By Anita Anand and Tegan Valentine
Late on September 26, 2016, popular Canadian women’s fashion retailer Aritzia filed the final prospectus for its IPO. The retailer’s C$400 million transaction is generating buzz as the year’s largest Canadian IPO. But it also creates a dual class share structure, which has given rise to a broader debate about legal protections for outside shareholders and the role that securities regulators should play in Canadian capital markets.
Many firms (e.g. Cara, Shopify and Stingray) have gone public with a multiple voting share structure (MVS) in which the firm issues two or more classes of shares, one to the public and the other to insiders (including founders and private investors). The class of shares issued publically has limited voting rights, while the class issued to insiders carries more voting rights and allows them to retain control of the company.
In the Aritzia IPO, founder Brian Hill and Berkshire Partners – a Boston-based private equity firm – will retain 41% and 55.6% of the voting power respectively after the IPO. For outside shareholders, this lack of voting control means they will be unable to effectively participate in the election of the board of directors or the appointment of auditors. This lack of influence is especially troubling given that the proceeds of the offering are going to the insiders, rather than other corporate objectives such as funding future corporate growth.
Advocates of MVS argue that this structure allows companies to preserve family control and maintain current growth strategies while allowing the firm to gain access to capital in public markets. Aritzia has used this argument to defend its proposed dual class share structure, indicating that by maintaining control, the corporation will not be subject to a takeover bid and will be able to continue on its projected growth path. Yet MVS make for poor accountability and bad corporate governance, which is perhaps why the dual class structure is listed as a risk factor in the IPO prospectus.
What about the applicable law? The jurisdiction of securities regulators is founded on investor protection and the protection of public interest (see Asbestos decision). Securities regulators should consider further regulating in this area by implementing sunset provisions and mandating procedures in changes of control when these structures are in place. This reform would better protect investors and would hopefully prevent a repeat of the 2010 Magna buy-out transaction.
Aritzia’s IPO comes at a time when the Canadian IPO market is relatively inactive and it has generated intense interest among investors. But it is important that investors, especially retail investors, understand the implications of investing in a dual class share company and that regulators ensure that investors are protected.
For additional information please watch Professor Anita Anand’s interview on BNN: