Second-tier shareholders are now the new normal

Another day and another issuer is tapping the markets with an issue where investors are being asked for their cash in return for an equity stake in the form of subordinate voting shares.

Fairfax Africa Holdings Corp. is the latest to adopt that model: it is planning to go public at US$10 a share. The road show is expected to be wrapped up by month’s end with pricing in early February.

Currently, Freshii is in the market with an initial public offering where the insiders will own shares that carry 10 votes — or 10 times the power of what the public is being offered. Earlier, Aritzia Inc. was in the market with a $351-million secondary offering of subordinate voting shares. That offering comes less than four months after it completed a $460-million initial public offering. The insiders own the highly attractive shares that come with 10 votes.

Fairfax Africa will invest what it raises from its IPO in debt and equity of African companies “or other businesses with customers, suppliers or business primarily conducted in, or dependent on, Africa.” Fairfax Africa is part of Fairfax Financial, a dual-class Canadian public company.

But the resources available to Fairfax Africa will be more than what the public investors kick in. Two other investors have agreed to invest US$116 in the company. As well Fairfax Financial has agreed to ante up an amount that could be US$300 million — in return for multiple voting shares. It plans to have a 30 per cent stake in Fairfax Africa.

The new issuer is following the script laid down by Fairfax India, which two years back, raised US$561 million from the public — again via subordinate voting shares. One week back, that company completed a US$500 million raise split between a public portion and a private placement.

The rub when it comes to dual class companies is twofold: they create a misalignment of interests between investors and the insiders; and they create a power vacuum.

Anita Anand, who holds the J.R. Kimber Chair in Investor Protection and Corporate Governance at the University of Toronto, said the main problem with such issuers is the “severe corporate governance concern” given the lack of voting power enjoyed by the holders of the subordinate voting shares, “relative to the equity they put into the company. That is the key issue, the lack of participation rights that the subordinate voting shareholders have in the corporation.”

But Anand sees a difference between the Fairfax situation and the slew of companies going public with two classes of shares.

In 2015, Fairfax asked shareholders whether they supported a plan whereby Prem Watsa, its founder and chief executive, would cap his voting stake (at a level that may be above his actual stake) for 10 years in return for certain concessions. By a large margin they gave him the green light. “I have less of an issue with that type of situation where shareholders are approving the structure than in the IPO situation,” she said. Particularly bothersome for Anand is that the IPO issuers haven’t set a time limit on their dual class structure. “It can remain in place indefinitely” she said noting that Aritzia listed the “ownership of our shares,” as a risk factor in its IPO because they concentrated “voting control with certain Shareholders who held our securities prior to our initial public offering and may prevent new investors from influencing significant corporate decisions, which may have a negative impact on the trading price of our subordinate voting shares.”

THE INSIDERS OWN THE HIGHLY ATTRACTIVE SHARES.

ARITZIA / FILES Aritzia Inc., whose store interior is above, is in the market with a $351-million secondary offering of subordinate voting shares. That offering comes a few months after it completed a $460-million initial public offering.