The Ontario Securities Commission should ban the fees paid to investment advisers who persuade their clients to accept takeover bids, says a prominent investment manager who is fighting the attempted buyout of DuPont Canada Inc.
Len Racioppo, president of Jarislowsky Fraser Ltd., has filed a letter of complaint with the OSC, saying that some stockbrokers are telling customers to tender their DuPont Canada shares solely to reap so-called "solicitation fees" of up to $1,500 per investor.
E.I. du Pont de Nemours and Co., DuPont Canada's U.S. parent, has offered $21 a share for the 24 per cent of the company it doesn't own. It has agreed to pay brokerages a solicitation fee for every customer who tenders at least 300 shares. The fee is 15 cents a share, with a minimum of $85 and a maximum of $1,500.
Such fees are common in takeovers, but Mr. Racioppo said he thinks they put brokers in a conflict by encouraging them to advise clients to accept bad deals. "They get paid to make you say yes."
As of last week, just 23 per cent of the minority shareholders had agreed to tender their stock, short of the 50.1 per cent needed to complete the deal.
The offer was extended until June 9 but du Pont has so far refused to increase its bid. Jarislowsky Fraser and its clients own about 20 per cent of the minority float, and Mr. Racioppo has fervently opposed the $21 bid because he believes it is too low.
In his letter to the OSC, he said some of his own clients who hold DuPont Canada shares in segregated accounts have received calls from brokerage firms, "for what we can only believe is to receive the fee."
"A terrible incentive is in place for brokers to solicit shares with the potential for little or no consideration being given to the shareholder's best interests," Mr. Racioppo wrote.
He asked the commission to "intervene now and eliminate the solicitation fee in the case of DuPont Canada or at the very least eliminate them from any future use."
But Ralph Shay, director of takeover bids for the OSC, said there is nothing illegal about solicitation fees so long as they are disclosed, as this one is near the end of du Pont's takeover circular.
"I guess it is a kind of conflict," Mr. Shay said. "But it's disclosed, so it's not a secret kind of commission that's being paid. It's been going on since the beginning of time."
The OSC is not going to intervene, and instead Mr. Racioppo's objection was directed to the commission's fair dealing project, which is studying the rules about how investment advisers and their customers interact.
Irvin Lipp, a spokesman for du Pont, said the company set the payout at 15 cents a share because that's the usual rate for solicitation fees. The fee is designed to compensate brokerages firms for the work they do in a takeover, such as informing clients of the offer and executing instructions, he said.
But if that is the case, there is a fairer solution, Mr. Racioppo said. Bidding companies could agree to pay a solicitation fee no matter which way the investor votes -- "for or against, tender or non-tender." In the meantime, du Pont has been meeting with shareholders to try to convince them $21 is a fair deal, Mr. Lipp said. He declined to comment on the progress of those discussions.
But most of DuPont Canada's large institutional shareholders have said the current bid fails to recognize the company's profitability, growth prospects and strong balance sheet. It has no long-term debt. The parent company has said that if it doesn't get the 50.1 per cent it needs, it will transfer its stake in DuPont Canada into its textiles subsidiary, which it is planning to spin off this year.