Canada: Telus And Mason: Courts Are Concerned By "Empty Voting" But Cannot Stop It

Last Updated: February 6 2013
Article by Jacob Kaufman

In TELUS Corporation v. Mason Capital Management LLC, 2012 BCCA 403, the Court of Appeal for British Columbia held that a shareholder does not have to be the beneficial owner of the shares held in order to requisition a shareholders' meeting pursuant to the British Columbia Business Corporations Act (the "BCBCA"), and that the right to requisition is not limited by the small size of a beneficial owner's net financial stake in the company.

For historical reasons, TELUS Corporation ("TELUS") had two classes of shares: common shares and non-voting shares. The non-voting shares traded at a slight discount relative to the common shares. TELUS proposed an arrangement to convert all non-voting shares to common shares on a one-to-one basis, which required a two-thirds majority vote in each share class. Following the announcement, the price differential between the common shares and the non-voting shares immediately narrowed.

Mason Capital Management LLC ("Mason"), a New York-based hedge fund, realized that this presented an arbitrage opportunity. Mason purchased approximately 18.7% of TELUS' common shares but sold short a similar number of common and non-voting shares, which resulted in Mason's net investment being a mere 0.21% of TELUS' capital. Due to this hedging, Mason would essentially break even if TELUS' shares either rose or fell, but would profit if the historic price differential between the two classes of shares re-emerged. Mason thus intended to thwart TELUS' arrangement to profit from this arbitrage plan.

In the face of Mason's opposition, TELUS withdrew its proposal but indicated it would still try to implement a one-for-one share exchange. In response, CDS & Co. ("CDS"), the registered holder of Mason's shares, requisitioned a shareholders' meeting to prevent the share exchange. TELUS declined to schedule this meeting and obtained an order from the B.C. Supreme Court allowing it to hold its own shareholders' meeting to approve the new share exchange plan (this time without requiring a two-thirds majority vote of the common shares). CDS called a meeting on the same day as TELUS' meeting.

After the B.C. Supreme Court quashed Mason's meeting, both CDS and Mason appealed.

Section 167 of the BCBCA provides that a registered holder of more than 1/20 of a company's shares may requisition a shareholder's meeting. The Court of Appeal rejected TELUS' argument that section 167 should be construed so as to allow only a person who is both the registered and beneficial holder of the requisite shares to requisition a shareholders' meeting. The definition of "shareholder" in the BCBCA refers only to registered shareholders; there is no additional requirement for beneficial ownership. Nor does the BCBCA's clear and unequivocal language require that the beneficial owner of the shares be identified in the requisition. Although there may be "rare cases" where such an identification "may be critical" in rejecting inappropriate requisitions, courts are not entitled to expand the requirements the BCBCA clearly sets out.

Likewise, Mason should not be prevented from requisitioning a shareholder's meeting because of its very limited net financial interest in TELUS. While the Court of Appeal repeatedly acknowledged that it was concerned about this so-called "empty voting", it concluded that as the wording of the BCBCA was clear, the solution to "empty voting" must come from the legislature and regulators, not the courts.

While Mason may have won the battle, TELUS may have won the war – its second arrangement passed at the shareholders' meeting (albeit without a two-thirds majority). Both parties have returned to the courts to continue the fight.

About Fraser Milner Casgrain LLP (FMC)

FMC is one of Canada's leading business and litigation law firms with more than 500 lawyers in six full-service offices located in the country's key business centres. We focus on providing outstanding service and value to our clients, and we strive to excel as a workplace of choice for our people. Regardless of where you choose to do business in Canada, our strong team of professionals possess knowledge and expertise on regional, national and cross-border matters. FMC's well-earned reputation for consistently delivering the highest quality legal services and counsel to our clients is complemented by an ongoing commitment to diversity and inclusion to broaden our insight and perspective on our clients' needs. Visit: www.fmc-law.com

For more information, visit our Canadian Securities Litigation blog at www.canadiansecuritieslitigation.com/

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