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Dual-Class Shares Explained: Does Your Vote Actually Count? | Canadian Investing · How Canadian Markets Work

0:00
Imagine you buy 80 % of a sports franchise. You
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pay the lion's share of the costs. You take on
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the vast majority of the financial risk. But
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the person who only bought 20 % of the team,
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they get to draft the players, hire the coach,
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set the ticket prices, and basically keep operational
0:19
control forever. Right. Yeah, that sounds incredibly
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frustrating for the person paying the bills.
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Yeah. Exactly. And today on The Deep Dive, we're
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looking at exactly that dynamic. We have a really
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fascinating stack of financial notes and research
0:35
here covering corporate governance. And we're
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going to slowly unpack the sheer audacious math
0:41
of something called dual class shares. It is
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an architecture that completely, well, it shatters
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the illusion of corporate democracy and it happens
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quietly. every single day, right out in the open.
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It really does, because when we buy a share of
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a public company, we usually assume we're buying
0:56
a voice. I mean, the market tells us that capital
0:59
equals influence, right? Yeah, absolutely. You
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put your money in, you get a ballot. Right. But
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today, we're going to move deliberately through
1:06
these sources to show how the game is engineered
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so that your voice, mathematically, cannot matter.
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We're going to explore how economic ownership
1:15
is severed from control, why this is such a massive
1:18
pillar of the Canadian corporate landscape specifically,
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and most importantly, the everyday investor,
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what you must do to protect yourself. Yeah, and
1:28
to really understand how this illusion of control
1:31
operates, I think we have to establish the baseline
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first. Like, what is the expectation of the market?
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A standard rule. Exactly. The default rule of
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corporate governance is very straightforward.
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It's one share equals one vote, and this is the
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fundamental chain of accountability. It ensures
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that the people who own the financial risk have
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the power to discipline the managers who run
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the business. Because if management fails, the
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shareholders can just consolidate their votes.
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They consolidate their votes, they remove the
1:59
board of directors, and they demand a change
2:01
in course. It's a self -correcting mechanism.
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Yeah, that's sort of the... the social contract
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of the stock market. It is. But the dual class
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structure fundamentally rewrites that contract.
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It takes the economic ownership of a company
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and surgically completely severs it from the
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voting control. OK, so let's unpack that. Let's
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walk through the math because the sources provide
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a really stark mathematical scenario to show
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how radical this severance is. Yeah, let's take
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it step by step. So let's imagine a publicly
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traded company and let's say it has exactly 100
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million shares outstanding. Okay. 100 million
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shares. Right. Now, the architects of this company
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decide to split those shares into two entirely
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different classes. First, we have 80 million
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shares that are designated as subordinate voting
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shares. Subordinate. Okay. And these are the
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ones sold to the public, right? Exactly. To the
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everyday investors, the pension funds, the mutual
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funds. And they carry the standard expected right,
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which is one vote per share. OK, so the public
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buys 80 million shares, meaning they hold 80
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million votes. And they are providing the vast
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majority of the capital for this company. Yes,
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80 % of it. But then we introduce the second
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class. The remaining 20 million shares are designated
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as multiple voting shares. And these aren't on
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the open market. No, not at all. They're held
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very tightly by the founding family or maybe
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a controlling insider group. And crucially, they
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do not carry one vote each. They are engineered
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to carry 10 votes each. OK, wow. Let me just
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trace the logic here slowly. Sure. If the public
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hold 80 million votes and the founders 20 million
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shares have a 10 to 1 ratio, then those founder
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shares generate 200 million votes. Exactly. 200
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million votes. So out of 280 million total votes,
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the founders hold 200 million. That's, um...
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I mean, that is 71 .4 % of the voting power while
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they only hold 20 % of the actual equity. That
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is the reality of the structure. They own 20
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% of the economic value, but they wield absolute
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unassailable control. It's wild. It really is.
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I mean, they dictate the composition of the board.
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They decide on every major transaction. They
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control the entire destiny of the enterprise.
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The public vote in this architecture, it's entirely
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decorative. It's just a pebble against a tank.
