The debate over ticker extensions and dual-class shares in Canada
It has been more than a year since the Toronto Stock Exchange (TSX), prodded by the Canadian Coalition for Good Governance (CCGG), ordered issuers to affix new extensions to their stock symbols. And it has been just over a month since the TSX put the kibosh on the whole program. With some 20 percent of TSX and S&P Composite Index companies maintaining some form of subordinated voting structure, the idea was to inform investors of their voting rights, thus increasing transparency and market efficiency. But in response to complaints from the CCGG and many other ‘vocal opponents’ among the buy side, sell side, traders and issuers, the TSX is discontinuing the program.
The exchange stopped giving special extensions to new listings and said existing issuers would lose theirs during a three-month process starting in May 2006. When that process is complete, the TSX will make available ‘comprehensive details’ on share structures on its web site.
‘One thing we accomplished with the initiative was to bring about a greater understanding of the different types of voting shares some issuers have,’ says Steve Kee, a TSX spokesman. ‘Companies should be encouraged to continue to discuss and talk about their share structures so shareholders are aware of what they’re investing in.’
Having put forward the concept of the symbol extension in October 2003, the CCGG remains a strong supporter of labeling dual-class shares. But David Beatty, CCGG managing director, believes the modified system did not achieve its desired goal of clarifying the identification of subordinated voting structures, pointing out that ‘the large number of extensions along with the inconsistent application of the extension rules have made the [initiative] more cumbersome than we believe was originally intended.’
The five new suffixes were MV for multiple voting, NV for non-voting, RV for restricted voting, LV for limited voting and SV for subordinated voting. The symbol for Quebecor World, for example, became IQW.SV to denote a subordinated voting issue. Sometimes the old A or B extensions, if used at all, were dropped and replaced by their voting designations. In other cases, the new voting designations were added to A or B extensions. Thus film company M8 Entertainment’s class A multiple voting shares switched from MEE.A to MEE.MV.A, but Telus’ class A non-voting shares simply changed from T.A to T.NV.
Traders loathed the extra letters, saying they caused computer problems and order entry keystroke errors. A report by TD Securities concludes: ‘The prevailing industry view we hear is that education on voting rights needs to be more grassroots, and that the point of execution, when an investor looks up a symbol to invest, is simply too late in the process to make a difference.’
As for issuers, despite initial confusion about the symbol change, most seemed to adapt without difficulty. ‘It took a little communication at the outset – particularly with retail investors,’ says Jane Watson, former vice president of IR at IT provider CGI Group. ‘Other than that, our life is unchanged.’
‘People on either side didn’t operate any differently from how they did before the change,’ adds Bob Tait, president and CEO of the Canadian Investor Relations Institute. ‘Those who have to answer questions about their classes of shares still have to answer the same questions. If anybody was making a different investment decision based on the new symbols, we did not hear about it.’
What was the point?
Of course, making investment decisions was what the new symbol extensions were supposed to be all about. So what was the point? Some market participants say there is no direct relationship between good corporate governance and dual-class shares. ‘Inferring that two classes of shares means poor corporate governance is an over-simplification resulting from a lack of analysis,’ comments Réjean Bourque, vice president of IR at Bombardier, who notes that both Enron and WorldCom were single class.
‘You can have a company that has good corporate governance practices as well as dual-class shares,’ agrees Beatty. ‘The two are not mutually exclusive. People will continue to invest in well-run dual-class companies. Subordinated voting structures pose a greater risk for investors because when a problem arises there are exceptionally limited options. And if a company doesn’t want to change its share structure, [the CCGG] can’t force it. What we can do is ensure firms with voting risks are labeled.’ He would like to see a single mark – such as ‘X’ – denoting all kinds of subordinated voting structures.
Labeled or not, dual-class shares are a fact of life in the Canadian market, and include such big names as Magna International, Molson and Rogers Communications. Controlling shareholders argue that such structures let them build long-term value while insulating them from short-term financial expectations and corporate raiders. They also point out that, in many cases, dual-class companies have performed perfectly well.
On the other hand, institutional investors say dual-class companies are too pervasive for them to ‘vote with their feet’ to avoid them. They say such structures are inherently unfair, raise the risk of poor performance, entrench management and allow managers to appropriate benefits due to shareholders. The poster boys here are Hollinger’s Conrad Black for allegedly looting his company and Magna International’s Frank Stronach for paying himself a huge salary.
For now, all shareholders can do is sell their shares, ask owners for change or hope the TSX and regulators amend the rulebook. Last August three money managers who owned 39 percent of the non-voting shares and 29 percent of the equity of executive search firm Caldwell Partners wrote to its founder and CEO asking for change. Doug Caldwell turned down their request.
‘It’s frustrating,’ admits Colin Stewart, a partner at JC Clark, one of the dissident investors. ‘But it’s a positive step whenever these issues are brought into the public light. It’s a slow process but as awareness grows it eventually has to bring change.’
Brian Barsness, vice president of fund manager Meritas Financial, says more and more companies can expect to face shareholder resolutions calling for the elimination of special voting shares. In 2004 Meritas voted against directors at Magna International to protest against the company’s dual-class shares. ‘Pressure is growing on dual-class companies and fewer of these structures will come to market,’ predicts Barsness, pointing out that the recent lifting of foreign content caps in retirement portfolios will increase the heat in boardrooms. ‘If we are looking for just industry representation, we can find another auto parts maker outside Canada.’ Interestingly, that is, in fact, exactly what Meritas decided to do.