Canada: Empty Voting: A Challenge To Shareholder Democracy. TELUS Corporation v. CDS Clearing And Depository Services Inc.

In its recent groundbreaking decision, the BC Supreme Court criticized empty voting and noted that courts have the power to curtail the practice.


In February 2012, TELUS announced an arrangement to eliminate its dual-class share structure and convert its non-voting shares into common shares on a one-for-one basis. After the announcement, Mason Capital Management LLC, a US hedge fund, employed an arbitrage strategy to defeat the arrangement and profit from the anticipated price spread this would cause between the two share classes. Mason's share purchases and short positions gave it almost a 20% voting position with a minimal net economic stake in the company. This "decoupling" of its voting power from its stake in the company's economic well-being is known as "empty voting."

TELUS withdrew its proposed arrangement but announced that it remained committed to a one-for-one share conversion. The anticipated trading price gap did not materialize after the arrangement was withdrawn.

On August 1, 2012, Mason attempted to requisition a meeting through CDS, the registered shareholder of its position. The requisition called for a shareholder meeting to amend the company's articles. The amended articles would require that any exchange or conversion of TELUS' non-voting shares into common shares would be at a ratio of either 1.08 to 1 or 1.0475 to 1, thus signalling a premium value for common shares and potentially widening the spread between the classes. Only common shareholders were to vote on these amendments.

As previously indicated, TELUS announced on August 21, 2012, that it would pursue an arrangement with its non-voting shareholders to exchange their shares for common shares on a one-for-one basis.


TELUS petitioned the court to prevent the requisitioned meeting from taking place. The court declared that the meeting could not be held on two grounds: (i) the CDS requisition was defective because it did not disclose the true beneficial owner behind the requisition and (ii) implementing the resolutions in the proposed manner would be beyond the powers of the company under its articles because the non-voting shareholders would be deprived of their right to vote on an amendment to their share terms and conditions. Mason is appealing this decision.

Empty voting

The court recognized the dangers of empty voting in strong terms. It described the practice of empty voting as "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 though shareholders may have different investment objectives, "the shareholder vote is intended to reflect the best interests of the company" through the "pursuit of wealth maximization." Shareholder democracy is "subverted" by empty voting:

[105] 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.

[106] In extreme examples, empty voters may even be adverse in interest to other shareholders ...

The court disagreed with Mason's submission that its interests were aligned with those of TELUS' other common shareholders, observing that their interests were not aligned "in a broader sense":

[110] I cannot agree with Mason's submissions ... While the issue of conversion ratios is indeed a matter of legitimate concern to all Common Shareholders, it is of overriding concern only to Mason. Only Mason stands to profit if the price differential between Common Shares and Voting Shares increases. And only Mason is indifferent to the overall value of TELUS itself.

The court also disagreed with Mason that, in ruling on the validity of a requisition, the court lacked the power to look into the "true economic interests or purposes" behind a shareholder's voting interest. The court found that the BC Business Corporations Act did not oust the court's power to consider the reasons underlying a requisition. In fact, the statute "specifically contemplates an investigation into the motivations behind a requisition." The court also noted its broad statutory discretion to make orders relating to the calling, holding and conducting of meetings "for any ... reason the court considers appropriate."

Because the court had already ruled that the requisition was invalid on other grounds, the court found it unnecessary to decide whether it ought to exercise its jurisdiction in this case. However, the court signalled that judicial intervention may be available to curb empty voting tactics.

Norton Rose Canada was co-counsel for the Petitioner, TELUS Corporation, in this proceeding.

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