Governance Canada

Discussion + Information on Governance in Canada
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FRANK STRONACH AND MAGNA’S ELIMINATION OF ITS DUAL CLASS EQUITY SHARES – WHAT’S THE BEEF?

In a major related party transaction between Frank Stronach and Magna International Inc. in 2010, Stronach’s controlling class of multiple voting shares were cancelled with a payment to Stronach valued at approximately US$ 1 billion. The transaction was denounced and vigorously opposed by large Canadian pension and investment funds lead by Ontario Teachers’ Pension Plan and CPP Investment Board. The challengers brought unsuccessful legal proceedings before the Ontario Securities Commission and the Ontario Superior Court of Justice and filed a failed appeal to Ontario’s Divisional Court. Notwithstanding (i) the unprecedented purchase price paid to Stronach to eliminate his controlling Class B Shares, (ii) the lack of a favourable recommendation to shareholders from Magna’s Special Committee, Chaired by Mike Harris, or from Magna’s Board of Directors, (iii) the absence of any fairness opinion from the independent financial advisor retained by the Special Committee, and (iv) the strong public opposition to the transaction from certain large shareholders and others, the arrangement was approved by a 75% vote of holders of Magna’s unaffiliated Class A Shares, who bore the bulk of the price paid to eliminate Stronach’s control. Following the overwhelming approval of shareholders, the Ontario Superior Court of Justice sanctioned the transaction in a “fairness” hearing, and its judgment was unanimously upheld by the Divisional Court on appeal.

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LEGAL ETHICS: CONFLICTING INTERESTS IN RELATED PARTY TRANSACTIONS

A lawyer who has a solicitor-client relationship with a controlling person and the controlled public corporation may be asked to be retained by the corporation on a related party transaction in which the controlling person may participate with interests that are not aligned with those of the corporation. In such a transaction, the lawyer has conflicting interests and cannot fulfill his or her fiduciary duty of loyalty owed to each client nor zealously represent various adverse interests of multiple clients on potentially contentious issues impartially with candid advice.

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