Disclosure Can Save Magna International Founder Stronach's Payday

Jun.17.10 | About: Magna International (MGA)

By Andrew Willis

Frank Stronach has always been the poster boy for all that’s wrong with corporate governance.

There have always been critics of the huge compensation paid to Magna International’s (NYSE:MGA) founder, and the blurred definition of where the auto parts business stopped and Mr. Stronach’s personal passions started.

For all the anti-Frank sentiment that’s washing around, market regulators aren’t attacking Mr. Stronach. It’s the Magna International board that is under fire as the Ontario Securities Commission prepares to hold a hearing into the $863-million package promised to Mr. Stronach in return for letting go of the dual share structure that ensures he controls this $7.6-billion company.

A quick reading of the OSC filings that set the stage for a hearing on the plan show the market watchdog is concerned with the lack of disclosure around these negotiations.

The OSC said Magna shareholders deserve to know how the board reached the valuation that led to Mr. Stronach’s eye-popping opportunity to collect $300-million of cash and a new single vote shares. The OSC’s view is that Magna directors, who made no recommendation to shareholders on this arrangement, needed to provide a “detailed discussion of the fairness of the Arrangement.”

Which raises an interesting question: Can more disclosure save a Magna deal with its founder that many in the market find offensive? (And another interesting governance question: Is there any job more thankless than being a director at Magna?)

Several public sector pension plans have come out against the arrangement, but mutual funds, insurers and other institutional investors will be tempted to plug their noses, and vote in favour.

Many analysts believe Mr. Stroanch’s payday can be preserved, as the upside for the stock outweighs the downside of handing the founder an eye-popping windfall.

The OSC is threatening to shut down the deal by putting what’s known as a cease trade order on Mr. Stronach’s multiple voting shares. Canaccord Financial analyst David Tyerman said in a report on Wednesday:

Our read of the OSC Statement of Allegations is that Magna/Stronach can avoid such fate by providing:

1) disclosure of the financial information provided to the Special Committee of the Board on the matter, including valuation reports by CIBC and PwC.

2) a detailed discussion and opinion of the fairness of the proposed transaction, and

3) adequate disclosure on the background and negotiations of the proposed transaction.