Pathathai Chungyam
If the reaction to Magna International Inc.'s decision to eliminate its dual-class shares is any indication of what investors think of these structures, more companies are likely to follow Magna's lead: The shares surged on Thursday after the announcement was made.
Founder and chairman Frank Stronach has been able to maintain control of the auto parts manufacturer despite holding a small slice of the company's equity, thanks to multiple-voting shares that carry 500 votes each.
He's by no means alone, though: According to a 2005 Parliamentary report, an estimated 20 per cent to 25 per cent of companies listed on the Toronto Stock Exchange have dual-class share structures (including Rogers Communications Inc. and Bombardier Inc.), compared to just 2 per cent in the United States (Google Inc. is one example).
Dual class shares certainly conflict with the democratic aspects of most share structures, where one share equals one vote. But the bigger question for investors relates to performance: Do companies with dual-class structures perform better or worse?
The answer isn't as straightforward as you might think.
The downside to dual-class is pretty obvious: Those shareholders who hold the multiple voting shares become entrenched in the company, and able to do what they want to do, simply because they can. Risky takeover? High executive compensation? No problem.
On the other hand, companies with dual-class structures are relatively immune to hostile takeovers, and therefore managers can make longer-term strategic plans without much concern if the share price dips in the near term.
They're both compelling arguments, which is why the academic evidence is mixed.
One recent study in the Canadian Investment Review found that Canadian dual-class companies actually looked pretty good on paper: They were larger, they maintained a higher dividend payout ratio and they consistently delivered higher returns on equity.
However, the study also found that the stocks of Canadian dual-class companies underperformed their peers and their sector by a wide margin (although it didn't provide the numbers).
The reason relates to what other commentators have pointed out: Since companies with dual-class shares structures are much more difficult to buy (at least without the controlling shareholder's blessing), the shares lack a built-in takeover premium.
Perhaps that is what is driving Magna shareholder higher on Thursday: Suddenly, that takeover premium has appeared.