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Yeah. I mean, I have to push back a little on
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the fairness of this. 71 % control from a 20
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% stake. It kind of breaks the fundamental premise
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of market risk, doesn't it? You are effectively
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buying all the financial exposure while they
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keep all the operational power. Yeah, you're
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absolutely right. Like, on any contested issue,
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say a highly controversial merger, the public
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could vote uniformly as a bloc. just completely
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united in opposition. And they would still be
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completely overruled by a minority owner. They
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would be completely overruled. The financial
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exposure belongs to the public, but the steering
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wheel is locked firmly in the hands of the founders.
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So if this setup so heavily structurally marginalizes
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the public shareholder, we have to look at how
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it became so normalized because our notes point
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out that this isn't just a fringe anomaly. It's
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a dominant, deeply embedded feature specifically
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in the Canadian corporate landscape. Yeah, it's
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unusually prevalent in Canada, especially when
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you compare it to similar global markets. You
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see it heavily concentrated among long -standing
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family -controlled firms. Right. We're talking
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about the massive pillars of the domestic economy,
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the media landscape, telecommunications, retail,
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and major transport networks. Which naturally
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begs the question. Why Canada? Yeah. What was
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the structural catalyst that allowed these specific,
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you know, family fiefdoms to establish such disproportionate
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control? The research highlights a few intersecting
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historical and structural reasons. First, you
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have to consider the geography and the demographic.
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OK. Canada is physically vast, but it possesses
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a relatively small population and historically
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a much smaller capital market than the United
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States. Right. That makes sense. So in the mid
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20th century. As these domestic family firms
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grew to a national scale, laying telecom wires
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across the entire country or building national
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retail chains, they desperately needed massive
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infusions of public capital to expand. Because
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it's expensive to build across that much land.
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But I'm guessing they didn't want to lose control
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to larger, heavily capitalized foreign competitors
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who might just swallow them whole. Exactly. That
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was the fear. So they utilized dual class structures
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to tap into the public capital markets without
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ever surrendering the steering wheel. Oh, I see.
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And second, in culturally and economically sensitive
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sectors like media and telecommunications, there
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were strict historical restrictions on foreign
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ownership. Right, because the government actively
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wanted these institutions kept in domestic hands.
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Exactly. And that regulatory environment heavily
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insulated these domestic family dynasties from
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outside hostile takeovers. So the regulations
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essentially built this protective moat around
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these families. They grew large, they stayed
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protected, and they basically codified their
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control. Yeah, and once that precedent was set,
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it created a highly permissive, path -dependent
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listing environment. Path -dependent meaning?
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Essentially, because early powerful— families
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were allowed to use this structure, the regulators
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and stock exchanges felt compelled to keep allowing
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it. If the Canadian exchanges certainly banned
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dual class shares, future companies might simply
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flee to other, more permissive global exchanges
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to list their stock. Oh sure, they just go list
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in New York or somewhere else. Right. So the
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structure became deeply entrenched as an accepted
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norm. Which brings us directly to the debate
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outlined in our notes. Because, as restrictive
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as this sounds for the public shareholder, the
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sources are really clear that this is a fierce,
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highly credible, and entirely unresolved argument.
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resolved. And we want to look at this impartially.
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What is the fundamental argument for allowing
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a founder to wield this kind of disproportionate
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insulated power? The strongest argument for the
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dual class structure centers around shielding
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visionary founders from the intense often destructive
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short -termism of public markets. Public markets
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are notorious for demanding continuous strong
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quarterly earnings. If a company wants to make
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a massive transformative investment say, completely
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rebuilding their technology infrastructure, that
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investment might take five years to pay off.
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Right. And it will severely depress earnings
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for the next 12 quarters. And a traditional public
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shareholder base might revolt over that. They
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want their returns this year, not five years
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from now. I mean, they might demand the board
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fire the CEO just to artificially boost the stark
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price today. Exactly. The dual class structure
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protects founder judgment. It allows a visionary
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leader to completely ignore the noise of activist
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investors, whether the short term earnings drop
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and just execute a truly long term strategy.
