Dual-class share structures are often billed as controversial since they offer a select group of shareholders voting rights that are superior to what common shareholders of the same publicly traded venture receive. This is especially true when dual-class shares play a role in a high-profile corporate dispute or battle for control. Such was the case in 2021 when board members at Rogers Communications disagreed over whether the company needed a management shakeup last year
The Toronto-based firm was founded in 1960 by the late Ted Rogers, who built a single FM radio station into a major player in cable, wireless services, broadcasting, publishing, and sports. Today, the firm is controlled by the Rogers family through a trust that owns 97 per cent of the company’s voting shares while other shareholders hold non-voting stock.
Last year, company chair Edward Rogers moved to replace the firm’s CEO amid the execution of a strategic acquisition of Shaw Communications. With support from other members of the controlling family, independent directors attempted to block this move by voting to install a new company chair—but Edward prevailed by simply using his powers as head of the family trust to replace the company’s board with a new one stocked with directors willing to support a change in executive leadership. Until Edward’s authority to do this was confirmed by the courts, the company had a duelling pair of boards with both claiming the right to govern its future.
Not surprisingly, the Rogers drama attracted a lot of commentaries on dual-class shares, which are used by a significant number of publicly traded firms across North America. In Canada, as IBJ editor Thomas Watson recently noted in Financial Post Magazine, the number of firms going public on the Toronto Stock Exchange with dual-class share structures more than doubled last year. And while dual-share companies still accounted for just 96 of the more than 1,700 TSX listings when the Rogers dispute was making headlines, these firms were collectively worth $675 billion (as of last September) with market capitalizations averaging more than three times the average TSX listing. But it is important to note that the Rogers family dispute does not prove that dual-class shares are either good or bad for investors.
As Globe and Mail writer Andrew Coyne noted last November: “That so many companies have taken to issuing these shares suggests there is a ready market for them. Which poses a puzzle for the critics: If non-voting or subordinate voting shares are such a bad idea, why are people so eager to buy them? No, they don’t get to vote at the company’s annual meeting. But they do get to collect their share of the profits. They also have less defence in the event the company’s controlling shareholders lose their minds. But it seems a risk many find worth taking. Who’s to say they’re wrong?”
Proponents of dual-share structures typically point to the benefits than can be gained by freeing management from the need to worry about activist shareholders or unwelcome takeovers. Critics, on the other hand, see the entrenched inequality amongst classes of shareholders as incompatible with good corporate governance. These arguments, of course, are often simplistic because not all dual-share structures are the same.
In this article, we aim to elevate the debate by highlighting four different ways that Canadian firms, including Rogers and Shaw, implement dual-class share structures. We then discuss the related advantages and risks and finish with some governance considerations.
DIFFERENT DUAL-CLASS SHARE SRUCTURES
Rogers Communications: As noted above, Rogers Communications Inc. (RCI) is a family-founded and family-controlled company with operations across Canada that include wireless and broadband services, media interests and sports ventures. Voting control of the firm is held by the Rogers Control Trust for the benefit of future and current members of the Rogers family, several of whom serve as RCI directors. The trustee is the trust company subsidiary of a Canadian chartered bank.
As of December 31, 2020, holding companies controlled by the family trust owned approximately 98 per cent of RCI’s 111,154,811 outstanding Class A voting shares and approximately 10 per cent of its 393,770, 507 Class B non-voting shares (or approximately 29 per cent of total shares outstanding). In most circumstances, only the Class A shares carry the right to vote. As a result, the Rogers Control Trust is able to elect all members of the RCI board and control most other matters submitted to a shareholder vote.
The Rogers Control Trust is governed by its chair and vice-chair along with the trustee and an advisory committee consisting of six family members and four non-family members. According to a government backgrounder, the trust chair acts “as the representative of the controlling shareholder” in dealing with RCI to provide leadership on company strategy and direction, and votes “the Class A Voting Shares held by the private Rogers family holding companies in accordance with the estate arrangements.” As the representative of RCI’s controlling shareholder, the Rogers Control Trust chair holds significant power. But the chair and vice-chair are both responsible to the advisory committee, which reviews the chair appointment on an annual basis with a supermajority vote of at least seven members required to make changes.
According to media reports, a group of committee members including three family members tried to restrict Edward Rogers’ power as chair of the Control Trust during last year’s battle over replacing the company’s CEO, but they were not able to garner the seven votes required to do so.
Shaw Communications: Like Rogers, Shaw Communications Inc. is a family-founded and family-controlled Canadian connectivity firm. According to the company’s 2021 annual report, voting control is held by the Shaw Family Living Trust (SFLT) and the Trust’s subsidiaries through the control of approximately 79 per cent of the company’s 22,372,064 outstanding Class A voting shares and 8.2 per cent of its 476,537,262 outstanding Class B non-voting shares (giving the Shaw Family a total equity ownership of about 10 per cent as of August 31, 2021). Only the Class A shares have the right to vote, except in the event of a potential takeover.
On April 14, 2021, Shaw recommended to shareholders that the company be acquired by Rogers in a deal worth approximately $26 billion, including Shaw debt of about $6 billion, which reflected a premium of approximately 70 per cent to Shaw’s Class B Share price on the last trading day prior to the deal’s announcement. According to a Rogers press release, the proposed transaction—which is being contested by regulators—would be funded by cash consideration of $40.50 to all Shaw shareholders, “with the exception of approximately 60 per cent of the Shaw family shares which will be exchanged for 23.6 million Class B Shares of Rogers at an exchange ratio of 0.70.” If approved, the deal would make the Shaw family one of Rogers largest shareholders, and Shaw CEO Brad Shaw, along with another person nominated by the Shaw family, would join the Rogers board of directors.
Onex: Onex Corp. is a Toronto-based alternative asset manager founded in 1984 by CEO Gerry Schwartz using $50 million from a small group of investors. By 2021, the company and its subsidiaries were managing assets worth about $47 billion. Subsidiaries include divisions focused on private equity (ONCAP and Onex Partners), credit investing (Onex Credit), and wealth management (Gluskin Sheff). The firm also has a small real estate division that owns a residential and commercial complex in Flushing Town Center, Flushing, NY.
Onex has two classes of common shares: subordinate voting shares (SVS) and multiple voting shares (MVS) that are 100 per cent owned by Schwartz—with the outstanding number of SVS shares vastly larger than the outstanding number of MVS shares (as of December 31, 2020, there were 90,310,931 SVS shares and just 100,000 MVS shares in circulation). As noted in the 2020 annual report, the MVS class of shares have “no entitlement to distribution on wind-up or dissolution above their nominal paid-in value and do not participate in dividends or earnings.” But as owner of the controlling class of shares, Schwartz is entitled to elect 60 per cent the firm’s directors and control 60 per cent of the total shareholder vote on most matters. Owners of SVS shares, including Schwartz (who controlled 13 per cent of the subordinate class of shares as of December 31, 2020), are collectively entitled to elect 40 per cent of the firm’s board and have the right to appoint Onex’s auditors. This group is further entitled, subject to the prior rights of other classes, to distributions of the residual assets on winding up and to any declared but unpaid cash dividends.
Interestingly, should Schwartz cease to own (directly or indirectly) in excess of 5,000,000 subordinate voting shares, his multiple voting shares would only allow him to elect 20 per cent of the board, while SVS owners would have the right to elect 80 per cent of the board and 100 per cent of the voting rights on general matters.
Magna International (circa 2010): Based in Aurora, Ontario, Magna International is a global auto parts supplier founded by Austrian-born entrepreneur Frank Stronach—who opened a machine shop in a Toronto garage in 1957 and built it into a multi-billion-dollar public company serving OEM customers ranging from General Motors to Volkswagen. Circa 2010, when Stronach was chair of the board, Magna’s founder controlled the company via control of The Stronach Trust—which owned all the 726,829 outstanding Class B multiple voting shares (each having 300 votes per share), while owners of 112,072,348 outstanding Class A subordinate shares had one vote per share. As a result, Stronach through The Stronach Trust controlled about 66 per cent of Magna’s voting shares while only owning about 0.64 per cent of all voting shares, a much smaller amount of equity than the controlling shareholders in our previous examples.
In 2010, Magna’s board of directors struck a controversial deal with Stronach to eliminate the company’s super-voting shares. A majority of minority shareholders eventually supported the deal—which proposed handing Stronach US$300 million in cash, common shares worth US$563 million, control of a potentially lucrative electric-car joint venture and the right to continue to collect consulting fees worth US$120 million. But it was challenged by investor-rights activists who noted Magna’s board did not make a recommendation on whether shareholders should accept the deal.
The Ontario Securities Commission declined to intervene, despite finding the process “fundamentally flawed” and “tainted by the involvement of executive management.” But the Canadian Pension Plan Investment Board (CPPIB) and the Ontario Teachers’ Pension Plan (OTPP)—who owned less than one per cent of the shares and one share, respectively—opposed the deal so vigorously that they took it to the Superior Court of Justice in Ontario. After losing their court case, CPPIB and OTPP appealed to the Divisional Court, but the appeal was dismissed, and the transaction closed on August 30, 2010. Interestingly, despite the opposition of some shareholders, the deal turned out well for investors since Magna’s market capitalization increased a net of $1.36 billion after the two share classes were unified.
DUAL-SHARE CLASS ADVANTAGES AND RISKS
The commonly cited advantages and risks associated with dual-class share structures are highlighted in Table 1 and examined in more detail below.
|Dual-Class Share Structures
|Dual-Class Share Structures
Advantages of Dual-Class Shares
Firstly, dual-class shares allow founders, along with their management teams and boards of directors, to design and execute strategies that they believe will best allow them to effectively compete within the industry in which they operate if they are a pure play firm or achieve an appropriate level of diversification if they are a multi-business enterprise (MBE). In addition, it allows MBE firms to operate in industries appropriate for the creation of economies of scope. Achieving the correct level of diversification would be at the discretion of the firm’s senior leaders and not subject to the pressures of the market with respect to share price in the short-term. It could also ensure the full attention of the founder on execution given the level of diversification.
Secondly, implementing a dual-class share structure encourages founders to list their stock publicly for investors who trust the leadership of founders and want to buy their shares despite not having equal voting privileges.
Thirdly, dual-share structures insulate founder-led firms from short-term stock traders, allowing them to focus on how well the business runs, instead of share price movements. As noted in the Ivey Business School case study “Growth and Transition at Onex Corporation,” Schwartz insists this means business founders can take their ventures public but still make every decision as if they expected to own the business permanently, allowing them to better consider the interests of communities and other stakeholders who play a role in whether a business succeeds or fails.
Dual-share structures can also protect firms from activist shareholders, proxy battles and hostile takeovers. For example, the leadership and board of Canadian Pacific (CP) would not have lost a 2012 boardroom battle to the Pershing Square hedge fund if the company had had a dual-class share structure. In this case, of course, it is worth noting CP management at the time was entrenched and doing a less than stellar job.
Finally, technology companies such as Zoom, Meta, Snap, Shopify, and Alphabet—which typically need to make significant capital expenditures with long-term horizons—use dual-class shares to protect themselves from stock market short-termism. In some industries where long-term investments are the norm, such as the pharmaceutical industry, we do not see a preponderance of dual-class shares. But an estimated 43 per cent of technology firms that executed an initial public offering in 2020 did so with a dual-share class structure.
Risks of Dual-Class Shares
Firstly, when a controlling shareholder holds a small economic interest in the business (s)he controls, there can be agency issues and conflicts of interest. This occurred in the Magna case described above. Over the years, while holding a small equity stake in the company, Stronach was repeatedly accused of making investment decisions that were unrelated to the auto sector, and therefore disadvantageous to owners of Magna’s subordinated-voting Class A shares. This eventually led to the creation of two spinoff companies—Magna Entertainment Corporation (MEC) and MI Development (MID)—with missions that allowed Stronach to focus on passion projects, including a desire to dominate horse racing. Despite this move, many observers insisted Stronach’s power to do whatever he wanted unfairly deprived shareholders of Magna of his knowledge and leadership as Magna’s chair, a position for which he received annual compensation ranging from US$1.9 million to US$40.5 million between 2000 and 2010.
As a dual-share company, Magna typically cited Stronach’s position as founder to justify paying him consulting fees equal to about 3 per cent of pre-tax profits, which was half the money set aside annually to reward executive performance as dictated by a corporate constitution put in place in 1984. In addition to tying executive compensation to operational performance, the so-called Magna Carta set aside fixed percentages of pre-tax profits for common shareholders, R&D and charitable giving. Stronach argued the constitution prevented Magna’s leadership from acting like executives at other companies who “stuff their pockets with all the gold they can find” regardless of profitability. But the constitution also allowed Stronach as the company’s controlling shareholder to make limited but significant investments in unrelated businesses against the wishes of minority shareholders.
Secondly, many consider non-voting/subordinate voting shares to be an inferior class since owners of these shares have to depend on the largesse of the voting/multi-voting shareholders to do what is best for all shareholders. The Magna case suggests that there had been a corporate discount for the non-voting shareholders given that Magna’s market capitalization increased a net of $1.36 billion after the two share classes were unified.
A third risk with dual-class share structures is the potential for entrenchment of management and board members. At Onex, as we mentioned earlier, Schwartz has the right to elect 60 per cent of the company’s board and to have a 60 per cent vote in all other shareholder matters. The dispute at Rogers was settled when the Superior Court of British Columbia ruled Edward Rogers, as chair of the Rogers Control Trust, had the right to choose who sat on Rogers Communications board. This gave him immense power over management selection, and less than two weeks after the court’s decision, he went ahead with his plan to install a new CEO.
Fourthly, the dual-class share structure leads to a greater likelihood that firms will engage in related transactions with the CEO.
Finally, there is a greater likelihood that the chair of the board will not be an independent director or non-executive chair. At Onex, for example, Schwartz is board chair, CEO and also a member of the leadership team of Onex’s largest subsidiary, a large-cap private equity firm. Edward Rogers isn’t CEO of the company founded by his father, but he is chair of the Rogers Communications board and is clearly not an independent board member while also controlling who serves on the company’s board and management team as chair of the Rogers Control Trust. Brad Shaw is currently chair and CEO of Shaw Communications, and, circa 2010, Frank Stronach was the chair of the Magna board.
While the Rogers dispute rightly put a spotlight on the shortcomings of dual-class shares, capital markets are more complex and nuanced than many arguments made against dual-class shares suggest. Meanwhile, the advantages they offer remain significant as numerous disruptive forces have managers across all sectors rethinking strategy, potentially opening the door to an increase in proxy battles between managers with long-term visions and investors with short-term objectives. And the reality on the ground is that companies continue to issue dual-class shares, and investors continue to buy them.
Recognizing this reality, the Canadian Coalition for Good Governance (CCGG), which represents a number of large institutional asset owners and managers, developed a dual-class share policy that encourages best practices for companies with dual-class shares. Some of the key principles include subordinated rather than non-voting shares, meaningful equity ownership and mandatory sunset provisions.
Although minority shareholders in dual-class share companies are at a disadvantage to controlling shareholders, there are still important differences between non-voting or subordinated voting shares. For example, Onex subordinated shareholders get to elect 40 per cent of the board of directors, as well as to appoint the company’s auditors. Subordinated voting shares also give minority shareholders the ability to vote at shareholders meeting, something Rogers non-voting shareholders could not do during the recent change in board membership.
Meaningful economic ownership of companies by controlling shareholders is another best practice because it helps align the interests of share classes as we see in three of the four examples cited in this paper. The Rogers Control Trust has a 29 per cent economic interest in Rogers Communications; the Shaw family holds a 10 per cent economic interest in Shaw Communications and Schwarz holds a 13 per cent interest in Onex. Of the four examples cited, the notable exception is Magna International (circa 2010) where Stronach controlled 66 per cent of the votes while owning only 0.64 percent of the total equity of the company.
Unfortunately, while we see pockets of best practice in TSX listed dual-class share companies, they are far from universal. In particular, sunset provisions—whereby the dual-class share structure dissolves at some point in the future (triggered by retirement or passing of the founder, or a decline in economic ownership such as we see in Onex)—are seldom seen.
Abbas Khambati, W. Glenn Rowe, Stephen Sapp, and Nadine de Gannes, Magna International and Dual-Class Share Unification (London, ON: Ivey Publishing), 15. Available from Ivey Publishing, product no. 9B20M209.
Andrew Coyne, “The Rogers Family Feud does not make Dual-Class Shares a Bad Idea,” The Globe and Mail, November 12, 2021.
Barbara Shecter, “Joe Natale out as Rogers CEO, to be replaced by former CFO Staffieri,” Financial Post, November 16, 2021.
Daniel E. Chornous and Andrew Sweeney, Magna International, presentation (October 5, 2021) to Corporate Strategy class, MBA Program, Ivey Business School, London, ON.
David Milstead, “Use of Dual-Class Shares on the Rise in Canada,” The Globe and Mail, December 6, 2021.
Globe Staff, “The Rogers Family Feud: From a Butt-Dial to a B.C. Supreme Court case, Here’s What’s happening inside Canada’s Biggest Telecom Boardroom,” The Globe and Mail, November 5, 2021.
James Bradshaw & Susan Krashinsky Robertson, “Ted Rogers’ Wishes for Family Control of Company have complicated the Power Struggle,” The Globe and Mail, October 22, 2021.
Ken Mark, Chris Makuch, Stephen Foerster and W. Glenn Rowe, Unlocking Value at Canadian Pacific: The Proxy Battle with Pershing Square (London, ON: Ivey Publishing). Available from Ivey Publishing product no. 9B17N024.
Maria Semenova, W. Glenn Rowe and Rod White, Growth and Transition at Onex Corporation. (London, ON: Ivey Publishing). Available from Ivey Publishing, product no. 9B16M123.
Thomas Watson, “One company, two faces: Problems with dual-class shares at Rogers,” Financial Post Magazine, April 21, 2022.
Thomas Watson, “The $1,700,000,000 golden handshake: Inside the best deal Frank Stronach ever made,” Canadian Business, April 5, 2011.