Canada: Court Expresses Concern About "Empty Voting"

The Supreme Court of British Columbia recently issued its decision in Telus Corporation v. CDS Clearing and Depository Services Inc.  The decision is noteworthy for two reasons:

  • its consideration of whether CDS Clearing and Depository Services Inc. and CDS & Co. (CDS) could properly requisition a meeting as a registered shareholder on behalf of a beneficial shareholder, Mason Capital Management LLC (Mason); and
  • its commentary on Mason's practice of "empty voting".

The Court determined that in order to comply with the form and substance of the relevant provisions of the British Columbia Business Corporations Act (BCBCA) it was not sufficient to have CDS as the registered owner requisition the meeting. Rather, the beneficial owner should have been identified in the requisition to satisfy the requirements of the BCBCA. The Court also expressed concern over the implications for shareholder democracy in cases where a shareholder possesses considerable voting power without a commensurate economic stake in the company through an "empty voting" arrangement.

Background

Telus Corporation has a dual share structure composed of common shares, which carry the right to vote, and shares which did not carry the same voting right. This structure arose as a result of Canadian regulations restricting foreign ownership of Canadian telecommunications companies.

In February 2012, Telus announced a proposal to convert all existing non-voting shares into common shares at a one-to-one ratio as a result of a decline in foreign ownership of its shares. The proposal required an amendment to the Telus articles, and therefore needed special majority approval of 66-2/3% of both common and non-voting shareholders.

Historically, the common shares traded at a 5% premium when compared to the non-voting shares. The price differential between the classes of shares narrowed considerably after the announcement, presumably reflecting the one-to-one ratio proposed by Telus.

Following the announcement, Mason began to acquire common shares while at the same time short-selling non-voting shares. The value of the Telus common shares acquired by Mason was approximately equivalent to the non-voting shares it shorted. Mason's hedged position meant that it would be unaffected whether the value of Telus shares increased or decreased. In fact, due to the short sale of non-voting shares, Mason would profit by a widening of the spread between trading prices for common shares and non-voting shares. Accordingly, Mason opposed the conversion proposal. In the face of Mason's opposition and significant voting block, Telus withdrew its initial proposal.

Despite Telus having abandoned the initial proposal, the price differential between the common shares and non-voting shares did not return to historic levels. Through a requisition made by CDS, Mason sought to call a general meeting of Telus shareholders to vote on establishing a minimum acceptable premium valuation of Telus common shares over non-voting shares for the purposes of any conversion of non-voting shares. CDS is a securities depository, which acts as a registered shareholder for intermediaries such as financial institutions and brokers, allowing for shares in public companies to be traded among participants without requiring any change in registration at the public company level. The requisition made no mention of Mason, stating only that CDS was acting at the request of an intermediary participant in CDS, Citibank Canada, which was in turn acting on behalf of an unidentified beneficial owner of 10 million common shares (later identified as Mason). Telus advised CDS that Telus would not call the general meeting requested in the requisition, citing defects in the requisition which were later considered by the Court. In the meantime, Telus sought to proceed with a conversion plan by way of a plan of arrangement.

Issues

The Court first considered whether CDS could properly requisition a shareholders' meeting. The CDS requisition did not identify Mason, the beneficial owner of the shares.

To fulfil the requirement that the requisition be signed by and include the names of all of the requisitioning shareholders, CDS listed itself as the requisitioning shareholder. Telus argued that only a registered shareholder with a beneficial interest is permitted to requisition a meeting such that the requisition could only proceed if the beneficial owner were to withdraw its position in CDS and register its own shares directly. Describing the calling of a shareholder meeting as an extraordinary step, Telus took the position that requiring a beneficial owner to register its position introduced a number of important safeguards, namely that:

  • the interested parties are able to understand who is behind a requisition;
  • the person behind the requisition takes responsibility for the request to call a general meeting; and
  • the ability to requisition a meeting will be confined to those beneficial owners whose interest in the shares entitles them to acquire a registered position.

The Court cited a general reluctance to enjoin a meeting of shareholders, but concluded that the contents of the requisition must comply in both form and substance with the requirements set out in the BCBCA. The relevant provisions give a right to shareholders to requisition a meeting, prescribe the contents of the requisition, set out the directors' obligations on receiving the requisition and excuse the directors from acting on a requisition in certain cases. The term shareholder is defined in the BCBCA to mean registered shareholders, and those registered shareholders are required to "hold" the shares specified.

The Court specifically declined to decide whether CDS can requisition a meeting on behalf of a participant or beneficial shareholder, but did conclude that the BCBCA required that names and addresses of the requisitioning shareholder(s) – in this case, the actual beneficial holder, Mason. The requirement was for the benefit of shareholders entitled to vote at the general meeting and to assist the directors and company in dealing with the requisition. Knowledge of the requisitioning shareholder's identity was also required in order to know whether the purpose of the requisition was to enforce a personal claim or address a personal grievance (in which case, directors are not required to call a meeting). CDS being named as the requisitioning shareholder did not fulfil the requirement. Because the directors were only obligated to call a general meeting if the requisition requirements were fulfilled, the directors were not required to call a meeting.

Having so concluded, the Court was not required to consider the other arguments advanced by Telus, but nonetheless provided its views on them. Of particular interest were the Court's remarks as to "empty voting". The decision suggests there may be a concern where an investor is permitted to exercise significant voting control over a company without any stake in that company's long- or short-term economic health by virtue of an arrangement where the voting interest is decoupled from the share's economic interest. The Court stated that one of the foundations of shareholder democracy is that shareholders have a common interest: a desire to enhance the value of their investment. The Court stated that where a party has a vote in a company but no economic interest, that party's interests may not lie in the well-being of the company itself. Such divergent interests were said by the Court to subvert the premise underlying shareholder votes.

Mason argued that its interests were aligned with those of other common shareholders, a suggestion that was rejected by the Court. While the Court acknowledged that the conversion ratio of non-voting shares to common shares was an issue of relevance to all common shareholders, only Mason stood to profit from that price differential and Mason was indifferent to the overall value of the company itself.

Implications

This decision indicates that a beneficial holder of shares may not be able to requisition a meeting, or exercise other rights which a statute provides only to registered shareholders, without either withdrawing its shares from CDS to become a registered shareholder, or, at a minimum identifying itself as the relevant beneficial holder accompanying a CDS exercise of registered shareholder rights.

The result in this decision did not turn on whether Mason's "empty voting" position disentitled it to requisition a meeting; however, the Court appears to have been sufficiently troubled to comment and raises the question as to whether a holder of an "empty voting" position will be able to exercise votes or similar rights such as requisitioning shareholder meetings. The Court's commentary on this point appears novel in a Canadian context and the premise that a shareholder's rights may be restricted where its interests are perceived to be inconsistent with the well-being of the company does not appear to be in accord with fundamental corporate law principles that shareholders may act in their own interests as they perceive them.

Mason has appealed the decision and an expedited hearing has been scheduled by the B.C. Court of Appeal for October 4, 2012. It will be interesting to see if the appellate court comments on the "empty voting" theory articulated by the Court in this decision.

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