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Governance in Dual Class Share Firms

Anita Anand

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Anand, Anita, Governance in Dual Class Share Firms (January 18, 2018). The Annals of Corporate Governance, Forthcoming. Available at http://dx.doi.org/10.2139/ssrn.3104712

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Electronic copy available at: https://ssrn.com/abstract=3104712

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GovernanceinDualClassShareFirms

By

AnitaAnand•

ForthcomingintheAnnalsofCorporateGovernance

• J.R.KimberChair in InvestorProtectionandCorporateGovernance,FacultyofLaw,UniversityofTorontocrossappointed to theRotmanSchoolofManagementanita.anand@utoronto.ca.Deep thanks toBenAlarie,AdrianaRobertson, Douglas Cumming, Naizam Kanji, Joseph McCahery, Bernard Sharfman, Richard Squire, MichaelTrebilcock,GeoffWoodandAlbertYoonforvaluablecommentsonearlierversionsandsomeoftheideasinthispaper.ProfoundthankstoJ.D.studentsChristopherPuskas,DavinaShivratan,TeganValentine,andAlvinYauforexcellentresearchassistanceandtotheLawFoundationofOntarioforfunding.

Electronic copy available at: https://ssrn.com/abstract=3104712

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ABSTRACT.......................................................................................................................................3

1. INTRODUCTION......................................................................................................................4

2. WHATAREDCS?THEBASICIDEA...........................................................................................9

3. THEORETICALBACKGROUND...............................................................................................12(i) AgencyTheory...................................................................................................................................................12(ii) PrincipalCostTheory.........................................................................................................................................15(iii)PrivateOrdering................................................................................................................................................16(iv)Summary...........................................................................................................................................................17

4. EMPIRICALSTUDIES..............................................................................................................18

5. TWOCASESTUDIES..............................................................................................................22(i) Fairfax................................................................................................................................................................22(ii)Magna................................................................................................................................................................24(iii)Summary............................................................................................................................................................26

6. GOVERNANCECHARACTERISTICSOFDCSFIRMS.................................................................27(i) MajorityoftheMinorityVote...........................................................................................................................27(ii)Sunsetprovision................................................................................................................................................30(iii)Independentdirectors.......................................................................................................................................31(iv)Independentchair..............................................................................................................................................33(v)Changeofcontrolprovisions.............................................................................................................................33

7. METHODOLOGYANDCONTEXT...........................................................................................34

8. RESULTS................................................................................................................................36

9. DIRECTIONSFORREGULATORYREFORM.............................................................................43(i) Fixed-termSunsetClause..................................................................................................................................45(ii)DisclosureofShareholderVoting......................................................................................................................47(iii)BuyoutProtections............................................................................................................................................49

10. CONCLUSION........................................................................................................................50

Electronic copy available at: https://ssrn.com/abstract=3104712

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Abstract

In a typical public company, shareholders can elect the board, appoint auditors, andapprovefundamentalchanges.Firmswithdualclasssharestructures(DCS)alterthisbalancebyinvitingthesubordinateshareholderstocarrythefinancialriskofinvestinginthecorporationwithout providing themwith the corresponding power to elect the board or exercise otherfundamental voting rights. This article fills a conspicuous gap in the scholarly literature byprovidingempiricaldataregardingthegovernanceofDCSfirmsbeyondthepresenceofsunriseandsunsetprovisions.ThesummarydatasuggestthatthegovernanceofDCSfirmsisnotuniformand DCS firms tend not to adopt governance measures voluntarily. In particular, a largeproportionofDCSfirmshavenomajorityoftheminorityvotingprovisionsandnoindependentchair. By contrast, almost half of the DCS firms have a sunset clause and a majority ofindependent directors. Finally, just under one-third of DCS firms have change of controlprovisionsoverandaboveexistinglaw.Onthebasisofthisevidence,thearticlearguesagainstcomplete private ordering in favor of limited reforms to protect shareholders in DCS firmsincluding:mandatory sunsetprovisions,disclosure relating to shareholdervotes,andbuyoutprotectionsthatwouldaddressweaknessesinherentinDCSfirms.

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1. Introduction

Inatypicalpubliccompany,shareholderscanelecttheboard,appointtheauditors,andapprove

fundamentalchanges.Inotherwords,theycanparticipateinthegovernanceofthefirm.Firms

withdualclasssharestructures(DCS)alterthisbalancebyinvitingthesubordinateshareholders

tocarrythefinancialriskofinvestinginthefirmwithoutprovidingthemwiththecorresponding

powertoelecttheboardorexerciseotherfundamentalvotingrights.AsHuandBlackexplain,

DCS“decouple”votingrightsandeconomicownership.1

TherationaleunderlyingDCSisthattheypreservefamilyorfoundercontrolwhileallowingthe

firmtogainaccesstocapitalinpublicequitymarkets.2Bylocalizingcontrolonthefounders,DCS

prevent the firm frombeingeasilyacquiredwithout the founders’ cooperation.3 Indeed,DCS

protectthefoundersfromthedemandsofordinaryshareholders,inturnallowingthemmore

freedomtogrowthecorporation.4Intheprocess,DCSdissuadepotentialsuitorswhowouldbe

willing to pay a premium for shares (a boon to all shareholders, except the controlling

shareholder,ofcourse).Inshort,DCSallowthefounderstofocusonlong-termvaluecreation

andmotivatethemtomakefirm-specificinvestmentsintheirownhumancapital.5

Heated controversy has arisen becauseDCS effectively insulatemanagement and the board,

leaving the subordinate shareholders exposed to decisions that potentially undermine their

1HenryHu&BernardBlack,“EquityandDebtDecouplingandEmptyVotingII:ImportanceandExtensions”(2008)156:3UPaLRev625.2Ibid.3 TianWen, “Youcan’t sell your firmandown it too:disallowingdual-class stock companies from listingon thesecuritiesexchanges”(2014)162:6UPaLRev1495,online:<http://scholarship.law.upenn.edu/cgi/viewcontent.cgi?article=9447&context=penn_law_review>[Wen].4 Andrew Hill, Enrolment Open for an MBA in Murdoch, Financial Times (July 18, 2011),http://www.ft.com/cms/s/0/2fda9e8e-b176-11e0-9444-00144feab49a.html#axzz2IYIKmzDt)ascitedbyWen,ibid.5HenrikCronqvist&MattiasNilsson,“AgencyCostsofControllingMinorityShareholders”,(2003)38:4JFinQA695;HarryDeAngelo&LindaDeAngelo,“ManagerialOwnershipofVotingRights:AStudyofPublicCorporationswithDualClassesofCommonStock”,(1985)14:1JFinEcon33;ClasBergstrom&KristianRydqvist,“OwnershipofEquityinDual-ClassFirms”,(1990)14:2JBanking&Fin255.

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economicinterests.6DCSallowthefirmtoextractcapitalfromsubordinateshareholderswithout

providingthemwiththevotingpowerthatallowsthemtoparticipateinthegovernanceofthe

firm.7Inshort,DCSallowmanagersandtheboardtosettheshort-termandlong-termstrategy

forthefirmwithouttheaccountabilitychecksprovidedbyparticipation inthecorporationby

subordinateshareholders.8

SomecommentatorsarguethatDCSshouldbepermittedbecauseotherwise,DCSfirmswould

belefttothewhimsofincompetentoruninformedshareholders.9Othersarguethattheweaker

governanceassociatedwithDCSisbuiltintothefirm’sstockpriceandultimatelycaveatemptor

shouldruletheday.Thatis,allinvestorshavethechoiceastowhethertoinvestand“ifyoudon’t

6AnitaAnand, “Thesuccess storiesofdual-class sharesmissan incontrovertible truth”,TheGlobeandMail (22February 2016), online: <https://beta.theglobeandmail.com/report-on-business/rob-commentary/the-success-stories-of-dual-class-stocks-miss-an-incontrovertible-truth/article28830388/?ref=http://www.theglobeandmail.com&> [Anand]; Shareholder Association for ResearchandEducation,SecondClass Investors:TheUseandAbuseofSubordinateShares inCanada (April2004),online:<http://www.share.ca/files/Second_Class_Investors.pdf>[SHARE];RonaldWMasulis,CongWang&FeiXie,“AgencyProblemsatDual-classCompanies” (2009)64:4JFin1697[Masulis,WangandXie];MiltonHarris&ArturRaviv,“CorporateGovernance:VotingRightsandMajorityRules”(1988)20:1JFinEcon203[Harris];Wen,supranote3.7AndrewWillis,“DualClasssharestructureshouldend,CaldwellTold”,TheGlobeandMail(5August2005),online:<https://www.theglobeandmail.com/report-on-business/dual-class-share-structure-should-end-caldwell-told/article18243209/>;BarryCritchley, “Time for regulators to takemajor lookatDCS”,FinancialPost (14May2015), online: <business.financialpost.com/news/fp-street/time-for-regulators-to-take-major-look-at-dual-class-shares/wcm/7b02fd1c-d28a-422c-ba39-aac77a1b6bb7>;JamesSurowiecki,“UnequalShares”,TheNewYorker(28May2012),online:<www.newyorker.com/magazine/2012/05/28/unequal-shares>;DealProfessor,“Snap’sPlanisMostUnfriendlytoOutsiders”,TheNewYorkTimes(3February2017)online:<https://www.nytimes.com/2017/02/03/business/dealbook/snap-ipo-plan-evan-spiegel.html>; The Economist,“Out of Control” The Economist (22 September 2014), online: <https://www.economist.com/news/finance-and-economics/21618889-more-worlds-big-stockmarkets-are-allowing-firms-alibaba-sideline>.8AnitaAnand,“WasMagnainthePublicInterest?”(2012)49:2OsgoodeHallLJ311.9BernardSSharfman,“APrivateOrderingDefenceofaCompany’sRighttouseDualClassShareStructuresinIPOs”,(2017)63:1VillLRevat11(forthcoming),online:<https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2986164>[Sharfman].

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likethem,don’tbuythem.”10TheoppositiontoDCScontinuestogrowwithleadingshareholder

groupsandownersofstockmarketindicesvoicingoppositiontothem.11

Asthecontroversyhasgrown,sohasthedivergenceofsubtopicscoveredinempiricalstudies

relatingtoDCSfirms.Forexample,AdamsandFerreirareviewtheempiricalevidencerelatingto

disproportionate ownership and conclude that DCS firms are not unpopular in the United

Kingdomthough thenumberof such firms isdecreasing inEurope.12 Inanalyzing theprivate

benefitsofcontrolacrossseveralcountries,DyckandZingalesidentifytransactionsthatinvolve

DCS firmsandmeasure thecontrolpremium for theholdersof the superior shares (i.e.with

votingpower) relative to the subordinate shares (i.e.withoutvotingpower).13They find that

higherbenefitsofcontrolareassociatedwithmoreconcentratedownership.14Thesearebuttwo

examplesfromtheextensiveliteraturerelatingtoDCSwhich,asdiscussedbelowandinAppendix

10SeeDrewHasselback&BarbaraShecter,“FromCaraOperationsltdtoShopifyInc:WhyDCSaresuddenlycoolagain”,FinancialPost(5May2015),online:<business.financialpost.com/news/fp-street/from-cara-to-google-why-dual-class-shares-are-suddenly-cool-again> [Hasselback and Shecter] who quotes Carol Hansell, arguing that “ifinvestorsdon’tlikedual-classshares,don’tbuythem.”;SeealsoSamerKhalil&MichelMagnan,“Dual-ClassShares:Governance, Risk and Rewards” (May/June 2007) Ivey Business Journal Online, online:<http://iveybusinessjournal.com/publication/dual-class-shares-governance-risks-and-rewards/>; Stephen M.Bainbridge,“WhatToDoAboutDualClassStock(IfAnything)?”(15November2015)StephenBainbridge'sJournalofLaw,Politics,andCulture,online:<http://www.professorbainbridge.com/professorbainbridgecom/2015/11/what-to-do-about-dual-class-stock-if-anything.html>.Bainbridgestates,“Publicinvestorswhodon’twantlesservotingrightsstocksimplywon’tbuyit.Thosewhoarewillingtopurchaseitpresumablywillbecompensatedbyalowerpersharepricethanfullvotingrightsstockwouldcommandand/orbyahigherdividendrate.Inanyevent,assumingfulldisclosure,theybecomeshareholdersknowingthattheywillhave lowervotingrightsthanthe insidersandhavingacceptedasadequatewhatevertrade-offisofferedbythefirminrecompense.”’;SeealsoIanBLee,“ThereisaLogicinDual-ClassShares”,NationalPost(8November2005),online:<https://www.law.utoronto.ca/documents/lee/DualClassOpEd.pdf>;YvanAllaire, “In Praise of Dual-Class Shares” Financial Post (27 May 2015), online: <business.financialpost.com/fp-comment/in-praise-of-dual-class-of-shares>.11SeeLucianABebchuk&KobiKastiel,“TheUntenableCaseforPerpetualDual-ClassStock”,online:(20April2017)(2017)103:4VaLRev585at598-599,online:<https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2954630>.[BebchukandKastiel]citingISSandGMIRatings.Alsosee,OntarioSecuritiesCommission,MI61-101ProtectionofMinoritySecurityHolders inSpecialTransactionsandCompanionPolicy61-101CPProtectionofMinoritySecurityHolders in Special Transactions (1 February 2008), online: <www.osc.gov.on.ca/documents/en/Securities-Category6/rule_20080201_61-101_protect-minority.pdf>[OntarioSecuritiesCommission].12DanielFerreira&ReneeAdams,“OneShare-OneVote:TheEmpiricalEvidence”(2008)12:1RevFin51,online:<http://personal.lse.ac.uk/FERREIRD/51.pdf>.13 These countries includeCanada,Denmark, Finland,Germany, Italy,Mexico,Norway, Sweden, and theUnitedStates.SeeAlexanderDyck&LuigiZingales,”PrivateBenefitsofControl:AnInternationalComparison”(2004)59:2JFin537at593.14Ibid.

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1,suggestthatDCSstructures,andtheacademicliteraturerelatingtothem,areconvolutedand

complex.

Asastartingpointandinordertoprovidefactualcontextforthediscussion,notethatsince2008,

almost10percentofallUSfirmscompletingIPOshavedonesowithaDCSinplace.15In2015,24

percentoffirmsthatlistedtheirsharesonUSstockexchangeshadDCS,comparedto15percent

ofpublicfirmsin2014andonly1percentin2005.16Anumberofwell-knownUSfirms,including

AlphabetandFacebook,havelonghadDCS.InCanada,thelistofDCSfirmsincludesiconsofthe

Canadiancorporateestablishment:Bombardier,PowerCorp.,RogersCommunications,Onexand

CanadianTire.Inrecentyears,bothcountrieshaveseenaremarkableincreaseinIPOswithDCS

includingFitbit,Box,andadivisionofAlibabaintheU.S.andCara,Aritzia,FreshiiandStingrayin

Canada.17RecentlystockmarketindicesincludingtheS&P500havetakenactionstoexcludenew

listingswithDCSsuchasSnapInc.’s2017IPO.18Needlesstosay,changeisintheairregarding

DCS.

Forsomejurisdictions,thisdebatehaspotentiallysevereconsequencesbecauseDCSfirmsplay

an important role in the economydue to their substantial size relative to the average listed

company. In Canada in 2015, for example, 85 out of 1487 firms listed on the Toronto Stock

Exchange (TSX) – roughly 5.72% – had DCS.19 These DCS firms had an average market

15LiaDerMarderosian,“2017IPOReport”(25May2017),HarvardLawSchoolForumonCorporateGovernanceandFinancialRegulation(blog),online:<https://corpgov.law.harvard.edu/2017/05/25/2017-ipo-report/>.16 Spencer G Feldman, “BNA Insights: IPOs in 2016 increasingly include Dual-Class Shareholder Voting Rights”,Bloomberg BNA (7 April 2016), online: <www.olshanlaw.com/media/publication/362_Feldman percent20BNApercent20Dual-Classpercent20Article.pdf>.17SeeHasselbackandShecter,supranote10.AlsoStevenDavidoffSolomon,“ShareholdersVotewithTheirDollarstoHaveLessofaSay”,NewYorkTimes(4November2015),online:<https://www.nytimes.com/2015/11/05/business/dealbook/shareholders-vote-with-their-dollars-to-have-less-of-a-say.html>.18SeeFortune,"Snapchat'sStockJustSufferedaBigSetback"Fortune(1August2017),online:<fortune.com/2017/08/01/snap-snapchat-stock-shares-sp-500/>.19 Data taken as at Dec 31, 2015. “Listing with us”, Toronto Stock Exchange (2015), online:<https://www.tsx.com/listings/listing-with-us> [Toronto Stock Exchange]; See also Matthew Merkley, “MultipleVoting Shares: Don’t Call It a Comeback”, (February 9, 2015) Blake, Cassels & Graydon LLP, online:<http://www.blakes.com/English/Resources/TrendsInsights/Pages/details.aspx?AnnouncementID=78>[Merkley].

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capitalizationof$3.39billion,20whiletheaveragemarketcapitalizationoftheTSXasawholewas

$1.5billionandthemedianmarketcapitalizationoftheTSXwasamere$111.9million.21Inshort,

DCS firms constitute a large percentage of the overall TSX Market Cap (approximately 12

percent). DCS firms constitute a big enough group to matter; this article begins with the

propositionthatweshouldcarefullyconsiderthem.

Acentralquestionthatarises,andwhichthisarticleaddresses, istheextenttowhichprivate

orderingshouldberespected,understandingthatcorporatelawgenerallyupholdsthechoices

that parties make. To what extent should the law allow the founders to pursue their

“idiosyncratic vision” for the DCS corporation?22 This article undertakes a comprehensive

analysisoftheempiricalandtheoretical literaturerelatingtoDCS(which includesacomplete

referencechartinAppendix1)beforeturningtofocusongovernancecharacteristicsofDCSfirms.

What governance mechanisms do DCS corporations typically have? Do these governance

mechanisms suggest that regulatory reform would be useful? This article argues against

completeprivateorderinginfavorofthreemodestreformstoimprovegovernanceinDCSfirms

including:mandatoryfixed-termsunsetprovisionswithamajorityoftheminorityvoteattheend

oftheterm;disclosurerelatingtoshareholdervotes;and,buyoutprotectionsthatwouldaddress

weaknessesinherentinDCSfirms.

AtleastoneotheracademicarticleanalyzesDCSfromanempiricalstandpoint.Windenexamines

sunriseandsunsetprovisionsfoundinthechartersofDCSfirms,withadatasetof123U.S.public

firms.Hepointsout,rightly,thatsuchprovisionscansatisfyboththedesireofentrepreneursto

pursuetheiridiosyncraticvisionsforvaluecreationwithoutfearofinterferenceordismissaland

theneedofinvestorsforavoicetoensuremanagementaccountability.23

20DataobtainedfromStandard&Poor’sCapitalIQandsupplementedbyFactSet’sfinancialdatabase.21TorontoStockExchange,supranote19.22ZoharGoshen&AssafHamdani,“CorporateControlandIdiosyncraticVision”(2016)(2016)125:3YaleLJ560,online:<https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2228194>.[GoshenandHamdani].Sharfman,supranote9.23AndrewWWinden,“Sunrise,Sunset:AnEmpiricalandTheoreticalAssessmentofDual-ClassStockStructures”(2017) Rock Center for Corporate Governance at Stanford University Working Paper No. 228<https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3001574>.[Winden]

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UnlikeWinden’sstudy,thisarticleexaminesnotonebutfivegovernancecharacteristicsofDCS

firmsanddoesso in theCanadiancontextwhereDCShavehistoricallybeenmoreprevalent.

Usingahand-collecteddatasetcomprisedofall85DCSfirmsontheTorontoStockExchange,it

examinesgovernancecharacteristicswithrespecttothesefirmsthataresalientindebatesabout

DCSandgovernancegenerally.24Thisarticlealsotakesabroaderlookatthepolicyimplications

ofcontinuingtorespectprivateorderingasameansforregulatingpubliccorporations.