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It gives them a buffer. Yes. Additionally, it
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acts as a very powerful takeover defense. A controlled
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company can simply refuse a hostile buyout offer
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that a dispersed, panicked shareholder base might
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otherwise accept under pressure. In the Canadian
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context, this is sometimes viewed as a positive
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public policy tool. A way to protect long -term
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value and ensure corporate head offices remain
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firmly rooted on Canadian soil rather than being
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hollowed out by foreign conglomerates. Okay,
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so that makes a lot of sense in a vacuum. The
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ability to look past the next quarter is genuinely
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rare and very valuable. But let's gently turn
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to the other side of the ledger. What happens
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when the founder isn't a visionary? If we sever
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control from economic risk, aren't we just creating
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a total structural lack of management accountability?
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That is the primary argument against the structure.
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If management is objectively terrible, the primary
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discipline of the free market, which is removing
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a bad board of directors, is completely paralyzed.
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Because you can't vote them out. Right. The public
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has absolutely no mechanism to force a change
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in course. Your only remedy is what governance
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experts call voting with your feet. Which simply
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means selling your shares. Yes. Selling your
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shares, likely at a loss, and walking away. And
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that introduces an even deeper structural flaw,
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doesn't it? We love the idea of a singular genius
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building an empire. But this structure persists
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long after the original visionary retires or
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passes away. If the founder's grandchild inherits
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that super voting block and they completely lack
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the founder's business acumen, the public is
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legally trapped in the passenger seat while an
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incompetent driver steers the company right off
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a cliff. You've just identified the exact danger
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highlighted in the corporate governance debate.
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They call it generational entrenchment. Generational
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entrenchment? Yes. The grandchild holds the 71
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% voting control. wielding absolute authority,
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but without any of the proven competence that
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originally justified it. Right. Furthermore,
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when one family controls the company indefinitely,
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there is a constant structural incentive for
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self -dealing. You mean like related party transactions?
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Yes. Arranging contracts, real estate deals,
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or supply agreements that disproportionately
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benefit the controlling family's private interests
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at the direct expense of the subordinate public
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shareholders. Oh, wow. So they could basically
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rent a building they privately owned to the public
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company at an inflated price, and the public
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shareholders just have to absorb that cost. Precisely.
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The debate is ultimately between giving a genius
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the freedom to build over the long term versus
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the terrifying reality of giving an unproven
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heir a blank check with public money. Which brings
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us to a massive vulnerability for the everyday
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investor. If I'm trapped in that passenger seat
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with a bad management team and a larger company
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decides they want to buy us out to fix the problem,
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the voting structure creates a terrifying loophole
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for the takeover, doesn't it? It absolutely does.
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Let's look at how a takeover works when voting
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power is severed from equity. Imagine a hostile
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buyer wants to take over our hypothetical company.
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They look at the math. They realize they do not
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need to buy the 80 million public shares to take
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control of the board. Right, because they only
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need the votes. Exactly. They only need the family's
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20 million super voting shares. So the buyer
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just walks right past the public, knocks on the
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founder's door, and offers a massive premium
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for those specific multiple voting shares. Yes.
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The family gets an absolute windfall. The buyer
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gains absolute operational control of the entire
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enterprise, and the public shareholders are left
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holding the bag. With no premium. No premium
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whatsoever. Yeah. They are suddenly minority
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partners with a new aggressive controlling owner,
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and their shares might actually plummet in value.
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That is incredibly predatory. But our research
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notes mention a specific regulatory fix for this.
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If a buyer bypasses the public, there is a mechanism
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called a coattail provision designed to protect
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the subordinate shares. How does that mathematically
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work? Coattail provisions are the critical defense
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for the public in the Canadian landscape. A coattail
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provision is a legally binding clause that requires
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that if a takeover bid is made for the multiple
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vote shares, an equivalent offer must be extended
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to the public's subordinate shares. OK, so we
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get to ride along on the founder's coattails.
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If the founder gets, say, a 50 % premium to sell
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their control block, the buyer is legally obligated
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to offer that exact same 50 % premium to the
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everyday shareholder. Precisely. It prevents
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the public from being economically bypassed during
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a change of control. That's a huge one. relief.
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It is, however, it is really vital to understand
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that coattails are not a universal automatic
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law for every single dual class company in existence.
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While modern listing requirements generally demand
13:42
them before a new company can go public, older
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structures that were grandfathered in, or companies
13:47
with highly specific articles of incorporation,
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they can vary wildly. So you cannot simply assume
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the safety net is there. You have to verify it
13:55
in the fine print. You must check the filings.
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Specifically, you have to read the company's
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continuous disclosure documents. Okay. These
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are the ongoing legal filings they must provide
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to the market, such as the annual information
14:07
form or the management proxy circular. That is
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where the exact wording of the coattail provision
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will be hidden. Okay. And beyond the coattails,
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our sources mention a few other structural complications
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that dictate how these companies evolve. For
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instance, sunset provisions. Sunset provisions
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are an increasingly popular modern compromise
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to the governance debate. A sunset provision
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is a clause stating that the dual class structure
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will automatically collapse converting all shares
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to a standard one share one vote model after
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a predetermined trigger. Like a time limit. Say
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seven or ten years after the IPO or maybe immediately
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upon the retirement or passing of the original
14:47
founder Exactly it elegantly solves the grandchild
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problem We discussed earlier right the genius
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founder gets the runway they need to execute
14:54
their long -term vision But the heirs do not
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get to inherit unearned absolute control once
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the founder steps down the public immediately
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regains their democratic voice That seems like
15:04
a really smart balance. And there's also the
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fascinating dynamic of index inclusion. Oh, yes.
15:09
The sources note that some major global index
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providers have started actively restricting or
15:15
entirely banning dual class companies from their
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flagship indices to punish poor governance. This
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is perhaps the most massive lever in the modern
15:22
market. When an index provider like S &P or FTSE
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bans a dual class company, they cut off the flow
15:30
of passive index capital. And passive capital
15:32
is huge. It's enormous. Passive mutual funds
15:36
and ETFs are legally obligated to buy shares
15:39
of every company in their underlying index. This
15:43
creates a constant structural, almost blind demand
15:46
that continuously supports a company's stock
15:49
price. So if a company is banned from the index
15:51
because of their super voting shares, they lose
15:54
that massive automatic pool of permanent buyers.
15:57
Exactly. Which mathematically depresses their
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valuation. It does. The capital markets exert
16:02
their own immense gravity. It forces companies
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to weigh the value of absolute control against
16:07
the financial penalty of being locked out of
16:09
the asset capital pools. And as a final complication
16:12
to watch for, we must clearly distinguish between
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subordinate voting shares, which have one vote,
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and non -voting shares. Right. Non -voting shares
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being a distinctly different class where the
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public gets literally zero votes. Yes. No pretense
16:24
of a voice at all. Just pure economic exposure.
16:27
Exactly. They're often used purely for capital
16:30
raising when a company wants money without diluting
16:32
their control, even by a fraction of a percent.
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Wow. If we synthesize all of these traps, the
16:39
fine print, the coattails, the sunsets, and the
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passive index flows, what is the exact playbook
16:46
for an everyday investor navigating this landscape?
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If someone is listening to this deep dive right
16:52
now, looking at their portfolio, what is the
16:54
actionable framework they need to apply? We can
16:57
distill this complex structural analysis into
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three distinct highly practical rules. Rule number
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one, check the tickers. Slowly and carefully
17:06
verify exactly which share class you are buying.
17:10
Canadian companies very frequently list two different
17:12
tickers for the same underlying enterprise, perhaps
17:14
a Class A and a Class B. Right, so you cannot
17:16
just type in the company name and blindly click
17:18
buy on the first symbol that pops up. You have
17:20
to actively select the correct class. You absolutely
17:24
must know what you hold. One ticker might have
17:27
standard voting rights, while the other might
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be strictly non -voting. Furthermore, they might
17:32
have vastly different liquidity in the open market,
17:35
meaning one is much harder to sell than the other.
17:38
Oh, I see. They might even have different dividend
17:40
entitlements. Okay, so rule number one is know
17:43
your ticker. What is rule number two? Rule number
17:45
two, verify the coattails. As we discussed, do
17:50
not assume you are automatically protected in
17:52
a hostile takeover. Go directly to the company's
17:55
continuous disclosure documents, read the prospectus,
17:58
and confirm in the legal text that coattail provisions
18:01
exist, and that they explicitly cover the exact
18:04
share class sitting in your brokerage account.
