A bailout won’t fix Bombardier’s biggest problems: family control and dual-class shares

Many alternatives regarding the way forward for troubled Bombardier Inc. happen to be proposed. The Quebec government has already committed $1.3 billion in aid and today some type of moral argument has been levelled at Ottawa to throw money into Bombardier’s cap also. This is a horrible idea from a governance perspective, in addition to a taxpayer perspective.

Let’s be clear about Bombardier’s governance reality: The Bombardier/Beaudoin families hold almost 60 per cent of voting power within the corporation, despite holding a fiscal interest of just one-quarter of this figure. This can be a dual-class-share firm that simply isn’t flying.

A federal bailout would place perhaps a billion or even more taxpayer dollars in the hands of family that is insulated from governance accountability because of the corporate structure that it has chosen. This insulation and insufficient accountability have not been good for the organization. Over the past 5 years, Bombardier’s stock price has declined a lot more than 75 percent. Why should Canadian taxpayers be on the hook for Bombardier’s poor corporate governance?

Related

As Ottawa weighs Bombardier Inc bailout, questions regarding previous aerospace funding lingerBombardier Inc’s biggest CSeries customer, Republic Airways, files for bankruptcy protectionQuebec proposes curbing Bombardier control of new jet program as it courts federal aid: sources

Dual-class share structures are fundamentally unfair: They leave the subordinate shareholders unprotected and cry out for a response from securities regulators. Advocates of such structures recall success stories – like Fairfax or Onex – without focusing on the point that dual-class-share structures undermine corporate governance standards since the subordinate shareholders are burdened with a disproportionate share from the economic risk within the firm relative to remarkable ability to help the affairs of the corporation. In particular, they cannot elect directors or otherwise ensure change through their vote.

As the Magna buyout showed, and also the Corus/Shaw deal suggests, dual-class structures can have severe consequences especially when there aren’t any legally mandated procedural safeguards relating to special committees, valuations, fairness opinions and voting conditions. Because the jurisdiction of securities regulators draws on investor protection and also the public interest, dual-class-share structures ought to be further regulated, otherwise prohibited, in capital markets.

From Ottawa’s perspective, if Bombardier were to receive federal funding, there are no accountability mechanisms in place to make sure that the current board would inflict better than it has to date. At the very least, the Bombardier board itself needs to be replaced and repopulated not with government representatives – as the Quebec government is proposing – but with independent directors (out of the box the case in non-dual-class firms). This will need a dismantling of the dual-class structure.

Reforms are needed to make sure that Bombardier’s subordinate shareholders can bring about the decision about who is around the board of this corporation. This isn’t the place for taxpayer money.

Anita Anand is the J.R. Kimber Chair in Investor Protection and Corporate Governance, Faculty of Law, University of Toronto. Email: anita.anand@utoronto.ca