Canada: British Columbia Court Of Appeal Permits Hedge Fund To Requisition A Shareholder Meeting Despite Concerns Of Empty Voting

On October 12, 2012, the British Columbia Court of Appeal released its decision in Telus Corporation v. Mason Capital Management LLC, 2012 BCCA 403, overturning a lower court decision invalidating a shareholder requisition for a shareholder meeting. The appellate court found that under the British Columbia Business Corporations Act, the court does not have inherent jurisdiction, in the face of a technically compliant requisition, to prevent a beneficial shareholder from using its intermediary to requisition a shareholder meeting on its behalf, even where that beneficial shareholder may have a limited interest in the well-being of the company or the value of its shares and is thereby engaging in the process known as "empty voting".

Background

In October of 2012, TELUS Corporation ("TELUS") was seeking shareholder approval for a plan to convert its non-voting shares to common shares (at the rate of 1:1) for the purposes of bringing the distribution of voting rights in line with capital investment and to improve the liquidity and marketability of TELUS shares. Following the announcement of this plan on February 21, 2012, the price differential between the two classes of shares narrowed.

Mason Capital Management LLC ("Mason"), a New York-based investment fund manager, opposed the conversion. Investment funds controlled by Mason were the beneficial owners of approximately 18.7% of the outstanding common shares of TELUS. These shares were deposited with CDS Clearing and Depository Services Inc. ("CDS"), and CDS was recorded as the registered owner of the shares. Following the announcement of the share conversion and to execute an arbitrage plan, Mason increased its holding of TELUS common shares, while hedging its position by short selling both common and non-voting shares. Mason's ultimate plan was to vote against the share conversion plan and to profit from the widening of the differential between the price of common shares and non-voting shares, which was expected to occur should the plan be defeated.

On August 1, 2012, Mason caused CDS (as the registered holder of Mason controlled shares) to issue a requisition for a shareholder meeting under section 167 of the B.C. Business Corporations Act, without identifying Mason or its address in the requisition. The requisition set out a series of resolutions designed to defeat the share conversion plan, or alternatively, to increase the conversion ratio. TELUS subsequently commenced; proceedings to challenge the validity of the requisition. At first instance, a single judge of the British Columbia Supreme Court held that this requisition was invalid because the requisition failed to disclose the identity or address of Mason, the beneficial shareholder who was in fact initiating the requisition.

CDS was Entitled to Requisition the Meeting as the Registered Holder

On appeal, TELUS asserted that the meeting requisition did not comply with the requirements set out in section 167 of the B.C. Business Corporations Act, arguing that only an entity that is both a registered and beneficial shareholder may requisition a meeting. However, section 167 of the B.C. Business Corporations Act merely provides that a "shareholder" may requisition a meeting if it holds in the aggregate 1/20 of the issued voting shares of a company. This section also states that the requisition must be signed by the requisitioning shareholder(s) and that the name and address of the requisitioning shareholder(s) also be provided. The appellate court ultimately concluded that based on the definition of "shareholder" in subsection 1(1) of the B.C. Business Corporations Act (being "a person whose name is entered in a securities register... as a registered owner"), a registered holder of shares (like CDS) was entitled to requisition the meeting without having to disclose the identity or address of the beneficial shareholder who had in fact initiated the requisition.

There is No Statutory Authority to Prevent Empty Voting

The B.C. Court of Appeal also considered whether it had the authority to prevent Mason from requisitioning a shareholder meeting based on concerns of "empty voting". The court defined "empty voting" as the "accumulation of votes by a party that has a very limited financial stake in a company". TELUS argued that due to Mason's hedged position, Mason had a limited financial interest in the company, its well being or the value of its shares, and that Mason's primary interest was limited to widening the gap between the prices of the two classes of shares.

Despite acknowledging concerns in terms of Mason possibly engaging in empty voting, the B.C. Court of Appeal was unable find any statutory authority that would allow it to intervene. The court concluded that section 167 of the B.C. Business Corporations Act (which requires that a requisitioning shareholder hold at least 1/20 of the issued shares of the company) does not mandate an analysis of any particular level of "net investment" or other "material interest" by that shareholder (other than holding the requisite percentage of shares prescribed by the legislation).

Similarly, the appellate court found that it did not have the power to "disenfranchise a shareholder on the basis of a suspicion that it is engaging in 'empty voting'". The court also recognized that, despite Mason's hedged position, it still had an economic interest in TELUS. Ultimately, the appellate court concluded that, despite concerns of "empty voting", Mason was not violating any laws and there was no statutory authority for the court to intervene on equitable grounds. Rather, the court stated 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".

Implications

The extent to which this decision may have broader application outside of British Columbia remains unclear. The B.C. Business Corporations Act differs from the corresponding Federal and Ontario legislation, particularly with respect to the requirements for requisitioning a meeting. Furthermore, unlike the British Columbia corporate legislation, the Canada Business Corporations Act and the Ontario Business Corporations Act do not contain a legislative definition of "shareholder".

Despite the legislative differences, it is important to note that the B.C. Court of Appeal declined to intervene even though it noted legitimate policy concerns with respect to empty voting, citing a lack of statutory authority. This aspect of the decision could be influential in other jurisdictions, including Ontario, where there is a similar lack of statutory authority on addressing empty voting. Accordingly, public companies in Canada may be powerless to prevent empty voting without legislative intervention.

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.

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Authors
Jonathan Wansbrough
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