Three Ways to Change the Vote Tally
Alexander is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Many times when investors buy shares of a company, they do so on the idea of one share equaling one vote. The idea of shareholders controlling the election of directors is one of the checks shareholders get on their companies and one of the powers they receive for their ownership. While most average investors will never play a major role in the affairs of their corporate investments, many still take some comfort in casting their proxy votes or showing up for one of Berkshire’s annual shareholder parties. But not every company relies on one share one vote. Here we will take a look at three examples where one share does not necessarily equal one vote and examine the specific case. These are certainly not the only three examples, and each corporate situation is different with various powers and reasons for each.
As a former government-owned airline, privatized in the 1980’s, Canada’s flag carrier Air Canada (TSX: AC.A) (TSX: AC.B) attracts political attention as well as financial debate. Airlines are often protected by their home nations, and flag carriers are particularly protected from foreign takeover. As a result, Air Canada created two share classes to manage its situation under laws restricting voting interests.
Air Canada’s website gives the explanation for its dual share structure, citing the Air Canada Public Participation Act, which limits the voting interests on non-residents of Canada to 25 percent. The “A” shares of Air Canada can only be held by non-Canadians and have a variable voting structure, while the “B” shares can only be held by Canadians and have one vote each. This structure has allowed Air Canada to attract foreign investment without giving up control of Canada’s flag carrier to foreign investors.
The threat posed by Air Canada’s current voting structure should be considered fairly minimal, even for foreign investors. It’s fairly common for governments to protect their airlines from foreign control, and this has been a major factor in the creation of international codeshares since airlines still wanted some of the benefits of a merger. Furthermore, Air Canada's voting shares are divided among many shareholders. In this case, a controlling shareholder is non-existent, and the change to the voting structure is just a way around the federal law in a way designed to attract foreign investment.
Canadian train and aerospace manufacturer Bombardier (TSX: BBD.A) (TSX: BBD.B) has a voting structure different from the one vote per share, but this company’s voting is set up another way. Unlike Air Canada, where shares are nationality restricted, Bombardier’s shares are set up in a way that gives the majority of the voting interest to members of the Bombardier family. In response to the question “Are there any controlling shareholders?”, Bombardier responds with the following:
“Yes. As stated in the 2011 Management Proxy Circular, as at March 30, 2011, Mrs. Janine Bombardier, Mr. J.R. Andre Bombardier, Mrs. Claire Bombardier Beaudoin and Mrs. Huguette Bombardier Fontaine controlled, indirectly through holding companies, 79.09% of the Corporation’s outstanding Class A shares, 0.08% of the outstanding Class B subordinate shares and 54.33% of all voting rights attached to all issued and outstanding shares.”
With about 300 million Class A shares outstanding and around 1.4 billion Class B shares outstanding, the way the Bombardier family controls the majority of the vote is through the multiple voting rights attached to the Class A shares. As stated by Bombardier, the Class A shares have ten votes and the Class B shares have one vote.
Some investors have likely been staying away from Bombardier since the family itself can control the manufacturer. This has led some analysts to believe the manufacturer is undervalued when considering other aspects of the company. Perhaps some of the skepticism over the family controlling the manufacturer comes from the less than stellar share price performance over the past decade. However, Bombardier is trying to stage a comeback and hopes to double its revenues over the next few years as it launches its new C Series airplane. Shareholders in Bombardier may have a lot to look forward to if the C Series is as successful as Bombardier expects. With the manufacturers still solidly profitable right now, although the company is controlled by the Bombardier family, its success will largely depend on the C Series.
Investors in the Royal Bank of Scotland Group (NYSE: RBS) had a rough end of June as various proposals for the bank were unveiled by the government. The uncertainty surrounding RBS exists due to the government’s 81% stake, giving it a large controlling interest in the bank. However, the government does not actually have 81% of the vote since it is limited to a lower percentage so RBS shares can remain listed. Nonetheless, the government is not able to get a percentage of the vote equal to its ownership stake.
Still, the government controls a majority of the votes, and this is what matters to RBS investors. RBS has become a bank where the future is as much decided by what happens in Parliament as what the bank actually does financially, and until there is a clear plan to move forward, this situation will remain. RBS has in effect become a controlled company, a situation largely resulting from its own risk taking decisions leading up to the financial meltdown. Were it not for the government’s capital, RBS would not have survived. As it stands now, RBS shareholders are in a tough spot but it’s still a better spot than if the government had not became the controlling shareholder. If a plan that benefits RBS shareholders does gain momentum, RBS shares could rally, even just on this reduction in uncertainty an the increased likelihood of a positive outcome. However, at this point there is no way to know when that would happen.
Different voting structures
In many companies, one share does not necessarily mean one vote, and the situations with each differ in their intent and origin. While the three companies listed above employ three different examples of share structures, there are still many more companies where the shareholder vote is set up in a modified way. As investors we should know what we own, know the control we have over what we own, and know why this is the case. Knowing the share structure all comes down to due diligence; something everyone should do before making an investment.
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Alexander MacLennan owns shares of Air Canada and Bombardier. This article is not an endorsement to buy or sell any security and does not constitute professional investment advice. Always do your own due diligence before buying or selling any security. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!