares would lose control once the no-vote shares are converted into single-vote shares.  A very interesting corporate governance situation.

As a shareholder of Telus (I own both the no-vote and the single-vote shares) the proposed transaction doesn’t affect me very much.  I usually don’t exercise my voting rights at the annual general meetings, I’m just happy to collect the dividends they pay me.  However, if I owned significant numbers of those shares then I would definitely be interested in the settlement.

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Voting rights can be an abstract and complicated issue – let me use an analogy.  Imagine sitting down for a Thanksgiving dinner with five other people.  There you are, one of six people at the table, a tasty roasted turkey (or tofurkey if you prefer) in the centre of the table.  The only problem is that there is only one fork at the table.  The person with the fork clearly has an advantage – that’s the multi-vote shares.  The rest of you still have a seat at the table but no real tools to eat the dinner.  If you want to equalize everyone around the table there are two obvious options: (1) take the existing fork away or (2) find five more forks so all six of you have a seat and a fork.  In either case, the person with the only fork at the beginning of dinner probably feels ripped off.  Fixing the dual class equity structures is even more complicated than settling forks and turkey dinners.

There are not any difficult accounting implications to dual class equity structures except appropriate disclosure that outlines the dividend and voting rights.  Dividends are still dividends, share issuances and share retirements are dealt with just like a single class structure.  As discussed above, you should see the corporate governance implications and the difficulty trying to unwind such structures.  Dual class equity structures are becoming rarer in Canada and were never popular in the US.  Keep your eye out as Telus completes the proposed transaction and as the other remaining dual class companies start to clean their equity structures up.  In every case you will find that either the fork-holder or the non-fork-holders will be unhappy – that’s the consequence of cleaning up a mess.

Note: this blog was originally posted on my site hosted by Pearson Education(http://php2.pearsoncanada.ca/highered/inthenews/accounting_in_the_news/)