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Litigation & Regulatory Risk - Magna
Transcript of Litigation & Regulatory Risk - Magna
The Opposing Shareholders complained to the OSC about the Proposed Transaction's unfairness, so the OSC Staff applied for a cease trade order; lost
Opposing Shareholders challenged the Plan of Arrangement at the SCJ fairness hearing; lost
Opposing Shareholders challenged the SCJ ruling at the Divisional Court; lost
the Transaction was completed 5 days later Magna International Inc. Re Magna (2010) In 1957, Mr. Frank Stronach formed a small tool and die company, Multimatic Investments Ltd., which subsequently expanded into the production of automotive components.
In 1969, Multimatic Investments Ltd. merged with Magna Electronics Corporation Ltd. to become Magna International Inc.
Headquartered in Aurora, Ontario, Magna is North America's largest automobile parts manufacturer, and one of Canada's largest companies.
Magna has approximately 117,000 employees in 305 manufacturing operations and 88 product development, engineering, and sales centres in 27 countries.
In 2009, its global sales were over $17 billion, and had assets in excess of $12 billion. What should the Opposing Shareholders do? The Proposed Plan of Arrangement of Magna International Inc. Magna's dual class share structure entitled to 1 vote per share
publicly listed on the TSX and NYSE
more than 80% are held and/or managed by institutional investors Class A Shares "Subordinate Voting Shares" (112,000,000) same rights to dividends as Subordinate Voting Shares
same rights to the property and assets of Magna on liquidation/dissolution/winding up
entitled to 300 votes per share; represents 66% of votes, but only 0.6% of the equity attached to Magna’s total outstanding shares
not publicly traded
no coat-tail provisions, no sunset provisions
convertible into Subordinate Voting shares on one-for-one basis
all held indirectly by Stronach Trust, a family trust controlled by Mr. Frank Stronach Class B Shares "Multiple Voting Shares" (726,829) Frank Stronach The Proposed Transaction Magna's executive management proposed to purchase all of Stronach's Class B Shares for:
9,000,000 newly-issued Subordinate Voting Shares and US$300 million in cash, a total consideration of approximately US$863 million in cash and stock;
5-year extensions of Frank Stronach's consulting contracts with Magna for fixed annual fees based on percentages of Magna's profits, estimated to be worth US$120 million; and
a controlling stake in the spin-out of Magna's E-car Division, with Magna contributing 73.33% equity ($220M) and Stronach Trust contributing 26.67% equity ($80M) but Stronach Trust having the right to appoint 3 of the 5 managing general partners.
If the Proposed Transaction was completed, Magna would have a single class of shares, and Frank Stronach would step down as Chairman of the Nominating Committee of Magna's board of directors.
Frank Stronach indicated that he was okay with going either way; he would sell all of his Class B Shares if the transaction was supported by the majority of Class A Shareholders. The Shareholders opposed to the Transaction Ontario Teachers' Pension Plan Board + Canada Pension Plan Investment Board + OMERS Administration Corp. + Alberta Investment Management Corp. + Letko, Brosseau & Associates Inc. + British Columbia Investment Management Corp.
together, they held and/or managed 4.6M Subordinate Voting Shares, or roughly 4%.
Argued that the 1,800% cash and stock premium to be paid for Stronach's Class B Shares is too exorbitant of a price; the 9M new Class A Shares would dilute their holdings by 11.4%, a much higher level than the average 1.28% dilution found in 15 similar transactions; and would set a bad precedent for other Canadian companies with dual class share structures.
the Class A Shareholders were essentially being forced to choose between their continued economic deprivation as a result of "the Frank Factor" and Magna's dual class share structure, and giving Frank Stronach an outrageous $1.2 billion payout. Not just economic reasons... Politics
OTPP was previously a large Magna shareholder, but sold off all except 1 share after Frank Stronach sold a sizable chunk of Magna to a Russian billionaire with close organized crime ties to Vladimir Putin.
OTPP kept the 1 share to remain fighting Frank Stronach's iron grip over Magna via the dual class share structure, as a matter of principle. Challenge the Proposed Transaction at the OSC/ON SCJ/ON Div Ct?
[(p)V + (1 – p)B] – C > B
[(p)400200000 + (1 – p)321724000] – 10000000 > 321724000
400200000p + 321724000 – 321724000p – 10000000 > 32172400
400200000p + 321724000 – 321724000p – 10000000 > 32172400
78476000p + 311724000 > 32172400
78476000p > 1000000
p > 10000000/78476000
p > 0.1274274937560528
Therefore, if probability of winning exceeds 13%,
it makes sense to challenge the Proposed Transaction. Born in Austria to working-class parents, Frank Stronach immigrated to Canada in 1954 following the Great Depression and WWII.
When the owner of the machine shop he was working at failed to follow through on an agreed-upon partnership, Stronach set up shop on his own – eventually becoming Magna International.
As a result of his personal interests in horse racing and gaming, Magna made several high-profile investments in those industries – most of which have ended disastrously for Magna shareholders.
Due to Stronach's sometimes-unpredictable control of Magna, the company’s stock traded at a significant discount to its rivals – a phenomenon known on Bay Street as the “Frank Factor”.
Many U.S. investment firms also avoided Magna due to its dual class voting structure, thus depressing the value of all Magna shares. The "Frank Factor"