Court Invalidates Shareholder Meeting Requisition; Sends Strong Message on Empty Voting

For the first time, a Canadian court has commented on "empty voting" tactics, signalling that courts may be willing to deny empty voters the ability to exercise shareholder rights, including the right of a 5% shareholder to requisition a shareholder meeting.

These comments were made in an important ruling of the British Columbia Supreme Court (September 11, 2012) on the validity of the shareholder meeting requisition submitted by Mason Capital in respect of TELUS Corp. relating to the collapse of TELUS's dual class share structure. The arguments advanced by TELUS included an argument that the requisition was not valid because Mason is an "empty voter" as it has almost entirely hedged its economic interest in TELUS while still controlling almost 20% of the vote.

Background

TELUS originally proposed to collapse its dual class share structure in February 2012. Under the terms proposed by TELUS, non-voting shares would be converted to voting common shares on a one-for-one basis. Following the announcement of that proposal, Mason began simultaneously acquiring common shares and short selling an almost equivalent amount of common shares and non-voting shares. Through this arbitrage strategy Mason acquired an almost 20% ownership interest in TELUS common shares but had almost no economic interest in TELUS. However, because of its short sales of non-voting shares, Mason stood to reap significant profit if the conversion proposal were to fail and the spread between the trading prices of the common shares and non-voting shares widened.

As a result of Mason's opposition and its control of 20% of the vote, TELUS withdrew the conversion proposal when it became apparent that Mason controlled a sufficient number of votes to block the 66 2/3% approval that was required for the proposal. Subsequently, in August 2012, Mason submitted a requisition for a shareholder meeting to adopt a number of resolutions aimed at requiring TELUS to ensure that any future conversions of TELUS's non-voting shares into voting common shares be effected at conversion ratios of 1.08 or 1.0475 non-voting shares for each common share. TELUS rejected Mason's requisition on several grounds, including on the basis that the requisition was founded on "empty votes" given that Mason had hedged almost all of its exposure to the common shares that it had the power to vote.

The Court's Decision

TELUS was successful in having the Court declare the Mason requisition invalid, both on the basis that the form of requisition submitted by CDS & Co. (as the registered holder of the shares controlled by Mason) did not disclose Mason's name and address as the beneficial holder of the shares, and also on the basis that the proposal made by Mason is inconsistent with the share provisions in TELUS's articles and did not provide non-voting shareholders the opportunity to vote on the proposal as those share provisions required.

TELUS also had taken the position that the requisition was invalid because Mason is an "empty voter". In light of the Court's findings with respect to the validity of the requisition, it was unnecessary for the Court to consider whether to exercise its jurisdiction to invalidate Mason's requisition on this basis. Nevertheless, the Court was highly critical of Mason's position and issued a strong statement on the problem of empty voting. In particular, the Court stated:

"The term "empty voting" encompasses a range of tactics investors use to decouple the voting interest and the economic interests carried in a share. By decoupling a share's economic interest from its voting interest, an investor can have significant voting control over a company without having any stake in that company's long or short term economic health.

The practice of empty voting presents a challenge to shareholder democracy. Shareholder democracy rests on the premise that shareholders have a common interest: a desire to enhance the value of their investment. Even when shareholders have different investment objectives, the shareholder vote is intended to reflect the best interests of the company in the pursuit of wealth maximization.

When a party has a vote in a company but no economic interest in that company, that party's interests may not lie in the wellbeing of the company itself. The interests of such an empty voter and the other shareholders are no longer aligned and the premise underlying the shareholder vote is subverted."

The Court also rejected Mason's submission that its interest was aligned with the interests of other common shareholders. The Court stated that, although the issue of conversion ratios is a legitimate matter of concern for all common shareholders, the issue is of "overriding concern" only to Mason given that Mason is indifferent to the overall value of TELUS itself but stands to profit if the price differential between common shares and voting shares increases.

While the Court did not base its order on the negative voting argument, the strong statement on empty voting suggests that the Court would have been willing to do so if necessary. The decision marks the first instance in Canada in which the issue of empty voting has received judicial consideration and is a promising indication that courts will be willing to take action to curtail the practice in appropriate circumstances.

A copy of the decision is available here.