There are 2 two parts to work on. The first part is due on Dec.7, just give your idea, and explain what do you think about it. The second is due Dec.11, Read the case and answer each question (there are a word limit in each questions, total 4-5pages).

Magna International Inc. - the elimination of the dual class structure.

“ We believe the proposed transaction if approved by shareholders, has the

potential

for

to unlock significant value for Magna shareholders and establish a strong foundation

the company’s long-term success.”(Don Walker and Siegfried Wolf, Co-Chief Executive

Officers)

“ I created the company [in 1957] from scratch and worked like crazy for 50 years

....[and] I’m still working

and making a contribution.”( Frank Stronach, Founder and Chairman of Magna)

Magna International Inc. announced at its AGM on May 6th 2010 that an agreement had been reached with the Stronach Family Trust (ST)

that subject to shareholder and court approval, it would eliminate its dual share structure. It dated back to 1978 and did

not contain a ’sunset’ clause or “coattail protection for the minority shareholders of Class A shares in the event of a change of control

transaction” (Osler 2010). Magna’s share price rose to $73.26 on the news.

A notice of a special meeting of shareholders was mailed out on June 2’ d.

and the Board of Magna established a special committee of independent directors to review the proposal.

The Class A subordinated voting shares (one vote per share) were widely held and traded on both the NYSE and TSX . But the

Superior Class B shares gave 300 voting rights per share and majority control, with less than 1% of the total equity of Magna.

They were wholly owned by the Stronach Family Trust (ST) and did not trade.

The details of the proposed ‘plan of arrangement‘ were that ST would:

1. relinquish 726,829 Class B shares and in exchange receive $300US in cash and 9 million new Class A shares

which at the current stock price were valued at $563m. This would lead to a dilution of Class A shares of close to 11.4%. ST would still be the largest single shareholder.

1. That ST and Magna would form a new joint venture aimed at building hybrid and electric

vehicles with an injection of $20m from Magna and $80m from ST with the latter having three of the five members of the Management Committee.

1. Frank Stronach would remain with Magna on a 5-year non-renewal consulting agreement which in 2011 would give him 2.75% of Magna’ s pre-tax profit, but would decline over the remaining 4 years. If the contract was cancelled, there was a guaranteed payment of $120m.

Dual class shares are not uncommon in Canada and this type of share structure often came about in many family businesses eg Empire in Nova Scotia, Ford in the USA and Volkswagen in Europe. The founders did not want to dilute control, particularly if they needed to raise additional equity capital. With the increased focus on corporate governance issues by regulators and the media, many boards in North America and Europe have eliminated dual voting structures without the degree of largesse found in this case. However, they have seen a resurgence in the USA with Google, Facebook, Fitbit, and Alibaba to name a few, all adopting various restrictive share structures. While the empirical evidence is mixed as to the performance of one type of voting structure to another, what is clear is that it can magnify success ( Couche-Tard which removed its structure when the sunset clause kicked in) or failure ( Bombardier). The OSC now require that companies with subordinated stock identify that such shares have subordinated voting rights

While Mr Stronach was admired for his entrepreneurship and vision in building Magna to be a major multinational, he was not without controversy. Whether it was his compensation, lifestyle or his investments in what were seen as non-core assets such as the Santa Anita race track in California, Magna was often in the news. In addition, Magna was involved in an abortive bid with a Russian partner to buy Opel, the European GM subsidiary (as of 2017 now owned by Groupe PSA).

The arrangement drew criticism from many quarters, but praise in others. On the latter it was expected that it would lead to longer-term share appreciation. The reasoning for this was not just from the more ‘democratic’ structure and the potential for board reform with all shareholders voting on board membership thus replacing the potential for cronyism, but a more effective market monitoring and influence thus reducing agency costs. If the company performed poorly, there was the potential for shareholder activism including a take-over bid In both instances top management could be replaced, another a corporate control check.

Additionally it was argued that Magna’s the stock would be more liquid and marketable.

For the opposing view on the deal, there were several contentious issues voiced in particular by some of the major institutional investors, including the Ontario Teachers’ Pension Plan Board and the Canadian Pension Plan Board over:

2. the size of the premium to the ST

2. the due process of the deal itself.

Indeed the OSC raised concerns over the disclosures to shareholders ruling that the approval process of the Board was

“defective from the start” and “issued a notice of a hearing alleging that the proposal was contrary to the public interest and issued a temporary cease-trade order” Osler, 2010

Legal challenges were launched in the Ontario Supreme Court to determine if the proposal was fair and reasonable and if the Board had fulfilled its fiduciary responsibility. The Court found that “the elimination of Magna’s dual class structure would benefit from both corporate governance and financial perspectives.” The OSC then permitted the arrangement to proceed to a vote but criticized the lack of a “fairness opinion from the special committee and the board and stipulated additional disclosures in the proxy documentation” (Osler, 2010).

In the event more than 75% of the Class A shareholder approved the plan at the July 23rd meeting. On an appeal by dissenting shareholders to the Ontario Divisional Court of Justice, this was dismissed and the arrangement was approved on August 30'. Although with the Court’s endorsement of the deal, the matter would appear to have ended. However, in April

2011, two major proxy advisory firms recommended against the re-election of the Magna International’s Board of Directors. To be specific, ISS Proxy Advisory Services is quoted as saying:

‘it was unacceptable that the special committee (of the Board) did not offer any recommendation to shareholders on whether to approve the offer and did not provide an independent fairness opinion on the deal’

Frank Stronach stepped down as a director of Magna in 2012, but remained as a consultant until 2014.

Question

What does the Magna case inform us as to how the ‘market’ values a firm with restrictive voting rights and how does it exercise its monitoring role.