On October 12, 2012, the British Columbia Court of Appeal (the "BCCA")1 set aside an earlier decision of the British Columbia Supreme Court (the "Supreme Court")2 thereby allowing CDS & Co. ("CDS"), in its capacity as the registered holder of common shares of Telus Corporation ("Telus") beneficially held by investment funds managed by Mason Capital Management LLC ("Mason"), to call and hold a meeting of Telus' shareholders in accordance with the shareholders' meeting requisition provisions under the Business Corporations Act (British Columbia) (the "Act").
The decision of the BCCA is noteworthy not just because the BCCA refused to be swayed by the policy concerns regarding "empty voting" – believing that this issue was better left to the legislature – but also in light of its commentary regarding amendments to the articles of a corporation incorporated under the Act.
Telus, a company incorporated under the Act, has a capital structure with two classes of shares – common shares and non-voting shares. Other than the fact that the non-voting shares do not carry any voting rights, the two classes of shares have identical attributes and rights. Both classes of shares are listed on the Toronto Stock Exchange, and the non-voting shares have historically traded at a slight discount to the common shares of 4.5%3.
For various reasons, including the promotion of good corporate practice and the enhancement of the liquidity and marketability of Telus' shares, the directors of Telus announced in February 2012 a proposed arrangement whereby the non-voting shares would be converted on a one-for-one basis to common shares. Immediately following the announcement, the trading price differential narrowed between the two classes of shares. Mason began acquiring Telus common shares for its funds, while hedging its position by short selling both common shares and non-voting shares. Mason had an arbitrage plan to vote against the arrangement, and profit from the price differential between the two classes of shares, which was expected to return following the defeat or withdrawal of the proposed arrangement. By April 2012, Mason's funds held approximately 18.7% of the issued common shares. Telus contended that, after taking into consideration Mason's hedged short position on both classes of shares, Mason's net investment in Telus represented only 0.021% of Telus' outstanding share capital.
On May 8, 2012, Telus announced that the proposed arrangement was being withdrawn, after it had become clear that Telus would not be able to secure the special majority vote of two-thirds of each class of shares required to implement the proposal.
CDS is the registered holder of approximately 95% of the outstanding common shares of Telus, holding such shares on behalf of many intermediaries, who in turn hold the shares on behalf of numerous other intermediaries and beneficiaries, some of which are Mason's investment funds. On August 1, 2012, CDS issued a requisition (the "CDS Requisition") for a general meeting of Telus shareholders (the "CDS Meeting") pursuant to the provisions of section 167 of the Act whereby only common shareholders would be entitled to vote. The CDS Requisition stated that CDS was operating under the direction of an anonymous beneficial owner of 10,000,000 common shares. Despite the anonymity in the CDS Requisition, Mason announced on August 2, 2012 that it had requisitioned the CDS Meeting.
The CDS Requisition sets out four resolutions that Mason wished to place before the common shareholders at the CDS Meeting. The first two resolutions (or mandatory resolutions) proposed the addition of a new provision to Telus' articles to prohibit Telus from converting or exchanging non-voting shares for common shares at an exchange ratio of less than one common share for 1.0475 or 1.08 non-voting shares, except in accordance with existing obligations under the articles or as authorized by an exceptional resolution approved by 80% of the common shareholders. The second set of resolutions, only to be considered if the first set of resolutions failed, were non-binding recommendations to the Telus directors (or advisory resolutions) that they not proceed with any exchange or conversion of non-voting shares for common shares unless the ratio was at a minimum exchange ratio of one common share for 1.0475 or 1.08 non-voting shares.
On August 21, 2012, Telus wrote to CDS indicating that Telus had declined to call the CDS Meeting because Telus believed that the CDS Requisition was defective in a number of respects. On the same day, Telus obtained an order from the Supreme Court granting it leave to hold its own general meeting as well as a separate class meeting of non-voting shareholders (together, the "Telus Meeting") to consider and vote on a second proposed arrangement. The new proposed arrangement would allow the non-voting shares to be exchanged for voting shares on a one-for-one basis without having to amend Telus' articles. Thus, while a 2/3 majority vote from non-voting shareholders was required to approve the proposed arrangement, only a bare majority of the common shareholders was required.