Thisfull-fledgedexaminationofDCSfirmscomesatanopportunemoment;withcontroversyand

potential regulatory reform on the agenda, the question persists as to how and whether

regulatorswillrespond.Butbeforereformoccurs,weshouldknowmoreaboutDCS,including

DCSgovernance.Part2providesbackgroundintermsoftheDCSstructuresandthediametrically

opposed views about DCS. Part 3 examines theoretical approaches that can be used when

analyzing DCS firms including agency theory and principal cost analysis. Part 4 reviews

divergences of findings in the empirical literaturewhile Part 5 takes up two case studies of

transactions in which DCS firms transformed their respective governance structures. Part 6

examines five governance characteristics against which DCS firms can be examined. Part 7

outlines the methodology and context while Part 8 sets forth data regarding DCS firm

governance.Theempiricalanalysisrevealsthatgenerallyspeaking,DCSfirmsdonotvoluntarily

adoptgovernanceprovisionsoverandaboveexistinglaw.Part9focusesonpolicyalternatives

forregulatoryreformpriortotheconclusioninPart10.

2. WhatareDCS?TheBasicIdea

“Dualclassshares”and“multi-votingshares”aregenerictermsthatrefertoatypeofcapital

structureinapublicorprivatecorporation.Thestructureinvolvestheissuanceoftwoormore

differentclassesofshareswherebyoneclass(the“superior”class)hasmorevotingrightsthan

24ThelistdrawsonAnitaAnand,FrankMilne&LynnettePurda,“DomesticandInternationalInfluencesonFirm-levelgovernance:EvidencefromCanada”(2012)14:1AmL&EconRev68.

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sharesheld,whiletheotherclass(the“subordinate”class)hasfewervotingrightsrelativetothe

sharesheld.Asaresult,holdersofthesuperiorclassofsharesownagreaterproportionofvoting

rightswithouthavingasmuchequityinvestedasthesubordinateshareholders.

Inanon-DCScorporation,votingrightsandequityinterestsarealigned.Thismeansthattheratio

ofvotestosharesheldisonetoone.Inotherwords,anindividualwhocontributes60percentof

theequitywilltypicallyhave60percentcompany’svotingrights.Bycontrast,inaDCSfirm,the

ratioisnotproportional.DCSdetachvotingrightsfromtheequityheld,allowinganindividualto

retaincontrolofacorporationwithoutholdinganequivalentfinancialinterestinthecompany.

Thenumberofvotesattributedtoeachshareunderthesestructuresvariesvastlyfromcompany

tocompany.

DCSaretypicallyimplementedbyfoundersofacorporationwhowishtoretaincontrolofthe

companywhilesimultaneouslyaccessingthewealthofthepublicmarkets.25DCShavealsobeen

usedtomaintainaparticular levelofnationalshareholderownership26andvotingcontrol. In

thesecases,theDCSplacealimitontheproportionoftotalvotingpowerwhichmaybeheldby

foreigninvestors.

CriticsofDCSarguethatwhentheyareusedinthepubliccorporationcontext,thedecouplingof

votingrightsandequityinterestsincreasesagencycostsbyallowingsuperiorshareholderstoact

inself-servingways.27Asimpleexampleofthisphenomenonisafounder’scalculusonwhether

topurchasea luxurygood.Supposethat thesoleshareholder,soledirectorandfounderofa

technologystart-upcompanytravelsonbusinessandisthusinterestedinpurchasingaluxuryjet,

whichwilldepreciateinvaluebytenmilliondollarsassoonasshebuysitandusesit.Sinceshe

isthesoleshareholderandsoledirectorofthecompany,shecanultimatelydecidetousethe

25Sharfman,supranote9at6-13.26InCanada,somecompaniesutiliseDCSstructurestoensureaminimumlevelofCanadianownershipismaintainedinaccordancewithapplicablelegislation.SeediscussionregardingempiricalanalysisinfraandAppendix4formoreonthesetypesofDCSfirms.27Anand,supranote6;SHARE,supranote6;Masulis,WangandXie,supranote6;Harris,supranote6;Wen,supranote3.

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corporation’sprofitstopurchasethisjet.However,shewillalsohavetobearthefullcostofher

decision to make this purchase. While there is no guarantee that she will act rationally or

responsibly,thealignmentofvotinginterestsandequityinterestsattheveryleastensuresthat

thecostsofthedecisionwillbebornebythedecisionmaker,thusincentivizingrational,wealth

maximizingbehaviour.

AssoonasDCSareintroduced,theseincentiveschange(oratleastmaychange).Supposethat

thecorporationgoespublicandissuesDCSsuchthatthefounderretains60percentofthevoting

rightsinthecompany,butnowwithonlya10percentequityinterestinthecompany.Thecost

totheentrepreneurforthejetisnowmuchlessasthesubordinateshareholdersalsoprovide

capitaltocontributetothecostofthejetandbearthecostofitsdepreciation.Suddenly,the

calculationofwhethertopurchasethejetissignificantlyalteredforthesuperiorshareholderas

shewillbeabletoreaptheentirebenefitofthejetwhilebearingonlyafractionofitscostand

associatedexpenses.

ThisisaprototypicalexampleofhowincentivescanbemisalignedinasimplifiedDCSfirm,but

thedecisionsatissueneednotrelatetoluxurygoodsorindulgentbehaviour.Ifseniormanagers

or boardmembers as controlling shareholders behave inwhat they consider to be the best

interestsofthecompany,saybyawardinglargebonusestomanagerswhohaveperformedwell,

the subordinate shareholders may nevertheless disagree that these bonuses represent an

inappropriate amount for the associated performance. But the subordinate shareholders are

unabletochangethedecision,orremovethedecisionmakers,becausetheydonothavethe

requisitevotingpowertoaffectchangeattheboardlevel.

This is the key point about DCS: they create the potential, and perhaps the incentive, for

directorialandmanagerialmisbehaviourandentrenchment.28Thisunderstandingofpotential

28BlairNicholas&BrandonMarsh,“Dual-Class:TheConsequencesofDeprivingInstitutionalInvestorsofCorporateVotingRights”,HarvardLawSchoolForumonCorporateGovernanceandFinancialRegulation(17May2017),online:<https://corpgov.law.harvard.edu/2017/05/17/dual-class-the-consequences-of-depriving-institutional-investors-of-corporate-voting-rights/>.SeealsoLucianBebchuk,ReinierKraakman&GeorgeTriantis,“StockPyramids,Cross-

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misalignedincentivesisthebasisforthetheoreticalanalysisinthefollowingsectionandforthe

ultimate argument here that private ordering does not necessarily guarantee positive firm

outcomes.

3. Theoreticalbackground

ThemisalignmentofincentivesthatcanemergeandgainlegitimacyinaDCSfirmcanbeanalyzed

from different theoretical vantage points. This section addresses a few salient theoretical

approaches,beginningwithagencytheorybeforeturningtoprincipalcostanalysisandprivate

orderingconcepts.AcompletelistofstudiesthatanalyzeDCSisfoundinAppendix1.

(i) AgencyTheory

WheredoDCSsitinthecontextofagencytheory?Scholarlyresearchhaslongusedagencytheory

todescribeinherentconflictsofinterestamongthevariousstakeholdersofacorporation.29An

agencyrelationship isone inwhichoneormorepersonsengagesanotherpersontoperform

some service on his or her behalf and which involves some delegation of decision making

authoritytotheagent.Ifbothpartiesareutilitymaximizers,theagentmaynotalwaysactinthe

bestinterestoftheprincipalanditisgenerallyimpossibleforanagenttomonitortheprincipal

atzerocost.30

Traditionally, agency theory has been viewed as an accurate depiction of the relationship

between management and shareholders in widely-held corporations rather than controlled

corporationsorDCSfirms.Inthewidely-heldcontext,theseparationofownership(shareholders)

OwnershipandDualClassEquity:TheMechanismsandAgencyCostsofSeparatingControlFromCash-FlowRights”,(1999)TheNationalBureauofEconomicResearchWorkingPaper6951,online:<https://papers.ssrn.com/sol3/papers.cfm?abstract_id=147590>.[Bebchuk,Kraakman,andTriantis]29Forasummaryofthisresearch,seeDavidFinegold,G.SBenson&D.Hecht.,“CorporateBoardsandCompanyPerformance:ReviewofResearchinLightofRecentReforms”(2007)15:5CorpGov:Int’lRev865.30MichaelJensen&WilliamHMeckling“TheoryoftheFirm:ManagerialBehavior,AgencyCostsandOwnershipStructure”(1976)3:4JFinEcon305.[JensenandMeckling]

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andcontrol(management)facilitatesmanagement’sabilitytoactinself-servingwaysbecause

individualshareholdersholdarelativelysmallportionofthecompany’sshares.Typicalofthe

classic Berle andMeans view of thewidely-held firm, a large number of small shareholders

implies that the single small shareholder has neither the power nor the incentive to devote

significantresourcestomonitormanagement’sbehaviorandundertakecorrectiveactionwhen

appropriate.31

TheBerleandMeansmodelispremisedonthewidely-heldcorporation

asopposedtofirmsin

which ownership is concentrated.32 However, there are various forms of ownership

concentrationsamonglargeshareholders,includinginDCSfirms.33

Agencytheoryispertinentin

theDCScontextbecausefirst,superiorshareholdersinaDCSfirmcanbedirectlyorindirectly

involved inmanaging the affairs of the corporation; and, second, conflicts of interest canbe

driven by the divergence of interests between large and small shareholders or between

subordinateshareholdersandsuperiorshareholdersinthesamefirm.Superiorshareholderscan

promptmanagementtobehaveinawayconsistentwiththeirowninterestsattheexpenseof

subordinateshareholders’interests.

Inparticular,superiorshareholdersarewell-positionedtoaffectchangesinfirmpolicywhichare

value-increasingtothembutnotnecessarilybeneficial totheDCSfirmasawhole.34

The loss

31See JensenandMeckling,supranote30;AndreiShleifer&RobertVishny,“LargeShareholdersandCorporateControl”(1986)94:3JPolEcon461.[ShleiferandVishny]32AdolfBerle&GardinerMeans,TheModernCorporationandPrivateProperty,reviseded(NewYork:MacMillan,1967).33AntonioSpizzirri&MattFullbrook(2013)“TheimpactoffamilycontrolonthesharepriceperformanceoflargeCanadian publicly-listed firms (1998-2012)” Clarkson Centre for Board Effectiveness, online:<http://www.rotman.utoronto.ca/-/media/Files/Programs-and-Areas/CCBE/FamilyFirmPerformanceReport1993-2012-Sep2013update.pdf?la=en>.34ShleiferandVishny,supranote31at472–74.Forarecentexampleofthis,seeBombardier’schangestoexecutivecompensation pay at Bombardier, Annual Meeting of Shareholders 2017 (11 May 2017), online:<http://ir.bombardier.com/en/event-calendar/68246-annual-meeting-of-shareholders-2017#>; Allan Woods,“Bombardier’sPierreBeaudoingivesupexecutivetitle,butwillcontinuetoleadboard”,TheStar(11May2017),online: <https://www.thestar.com/news/canada/2017/05/11/bombardiers-pierre-beaudoin-stepping-down-as-executive-chair.html>[Woods];RossMarowitz,“OntarioTeacher’sPensionPlanvotesagainstBombardierchair”,The Star (9 May 2017), online: <https://www.thestar.com/business/2017/05/09/ontario-teachers-pension-plan-votes-against-bombardier-chair.html>. Despite Bombardier receiving $372.5 million in loans from the federalgovernmentand$1billioninloansfromtheQuebecgovernment,Bombardierproposedtoincreasethepayofits

14

resultingfromtheseactionsconstitutesthearchetypical“agencycosts”35including:monitoring

costsborneby theprincipal toensure that itsagentsare fulfilling their responsibilities; costs

expendedbytheagentstoprovideassurancethattheyaredoingtheirjobsresponsibly;andthe

remaininglossthatarisesfromdivergentinterests.36

Agencycostscanariseinfirmswithasingleclassofsharesandacontrollingshareholdergiven

that on any given shareholder vote, the controlling shareholder can determine the outcome

(dependingofcourseonthepercentageofsharesowned).37Butthesefirmsdonotraiseidentical

concerns as DCS, since the controlling shareholder has not, undemocratically, awarded itself

multiplevotespershareasithasintheDCScontext.38Thus,DCSfirmsraiseagencyproblems

thataredifferentindegreeandkindfromthosethatariseinthenon-DCScontrollingshareholder

firm.

Ideally,boardsofdirectorsandseniormanagementstrivetofindabalancebetweenactingas

bothmonitors of and advisors to themanagerial team.39 This monitoring function becomes

constrainedinaDCScorporationsincesubordinateshareholdershavelessornopowertovote

topsixexecutivesby50percent.Inresponsetowidespreadpublicbacklash,Bombardierdelayedsalaryincreasesbutneverthelessagreedtoexecutivepay increasesdespitevocaloppositionfromvarious investorrightsgroups.PierreBeaudoin,whowastheexecutivechairmanatthetimeandremainsthenon-executivechairmanoftheboardofdirectors,effectivelycontrolsthecompanythroughhisfamily’smultiplevotingshares.35SeeJensenandMeckling,supranote30.36Ibid.,at308.37CalinValsan,“ACanadianCorporateOwnershipSurvey”(2007)Bishop’sUniversity–WilliamSchoolofBusiness,online:<https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1158544>.38AsBen-AmarandAndrenote,alargeproportionofCanadianpubliccompanieshavecontrollingshareholders(whoaretypicallyfamilies)whoexercisevotingrightsdisproportionatetotheirfractionofcashflowrights,whichisoftenachievedthroughtheuseofDCSandstockpyramids.WalidBen-Amar&PaulAndre,“SeparationofOwnershipfromControlandAcquiringFirmPerformance:TheCaseofFamilyOwnershipinCanada”(2006)33:3JofBusFin&Acc517at519-520[Ben-AmarandAndre];SeealsoBenAmoako-Adu&BFSmith,“DualClassFirms:Capitalization,Ownership Structure and Recapitalization Back into Single Class” (2001) 25:6 J Banking & Fin 1083. Note thatAnderson,OttolenghiandReebpointoutthat,at least intheU.S.,theamountofeconomicownershipdoesnotsignificantlydifferbetweensingleandmulti-classcontrolledcompanies.SeeRonaldAnderson,EzgiOttolenghi&DavidReeb(2017)“TheDualClassPremium:AFamilyAffair”FoxSchoolofBusinessResearchPaperNo.17-021,online:<https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3006669>.39SeeDavidAnderson,StewartMelanson&JiriMaly,“TheEvolutionofCorporateGovernance:PowerRedistributionBringsBoards toLife” (2007)15:5CorpGov: Int’lRev780at791;ReneeAdams&DanielFerreira, “ATheoryofFriendlyBoards”(2007)62:1JFin217at218.

15

out unaccountable or underperforming individuals; there is no built-in check on the

accountabilityofthesuperiorshareholders.Thus,agencycostsinDCSfirmscanproliferateand

at leastdiffer fromagencycoststhatarise intraditional (i.e.nonDCS)corporatestructures.40

DCS tie the hands of the subordinate shareholders by effectively preventing their vote from

mattering.

(ii) PrincipalCostTheory

WhileagencytheorypointsoutthewayinwhichagencycostscanariseinDCSfirms,“principal

cost theory”essentially functionsasadefenceofDCSandprivateorderinggenerally. Indeed,

GoshenandSquireintroducethistheoryasapartialdefenceofDCS.41Specifically,theyargue

thatinvestorsshouldnotonlybeconcernedwithincreasedagencyconflictcosts(arisingfrom

conflictinginterestsbetweenmanagersandinvestors)butalsowith:principalcompetencecosts

(arisingfrominvestormistakesduetoalackofexpertise);agentcompetencecosts(arisingfrom

honestmistakesbymanagement);andprincipalconflictcosts(arisingfromconflictinginterests

among investors). These different costs arise on a spectrum of intensity depending on how

ownershipandcontrolexistinaparticularfirm.

GoshenandSquirefocusonthepotentialfailingsofshareholdersgiventhatshareholdersarenot

experiencedmanagersboundbya fiduciaryduty to thecorporation.But theygo furtherand

arguethattheoptimalarrangementofcontrolinaparticularfirmiscontextuali.e.firm-specific.

Theycontendthatthisinsightexplainswhyempiricalstudies(manyofwhicharediscussedinthe

nextsection)findnoconsistentrelationshipbetweenDCSandoverallfinancialperformance:in

somefirms,thestructurewillbevaluedecreasing,whileinothersitwillbevalueincreasing.42

40ZoharGoshen&RichardSquire,“PrincipalCosts:ANewTheoryforCorporateLawandGovernance”(2017)117:3ColumLRev,online:<http://columbialawreview.org/content/principal-costs-a-new-theory-for-corporate-law-and-governance/>.[GoshenandSquire]SeealsoBebchuk,Kraakman,andTriantis,supranote28.41GoshenandSquire,supranote40.42 Ibidat805-807,815,whoarguethat“Theuseofdual-classsharesstructure isagood illustrationof the firm-specificnatureofcorporategovernance,asthestructuremaybewell-suitedtofirmsincomplexindustriessuchasinformationtechnology(e.g.,Google,Facebook,andLinkedIn),ortofirmswhoseoutsideshareholdersrecognize

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Consistentwiththiscontextualview,LinarguesthatDCSareusefulwhenacompanyisinvesting

primarilyinintangibleassetslikepatentsorhumanresources,asshareholdersmaybemorelikely

to misjudge the value of such long-term investments. DCS are less justified in firms with

predominatelytangibleassets,likemanufacturingormining,sinceinformationaboutthevalue

oflong-terminvestmentsismoreobservableandverifiabletooutsideinvestors.43

(iii) PrivateOrdering

TheideathatDCSarevalue-maximizinginsomefirmsbutnotothershasgivenrisetoclaimsthat

favourtheuseofDCS.SharfmanarguesthatDCSfacilitateefficientprivateorderingbyallowing

a company to structure its internal affairs according to its own particular qualities and

attributes.44Ifinvestorsdonotwishtoinvestinsuchfirms,theydonotneedto,butthefactthat

IPOswithDCSaresuccessfulinattractinginvestments(includingfromsophisticatedinstitutional

investors)means that investors see thevalueofDCS firms incertaincontexts, suchas in the

technologysectorwherethestructureiscommonlyused.45

Claims regardingprivateorderingare inessencenormativearguments.GoshenandHamdani

argue that entrepreneurs should be permitted to contract with investors for uncontestable

controlinordertopursuetheiridiosyncraticvisionsforthecorporation.46Windencontendsthat

theDCSprovidestheentrepreneurwithmaximumabilitytorealizeheridiosyncraticvision,which

“canbenefitboththeentrepreneurandherinvestors,butasaresultofthesmallerequityclaim

management’suniqueskillandstrategicvision(e.g.,BerkshireHathaway).Itisnonethelessanextremeoptiononthegovernance-structuremenu,anditisuncommonamongpublicfirmsintheUnitedStates.”43 Yu-Hsin Lin, “Controlling Controlling-minority shareholders: Corporate Governance and Leveraged CorporateControl”,(2017)2ColumBusLRev453at472-474,online:<https://cblr.columbia.edu/wp-content/uploads/2017/08/1_2017.2_Lin_Final.pdf>.44BernardSSharfman,“HowDCSinIPOsCanCreateValue”,ColumbiaLawSchool’sBlogonCorporationsandtheCapitalMarkets (1August2017),online:<http://clsbluesky.law.columbia.edu/2017/08/01/how-dual-class-shares-in-ipos-can-create-value/>45Ibid.46GoshenandHamdani,supranote22.

