The Canadian Coalition for Good Governance (CCGG), an organization representing institutional shareholders and asset managers, has released its "Dual Class Share Policy" (the Policy), which sets out CCGG's new governance guidelines for companies with dual class share (DCS) structures. Although CCGG acknowledges that there was a lack of "unanimity among CCGG members", the Policy notes that CCGG's board of directors and a large majority of CCGG's members support the DCS company best practices principles (the Principles) in the Policy. The Principles are intended to be applied on a going-forward basis to newly created DCS reporting issuers, although CCGG also encourages existing DCS reporting issuers "to take these principles into account if and when appropriate".
While the Policy reflects CCGG's views, and constitutes neither legal requirements nor regulatory guidance, the Policy provides an indication of the views of CCGG members, such as institutional investors, with respect to investments in DCS companies.
DCS structures include companies with multiple voting shares (MVS) (e.g., 10 votes per share) and subordinate voting shares (SVS) (e.g., one vote per share) and companies with voting and non-voting common shares. The Policy notes that there are currently 77 DCS companies (exclusive of investment funds) listed on the Toronto Stock Exchange (TSX), although, possibly reflecting heightened regulation (for example, the Ontario Securities Commission Rule 56-501 and Part VI.H of the TSX Company Manual), there have not been recent DCS company IPOs in Canada, unlike in the U.S. with Google, Facebook and Groupon. DCS structures have, however, been a topic of interest in Canada, given some recent high-profile legal disputes (see our February 2013 Blakes Bulletin: Court Approves Telus Arrangement and our September 2010 Blakes Bulletin: Appeal of Magna's Plan of Arrangement Dismissed by Ontario Divisional Court).
In its policy entitled "Governance Differences of Equity Controlled Corporations" (the Controlled Corporations Guidelines), which was released in October 2011, CCGG indicated it would prepare a specific subset of guidelines for corporations with DCS structures, which guidelines are now established in the Policy. However, the Controlled Corporations Guidelines continue to apply to DCS companies, except to the extent they are modified by the Policy. Please see our October 2011 Blakes Bulletin: CCGG Releases Governance Guidelines for Equity Controlled Corporations for more information concerning the Controlled Corporations Guidelines.
The Policy includes a summary of certain advantages and disadvantages associated with DCS structures and an acknowledgment that there is a lack of "unanimity" among CCGG members as to the governance principles which should apply to DCS companies. While some CCGG members believe that appropriate disclosure combined with a meaningful MVS equity ownership stake is sufficient to address shareholder protection concerns associated with DCS structures, and that utilization of robust board conduct review and conflicts committees can go a long way toward alleviating any potential conflicts or related-party issues, CCGG's board of directors and a "large majority" of CCGG's members support the Principles reflected in the Policy.
The Policy's supporters also believe DCS structures should only be used in "exceptional circumstances" and that the best practice for companies going public is to adopt a capital structure with a single class of voting common shares.
The Principles are intended to be applied to any newly created DCS reporting issuer, while existing DCS reporting issuers are encouraged to take the Principles into account if and when appropriate. The Policy's supporters also expect DCS companies undertaking an IPO after the Policy date that do not comply with the Principles to annually explain to shareholders the reasons for non-compliance. The Policy does not extend this expectation as to disclosure to existing DCS reporting issuers, even as a recommended practice.
The Principles contained in the Policy are summarized below.
1. Electing Directors
The Policy provides that holders of MVS should only be entitled to nominate the number of directors equal to the least of (1) two-thirds of the board; (2) the number obtained when the board size is multiplied by the percentage of total voting rights held by the MVS holders; (3) if the holders of the MVS are "related" to management of the controlled corporation, then one-third of the board. Under the Controlled Corporations Guidelines holders of MVS (assuming they are the controlling shareholder) will generally be considered to be "related" to management where an executive of the controlled corporation is also (1) a significant shareholder, (2) employed by the controlling shareholder (or one of its controlling shareholders); or (3) an immediate family member of the controlling shareholder.
The Policy does not provide for how directors are to be designated as nominees of the holders of MVS, as opposed to nominees of the company, but indicates that a separate vote of the SVS in director elections is not required. Additionally, the Policy states that when reporting voting results, the DCS company should disclose the MVS and SVS results separately.
2. Maximum Voting Ratio of MVS to SVS
The Policy provides that a DCS structure should include a meaningful MVS equity ownership stake, which may vary depending on context. The Policy specifies that a ratio of voting rights of an MVS to an SVS of no more than four-to-one (that is, a minimum 20% equity stake is required for 50% voting control) would generally be sufficient. The Policy's supporters recognize that one factor which could justify a lower percentage is if the dollar amount of the ownership stake represents a significant economic interest in the DCS company's equity.
3. Non-Voting Common Shares
The Policy provides that reporting issuers should not have non-voting common shares.
The Policy provides that all DCS reporting issuers, even if they are not TSX-listed, should have coattails (provisions requiring that a take-over bid made for the MVS be extended to the SVS on the same terms). Further, it also recommends that the TSX should create a standard form of coattail provisions to be adopted by all DCS reporting issuers.
5. Collapse of DCS Structure
The Policy provides that the DCS structure should collapse (when MVS are exchanged for SVS on a one-for-one basis) at an appropriate time, as determined by the DCS company board and, if practicable, as set out in the DCS company's articles, unless a majority of the SVS voting separately approve the continuation of the DCS structure, on the basis of five-year terms.
The Policy further provides that the DCS company should, on an ongoing basis, consider the reasons why the DCS structure was established and whether those reasons remain valid and should annually explain to shareholders the reasons why the continued existence of the DCS structure is appropriate.
6. Monetization of MVS
The Policy provides that a holder of MVS should not be allowed to monetize the holder's MVS by entering into a derivative transaction.
7. Payments to an Owner of MVS upon Collapse of the DCS Structure
The Policy provides that no premium should be paid to the owners of MVS upon collapse of the DCS structure and that MVS should convert into SVS on a one-for-one basis.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.