October 20th, 2010
A judge of the Ontario Superior Court of Justice’s Commercial List recently approved a plan of arrangement that eliminated the dual class share structure at Magna International Inc. (“Magna”) and in the process provided a large payout to its former controlling shareholder.
Magna is in the business of developing and manufacturing automotive systems, components, and parts. Prior to the plan of arrangement, Magna had a dual class capital structure. Magna’s Class A shares were subordinate voting shares that were widely held and listed on both the TSX and the NYSE. Magna’s Class B shares were multiple voting shares owned 100% by companies controlled by The Stronach Trust (“Stronach”). Each Class B share carried 300 votes. Pursuant to the capital structure in place prior to the plan of arrangement, the Class B shares comprised less than 1% of Magna’s total equity, but represented approximately 66% of the votes attached to Magna’s voting securities. Accordingly, Stronach was the ultimate controlling shareholder of Magna.
In the spring of 2010, the executive management of Magna negotiated a proposed transaction with Stronach wherein Stronach would sell its Class B shares to Magna for cancellation for consideration of 9,000,000 Class A shares, and $300 million in cash. A special committee of the board of directors reviewed the transaction and recommended that it be put to the shareholders for a vote.
The special committee felt that both the Class A shareholders, and Magna, might benefit from the transaction in that: the pre-arrangement share price was likely depressed due to the dual class share structure; after the transaction, the shareholders would have a vote in the company proportionate to their equity in the company; some investors may have been staying away from Magna due to the dual class share structure, and the transaction may therefore increase the liquidity of the stock as those investors took a position in Magna; and Magna’s shares may be more attractive for the purposes of raising capital or as acquisition currency in the future.
In spite of the foregoing factors, the special committee realized that the transaction imposed a cost on the Class A shareholders by an 11.44% dilution in their shareholding (through the issue of new Class A shares), and through the cash payout of $300 million dollars.
Based on the foregoing factors, the special committee opted to not make a recommendation either way as to whether the shareholders should accept or reject the transaction. The committee felt that reasonable shareholders could come to differing views as to whether the transaction was a good deal, due largely to the fact that it was impossible to accurately quantify the future benefit that may flow to the Class A shareholders as a result of the transaction. Instead, shareholders were left to make their own determination on the fairness of the transaction based on the information at their disposal. However, those members of the special committee that were Class A shareholders expressed their view that they personally were in favour of the transaction.
At a meeting of the shareholders, the 75.28% of the minority Class A shareholders voted in favour of the plan of arrangement. After the vote, Magna sought court approval of the plan of arrangement. Several shareholders opposed the court’s approval of the plan of arrangement.
In considering whether to grant approval to the plan of arrangement, Justice Wilton-Siegel considered the 3-part test that governs court-approval of a plan of arrangement: the statutory procedures must have been met; the application to approve the plan of arrangement must have been put forward in good faith; and the arrangement must be fair and reasonable.
Justice Wilton-Siegel quickly concluded that the first two steps were satisfied. The majority of the analysis in this case concerns the “fair and reasonable” requirement.
The opposing shareholders raised several points in favour of their position that the plan of arrangement was not fair and reasonable:
- The cost to the Class A shareholders was fixed, quantifiable and immediate, whereas the benefit to the Class A shareholders are uncertain, unquantifiable, and could not be assured;
- The transaction served to dilute the Class A shares to a far greater degree than any recent comparator transactions that also featured the elimination of a dual class share structure; and
- This transaction was lacking many of the traditional indicia of fairness and reasonableness, such as a recommendation from the special committee or board of directors in favour of the transaction.
Justice Wilton-Siegel rejected the arguments advanced by the opposing shareholders. Justice Wilton-Siegel relied heavily on the outcome of the shareholder vote, holding that “the outcome of the shareholder vote should be regarded as a determination by the Class A shareholders that the proposed Arrangement was sufficiently fair and reasonable to be acceptable to them.” Justice Wilton-Siegel held that the shareholders had sufficient information to make an informed decision; there was no misleading, incomplete, or inadequate disclosure by Magna; there was no evidence any of the Class A shareholders had a different economic interest in determining their vote; and there was no coercive element in either the structure of the arrangement, or in the voting process.
Justice Wilton-Siegel also pointed to the market response to the arrangement as an indicator of fairness: the share price increased as a result of the announcement of the arrangement, and many financial analysts reported that the arrangement would cause Magna’s share price to increase in the future.
Finally, Justice Wilton-Siegel noted that if any of the shareholders did not wish to remain invested in Magna, they would be able to sell their position on a liquid trading market.
For the foregoing three reasons, Justice Wilton-Siegel found that the arrangement was fair and reasonable, and he granted court approval of the arrangement.
Justice Wilton-Siegel’s ruling was upheld on appeal by a panel of the Divisional Court, and the transaction closed on August 31, 2010.