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as compared to concentrated ownership it leaves investors with relatively high exposure to

agencycosts.”47Sharfmanarguesthatinformedinvestorsgenerallyconsiderthepotentialrisks

thatcomewithhavingDCS(suchasincreasedagencycosts)andweighthatagainstthebenefits

thatcomefromhavingthiskindofcontrol(suchasdecreasedprincipalconflictandcompetency

costs).Theoptimalgovernancearrangementwillbeonethatminimizesthetotalcontrolcosts.

Sharfmanpointsoutthatincertainfirms,especiallythosewithpurportedly‘visionaryleaders’,

theoptimalarrangementtominimizetotalcostsofcontrolmaywellbeaDCS.Thereisatrade-

off:SnapInc.’sdualclassIPOreceivedfundingfromsophisticatedinvestors(manyofwhomhad

previously spoken out against non-voting shares) because investors determined that the

increased potential for agency costs was offset by the reduction in principal conflict and

competencecosts.48Subordinateshareholdersarepreparedtoallowentrepreneursmaximum

abilitytorealizetheirvision,whichexplainswhythisstructureisinplaceinmanymajorfirms

with foundersascontrollingshareholders, including:Snap (EvanSpiegelandRobertMurphy),

BerkshireHathaway (WarrenBuffet),Alphabet (LarryPageandSergeyBrin), Facebook (Mark

Zuckerberg),Alibaba(JackMa)andComcast(Robertsfamily).49

(iv)Summary

TheseargumentsfavorDCS.Buttheyare,asBebchukandKastielexplain,Panglossianviews.50

Thearrangementsthatthefoundersadoptmaynotbevalue-maximizingatall.TheDCSfirms

mentionedabovearehighlysuccessfulfirmsbuttheexamplesthemselvesarenotevidenceofa

causal link between DCS firms and a firm that has in place a value-maximizing corporate

structure.Thisisakeypoint:DCSfirmsmaydowellwithsuchastructurebut,thenagain,they

maynot.Thenextsectionsofthisarticleareinitiallyagnosticonthisissue,andseekmainlyto

47Winden,supranote23.48 Sharfman, supranote 9 at 20 – 22. Sharfman bases his argument onGoshen and Squire’smodel of optimalcorporategovernancearrangements.SeealsoJosephAMcCahery&ErikPMVermeulen,“VentureCapital2.0:FromVenturingtoPartnering”1:2AnnCorpGov95,online:<http://dx.doi.org/10.1561/109.00000007>foradiscussionaboutthedecisionsto implementDCSandothermanagemententrenchingtakeoverdefencemechanismsinthecontextofinitialfinancingforstart-upcompanies.49Sharfman,supranote9.50BebchukandKastiel,supranote11at36.

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provideanobjectivesnapshotofDCSgovernancecharacteristics.Thearticlethenreturnstothe

private ordering question, arguing that certain reformswould enhance DCS governance and

accountabilityatleastfromtheperspectiveofsubordinateshareholders.

4. EmpiricalStudies

ThedebatebetweenproponentsandopponentsofDCSisatastandstill.Thisstandstillisduein

partbecausethecurrentliteratureisinconclusiveabouttherelationshipbetweenDCSandfirm

performance.ThissectionanalyzesvaryingviewpointsintheempiricalliteraturerelatingtoDCS.

AcompletelistofthevariousstudiesthatanalyzetheeffectsofDCSonfirmvalueisfoundin

Appendix1.

A number of scholars oppose DCS and have found evidence that such structures encourage

managerialentrenchmentandreduceshareholderwealth.Masulis,WangandXie,forexample,

find that DCS firms pay their CEOs more than non-DCS firms and are more likely to make

shareholder value-destroying acquisitions.51Hossain finds thatDCS firms primarily undertake

value-destroying acquisitions, while also noting that long-term post acquisition operating

performanceforsingleclassfirmsaresignificantlyhigherthancomparableDCScounterparts.52

Along similar lines, SmartandZutter find thatmanagers receivehigher compensation inDCS

firmsandthatthesefirmstradeatalowerpricerelativetoearningsandsalesthantheirsingle-

classpeers.53

ThesestudiesspeaktopoorgovernanceinDCSfirms.Onastructurallevel,LiandZaiatasargue

that there are general governance and transparencyproblemswithDCS firms since they are

associated with poorer information environments and increase accrual-based earning

management, which is consistent with the hypothesis that managers of DCS firms are

51Masulis,Wang,andXie,supranote6.52AshrafeeTHossain,“Dualv.SingleClassFirms:AnAcquisitionPerspective”(2014)14:3JAcc&Fin1221,online:<http://digitalcommons.www.na-businesspress.com/JAF/HossainAT_Web14_3_.pdf>.53ScottBSmart&ChadJZutter,“ControlasaMotivationforUnderpricing:AComparisonofDual-andSingle-ClassIPOs”,(2003)69:1JFinEcon85,online:<http://www.sciencedirect.com/science/article/pii/S0304405X03001090>.

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incentivizedtoconcealprivatecontrolbenefits fromoutsideshareholders.54Tobuttresstheir

findings,theynotethatafterunification(i.e.aftermultipleclassesofvotingsharesarecollapsed

intoasingleclassofshareswithequalvotingrights),firmsexperienceanimprovementinthe

informationenvironmentandadecreaseinearningsmanipulation.55

Quiteapartfromtheimpactofgovernancechanges,otherstudiesfindthat,onabroadlevel,

DCStendtodecreasefirmvalue.Gompers,IshiiandMetric,forexample,takeacomprehensive

viewofDCS firmsand find support for thehypothesis that voting control leadsmanagers to

underinvest and reduce firm value.56 King and Santor similarly note that DCS firms decrease

value,astheyfindthatfamilyownedfirmsthatuseDCShavevaluationsthatarelowerby17

percentonaverage relative towidelyheld firms,despitehaving similar returnonassets and

financialleverage.57Finally,intheIPOcontext,Smart,ThirumalaiandZutterfindthatDCSfirms

tradeatlowerpricesthandosingleclassfirms,bothattheIPOstageandforatleastfiveyears

followingtheIPO.TheyalsonotethatgeneralCEOturnoverissensitivetofirmperformancefor

singlebutnotDCSfirmsandthat,followingunification,statisticallyandeconomicallysignificant

valuegainsoccurforthecompany.58

WithsuchevidencemountedagainstDCSfirms,itmayseemsurprisingthatthesefirmscontinue

topersistinourcapitalmarkets.WhileopponentsofDCSmaywishtopaintthepersistenceofa

DCSasamixofregulatoryfailureandmanagerialself-service,therealityisthatforvirtuallyevery

studynotingaproblemwithDCSfirms,thereisastudyeitherfindingabenefitoraneutraleffect

54TingLi&NataliyaZaiatas,“InformationEnvironmentandEarningManagementofDualClassFirmsAroundtheWorld”(2017)74:1JBanking&Fin1,online:<http://www.sciencedirect.com/science/article/pii/S0378426616301583>55Ibid.56PaulAGompers,JoyIshii&AndrewMetrick,“Incentivesvs.Control:AnAnalysisofU.S.Dual-ClassCompanies”,(2004)TheNationalBureauofEconomicResearchWorkingPaper10240,online:<http://www.nber.org/papers/w10240>.57MichaelRKing&EricSantor,“FamilyValues:OwnershipStructure,PerformanceandCapitalStructureofCanadianFirms”(2008)32:11JBanking&Fin2423,online:<http://www.sciencedirect.com/science/article/pii/S0378426608000502>.58ScottSmart,RamabhadranSThirumalai&ChadJZutter,“What’sinavote?TheShortandLong-RunImpactofDual-ClassEquityonIPOfirmValues”(2008)45:1JAcc&Econ94,online:<https://kelley.iu.edu/Faculty/Finance/ssmart/publications/jae2008.pdf>.

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ofDCSonfirmvalue.Forexample,Jordan,KimandLiufindthatDCSfirmsfacelowershortterm

market pressures than single class firms and that DCS firms tend to have more growth

opportunities(throughhighersalesgrowthandR&Dintensity).59Similarly,DimitrovandJainfind

thatDCSrecapitalizationsareshareholdervalueenhancinginitiatives:onaverage,stockholders

earnedsignificantpositiveabnormalreturnsof23percent inafouryearperiodfollowingthe

announcementandthisabnormalreturnwasevenlarger(53percent)forDCSfirmsthatissued

equity.60

If they stood on their ownwithout any contrary empirical evidence, these paperswould be

persuasiveinpointingtothebenefitsofDCSfirms.Butjustastherearestudiesthatpointtothe

benefitsofDCS,therearecorrespondingstudiesthathighlightaneutralornegativeeffectsof

DCS.Anderson,OttolenghiandReebfindthat,aftercontrollingfortime, industry,andawide

varietyoffirm-specificfactors,DCSalonehavenoeffectonoutsideshares.61Similarly,Ben-Amar

andAndréfindthattheseparationofownershipandcontrolthataccompaniesDCSdoesnotlead

to value destroyingM&A,62 Gabriel Morey finds that multi-class shares have no statistically

significanteffectonlong-termvaluecreation,63andJog,Zhu,andDuttafindthatrestrictedvoting

sharestructuresdonotlowerfirmvalue,operatingperformance,orstockperformancerelative

tonon-restrictivevotingsharefirms.64

WhileneutralfindingsregardingDCSeffectsonfirmperformancemaynotseemlikeapersuasive

reasontokeepthem,onemustbecognizantofthefactthatmostproponentsofDCSarguethat

59BradfordJordan,SoohyungKim&MarkHLiu,“GrowthOpportunities,Short-TermMarketPressure,andDual-ClassShareStructure”(2016)41JCorpFin304,online:<https://www.sciencedirect.com/science/article/pii/S0929119916301444>.60ValentinDimitrov&PremCJain,“RecapitalizationofOneClassofCommonStockintoDual-Class:GrowthandLong-RunStockReturns”(2006)12:2JCorpFin342,online:<https://www.researchgate.net/publication/223499102_Recapitalization_of_One_Class_of_Common_Stock_into_Dual-Class_Growth_and_Long-Run_Stock_Returns>.[DimitrovandJain]61Anderson,OttolenghiandReeb,supranote38.62Ben-AmarandAndre,supranote38.63 Gabriel Morey, “Multi-Class Stock and Firm Value”, Council of Institutional Investors (May 2017), online:<http://www.cii.org/files/publications/misc/05_10_17_dual-class_value_study.pdf>.64VMJog,SDuttaandPCZhu,“ImpactofRestrictedVotingShareStructureonFirmValueandPerformance”(2010)18:5CorpGov:Int’lRev415.

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firms (and investors) should be able to choose this structure if the particular company and

situationwarrantit,asDCSwillbevalue-increasinginparticularsituations.65Forexample,Nuesch

findsthatDCSneitherharmsnorbenefitsfirmperformanceonaverage,astheeffectonfirm

performanceiscontextspecific.Inparticular,DCSincreasefirmperformanceifthefirmrequires

external financing, while hindering firm performance if the firm does not require external

financing.66ThisiswhatmostDCSproponentswouldexpect:ifusedintherightsituation,DCS

have a positive effect on firm value. Thus, the caveat emptor argument and the need for

regulatoryrestraintarebuttressedbyneutralfindingsofDCSonfirmvalueandperformance.

WhiletheabovestudiesfocusontherelationshipbetweenDCSandfirmvalue,andsuggestthat

theempiricalscholarshipisnotdeterminative,morerecentscholarshiphasturnedtoconsider

theeffectofDCSoninnovation.Baran,etal.showthattheenhancedmanagerialentrenchment

permittedintheDCSfirmfostersinnovativemanagementculture.67Theauthorsstudytheeffect

ofDCSoninnovation,output,qualityandcreativityandfindthatdisproportionateinsidercontrol

ispositivelycorrelatedwiththenumberofpatentsandcitationsinafirm.Indeed,theyshowthat

high levels of innovation activity “mitigate the negative effect of excess managerial

entrenchmentonfirmvalue.”68

In short, DCSmay benefit young, innovate firms by engendering an innovativemanagement

culturewhereexecutivesfilepatentsmorefrequently.TheimportanceoftheBaran,etal.study

isfar-reaching:criticshavewarnedabouttheincreaseduseofDCSintheIPOcontextespecially

inthetechnology,mediaandtelecommunicationssectorsbecauseofgovernanceconcerns.But

65SeeforexampleSharfman,supranote9,andGoshenandSquire,supranote40.66StephanNuesch,“Dual-ClassShares,ExternalFinancingNeeds,andFirmPerformance”(2016)20:3JMgmt&Gov525,online:<https://link.springer.com/article/10.1007/s10997-015-9313-5>.67LindsayBaran,ArnoForst&MTonyVia,“DualClassFirmStructureandInnovation”(2017)FinancialManagementAssociation (working paper), online: <http://fmaconferences.org/Boston/DualClassInnovationFMA.pdf> See also,MarkHumphery-Jenner,“TakeoverDefenses,Innovation,andValueCreation:EvidencefromAcquisitionDecision”(2014)35:1StrategicMgmtJ668althoughhisempiricalresearchexcludesDCS.68Baran,etal.,supranote67,at5.

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quiteapartfromthecounter-argumentsthatDCShaveapositiveeffectonfirmvalue,theycan

alsohaveapositiveeffectoninnovation.69

5. TwoCaseStudies

ThetheoreticalandempiricalliteraturespursintensedebateaboutDCS.Thissectionexamines

two very different firms and the ways in which they have each sought to rearrange their

respectiveDCS.ThefirstexamplehighlightsapubliccorporationthatseekstoretainitsDCSwhile

thesecondinvolvesapubliccorporationthatseekstodismantleitsDCS.Takentogether,these

twocasesprovideinsightintothewayinwhichafirmcanadaptitsDCSstructuretothewillof

thefounderandsuperiorshareholder.

(i) Fairfax

ThefirstexampleinvolvesoneofCanada’smostsuccessfulfirms,FairfaxFinancialInc.In2015,

Fairfaxincreasedtheratioofmultiplevotingsharestosubordinatevotingsharesfrom10:1to

50:1.This changewasput to shareholders fora “majorityof theminority”vote.Subordinate

shareholdersvotedinfavorofthenewsharestructureandspecificallytopreservethecurrent

41.8percentvotingpowerofitsfounder,ChairandCEOPremWatsa.Theyalsovotedinfavorof

aresolutionthatpreventedWatsafrombeingabletoprofit,orreceiveanypremiumorbenefit,

fromthespecialvotingrightsattachedtohisshares.Asaresultof theirapprovalof thenew

structure,intheeventofachangeofcontrol,subordinateshareholdersalsohavetherightto

receivethesameconsiderationonapersharebasisasholdersofthemultiplevotingshares.The

newsharestructurealsocontainedafive-yearsunsetprovision;inordertocontinuetoremain

inplaceafter2020,thesharestructurewouldneedtoberatifiedbyamajorityoftheminority

vote.70

69Baran,etalsupranote67at4.SeealsoMcCahery&Vermeulen,supranote48onthegeneraluseofDCSinstart-upsunderthecontextofmaintaininginnovationandentrepreneurialculturesduringthelead-uptoanIPO.70FairfaxFinancialHoldings,FairfaxCallsSpecialShareholders'MeetingtoConsiderAmendmenttoTermsofMultipleVoting Shares (12 June 2015), online: <http://www.Fairfax.ca/news/press-releases/press-release-

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Themodification toFairfax’s share termswasapprovedataspecialmeetingby69.7%of the

votescastbysubordinateshareholders.71Prior tothis finalvote, themeetingtoconsiderthe

proposalwaspostponed twice, in the first instance to “allowmore time for theholdersof a

significantnumberofshareswhichhavenotbeenvotedtovotetheirshares,andallowFairfax's

management to continue ongoing discussions with shareholders concerning the proposed

amendment.”72Thesecondpostponementoccurredbecauseofmodificationstotheproposal,

which Fairfax stated were “in response to discussions with certain significant institutional

shareholdersofFairfax.”73Withthefurtheramendments,Fairfaxgarneredvotingsupportfrom

manyoftheinstitutionalshareholdersandapprovetheproposal.74

Fairfaxwantedtoundertakethistransactionasinsiderssoughttoavoidvotingcontrolthatwas

occurringbecauseofdilution.Thus, intheyearpriortothisamendment,Fairfaxexploredthe

possibilityofissuinganewclassofnon-votingsharesinordertomanagedilution.However,the

TSXadvisedthatitwouldrejectFairfax’sproposednewnon-votingshareclassunlesstheclass

containedacoattailprovision(enablingthenon-votingsharestobeconvertedintosubordinate

votingsharesintheeventofatake-overbid).75Furthermore,arelevantsecuritiescommission

details/2015/Fairfax-Calls-Special-Shareholders-Meeting-to-Consider-Amendment-to-Terms-of-Multiple-Voting-Shares/default.aspx>.71Fairfax,"FairfaxAnnouncesApprovalofAmendmentstoMultipleVotingShareTerms”(24Sept2015),online:<http://www.fairfax.ca/news/press-releases/press-release-details/2015/Fairfax-Announces-Approval-of-Amendments-to-Multiple-Voting-Share-Terms/default.aspx>72Fairfax,“FairfaxSpecialMeetingPostponedtoAugust13,2015”(20July2015),online:<http://www.fairfax.ca/news/press-releases/press-release-details/2015/Fairfax-Special-Meeting-Postponed-to-August-13-2015/default.aspx>73Fairfax,"FairfaxAnnouncesModificationstoMultipleVotingShareProposalandPostponementofSpecialMeetingofShareholderstoAugust24,2015”(11August2015),online:<www.fairfax.ca/news/press-releases/press-release-details/2015/Fairfax-Announces-Modifications-to-Multiple-Voting-Share-Proposal-and-Postponement-of-Special-Meeting--of-Shareholders-to-August-24-2015/default.aspx>74Ibid.75Fairfax,"NoticeofSpecialMeetingofShareholders",online:<https://www.sec.gov/Archives/edgar/data/915191/000104746915005451/a2225117zex-99_3.htm>.TheTSXadvisedthatthenewclassofshareswouldneedaprovisionallowthe“non-votingshareswereconvertibleintosubordinatevotingsharesintheeventofatake-overbidforthesubordinatevotingshares(regardlessofwhetheranofferwasalsobeingmadeforthemultiplevotingshares),exceptincircumstanceswhereaconcurrentofferonequivalenttermswasalsomadeforthenon-votingshares.Ifholdersofnon-votingshareswereentitledtoconverttheirsharesintosubordinatevotingsharesandtenderthemtoatake-overbid,suchaconversionfeaturewouldcreateanopportunityforathird-partytomakeanunsolicitedtake-overbidforsubordinatevotingsharesand

24

rule (Rule 56-501) effectively requires shareholder approval for any recapitalization.Worried

about the impactof a third-party tomakea take-overbidand the corresponding conversion

rightsthatwouldbetriggered,Fairfaxdidnotcreateanewnon-votingclassofshares.Instead,it

proposed theamendment to itsexisting share structurewhichwasultimatelyapprovedbya

majority of theminority shareholders. In this way, it was able to preserve the vision of the

founderwhichwasattractivetoshareholdersfromasharepricepointofview.

(ii) Magna

OursecondexampleinvolvesCanada’slargestautopartsmanufacturer,MagnaInternational,a

multinationalpubliccorporationfoundedbyFrankStronachin1957.Priortothetransactionat

issue,MagnahadinplaceaDCSwithonevotepershareattachingtoapproximately112million

widely-held Class A subordinate voting shares and 300 votes per share attaching to

approximately700,000ClassBsharesheldbyStronach.TheDCSenabledStronachtomaintain

controlofthecorporationwhileowningasmallpercentageofitsshares.

Under a planof arrangement proposed inMay2010,Magna sought to collapse itsDCS. The

transaction, oneof the largest salesof control transactions inCanadianhistory, involved the

purchase byMagna of all Stronach’s shares—constituting 0.6 percent of the equity but 66

percentofthevotingrights—inexchangefor9millionsubordinatevotingsharestotalingUS$300

million.76 The transaction diluted the holdings of the subordinate shareholders and enabled

Stronachtobepaida1,800percentpremiumofthetradingvalueoftheClassBmultiplevoting

shares.