On August 31, 2012, CDS sent a notice to Telus shareholders calling the CDS Meeting to be held on October 17, 2012, the same date as the Telus Meeting. Telus immediately commenced proceedings in the Supreme Court and subsequently obtained an order from the Supreme Court that CDS and Mason were not entitled to call the CDS Meeting on the basis that, among other things, the CDS Requisition was defective. On appeal by Mason and CDS, the Supreme Court's order was set aside by the BCCA.
the issues and BCCA reasons for judgment
Both the Supreme Court and BCCA decisions discussed the following noteworthy issues:
- the ability of a registered holder, such as CDS, to requisition a shareholders' meeting on behalf of an anonymous beneficial shareholder under the Act;
- whether the proposed resolutions for the CDS Meeting would effectively alter Telus' articles by affecting the rights and restrictions of the non-voting shares, and therefore be ultra vires; and
- the practice of "empty voting", the challenges it creates for shareholder democracy, and the court's role and inherent jurisdiction to intervene in such practices.
can a registered holder requisition a shareholders' meeting under the Act without naming the beneficial holder?
Subsection 167(2) of the Act provides that shareholders holding in aggregate at least 5% of the issued voting shares of a company are entitled to requisition a general meeting of shareholders. The term "shareholder" is defined in the Act to mean "a person whose name is entered in a securities register of a company as a registered owner of a share of the company" (i.e., a registered shareholder). In addition, subsection 167(3) stipulates that a requisition must be signed by, and include the names and mailing addresses of, all of the requisitioning shareholders.
The Supreme Court held that Telus' directors had the right to decline the requisitioned meeting because the CDS Requisition did not comply with the requirements set out in subsections 167(2) and (3). In its decision, the Supreme Court took the view that a requisition only naming CDS (the registered holder in this case) as the requisitioning shareholder was insufficient since it did not allow Telus to determine whether the meeting was being requisitioned for an improper purpose which if that was the case would allow Telus to properly reject the requisition:4
. . . [I]n 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. I do not think that naming the nominee of the statutory depository on a requisition requiring a general meeting fulfills that purpose. Nor do I think that such an interpretation impairs the efficient operation of capital markets.
… in my opinion, the [CDS] Requisition must identify the beneficial shareholders behind the requisition so the directors can meet their duties under ss. 167(2), (3) and (7).
In contrast, the BCCA focused on a plain reading of the Act. Since the term "shareholder" is defined as the registered shareholder, the court determined that CDS, as the registered shareholder of the Telus shares in question, had the power to requisition the CDS Meeting. Further, the court determined that the language of the Act was clear – a requisition must be signed by a registered shareholder and only required the furnishing of the registered shareholder's address; there is no requirement that the requisitioning shareholder also be a beneficial holder or for the beneficial holder to be named in the requisition.
In response to the Supreme Court's discussion regarding the directors' duties to ascertain whether the purpose of a requisition is to enforce a personal claim or address a personal grievance, the court noted that the statute "does not place any duty on directors to detect inappropriate requests for meetings – it merely gives them discretion to refuse to call a meeting in certain circumstances."5 Although there may be situations where the knowledge of the identity of the beneficial shareholder may be critical in determining whether a requisition is appropriate, the BCCA stressed that the courts are not given the power to expand the requirements for a requisition beyond those clearly set out in the Act.
are the resolutions proposed ultra vires?
