Every Wednesday, we publish our “Investor Toolkit” series. Whether you’re a new or experienced investor, these weekly updates are designed to give you our specific advice on successful investing. Each Investor Toolkit update gives you a fundamental piece of investment advice and shows you how you can put it into practice right away.

Tip of the week: “There are a few good reasons to pay a little extra money for the right class of shares in the stocks you buy.”

A few weeks ago, Telus Corp. (Toronto symbols T and T.A) was forced to scrap its plan to merge its common shares and its non-voting shares into a single class.

Mason Capital, a U.S.-based hedge fund which owns almost 20% of the company’s common shares and a small part of the non-voting shares took a stand against the proposal. Mason objected that this would diminish the value of the common shares, which trade at a higher price than the non-voting shares. It won the argument, for now.

This debate served to highlight the issue of which class of shares to buy. It can make more than a nominal difference for investors, especially when takeover bids come into play.

A number of other Canadian companies, such as Bombardier, Canadian Tire and Teck Resources, have two classes of common shares: voting and non-voting (or multiple voting and subordinate voting).

The two classes get the same or almost the same dividend. The main difference: holders of voting or multiple-voting shares control the company. Non-voting and subordinate-voting shares only have meaningful voting rights in extraordinary circumstances.

Companies with multiple share classes often have a so-called “coattails provision.” This provision aims to ensure that both share classes have equal rights in the event of a takeover. So, if you hold non-voting or subordinate-voting shares, you won’t miss out on a takeover bid.

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Non-voting shares trade more actively than the voters, usually at a slight price discount. But successful investors focus on finding investments that you can stick with indefinitely, so they put a lower priority on liquidity. They may pay a little more for the voting shares. Here’s our advice on which class to buy:

1. Always choose voters if they trade at a premium of 5% or less over non-voters. Chances are you’ll get the premium back when you sell, and the voting stock won’t go below the non-voting. But the voting-stock premium could balloon to 20% or more in a takeover.
2. Choose non-voting shares if the voters trade at a premium of 10% or more. If takeover interest wanes, the premium may shrink to 5% or less. If there is a takeover, the coattails provision may apply. If so, the premium on the voting shares should evaporate.
3. If the voting-stock premium is between 5% and 10%, base your decision on your own temperament and judgment. If you’re an aggressive investor and a takeover bid seems likely, you may prefer the voting stock. Follow the investment advice that best suits your own temperament and circumstances.

Whenever premiums exceed 5%, however, many conservative investors routinely choose the cheaper non-voters. They see themselves as investors, not gamblers.

COMMENTS PLEASE

Hedge funds like Mason Capital are playing a larger role as shareholders of a number in Canadian companies. Do you feel their influence works in favour of the other shareholders? Or do you feel they are basically quick-buck artists with no real concern for the long-term health of the company and its shareholders? Let us know what you think in the comments section below. Click here.