Inaddition,undercertainconsultingcontractswiththecorporation,Stronachwasabletoreceive

3 percent ofMagna’s pre-tax profits.Magnawas required to pay the fees owing under the

potentiallyacquiresharesrepresentingamuchlargernumberofvotesthanthe58.2%thenrepresentedbytheoutstandingsubordinatevotingshares.”76MagnaInternationalIn.(Re)(2010),34OSCBull1290atpara103(OSC)[FullReasons].

25

consulting contracts for a one-year term if they were terminated early. Finally, Magna and

StronachwouldenterintoapartnershipthatwouldbeindirectlycontrolledbytheStronachTrust

in order to develop Magna’s electric vehicle business. The Magna board neither made a

recommendationtoshareholdersnorprovidedthemwithavaluationorfairnessopinion.77

Inresponsetotheproposedarrangement,staffoftherelevantregulator,theOntarioSecurities

Commission (OSC), alleged that the transaction was contrary to the public interest for the

following reasons: the circular did not contain specific financial information that the special

committee of theMagna board (formed to consider the transaction) had obtained from its

financialadvisors;thedisclosurecontainedneithersufficientinformationrelatingtothefairness

ofthetransactionnorusefulrecommendationstoshareholders;thetransactionwasnoveland

unprecedentedbecausetheshareholderswereaskedtoapproveitwithoutarecommendation

andwithoutsufficientinformation;andtheapprovalandreviewprocesswasinadequate.

Agroupofshareholdersalsosoughtapermanentceasetradeorderbecausethetransaction,in

theirview,wasabusiveandcoercive.78TheOSCheldthatthecirculardidnotcontainsufficient

disclosureandorderedmoredisclosuretobefiledandapprovedbeforethetransactioncould

proceed.TheOSCordered“acleararticulation”79ofhowmanagementandtheboardarrivedat

theconsiderationtobepaidtoStronachandthepotentialeconomicbenefitstoshareholders.

Thisdisclosurewastoincludeadescriptionofthepotentialalternativesconsideredbythespecial

committee, a discussion of the approval process adopted by the special committee, and a

statementofhowthefinancialadvisorsassessedthetransaction,providingreasonswhyitcould

77Ibid;SeeMagnaInternationalIn.(Re)(2010),33OSCBull6013[InitialReasons];SeealsoAnitaAnand,“OffloadingtheBurdenofBeingPublic:AnAnalysisofMulti-VotingShareStructures”,(2016)10:3VaL&BusRev395,online:<https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2728481>.[AnitaAnand]78 The “Opposing Shareholders” consisted of the Ontario Teachers’ Pension Plan Board; Canada Pension PanInvestmentBoard;OntarioMunicipalEmployeesRetirementSystem(OMERS)AdministrationCorporation;AlbertaInvestment Management Corporation; Letko, Brosseau & Associates; and the British Columbia InvestmentManagementCorporation.InitialReasons,supranote77.79Ibidatpara41.

26

notrenderafairnessopinion,amongotherthings.80TheOSCdidnotissueapermanentcease

tradeorderasstaffhadrequested.

The terms of the transaction also required court approval and a minority shareholder vote

regarding whether the transaction (being an arrangement) was “fair and reasonable.” The

minorityshareholdersapprovedthetransactionbut,asarguedbelow,thetransactionpresented

tothemwasarguablyabusivesincetheywereaskedtochoosebetweenthelesseroftwoevils.

Iftheyvotedagainstthetransaction,theywouldbevotingtomaintainthestatusquo.Ifthey

votedforthetransaction,theywouldbeapprovingthecollapseofthefirm’sDCSstructureby

payingexorbitantconsiderationtothefounder.

(iii)Summary

InbothFairfaxandMagna,thereweregovernancechanges,oneinwhichtheDCSwasretained

and the controlling shareholder was strengthened (Fairfax) and one in which the DCS was

removedandthecontrollingshareholderwasweakenedbutpaid(Magna).Thetwoscenarios

illustrate the differences among DCS firms in terms of their governance. While they all by

definition have some sort of multi-voting share structure, the minutiae of their governance

differs.Itisunderstandableforfoundersofafirm,likeWatsaandStronach,toseektocontrolits

developmentviaaDCSinpursuitoftheirrespective“idiosyncraticvisions.”ThisexplainswhyDCS

havegrowninpopularityinrecentyears81perhapsalsoasaresponsetothesimultaneousriseof

shareholder activism.82 As shareholders have sought to exercise their statutory rights to

participate in the corporation (such as in terms of board composition), and indeed have

advocated for stronger rights (such as in terms ofmajority voting), founders have sought to

protectthemselvesagainstalossofcontrol.83

80Ibid.81SeeAnitaAnand,supranote77;BebchukandKastiel,supranote11.82 Simon C Y Wong, (29 January 2013) “Rethinking One Share, One Vote” Harvard Business Review, online:<https://hbr.org/2013/01/rethinking-one-share-one-vote>.83Seeforexample,OnurArugaslan,DouglasOCook&RobertKieschnick,“OntheDecisiontogoPublicwithDualClassStock”(2010)16:2JCorpFin170,online:<www.sciencedirect.com/science/article/pii/S0929119909000510>

27

6. GovernanceCharacteristicsofDCSFirms

ThedifferentgovernancestructuresintheFairfaxandMagnaexamplesdiscussedaboveinvite

ustolookbehindDCSgenerallytoanalyzegovernancecharacteristicsofDCSfirms.Howdifferent

is the governance in DCS firms? The focus of this section is on five areas of governance

characteristics chosen because of their centrality to the academic discussion (and indeed

criticisms)aboutDCSgovernance:84

• whethersubordinateshareholdershavetheabilitytovoteonmatters(suchasthewayin

whichcontrolisheld)viaamajorityoftheminorityvoteprocess;

• whethertheDCSissubjecttoasunsetprovisionlimitingthelengththattheDCSwillpersist

inthecorporation;

• whethertheboard ispopulatedbymore independentdirectorsthan isrecommendedby

law;

• whethertheboardoftheDCScorporationisledbyanindependentboardchair;and

• whetherthecorporatechartercontainsprovisionsspecifyingchangeofcontrolrightsforthe

subordinateshareholders.

Eachofthesegovernancecharacteristicsisexplainedbelow. (i) MajorityoftheMinorityVote

Aresubordinateshareholdersprovidedwithamajorityoftheminorityvote(forexampleonthe

creationof theDCS, theelectionofdirectors, theappointmentofauditors,or theapprovalof

financialstatements)?

whofindthatdeviationsformaone-shareonevoteregimearedoneprimarilysoinsiderscanretaincontrol;SeealsoStephanieBen-Ishai&PoonamPuri,“DualClassSharesinCanada:AnHistoricalAnalysis”(2006)29:1DalLJ117,online:<https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1427666>.84SeeAnand,MilneandPurda,supranote24.

28

Oneofthehallmarksofcorporatedecision-makingistheabilityofshareholderstoparticipatein

thecorporationbymeansoftheirvote.85Involvingshareholdersintheprocessofdevelopingthe

DCSinthiswaymayofferahostofbenefitstoshareholdersandthefirm.Partchfindsthatwhen

firmsaskshareholderstoapproveaproposedDCS,managersaretransparentastothereasons

whythefirmwishestocreateasecondclassofcommonstock:sothatthemajorityshareholders

can retain control while obtaining equity to finance unique growth opportunities. This is a

promisewithwhichmostfirmskeepaftertheDCSisapprovedbyamajorityorsupermajorityof

shareholders.86 This transparency anddialoguewithmanagementmay allow shareholders to

assessthevalidityoftheproposedbusinessstrategyandonlyapprovetheproposalsthatarein

theirinterest.DimitrovandJainprovideempiricalsupportforthishypothesisbyfindingevidence

that shareholders received significantly higher returns after DCS recapitalizations than their

competitors.87

Others scholars are concerned about the level of choice that shareholders exercise when

approvingDCSrecapitalizationproposals,arguing that theseproposalsare rarelyvoteddown

because of collective action problems.88 Individual shareholders have little incentive to do

researchandmakeaninformedvoteaboutthevalidityontheDCSbecausethecostsofdoingso

exceedthelikelyreturns.Thus,eveniftheproposalwouldreducetheirwealth,orprovideless

participation in governance, individuals have little incentive to organize opposition to the

85Recognizingthis,somesecuritiesregulatorsmandatethatanyreorganizingorreclassificationofcommonvotingsharesintorestrictivevotingsharesbeapprovedbyamajorityoftheminorityshareholders.SeeOntarioSecuritiesCommission, “Notice of Rule under the Securities Act Rule 56-501 Restricted Shares” (9 April 1997), online:<http://www.osc.gov.on.ca/en/SecuritiesLaw_rule_19970411_56-501_r.jsp>.86MMeganPartch,“TheCreationofaClassofLimitedVotingCommonStockandShareholderWealth”(1987)18:2J Fin Econ 313 at 313-314, 317, 322, online: <www.sciencedirect.com/science/article/pii/0304405X87900432>;RichardVecchialla,MelaniePrudom&RobertHamiltonIII,“ExposingtheCorporateVampires:AShareholder’sGuidetoManagementEntrenchment”(1998)31:5LongRangePlanning659,online:<www.sciencedirect.com/science/article/pii/S0024630198000715>.87DimitrovandJain,supranote60.88JunzhengShen,“AComparativeAnalysisofDualClassShareStructures”,(4November2016)ColumbiaLawSchool’sBlogonCorporationsandtheCapitalMarkets(blog),online:<http://clsbluesky.law.columbia.edu/2016/11/04/a-comparative-analysis-of-dual-class-share-structures/>;BenitoArrunada&CandidoPaz-Ares,“Theconversionofordinarysharesintonon-votingshares”(1995)15:4Int’lRevL&Econ351,online:<www.sciencedirect.com/science/article/pii/0144818895000356>.[ArrunadaandPaz-Ares]

29

proposalbecausetheywouldbearallthecostswhileextractingonlyafractionofthebenefit.89

Arrunada and Paz-Ares argue that this creates a classic prisoner’s dilemma; the individually

optimal strategy is to convert one’s shares into non-voting shareswith higher dividends and

generally accept the proposal as is, even if the collectively optimal decision for outside

shareholdersisnottoconverttheirsharesoraccepttheproposal.90

Providingvotingrights tosubordinateshareholdersmaymitigatemanagemententrenchment

thatDCScreate.Forexample,boardsofdirectorscanbeeffectiveatmonitoringmanagerswhen

they are independent.91 Previous studies have demonstrated that giving all shareholders the

ability to nominate directors and vote in elections increases the quality of the board’s

independence.92Therefore,ifaDCSfirmgivesminorityshareholderstheabilitytovoteonboard

of director elections, the board is likely to be more independent than if the controlling

shareholdersretainallnominationandvotingpowers.

Giventhesefindings,whetheraDCSfirmgivesshareholderstheopportunitytovoteonimportant

aspectsofthecompany’sgovernancewarrantsexamination.NowintheCanadiancontext,Rule

56-501effectivelyrequiresshareholderapprovalforanyrecapitalizationsbutthatofcoursedoes

notcoverallinstancesinwhichDCSfirmsmightactandinwhichsubordinateshareholdervoting

maybewarranted.Thepresenceorabsenceofvotingrightsforminorityshareholderswilllikely

affect the opportunities afforded to management to extract private benefits from the firm,

suggestingthatsomeDCSfirmsmaybebetteratprotectinginvestorrightsthanothers.Note,

however, that there is little empirical evidence that approval by a majority of outstanding

disinterested shares provides an important backstop in controlling shareholder freeze-outs,

89ArrunadaandPaz-Ares,ibid.90Ibid.91CongWang,FeiXie&MinZhu,“IndustryExpertiseofIndependentDirectorsandBoardMonitoring”(2015)50:5JFin&QuantAnalysis929at929,934,online:<https://www.cambridge.org/core/journals/journal-of-financial-and-quantitative-analysis/article/industry-expertise-of-independent-directors-and-board-monitoring/E76A14A531242C461430348A1B9DDF39>.92GilbertoLoureiro,“MonitoringtheBoard:ShouldShareholdershaveDirectProxyAccess?”(2012)12:6QuantFin943,online:<https://www.cambridge.org/core/journals/journal-of-financial-and-quantitative-analysis/article/industry-expertise-of-independent-directors-and-board-monitoring/E76A14A531242C461430348A1B9DDF39>.

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managementbuyoutsorconflictedmergers. 93 In the Israeli context, Lichtsuggests thatsuch

approvalsareunlikelytomitigatethethreatofdilution.94

(ii) Sunsetprovision

IstheDCSsubjecttoasunsetprovision?

Aswehaveseen,onecommonargumentinfavourofDCSisthatthisstructureallowsfounders

withacorporatevisionandsuperiorleadershipskillstoretaincontrolofthecompany,leadingto

benefitssuchasreducedagencycostsandafocusonlong-termgrowth.95BebchukandKastiel

argue that a founder’s potential for superior leadership decreases as the time from the IPO

increases.96Thus,acasecanbemadeforfixed-timesunsetprovisionsintheeventaDCSisused

withanIPO.97Thisclausewouldbetriggeredatapredetermineddate,suchastentofifteenyears

after the IPO,andwouldautomaticallyconvertall superiorvotingshares intoordinaryvoting

shares, unless extended by a majority vote of shareholders unaffiliated with the controlling

shareholder.98A“stepdown”mechanismisalsopossiblee.g.10-1votingatIPO,9-1ayearafter

andsoforth.

Variousorganizationshavealsoarguedinfavourofsunsetprovisions.Forexample,theCanadian

CoalitionforGoodGovernance,anumbrellagroupconsistingofthecountry’slargestinstitutional

93EdwardRock,“MOMApprovalinaWorldofActivityInvestors”(2018)NYULawandEconomicsResearchPaperNo.18-02,online:<https://ssrn.com/abstract=3122681>.94AmirLicht,“BeCarefulWhatYouWishFor:HowProgressEngenderedRegressioninRelatedPartyTransactionRegulation in Israel” (2018) European Corporate Governance Institute (ECGI) Working Paper No 382, online:<https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3104062>.95BebchukandKastiel,supranote11.96Ibidat1-4.97Ibidat32.Othertypesofsunsetprovisionsinclude“triggeringevent”sunsetprovisionswhichtriggeramergingofsharesuponacertainevent, suchas the founder’sdeath,and“ownership-percentage”sunsetprovisions,whichtriggerconversionintoregularshareswhenthefoundershavelessthanacertainpercentageofthetotalnumberofoutstandingstock.WhileBebchukandKastielacknowledgethatthesewouldbebetterthannosunsetprovision,theyarguethatthesearestill lesspreferabletofixed-termsunsetprovisionsastheycanstillallowafoundertocontrolacompanyfordecadesoreveninperpetuity,oneoftheprincipleissuewithDCStodaythatsunsetprovisionsaredesignedtorectify.98BebchukandKastiel,supranote11at32.Anand,supranote6.

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investors,recommendsthatDCSremaininplaceforuptofiveyears,renewableuponamajority

voteby thesubordinateshareholders.99Likewise, theCouncilof Institutional Investors (CII) is

strongly in favour of a “one share one vote rule”, but argues in favour of imposing sunset

provisionsifafirmneverthelessissuesaDCSinanIPO.100Inrecentyears,theCIIhaspushedfor

theS&PDowJonesIndices,MSCIInc.andFTSERusselltoexcludefirmswithnon-votingstock

fromtheirindexesunlesstheyhavesunsetprovisionssuchasamaximumsunsetprovisionoffive

years(extendablewithashareholdervotetoamaximumoffiveadditionalyears).101

(iii) Independentdirectors

Does the Board comply with the suggested best practice to have a majority of directors

independent?

The third DCS governance characteristics examined is whether the board has in place

independentdirectorsthatexceedtheamountrecommendedbylaw(whichisthatamajorityof

theBoard’sdirectorsshouldbeindependent).102Independentdirectorshavebeenrecognizedas

a key corporate governance tool to reduce agency costs by guarding against managerial

99ThomasAFenton,“Heretostay–DualClassShareStructures”(2016)1:1TheCanadianInstitute’sSecuritiesLaw&Litigation,online:<www.airdberlis.com/Templates/Articles/binaryServer.ashx?bin=1000721.pdf>.100KenBertsch,“UnequalVotingrightsinCommonStock”(CIIRemarkstoInvestorAdvisoryCommitteeCouncilofInstitutional Investors delivered at theU.S. Securities and exchange Commission, 9March 2017) [unpublished];“Dual-classstock”,CouncilofInstitutionalInvestors,online:<http://www.cii.org/dualclass_stock>.101CouncilofInstitutionalInvestors,“Inre:S&PDowJonesIndicesconsultationwithmembersoftheinvestmentcommunity on the eligibility of non-voting share classes in S&P DJI indices” (27 April 2017), CII, online:<http://www.cii.org/files/issues_and_advocacy/correspondence/2017/20170426percent20CIIpercent20commentpercent20S&Ppercent20nopercent20votepercent20share.pdf>.BebchuknotesthatfirmssuchasFitbit,Groupon,KayakandYelphavealladoptedfixedtermsunsetprovisionsandofthefiftylargestduallistedfirmsthatwentpublicbetween2009and2015,twelvewentpublicwithafixed-timesunsetprovision.ComparabledataisnotpublicallyavailableforCanadianDCSfirms;thisarticlefillsagapinthisregard.SeealsoDainesandKlausnerwhostatethatattheinceptionofanIPO,provisionsinafirm’scharterprovidelittleornoinformationtothemarket.RobertDaines&MichaelKlausner,“DoIPOChartersMaximizeFirmValue?AntitakeoverProtectioninIPOs”(2001)17:1JLEcon&Org83.102 National Instrument 58-101 recommends as best practice that a majority of directors are independent.Independent is defined as “no direct or indirectmaterial relationship”, seeDisclosure of CorporateGovernancePractices,OSCNI58-101(2005). [NI58-101]Corporatestatutes inCanadarequirethatat least twooutof threedirectorsare“notofficersoremployeesofthecorporationoritsaffiliates”,seeCanadaBusinessCorporationsAct,RSC1985,cC-44,s102(2).

32

entrenchmentandself-servingbehavior.103Theideathatindependentdirectorscanbringmuch-

neededmanagementoversighttotheoperationsoftheboardhasgivenrisetoadvocatesfor

independentboardsworldwide.

Canadianguidelinesinitiallyrecommendedboardindependence(formallydefinedbelow)when

theTorontoStockExchangeadoptedtherecommendationsofthereportoftheTorontoStock

ExchangecommitteeoncorporategovernanceinCanada(theDeyCommittee)in1995.Inthe

U.S.,stockexchangesalteredtheir listingstandardstorequirefirmstomaintainamajorityof

independentdirectorsaftertheenactmentoftheSarbanes–OxleyAct in2002.104Outsidethe

North American context, international organizations (such as the OECD) and national stock

exchangesinmanycountriessuchastheUnitedKingdom,Australia,Portugal,andCyprus,have

advocatedboardindependence.

IntheyearssinceSarbanes-Oxley,U.S.andCanadiancorporationshaveexperiencedsignificant

increases inboard independence.105Although this trendhasbeen somewhat slower inother

countries,therateofadoptionofrequirementsrelatingtoindependentboardsisnevertheless

103SeeTorontoStockExchange,“WhereWereTheDirectors?Guidelines for ImprovedCorporateGovernance inCanada”(1994),The‘Dey’ReportforCanadiancontext.104AlthoughtheSarbanes–OxleyActwaspassed in2002, itwasnotuntil2003that theSecuritiesandExchangeCommissionapprovedchangestothegovernancerequirementsoftheUnitedStates’stockexchanges.Sarbanes–OxleyActof2002,Pub.L.107–204,116Stat.745(2002).105SeeVidhiChhaochharia&YanivGrinstein,“TheChangingStructureofU.S.CorporateBoards:1997–2003”(2007)15:6CorpGov:Int’lRev1215;SharonLee&LoringCarlson,“TheChangingBoardofDirectors:BoardIndependenceinS&P500Firms”(2007)11:1JOrgCultureComm&Conflict31.

