The Rogers Communications Inc. (RCI)(TSX:RCI.B) boardroom battle over control of the telecom giant could act as a referendum on the company’s corporate share structure.
That is the opinion of several business law and corporate governance experts who said the RCI case has unearthed a major potential risk for publicly traded companies with a dual-class share structure – where Class B shares are available for the average investor to buy, even when those shares lack Class A share voting rights.
The structure creates a company that has the market capitalization of a large public entity and a select group of people holding Class A shares – usually the company’s founder and his/her family – who have complete control of the firm.
“The Government of Canada needs to take a look at whether these [structures] serve the interest of all shareholders,” said Richard Leblanc, professor of governance, law and ethics at York University and director of the Bar of Ontario’s Financial Accountability Program.
“Good governance is one share, one vote. Most of the equity of [RCI] is in institutional and retail shareholders. They own 70% of the equity – the Class B shareholders – and they are expecting a meeting where they may not have a vote but they can ask questions to management and decide whether or not to buy in.”
Leblanc has done extensive research on corporate governance around the world and has written numerous reports on best practices, as well as worked with a number of companies’ boards on director education. To him, the RCI case – where Edward Rogers, son of RCI founder Ted Rogers, is trying to change members of RCI’s board despite being voted out as board chair – is prime evidence of just how defective Canadian corporate governance regulation has become.
“We have been very permissive when it comes to corporate governance in Canada,” Leblanc said. “We have principles, but we don’t have rules. … Our corporate governance legislation has not been updated since 2005. We are one of the very few industrialized countries who have not done so since the global financial crisis of 2008.”
Carol Liao, director of the Centre for Business Law at University of British Columbia’s Peter A. Allard School of Law, said dual-class share structures exist because they allow a company’s founder – often the engine behind its growth – to retain control despite needing a public offering’s injection of capital.
“There are legitimate concerns about keeping at bay short-term investors and others who don’t have long-term interests or vision for the company,” Liao said. “For a founder to have gone to the point where venture capitalists and others are investing in the business, that founder must be one of two things: a product visionary or a great salesperson. This is the person that has built the rocket ship, and they are the face of company to key customers. You can’t just find another person off the street for that.”
But what complicates matters in this case is the fact that the founder, Ted Rogers, died in 2008. The Rogers Control Trust, which holds 97.5% of RCI’s voting shares, then passed the position of trust chair to Edward Rogers, with family members (Edward’s mother, Loretta Rogers, and his two sisters) also among the leadership group at the trust and RCI.
It is with the position of trust chair that Edward Rogers challenged for RCI leadership in court according to the B.C. Business Corporations Act – acting as the majority holder of voting shares to change RCI’s board. The challenge, for a short time, essentially created two boards at RCI vying for control.
What is unsettling for many observers is that a dual-class stock structure makes a company simultaneously vulnerable to family squabbles touching off disproportionately large economic impacts through the large number of individual and institutional investors linked to RCI’s corporate well-being.
That is the case with RCI, where Liao said the presence of institutional investors like pension funds means that some people who hold a stake in RCI may not even know they do – while suffering from RCI’s drop in share prices as the leadership row boiled over.
“[The situation] should make us uncomfortable,” Liao said. “The children of the founder didn’t build the rocket ship, so all the justifications for [Class-A share] control seems less so here. This is a very large public telecommunications company in Canada, and I’m not sure if family dynasties are the most conducive to good governance.”
Leblanc added that B.C.’s Business Corporations Act is the only one in Canadian provincial jurisdictions that would allow Edward Rogers to argue he can unilaterally make changes to the RCI board without holding shareholder meetings.
“Here you have an act that’s clearly defective,” Leblanc said. “All of this could have been avoided if the B.C. government had updated its statute to be consistent with the CBCA [Canada Business Corporations Act] and other provincial statutes. And when you couple the defective B.C. statute with a dual-class shares and a voting trust, you have a perfect storm – with the concentration of power in one individual.”
Leblanc added that, if B.C. does not change its corporate laws, the risk is there that other companies’ leadership may also seek to exploit this loophole that allows them carte-blanche control of public firms that are otherwise subject to corporate governance regulations – a “race to the bottom,” as the professor describes.
“The interesting dynamic here is that there’s intense dislike between family members,” he added. “And you have to ask yourself in terms of corporate governance: Should this be happening? Investors want a board that is aligned and doing its job; we are anything but that, when it comes to [RCI].”
All the discussions about changes to allowing dual-class share structures, however, may be premature, said Mark Gillen, professor of business law, trust and securities regulations at the University of Victoria and the author of several books on Canada’s corporate legal landscape over the last two decades.
The key reason that he expects such a structure to continue, Gillen said, is that – despite the RCI situation and the negative publicity it has generated – companies, investors and the public tend to be OK with dual-class share structures.
Gillen noted that many articles were written about dual-share structures in the U.S. in the 1980s. The New York Stock Exchange (NYSE) even prohibited them at one point. But it eventually capitulated because the prohibition resulted in some companies choosing to list on other stock exchanges.
Gillen also recalled a 1985 Ontario Securities Commission meeting held on the issue. Ted Rogers and Canadian auto-parts magnate Frank Stronach of Magna International Inc. (TSX:MG) were also in the meeting.
Gillen said Stronach’s support of dual-class share structures remains salient.
“He said, ‘You look across all the plants I have. That’s all public funding [capital], and there are a lot of employees there.’ He was basically saying, ‘There’s a lot of people who wouldn’t have a job if I couldn’t use non-voting common shares. I wouldn’t have been able to raise the money to build those plants.’
“Companies will point to companies like Tesla [Inc. (Nasdaq:TSLA)], Facebook and Magna and say, ‘We are the real innovators in society, and you are going to cut us right off.’”
Gillen also noted that enforcement on a prohibition of dual-class structures would be extremely difficult because workarounds already lurk in the background of preferred shares – which are almost always non-voting.
He said such a regulation might also push Canadian companies and investors to foreign markets to complete transactions that would otherwise be on Canadian soil.
“The answer to this question is not straight forward,” Gillen said. “You will have a lot of small- to medium-sized enterprises who always complain about their access to capital say, ‘You just cut off another avenue for us to access capital.’ When they go to market, these companies are not going to put themselves in a position to lose control of their business they’ve spent years building up. If they have one-vote-per-share, they are hooped.”
That’s why, both Liao and Leblanc said, part of the solution may be “sunset clauses” – rules embedded in a company’s bylaws that dual-class structures last a defined rather than an indefinite period of time.
Liao noted that, with dual-class structures recently back in vogue for a number of tech firms, she is seeing more companies take that approach to ensure founders’ control of their firms eventually fades as the company evolves.
“I feel what may happen is investors might pay more attention on whether such structures of a given public company include whether there are sunset clauses to limit the period in which the founders have a controlling stake,” she said. “Maybe we will see increased market pressure for sunset clauses in dual-class share structures depending on how this Rogers saga plays out.” •