Dual Class Shares Bombardier
What are dual class shares?
What Are They?
“Dual class shares” refers to a share capital structure of a corporation that provides for at least two classes of shares, one of which has voting rights or rights to elect directors that are not commensurate with the number of shares held. A common structure is to have a multiple voting class (the superior class) held by founders and/or other insiders that has 10 or more votes per share and a subordinate voting class (the inferior class) held by the public that has only one or no votes per share. There can be other structures, such as a superior class that has the right to elect a majority of the directors, regardless of the number of shares held. The key element of dual class shares is that a superior class has the right to elect a substantial number of the directors, usually a majority, despite owning less than a majority of the equity (often, owning only very little of the equity).
In certain industries that require Canadian control as a matter of law (such as energy, telecommunications and media), dual class structures are frequently used to ensure that the appropriate threshold of Canadian ownership and control is maintained. However, the dual class structures used in those circumstances often go further than required to meet legal requirements, and entrench control in the hands of the founder or founding family.
Much has been written over the last decade about dual class shares. Institutional Shareholder Services (popularly known as ISS) believes that they should be illegal for public companies. The Council of Institutional Investors recently asked the NYSE and NASDAQ to permit no new listings of them.
Are dual class shares good or bad? And if shareholders are willing to invest in dual class companies, why should they be prohibited?
Who Has Them?
Many recent and successful U.S. technology initial public offerings (Google, Facebook, Linkedln, Zynga, Groupon) have featured dual class structures. Warren Buffet uses them at his Berkshire Hathaway investment company. So do other substantial U.S. companies, such as Ford, Blackstone, Visa, Nike and The New York Times. So do substantial Canadian companies, such as Atco, Bombardier, Celestica, Empire (Sobeys), Fairfax, Rogers and Smart. The number of dual class share companies listed on the TSX is about 8% of the listed non-mutual fund, non-exchange traded product issuers.
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The Bombardier Dual Class Structure
|As at Feb 25, 2016||Voting Rights||Issued & Outstanding||Ticker|
|Class B||1 vote per share||1,906,316,489||BBD.B|
|Class A||10 votes per share||313,900,550||BBD.A|
|Preferred Shares and others||No votes|
As stated in the 2015 Management Proxy Circular, as at March 9, 2015, the Bombardier family controlled, indirectly through holding companies, 79.29% of the Corporation’s outstanding Class A shares, 0.08% of the Corporation’s outstanding Class B subordinate shares and 54.35% of all the voting rights attached to all issued and outstanding voting shares.
Dual-class shares are the third rail in Quebec
It would be a bit gauche for the Caisse de dépôt et placement du Québec to dish out I-told-you-sos to investors who bought into Bombardier Inc.’s recent share offering. But this week’s slide in the company’s stock price, to a 22-year-low, suggests that the pension-fund manager’s unsuccessful push for a governance overhaul at Bombardier was a harbinger of the current crisis of confidence facing the plane and train maker.
The Caisse ended up buying just a smattering of the nearly 500 million subordinated voting shares Bombardier issued in a February sale that raised $1.1-billion for the cash-depleting transportation concern. The pension giant passed on becoming the lead investor on the issue after Bombardier’s controlling family balked at its demands, which reportedly included reducing the votes attached to the company’s multiple-voting shares to six from 10.
Had it accepted the Caisse’s conditions, the Bombardier-Beaudoin family would have seen its voting control slip below 50 per cent, a development that would have loosened the grip of patriarch Laurent Beaudoin and his relatives. It might have reassured investors that newly named chief executive Alain Bellemare and the board of directors had a free hand to run the firm.
But news of the Caisse’s clash with the Bombardier clan also got plenty of backs up in corporate Quebec, where the 10-to-1 ratio between multiple and subordinated voting shares has been the preferred means of maintaining control and, hence, keeping a roster of global-sized head offices in the province. Power Corp., Alimentation Couche-Tard Inc., the Jean Coutu Group Inc., CGI Group Inc. and Quebecor Inc. are just a few of the big Quebec players whose controlling shareholders rely on the 10-to-1, dual-class share structure. Without it, there would be a glut of empty office space in the Greater Montreal area.
Takeovers are sensitive topics in most jurisdictions. But there’s an added layer of sensitivity in Quebec, where the existence of a francophone business class is still a comparatively recent phenomenon and the sale of such iconic companies as Alcan and Cirque du Soleil creates fears that Quebec Inc.’s glory days are behind it. If any institution should understand this touchiness, it’s the Caisse.
That’s not to suggest the pension-fund manager wasn’t right to demand changes at Bombardier. The company’s chronic underperformance and repeated dismissal of criticism warranted an intervention. Had Bombardier taken the Caisse’s advice, investors might now be showing more patience.
Defenders of a dual-class share structure say it encourages long-term thinking by management and the board by shielding them from the tyranny of quarterly earnings targets. It gives entrepreneurs time to realize their often complicated visions without being distracted by market diktats. If investors don’t like it, they shouldn’t buy subordinated voting stock in the first place. Besides, as the appetite for recent technology IPOs with dual-class share structures suggests, most investors care more about a good story than how many votes they get.
There was a time when Bombardier fit into that category. Without Mr. Beaudoin’s vision and discipline, Bombardier might still just be a snowmobile maker in the Eastern Townships. With him on board (he married the boss’s daughter), investors experienced a ride of a lifetime that saw their shares hit $26 in 2000.
Once Bombardier entered the big leagues, however, there was too much at stake to bet everything on a dream. Mr. Beaudoin could never accept the advice of his hand-picked replacements as CEO – Bob Brown and Paul Tellier – that taking on Boeing and Airbus was a suicide mission. They considered the 100-plus-seat C Series aircraft a bet the company couldn’t win.
Neither Mr. Brown nor Mr. Tellier lasted very long in the top job. They soon found that their power wasn’t commensurate with the title. And the market knew they were placeholders until Mr. Beaudoin considered his son Pierre ready for the top job, which he got in 2008.
The market lost confidence in Pierre Beaudoin long ago. Bombardier’s recent share issue was oversubscribed not because investors had a change of heart. Many were just looking to make a quick buck, as the stock rallied with Mr. Beaudoin’s replacement by Mr. Bellemare. But the latter may discover that his marge de manoeuvre is no greater than that of the two previous non-family CEOs.
The Caisse was merely applying its own guidelines in requesting that Bombardier reduce the number of votes attached to its Class A shares. Had it succeeded, it might have given investors reason to believe the company had truly turned over a new leaf.
It would also have sent most of Quebec Inc. into a panic.
Now is the time for Bombardier to dismantle its dual-class share structure