33

becomingsignificantaroundtheworld.106ThequestioniswhetherDCSfirmsinparticularhave

alsoadoptedthisgovernancemechanism.107

(iv) Independentchair

IstheBoardoftheDCSfirmledbyanindependentchair?

The fourth DCS governance characteristics examined is whether the DCS board is led by an

independentboardchair.AstudyconductedbyAnand,PurdaandMilne108foundthatfirmswith

independentboardsofdirectorsaremorelikelythanfirmswithoutindependentboardstoadopt

mechanismsdesignedtoenhancetheirabilitytomonitorfirmmanagement.109ButdoDCSfirms

typicallyadoptanindependentchair?

(v) Changeofcontrolprovisions

Doesthefirmhavechangeofcontrolprovisionsinplaceoverandaboveexistinglaw?

106SeeNiamhBrennan&MichaelMcDermott,“AlternativePerspectivesonIndependenceofDirectors”(2004)12:3CorpGov:Int’lRev325;LenaTsipouri&ManolisXanthakis,“CanCorporateGovernanceBeRated?IdeasBasedontheGreekExperience”(2004)12:1CorpGov:Int’lRev16;JayDahya,OrlinDimitrov&JohnMcConnell,“DominantShareholders,CorporateBoardsandCorporateValue:ACross-CountryAnalysis”(2008)87:1JFinEcon73[Dahyaetal];BernardBlack,“TheCorporateGovernanceBehaviourandMarketValueofRussianFirms”(2001)2:2EmergingMarket Rev 89, online: <https://papers.ssrn.com/sol3/papers.cfm?abstract_id=263014>; Beverly Jackling &Shireenjit Johl,“BoardStructureandFirmPerformance:EvidencefromIndia’sTopCompanies” (2009)17:4CorpGov:Int’lRev492;BernardBlack,HasungJang&WoochanKim,“DoesCorporateGovernancePredictFirms’MarketValues?EvidencefromKorea”(2005)EuropeanCorporateGovernanceInstituteWorkingPaperNo86/2005,online:<https://papers.ssrn.com/sol3/papers.cfm?abstract_id=311275>.107Dahyaetal.,ibidmovingbeyondasinglecountryanalysis,Dahyaetalexaminedtheprevalenceofindependentboardsinacross-countrystudyoffirmsfromtwenty-twocountriesandshowedthatthepervasivenessofadoptingindependentboardsistrulyglobalinnature.108AnitaAnand,FrankMilne&LynnettePurda,“MonitoringtoReduceAgencyCosts:ExaminingtheBehaviorofIndependentandNon-IndependentBoards”(2010)33:4SeattleULRev809,online:<digitalcommons.law.seattleu.edu/cgi/viewcontent.cgi?article=1003&context=sulr>.[Anand,MilneandPurda]109Ibidat835.

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ThefifthandfinalgovernancecharacteristiciswhetherDCSfirmshaveacorporatecharterwhich

contains provisions specifying change of control rights for the subordinate shareholders. In

Canada,takeoverbidsofDCSfirmsmustincludeaprovisionthatnooffertoacquireaclassof

controllingshareswouldbevalidwithouttheacquirermakingaconcurrentofferonthesame

termstotheotherclassofshareholders(thesearecalled“coattail”votingrights).110ADCSfirm

cannothaveatakeoverbid,aproxycontestoranyotherforcedchangewithoutcoattails.111The

question that thenarises iswhetherDCS firmshave implementedotherprovisions regarding

changesofcontrol:dothey,forexample,ensurethatequivalenttermsareofferedtosubordinate

shareholdersinthecaseofallchangesofcontrol?Dotheyhavespecificagreementsunderwhich

the foundersor superior shareholdersagreenot to transfer their sharesat leastnotwithout

approvaloftheboard?Dotheyseektoensurethatafairprocessoccurs?

7. MethodologyandContext

Usingthesegovernancecharacteristics,wenowturntooursamplesetoffirmswhichincludes

allDCSfirmslistedontheTSXasofDecember31,2015.Thetotallistoffirmsconsistsof85firms

listedinAppendix2.Thedataconsistoftwogroupsoffirms,thefirstofwhichconsistsof70firms

forwhichaDCSwasimplemented.Thesecondgroupconsistsof15firmsforwhichDCSwere

implementedbecause theywerede factomandatory,usuallydue to legislative requirements

regardingthenationalityofownershipofthefirmsanditsshares.112TheseDCSfirmsarereferred

toasthe“requiredbylaw”orRBLfirms,andarefurtherdescribedinAppendix4,Exhibit1.RBL

firmsimplementDCStoensureaminimumlevelofCanadianownershipismaintainedinkeeping

withapplicablelegislation;theystipulateprovisionsbywhichsharesareautomaticallyconverted

betweenclassesdependingonwhethertheshareholderisCanadianornot.Theyfurtherlimit

110In1987,theTSXmandatedthatanycompanyissuingaclassofshareswithsuperiorvotingrightswouldhavetoincludeaprovisionthatnooffertoacquireaclassofcontrollingshareswouldbevalidwithouttheacquirermakinga concurrent offer on the same terms to the other class of shareholders. “Restricted Securities”, TSX CompanyManualats624.111DCSfirmslistedontheTSXpriorto1987were“grandfathered.”SeeMerkley,supranote19.112Certainlegislationrestrictsthelevelofownershipthatcanbeheldbyforeigners.TheDCSautomaticallyconvertssharesbetweenclassesdependingonwhethertheownerisCanadianornot.ThisallowsthevotingpercentageofCanadianownerstoalwaysbeabovethelegalminimum.

35

thevotingpowerofthenon-Canadianssuchthatthetotalvotingrightsheldbynon-Canadians

donotexceedthelimitasperlegislation.

Asmentionedabove,asof2015,85outof1487firmslistedontheTSX–roughly5.72percent–

hadDCS.113TheseDCSfirmshadanaveragemarketcapitalizationof$3.39billion,114whilethe

averagemarketcapitalizationof theTSXasawholewas$1.5billion,and themedianmarket

capitalizationoftheTSXwasamere$111.9million.115Inaddition,thesectorbreakdownofDCS

firmsontheTSXisrelativelyunrepresentativeofthesectorbreakdownoftheTSXitself.While

17percentofthelistedissuersontheTSXwereintheminingindustry,116onlyapproximately2

percentoftheDCSfirmsinthisdatabaselistedontheTSXwereintheminingindustry.117The

DCSfirmsspecificallywereoverrepresentedbyfirmsinthecommunicationsandmediasector

(whichmade up 17.65 percent of theDCS firms as compared to 2 percent on the TSX), and

diversifiedindustries(whichmadeup38.82percentoftheDCSfirmsascomparedto13percent

ontheTSX).Financialservices,realestateandtechnologywerealsooverrepresentedamongst

theDCSfirms:14.12percentofDCSfirmswereinfinancialservicesascomparedto5percentof

thefirmsontheTSX,9.41percentwereinrealestateascomparedto4percentontheTSX,and

7.06percentwereintechnologyascomparedto4percentontheTSX.

589firmslistedontheTSXin2015wereexchange-tradedfunds(ETFs),closed-endfunds,special-

purposeacquisitionfirms(SPACs)andothernon-traditionalfirms,makingup39.6percentofthe

TSX.118ThesetypesoffirmsdominatedtheTSXIPOmarketin2015,as76outofthe107new

listingsin2015wereETFs&closed-endfundIPOs,and5werecapitalpoolfirms(CPCs)orspecial-

113TorontoStockExchange,supranote19;SeealsoMerkley,supranote19.114DataobtainedfromStandard&Poor’sCapitalIQandsupplementedbyFactSet’sfinancialdatabase.115TorontoStockExchange,supranote19.116MarketIntelligenceGroup,MiGReportDecember2015(2015),online:<https://www.tsx.com/resource/en/1265/mi-g-report-december-2015-en.pdf>.[MarketIntelligenceGroup]117BasedontheTSXclassificationsofthe85firmsintheDCSdataset.118SeeTMX,“TheMiGReportDecember2015”,online:<https://www.tsx.com/resource/en/1265/mi-g-report-december-2015-en.pdf>at3.SeealsoJasonKirby,"PubliccompaniesinCanadaaregoingthewayoftheDodo",Maclean's(2August2016),online:<www.macleans.ca/economy/economicanalysis/public-companies-in-canada-are-going-the-way-of-the-dodo/>.

36

purposeacquisitionfirms(SPACs).119SuchfirmsarerelativelylessrepresentedamongsttheDCS

firms,asonly5outof85firms(5.88percent)wereSPACs.

Nevertheless,DCS firms continue to gainprominence inCanadianmarkets.Most recently, in

2016and2017,amajorityoftheIPOsinvolvedDCSfirmswhichofferedsubordinatevotingshares

carryingonevotepershare,whilethefoundersorcontrollingshareholdersmaintainedcontrol

throughmultiplevotingshares.120Weturnnowtoexaminethesummarydatawithregardtothe

fivegovernancecharacteristicsoftheDCSfirmslistedontheTSX.

8. Results

MajorityoftheMinorityVote:Ofthe85DCSfirmsexamined,onlyeightfirmshadexplicitmajority

ofminorityvoteprovisions(oneofwhichwasarequiredbylawDCScompany-Quebecor).Of

theeight firms thathada relevantprovision, seven firmsallowed for the subordinate voting

sharestoelectaparticularnumberofdirectors,votingasaseparateclass.TwoDCSfirmssetout

thatthesubordinateshareholdersareentitledtovoteseparatelyasaclassontheappointment

ofanauditor.Onecompany(i.e.Fairfaxdescribedabove)requiredaminorityshareholdervote

to sustain the substantial voting power of the majority shareholder. In addition, two firms

(BrookfieldRealEstateServicesandInformationServicesCorp)hadaspecialvotingsharewhich

allowstheholdertoappointacertainnumberofdirectors.

Oftheremaining75firms,70hadnoexplicitmajorityofminorityruleandfivehadprovisions

enablingminorityshareholderstovoteinthecaseofqualifyingacquisitions.However,thefive

provisions regarding qualifying acquisitions were required by legislation (under Multilateral

Instrument61-101),sodonotindicategovernancemechanismsputinplacebythecompanyover

andaboveexistinglaw.

119MarketIntelligenceGroup,supranote116.120"CanadianIPOsontheReboundin2017"(19July2017),TorysLLP,online:<https://www.torys.com/insights/publications/2017/07/canadian-ipos-on-the-rebound-in-2017>.

37

SunsetProvision.Thesecondgovernancecharacteristicexaminedwaswhetheracompanyhasa

sunsetprovisionwhichmaylimittheperpetuityoftheDCS.Intotal,41firms(48.24percent)had

asunsetprovisionofsomesortandtheremaining44firms(51.76percent)didnothaveasunset

provisionatall.Ofthe41firmswithasunsetprovision,10wereRBLfirms.

DCS firms with a sunset provision predominantly provided that if control of DCS reached a

particularpoint,themultiplevotingshareswouldbeconvertedintosubordinateshares.24firms

(44.44percentofinstanceswithasunsetprovision)containedsuchaprovision.Fourfirms(7.41

percent)includedprovisionsthattriggerconversionofmultiplevotingsharesintosubordinate

sharesintheeventthataparticularindividualisnolongeremployedatthecompany;fivefirms

(9.26percent)includedsunsetprovisionsactivatedupontheclosingofaqualifyingacquisition;

and9firms,allofwhichwereRBLfirms(16.67percent),includedsunsetprovisionspertainingto

thenationalityofshareholders(i.e.Canadianownershipmustbemaintainedataparticularlevel).

12firms(22.22percent)hadotherrestrictiveclausesincludingprovisionsthatsharescannotbe

transferredtoanyoneotherthantoapermittedperson.

Table1:TypesofSunsetProvisions

SunsetProvisionBasedon: NumberofFirms %ofTotal

VotingRightsorShares 24 44.44%

Employment 4 7.41%

QualifyingAcquisition 5 9.26%

Canadian/ForeignOwnership 9 16.67%

Other 12 22.22%

TOTAL 54 100.00%

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Intotal,41firmshadasunsetprovision11ofwhichstipulateseveralcircumstancesinwhicha

sunsetclausewouldbeactivated.121OnlyonecompanyspecifiedayearatwhichtheDCSwould

ceasetoexistaltogether,AlimentationCouche-Tard.ItsetoutthattheDCSwilldissolveonthe

daythe'MajorityHolders'havereachedtheageof65,whichis2021.Fairfaxalsohasasunset

clausetiedtoatimeperiod,stipulatingthatundercertainconditions,ashareholderratification

votewillbeheldeveryfiveyearstosustainthepresenceoftheDCS.

A comparison of RBL firms to the remaining DCS firms revealed that a substantially greater

proportionofRBLfirmshadasunsetprovision(66.67percentofRBLfirmshadasunsetprovision

incomparisonto44.29percentofDCS firmsthatdidnotrequireaDCSby law). Howdowe

explainthisdifference?PerhapstheRBLfirmsbelievethattheycanrenewtheDCSattheendof

theperiodorthataDCSmaynotbeperpetuallyrequiredgivenpotentialchangesinthegoverning

legallandscape.

IndependentDirectors.Theword“independent”embodiesaconsiderationofwhetheradirector

is involvedwithmanagement and factors such as whether the director was a participant in

managementoverthepastthreeyears,hasafamilymemberinvolvedinmanagement,orhas

someotheraffiliationwiththecompany.Adirectormaybenon-independentbecausehisorher

spouseisthecompany’sCEOeventhoughheorsheisnotinvolvedwithmanagementperse.122

Outofthe85DCSfirms,71firms(83.53percent)hadamajorityofindependentdirectorsontheir

board which is consistent with corporate governance comply-or-explain guidelines.

Unsurprisingly the averageproportionof independentboardmemberswas amongst the100

largest TSX firms (a significantmajority, 80%, of these boardmemberswere independent in

121 For example, Danier Leather stipulates that MVS will convert into SVS in the event that these shares aretransferredtoanyoneotherthantoapermittedtransfereeandifJeffreyWortsmanisnolongeraseniorofficerofthecompany,amongstotherstipulations.INSCAPECorp.hasasunsetprovisiontriggereduponthedeathofMadanBhayana.ONEXallowsfortheconversionofMVSintoSVSattheoptionoffounderGeraldSchwartz.122SeeAuditCommittees,OSCNI52-110(2004)[NI52-110]andasreferredtobyNI58-101supranote102.

39

2016).123Anadditionalfivefirms(5.88percent)hadanequalnumberofindependentandnon-

independentdirectors.Ninefirms(10.59percent)didnotadheretobestpracticeguidelinesto

haveamajorityofindependentdirectorsontheboard.Table2belowcontainsabreakdownof

boardindependenceamongsttheDCSfirmsexamined.

Table2:BoardIndependence

BoardIndependence Number of

Firms

%ofTotal

Lessthanhalfoftheboardwasindependent 9 10.59%

Equalnumberofindependentandnon-independentdirectors

(50percentoftheboardwasindependent)5 5.88%

MajorityofIndependentDirectors 71 83.53%

TOTAL 85 100%

IndependentChair.Examinationofthecompositionoftheboardofdirectorsrevealedthat61

firms (71.76percent) didnot have an independent chair per se.124However, 47 firms (55.29

percent)hadachairwhowasuninvolvedinthemanagementofthefirm.

123“CanadianSpencerStuartBoardIndex2016BoardTrendsandPracticesofLeadingCanadianCompanies”(2016),SpencerStuart,online:<https://www.spencerstuart.com/~/media/pdf%20files/research%20and%20insight%20pdfs/%20spencer-stuart-canadian-board-index-dec-2016.pdf> examined one hundred TSX listed companies withrevenueofatleast$1billionandforwhichCanadianresidentscomprisedaminimumof25%ofeachoftheirboardsasofJune2016.Thestudyfoundthat80%ofthesecompanieshadamajorityof independentdirectors in2016,basedontheCanadianSecuritiesAdministratorsdefinitionofindependence.Italsostatesthatthepercentageofindependent directors of the 100 largest TSX companies have been quite consistent since 2010; Yvan Alliare,"Controlled Companies Briefing" (2010) Canadian Institute of Chartered Accountants, online: <https://www.cpacanada.ca/-/media/site/business-and-accounting-resources/docs/controlled-companies-briefing---questions-for-directors-to-ask.pdf> refers to a 2009 Spencer Stuart report noting that 79% of directors for thelargest100Canadiancompanieswereindependentin2009.124Basedonthedefinitionof“independence”setoutinNI52-110,supranote122andasreferredtobyNI58-101,supranote102.

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Table3:IndependentChair

IndependentChair Number of

Firms

%ofTotal

Independentchair 24 28.24%

Independentchairwhoisuninvolvedinmanagement 24 28.24%

Non-independentchair 61 71.76%

Non-independentchairwhoisuninvolvedinmanagement 23 27.06%

Non-independentchairwhoisinvolvedinmanagement 38 44.71%

TOTAL 85 100%

Ofthe61firmswithanon-independentchair,35appointeda“lead”independentdirector.Alead

directorchairsthemeetingsofindependentdirectors.Indeed,

Arguably the position has now grown to a level where it can be seen as a separate,

independentchairman-typerole.Theleaddirectorisresponsiblefordealingwithawide

gamut of tasks, from regulatory compliance through to performance evaluation of

employees,directorsand[otherseniorofficers].125

ChangeofControl.Only25firms(29.41percent)hadachangeofcontrolprovisionotherthan

themandatedcoattailprovision.Ofthesefirms,tenhadagreements126inplacetoensurethat

equivalenttermsareofferedtosubordinateshareholders inthecaseofatake-over.FiveDCS

firmshadspecificagreementsunderwhichthefounderormajorityshareholderagreednotto

transferitsshares.

Summary.AssuggestedbyTables4aand4bbelow,DCSfirmsgenerallydonotvoluntarilyadopt

governanceprovisionsoverandaboveexisting law. A largeproportionofDCS firmshaveno

125"TheRoleoftheLeadDirector"(September2014),FinancierWorldwide,online:<https://www.financierworldwide.com/the-role-of-the-lead-director/#.WaQeRLGZN-U>.126Thesetencompanieshaveexplicitagreementsmadewiththefoundersormajorityshareholdersandatrustee,stipulatingthatcertainactions(e.g.thetransferofsharespriortothecompletionofaqualifyingacquisition)requireauthorizationbythetrusteewhoactsonbehalfoftheholdersofthe[SVS].SeeAppendix4,Exhibit2formoredetails.

41

majorityof theminorityvotingprovision,meaningthatcontrol restswiththesuperiorvoting

shareholders.Thisisunsurprisingofcourse,giventhatamainpurposeoftheDCSistomaintain

controlinthefounderorrelatedparties.Intermsofsunsetclauses,almosthalfoftheDCSfirms

haveonethoughafairproportionofthesefirms(15outof75firmsor17.65percent)areRBL

firmsinwhichtheDCSispresentforstatutoryreasonsrelatingtomaintainingCanadiancontrol

ratherthanmaintainingcontrolamongstfounders.MostDCSfirmsdonothaveanindependent

chair127buttheydohavechairsthatarenot involvedwithmanagement.ThemajorityofDCS

firms have independent directors, which suggests that they can be understood to be a key

monitoringmechanisminDCSfirms.Yetitispossibleforindependentdirectorstobeclassified

as independent even though they have had indirect connections with the firm or senior

management.Finally,justunderone-thirdofDCSfirmshavechangeofcontrolprovisionsover

andaboveexistinglaw.

