Making Sense of Magna

Abstract

In 2010, Magna International Inc. (Magna) obtained court approval of an arrangement to buy back its super-voting shares, which placed control in the hands of a shareholder with 0.6 percent of the equity, at a 1,800 per cent premium to non-voting shares. I agree with the decision to approve but disagree with some of the court’s reasons. Magna’s board failed to provide a clear description of the possible benefits of the transaction. For example, theory and empirical analysis challenge the board’s suggestion that liquidity benefits would help justify the arrangement. The board and the court also failed to describe clearly the beneficiaries of the transaction. A special committee of the board concluded that Magna would benefit from the arrangement but offered no conclusion on whether shareholders would benefit. This is internally inconsistent: Since Magna issued shares as consideration in the arrangement, the only way to determine whether Magna would benefit on net was to determine the arrangement’s impact on share value. I analyze these and other errors, identify the possible benefits and beneficiaries of the arrangement, and conclude that while the court could have been more critical of Magna’s approach, it was correct to look to shareholder support — both from market signals and from voting — as a justification for approving the arrangement.

Keywords: Super-voting shares, Magna