In its reason for judgement dated September 11, 2012, the Supreme Court of British Columbia ruled that Telus Corporation was not obliged to hold a shareholder meeting requisitioned by Mason Capital Management LLC on the basis that the requisition for the meeting did not comply with the law. While the ruling was based on application of the shareholder requisition provisions of the British Columbia Business Corporations Act (the BCBCA), the court also made some interesting comments regarding the need to disclose beneficial owners when making a requisition, the practice of “empty voting” and, in particular, the implications for corporate law principles where some shareholders have an economic interest that does not align with the interests of shareholders in a broader sense.
Telus had called its own meeting of shareholders to implement a plan of arrangement that would see the conversion of its non-voting shares into common shares. Telus’ historical dual-class shares structure was originally implemented to allow for foreign ownership without tripping Canadian telecommunication company restrictions on foreign control. While similar in attributes, other than voting, the common shares had historically traded at a premium to the non-voting shares. Mason, a U.S. based hedge-fund, proposed instead its own resolutions that would prevent the conversion unless it took place at a ratio which reflected the purported historical premium paid for the common shares. After learning of Telus’ proposal, Mason acquired a significant number of both classes of shares, simultaneously short selling to hedge its position. In effect, while controlling close to 20% of the vote, Mason had very little net economic interest.
The requisition for the impugned meeting was made by CDS, being the registered holder of Mason’s shares. On the main issue at hand, the court agreed with Telus that the requisition did not comply with the technical requirements of the BCBCA. The requisition was deficient because, while not expressly required by the statute, it failed to identify the beneficial owner on whose behalf the requisition was made by CDS. The directors of Telus where, therefore, not obliged to send a notice in respect of the requisitioned meeting.
The court also went on to discuss the issue of “empty voting” noting the misalignment of the interests of Mason with other Telus shareholders. Mason had argued that the issue of empty voting was irrelevant because its interests were aligned with those of other common shareholders, both having an interest in being compensated for the historical premium paid for their common shares. It further argued that under the requisition provisions of the BCBCA, the court did not need to look behind a shareholder’s voting interest to its true economic interests or purposes.
The court ruled against Mason on both points.
On the issue of alignment of interests, the court found that Mason’s concern with respect to the conversion ratio was of an “overriding concern” only to Mason since only Mason stood to profit with an increase in the price differential among the two classes of shares and only Mason was indifferent to the overall value of the company itself. Having some interests in common with other common shareholders, according to the court, did not amount to those interests being “aligned in a broader sense.” Specifically with respect to empty voting, the court noted the challenge that it presents for shareholder democracy which “rests on the premise that shareholders have a common interest: a desire to enhance the value of their investment.”
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.
On the second issue, the Court’s found that the BCBCA in fact specifically contemplates an investigation into the motivations behind a requisition and gives the court broad discretion to make orders relating to shareholder meetings for any reasons it considers appropriate. That said, since Mason had failed on the validity of the requisition itself, it was not necessary to consider whether the court ought to exercise such broad jurisdiction in this case.
While the issue of empty voting has been on the horizon for quite some time, we have yet to see any definitive regulatory or judicial determinations in Canada of how it is to be dealt with. In addition to the issues it may present for shareholder democracy in general, securities regulators are also attempting to come to terms with the very challenging disclosure issues that it presents. When they implemented their latest insider reporting rules, the Canadian Securities Administrators had mentioned that they would be reviewing issues relating to empty voting. Prior to then, in dealing with the issue of cash-settled equity swaps in the context of a takeover bid, the Ontario Securities Commission explicitly stated that it could use its public interest jurisdiction to sanction a party who intentionally divests beneficial ownership of securities as a means to evade reporting requirements.
For more information, see TELUS Corporation v. CDS Clearing Depository Services Inc.