Desmarais family rejects bid to collapse Power Corp. dual-class share structure

Jan. 15, 2020
David Milstead, The Globe and Mail

Power Financial Corp. directors urged Montreal's Desmarais family to create a provision to allow for the eventual elimination of the dual-class share structure that gives the family control over parent company Power Corp. - but the Desmarais clan rejected the proposal.

The suggestion came during negotiations between the two companies late last year after Power Corp. proposed a plan to buy the minority stake in Power Financial that it doesn't already own, according to disclosures published Tuesday in a shareholder takeover bid circular.

Power Corp. unveiled its bid in December, offering to pay 1.05 shares of Power Corp. for each Power Financial share in a bid to eliminate the holding company.

During the negotiations, a special committee of the board of Power Financial urged the Desmarais family to build in a sunset clause that would allow for the eventual elimination of the dualclass share structure at Power Corp. if the Desmarais family's equity stake in the company were to fall below an undisclosed level, the takeover bid circular reveals.

A Desmarais family trust owns 22 per cent of Power Corp., but has voting control of the company through a class of shares that have special voting rights.

The buyout deal is the result of shareholder pressure to simplify the Power group's corporate structure, which sees Power Corp. hold a majority stake in Power Financial, which in turn owns majority stakes in IGM Financial Inc. and Great-West Lifeco Inc. All four companies trade on the Toronto Stock Exchange.

Power Corp. says it can cut costs and focus on its financial businesses, which have become the bulk of the family's holdings.

At the same time, Paul Desmarais Jr., 65, and his brother, André Desmarais, 63, plan to retire as co-CEOs - but remain on the Power Corp. board, where they are chairman and deputy chairman, respectively.

Power Financial has no dualclass share structure and that became a sticking point in negotiations, according to background information about the transaction included in the circular released Tuesday. Power Financial shareholders will vote on the deal Feb. 11.

The circular says Power Corp. presented a nearly a one-for-one share-offer exchange to the Power Financial board at a Nov. 7 meeting. Power Corp. proposed to swap 1.0002 of its shares, plus one cent, for each Power Financial share. Power Financial's board immediately formed a special committee of three directors -Siim Vanaselja, Susan McArthur and Marc Bibeau - to weigh the Power Corp. offer.

Over the next month, according to the circular, the special committee wrestled with valuation and legal issues. It learned from its lawyers that because Power Corp.'s multiple-voting share structure was in place prior to the Toronto Stock Exchange's 1987 rules governing multiplevoting shares, the minority shareholders of Power Corp. lacked a "coattail" protection ensuring they receive the same payment in takeovers as the multivoting shareholders.

On Dec. 6, Mr. Vanaselja, the chair of the Power Financial special committee, told Paul Desmarais Jr. that the committee felt "there was clear benefit to Power Corp. in eliminating the dualholding company structure" and that Power Financial shareholders giving up their shares for Power Corp. shares with inferior voting rights made the value of the offer "more complicated" than Power Corp. thought.

The special committee then proposed "coattail" provisions - lacking under the TSX grandfathering - that would protect the Power Financial shareholders when they became Power Corp. stockholders. The special committee also asked for a sunset provision that would provide for a collapse of the Power Corp. dual-class share structure once the Desmarais family's ownership fell below a specified percentage. The circular did not disclose the percentage.

The circular said Mr. Desmarais responded "by noting that the [share structure] had been in place since the 1920s and predated his family's ownership interest in the company, was in place at the time of listing of the Power Corp. shares on the TSX, [and] has been properly publicly disclosed."

Mr. Desmarais "concluded by saying that he did not believe [the Desmarais family company] would support any changes to the capital structure of Power Corp. in connection with the reorganization."

That led the special committee to urge Power Corp. to raise its offer. Two days later, the special committee asked for 1.07 Power Corp. shares. Based on the closing prices on Dec. 6, the day before the counterproposal, the special committee was asking for a 5-per-cent premium, versus the no-premium deal Power Corp. offered.

Mr. Desmarais rejected that, arguing the offer on the table created value for Power Financial shareholders, but acknowledged Power Corp. might consider a ratio of 1.01 to 1.02. At the end of the Sunday negotiating sessions on Dec. 8, however, Mr. Desmarais accepted the special committee's revised offer of 1.04 Power Corp. shares per Power Financial share.

Power Corp. later bumped the offer up to 1.05 shares because of the timing of Power Corp.'s 2020 dividends.


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