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Hot mess

28 April 2016 By Rob Cox

As Canadian provinces go, Quebec is something of an innovator. Among its creations are Cirque du Soleil and poutine, a concoction of French fries, gravy and cheese curds. It is perhaps fitting, therefore, that the territory is now embroiled in a messy corporate governance circus that threatens one of its more laudable financial ideas.

At the center of the spectacle is a local corporate success story: Alimentation Couche-Tard, and its entrepreneurial founder Alain Bouchard. From its start as a convenience store in a Montreal suburb in 1980, the company now operates some 16,000 Couche-Tard, Mac’s and Circle K outlets, dispensing Polar Pop beverages, fuel and hot dogs to the masses.

According to a video history of the company, Bouchard “fell in love with convenience retailing in the 1970s” and focused on doing a better job of pleasing customers than rivals. Building on that store in Laval, the company set to work devouring competing chains at home, and eventually abroad. It went public on the Montreal Exchange in 1986.

A decade later, though, Bouchard and his colleagues Richard Fortin, Réal Plourde and Jacques D’Amours layered a second class of super-voting stock – call it the gravy – on top of smaller potatoes. This ensured they had sufficient control to grow the business undeterred by unwanted suitors. Both classes, which began trading on the Toronto Stock Exchange in 1999, have surged a formidable 600-fold. Couche-Tard is now worth some C$30 billion, or about $24 billion.

It’s an amazing tale, but also consider the inventive bit. Unlike the dual-class structures that have become an epidemic in U.S. capitalism, particularly in Silicon Valley where companies like Google and Facebook have adopted them, Couche-Tard promised shareholders it would phase out its super-voting arrangement when the last of its founders, D’Amours, turned 65. That happens in 2021.

This so-called “sunset provision” is a pioneering way to bridge the dual-share divide. Supporters of super-voting stock argue that exceptional entrepreneurs – say Bouchard in mini-marts, or Mark Zuckerberg, who just engineered a third class of Facebook shares to further cement his control of the social-networking giant – need a clear runway to build their businesses without distraction. Giving them control of their boards and important corporate decisions is therefore necessary.

There are drawbacks, however. “Dual-class structures insulate management and the board,” wrote Anita Anand, the J.R. Kimber chair in investor protection and corporate governance at the University of Toronto, in a recent op-ed published in the Globe and Mail. “They are detrimental to outside shareholders because they undermine accountability mechanisms built into the corporate statute, including the ability to elect directors. Shareholders carry the financial risk without the corresponding voting power to alter the board or effect change.”

A concept like the one spearheaded in 1999 by Couche-Tard “is a good way to balance the two sides out,” says Neil Gross, executive director of the Canadian Foundation for Advancement of Investor Rights, whose mission is to enhance integrity and fairness in the country’s capital markets. The problem, he notes, is that “as you come close to the sunset, people start to reassess.”

Bouchard and his three co-founders are guilty as charged. In a classic instance of changing the rules mid-game, last year they tried to amend the company’s by-laws to keep their control, or hand it down to heirs, even after they turned 65. In the end, Couche-Tard scrapped the plan after it became evident it would fail to gain the two-thirds vote necessary from second-class shareholders to pass at last September’s annual meeting.

The issue hasn’t gone away, though. In fact, it looks to be intensifying as the company begins planning for this year’s gathering. It has set off alarm bells in Quebec City. The worry is that one of the corporate jewels in the province’s crown might become susceptible to a takeover when its founders lose their extra control.

It’s a concern Bouchard is actively stoking. “I’ve talked to governance people from Toronto,” he told Montreal’s La Presse newspaper last week. “They’re standing high on their pedestal and they’re lecturing us. I don’t have time to waste with those types of people. I’m a bit fatalist, but if this forces the sale of Couche-Tard, so be it.”

Finance Minister Carlos Leitao has hinted that Quebec, which has a history of protectionist leanings, might be of assistance. It could, for instance, use Investissement Quebec, an economic development agency and financing corporation, or even pension plan funds, to tip the vote in Bouchard’s favor.

Couche-Tard was ahead of the game harmonizing long-term entrepreneurial ambitions with the concerns of minority investors. The sunset clause is the kind of financial invention that could usefully be exported from Quebec to Palo Alto and beyond. The founders may be regretting it today, but it’s not the least bit unfair.

If they cannot live by their promise, they need to convince shareholders of their position, maybe explain how their children can similarly generate 600-fold returns, or simply pay investors for the privilege of reforming Couche-Tard’s by-laws. Anything short of that would be as appetizing as a soggy plate of gravy fries smothered in the solids of soured milk.


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