127Anand,MilneandPurda,supranote108.ThisisconsistentwithAnand,MilneandPurda’s,supranote24findingthatapproximately41.90percentofTSXcompanieshadanindependentchairduringtheperiodoftheirstudy.

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Table4a:SummaryofDCSGovernanceCharacteristics(AllFirms)

GovernanceCharacteristic DCSFirmsWith DCSFirmsWithout

MajorityoftheMinorityVote 9.41% 90.59%

SunsetProvision 48.24% 51.76%

IndependentDirectors 83.53% 16.47%128

IndependentChair 28.24% 71.76%

ChangeofControl 29.41% 70.59%

Table4b:SummaryofDCSGovernanceCharacteristics(ExcludingRBLFirms)

GovernanceCharacteristic DCSFirmsWith DCSFirmsWithout

MajorityoftheMinorityVote 10.00% 90.00%

SunsetProvision 44.29% 55.71%

IndependentDirectors 81.43% 18.57%

IndependentChair 20.00% 80.00%

ChangeofControl 30.00% 70.00%

In summary,DCS firms (with andwithoutRBL) tendnot tohave fouroutof five governance

metrics inplacewhichisespeciallytruewhenRBLfirmsareexcludedfromthesample.Other

than thisbroadgeneralconclusion, there isconsiderablevariability in thegovernanceofDCS

firms,evenexcludingtheRBLfirmsfromthesample.Forexample,AkitaDrillingandLassonde

Industries both have two of the five governance characteristics, however, their governance

differsgreatly.Bothfirmshaveboardsthatare44.44percentindependent,buttheonlyother

governance characteristic that Akita Drilling displays is that its chair is uninvolved with

management,whileLassondeIndustrieshasasunsetclauseprovision.

128NotethatthisincludesDCSfirmswithamajorityofnon-independentdirectors,andfirmswithanequalnumberofindependentandnon-independentdirectors.

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This divergence in governance is not unique in theDCS firms examined. DCS firms generally

shared minimal similarity in governance practices. Of the firms with a similar number of

governancecharacteristics(threetofour),therewassomesimilarityas15outof22firmshada

chair who was uninvolved with management and 19 firms had a majority of independent

directors.However,theremainingcriteriaonceagainvariedgreatly.Lessthanhalfofthefirms

hadasunsetclause(8firmshadonetypeofsuchprovisionand1firmhadtwotypesofsunset

provisions),only1companyhadamajorityoftheminorityprovision(thecompanyhadonlyone

typeofsuchprovision),7firmshadanindependentchair,7otherfirmshadaleadindependent

director,andadifferentcombinationof7firmshadachangeofcontrolprovision.

WeshouldnotbesurprisedthatgovernanceamongDCSfirmsvariesgreatly;thisisthecasewith

publicfirmsgenerally.Buttheresultssuggestthatlaw–evenvoluntaryguidelines–canmatter

tofirms’governancechoices.DCSfirmstendtohaveamajorityofindependentdirectorslikely

becausethisisabestpracticesruleinCanada’scorporategovernancelegalregime.Giventhat

governance of DCS firms varies greatly, one may question whether legal protections for

subordinateshareholdersarewarranted.Itistothisquestionthatwenowturn.

9. DirectionsforRegulatoryReform

TherearegoodreasonstobeconcernedaboutgovernanceinDCSfirms.DCSstructuresinsulate

managementandtheboardwhosemembersmay(ormaynot)actinthelong-termbestinterests

ofthecorporation.Insidersaresubjecttofewerchecksonself-dealingandexerciseanunfettered

abilitytodefineexecutivepay,bonusesandstockoptionplans.DefendersofDCSmayarguethat

questionspertainingtoDCSgovernanceareirrelevantbecausethesubordinateshareholdersare

not“forced”tocarrytheriskofweakgovernance:theycanrefusetoinvestinDCSfirmsifthey

donotwishtobearthenon-participatoryriskinherentinthesefirms.

ThisargumentignorestherelativelysmallsizeoftheCanadiancapitalmarketsandthelackof

options for many large institutional investors, including Canada’s pension funds. The TSX’s

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marketcapitalizationof$2.284trillionisminisculecomparedtoNYSE’s$19.3trillionmarketcap.

Privateorderingtakentoitslogicalconclusioncanseverelylimitinvestors’choices.Inparticular,

5.72percentofTSXfirmshaveDCS.129IfaninvestordoesnotwanttoinvestinaDCSfirm,its

investment options are restricted. Canadian DCS firms have achieved 12 percent annualized

returnsoverthelast10years,aconsiderablyhigherratethanthe7.1percentachievedbynon-

DCS firms.130 Some of the bestmarket performers have beenDCS firms; CCL Industries Inc.,

Fairfax,andCouche-Tard,allDCSfirms,haveoutperformedtheircompetitorsbyaconsiderable

margin.131Inadditiontotheestablishedmarketgiantswhicharecross-listedonaUSexchange,

suchasBombardierandRogers,an increasingnumberofCanadianfirms launching IPOshave

opted for DCS, such as Spin Master, Cara Operations, Shopify, Stingray Digital, Aritzia, and

Freshii.132 If investors’ forced choice is to abstain from investing inDCS firms, they are likely

unable to participate in some of the most successful firms, putting them at a significant

disadvantageintherelativelysmallcapitalmarketthatcharacterizesthecountry.

Onemayarguethatsuchunhappyinvestorsshouldnegotiatethe“terms”oftheircontractprior

tobuyingintotheinitialpublicofferingwhentheycouldseekasunsetclauseandothermaterial

governanceprotections.133ButasDainesandKlausnerhaveshown,the“terms”oftheIPOare

notnegotiatedand in factprovide little informationtothemarket.134 Inotherwords,private

orderingdoesnotensurethatthesubordinateshareholders’interestsareprotectedonanon-

goingbasis.Thisisthestartingpointforthereformproposalsbelowwhicharebasedontheidea

thatidealcircumstancesdonotalways(usually)prevail.

12985outof1487companieslistedontheTSXasnotedinTorontoStockExchange,supranote19.SeealsoMerkley,supranote19.130Ibid.131Ibid.132JoeCastaldo,“DualClassSharesareinfashionagain–butthey’restillabadidea”,CanadianBusiness(10February2017), online: <http://www.canadianbusiness.com/investing/dual-class-shares-are-in-fashion-again-but-theyre-still-a-bad-idea/>.133Winden,supranote23at52.134DainesandKlausner,supranote101.

45

(i) Fixed-termSunsetClausewithMandatoryVote

Variousscholarsadvocatetheuseofsunsetprovisions.135Therationale issound:subordinate

shareholders’ interests may be abused when the corporation makes consistent non value-

maximizing decisions, an incumbent’s performance declines or less talented individuals take

controlofthecompany.136AsunsetprovisionwouldmitigatethisriskbybarringperpetualDCS,

unlesssubordinateshareholdersagreetomaintainthestructure.Theproposalhere,however,

isaslightvariationontheproposalforafixedtermsunsetprovision:thesunsetshouldbein

placeforalimitedtermunlessfurthermajorityoftheminorityshareholderapprovalisobtained

fortheDCS.

AsunsetprovisionshouldbeagreeabletoeventhemostardentadvocatesofDCS.Afterall,if

DCSallowfirmstoachievelong-termgoalsthatarevalue-enhancingforallshareholders,superior

andsubordinateshareholdersalikewillvotetoextendtheDCSsothetalentedmanagerscanstay

incontrol.Thus,sunsetprovisionswouldallowfirmstoreapthepurportedbenefitsofaDCS

while preventing the entrenchment of untalented management many years after the initial

justification(andinvestorsupport)fortheDCShavedissipated.(Drawingontheexampleabove,

theCEOofFairfax,PremWatsa,remainedinplacewithaDCSonlyafteramajorityoftheminority

shareholdersapprovedhisenhancedcontrolrightsforalimitedperiodoftime).

OnecouldarguethatmandatorysunsetsmightbeunnecessaryifthedevelopmentoftheDCS

eventuallyleadstheDCSstructuretobeinefficient.Thesuperiorshareholdercanthensimplybe

bought out in a transaction in which the surplus created by the move from a less efficient

structure to a more efficient structure is shared between the superior shareholder and the

subordinateshareholders.Inotherwords,asSquireargues,itseemsthatprivateorderingcan

135See,forexample,BebchukandKastiel,supranote11andWinden,supranote23.136ThomasChemmanur&YawenJiao,“DualClassIPOs:ATheoreticalAnalysis”(2012)36:1JBanking&Fin305at306-307; 315, online: <www.sciencedirect.com/science/article/pii/S0378426611002214>. Richard Squire hasmentionedinresponsetothisargumentthatthatfoundersmayalsomakethemistakeofselectingasingleclassstructurewhentheyshouldhaveselectedaDCS.ButthisargumentisunpersuasiveinmyviewgiventhatasingleclassstructuredoesnotbearthenormativefailingsofaDCSandinparticularthedecouplingofequityfromcontrolinasystematicway.SeeAnitaAnand,supranote77.

46

accomplishmid-coursechangesinafirm'sgoverningstructure,againmakingmandatoryrules,

suchasasunset,unnecessary.137

Inresponsetothisargument,onemustappreciatethepotentialforabuseinthebuyoutofthe

founder.IntheMagnatransactiondiscussedabove,forexample,thetransactionpresentedto

thesubordinateshareholderswasarguablyabusive.138Theywereaskedtochoosebetweenthe

lesseroftwoevils.Ontheonehand,iftheyvotedagainstthetransaction,theywouldbesignaling

theirdesiretomaintainthestatusquoinwhichthesuperiorshareholderandfoundercontrolled

Magna while holding 0.6 per cent of the equity. On the other hand, if they voted for the

transaction, theywould be approving the collapse of the firm'sDCS structure and the firm's

repurchaseof the equity held by a founderwhohadhistorically extracted significant private

benefitsofcontrol. Thecaveat,however,wasthatthetotalconsiderationtobepaidforthis

transactiontooccurwasexorbitant.

ThechoicefacedbysubordinateshareholdersintheMagnacasesuggeststhatthegreaterthe

privatebenefitsthatthefounderextractsfromacorporationwithDCSshares,thehigherthe

premiumthatwillbepaidtoextricatethecorporationfromthefounder.

Indeed,theboardof

directors'decision toproceedwith the transactionmayheighten the incentive fora superior

shareholdertoincreaseitsprivatebenefitsinordertoextortagreaterpremiumforthecollapse

ofaDCS.Thisisthepowerofthedespotthatthefoundercanexert.139

Afurtherdifficultywiththisargumentisthatthetermsofthebuyout,andtheprocessbywhich

these terms are negotiated and reached, have been poorly regulated. The 1,800 per cent

premiumwasexorbitant incomparisontobothmarketvalueandthetypicalpricerangethat

would be paid to eliminate a controlling shareholder.140 In the face of an astoundingly high

137ThankyoutoRichardSquirewhoraisedthispointinanemailtomeonDecember27,2017.138IhavepresentedadevelopedargumentalongtheselinesinAnand,“WasMagnainthePublicInterest?”,supranote8at312.139Ibid.140SeeBenAmaoko-Adu,BrianSmith&VishaalBaulkaran,“UnificationofDual-classSharesinCanadawithClinicalCaseonMagnaInternational”(PaperdeliveredattheCapitalMarkets InstituteConferenceonDual-classShares,

47

premium,theprocessesthattheMagnaboardandspecialcommitteefollowedwarrantedclose

scrutiny and ultimatelywere inadequate.141 The special committee did not obtain a fairness

opinionandvaluationandtheboarddidnotmakearecommendationtoshareholders.Overand

above theabsenceof these traditional safeguards, thespecial committeeconcluded that the

transactionhadpositivebenefitsforMagnawithoutassuringitselfthat itwaspositiveforthe

subordinateshareholders.142

Thequestionmustbeasked:Ifaboardrefusestomakearecommendation,andnovaluationor

fairnessopinionisprovided,howisitthattheminorityshareholdersaretoarriveataninformed

opinion that underpins their position and ultimately their vote? Therefore, process becomes

strikinglyimportantattheendoftheday.MagnaisanextremeexampleofDCSbuyoutsgone

wrong.Onthepositivesideexpost,thetransactionsuggeststhatsunsetsareausefuladdition

tothelegalregimeinadditiontootherreformsdiscussedbelow.

(ii) DisclosureofShareholderVoting

Shareholdervotingexpressesanevaluationofthestatusquoirrespectiveoftheoutcomeofthe

voting process. Shareholder dissent in cases such as proxy contestsmay lead to subsequent

governancereformsbecausesuchvotesactasapublicsignalofdiscontentwiththewaythefirm

iscurrentlygoverned.Managementmayacton thesesignalsevenwhenthe resultsarenon-

binding.143

Rotman School of Management, University of Toronto 15 February 2011, [unpublished], online:<http://www.rotman.utoronto.ca/userfiles/cmi/file/Magna%20Unif2_Feb%207%20(Revised).pdf>. The papercompares Stronach’s percentage return to the return paid to what other companies paid their controllingshareholderswhoheldsuperiorvotingshareholdersofthe31previouscasesofunificationontheTSX,onlyonehadaspecialpayouttothecontrollingshareholdersimilarinmagnitudetothepayouttoMagna’sfounder.141SeealsoremarksbyJusticeWilton-SiegelfollowingtheMagnatransaction, inTimKiladze,(22February2011)“Magnaboard‘spectacularly’vacatedfield:judge,”TheGlobeandMail,online:<http://www.theglobeandmail.com/globe-investor/investment-ideas/streetwise/magna-board-spectacularly-vacated-field-judge/article1916419/>.142EdwardIacobucci,“MakingSenseofMagna”(2011)49:2OsgoodeHallLJ237at251.143SteveSauerwald,JVanOosterhout&MarcVanEssen,“ExpressiveShareholderDemocracy:AMultilevelStudyofShareholder Dissent in 15 Western European Countries” (2016) 53:4 J Mgmt Stud 520 at 524-525, online:<onlinelibrary.wiley.com/doi/10.1111/joms.12171/full>.

48

Forexample,theUnitedKingdombecamethefirstcountrytorequirethatshareholdersbegiven

anadvisoryvoteonboardpay,whichsubsequently led tomoresignificantdialoguebetween

shareholders andmanagement and tangible changes to executive pay. Specifically, after this

requirementwasimplemented,executivecompensationonlyrosebetweenfivetosixpercentin

2006,whichwasasharpreductionfromtheaverage14percentincreasesintheprecedingfive

years.

Morerecently,Iliev,etal.conductedastudyof8160firmsacross43countriesandfoundthat

highratesofdissentingvotesfromoutsideshareholdersledtohigherratesofdirectorturnover

andmorewithdrawalsfrommergersandacquisitionsdeals.144Theirstudywasconsistentwith

previous empirical research which found that high dissenting vote percentages are often

followedbycorporategovernancechangesinthefollowingyear.145

Thus, in thecontextofDCS firms, requiring theseparationanddisclosureofsubordinateand

controlling shareholder vote counts could put some pressure onmanagement to change its

behavior,whichwouldbesimilartohowthe“complyorexplain”approachworksbyputtingsoft

pressureoncorporationstovoluntarilycomplywithbestpracticesrecommendations.146Without

suchdisclosure,onecannottellhowshareholdersunaffiliatedwiththecontrollingshareholder

voted, potentially giving a false sense of support for the management team. By mandating

disclosureofcontrollingandsubordinatevoteresultsseparately,subordinateshareholdersmay

beabletoexpresstheirdissatisfactionwiththestatusquoandexercisethepotentialdisciplining

effectsthatcomefromexpressivevotingnotedabove.

144PeterIliev,KVLins,etal,“ShareholderVotingandCorporateGovernanceAroundtheWorld”(2015)28:8RevFinStud2167at2192,2196,online:<https://academic.oup.com/rfs/article/28/8/2167/1599500/Shareholder-Voting-and-Corporate-Governance-Around>.145Ibidat2168.146SuchadisclosurerequirementmayhavebeenusefulattherecentBombardierAGM,wherethemanagementwashappytoreportthatover90percentofshareholdersvotedtoreelecttheboardofdirectorsandalsovotedinfavorofahotlycontestedexecutivecompensationpackage.SeeMarowitz,supranote34. Regardingcomplyorexplaingenerally,seeAnitaAnand,“AnAnalysisofEnablingvsMandatoryCorporateGovernance:StructuresPost-Sarbanes-Oxley”(2006)31:1DelJCorpL229andAnand,MilneandPurda,supranote24.

49

(iii) BuyoutProtections

TheMagnatransactiondiscussedabovesuggeststhattheprocessunderwhichbuyoutsoccurare

in the end substantively important to the subordinate shareholders. Ensuring that these

shareholdersareadequatelyprotectedinthecontextofthebuyoutofthefounderisdifficultto

ensurepriortotheIPO.Therefore,thisthebuyoutisanareainwhichprivateorderingshould

yieldtothemandateofsecuritiesregulatorswho,intheirroleasprotectorsofinvestorsandthe

publicinterestwritlarge,shouldbeconcernedwithbothprocessandsubstanceinthebuyoutof

aDCSfounder.147

Securitiesregulatorshavefocusedtosomeextentonprocessasbeingcentraltotheinterestsof

subordinateshareholdersintheDCS.Canadianlawrequiresindependentvaluationsandmajority

ofminority security holder approvals for specified types of transactions, such as issuer bids,

insiderbids,businesscombinationsandrelatedpartytransactions.Forexample,theofferorof

an insider bid (that may occur if a founder is being bought out) must provide minority

shareholderswithaformal,independentvaluationoftheproposedtransactionattheofferor’s

expense.148 But the law regarding valuations has been somewhat controversial especially in

termsofinformationthatisdisclosedtoshareholders.149Currentlawshouldspecificallymandate

that the board form a special committee of independent directors and that it make a

recommendationtothesubordinateshareholders.Itshouldrequireindependentvaluationsand

majorityoftheminorityapprovalofbuyoutsofthefounderinaDCSfirm.

While US securities law contains little regulation relating to DCS,150 regulators in some

jurisdictions seem to be moving towards greater regulation. In Canada, the OSC recently

147 See Ontario Securities Commission, supra note 11. See also Ontario Securities Commission Rule 56-601“RestrictedShares”whichcompelsissuesofDCStomakespecificdisclosureregardingcharacteristicsofsharesinofferingdocuments.148Ibids.2.3.149SeeReInterOilCorporation,2017YKSC16.150RobertJ.JacksonJr.,“PerpetualDual-ClassStock:TheCaseAgainstCorporateRoyalty”,(AddressdeliveredattheUCBerkeleySchoolofLaw,15February2018),online:<https://www.sec.gov/news/speech/perpetual-dual-class-stock-case-against-corporate-royalty#_ftn19>.

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publishedguidanceregardingminorityshareholdersinconflictofinteresttransactions.151They

isolate several key areas for their review of material conflict transactions, namely: timely

formationofspecialcommittees,abroadcommitteemandate,independenceofthecommittee

members,reluctanceofover-relyingonfairnessopinions,andconsiderationsofwhatisinthe

best interests of both the corporation and its minority shareholders.152 As this article has

suggested, these are much-needed protections; one should therefore question why the

regulatoryapproachisintheformof“guidance”asopposedtomandatorylaw.

