In TELUS Corporation v. Mason Capital Management LLC, the British Columbia Court of Appeal has overturned an important ruling of the British Columbia Supreme Court, widely lauded for articulating concerns regarding “empty voting”. The Court of Appeal acknowledged that empty voting is a concern, but emphasized that this concern must be dealt with through regulatory or legislative change. The Court of Appeal also affirmed the right of CDS to bring corporate actions on behalf of underlying beneficial shareholders in British Colombia.
Generally, the economic interests of shareholders as equity holders are aligned with those of a corporation, and shareholders are expected to vote according to those aligned interests. Empty voting can occur in a variety of ways, but in each case represents the separation of a shareholder’s ability to vote on the affairs of a corporation from the underlying economic interest in the value of the shares.
In TELUS, a New York-based hedge fund, Mason Capital Management LLC, sought to exploit an arbitrage opportunity in the wake of TELUS’ decision to collapse its dual class share structure. TELUS’ dual class share structure had been implemented to comply with Canadian regulations restricting foreign control of Canadian telecommunications companies at a time when TELUS had a significant number of non-Canadian shareholders. The non-voting shares were intended to be economically identical to the voting shares, with the sole difference that they did not carry the right to vote. The voting shares had historically traded at an almost 5% premium to the non-voting shares.
TELUS’ announcement that it intended to collapse the dual class share structure by converting its non-voting shares to voting shares on a one-to-one basis resulted in a narrowing of this spread. Mason executed an arbitrage strategy immediately after the announcement, purchasing voting shares for its funds, while hedging its position by short selling both voting and non-voting shares. By April 10, 2012, Mason had acquired 18.7% of the TELUS voting shares; however, as a result of its hedging, Mason had a minimal economic interest in the rise or fall of TELUS’ share price.
Where Mason did stand to benefit was from the re-emergence of the historical premium attached to the voting shares if the TELUS proposal to collapse its dual class share structure was defeated, which would allow Mason to profit on both its long and short positions. At the same time, Mason would not lose even if the proposal to collapse the dual class share structure was approved.
Mason’s voting position allowed it to defeat the original TELUS proposal, which would have required the support of 2/3rd’s of votes cast. Yet, the historical spread did not re-emerge immediately as the TELUS board stated its commitment to collapse the dual class share structure by other means. In response, Mason provided instructions to CDS to requisition a meeting on its behalf to consider adding a provision to TELUS’ articles aimed at preventing a one-to-one conversion by requiring a conversion ratio of either 1.08 or 1.0475. The meeting was scheduled for October 17, 2012. TELUS sought an order that the Mason meeting requisition did not comply with British Columbia corporate law or TELUS’ articles, and that CDS was not entitled to requisition a meeting on Mason’s behalf. At trial, TELUS won on both fronts.
While the trial decision was decided on technical grounds, the trial judge also articulated the potential abuses inherent in situations where a party has a vote in a company, but no corresponding economic interest.
In its reasons, the Court of Appeal was sympathetic to the concerns expressed by the trial judge, stating “the fact that Mason has hedged its position to the extent that it has is cause for concern. There is, at the very least, a strong concern that its interests are not aligned with the economic well-being of the company.”
While it recognized these concerns, the Court of Appeal disagreed with the trial judge in his conclusion that the relevant corporate legislation provided the court with the authority to prevent Mason from requisitioning a shareholders’ meeting to consider its proposals. The Court found no indication that Mason had violated any laws, nor was it able to find any statutory provision that would allow it to intervene on broad equitable grounds to prevent the meeting. On the governance concerns expressed by the trial judge, the Court concluded “to the extent that cases of “empty voting” are subverting the goals of shareholder democracy, the remedy must lie in legislative and regulatory change.”
The Court of Appeal also affirmed the right of CDS to requisition a meeting on behalf of underlying beneficial shareholders in British Colombia, rather than requiring beneficial shareholders to remove themselves from the CDS system by registering their positions, reflecting the reality that the most Canadian public company shares are held through CDS, which acts as Canada’s national securities depository. In addition, the Court of Appeal emphasized that it was CDS’s responsibility to ensure that it acts on appropriate instructions of beneficial shareholders when taking corporate action as a registered shareholder, not the issuer’s.
In both Canada and the US, legislators and regulators have been urged to take action to address the potential abuses associated with empty voting. The Court of Appeal’s decision in TELUS indicates that Canadian courts may be unwilling to act on these concerns in the absence of further regulatory or legislative action.
Corporations faced with a similar situation might consider taking up their cause through Canadian securities regulators, rather than the courts, given their broad public interest jurisdiction. In the 2006 Sears decision, the Ontario Securities Commission noted that it might be willing to intervene if the use of derivative instruments by a shareholder constituted abusive conduct. It is worth noting, however, that we understand Canadian securities regulators were asked to consider the adequacy of Mason’s disclosure regarding its proposals in light of its obligation under securities laws to describe any material interest in the matters to be considered, but refused to do so. Whether our regulators and legislators will take action in response remains to be seen.
The Court of Appeal’s reasons are available on its website.