The battle for control of Canadian Tire Corp. Ltd. (CTC), has dramatized a wider and increasingly bitter conflict between two divergent groups in the Canadian investment world. On one side stand corporate owner-managers who have tightened their control by monopolizing ownership shares that provide company voting rights.
Set against them are professional money managers determined to defend themselves and client investors who own shares without voting rights. While both kinds of ownership stocks provide dividends from profits, conflicts between the two shareholder classes arise when takeover bids enhance the market value of voting stock and devalue nonvoting shares.
Such shares, declared William Allen, president of Toronto’s Alienvest Group Ltd., have caused “the quality of the domestic securities market to deteriorate, often for the benefit of some very powerful corJarislowsky: porate groups.”
Allen himself was among a powerful group of money managers who fought for last week’s regulatory decision to bar the CTC takeover bid by 348 dealers who own Canadian Tire retail stores. The challengers represent major personal and institutional investor clients, including insurance companies, pension funds and universities, who hold nonvoting CTC stock. The joint ruling by the Ontario and Quebec securities commissions underscored the power of the money managers and, in effect, rewrote the rules in favor of nonvoting shares generally. The dealers’ takeover attempt, declared Montreal investment counsel Stephen Jarislowsky, was “such an obvious case of unbridled greed that the rest of the investment
industry was on our side.” For his part, Allen noted that the ruling “will comfort investors everywhere.” He added, “The efforts by institutions such as pension funds to defend their assets will continue and strengthen.”
Those efforts aim to establish what Jarislowsky described as “a new era of protection for nonvoting shareholders”—and for money managers. Jarislowsky said that he and other investment counsellors “could have been sued for gross negligence for acquiring a nonvoting share for a client” had the CTC takeover been allowed. The CTC decision, he said, may give investment counsellors more freedom to buy nonvoting shares for clients.
Unfair: In the CTC case, Jarislowsky and other money managers argued that the dealers’ takeover proposal was unfair to holders of a huge majority of the company’s stock. Of the total of almost 88 million CTC ownership shares, only 3.45 million of them provide voting
rights. CTC’s founding Billes family holds some 60.9 per cent of the voting shares, the Canadian Tire retail dealers slightly more than 17 per cent, with ownership of the rest scattered. After the dealers’ bid to buy an additional 49 per cent of the voting stock, those shares more than doubled in market value while nonvoting shares fell. The investment managers charged that the takeover attempt was not only unfair to nonvoting shareholders but that it could also set up a corporate conflict of interest.
Devalue: The chal
lengers argued that control by the CTC dealers, who buy merchandise from the parent company and retail it to the public, might permit profits to be concentrated in the wholesaling operation at the expense of nonvoting shareholders. As well, the money managers contended that the takeover would devalue nonvoting shares in other companies, disrupt stock markets and limit the caunbridled greed’ and a comfort to investors everywhere pacity of companies to
raise funds through
such new share issues.
The ruling against the takeover immediately reversed a slide in the value of CTC nonvoting Class A shares and similar stocks in other firms. Before the decision, CTC nonvoting stock— which had traded at around $14 a share a year earlier—had dwindled to about $11.50, while common voting shares in the firm had climbed to $90 from about $15 last year. Within 24 hours of last week’s regulatory ruling, the CTC nonvoting shares rose in value by about $2 each, and voting shares fell to $46.
The crucial issue in the case turned on the intent of a so-called coattail clause in the CTC corporate bylaws. It stipulated that if a majority of common voting stock was taken up during
a takeover bid, voting rights would automatically be extended to the nonvoting shares. The securities commissions held nine days of joint hearings on the bid in December and January, and included such expert testimony as that of Thomas Kierans, president of the Toronto investment house of McLeod Young Weir Ltd., who urged the commissions to block the deal. The dealers argued that because their offer was for less than half of the CTC voting stock, the clause was not applicable. Opponents countered that, in practice, the proposed deal would give the retailers majority control —about 66 per cent of the voting shares, including those already owned by the dealers. They said that result was assured because of the Billes family offer to sell as many of its voting shares as needed to provide the dealers with an additional 49 per cent.