10. Conclusion

Thisarticlefillsaconspicuousgapinthescholarlyliteraturefirst,bycomprehensivelyaddressing

avastbodyofliteraturerelatingtoDCS;andsecond,byprovidingempiricaldataregardingthe

governanceofDCSfirmsbeyondthepresenceofsunriseandsunsetprovisions.Thesummary

datasuggestthatthegovernanceofDCSfirmsisnotuniformandDCSfirmstendnottoadopt

governancemeasuresvoluntarily.Inparticular,alargeproportionofDCSfirmshavenomajority

oftheminorityvotingprovisionsandnoindependentboardchair.Bycontrast,almosthalfofthe

DCSfirmshaveasunsetclauseandamajorityof independentdirectorsthe latterofwhich is

containedinbestpracticeguidelinesforallpublicfirms.Finally,justunderone-thirdofDCSfirms

havechangeofcontrolprovisionsoverandaboveexistinglaw.Thesedatainvitefurtheranalysis

aboutthegovernanceofDCSinthecontextoftheassociatedregulatoryregime,aregimethatis

mandatedtoprotectinvestors’interestswhichobviouslyincludessubordinateshareholdersin

the DCS context.Mandatory sunset provisions, disclosure relating to shareholder votes, and

buyout protections would at least partially address governance weaknesses inherent in DCS

firms.

151 Canadian Securities Administrators,Multilateral CSA Staff Notice 61-302 Staff Review and Commentary onMultilateralInstrument61-101ProtectionofMinoritySecurityHoldersinSpecialTransactions(27July2017),online:<https://www.osc.gov.on.ca/documents/en/Securities-Category6/csa_20170727_61-302_sn-staff-review.pdf>152 Mindy B Gilbert, Patricia Olasker, et al, “Boards Beware: Regulators Actively Monitoring Related PartyTransactionsAuthors”(2017)DaviesLLP,online:<https://www.dwpv.com/en/Insights/Publications/2017/Boards-Beware-Regulators-Actively-Monitoring-Related-Party-Transactions>.

51

APPENDIX1 ScholarlyResearchonDualClassSharesStructures

This Appendix sets forth five tables as follows: empirical studies that find that DCS aredetrimentaltoinvestorsorfirmvalue;studiesthatfindthatDCShaveapositiveeffectonfirmvalue; nonempirical studies relating toDCS; governance andother articles; and governmentsourcescitedinthispaper.

TableofStudiesFindingDCSareHarmfultoInvestors/FirmValue

Author(s) Sample DataSource MainFindings

Li and Zaiats(2017)

12672 firmsfrom 19countriesbetween1994 and2010

Datastream,Worldscope,InternationalI/B/E/S, TRTH(managedbytheSecuritiesIndustryResearch Centerof Asia-Pacific(SIRCA), Djankovet al. (2008), LaPorta et al.(1998), Doidge(2004),

Dual class firms are associated with poorerinformationenvironmentsandincreaseaccrual-basedearning management, which is consistent with thenotion that managers of dual class firms exhibitincentives to conceal private control benefits fromoutside shareholders. They also find that DCSstructuresweaken themitigating impact of investorprotection on earnings management and that,following unification, firms experience animprovement in information environment and adecreaseinearningmanipulation.

Hossain(2014)

Corporatetakeoversbetween1996 and2009 (12,404transactionsintotal)

Compustat,CRSP Hossainfindsthatsingleclassfirmsexperiencehigherabnormalreturnsaroundacquisitionannouncementsand that dual class firms primarily undertake valuedestroying acquisitions. Long-term post-acquisitionoperatingperformancesforsingleclassfirmsarealsofound to be significantly higher. Overall, the resultsindicatethatthereisanagencyissueinherentwithinadual-classsharestructure.

52

Amoako-Adu,Smith,Baulkaran(2011)

32unificationsofDCSonTSXfrom 1989-2010.

TSX AuthorsfindthatfirmsthateliminateDCSstructuresexperience increased stock performance via theopportunitytorestructuretheboard.

Arugaslan,Cook, andKieschnic(2010)

6600 IPOsbetweenJanuary 1,1980 andDecember31,2008.

Thomson's NewIssues

Authors find that managers do not prefer DCS tonecessarily invest in long-term projects; rather, it isdonemainlytoretaincontrolofthecompany.Insidersdothistodiversifytheirownportfoliosandmaintaincontrol.

Masulis,Wang & Xie(2009)

U.S Dual-Class Firmsfrom1994 to2002.

GIM,Compustat,andCRSP

Asdivergencewidensbetweeninsidervotingandcashflowrights,corporatecashholdingsareworthlesstooutside shareholders, CEOs receive highercompensation, managers make shareholder value-destroying acquisitions more often, and capitalexpenditurescontributelesstoshareholdervalue.

King andSantor(2008)

613Canadianfirms from1998to2005

SEDAR, StatisticsCanadaInterCorporateOwnership Data,Financial PostTop500

Authors find that family owned firms that use DCShave valuations that are lower by 17% on averagerelative to widely held firms, despite having similarROAandfinancialleverage

Smart,Thirumalai,and Zutter(2008)

2622 IPOs(including253dualclassissues)

Disclosure NewIssues(DisclosureInc.)

Dual-classfirmstradeat lowerpricesthandosingle-class firms, both at the IPO and for at least thesubsequentfiveyears.TheyalsofindthatgeneralCEOturnoverissensitivetofirmperformanceforsinglebutnotdualclassfirms.Theyfurthernotethatwhendualclass firms unify their share classes, statistically andeconomicallysignificantvaluegainsoccur.

53

Dyck andZingales(2004)

393 controltransactionsbetween1990 and2000 in 39countries

SDCinternationalmergers andacquisitionsdatabase

Authors find that higher benefits of control areassociated with more concentrated ownership.However,publicpressurescanreduceprivatebenefitsof control though thismay not necessarily translateintoincreasedshareholdervalue.

Gompers,Ishii, andMetrick(2004)

Dual Classfirmslistedinthe UnitedStates

Securities DataCompany (SDC),Center forResearch inSecurity Prices(CRSP), and theInvestorResponsibilityResearchCenter

Authorsfindthattherelationshipoffirmvaluetocashflowrightsispositiveandconcaveandtherelationshipto voting rights is negative and convex.Overall, theevidenceisconsistentwithanentrenchmenteffectofvoting control that leads managers tounderinvestmentandanincentiveeffectofcashflowownership that induces managers to pursueaggressivestrategies.

Smart andZutter(2003)

2622 IPOs(253 dualclassissues)

Disclosure NewIssues(DisclosureInc.)

Authors find that DCS firms trade at lower pricesrelative to earnings and sales than single-class IPOs.Thispricingdifference,combinedwitha findingthatmanagers earn higher compensation, suggests thatdual-class ownership structures protect privatecontrolbenefits.

Amoako-Aduand Smith(2001)

32unificationsof dual classcompaniesfrom1989 to2010

AuthorsfindthatthereissomevaluetoDCS,butpointtomanyexamplesofDCSandtightly-controlledfirmssuggest that DCS should be permitted but closely-monitoredtopreventagencyproblems.

TableofStudiesFindingBenefitsornoImpactofDCSFirmsonFirmPerformanceorInvestor

InterestsAuthor(s) Sample DataSource MainFindingsAnderson,Ottolenghi,

2379 firms(or 24,724firm-year

Russell 3000,CompuStat, Centeron Research in

Authors find that adopt a buy-and-hold strategy ofDCS family firms earns excess returns of 350 basispoints per year relative to thebenchmarkof single

54

and Reeb(2017)

observations)spanningfrom 2001through2015

Securities Prices(CRSP)

class nonfamily firms. They argue that “aftercontrolling for time, industry and awide variety offirm-specific factors, our analysis does not lendsupport to the notion that DCS harm outsideinvestors. Rather, DCS shares have no effect onoutsideinvestors.Whenfamilyshareholdersownthesuperior shares, however, they find that thesubordinateshareholdersearnareturnpremiumontheir investment. They suggest that family controlplayers a key role in the effect of DCS onminorityshareholders.

GabrielMorey(Council ofInstitutionalInvestors)(2017)

1762 Russell3000firms

FactSet and SECdata

AuthorfindsthatDCSneitherincreasenordecreaseacompany’s annualized return on invested capital(ROIC).

Winden(2017)

123U.S.publicfirms

InstitutionalShareholderServices(ISS), companycharters in theTakeover Defensedatabase ofSharkRepellant.netprovidedbyFactSet

Author finds that entrepreneurs and founders useDCS to pursue long-term objectives and gainimmunity from short-term shareholder whims.However, sunset clauses and other protections forshareholders should be included to ensuremanagerial accountability and offer shareholder avoiceingovernance.

Jordan, Kim,and Liu(2016)

Dual-classand single-class firmsfrom1994 to2011

Compustat,Gompers et al.(2010) and Smartand Zutter (2003)and supplementthe sample byhand-collectingdual-classfirms

Authors find that DCS firms face lower short-termmarket pressure than single-class firms. They alsofind that DCS firms tend to have more growthopportunities(highersalesgrowthandR&Dintensity)andDCSincreasethemarketvaluationofhighgrowthfirms.

Nuesch(2016)

Yearlyobservationsfrom publiclylisted Swissfirms from1990to1999

Swiss Stock Guide,Thomas ReutersDatastream.

AuthorfindsthatDCSneitherharmnorbenefitfirmperformance on average. DCS increase firmperformanceifthefirmrequiresexternalfinanceanddecrease firm performance if the firm does notrequireexternalfinance.

55

Baran, Forst,and Via(2014)

Dual-classshares in theUSA frombetween2000-2008.Excludesforeign andfinancialfirms.

Center forResearch inSecurity Prices atthe University ofChicago (CRSP),Compustat,National Bureau ofEconomicResearch(NBER) patentdatabase, andEDGAR.

Authors find that the enhanced managerialentrenchment permitted in the DCS firm fostersinnovative management culture. Authors find thatthere is a "positive relationship" between the"wedge"(i.e.thedifferentialbetweeninsidervotingrights and cash flow rights compared against non-insidershareholders)andbothpatentsandcitations.They contend that this "benefits shareholders asexcessmanagerialentrenchmentincreases."

Humphery-Jenner(2014)

3935acquisitionsthat aremadebetween1990 and2005andare bycompanieslisted in theUS.

SDC platinum andCenter forResearch inSecurity Prices atthe University ofChicago(CRSP)

Author finds that hard-to-value firms that areentrenched make acquisitions that generate moreshareholderwealth and aremore likely to increasecorporate innovation. This entrenchment is afunctionofanti-takeoverprovisionswhichcanbeafunctionofDCSstructures.

SpizzirriandFullbrook(2013)

435firmsforallorpartoftheperiodbetween2002and2012.

S&P/TSXCompositeIndex(TSXIndex)

AuthorsfindthatCanadianfamily-controlledfirmsbenefitminorityshareholderssignificantlydespitecontraryacademicresearch.

Jog, Zhu, andDutta(2010)

All Canadianpubliclylistedfirms from1996 to2005(10,366 firm-yearobservations)

Stock Guidedatabase, TSXMonthReview

Authorsdonotfindthatrestrictivevotingshare(RVS)structureslowerfirmvalue,operatingperformance,or stock performance relative to non-RVS firms inCanada. Also, they do not find evidence ofshareholder value expropriation in key financialdecisions, such as mergers and acquisitions anddividendpayments.

Valsan(2007) 1,452firmsinthe spring of2007

Toronto StockExchange

AuthorfindsthatCanada'slargegeographicexpanseand its demographic blocs create conditions whichfavour tightly-controlled family firms. This trend isshifting away towards wider shareholding to thebenefit of minority shareholders while reducingagencycosts.

56

Ben-Amarand André(2006)

327CanadianTransactionsfrom 1998-2002

Thomson FinancialSecurities Data’sSDC PlatinumWorldwideMergers &AcquisitionsDatabase

AuthorsdonotfindthatseparationofownershipandcontrolleadstovaluedestroyingM&A.

Dimitrov andJain(2006)

178 firmsthat changedfrom a one-share one-votefirmintoa dual classcompanybetween1979 and1998

Center forResearch inSecurity Prices atthe University ofChicago (CRSP),Dow Jones NewsWire, Securitiesand ExchangeCommission

AuthorsfindDCSrecapitalizationstobeshareholdervalue-enhancing initiatives. In particular, dual classrecapitalizingfirmsgrewfasterthanfirmsinacontrolgroupandthegrowthwasbeneficialtoshareholders;the stockholders, on average, earned significantpositiveabnormalreturnsof23.11%inaperiodof4years following the announcement. Abnormalreturnsof52.61%wereobservedfordual-classfirmsthatissuedequity.

CronqvistandNilsson(2003)

309SwedishFirmsfrom1991-1997.

SwedishSecuritiesRegisterCentre

Authors find that examples of Swedish CMS / DCSstructures have a lower return on assets andcommanda lowershareprice(owingtotheagencycostsassociatedwithsuchstructures).However,suchstructuresmay be beneficial to society by allowingfounderstoseekoutlonger-terminvestmentreturns.

DainesandKlausner(2001)

310USFirms(106firmswithventurecapitalinvestment,91withLBOspecialistinvestment,and113others)thatwentpublicbetweenJanuary11994–July11997

SecuritiesDataCorporation,Pratt’sGuidetoVentureCapitalSources,LEXIS/NEXISM&A

Authorsarguethatthereisnostrongevidencetosuggestthat anti-takeover provisions (including DCS) post-IPOsupports the private benefit hypothesis. There may beidiosyncratic benefitswhichmanagers seek to preserve.Ultimately, anti-takeover provision needs to be studiedfurthertoyieldmoresatisfactoryexplanationsastotheirroleinfirmsduringIPOs.

BergstromandRydqvist(1990)

45USfirms SwedishStockExchange

AuthorsstudySwedishDCSfirmsandfindthatthereisnoevidenceofwealthexpropriationbycontrollingshareholders;butcannotdefinitivelysaythatthisexpropriationdoesnothappen.

57

Partch(1987) 44firmsthat

createdMVSfrom1963-1985

S&PSecurityOwner'sStockGuideandMoody'sManuals

AuthorfindsthatfirmsthatcreateDCSstructuresdonotaffectshareholderwealth.

DeAngeloandDeAngelo(1985)

45USfirms StandardandPoor'sSecurityOwners'StockGuide,TheBondQuotationRecord,ISLDailyStockPriceGuide

Authors find that DCS firms can be viewed as anintermediateorganizationbetweenwidelydispersedpubliclyownedcorporationanda closely-held firm.Authors find that DCS structures value managerialvote control though authors do not specificallyelaborateonthebeneficialornegativeconsequencesofsuchstructures.

TableofTheoreticalStudiesofDCSFirmsonFirmPerformanceorInvestorInterests

Author(s) Sample DataSource MainFindings

Bebchuk andKastiel(2017)

Variousothersurveys ofDCS inacademicpapers andcase studiesfeaturingSNAP.

Authors argue that DCS have detrimental effectswhichmaydistort andmisalignmanagerial interestsagainst thosewith public investors. These problemsaremorepronouncedaslongertimepassesfromtheIPO.Authorspropose remedyof finiteDCSdurationvia sunset clauses to reduce risks of perpetual DCSstructures.

Goshen andSquire(2017)

Selectcompanycases likeFacebookandGoogle

Authorsargue that firmsarebest suited toconsiderthe context in designing an optimal governancestructure. This is more beneficial than havingmandatorystructuresforcertainfirmsunderwhattheauthors call the "Principal Cost Theory".

Lin(2017) Literaturereview ofpastempiricalstudies onDCS.

Author argues that DCS structures should not bebannedentirely;but,theyshouldberolledbacktore-empowershareholderswiththe"oneshare,onevote"principle.

58

Nicholas andMarsh(2017)

Case studiesfromexamples likeSNAP andHollinger

AuthorsarguethatDCSstructurescreatepossibilitiesof managerial misconduct. While institutionalinvestors may be amenable to longer-term gainsflowingfromlong-termmanagerialprotectiondesiresbyDCSstructures,authorsrecommendsuchinvestorsstill remain vigilant to the dangers of managementmisconduct.

Sharfman(2017)

CasestudyonSNAPIPO

Various newssources

Author argues that DCS structures are sociallybeneficial.Theyenablefirmstoremaininnovativeandcompetitiveandagainstthewhimsoflesscompetentshareholders.MandatoryprovisionsagainstDCS(e.g.overlyrestrictivesunsetprovisions)aredetrimentaltocreation of value-maximizing companies like Snap,Alphabet,BerkshireHathaway,etc.

Sharfman(2017)

Author argues that DCS offer great value for firmsentering into IPOs. This method of private orderingshouldbe supportedwith its costs (andbenefits) ofthisstructurealreadyfactoredintothemarketpriceoftheofferedshares.

Anand(2016) Author argues that DCS and MVS structuresundermineminorityshareholders'rightswhilegivingholders of DCS and MVS holders incentive to self-enrich. DCS/MVS structures should be reformed torebalance the currently disproportionate risks thatminorityshareholderscarry inrelationtothosewithgreatervotingrights.

Goshen andHamdan(2016)

Variousacademicjournalarticles andcaselaw.

AuthorschallengeideathatDCSandothermethodsofmaintaining managerial control as wrong-headed.Rather,theauthorscontendthatgreatermanagerialcontrolcomesfromentrepreneurial/founders'desireto pursue their business vision.

McCahery andVeremeulen(2016)

Authorsfindthatsmall/mediumenterprisesadoptvariousanti-takeover provisions including DCS structures duringthelead-uptoanIPOforfearoflosingmanagerialcontrolovertheircompanyand losingtheircultureof innovationandentrepreneurship.

59

Shen(2016) Author argues that DCS structures should not beprohibited, but there is a risk that shareholderapproval(ordisapproval)ofsuchDCSstructuresgivesrise to collectiveactionproblemswhichmay reduceshareholderoversightefficacy.

Wang, Xie,and Zhu(2015)

Authors find that from a governance perspective,independent board members provide greatermonitoring over management. Prior industryexperienceenhancesthisindependentboardmemberoversightcapacity.

Wen(2014) Case studyfocusing onGoogle,Facebook,ReadersDigest, NewsCorp

Various newssources(WSJ,NYTimes, WSJ,Bloomberg),company IPOregistrationstatements withtheSEC.

AuthorarguesthatDCSare"onbalance"negativeforshareholders.CitingcasestudiesofGoogle,Facebook,Readers Digest, News Corp, Magna, and otherexamples,authorcontendsthatDCSwilllimitbenefitsto the private controlling shareholders whileneglectingbroadershareholderbenefits.

Wong(2013) Author argues that all shareholders should be givensome voice in the Anglo-American "one share, onevote" spirit of corporate structuring and to preventmanagerialself-entrenchment.

Chemmanurand Jiao(2012)

Authorsmodels

Authors find that while there may be optimalscenarios for both DCS and single-share structures,DCS structures create risks where entrenchedmanagerswillnotdeliverasstrongareturnasarguedbyDCSproponents.

Loureiro(2012)

Author's ownmodel

Author argues that shareholder proxy accessenhances opportunities to elect independent boardmembers. In turn, thisenhancesgreatergovernanceovercorporatemanagement.

60

Ferreira andAdams(2008)

Variousacademicstudies onDCS

AuthorsconductanempiricalliteraturereviewofDCSstudies and find a fairly equal number of empiricalpapers which favour and disregard DCS structures.Generally,DCSstructuresareprominentintheUSandsomewhatintheUK,butisdecreasinginpopularityinEurope.

Hu and Black(2008)

Variouscompanycase studiesand US caselaw.

Authorsarguethatphenomenonofworldwideequitydecouplingofeconomicandvotingrightshasledtoaneed to regulate such equity structure alteringdecisions. The disconnect between the benefits ofdecoupling (from a financial andmanagerial controlstance) versus the corporate and legal governanceparadigm (which presumes coupled voting andeconomic rights for shareholders) require regulatoryresponsestotherisksofdecoupling.Examplesofsuchrisks of non-regulation include the then unknownconsequences of decoupling in the Great FinancialCrisis.

Adams andFerreira(2007)

Authors ownmodels

Authors’modelshowsthattherearesituationswherepolicies that enhance board independence may bedetrimental forshareholders inasoleboardsystem,but not for shareholders in a dual board system.

Khalil andMagnan(2007)

Authors argue that DCS offer comparable long-termreturns to investors compared against single-classshares.Similarly,governancemayonlybeoneaspectofaninvestor’sdecision-makingcriteria.

