Dual-class share structure still popular in Cda
TORONTO - Canada's largest helicopter services firm plans to issue two classes of shares when it converts from income trust to corporation next year, a sign the structure giving one set of shareholders the lion's share of control over a company is not going out of vogue.
Canadian Helicopters Income Fund (TSX:CHL.UN) said Monday it plans to use the dual-class structure to help it satisfy Canada's stringent foreign ownership requirements, creating an ordinary class of stock that can be held by numerous foreign investors and one for domestic shareholders with a majority say in company affairs.
Some major Canadian companies have recently said they'll go in the opposite direction, in particular auto parts giant Magna (TSX:MG.A), which announced last week it will do away with its controlling shares.
The diversion of strategies outlines a subtle difference between those adopting the structure as an innovative investment strategy and those who see it as an anachronism that allows powerful families to keep a tight rein on businesses trading their shares publicly.
In the case of Canadian Helicopters, and other airlines such as Air Canada and WestJet, Canadian ownership laws dictate that foreign investors can own a maximum of 25 per cent of companies in the air transport industry.
"Effectively you can have significantly more foreign ownership in terms of number of people owning stock, more stock out there, but not going offside on the votes," said Don Wall, president and CEO of Canadian Helicopters.
By issuing a second class of shares, Canadian Helicopters, WestJet Airlines Ltd. (TSX:WJA) and Air Canada (TSX:AC.A) are able to attract more foreign investment while remaining within the parameters of the law, because if the foreign-owned shares exceed 25 per cent of the company's total shares, their voting rights are diminished.
In other words, if 50 per cent of a company was owned by foreign investors, each foreign-owned share would only get half a vote.
This structure does pose some risks to foreign investors — including the fact that they may end up with less than one vote per share — but tends to raise fewer objections than the type of dual-class structure in place at family controlled public companies like Magna, Power Corp. of Canada (TSX:POW), Rogers Communications Inc. (TSX:RCI.B), Shaw Communications Inc. (TSX:SJR.B), Teck Resources Ltd. (TSX:TCK.B) and Bombardier Inc. (TSX:BBD.B).
For one thing, common shares tend to be far more liquid than foreign-owned variable shares, said Rob McInnis, director of investor relations at WestJet.
"All our liquidity is in common shares and we have virtually no liquidity in the variable shares, so we trade probably 300,000 to 500,000 shares in our common and 5,000 to 10,000 a day in our variables," he said.
To overcome this, some banks and brokers have set up a mechanism that allows foreign investors to trade in the common shares, but it's more expensive for them to do that than for a Canadian investor, McInnis added.
However, WestJet doesn't face the same problems as family-run companies like Magna, he said.
Magna co-CEO Don Walker said last week the proposal to eliminate the Stronach family's voting control is meant to address shareholders' frustrations with what they view as an unreasonably low share price. Some U.S. investment firms have a practice of avoiding companies with dual-class voting structures, and this may have depressed the market value of all Magna shares, which trade on both the TSX and the New York Stock Exchange.
So far, the plan seems to be working. Magna's shares have gained more than 15 per cent since the move was announced Thursday, to $74.26 as of Monday afternoon.
"The market in general would suggest that companies without dual-class share structures perform better, and that certainly is reflected in what happened with Magna's share price," said Bob Walker, vice-president of sustainability at Northwest & Ethical Investments LP.
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