Canada: Mason Capital Succeeds: Appeal Court Confirms CDS' Ability To Requisition Meeting By "Empty Voter"

In TELUS Corporation v. Mason Capital Management LLC, the British Columbia Court of Appeal considered the validity of a shareholder's requisition for a general meeting of shareholders. The Court clarified that a requisition made under s. 167 of the Business Corporations Act need not identify the beneficial owner of the shares used to call the meeting in order to be valid. In addition, the Court held that it had no authority under the Act to restrain a shareholder from requisitioning a meeting on the basis of its "net investment" or that its interests are not aligned with the economic well-being of the company.

Background

The requisition concerned the capital structure of the respondent, TELUS Corporation (TELUS). TELUS has two classes of shares: common shares and non-voting shares. TELUS originally adopted this capital structure in order to comply with foreign ownership restrictions on its voting shares.

When foreign investment in TELUS decreased and the rationale for having non-voting shares disappeared, TELUS's board of directors explored the possibility of consolidating the company's share structure by exchanging the non-voting shares for voting shares.

TELUS ultimately announced plans to see the non-voting shares converted on a one-for-one basis to common shares. This announcement resulted in a narrowing of the price differential between the two classes of shares. Historically, the non-voting shares traded at a discount relative to the trading price of the common shares.

In response, the appellant, Mason Capital Management LLC, began acquiring common shares and hedging its position by short selling both common and non-voting shares. As a result, Mason's interests lay in widening the gap between the prices of non-voting and common shares.

Mason later requisitioned a general meeting pursuant to s. 167 of the Act, proposing that four resolutions be put before shareholders. The first was to amend TELUS's articles to prohibit the company from exchanging non-voting shares for common shares at a ratio of less than 1.08 non-voting shares per common share, with limited exceptions. The second resolution was identical to the first except that it specified a lower rate of exchange. The third resolution, which was to be considered only if the first two resolutions were not approved, was a non-binding recommendation to the directors that they not proceed with any exchange of shares at a ratio of less than 1.08 non-voting shares per common share. The fourth resolution mirrored the third resolution, but specified a lower rate of exchange.

Although Mason was behind the requisition, the requisition was formally made by CDS & Co., the nominee of CDS Clearing and Depository Services Inc. As the national securities depository, CDS was the registered shareholder of most of the common shares, which CDS held on behalf of numerous intermediaries, including on behalf of Mason. The requisition stated that CDS was the registered holder of a number of shares sufficient to requisition the meeting, and that CDS was operating under direction from a beneficial owner of the shares. The requisition did not identify Mason as the beneficial owner behind the requisition. However, on the day immediately following CDS's requisition Mason issued a press release announcing that it had requisitioned the meeting.

TELUS responded to the requisition by seeking and obtaining court orders preventing Mason from calling or holding the meeting. As discussed by our colleagues in an earlier post, the chambers judge held, among other things, that the requisition was improperly made because it did not fully identify the beneficial owner of the shares that were used to call the meeting, and, alternatively, that the proposed resolutions were contrary to TELUS' articles and the Act. Mason appealed.

Decision

The key issues on appeal were whether the requisition was improperly made because it did not identify the beneficial owner of the shares used to call the meeting, whether the resolutions were contrary to the TELUS's articles and the Act, and whether Mason should be permitted to requisition a meeting despite having a very limited net financial interest in the company due to its hedged position.

Mr. Justice Groberman, writing for the Court, concluded that CDS was capable of "requisitioning a meeting on behalf of the beneficial owner of shares that are deposited with it" and that there was no "requirement that the beneficial owners of shares be identified in a requisition". The basis of this conclusion was section 167(3)(b) of the Act, which provides that, in order for a requisition to be validly made, it must be signed by and include the names and mailing address of all of the requisitioning shareholders. "Shareholder" is defined in s. 1(1) of the Act to mean "any person whose name is entered in a securities register of a company as a registered owner of a share of the company". The Court observed that because the definition of "shareholder" includes registered owners, "the plain words of the statute dictate that CDS is entitled to requisition a meeting".

