Issuance of Tracking Stocks by Privately-held Companies

Definition von Tracking Stocks: Common stock issued by a parent company that tracks the performance of a particular division without having claim on the assets of the division or the parent company. Also known as ”designer stock”. Eine Aktiengattung, wie es sie so in Deutschland nicht gibt. Einmal mehr waren die Gesellschaftsrechtler des angelsäxischen Rechtssystems sehr kreativ…

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By Andre Perey (Blake, Cassels & Graydon LLP). Canada

What are the primary drivers of the lack of use of Tracking Shares?

Given the short lifespan of Tracking Shares in the US and the few examples of use of Tracking Shares in Canada, it is useful to consider the primary difficulties with this type of structure.

First, and foremost is the potential conflicts of interests which will inevitably be faced by the directors of a Tracking Share issuer. Since the Tracked Unit underlying the Tracking Shares remains part of the greater company, under the control of the same board, there may be instances in which different classes of shares will have divergent interests. As a director’s fiduciary duty is to the company itself, it is not clear how directors would resolve such conflicting interests among equity holders.

Second, given that a Tracking Share remains part of the company, they are generally subject to the same risks as investments in the company as a whole. Should the company face liquidation or bankruptcy, the assets of the Tracked Unit will be available alongside the assets of the company as a whole to satisfy the outstanding obligations to creditors.[1]

Third, it can be difficult to appropriately value the Tracked Unit. This is a particularly pertinent issue with respect to private companies ...

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