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The Duel Over Dual-Class Shares

By Chad Fraser on May 19, 2016

Dual-class share structures are a hot topic these days, particularly here in Canada.

Driving the debate is Montreal-based Bombardier Inc. (TSX: BBD.A, BBD.B), which is negotiating with the federal government for a $1-billion bailout after its CSeries airliner ran way over budget and years behind schedule.

That’s where share structure comes in: The company’s class A shares have 10 votes each, while the B shares carry just one. The class A shares are 79.5% owned by the Bombardier family, descendants of company founder Joseph-Armand Bombardier, and the Beaudoin clan, relations of Bombardier’s son-in-law.

That hands these families 54% of the votes, even though they only hold a 13% economic interest. According to Bloomberg, the bailout talks deadlocked after Ottawa made ending this setup a condition.

The government’s position suggests multiple share classes are an inherently bad deal for investors. But are they? Let’s take a closer look.

Facebook Makes It Three

On the surface, having more than one share class seems like a good way for founders to look out for their own interests. (Company founders and/or their families often control multiple-share firms.)

At Facebook (NSDQ: FB), for example, founder and CEO Mark Zuckerberg controls 60% of the votes through his 468 million class B shares (10 votes each), which don’t trade publicly, and four million class A shares (one vote each), which trade under the FB symbol.

But that presented him with a unique problem: Last year, he and his wife, Priscilla Chan, promised to donate 99% of their Facebook shares to their philanthropic foundation, the Chan Zuckerberg Initiative, over their lifetimes, which would erode his control of the company.

So, on April 27, with a sparkling earnings report as the backdrop, Zuckerberg rolled out a plan to give shareholders a special dividend of two new class C shares for every class A and B share held. The new shares would trade under a different symbol than the class A shares and carry no voting power.

It’s essentially a three-for-one stock split that gives Zuckerberg a raft of new class C shares he can donate without putting his control in jeopardy.

One Among Many

Facebook and Bombardier are far from the only companies with more than one share class: According to The Globe and Mail, 12% of the firms on Canada’s S&P/TSX Composite Index use this structure, while 7% of S&P 500 firms do.

We don’t currently hold any dual-share companies in our Canadian Edge Dividend Champions Portfolio, but other Canadian examples include computer-outsourcing firm CGI Group (TSX: GIB.A, GIB.B) and convenience-store operator Alimentation Couche-Tard (TSX: ATD.A, ATD.B). In the U.S., Alphabet (Nasdaq: GOOG, GOOGL) adopted a multiple-class share structure back in 2012 that’s similar to what Facebook is proposing.

As for Zuckerberg, in the post-earnings call, he cited Facebook’s existing dual-class structure as a key part of its success to date:

“Early on, we received some generous offers from companies trying to buy Facebook, and our structure helped us resist that pressure,” he said.

“More recently, we navigated a challenging transition to mobile, but because we were a controlled company, we were able to focus on improving the user and product experience of our apps first, then build a strong mobile business over time, rather than being forced to do something shortsighted.”

Dual-Share Companies Outperform

The numbers suggest there’s something to the long-term view Zuckerberg says Facebook’s structure lets him take.

That’s because for every Bombardier—which has plunged more than 70% in the past five years as the CSeries lagged and its train business missed key deadlines—there are plenty of dual-share companies that outperform.

In fact, north of the border, dual-share firms have posted annualized returns of 12% in Canadian dollars over the past decade, compared to 7.1% for those with one class, according to Bloomberg. And U.S. firms with this structure have performed even better, returning 13% annualized, compared to 9.5% for the S&P 500.

Take the Long View

The takeaway? If there’s a talented founder-CEO at the helm with a compelling long-term vision, swapping some voting power to make sure they keep voting control may be a good deal for investors.

But keep in mind that one day this outsized sway will likely fall to the next generation, which could bring less drive and savvy to the table. That may be a good time to rethink your investment.


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