The regulators’ decision to block the takeover was a turning point in the controversy over nonvoting shares —a type of security that is not yet allowed by the New York Stock Exchange. But nonvoting shares, or shares with limited voting privileges, have been a traditional feature of the Canadian investment scene. But in the latter half of the 1970s issuing restricted shares became widespread. Communications companies, including Maclean Hunter Ltd., issued nonvoting shares in order to raise capital outside of Canada while conforming to the federal law that requires such firms to keep at least 80 per cent of company control in Canadian hands. A more significant factor was the spreading rash of takeovers. Management groups in firms that feared hostile takeover bids strengthened their control by issuing nonvoting shares while increasing their hold on voting stock.
Benefits: The issue has long concerned regulators and stock exchanges. Five years ago the Toronto Stock Exchange (TSE) urged that companies issuing nonvoting shares introduce provisions that would enable the holders of those shares to share in the finan-
cial benefits of a takeover. As a result, of the 175 TSE-listed companies having issues of stocks with either limited or no voting rights, about 95 have socalled coattail provisions that protect the rights of nonvoting shareholders.
Determined: In 1984 the Ontario Securities Commission ruled that in the future companies would have to secure the approval of minority shareholders before converting common shares into restricted ones. As a result, the Toronto-based conglomerate Crownx Inc. was forced last spring by its share-
holders to abandon a plan that would have more than tripled the number of nonvoting shares.
The defence of shareholder rights has produced a number of determined and resourceful leaders. One is Jarislowsky, a German-born graduate of the Harvard Business School who moved to Canada in 1949 to work for Alcan Ltd. as a sheet-metal engineer trainee. Now, his Montrealand Toronto-based investment counseling firm,
Jarislowsky, Fraser & Co. Ltd., manages more than $8 billion in assets for 200 institutional funds and 17 Canadian universities as well as corporate clients. Jarislowsky, 61, has been successfully fighting for shareholders’ rights in Canada since 1971, when he helped to win an additional $18 million for ordinary investors in Supertest Petroleum Corp. Ltd. of London, Ont., when the firm was swallowed up by BP Canada Ltd. He has locked horns with some of corporate Canada’s most powerful figures, including Power Corp. of Canada’s Paul Desmarais and, in 1985, Montreal’s Bronfman family, forcing their giant liquor firm to abandon a plan to tighten family control over the company.
What the CTC case showed, Jarislowsky told Maclean ’s, was that “battles like this must be fought from a mainline position. We are the country’s largest pension fund managers, and there is a certain amount of recognition.” He added: “To argue
that the investing public must sit down and read all the fine print is silly. People would believe that they can’t get a fair deal.”
Implications: Toronto’s Allen, whose own firm has been at the forefront of the fight for shareholder rights, said that there were other important implications in the CTC decision as well. With more than $150 billion in assets, Canadian pension funds are Canada’s largest capital pool of private savings. But they are effectively prevent¡5 ed by federal law from “ investing more than 10 ÿ per cent of their assets § in foreign securities. “If you imprison them to the tune of 90 per cent,” said Allen, “then it is an absolute obligation for regulators and stock exchanges to make certain that the market’s quality is of the highest.” Now, with the decision to halt the CTC dealers’ takeover attempt, the Ontario and Quebec securities commissions appear to have signalled the marketplace that they intend to do just that.
The story you want is part of the Maclean’s Archives. To access it, log in here or sign up for your free 30-day trial.
Experience anything and everything Maclean's has ever published — over 3,500 issues and 150,000 articles, images and advertisements — since 1905. Browse on your own, or explore our curated collections and timely recommendations.WATCH THIS VIDEO for highlights of everything the Maclean's Archives has to offer.