Ben-IshaiandPuri(2006)

AuthorsarguethathistoricalCanadianfactorssuchasnationalistcorporatepolicyenabledCanadianfirmstohave a higher DCS presence. This phenomenonremains active today. Non-DCS shareholders havepushed back against DCS and the problems ofpermanentself-entrenchmentandmanagerialcontrolbyreducinginvestments.

61

Vecchialla,Prudom andHamilton III(1998)

Authors argue that self-entrenching managers are"corporate vampires" that erode shareholder value.DCS structures and other managerial protectionavenues should be regarded by shareholders withsuspicion.

ArrunadaandPaz-Ares(1995)

Authors argue that the process of conversion toDCS/MVS structures has been problematic forshareholders. These situations create Prisoner'sDilemma for shareholders who may be better offcooperating and rejecting conversion even if theconditionsof theconversionwill incentive individualacceptanceoftheoffertoconvert.

Harris andRaviv(1988)

Authors' owngeneratedmodels

Authors set forth conditions where one-share/one-vote models are socially optimal. Symmetricaltreatment of incumbents and rivals helps createbetter management. This system is a check againstbadmanagementseekingsolelytoself-entrench

TableofStudiesDealingwithAgencyTheoryandGovernance

Author(s) Sample DataSource MainFindings

Sauerwald,VanOosterhout,and VanEssen(2016)

12,513proposalsvoted on in717 firmslisted in 15WesternEuropeancountries

ISSGlobalMeetings Authors find that shareholders voicing dissent areindicative of concern for corporate governance.Votingisthereforeanexpressiveact.

Iliev, Lins,Miller, andRoth(2015)

8,160 firmsacross 43countries

FormN-PXreports Authorsfindthattheshareholdervotingprocessisanimportant mechanism by which corporategovernanceisexercisedaroundtheworld.Similarly,institutionalreformswhichenhancevotingshouldbewelcomed and likely offers value. Laws whichencouragesuchreformsandprotectvotingshouldbewelcomed.

62

Anand,Milne, andPurda(2012)

Authors find that voluntary corporate governancepracticeshaveincreasedinCanadaandUSstandards.Authorsalsofindthatwhenfirmsaregivenfreedomof choice under a best practice regime, they maychoose (sometimes more stringent) governancepractices contained in the legal regime of anothercountry.

Anand(2011) Case Study onMagna

CaseLaw AuthorfindsthattheOSC’sfailuretocontemplatetheinjuries to minority shareholders in the Magnatransactions means that the OSC did not fullyconsiderthepublic interest.Theauthorarguesthatthepublicinterestconsiderationisvitaltotheroleofasecuritiesregulator.

Iacobucci(2011)

CaseStudyonMagna

CaseLaw Author finds that while many governance issuesexisted in terms ofMagna’s special committee notidentifyingplausiblebenefitsandbeneficiariesoftheDCS structure change at Magna, the court hadconsidered broad evidence to approve thearrangement.

Anand,Milne, andPurda(2010)

1200 Firmsfrom 1993 -2003

TSX and TSX/S&Pindices listing forfirms

Authors find that voluntary board adoption ofgovernance mechanisms increase in both boardscomprisingmore independentdirectors andboardscomprising more non-independent directors.However, independent boards place specialimportanceonmaintainingboardcommitteesstaffedexclusivelywithindependentdirectorsandthattheirability to voluntarily adopt other monitoringmechanisms is sensitive to the presence of acontrollingshareholder.

Jackling andJohl(2009)

Theauthors'findingssuggestthatalargerboardsizehas a positive impact on performance. Similarly, aboard's greater exposure to the externalenvironment improves access to various resourcesandthuspositivelyimpactsperformance.

Dahya,Dimitrov andMcConnell(2008)

799 firmsfrom 22countries

Credit LyonnaisSecuritiesAsia(CLSA) corporategovernance scores

Authorsfindthatthereisapositiverelationbetweenboard independence and corporate value. Thissuggeststhatindependentgovernanceaddsvaluetoshareholders.

63

andtheStandard&Poor’s (S&P)transparencyrankings

Anderson,Melanson,and Maly(2007)

Surveyof658directorsfromCanada,Australia,NewZealand,andtheUSA

Authors find that directors are seeking to balanceroles as corporate monitor of management andcollaboratorswithmanagement. This ispositive forgovernancegenerally.

ChhaochhariaandGrinstein(2007)

S&P 500,Midcap 400,SmallCap600

InvestorResponsibilityResearch Centre(IRRC)

Authors find that general trends in directorshipsmovestowardsgreaterindependenceduringsampleperiod.Suchatrendisfoundinallsizesofcorporatecapitalizations.

Finegold,Benson, andHecht(2007)

105 studiesfeaturing1) statisticaltestsoftherelationshipbetweencorporateboardsofcompanyperformance;2), werepublishedinthe mainpeer-reviewedjournals thatdeal withcorporategovernance,and3) appearedafter1989

Authorssummarizevariousacademicstudiesdealingwithcorporateperformancepost-SOXandNASDAQ/NYSE reforms.Generally, thebroadarrayofpapersshowdifferentperspectivesofcorporategovernance.

Lee andCarlson(2007)

The authors have found that post-SOX boardmembership has increased in independence and inboard level. This has increased efficiency inmanagementoversight.

64

Anand(2006) Firmsshouldvoluntarilyadoptcorporategovernance

practices since they offer net benefits on a cost-benefit analysis. Author finds that the enablingregimeoffersbetterbenefitsintermsofgovernance.

Black, Jang,and Kim(2005)

515Koreancompanies

2001 Korea StockExchangesurvey

Authors find that Korean firms with 50% outsidedirectors have 0.13 higher Tobin's q (roughly 40%higher share price). Therefore, evidence supportsview that independent directors offer greaterbenefitstoshareholders.

Brennan andMcDermott(2004)

AuthorsfindthatIrishcompanieshaveincreasedthetrend towards board independence despite thedifferentcriteriawhichmaydefine"independence"

Tsipouri andXanthakis(2004)

AuthorsfindthatgenerallyGreekfirmscomplywithOECDcriteriaforinternationalbestpracticesforgoodcorporategovernance.

Black(2001) 21 RussianFirms

BrunswickWarburg(Russianinvestmentbank).

AuthortentativelyfindsthatRussianfirmsbenefittedfromgovernancechangesdespitetheweakerleveloflegalandculturalemphasisongovernance.

Bebchuk,Kraakmanand Triantis(1999)

Authors' ownmodels

Authors discuss three basic forms of minorityshareholdercontrol(stockpyramids,DCS,andcross-ownership structures).Authorscontend thatanyoftheseforms(orhybridcombinationsthereof)createskewed incentives for controlling-minorityshareholders (CMS). This impacts the scope anddegreeofcontroloverthatparticularprojectchoice.Authors' model shows that agency costs increasemorerapidlyasthefractionofequitycash-flowrightsforCMSdecrease.Essentially,CMSstructuresmorelikely arise as the possibility of private benefits forCMSarises.

Shleifer andVishny(1986)

Authors' ownmodels

Theauthorsfindthatfirmswithasignificantnumberof small shareholders imply that the single smallshareholderhasneitherthepowernortheincentiveto devote significant resources to monitormanagement’s behavior and undertake correctiveactionwhenneeded.

65

Jensen andMeckling(1976)

Authors' classical paper that discusses thecharacteristicsrelatedtoagencycosts.Authors findthat divergent interests betweenmanagement andshareholderscanleadtoagencycosts,i.e.coststhatshareholders incur to ensure that directors andmanagersdonotplacetheirowninterestsabovethecorporation’s.

TableofGovernmentSources

Source Summary

Canadian SecuritiesAdministrators, MultilateralCSA Staff Notice 61-302 StaffReview and Commentary onMultilateralInstrument61-101ProtectionofMinoritySecurityHoldersinSpecialTransactions(27July2017)

CSAcommentaryonMI61-101.CSA reaffirmsgoalofMI61-101 is that securityholdersbetreatedinamannerthatisfairandthatisperceivedtobefair.MI61-101implementstheseprinciplesthroughproceduralprotectionsforminoritysecurityholdersthatincludeformalvaluations,enhanceddisclosure,andapprovalby a majority of minority security holders. MI 61-101 also mandates theinvolvement of a special committee of independent directors in specificcircumstances and 61-101CP recommends their use in all material conflict ofinteresttransactions.

OntarioSecuritiesCommission,Audit Committees,OSCNI 52-110(2011)

Regulatorswanttoencouragereporting issuerstoestablishandmaintainstrong,effectiveandindependentauditcommittees.NIrequiresthatauditcommitteesalsobe responsible for managing, on behalf of the shareholders, the relationshipbetweentheissuerandtheexternalauditors.

OntarioSecuritiesCommission,MI 61-101 Protection ofMinority Security Holders inSpecial Transactions andCompanion Policy 61-101CPProtectionofMinoritySecurityHoldersinSpecialTransactions(1February2008)

OSCandAMFexpectthatallsecurityholdersbetreatedinamannerthatisfairandthat is perceived to be fair in matters of insider bids, issuer bids, businesscombinations and related-party transactions. Document clarifies disclosurerequirements, director duties, and minority approval processes during thesetransactions.

OntarioSecuritiesCommission,Disclosure of CorporateGovernance Practices, OSC NI58-101(2005)

NIrequiringmandatorydisclosureforindependentdirectorsandnon-independentdirectors, attendance record, residency, compensation, nomination, and othercriteria.

OntarioSecuritiesCommission,“Notice of Rule under theSecurities Act Rule 56-501Restricted Shares” (9 April1997)

OSC notifies marketplace about the implementation of Rule 56-501 concerningRestricted Shares. Substantively, the rule meant that an issuer shall not file aprospectus, and prospectus exemptions are not available, in respect of a stockdistribution (as defined in the Rule), unless either the stock distribution orreorganization (as defined) that resulted in the creation of the restricted sharesreceivedminorityapproval.

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APPENDIX2DCSFirms

ThedatasetconsistsofthefollowingDCSFirmslistedontheTSXasofDecember31,2015

AcastaEnterprises CorbySpiritandWine MadisonPacificPropertiesADFGroup CorusEntertainment MDCPartnersAGFManagement CymbriaCorp MolsonCoorsCanadaAirCanada DanierLeather NewfoundlandCapitalCorpAkitaDrilling DHXMedia OnexAlignvestAcquisitionCorp DorelIndustries OvivoIncAlimentationCouche-Tard DreamUnlimited PostmediaNetworkCanadaCorpAndrewPeller DundeeAcquisitionLtd PowerCorporationofCanadaATCO DundeeCorp QuebecorIncBeckerMilk EmpireCompany ReitmansBombardier Exfo RogersCommunicationsBramptonBrick FairfaxFinancialHoldingsLtd ShawCommunicationsBrookfieldAssetManagement FairfaxIndiaHoldingsCorp ShopifyIncBrookfieldRealEstateServices FieraCapitalCorp SiriusXMCanadaHoldingsBrookfieldRenewableEnergyPartnersLP

FirstServiceCorp SmartRealEstateInvestmentTrust

BRPInc GDIIntegratedFacilityServices SpinMasterCorpCan-FinancialsIncomeCorp GibraltarGrowthCorp StingrayDigitalGroupCanadianTire GuardianCapitalGroupLtd TeckResourcesLtdCanadianUtilities GVICCommunications TorstarCorpCaraOperations HammondManufacturing TransatA.T.IncCargojetInc HammondPowerSolutions TranscontinentalCCLIndustries HNZGroup TrimetalsMiningCelestica INFORAcquisitionCorp TVAGroupCentralFundofCanada InformationServicesCorp UrbanaCorpCGIGroup INSCAPECorp VelanIncChorusAviation JeanCoutuGroup WestjetAirlinesCogeco LassondeIndustries WilmingtonCapitalManagementCogecoCommunications LeChateauInc.ColliersInternational LogistecCorp

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Appendix3

DescriptionofGovernanceCharacteristics

Criteria/Variables Description

GovernanceCharacteristics

GovernanceCharacteristic1:MajorityoftheMinorityVote

Eachfirmwasexaminedtodeterminewhethersubordinateshareholdershavetheabilitytovoteonmatters suchas theway inwhich control isheldviaamajorityoftheminorityvoteprocess.It was determined whether a majority of thesubordinate shareholders’ vote is required foranyitems,exceptifthecompanydissolvesorifrequired by law, and was sorted into thefollowing categories: election of directors,appointment of auditors, approval of financialstatements,andother.Source:SEDAR

Governance Characteristic 2: SunsetProvision

EachfirmwasexaminedtodeterminewhetheritissubjecttoasunsetprovisionlimitingthelengththattheDCSwillexistinthecorporation.Sunsetclause provisions are sorted into the followingcategories:votingrights,employment,qualifyingacquisition,foreignownership,andother.Source:SEDAR

Governance Characteristic 3: IndependentDirectors

Each firmwasexamined todeterminewhetherits board is populated by more independentdirectors than is recommended by law(majority).Itwasdeterminedwhethertheboardhasamajorityofindependentdirectors,anevennumber of independent and non-independentdirectors, or majority of non-independentdirectorsin2015.Source:SEDAR

PercentageofBoardIndependence For each firm, a percentage of boardindependence was calculated by dividing thenumberof independentboardmembersbythetotalnumberofboardmembers.

68

Source:SEDARGovernance Characteristic 4: IndependentChair

Each firmwasexamined todeterminewhetherthe board of the DCS corporation is led by anindependent board chair. Independence wasdetermined based on the definition set out inNational Instrument 52-110 Audit CommitteesandasreferredtobyNationalInstrument58-101DisclosureofCorporateGovernancePractices.Source:SEDAR,Standard&Poor’sCapitalIQ

LeadIndependentDirector Eachfirmwasexaminedtodeterminewhetheritappointed a lead independent director on theboard.A lead independent director is typicallyappointed to chair meetings of independentdirectors and help provide oversight of theboard.Source:SEDAR

Chair of the Board is Uninvolved withManagement

Each firmwasexamined todeterminewhetherits chair of the board of directors is or is notinvolvedinmanagementofthecompany.Source:SEDAR

Governance Characteristic 5: Change ofControlProvisions

Each firmwasexamined todeterminewhetherthe corporate charter contains provisionsspecifying change of control rights for thesubordinate shareholders in addition to themandatoryTSXcoattailprovision.Source:SEDAR

APPENDIX4

BackgroundonDCSFirmswheretheDCSisdefactorequired:

RBL firms use the different voting share classes to strategically ensure a minimum level of

Canadianownershipismaintainedinaccordancewithapplicablelegislation,suchastheCanada

Transportation Act.153 These firms stipulate provisions by which shares are automatically

153CanadaTransportationAct,SC1996,c10.

69

converted between classes depending onwhether the shareholder is Canadian or not. They

furtherstipulateprovisionswhichlimitthevotingpowerofthenon-Canadianssuchthatthetotal

votingrightsheldbynon-Canadiansdonotexceedthelimitasperlegislation.

AirCanada, forexample,utilizesanautomatic share conversionpolicywhichensuresClassB

sharesareonlyheldbyCanadiansandClassAsharesareonlyheldbynon-Canadians.Inthecase

thataClassBshareisheldbyanon-Canadian,itisautomaticallyconvertedintoaClassAshare.

Similarly,inthecasethataClassAshareisheldbyaCanadian,itisautomaticallyconvertedinto

aClassBshare.Inadditiontotheautomaticconversion,AirCanadastipulatesthatshouldthe

numberofClassAsharesexceed25percentofthetotalsharesorshouldthetotalvotescastby

ClassAsharesexceed25percentofthetotalvotesatameeting,thevotesattachedtoeachClass

AsharewillbedecreasedproportionatelysuchthatallClassAsharesdonotholdmorethan25

percentofthetotalvotesanddonotexceed25percentofthetotalvotescastatameeting.154

ThisprovisionensuresthatatnopointintimewillClassAsharesholdmorethan25percentof

thevotingpowerormorethan25percentofthetotalvotesatanygivenmeeting.

CargojetInc.,ChorusAviation,TransatA.T.Inc.,andWestjetAirlineshaveimplementedsimilar

provisions and DCS structures in order to abide by the Canada Transportation Act, which

mandates that at least 75 percent of the voting interests of the company be owned and

controlledbyCanadiansinordertoclassifyaCanadianairline.155TheBroadcastingAct156similarly

imposes foreign ownership restrictions which have prompted some firms to implement DCS

structures. Chorus Entertainment andDHXMedia, for example, utilize a DCS to ensure non-

Canadianownershipdoesnotsurpass33.33percentofthevotingsharesorvotesatameeting.157

154AirCanada,ManagementInformationCircular(April2016),online:<http://www.sedar.com>.155Section55(1),CanadaTransportationAct,SC1996,c10.156BroadcastingAct,SC1991,c11.157See:ChorusEntertainment,AnnualInformationForm(Nov2015),online:<http://www.sedar.com>;DHXMedia,ManagementInformationCircular(Nov2015),online:<http://www.sedar.com>.

70

BackgroundonChangeofControlProvisionsinDCSimplementedviaTrustAgreements

Tenfirmsfirmsthathadtrustagreementsinplacetoensurethatequivalenttermsareofferedto

subordinateshareholdersinthecaseoftake-overs(thoughnoneofthemwereincometrustsper

se).Thesetenfirmshaveexplicitagreementsmadewiththefoundersormajorityshareholders

andatrustee,stipulatingthatcertainactions(e.g.thetransferofsharespriortothecompletion

ofaqualifyingacquisition)requireauthorizationbythetrusteewhoactsonbehalfoftheholders

oftheSVS.Ofthesefirms,fivefirmshavefounderswhohaveagreednottotransfertheirshares

prior to the completion of a qualifying acquisition and the other five have varying other

provisions.Theseprovisionsassummarizedasfollows:

• ADFGroupstipulatesthatpriorwrittenconsentoftheTrusteeshallberequiredinconnection

withanydirectorindirectsaleordispositionofMVSbythePrincipalShareholders.

• DanierLeatherhasatrustagreementthatstipulatesthatMVSwillbeconvertediftransferred

tonon-permittedperson(notethatthisoverlapswiththeirsunsetclause).

• DHXMediahasanagreementthatthefounderwillnottransfertheirpreferredvotingshares

withoutpriorboardapproval.

• SiriusXMCanadaHoldingssetsoutthat itcannotissueClassAsharestoClassCorClassB

holdersthroughconversionrightsifitwouldcausetherestrictedclasstoholdgreaterthan33

1/3percentofthevotingrightsorvotingshares.

• FairfaxFinancialspecificallyagreednotsellitsMVSholdingsunlessanequalofferismadeto

SVS.

• NewfoundlandCapital’strustagreementoutlinesthatthemajorityshareholderagreesnotto

acceptanytake-overbidunlessasimilarofferisalsomadetoClassA.

• OnexsetoutthatthetransferofMVSrequirestwo-thirdapprovalthroughaseparateclass

vote.

• AirCanadasetoutthatunderitsamendedRightsPlan,eachright,otherthanthoseheldby

anAcquiringPersonandcertainofitsrelatedparties,entitlestheholdertopurchasefromAir

Canada$200worthofVariableVotingSharesorVotingSharesfor$100(i.e.ata50percent

71

discount) incertaincircumstances followinganoffer toacquire20percentormoreof the

outstandingVariableVotingSharesandVotingSharesofAirCanadacalculatedonacombined

basis.

• Cymbria’strustagreementsetsoutthatCommonSharescannotbedisposeduntilallClassA

&ClassJsharesareretracted.

• FieraCapitalhasseveralagreementsregardingthetransferofsharesandvoting(specifically

DFH,NationalBank,DJM,ArvestiaInc.,FieraCapitalInc.andFieraL.P.enteredintoaprincipal

investors agreement and a voting arrangements/put option agreement was entered into

betweenJean-GuyDesjardinsandNationalBank).

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