Voting & Non-Voting Shares – Securities Regulation

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I need to raise money, but I don’t want to lose control; thus, issue shares in classes, some voting, some not. I can issue equity without losing control. Investors are satisfied because they just want your expertise, don’t want to own the company.

Problem: investor does not have a problem with founder controlling the company, but there would be a huge

issue if controlling SH can sell shares at a PREMIUM that investors have no right to participate in.

Solution – Canada Decides…

  • IF you want to create restricted voting shares, have to get a majority of the minority vote
  • Have to call them restricted voting shares and
  • COATTAIL Provision: if someone makes a takeover bid for my shares, then my shares become exactly like yours and we all get one vote, i.e. a bidder cannot attain control without making the same offer to all SHs.

Canadian Tire (1986, OSC)

Ratio: Coattail provision, despite not countering statute or case law, was not allowed to go through as it would prejudice minority shareholders (ex of OSC making any decision it sees fit in the public interest). Found that collateral agreement rule only applies in the context of a t/o bid (since this was not a takeover bid, collateral agreements did not apply)

Facts: Dealers of Canadian Tire formed a company, made an offer to purchase 49% of voting shares of Canadian Tire from Controlling SH (at a price of 160.24/share, when the stock was at $16/share= a massive premium for the voting shares of Canadian Tire!) As evidence of good faith, 30 million dollar irrevocable deposit. Dealers already owned 17.4% of the voting shares. If they were successful in their offer, they would own 66.66% of the voting shares.

  • Coattail says in the event an offer is made and a majority of the voting shares have been tendered, each non-voting share shall be entitled to 1 vote. (Thus, we won’t get a premium you won’t get – protected in event of TOB). On that promise to SHs, they agreed to take back non-voting shares and give the family voting shares.
  • Coattail was triggered by an offer. Dealers read the coattail, and said look at this. If we make an offer for 49% of the voting shares, it doesn’t trigger the coattail, we only have to buy from Controlling Family, and we get control of Canadian Tire (we already own 17%), and we can shut out the rest of the public. So they do it. The non-voting SHs go apoplectic.

Decision: OSC says nothing in this coattail stops this transaction. There is nothing in the case law that would stop the dealers. Nothing in the statute stops this transaction. No law, not precedent, no contract stopping this. I have no way of stopping the transaction. But they stopped it anyway – cease trade.

  • Counter Argument: Can we not rely on the commercial world for certainty? The law is the law, there is a valid contract! (arbitrary!)

Collateral Agreement Rule Only Applies in the Context of a Takeover Bid

This is not a takeover bid, therefore collateral benefits do not apply; everyone would get the same price; 30 million was merely a deposit. It was not a premium. Collateral benefits only apply to takeover bids; this isn’t a takeover bid because the OSC said it isn’t a takeover bid. Once the OSC said no takeover bid, no takeover bid and collateral agreements don’t apply.

Now, if there is a takeover bid, (a legit one), the DEPOSIT will be deducted from the same price, and everyone gets the same price. It is simply a contract between dealers and Billes family, irrevocable.

  • Now diff classes of shares and coattail provisions are much rarer

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