The Ontario Securities Commission encouraged “despotic behaviour” in the markets by allowing the $1-billion deal that saw Frank Stronach cede his tight grip on Magna International Inc., a University of Toronto law professor and securities expert told a recent roundtable exploring the fairness of the deal.
Anita Anand, who also chairs the OSC’s investor advisory panel, believes the deal was abusive to shareholders whom she said were forced to choose between the lesser of two evils. “What shareholders were presented with was an incredibly constrained choice: purchase the control block at an exorbitant and unprecedented premium or allow more of the same [with] a controlling shareholder extracting significant private benefits of control,” Anand said at the University of Toronto Faculty of Law discussion. “After Magna, the greater the private benefits of control, the higher the premium that will be paid to extricate the firm from the controlling shareholder. This is what I call the power of the despot.”
Stronach was able to control the company despite holding just 0.6 per cent of its 113 million shares because of Magna’s dual-class share structure. Stronach’s 720,000 Class B shares each carried 300 votes, while the remaining 112 million Class A shares got one vote each.
In July last year, 75 per cent of Class A shareholders voted to pay Stronach and the Stronach Trust $300 million in cash to eliminate the Class B shares and end his stranglehold on the company. He also received nine million Class A shares, plus a four-year consulting contract that paid him between two and three per cent of pre-tax profits. Finally, Stronach got a 27-per-cent controlling stake in Magna’s electric car business. The deal’s $1-billion value represented an 1,800-per-cent premium on the value of his shares.
The OSC found the process followed by a special committee established by Magna’s board of directors to assess the deal was “fundamentally flawed” but declined to intervene in June. Instead, it ordered more disclosure for shareholders ahead of the vote.
The regulator was concerned about the involvement of senior management in the negotiation of the deal and the special committee’s limited mandate, as well as its failure to consider the fairness of the transaction for Class A shareholders who would bear the brunt of the cost.
In August, the Ontario Superior Court approved the agreement as “fair and reasonable,” a decision reinforced by the Divisional Court on appeal by several large pension-fund managers who hold Magna shares.
Jeremy Fraiberg, a partner at Osler Hoskin & Harcourt LLP who represented Magna in the structural reorganization, told the audience the OSC was right to stay away from the deal.
“The definition of fair value in our securities law is the price that a willing buyer will pay to a willing seller with full information under no compulsion to act,” he said. “Even if we assume the process was rotten to the core — which I don’t accept — and that there is complete, transparent disclosure in the case, then when shareholders say, ‘Notwithstanding the problems, we want the deal,’ to do anything other than allow it would be paternalistic, in my view.”
But Anand said the OSC took too much comfort in the fact that the court would need to approve the transaction while ignoring a lengthy history of jurisprudence that gave it a broader power to stop the deal if it wasn’t in the public interest because of the precedent it would set.
“The public-interest power relates to the preventative jurisdiction that the commission must occupy in order to protect market confidence and protect the integrity of the capital markets.”
Just because rational shareholders faced with a restricted choice approved the deal didn’t mean it was in the public interest, according to Anand. “Securities regulation is not based on the rational-investor model. There is a responsibility to intervene where the transaction is abusive.”
James C. Tory, a partner at Torys LLP who regularly advises corporate boards in disputes, said he was troubled by the court’s approval of the Magna deal despite the significant concerns. “The advice we routinely give corporate boards is that process is critical. If you have a transaction emerging from a defective process, then that calls into question the quality of the decision.”
Benjamin Zarnett, a partner at Goodmans LLP who represented the CPP Investment Board in its opposition to the deal during the court-approval process, said the court focused too much on the result of the vote in deciding whether the deal was fair and reasonable. “Did court approval play a meaningful role here?” he asked. “They looked at the vote in many ways, but if the court is only scrutinizing the vote to make sure there is one, what does it add?”
According to Fraiberg, the court’s role should be to ensure that the vote was fair and took place with full information. In any case, he said an increase in the value of the shares since the terms of the deal were announced has vindicated the shareholders.
The market reaction at the time — a jump in share price — showed the deal was seen as one that added value for Magna despite the huge price tag, Fraiberg said. In contrast, when the OSC announced it was looking at intervention, the share price dropped. “Just the prospect of a roadblock knocked five per cent off Magna’s market valuation,” he noted. “There clearly was a considerable amount of value attributed to the deal.”
This article originally appeared in Law Times, March 14, 2011 issue.
