By: Larry MacDonald

Most pension plans in Canada are restricted by the Pension Benefits Standards Act of 1985 from owning more than 30% of the votes attached to shares issued by a public company. The rationale, among other things, is to prevent pension plans from controlling large chunks of the Canadian economy.

This restriction has come under question lately, a recent manifestation being a paper written by Poonam Puri, an Associate Professor of Law at Osgoode Hall Law School. There are two main complaints:

• pension funds are blocked from becoming active investors and pursuing the maximization of shareholder value
• Canadian pension funds are put at a competitive disadvantage vis-à-vis foreign pension funds (Canada is the only OECD country that imposes such a rule).

Professor Puri argues the rule should be abolished for the above two reasons plus the fact pension funds are increasingly finding ways to get around the rule anyways. He cites three instances by the Ontario Teachers’ Pension Fund to achieve technical compliance with the 30% rule:

• use of convertible debt (e.g. private placement of convertible debentures from Railpower Technologies Corp. in 2007)
• use of convertible non-voting shares (e.g. non-voting shares issued by Maple Leaf Foods Inc. in 2007)
• use of a shell company to own and vote shares as the pension fund directs (e.g. attempt to privatize BCE Inc.)

The professor makes a good case. But what about the original purpose of the rule — which was to prevent pension funds from owning major pieces of the Canadian economy? Pension funds represent the interests of specific social groups such as unionized teachers, auto workers, and civil servants: would companies and sectors controlled by their pension funds be run in a way beneficial to the companies themselves, minority shareholders, and indeed, the whole of society — or more in the interests of these organized groups and their retirees?