Regulator stops vote on Magna stock plan

Tony Van Alphen

BUSINESS REPORTER

Ontario’s securities regulator has stopped a vote on a stock restructuring plan at Magna International until shareholders get more details to make an informed decision.

A three-member panel of the Ontario Securities Commission ruled late Thursday night that before shareholders vote on the plan, Magna must amend a current circular to provide them with numerous pieces of new information regarding its background and implications.

“In our view, the circular does not provide sufficient disclosure to shareholders to permit them to make an informed decision and does not contain certain information that is material to shareholders in the circumstances,” the panel said after hearing testimony and arguments for two days this week.

Under the plan, a Stronach family trust would eliminate 726,829 multiple voting B shares and control of Magna in exchange for nine million A shares worth $563 million plus $300 million in cash. It would still make Stronach the company’s biggest single shareholder with 7.6 per cent.

He would also continue to receive annual “consulting contracts” that would earn him between two and three per cent of Magna’s pre-tax profits for the next four years.

Furthermore, Stronach would also have control of a new joint electric car venture with Magna although he is contributing only 26 per cent of the money.

The plan would give a Stronach family trust with a premium of 1,800 per cent for their B shares. Stronach, who founded and built Aurora-based Magna into a global auto parts powerhouse, has indicated he would be content in retaining his 66 per cent of the voting shares while holding less than one per cent of the equity.

OSC staff asked the commission to stop the plan until there was more disclosure because it wasn’t in the public interest and harmful to the markets. It also described the plan as “an abuse” and the premium to the Stronach trust as “unprecedented.”

The commission panel concluded that shareholders need to get the same information, analysis and assessments of the plan that a special committee of the Magna board received even though directors did not provide them with a recommendation.

”There is no meaningful discussion of the implications of those matters or of the substantive information that was received,” the OSC panel said.

“The circular states that “… the special committee did not find it practicable to, and did not, quantify or otherwise attempt to assign relative weight to specific factors in reaching its conclusions.

“That may be adequate disclosure where a board of directors or special committee has made a recommendation to shareholders in respect of a transaction. It is not adequate where shareholders are left to their own devices to make a decision in circumstances such as these.”

The panel also called the circular’s disclosure on “significant dilution” of the stock of A class shareholders as “misleading.”

“Our concerns are serious and substantive,” the commission panel said adding that the circular’s deficiencies are more than technical or a matter of judgment.

The panel outlined more than a dozen areas where the company needed to provide more disclosure. Those areas ranged from clarification of how the committee reached the payout price with the Stronach trust to explaining metrics of “value sharing” and the views of other members besides lead director Michael Harris, a former Ontario premier, under the plan.

While the commission said the company did not meet its obligations regarding disclosure, it did not agree with staff’s allegations that there was abuse of the capital markets or unfairness to shareholders. The commission also did not require a formal valuation of the plan for shareholders after the company’s financial advisers indicated difficulties. Lawyers for Magna and the committee had argued shareholders had received adequate information. They also noted that proxy results showed holders of 57 per cent of all the company shares had already voted for the plan.

But the commission said in its decision that doesn’t mean they had enough details to make an informed decision, Larry Lowenstein, a lawyer for the Magna committee, also said there “not one scrap” of evidence that the company held back information.

The two-class stock structure has left Magna shares trading at a historic discount and some shareholders argue that although the payout to the Stronach trust is huge, the elimination of the B class will generate more long-term value for their stock.

Sam Rickett, another lawyer representing the special board committee, described the OSC suggestion of a lack of negotiations with Stronach and his daughter Belinda of the family trust as “Disneyland.” Harris, who had a reputation as a hard negotiator in leading the province, didn’t have much leverage since the Stronachs were content with the status quo, he said. Rickett also said if the commission stopped a vote, it could cause irreparable damage to the company’s market value. The company already lost one half billion dollars in market capital last week after the commission called a hearing, he indicated.

But institutional shareholders argued earlier the plan would set a dangerous precedent because it would encourage controlling shareholders of other companies with dual class structures to demand huge premiums.

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