Canada wrestles with corporate-control issue
Toronto — There is growing concern that the use of nonvoting common shares is putting control of Canadian business in too few hands. ''Capitalism Canadian style'' is a phrase in a report by the Ontario Securities Commission (OSC) which criticizes the use of nonvoting shares to increase control of Canadian companies while putting up little or no extra cash.
A nonvoting common share carries the right to own a piece of the company but not to have a say in how it is run. Unlike preferred shares, the nonvoting common does not have a guaranteed dividend or first call on assets in case of a breakup: all of the risks, none of the reward. Such shares are listed on the Toronto Stock Exchange; they are not allowed to be listed on the New York Stock Exchange, but they do exist in London.
''The issuance of restricted shares permits a person to maintain control in perpetuity despite his failure to participate in any further risk equity financing by the issuer,'' the OSC report says.
Analysis of ownership of the biggest publicly owned companies in Canada shows that 78.4 percent of the Toronto Stock Exchange 300 index companies are controlled by one person or at best by a tightly knit group. The TSE 300 index, according to Toronto broker William Allen, ''represents all the worthwhile companies in Canada.''
As a further indication of concentration of corporate power in Canada, the TSE 300 has been whittled down to 283 companies through various mergers and acquisitions. There are also a number of companies on the TSE 300 that cannot be controlled: The Bank Act prohibits a person or group from owning more than 10 percent of one bank; there are similar restrictions on regulated utilities, such as Bell Canada.
Others on the list, such as Alcan Aluminium and Canadian Pacific, are widely held, with one of the largest shareholders (under 10 percent in each case) of both those companies, being the giant Quebec pension fund, the Caisse de Depot.
Control of a company was defined in an Ontario Securities Commission study in two ways. Legal control, where one person or a small group of shareholders owns 50 percent or more of stock (137 companies, or 48.4 percent of the TSE 300), and effective control, owing between 20 and 49.9 percent (85 companies or 30 percent of the index). Sixty-one widely held companies made up 21.6 percent of the index.
For comparision purposes the OSC included a list of the extent of control of Standard and Poor's 500 index for the New York Stock Exchange: legal control, six companies, or 1.2 percent of the S&P index; effective control, 68 companies, or 13.6 percent; widely held, 426 companies, or 85.2 percent of the index.
Some of the people who control Canadian industry may be about to find out that you can't both sell off big chunks of shares to raise money and still keep control. The Ontario Securities Commission has issued new rules, although hardly as severe as some investment dealers expected, and the managers of big pension funds are starting to scream about investing in companies in which they don't have a vote.
The institutions have little choice. The law says the number of risky stocks in their portfolios can't exceed 7 percent, and they have to invest in Canadian shares, which leaves them with the TSE 300.
William Allen, head of Allenvest, a small independent broker, has been leading the battle to outlaw the restricted shares. He worries that tight control makes public issuing of stocks a farce: ''So many industries are oligopolies, it's very difficult to say we have a true competitive environment as compared to the United States.''
In the OSC report, six companies were named as examples of how issuing nonvoting restricted shares had been used to increase control in the past year. Four of them are Consumers Distributing, controlled by Jack Stupp; Canadian Tire , controlled by a branch of the Billes family; Dennison Mines, controlled by Stephen Roman; and Norcen Energy Resources, controlled by the Black brothers, Conrad and Monty, the present rulers of the Argus Corporation empire.
The OSC, which has to approve all prospectuses for equity issues done on the Toronto Stock Exchange, says it will not approve any nonvoting share issue that does not include protection for the nonvoting shareholder, especially in time of a takeover. And if there is a reorganization of common shares into classes of voting and nonvoting, the deal has to be approved by a majority of the minority shareholders.
There are 130 companies with nonvoting shares listed on the Toronto Stock Exchange. And the number of nonvoting shares has been rising; it was only 64 in 1979. The market itself has started to say it does not like the nonvoting common. Many of the shares, although created equal to the voting common shares, are now trading at lower prices.
With all that, it is hardly suprising that individual Canadians are not big investors in equity markets. A recent survey by the Toronto Stock Exchange showed that only 9 percent of Canadians own shares, compared with 22 percent in the US.