Corporate governance research has been shaped by the Berle and Means model that focuses on publicly-traded corporations characterized by the separation between ownership and control. Yet, a look at the ownership structure of public corporations around the world shows that this model is the exception rather than the norm. Indeed, the majority of public corporations across countries have a dominant or controlling shareholder. Ownership concentration generates different governance problems than ownership dispersion, the most important of which is the appropriation of private benefits of control namely through a related party transaction (RPT). Hence, over the last few years, the regulation of RPT has attracted increasing attention on the part of academics, lawmakers and regulators.
Canada is an interesting laboratory to study the law governing related party transactions because of the distinctive features of its capital markets and its regulatory landscape. The ownership structure of Canadian corporations resembles more closely those of continental Europe and South East Asia than those of the United States. Further, deviation from the one share/one vote rule is widespread in Canada. Thus, the primary corporate governance problem in Canada relates to the risk that dominant shareholders extract private benefits of control at the expense of the corporation and its public shareholders. As for regulation, publicly-traded corporations are subject to provincial corporation and securities laws, which are largely harmonized at the national level.
My recent paper reviews the law governing RPT in Canada, which is the product of corporate law and securities regulation. Although they are not prohibited, conflict of interest transactions are regulated by an intricate set of ex ante rules and ex post standards of review that impose procedural and substantive requirements. Specifically, the paper shows that the following fundamental questions lead to many answers in the Canadian context: 1) Who is charged with the screening of RPT?; 2) How does the screening work?; 3) When does it operate?
Against this backdrop, the paper analyses the role of procedural safeguards and substantive review by looking at two conflicting cases regarding the impact of majority of the minority approval. In Magna International, which dealt with the collapse of the dual-class share structure of the corporation, both the Ontario Securities Commission and the Superior Court considered that the majority of minority (MOM) approval of the operation was the key safeguard for minority shareholders that offset other procedural deficiencies. In InterOil, in the context of a going private transaction, the Yukon Court of Appeal found on the contrary that MOM approval could not correct procedural deficiencies. In particular, it emphasized that it could not eschew an analysis of the decision-making process leading to MOM approval.
My paper digs beyond these two cases by presenting data on the use of majority of the minority approval by reviewing 79 transactions between 2013 and 2018 where this procedural safeguard was mandated. The results show that 67 transactions out of 79 received MOM approval of 90% or more. For the other 12 transactions, only one failed to obtain majority of the minority approval, and two were in a ‘danger zone’, ie received approval between 60-70%. In addition, there were no transactions where shareholders relied on MOM approval to bargain for better deal terms for minority shareholders. The anecdotal and empirical discussion serves to put majority of the minority approval in perspective with respect to its protective function.
The analysis closes with a discussion of a recent initiative on the part of Canadian securities regulators, Multilateral CSA Staff Notice 61-302, which introduced a formal program to review related-party transactions, such as insider bids and going private transactions, on a ‘real-time’ basis. The objective of the review program is to identify and resolve issues in real time, prior to shareholder approval or closing, in order to reduce the risk of harm to minority security holders. Thus, the review of RPTs of transactions is initiated upon the filing of a disclosure document for the transaction, such as a proxy circular. This formal review program marks a shift in the approach of regulators towards RPTs as historically they would engage in such review only following the complaint from an interested party. In addition, Multilateral CSA Staff Notice 61-302 provides guidance to issuers regarding a number of important elements pertaining to RPTs, in particular on the role of special committees of independent directors, fairness opinions, and disclosure obligations.
We have yet to measure the full implications of this initiative. On the one hand, it may buttress the effectiveness of majority of the minority approval by reinforcing the procedural safeguards. On the other hand, it may have unintended effects on the protection of minority shareholders as the latter may become disinterested in MOM approval as they consider it to be a mere formality which takes place after regulatory review.
Stéphane Rousseau is a Full Professor and incumbent of the Chair in Governance and Business Law at the Faculty of Law, Université de Montréal.
 Alessio Pacces, Rethinking Corporate Governance: The Law and Economics of Corporate Control, London, Routledge, 2012.