TORONTO (Reuters) - Auto parts maker Magna International Inc unveiled more details on Thursday on its proposed payout to founder Frank Stronach of nearly $900 million, but it may not be enough to satisfy regulator concerns.
Responding to complaints from the Ontario Securities Commission (OSC), Magna released two reports about the controversial plan, which would eliminate its two-class share structure and see Stronach cede control.
The Stronach Trust has about two-thirds of Magna's voting rights through the majority of its class B supra-voting shares. In exchange for giving them up, the trust would get 9 million newly issued class A shares, or about 7.5 percent of Magna, and $300 million in cash.
If approved in court and by shareholders, the deal would give 77-year-old Stronach, who came to Canada from Austria at the age of 21 with only a couple hundred dollars in his pocket, an $863 million pay day.
But after numerous complaints from investors that the premium Stronach would receive is unreasonably high, the OSC called a hearing on the matter for June 23 that could block the plan, or place terms and conditions on it that would need to be met for it to go ahead. A preliminary hearing is scheduled for Friday.
"There are two sets of concerns," said Ermanno Pascutto, executive director of FAIR Canada, an independent non-profit agency that champions investor rights, "one is the premium and the second is the process.
"I don't think that (the documents Magna released) really addresses any of the concerns."
Pascutto and others have called for the OSC to block the plan or force Magna to provide an assessment of fairness of the deal, or, at the very least, for the company's board to recommend the deal to shareholders, which it has not done.
Richard Powers, an associate dean and academic director of the Governance Essentials Program at the University of Toronto's Rotman School of Management, said he too thinks it's odd that the board did not make a recommendation on the deal, but that doesn't mean a regulator should decide its fate.
"I don't find it surprising at all that Magna and Frank Stronach would do something that wasn't consistent with best governance practices," he said. "They've done that for years, so certainly, investors had to go in with their eyes open."
Investors have long complained about the large "consulting fees" Stronach has paid himself in the past, but they stuck with the company, he said.
"The question is: how much is control worth? That's what investors have to decide. I just don't know how you put a price on that."
Even with all the shareholders that have complained loudly about the proposal, if the OSC were to allow it to proceed to a shareholder vote, it may well go through.
Magna said on Wednesday that more than 24 percent of its shares outstanding had been voted thus far, with more than 99 percent in favor of the proposed deal.
The OSC, however, said the plan, as is, would be "contrary to the public interest and harmful to the integrity of the Ontario capital markets."
The commission wants Magna to give investors more information, including a valuation of the proposal's subject matter, a detailed discussion of its fairness, an opinion as to its fairness from a financial point of view, and adequate disclosure of the background and negotiations surrounding the arrangement.
Magna responded by putting up on its website a presentation on the project prepared by its financial adviser, CIBC World Markets.
It also posted a report from PricewaterhouseCoopers LLP on the estimated fair market value of Magna's electric vehicle business, which would be a Stronach-controlled spinoff from the company if the deal were approved by shareholders.
Magna says eliminating the dual-share structure would unlock shareholder value and boost its valuation, and the stock surged as much as 23 percent in May when the company announced the proposal.
The stock gained 6 Canadian cents on Thursday, or 0.1 percent, to C$69.36 on the Toronto Stock Exchange. It fell 5.5 percent on Wednesday after the OSC announced the hearing.
Reporting by John McCrank; editing by Mario Di Simine