On October 12, 2012, the British Columbia Court of Appeal overturned the lower court decision which held that a requisition for a general meeting of shareholders of TELUS Corporation (TELUS) made by Mason Capital Management LLC (Mason), through CDS & Co. (CDS), was invalid because it did not comply with the requirements of the Business Corporations Act (British Columbia) (BCBCA) and because the proposed resolutions did not conform with TELUS’s articles. Furthermore, 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 lower court decision notes that TELUS has a dual share structure composed of common shares and non-voting shares. The non-voting shares have historically traded at a slight discount relative to the trading price of the common shares. In February 2012, TELUS announced that it proposed to convert all non-voting shares to common shares on a one for one basis. The announcement resulted in a narrowing of the price differential between the two classes of shares.
As noted in the decision, Mason executed an arbitrage plan after the announcement whereby it acquired TELUS common shares for its funds, hedging its position by short selling both common and non-voting shares. The effect of this was that while Mason controlled close to 20% of the vote, it had very little net economic interest. Mason anticipated voting against the arrangement, and profiting from the re-emergence of the historical premium attached to the voting shares once the arrangement was defeated or withdrawn. Subsequently, TELUS withdrew its original proposal.
On August 1, 2012, CDS issued a requisition for a general meeting of TELUS, stating that it was the registered holder of more than 1/20 of the issued voting shares of TELUS, and that it was operating under direction from a beneficial owner of 10,000,000 common shares. As noted in the decision, the requisition did not identify the beneficial owner of the shares, though it was understood that the requisition was on Mason’s behalf. The requisition sets out four resolutions that Mason wished to place before the shareholders aimed at requiring TELUS to ensure that any future conversions of non-voting shares into common shares be effected at certain conversion ratios.
On August 21, 2012, TELUS advised CDS that it believed the requisition to be defective and hence declined to schedule the meeting demanded by the requisition. Earlier on August 21, 2012, TELUS obtained an order of the Supreme Court of British Columbia granting it leave to hold its own meeting on October 17, 2012, to vote on a second proposed arrangement that would allow non-voting shares to be exchanged for voting shares on a one-for-one basis.
BC Supreme Court Decision
The first issue the Supreme Court considered was whether CDS had properly requisitioned a meeting. CDS had listed itself as the requisitioning shareholder. TELUS argued that CDS had not properly brought the requisition and that only registered shareholders with a beneficial interest could requisition a meeting. Furthermore, TELUS argued that a requisition could only proceed if the beneficial owner withdrew its position in CDS and registers its own shares directly. It was TELUS’ position that by requiring a beneficial owner to register its position, a number of important safeguards were introduced.
The Supreme Court explained that the term “shareholders” is defined in s. 1(1) of the BCBCA to mean registered shareholders and that registered shareholders who may requisition a general meeting are described in s. 167(2) of the BCBCA as those who “hold in the aggregate at least 1/20 of the issued shares of the company that carry the right to vote at general meetings”.
The Supreme Court held that the requisition must include the names and addresses of the requisitioning shareholders. There is an obligation on the directors only to call a general meeting if the provisions of ss. 167(2) and (3) are met and that the directors could not ascertain whether the required threshold was met by a requisition naming only CDS. Furthermore, in order to know whether the purpose of the requisition is to enforce a personal claim or address a personal grievance, the identity of the requisitioning shareholders must be known. The Supreme Court held that the requisition, which named only CDS, was defective as it did not identify the beneficial owner behind the requisition.
The Supreme Court also held that the Mason’s proposed resolutions were contrary to TELUS’s articles and the BCBCA as the proposed resolutions, if adopted, would effectively amend Article 27 of TELUS’ articles without complying with the requirements set out in that provision.
With respect to the “empty trading” strategy, the Supreme Court was highly critical of Mason. In particular, it felt that Mason’s interests were misaligned with the interests of other common shareholders. The Court noted that although the issue of conversion ratios was a legitimate matter of concern for all common shareholders, the issue was of “overriding concern” only to Mason given that Mason stood to profit if the price differential between common shares and non-voting shares increased. The fact that Mason shares some interest with other common shareholders did not mean that its interests align with those shareholders in a broader sense. Despite the criticism, the Supreme Court did not base its decision on TELUS’ empty voting argument.
Court of Appeal Decision
In its decision, the Court of Appeal concluded that the requirements of section 167(3)(b) of the BCBCA are “clear and unequivocal – a requisition must be signed by a registered shareholder, and the registered shareholder’s address must be furnished” and that there “are no requirements in the section to furnish the names of those beneficially entitled to the shares, and that the chambers judge erred in reading such a requirement in”. According to the Court of Appeal, CDS is the registered shareholder in respect of the shares that were used to requisition the meeting. Unless there were compelling reasons to hold otherwise, the plain words of the statute dictated that CDS is entitled to requisition a meeting. Furthermore, there is nothing in s. 167(3)(b) of the BCBCA that suggests either that a requisitioning shareholder must be the beneficial owner of shares, or that he, she, or it must disclose the name of the beneficial owner.
Regarding the proposed resolutions, the Court of Appeal concluded that the proposed resolutions were not inconsistent with the provisions of Article 27 of TELUS’ articles.
With respect to the “empty voting” concern, the Court of Appeal noted that while Mason’s interests are not consistent with the economic well-being of TELUS, there is no indication that Mason was engaging in anything illegal in its trading practices.
The Court of Appeal acknowledged that while the problem of “empty voting” has been identified in cases and in legal literature, courts are entitled to intervene only when they have specific authority to do so under statutory provisions. Specifically, the Court of Appeal stated that 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. That said, there is no indication that it is violating any laws, nor is there any statutory provision that would allow the court to intervene on broad equitable grounds. To the extent that cases of ‘empty voting’ are subverting the goals of shareholder democracy, the remedy must lie in legislative and regulatory change.”
According to TELUS’ press release dated October 15, 2012, the BC Supreme Court ordered a joint shareholder meeting to be held on October 17, 2012 to consider TELUS’ share exchange proposal and Mason’s related resolutions. The Supreme Court found that it was appropriate to allow proxies received by TELUS from common shareholders to be voted by TELUS in respect of Mason’s resolutions. As a result, a proxy granting authority to management to vote in favour of TELUS’ proposal could be voted against Mason’s resolutions. Alternatively, a proxy granting authority to vote against TELUS’ proposal could be voted in favour of Mason’s resolutions. Following the meeting on October 17, 2012, TELUS released the results of the meeting. TELUS shareholders overwhelmingly voted in favour of TELUS’ proposal. Mason has stated that it will appeal the orders granted by the Supreme Court. None of Mason’s resolutions received the required common shareholder support to pass. A hearing for the final order to approve the transaction is scheduled for November 5, 2012.