Early in May this year, Magna International Inc. (Magna) announced plans to eliminate the super-voting shares held by its founder, Frank Stronach, through Stronach Trust. The super-voting shares carried 300 votes each, and gave Mr. Stronach 66% of all shareholder votes yet made up less than 1% of all company shares. The Magna shares that trade on the TSX carry just one vote.
The Magna plan required shareholder approval. Generally, investors support plans to eliminate super-voting shares because the one-vote shares tend to trade at higher prices after the super-voting shares are eliminated. The Magna proposal immediately attracted criticism from some investors however. This was because of the steep price Magna agreed to pay Stronach Trust in exchange for the elimination of its super-voting shares. The price tag was 9 million of the company’s Class A (one vote) shares and US$300 million in cash, which was equal to US$1,187 per super-voting share. Magna’s Class A shares were trading at US$62.53 prior to the announcement of the transaction. Similar Canadian transactions have not involved paying such a high premium to eliminate super-voting shares. In fact most super-voting shares have been eliminated ‘at par’, so that each of them is cancelled in exchange for one single vote share.
Most of the opposition to the Magna transaction came from the company’s shareholders, but not all of it. On June 15, staff of the Ontario Securities Commission (OSC) issued a statement of allegations which culminated in the assertion that the proposed transaction was contrary to the public interest. The allegation was based on the Magna board’s decision not to provide shareholders with a recommendation to vote for or against the deal and the ‘inadequate’ process followed by the board in its negotiations with Stronach Trust. The OSC held a hearing in late June and although it did not derail the transaction, it did ask Magna to provide shareholders with additional information before allowing a vote on it.
At a meeting on July 23, Magna’s shareholders voted on the transaction and gave it the required approvals.
The drama did not end there, however. Transactions such as the one between Magna and Stronach Trust must be approved by the courts after securing the support of shareholders. Several high profile Magna shareholders including the Canada Pension Plan Investment Board (CPPIB), the Ontario Municipal Employees Retirement System (OMERS) and the Ontario Teachers’ Pension Plan Board (OTPPB) argued before the court that its approval should not be granted because the price to be paid by Magna to Stronach Trust was so high that it was unfair to the other shareholders.
The Ontario Superior Court sided with Magna and approved the deal. The Court found that the approval by shareholders of the transaction and the opportunity that those shareholders had to sell their stock combined to satisfy the applicable fairness test.
The CPPIB, OMERS and OTPPB appealed. On August 30, the Ontario Divisional Court confirmed the Superior Court’s decision.
For investors, the Magna saga makes clear that ultimately, decisions on significant transactions are almost certainly in their hands alone.