CHUM and the premium for control: it is legal, but is it fair?

The opinions expressed here are strictly those of the author and do not reflect a position of the Institute nor of its board of directors.

The acquisition of CHUM Ltd by Bell Globemedia has brought the issue of control through superior voting shares back in the limelight.

In an early, path-breaking move, the Toronto stock exchange decreed in 1987 that, from that point on, any company issuing a class of shares with superior voting rights would have to include a provision that no offer to acquire the class of controlling shares would be valid without the would-be acquirer making a concurrent offer at the same terms and conditions to the other class of shareholders.

In one fell swoop, this « coattail » provision eliminated much of the so-called “private benefits” enjoyed by a controlling shareholder. Largely as a result of this provision, studies of the private benefits of control across many countries place Canada at the top of the class, with the U.S and the U.K, when it comes to   limiting the size of these benefits.

However, when the TSX put the coattail rule in place in 1987, it grandfathered the then-current situation whereby a number of companies could continue to operate with a dual class of shares without any coattail provision. The TSX did not impose a period of transition. Therefore, twenty years later, the following situation prevails:

• 96 companies (in  April of 2005) of the 1,459 listed on the TSX had a dual class of shares;
• At least 13 of these companies still did not have a coattail provision;
• Of these 96 companies, 71 did not list their superior voting shares;
• Among the 25 companies that listed, only 8 had both a coattail provision and substantial float; the premium on those shares ranged from none to less than 3% (with the exception of Teck Cominco over some periods of time);
• There were 5 companies among the 25, which had no coattail and a reasonable level of transactions; the premium on the superior voting shares of these companies was substantial, ranging from 4% to 15% over the last 30 days;
• For 11 of these 25 companies, a very small float and very few transactions characterize their listed superior-voting shares, as the controlling shareholders own most of these shares. In these cases, listing these shares appears to serve the purpose of providing the controlling shareholders with the ability to set at will an appropriate price for these superior voting shares.
• Then, there is CHUM Limited, a company without a coattail provision and without float on its voting shares. With a dual-class share structure (a class of non voting shares and a class of voting shares) and close to 90% of the 6,748,030 voting shares held by the founder’s family, there are very few transactions on the listed voting shares. For instance, in the 30 days prior to the announcement of the buy-out of CHUM by Bell Globemedia, there were a total of 551 voting shares exchanged over four different days (with 26 days with not a single share traded).

Over time, the price of the CHUM voting shares has been set at various levels. For instance, according to the price history produced by the Toronto Stock Exchange:

• On June 12th, voting shares closed at a 14.3% premium over non-voting shares.
• From June 21st to June 29th the premium hovered around 4%.
• On June 30th, it jumped to 17.7% as result of a transaction for 183 shares.
• On July 12th (the day before the announcement of the takeover), it closed with a 12.0% premium.

The premium of 11% set for the transaction does not reflect a market valuation of the CHUM voting shares; it may be claimed, however, that this premium is in the range of the observed premium for the few (5) companies without a coattail and with significant float.

The facts about superior-voting shares and control premium are pretty compelling:

• With a coattail provision, no premium is expected nor paid to the controlling shareholders;
• The absence of coattail in at least 13 cases is an anomaly twenty years after the enactment of this measure by the TSX;
• When superior voting shares are listed but very lightly traded, one should not assume that the price of these shares reflects a market assessment of the fair value of control; as a result, it is incorrect to state that shareholders who bought the non- voting shares were informed of the market premium for the voting shares;
• It is a fact, however, that buyers of the non-voting shares of CHUM were well informed about the absence of a coattail provision. The company’s information circular advises, in bold letters, that “Holders of Non-voting Class B shares will not be entitled to participate in any take-over bid for the Common Shares of the Corporation”. Technically, the holders of voting shares could have sold the control of the company without any offer made to the holders of non-voting shares;
• It is also a fact that companies without a coattail provision (and sufficient float) tend to show a significant market premium for their superior-voting shares.

Absent a coattail provision, it is consistent with financial market practices that holders of controlling shares be paid a premium over the price paid to other shareholders at takeover time. But is it fair? Is it appropriate for controlling shareholders to extract a premium to which they would not be entitled, had they listed their shares after 1987, or had the regulators put in place an orderly process for the inclusion of a coattail provision within a reasonable period of time?