The dual class share is an antiquated structure that seems out of the place in this era. Imagine if I owned a successful auto parts manufacturing firm and I decided to cash out 95% of my holdings by going public but retained 95% of the voting shares. I would have the ability to set my own compensation, I could make my wife and my sons executives at the company with generous salaries and I could use company funds to invest in other businesses, say a racetrack. I would argue that having the voting shares makes sense as I should be rewarded for my vision in founding the company and since I started the firm, I know what’s best for its future. So what if the market ascribes a discount to my stock, if investors don’t like my stock price they don’t have to buy it. If investors make a big enough stink, maybe I’ll give up my voting shares, but they better pay me a massive premium to do that. Would you buy shares in my stock?
About 15% of the companies in the S&P/TSX Composite have dual classes of shares. Brookfield Asset Management, Canadian Tire, Rogers Communications, Teck Resources and Telus are some of the largest Canadian companies with unequal voting shares. Our clients own a lot of Canadian stocks with dual class shares and for the most part we are happy with the companies as the management teams not only are shareholder friendly but also maintain significant ownership stakes. But all it takes is for one bad apple, Magna, to ruin it for the bunch. There are many examples of companies (Home Capital in 2003, Gildan Activewear in 2005) that have ceded the voting control with no premiums paid to the founders and their stock prices have appreciated significantly.
If you are going to be a public company and receive all the benefits of having a listed stock then you have to accept the risks that your company could get taken over or that you will get booted out if you do a poor job. Management has to remember that shareholders are owners too and if management doesn’t own a majority stake they should not have a majority vote.
