CCGG Releases Guidelines for Dual Class Share Structured Companies

The Canadian Coalition for Good Governance (CCGG), a corporate governance organization in Canada which represents the interests of institutional investors by promoting good governance practices in Canadian public companies, recently published their policy on dual class share companies, specifically in the context of companies undertaking initial public offerings (IPO’s).

Dual class share structures exist where a company issues a class of shares carrying a disproportionate vote per share relative to other classes of shares (i.e. multiple voting and subordinate voting shares).  These can otherwise be referred to as restricted shares, which are governed by Ontario Securities Commission Rule 56-501.

The policy encourages companies undertaking IPO’s to employ a single class of voting common shares other than in “exceptional circumstances”.  In such circumstances, the policy sets out a number of guiding principles for companies to follow where they don’t employ a single class of voting common shares which cover, among other principles, director elections, maximum voting ratio for multiple voting and subordinate voting shares, non-voting common shares, coattails (to ensure fairness in the context of a change of control), collapse of the dual class share structure and payments on such collapse.

If a company opts to undertake an IPO with a dual class structure and does not abide with the principles set out in the policy, the CCGG expects the company to adequately explain to their shareholders why, in their situation, it is not appropriate to comply with those principles.  Such explanation should be presented annually to the shareholders in the company’s management proxy circular or other public document.

It will be interesting to see whether those companies currently in the process, or eventually desirous, of going public choose to adhere to the CCGG policy.  Many recent IPO’s involving large technology companies (i.e. Facebook, Google, Groupon, LinkedIn, Zynga, etc.) were undertaken with dual class share structures in place which, arguably, prompted the CCGG to release their policy on same.  With the impending Twitter IPO projected as early as November 15, 2013 and the Alibaba IPO projected for some time in 2014, it will be interesting to see if those companies heed the advice of the CCGG or prefer the route that their large technology counterparts opted for in dual class share structures.

Why do such emerging tech companies ostensibly prefer dual class share structures?  Well, for one instance, by issuing higher voting stock for themselves and restricted voting shares to the public, this allows founders to retain voting control of their company and still gain access to public capital markets.  Additionally, dual class share structures provide for many other advantages including, without limitation, greater control and focus on long term success and profitability, limited or controlled shareholder activism while maintaining unfettered board discretion, and the provision for defensive strategies from potential takeover opportunities that company may be susceptible to.  Although the CCGG recognizes these advantages, they also cite that dual class share structures promotes certain detriments such as, among others, disproportionality amongst minority shareholders, the shifting of financial risk to the public, mismanagement and entrenchment of poor performance and lack of accountability.  The goal of the CCGG policy is to strike a balance between these advantages and disadvantages and provide a policy to govern those companies contemplating an IPO, all the while promoting good governance, accountability and transparency.

You can read more about the CCGG policy in a recent article from the Globe and Mail as well as access the full policy here.

If you would like further details, please feel free to contact one of our securities law professionals if you have any questions.

Author:  Chase Irwin

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