On June 24, 2010, the Ontario Securities Commission released its highly anticipated decision which cease traded the proposed transaction to collapse the Magna International dual class share structure.
Magna's current dual class share structure has 112,072,348 Class A Subordinate Voting Shares, carrying one vote per share, held by the public and 776,961 Class B Shares, carrying 300 votes per share, held by the Stronach Trust. The two classes of shares have equal rights to distributions of dividends and return of capital. As a result of this structure the Stronach Trust holds approximately 66% of the voting rights and controls Magna, despite the fact that the public shareholders own approximately 99.4% of Magna's equity.
On May 6, 2010, Magna announced a proposal to repurchase for cancellation all of its outstanding Class B Shares from the Stronach Trust in consideration for 9 million Class A Subordinate Voting Shares, $300 million, a four year extension of the consulting agreements with Frank Stronach's controlled companies and a controlling interest in Magna's E-car electric vehicle business. A shareholders' meeting to approve the transaction was scheduled for June 28, 2010 and a fairness hearing before the Ontario Superior Court to approve the plan of arrangement to effect the transaction was scheduled for June 29, 2010.
Magna's board and the special committee of independent directors did not provide any recommendation to shareholders or an assessment of the fairness of the proposed transaction. The special committee did not obtain a fairness opinion, adequacy opinion or formal valuation of the Class B Shares.
The proposal generated considerable controversy because the level of dilution to the public shareholders of approximately 11.4% far exceeded any other dual class structure collapse and the implied premium for the Stronach Trust over the preannouncement trading price of the Class A Subordinate Voting Shares was approximately 1800%, before considering the value of the consulting agreements and the controlling interest in the E-car business.
Staff of the Commission issued a Notice of Hearing and Statement of Allegations on June 15, 2010, convening a hearing before the Commission to consider whether the transaction was contrary to the public interest, primarily as a result of deficiencies in Magna's disclosure and the process pursuant to which the transaction was proposed to shareholders.
After Staff's action, Magna released additional information regarding certain aspects of the transaction, such as two reports by the special committee's financial advisor and a valuation of the E-car business prepared by an accounting firm.
The hearing was held on June 23 and 24, 2010 and the Commission released its decision, including summary reasons, late on June 24, 2010. The full reasons of the Commission will be released in due course.
The Commission determined that the disclosure provided to Magna's shareholders failed to meet the standards required under Ontario securities law and was not sufficient to permit the shareholders to make an informed decision as to how to vote on the transaction.
Citing the failure of Magna's board and special committee to provide a recommendation or an assessment of fairness of such a complex transaction with Magna's controlling shareholder, the Commission determined that:
- shareholders must receive substantially the same information and analysis that the special committee considered; and
- the disclosure must address the legal and business issues raised by the transaction.
The Commission ordered that, prior to re-submitting the transaction to shareholders for approval, Magna must provide an amended information circular remedying the disclosure deficiencies identified in the Commission's decision. The Commission took this position despite evidence that a substantial majority of the Class A Subordinate Voting Shares had already been voted in favour of the transaction. The Commission panel noted that, while shareholder approval was an important factor in their deliberations, it cannot be relied on to say that the disclosure in the Magna circular was adequate.
The Commission provided detailed guidance on the matters that should be addressed in the amended circular, based on the evidence and submissions relating to the background to, and rationale for, the transaction presented at the hearing. In particular, 12 specific omissions and deficiencies were identified in the decision that must be corrected to permit shareholders to make an informed decision.
The Commission panel was not persuaded that the transaction was abusive of shareholders or the capital markets, within the meaning of securities law. Accordingly, the Commission held that the shareholders should be permitted to decide on the merits of the transaction, if adequate disclosure is provided. The Commission panel also indicated that they took comfort from the fact that an Ontario court will, as part of the arrangement process, determine whether the transaction as a whole is fair and reasonable, noting that such a determination was not within the Commission's jurisdiction as a securities regulator.
We expect that the Commission's full reasons will provide valuable guidance to market participants regarding the scope of the Commission's public interest jurisdiction. Furthermore, the Commission indicated that the reasons will discuss its concerns with the process followed by Magna's board and special committee. We expect that this guidance will be extremely beneficial to boards of directors generally in assessing related party transactions.
Borden Ladner Gervais LLP (James Douglas, David Di Paolo, Paul Findlay, Margot Finley and Caitlin Sainsbury, with help from David Surat) acted as counsel to the following institutional investors who intervened in support of Commission Staff at the hearing: Ontario Teachers' Pension Plan Board, Canada Pension Plan Investment Board, OMERS Administration Corporation, Alberta Investment Management Corporation, Letko, Brosseau & Associates Inc. and British Columbia Investment Management Corporation.
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