(Toronto) Recent conflict over Rogers Communications board has highlighted the governance risk associated with dual class companies, but experts say companies with this structure can be hard to avoid for investors, because they generate significant profits.
Companies with dual class share structures issue different sets of ordinary shares that offer different voting and control rights. Often, a group of shareholders gets a disproportionate share of these rights. These are usually the founders, family members or managers of the company.
This kind of structure is used by companies as diverse as Google’s parent company, Alphabet, and Ford Motor Company. In Canada, the list includes Shopify, Canada Goose Holdings, Bombardier and Alimentation Couche-Tard.
According to investment experts, the structure can be problematic when a class of shareholders wants to take the business in a contested direction, as Edward Rogers did with his late father’s business.
Because Edward Rogers controlled 97.5% of the telecommunications giant’s Class A shares, he was able to replace five board members over objections from other directors, including his mother and sisters.
The BC Supreme Court on Friday upheld Edward Rogers’ right to make the changes since he held control of the votes.
“The worst case (for double classes of shares) is what we are currently seeing at Rogers”, underlined François Dauphin, director general of the Institute on the governance of private and public organizations (IGOPP), in Montreal.
But even these scenarios don’t often make investors hesitate to put money in dual-class companies, since this kind of structure is prevalent, especially among the more profitable companies, he pointed out. .
Strong growth values
TMX Group has 90 companies on the Toronto Stock Exchange with dual class structures. Toronto Stock Exchange companies using this arrangement are active in a variety of industries, from financial services to retailers, industrials, mining, real estate and technology.
Twelve of the 90 companies listed on the Toronto floor in 2021, up from six in 2020 and three in 2019.
Mr Dauphin pointed out that many of the names on this list – Shopify, Stingray, Lightspeed Commerce, and Nuvei – have performed well in the stock market in recent years, making them hard to ignore, even for investors concerned with dual structures. class of shares.
For example, Shopify’s stock value, which was around $ 50 five years ago, is now close to $ 2,000.
“Someone not investing in new dual class share structures would have missed out on a lot of very good, beautiful new companies, which have growth potential that no other company currently has,” Mr. Dolphin.
While Mr. Dauphin understands why people may worry about double classes of stocks, he thinks they are often good investments because of the influence they have on entrepreneurs.
“They can really have a longer term horizon […] which is extremely interesting for new technology companies who need this time to mature their new ideas, ”he said.
He also likes this structure because it usually offers some immunity to hostile takeovers, since the higher class and number of shares held by family members or founders is often enough to thwart an acquisition or merger. , even if it is supported by another category of shareholders.
However, in the eyes of Alexander Dyck, professor of finance, economic analysis and politics at the University of Toronto, this protection against hostile takeovers is the problematic part of this structure.
“Once the founder is no longer in charge, it could be very helpful to have someone else come in and oversee and if management is not up to par, to replace or take over. relay in another way, ”he explained.
Mr. Dyck finds that the more a business has a two-tier structure, the more likely it is to run into problems, especially when a business changes hands to move to a new generation of family – whose business acumen can sometimes be. less sharp.
Despite the challenges and his belief in the need for oversight for corporate governance, Dyck agrees that many dual class companies have achieved significant returns.
“It’s a risk, but when you try to look at risk and return, you might find that there is more return versus risk in this business,” he noted.
“Investors understand that, so there is a cost. ”