In considering the ultra vires issue, the Supreme Court held that Mason's proposed mandatory resolutions were contrary to Telus' articles and the Act. In particular, the court took the view that the mandatory resolutions, in setting a minimum exchange ratio between the two classes of shares, would modify the rights and attributes attached to both the common shares and the non-voting shares as set out under Article 27 of Telus' articles. Therefore, the court determined that, pursuant to the provisions of the Telus articles and the Act, the proposed resolutions would require approval by the common shareholders and non-voting shareholders, voting as separate classes, and that the general meeting of shareholders requisitioned by CDS to consider the proposed resolutions would not fulfill this requirement.6
The BCCA did not agree. In reviewing Telus' articles, and in particular Article 27 which contained the rights, privileges, restrictions and conditions attached to the non-voting and common shares, the court noted that the mandatory resolutions in the CDS Requisition could have been set out in other provisions of the articles and therefore there need not have been an amendment to Article 27. An amendment to Article 27 would have required 2/3 majority approval from each class of shares pursuant to Article 27.10, and under the Act a shareholder requisitioned meeting (being a general meeting) could not be constituted as a class meeting for a vote by the holders of non-voting shares. In considering Article 27.9, which required that the common shares and the non-voting shares have the same "rights" and attributes," the court concluded that "the proposed resolutions do not affect any ‘right' or ‘attribute' of the non-voting shares, because there is no right or ability to convert or exchange shares"7 in the articles. The BCCA went on to state that, other than in narrowly defined circumstances, the articles of Telus do not suggest any ability to exchange or convert non-voting shares for common shares.
With respect to the two advisory resolutions, the BCCA acknowledged that the requisitioning of a meeting merely to consider advisory resolutions might not "justify the calling of a special shareholder meeting,"8 but concluded that it was "not convinced that section 167 precludes shareholders from requisitioning a meeting for that purpose."9
Ultimately, the BCCA did not find the proposed resolutions in the CDS Requisition to be ultra vires.
empty voting and the court's role in preventing such practices
Telus argued that Mason should not be allowed to requisition a meeting (through CDS) because, despite Mason's significant holding of Telus common shares, its hedged position meant that Mason had a very limited net financial interest in Telus. Both the Supreme Court and the BCCA expressed concern with respect to "empty voting" – being the accumulation of votes by a party that has very limited or no financial stake in the company (or the "decoupling [of] a share's economic interest from its voting interest")10 – and the challenge that "empty voting" causes to the protection of corporate shareholder democracy.
While the Supreme Court did not rest its decision on this issue, the court's commentary in this regard indicated that the court would have been willing to interpret section 167 of the Act to require any shareholder requisitioning a meeting under that statute to have a significant economic interest in the shares that it purports to vote.
In response to the Supreme Court's comments on this issue and its interpretation of the requirements under section 167 of the Act, the BCCA cautioned that the courts are only entitled to intervene when they have specific authority to do so under statutory provisions. On a plain reading of subsection 167(2), the BCCA concluded that such provision "does not refer to any particular level of net investment in a company, but only to the holding of a particular proportion of the issuer voting shares" and that "[t]he reference to the ‘aggregate' shareholding simply allows the voting shares of multiple shareholders to be added together; it does not allow the court to look behind shareholders to determine whether the shareholding represents a ‘material interest in the company.'"11
Despite its stated concerns with "empty voting", the BCCA was not able to find anything in the Act that gave the court authority to prohibit a shareholders' meeting on the basis that the requisitioning shareholder is engaging in "empty voting." Although there may be "a strong concern that [Mason's] interests are not aligned with the economic well-being of the company … there is no indication that [Mason] is violating any laws, nor is there any statutory provision that would allow the court to intervene on broad equitable grounds."12 To conclude, the BCCA noted that the remedy must lie in legislative and regulatory change to address the problem of "empty voting" and its potential negative impact on the goals of shareholder democracy.
Historically, dissidents requisitioning a meeting have registered their shares not only to ensure that they satisfy the requirement that they be a registered shareholder in order to requisition a meeting, but also to ensure that they have greater flexibility in dealing with issues that may arise surrounding the requisitioned shareholders' meeting. Prior to the decision of the Supreme Court, there was some (albeit limited) concern as to whether a nominee that was merely a registered shareholder – and not also a beneficial shareholder - could requisition a meeting; this concern should now abate.
The issues surrounding "empty voting" will no doubt continue to generate commentary; however, we would suggest that the concerns related thereto will not be easily resolved. The fact of the matter is that "empty voting" has been with us for some time – whether through a shareholder voting shares that were sold following the "record date" or the numerous financial or derivative products in the market-place which can separate voting control from other indicia of share ownership.
With respect to the decision of the BCCA regarding the mandatory resolutions in the CDS Requisition not being ultra vires, we suspect that this reasoning will generate significant discussion in years to come.