Prior to TELUS Corporation’s (TELUS) October 17, 2012 meeting of the shareholders (the TELUS Meeting), Mason Capital Management LLC (Mason), a New York investment fund manager and TELUS’ largest shareholder, appeared to be gaining momentum in the ongoing proxy battle between the parties. At the TELUS Meeting, however, shareholders of TELUS voted overwhelmingly in favour of TELUS’ share consolidation plan; a plan Mason has been diligently trying to thwart. TELUS will ask the court to sanction its shareholder approved plan in early November.
Leading up to the TELUS Meeting the parties have been engaged in a highly publicized court battle which has brought to the forefront a troubling governance issue; the practice of “empty voting.” Empty voting is a phenomenon whereby a party with very little financial stake in a company is able to accumulate a large number of votes. Although the British Columbia Supreme Court (the BCSC) in Telus Corporation c. Mason Capital Management LLC provided compelling policy arguments against empty voting, the British Columbia Court of Appeal (BCCA) chose not to intervene in this regard and, in doing so, affirmed that under British Columbia law, the court has no power to disenfranchise a shareholder by reason that the interest of such shareholder may not be aligned with other shareholders or the well-being of the corporation.
In February 2012, TELUS announced its initial plan to collapse the company’s dual share structure by converting its non-voting shares into common shares at a one-to-one exchange ratio (the Initial Plan). TELUS’ Initial Plan was subsequently modified in late August 2012 when it announced its plan to effect the share conversion by way of a plan of arrangement, which, unlike the initial plan, would only require the simple majority vote of common shareholders and would not affect the company’s articles. The goal of moving away from a dual share structure was to ultimately improve corporate governance.
Following the announcement of the Initial Plan, Mason began accumulating common shares of TELUS while simultaneously short selling non-voting shares. This arbitrage arrangement successfully hedged Mason’s position. Mason attained a 20% voting stake in TELUS while maintaining very little net financial interest in the company.
On Aug 1, 2012 CDS Clearing and Depository Services Inc. (CDS) issued a requisition (the Requisition) which called for a meeting of the shareholders (the “CDS Meeting”) on behalf of an unidentified beneficial holder of 10 million common shares, which was later determined to be Mason. Since Mason stood to profit from the widening of the spread between the two share classes, the Requisition set forth various resolutions which opposed the TELUS’ share conversion. The CDS Meeting was held jointly with the TELUS Meeting on October 17, 2012 in order to give shareholders an opportunity to consider both parties’ resolutions at once.
At trial, TELUS sought an order declaring the Requisition invalid. TELUS claimed, among other things, that the Requisition was defective as it was founded on “empty votes” and did not properly identify the beneficial shareholder, Mason.
Both the trial and appeal decisions highlight the significant discord that can be caused when a shareholder’s economic interests are incongruent with their voting power. By focusing on the existing opportunity under Canadian law for activist shareholders to profit from the use of hedging tactics, both levels of court brought attention to the importance of shareholder democracy and transparency.
At trial, the court discussed the notion of shareholder democracy, highlighting the fact that in order to achieve democracy, shareholders must be working toward one preeminent goal – the pursuit of enhancing the value of their investment. The trial judge found that although Mason’s concern over the share conversion ratio was something which affected all shareholders, it was a concern which had a disproportionate impact on Mason. In reviewing the British Columbia Business Corporations Act (the Act), the trial judge determined that section 167(7)(d) empowered the court to intervene in order to ascertain the motivations behind any requisition. Moreover, the court found that it had the power to intervene to subvert empty voting practices under section 186. This section grants broad discretionary power on the court to make orders pertaining to the calling, holding or conducting of meetings. Based on BCSC’s ultimate finding on the Requisition, as set out below, the judge chose not to exercise its power under either of the above noted sections.
On appeal, the court came to different conclusions. Specifically, the court reviewed the broad discretionary control granted under section 186 and found that nothing in this section allowed a court to disenfranchise a shareholder on the suspicion of empty voting. Moreover, the court highlighted that despite Mason’s hedged position, its concern over the share conversion ratio was in fact a viable concern to the broader shareholder base. Ultimately, the court of appeal signaled to the legislature and regulators that an overhaul is required in order to properly address the challenging governance issues presented by empty voting. The court affirmed that Mason’s arbitrage plan is not in violation of any laws.
With respect to the Requisition, the BCSC reviewed provisions of the Act and held that by not identifying the requisitioning shareholder the Requisition was defective. The BCCA allowed the appeal and found that there is no requirement to name a beneficial holder of shares in the Requisition in British Columbia.