18:06
Trust, but mathematically verify in the paperwork.
18:09
Precisely. And I assume the final piece of the
18:11
puzzle is actually using the only leverage the
18:13
public has left, which is the vote itself. Rule
18:16
number three. Yeah. Vote anyway. Retail voter
18:18
turnout is notoriously systemically low. It is
18:21
a known issue because proxy voting materials
18:24
often arrive looking like dense, impenetrable
18:28
junk mail full of legal jargon. Most investors
18:32
simply throw it straight into the recycling bin.
18:34
But you must vote your shares. But let me just
18:37
gently challenge that premise for a moment based
18:38
on the math we established. Sure. If the founder
18:41
mathematically controls 71 % of the total vote
18:44
and I take the time to diligently fill out my
18:47
proxy form for my 80 shares, isn't voting basically
18:52
trying to bail out the Titanic with a thimble?
18:54
I literally cannot change the mathematical outcome
18:57
of the vote. Why bother putting in the effort?
19:00
I completely understand that frustration. It
19:02
feels futile. But it is critical to correct that
19:06
assumption because it's not always bailing water
19:08
with a thimble. Okay There's a legal concept
19:10
called the majority of the minority majority
19:12
of the minority. Yes sometimes specific corporate
19:16
matters Particularly structural changes or the
19:18
related party transactions we discussed earlier
19:20
They require the explicit majority approval of
19:24
the subordinate class alone. Ah So for those
19:27
specific, highly -conflicted decisions, the founder's
19:30
super -voting shares are legally sidelined? Exactly.
19:33
They are recused from the vote. In those crucial
19:36
moments, retail votes actually mathematically
19:38
count. They are the only votes that count. If
19:41
you throw away your proxy, you are abandoning
19:44
the only direct power you have. Furthermore,
19:47
even on standard, everyday matters, where the
19:50
founder will inevitably win. massive withholding
19:53
of votes by the public is a loud highly visible
19:57
signal to the market to the market to the media
19:59
and to the board that the public is deeply dissatisfied
20:02
by not voting you are simply guaranteeing that
20:05
you get the outcome you didn't choose you are
20:07
silencing yourself that reframes the entire effort
20:10
completely so if we pull all of these takeaways
20:13
together wrapping up the core message of this
20:15
deep dive The illusion of control is very real.
20:19
The dual class structure fundamentally alters
20:21
the balance of power, creating an environment
20:23
where founders can operate without the traditional
20:25
discipline of the free market. But knowledge
20:28
of your rights? actively knowing your ticker,
20:31
verifying your coattails and the filings, and
20:33
using your vote when it is called for is the
20:36
only real shield you have in a dual class landscape.
20:39
You have to be an active, informed participant,
20:42
even if you are relegated to the passenger seat.
20:45
Knowledge is the only shield. Understanding the
20:47
architecture is the absolute prerequisite to
20:50
participating in it safely. It's a profound shift
20:53
in how we look at ownership itself. And before
20:56
we close out today's deep dive, I want to leave
20:58
you with a final, lingering, somewhat provocative
21:00
thought to mull over. Something building on the
21:04
unintended consequences of those index provider
21:06
bans we discussed earlier. The restriction of
21:08
passive capital. Exactly. We talked about how
21:11
major global index funds are beginning to restrict
21:13
or ban dual class shares to punish companies
21:15
that don't offer fair democratic voting. It is
21:18
a noble crusade for better corporate governance.
21:22
But if the major index funds of the world eventually
21:24
decide to completely ban all dual class companies
21:27
from their portfolios, will the visionary founders
21:29
of tomorrow simply refuse to go public at all?
21:32
Could the crusade for fair voting accidentally
21:35
trap all the best, highest growth, most innovative
21:38
companies in the private market forever, shutting
21:41
out the everyday investor entirely? That is the
21:44
risk. It brings us right back to the beginning.
21:46
In our strict demand for a perfect voice, might
21:48
we lose the opportunity to participate in the
21:51
growth altogether? We will leave you to think
21:52
on that. Until next time.