The Family Wants Out – Should You?

Be wary of family controlled businesses. Conflicts may arise.

The Motley Fool

ShawCor (TSX:SCL.A) has carved out a unique niche in the energy industry and grown to become a global leader in pipe coating services.  Like its business, ShawCor’s ownership structure is somewhat unique.  The company was, and still is, a family controlled entity.  Even though the family owns just 18% of the company’s equity, it controls 69% of total shareholder votes.  This is possible because of what’s known as a “dual-class share structure”.

A quick scan of the S&P/TSX Composite Index indicates there are 17 Canadian companies, representing about 6% of the total market cap of the Index, carrying a dual-class structure.  The more widely held names include Rogers Communications (TSX:RCI.B), Teck Resources (TSX:TCK.B), Shaw Communications (TSX:SJR.B), and Alimentation Couche-Tard (TSX:ATD.B).

If you hold a diversified mix of Canadian stocks, chances are good that you own at least one of these 17 names.  If so, at some point, you are likely to find yourself in a similar situation as the one that ShawCor shareholders now face.

The Situation

There will come a time when the family wants out.  That time is now for ShawCor.  On August 30, 2012, Ms. Virginia Shaw, the controlling shareholder, indicated to the Board that she was ready to sell.  After several months of trying in vain to sell the company in its entirety, ShawCor shareholders now have the option to collapse the dual-class structure.  Effectively, buy out Ms. Shaw.

This move carries positives and negatives and ShawCor Class A shareholders will vote on it at a March 14th special meeting.

Positives include a special dividend of $1.00 per share if the deal is affirmed, EPS accretion due to less shares outstanding, and common shareholders finally gaining control over the company.

The big negative is that cash on hand and debt financing are needed to buy out Ms. Shaw’s stake.  This may impact the company’s ability to pursue future growth opportunities.  In addition, that the company was not sold in its entirety after being shopped extensively indicates no other market participant was willing to pay the $43.43/share price tag that has been hung on Ms. Shaw’s shares.

The Decision

ShawCor shareholders are in an intriguing predicament.  This company is cyclical and business is booming.  Clearly, Ms. Shaw realizes this.  Safe to say, non-controlling shareholders are not getting her stake on the cheap.  The risk of not paying up for the stake and taking control of the company is what a spurned, and still in control Ms. Shaw might choose to do next.  Non-controlling shareholders risk being presented with a less appealing scenario the next time around.

The Foolish Bottom Line

Once a controlling shareholder decides to exit, their motivation shifts from wanting to create the most valuable company possible, to wanting to extract as much value as possible from the company, and its remaining shareholders.  They only get one chance to sell.  Interests that were once aligned are no longer.

We are still on the first or second generation for many of these family controlled corporations.  As controlling stakes get passed further down the generational ladder, dilemmas such as the one that ShawCor holders face are likely to become more frequent.

It’s hard to make a buy/sell decision on any of these 17 names simply because they have a dual-class ownership structure.  However, because of the embedded conflict that arises when it comes time for the family to sell, these companies deserve a larger margin of safety before wading in.  Be mindful of this dynamic.

Follow us on Twitter and Facebook for the latest in Foolish investing.

Fool contributor Iain Butler does not own shares in any of the companies mentioned in this report at this time.  The Motley Fool has no positions in the stocks mentioned above.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

More on Investing

A plant grows from coins.
Dividend Stocks

Top Canadian Stocks to Buy for Dividend Growth

Dividend growth stocks can be a good option to build a passive income that beats inflation and improves buying power.

Read more »

Women's fashion boutique Aritzia is a top stock to buy in September 2022.
Stocks for Beginners

Got $5,000? Buy This Canadian Stock Before Trump’s Tariffs Take Effect

Canadians still have about a month before tariffs hit, so how can you protect yourself in the meantime?

Read more »

Concept of multiple streams of income
Top TSX Stocks

The Best Stocks to Invest $1,000 in Right Now

Here are some of the best stocks that every investor should own today to generate massive income and strong growth…

Read more »

The TFSA is a powerful savings vehicle for Canadians who are saving for retirement.
Dividend Stocks

Trump’s Tariffs Could Hurt Your TFSA – But These 2 Stocks Will Keep it Safe

Worried about tariffs coming down? Then consider these two stocks to keep your portfolio safe.

Read more »

concept of real estate evaluation
Dividend Stocks

3 Top Real Estate Sector Stocks for Canadian Investors in 2025 

The Canadian real estate sector could see modest growth in 2025, but its long-term secular demand remains intact.

Read more »

Dividend Stocks

Buy These 3 Canadian Stocks Before Tariffs Change the Game

These three dividend stocks offer security, growth -- you name it. No matter what tariffs come our way.

Read more »

Senior uses a laptop computer
Retirement

Top TSX Retiree-Friendly Stocks to Own in 2025

Amidst the volatility around Trump tariffs, these three retiree-friendly TSX stocks can provide stable income and resilient growth.

Read more »

data analyze research
Dividend Stocks

This 7.6% Dividend Stock Is a Must-Buy as Trump’s Tariffs Hit Canada

If there's one way to add some consistency to your portfolio, it's an investment in a passive-income powerhouse like this…

Read more »