Monday, March 30, 2009

Torstar Revealed

Re: Buying Dual-Class Share Structure (article below)
By: Thicken my Wallet

Re: “You are a fool if you buy the short-end of dual-class share structure company”

Torstar Inc.'s dual-class share structure is why the Toronto Star speaks against income trusts so vociferously and with no facts whatsoever to support their position.

The Toronto Star is owned by Torstar Inc., that employs this corporate abuse known as the Voting/Non Voting Share dual-class share structure, as discussed in the article below by Thicken my Wallet.

Torstar were being pressured by the market (read: their Non-voting shareholders/owners) into converting to a trust to maximize shareholder value. Doing so would have also maximized Ottawa's tax collection of Torstar's earnings. However such a conversion by Torstar would have meant giving up the corporate abuse known as Voting/Non-voting shares and the benefits under that dual-share structure that accrue to the benefit of one class of shareholder (Voting) at the expense of the other (Non-Voting). Conversion to a trust would have eliminated this dual-class shareholder inequity.

As a result, the Voting shareholders of Torstar opted to place their economic interests ahead of their Non-voting shareholders’ interests by rejecting this value maximizing alternative. Worse still, is that Torstar then used its newspaper’s editorial pages, as their instrument, to advance this narrow corporate objective of its closely held Voting shareholders by speaking out against income trusts at the expense of honest reporting and to the overall detriment of its Non-Voting shareholders, of Canadians taxpayers and efficient capital markets. Again, the Toronto Star took this editorial position with no facts to back up its many spurious claims about income trusts and actually reported falsehoods to make its case against income trusts. Some newspaper?

The Toronto Star and its Editorial Board are complete journalistic sell outs. They are a disgrace to their profession.....evidently that of prostitution.

The comparison to fellow media baron Conrad Black in the article below is appropriate, another disgraced devotee of Voting/ Non-voting shares.

Buying Dual-Class Share Structure
By: Thicken my Wallet
Friday, March 07, 2008 10:14 AM

You are a fool if you buy the short-end of dual-class share structure company. Ask anyone who invested in Hollinger during the Conrad Black era. Dual-class shares refer to publicly traded companies that have multiple classes of shares: one class of shares are not publicly traded but entitle the shareholders to a controlling vote; they are typically held by the founding family, the founders of the corporation or loyal executives. The other class of shares, which you and I buy, have no entitlement to vote or, even if all of us voted en masse, we would still be out-voted by the founders. For example, the Class B shareholders of Google (held by the founders and top executives) have 10 votes for 1 vote a Class A share would have (the class of shares which are traded publicly).

The primary disadvantage of a company with a dual-class share structure is there are no effective checks and balances to management excesses such as excessive executive compensation .

My trader friend made an interesting observation during the Conrad Black criminal trial- the shareholders got what they deserved. You invested in a company where Black, a notorious egomaniac and over-spender, held 73% of the voting shares with only 30% of the issued equity and shareholders were shocked when he did not behave in the best interests of the company? Who was going to stop him? In these types of companies, the vote is stacked against the average investor. The larger issue is that companies with dual-class structures tend to be poorer performing stocks than their single-class structure counterparts (ask someone who invested in shares of Ford).

The notable exception being Berkshire Hathaway; the company run by Warren Buffet (but there are questions how well the company will perform after Buffet). Part of this is human nature; there is a Chinese saying that wealth never survives three generations.

In dual-class companies founded by a family, the first generation may have the drive to build the company but that talent and drive may not translate to subsequent generations (trust fund kids don’t necessarily make good management material). The other part is there isn’t any real incentive to listen to shareholders. The company could go sideways for years and the founders can never be voted out.

Finally, the founders tend not to like issuing more equity to fuel expansion since they do not want to be diluted so the company tends to borrow a lot more which makes the company very debt heavy. You can usually tell if a stock has a dual-class structure if the stock has an “A” and a “B” ending to it. For example, Rogers Communications Inc. has a stock symbol of RCI.A and RCI.B. The class of shares which have little to no trading activity is the founder shares and shares with a lot of trading activity is the one that you and I buy.

I like avoiding dual-class structure stock. Obviously, there are good stock which have dual-stock structures but, by in large, I am uncomfortable with the fact the shareholders cannot throw out management even if it tried. As always, do your due diligence before buying anything.

1 comment:

Anonymous said...

Great explanation about the differences in shares and why it matters.

Love the way it was illustrated with this company as an example. Priceless!