“Majority of the Minority”: A Simple Remedy for Minority Squeeze-Outs

During the last ten years of my life I have had the good fortune of experiencing the booms and busts of the markets, and have seen many incredible things occur over this time frame. In particular, working on the Sales & Trading Desk at a boutique dealer generating ideas for hedge funds gave me some really great experiences in terms of being on the forefront of what is happening in the world, especially in the M&A and risk-arbitrage space.

Over my time in the markets, one thing I have noticed is the massive difference between Canadian and foreign M&A rules and regulations. Specifically, I notice much more inequity in foreign M&A, especially when it comes to calling special shareholder meetings, the rampant use of poison pills (in the US in particular), and in the recent case of Novartis and Alcon, the treatment of minority shareholders (http://online.wsj.com/article_email/SB10001424052748704140104575057841177401382-lMyQjAxMTAwMDEwMTExNDEyWj.html).

In this case, Novartis, a 25% holder of Alcon, made an all-share offer to the remaining Alcon shareholders. Two issues arise here. First of all, all-share offers expose shareholders to market risk, which is evident as the 2.8 Novartis share offer, originally valued at ~$180, has traded down to ~$160. The deal is quite clearly much less attractive to any shareholder that did not hedge their stake in Alcon, which quite frankly, would be the vast majority of minority shareholders. As you can imagine, any shareholder who was expecting $180 per share and is getting $160 in actuality would be upset with the outcome. Secondly, Nestle is the majority owner of Alcon with a 52% stake, so they basically control any and all actions of Alcon. This is especially true in M&A situations, because it is clear that both companies (which own a cumulative 77% stake) want the deal done. Under Swiss securities laws, the 23% of minority shareholders have very limited say.

In comparison, such a situation in Canada would be settled rather easily and amicably. For example, in Canada we have a simple provision called a “majority of the minority”, which directly addresses minority shareholder concerns in M&A and / or other major shareholder vote situations. This rule was instated by regulators to give minority shareholders a voice, because traditionally, minority shareholders would be steam-rolled by corporations and / or large shareholders that may not have the best interests of ALL shareholders in mind. If the Novartis / Alcon deal were to occur in Canada (under OSC rules and regulations), there would be two votes required in order to get the deal done. First, there would be an overall shareholder vote that would include Alcon, Nestle, and the remaining minority shareholders. In the worst case scenario, this vote would still go through as the 77% held by Novartis and Nestle would supersede the 66.66% of votes required by Ontario securities laws. The second vote would occur for just the minority shareholders, with Nestle and Alcon abstaining. If greater than 50% of the 23% minority shareholders voted in favour of the transaction, it would proceed. You can see how this is a much more fair method in terms of giving a voice to the minority shareholder.

Like many exciting market / legal events such as Novartis / Alcon, the precedents set in the past were exciting landmark events as well. In Canada’s case, the importance and strength of the “majority of the minority” provision was really exemplified in the 2005-2006 case brought against Sears Holding Corporation (SHLC) (http://www.ogilvyrenault.com/en/resourceCentre_1622.htm) by a group of hedge funds (Hawkeye, Knott Partners, and Pershing Square). In this case, SHLC was a majority shareholder (56%) of Sears Canada (SCC), and attempted to wrest control of the company by offering a premium to the shares of ONLY one other major shareholder (Vornado Realty Trust) relative to the minority shareholders ($18.00 compared to $16.86). There were many twists and turns to this case with several other issues at hand, however, the OSC ended up ruling in favour of the hedge funds because SHLC effectively tried to give additional consideration to one particular shareholder at the expense of all others. This is simply not allowed under Canadian Securities laws, as the consideration paid for one security must be pari passu with another security that possesses identical features. In the end, SHLC withdrew its bid and decided to acquire a greater stake in SCC by purchasing stock piecemeal on the open-market. However, if SHLC had proceeded, it would have been forced to give a “majority of the minority” vote for SCC shareholders, which they would have ultimately lost as the hedge funds effectively controlled that majority.

Circling back to the Novartis / Alcon deal, I must say that even though Alcon cannot invoke a “majority of the minority” vote, I find it fascinating that the Board of Directors of Alcon had enough foresight and heart to establish a Special Committee to review Takeover Bids in order to prevent the oppression of minority shareholder rights. Furthermore, it is good to know that corporate governance is alive and well somewhere in this world, as the Alcon Special Committee is actually in the process of establishing legal actions to prevent this deal from occurring, or at least ensure that minority shareholders get what they deserve.