THE STREET

Why bailing out dualclass companies does not reward every shareholder equally.

The outstretched hand of ailing Bombardier Inc. unabashedly pleading for a taxpayer- funded bailout from Ottawa is dragging the debate over dual-class corporate structures into uncharted territory. The Montreal-based aerospace and transportation company, controlled by the Bombardier and Beaudoin families, is seeking at least $1 billion from the federal government to match the $1.3 billion already pledged by the Quebec government. It would be tempting to be swayed by Quebec’s argument that saving Bombardier is akin to saving Ontario’s battered auto industry back in 2009. Don’t be fooled.

This is the first time a publicly traded company that is tightly controlled by a private family is looking for a bailout using the public purse. This is not a policy question about whether the federal government should be picking winners and losers; it’s about whether taxpayers should be investing in any family, let alone one with a spotty track record. Keep in mind Bombardier’s stock price has plunged 75 per cent in the past five years. If that return isn’t good enough for its shareholders, how could it possibly be good enough for Canadian taxpayers?

The prospect of bailing out a dual- class company is raising eyebrows in governance circles and boardrooms across the land. There is already plenty of static around the merits of dual-class share structures. In these types of companies, enormous decision-making power is wielded by a significant shareholder, usually a founder or family, and they derive that power in the voting rights they secure through either multiple voting shares or voting and non-voting common shares. Needless to say, these companies are not renowned for their best corporate governance practices.

In all, there are more than 80 public companies with dual-class structures, accounting for about 10% of the total listings on the TSX and TSX Venture exchanges. Even in the U.S., the once-reviled dual-class structure is becoming much more fashionable since some of the most important companies to have gone public in the past few years, including Google Inc., Facebook Inc. and Shopify Inc., used this controversial corporate design.

Notwithstanding their less- than- robust corporate governance standards, dual-class structures exist because their benefits are viewed in some circles to outweigh the risks to capital markets and the public interest. Proponents argue founders can raise money on public markets and maintain control while investors reap the benefits of the long-term focus of families with skin in the game. The flip side, critics say, is that they undermine a principal corporate governance tenet by limiting the ability of minority shareholders to influence the affairs of the company. In other words, the risk/reward ratio is heavily skewed in favour of those holding the voting shares.

Generally, oversight of dual- class companies by Canadian securities regulators has attempted to rein in the controlling shareholder rather than codify the governance rights or improve the structural safeguards of minority shareholders. The reason: prohibiting dual-class structures or restricting them would deter entrepreneurs from taking companies public or possibly give them reason to take their listings outside of Canada. At the same time, investors have become more sophisticated and are better able to understand their peculiarities.

Still, using the public purse to bail out the balance sheet of a dual- class company has never been contemplated. If politicians are going to wade into the business arena with cash handouts for such entities, there should at least be some expectation those companies will be required to live up to the spirit of respecting minority shareholders and taxpayers. It’s time to raise the bar on the governance practices of dual-class companies. Meaningful regulatory reform that bolsters the regulatory obligations of the corporation, and its board of directors and senior management is what’s needed, not a list of conditions for a loan that may never be repaid. In other words, let’s change the rules before any cheques are cut.

DUAL-CLASS COMPANIES ARE NOT RENOWNED FOR THEIR BEST CORPORATE GOVERNANCE PRACTICES