The Court further concluded that s. 167(7)(d)(ii) also does not require the identity of the beneficial shareholder be revealed, on the basis that such provision of the Act does not require the directors to detect whether a requisition is inappropriate, but merely gives them the discretion to refuse to call a meeting where the primary purpose is to enforce a personal claim or redress a personal grievance. While there may be rare cases where the identity of the beneficial holder may be critical to weed out an inappropriate requisition, the Court noted, s. 167(7)(d)(ii) did not permit the Court to expand the requirements for a requisition beyond what is set out in the Act.

The Court then considered whether the proposed resolutions were inconsistent with certain provisions in the articles. In particular, one of the provisions set out certain rights, privileges, restrictions and conditions attached to the common shares and non-voting shares, but did not contemplate an exchange of one class of shares for the other (the "Rights Provision"). TELUS argued that the proposed resolutions were inconsistent with another provision in the articles, which provided that the Rights Provision could only be "deleted, amended, modified, or varied" by a special resolution of each share class. However, the Court held that because the Rights Provision did not purport to be the exclusive provision in the articles setting out the rights, privileges, restrictions, and conditions that attach to the shares, it could not be said that the proposed resolutions deleted, amended, modified, or varied the Rights Provision.

TELUS also argued that the proposed resolutions breached a provision in the articles which provided that each common share and non-voting share "shall have the same rights and attributes and be the same in all respects". However, the Court observed that, under the articles, there was "no existing right to exchange or convert non-voting shares to common shares, nor [would] the resolutions, if passed, create such a right". The matter was also not left in the discretion of the board of directors. Accordingly, the proposed resolutions did not affect any right or attribute of the non-voting shares.

In addition, the Court observed that the third and fourth resolutions, despite being purely advisory, were not precluded by the Act from constituting the subject of a requisitioned meeting. Section 167(1) of the Act provides that a shareholder may requisition a general meeting for the "purpose of transacting any business that may be transacted at a general meeting". In the Court's view, the phrase "transacting any business that may be transacted at a general meeting" has a wide ambit that includes advisory resolutions.

The Court then turned to the issue of whether Mason should be permitted to requisition a meeting despite the fact that its hedged position meant that it had a limited net financial interest in the company. Although the Court recognized that this was a "cause for concern", it observed that it was sufficient that a requisitioning shareholder hold the required number of shares to requisition a meeting pursuant to s. 167(2) of the Act. The Act did not provide the Court with the power to "look behind the shareholdings to determine whether the shareholding represents a 'material interest' in the company". The Court concluded by remarking that, to the extent that cases of "empty voting" are subverting the goals of shareholder democracy, "the remedy must lie in legislative and regulatory change." TELUS also attacked Mason's empty voting position on the basis that s. 186 of the Act gives a court broad discretion to enjoin a meeting. While acknowledging it gives a court fairly broad authority to control the calling and conduct of a meeting, the Court found it does not allow a court to disenfranchise a shareholder on the basis that it is suspected of empty voting. 

In the result, the Court allowed the appeal and set aside the orders of the chambers judge.

Analysis

The Court's decision has important implications. First, the Court's conclusion that it is not entitled to "look behind" a shareholder's shareholdings should help to avoid the prospect of unwarranted court challenges based on shareholder motive. Subsequent to the decision of the chambers judge, it may have been open to interpret that a shareholder's rights could be restricted where its interests were perceived as being inconsistent with the best interests of the company.

The Court has also helpfully clarified the power to requisition a meeting for the purposes of considering advisory resolutions. By broadly interpreting s. 167(1) of the Act, the Court may have foreclosed future arguments that the meaning of the phrase "transacting any business that may be transacted at a general meeting" should be narrowly construed.

Clear rules are required to ensure a level playing field for management and dissidents. The Court's decision provides well-needed clarity with respect to the law and procedure that governs requisitions of shareholder meetings, and implicitly emphasizes that the provisions of the Act should generally be read in their ordinary sense where their language is clear and unambiguous.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions