The torrent of litigation relating to Telus Corporation's proposal to eliminate its class of non-voting shares is over. Telus has recently announced an agreement with Mason Capital Management LLP (Mason) which ends further litigation between them relating to the arrangement implementing Telus' new proposal. The British Columbia Supreme Court approved Telus' arrangement providing for the exchange of its non-voting common shares (non-voting shares) into voting common shares (voting shares) on a one-for-one basis (the Arrangement Decision), as Telus management and its board had recommended. The approval came despite the opposition of Mason, a hedge fund manager who had engaged in an arbitrage "play" based on obtaining a premium for the voting common shares on the collapse of the non-voting shares into voting shares.
The Arrangement Decision addresses a number of interesting issues in connection with both contested shareholders' meetings – proxy fights – and court approvals for plans of arrangement. Among other interesting aspects of the decision:
- a broader use of discretion in management proxies is permissible in certain circumstances
- classes of shares not legally affected by an arrangement need not necessarily be provided with a vote, even if their economic interests are affected
- an "empty voting" position does not disenfranchise a shareholder from exercising shareholder rights, but may be a factor in considering its objections to an arrangement's fairness
- recommendations of proxy advisory firms are given weight in the court's consideration of the arrangement
- shareholder voting thresholds for approval of an arrangement set out in an interim court order do not demonstrate court approval of them.
The history of the court battles, and a description of the Arrangement Decision, follows.
TELUS' DUAL CLASS STRUCTURE
Telus had a multiple class share structure with voting shares and non-voting shares. The non-voting shares were created to allow foreigners to participate economically in Telus without the corporation running afoul of Canadian telecommunications foreign ownership restrictions. The non-voting shares were virtually identical in all material respects to the voting shares. However, the common shares carried voting rights in all circumstances, which the non-voting shares did not. Both shares were publicly traded. Historically, the non-voting shares traded at a discount to the price of voting common shares of approximately 4.5%.
TELUS' INITIAL PROPOSAL
Because foreign ownership of Telus shares had dropped significantly and as it appeared that the federal government might liberalize foreign ownership rules further, Telus began to consider collapsing its dual class structure into a single voting class through a conversion of non-voting shares into common shares, and the terms on which such a conversion would occur.
Among the benefits from a collapse of the share structure was increasing trading liquidity, eliminating a class of non-voting shares consistent with good corporate governance practices and the lack of any effect on dividends payable on the shares.
Based in part on a fairness opinion, the independent Special Committee of the Telus board recommended, and the board agreed, on recommending to the shareholders a one-for-one conversion of the non-voting shares into voting shares. This initial proposal involved amending Telus' articles, requiring a two-thirds majority of the votes cast by the holders of the non-voting shares and the holders of the common voting shares, each voting separately as a class (the initial proposal). On announcement of the initial proposal, share prices of both classes rose.
MASON'S ARBITRAGE STRATEGY
Mason initiated a short-term arbitrage strategy involving acquiring a large number of common shares while simultaneously hedging its position by short selling an equivalent number of non-voting shares and common shares. Mason's investment in Telus was accordingly structured in such a way that its economic interest in Telus related to the spread of the share prices as between the two classes, not to increases in the prices of the shares themselves. Mason's commercial objective was to obtain a premium for the voting common shares on a conversion of the non-voting shares into the voting shares. Mason indicated that it would not support the initial Telus proposal unless a premium was paid on the voting common shares for the conversion of non-voting shares into voting shares (such as through a lower than one-to-one exchange ratio of non-voting for voting common shares). Through its short sales, Mason held a very small economic interest in Telus as such, but its common voting share position provided it with significant voting power. Mason's position was characterized by Telus and others as an "empty voting" position given that its voting power was not commensurate with its actual economic interest in Telus.
Telus realized that its initial proposal would not be approved, as Mason had sufficient voting shares to deny the required two-thirds majority approval vote by the common shareholders. Accordingly, Telus abandoned its initial proposal.
Telus, however, publicly indicated that it was committed to achieving the same result, albeit by other means. The market thus continued to expect that the share re-organization would occur and the historical spread between the trading values of the non-voting and the voting shares did not reappear. This prevented Mason from closing out its position profitably, as its profit depended on a price spread between the prices of the voting common shares and non-voting shares. Accordingly, in order to cause Telus to abandon its reorganization plans based on a one-for-one exchange ratio, Mason requisitioned Telus to hold a common shareholders' meeting to consider Mason's resolutions to amend Telus' articles to require an exchange ratio of greater than one-to-one in favour of the common shareholders (Mason's resolutions).
TELUS' NEW PROPOSAL
Telus devised a new proposal by which the two classes could be collapsed into common voting shares, which would not require a two-thirds majority vote of common shareholders. The new proposal involved a court-approved plan of arrangement that provided for a one-time exchange (as opposed to conversion) of the outstanding non-voting shares for common voting shares. Telus' position was that, unlike the initial proposal, the new proposal did not require any amendments to Telus' articles to remove the non-voting shares from Telus' authorized share structure – there simply would be no outstanding non-voting shares if the proposal was implemented. The new proposal called for approval at a meeting by two-thirds of the votes cast by the holders of non-voting shares as a class, but only a simple majority of the votes cast by common voting shareholders. While Mason held sufficient common shares to deny two-thirds majority approval by the voting common shareholders of Telus' initial proposal, it did not hold sufficient common shares to itself block majority common share approval of the new Telus proposal. As with the initial proposal, Telus' Special Committee determined that the one-for-one exchange ratio was fair from a financial point of view to the holders of both classes of shares, based in part on a fairness opinion received from its financial advisor.
As is typical for arrangement proceedings, Telus obtained an interim court order providing for calling a shareholders' meeting to approve the new Telus proposal and the voting thresholds for approval of the arrangement by the non-voting (two-thirds) and common voting (majority) shareholders.
MASON'S MEETING REQUISITION
CDS is a securities depositary which acts as registered shareholder for intermediaries such as brokerages, which facilitates the trading of public company shares without requiring a change in registration of ownership on the company's books. CDS provided to Telus a requisition initiated by Mason to hold a shareholders' meeting to consider Mason's resolutions on the same day as the meeting called by Telus to consider Telus' new proposal.
However, in a B.C. Supreme Court decision, Mason's shareholders' meeting requisition was found to be invalid upon challenge by Telus. In that decision, the Court determined that in order to comply with the form and substance of the British Columbia Business Corporations Act (BCBCA), it was not sufficient for CDS as the registered owner to requisition the meeting; rather, the beneficial owner (Mason) should have been identified in the requisition to satisfy the BCBCA shareholder‑requisitioned meeting requirements. The Court's decision also expressed concern over the implications for shareholder democracy where a shareholder such as Mason possessed considerable voting power, without a commensurate economic stake in the company, which the Court referred to as an "empty voting" arrangement. This decision is described in our September 2012 Blakes Bulletin: Court Expresses Concern About "Empty Voting".
MASON'S MEETING REQUISITION APPEAL DECISION
The B.C. Supreme Court decision invalidating Mason's meeting requisition was overturned by the British Columbia Court of Appeal. See our October 2012 Blakes Bulletin: Court of Appeal Overturns Decision of Empty Voting. The Court of Appeal held that Mason's requisition for a shareholders' meeting was indeed valid, in that the BCBCA did not require the beneficial owner to be identified in a requisition. Thus, the requisition by CDS, as the registered shareholder, was valid. The Court of Appeal also found that Mason's status as an "empty voter" did not disentitle Mason from its rights to requisition a shareholders' meeting through CDS, given the wording of the BCBCA providing such rights to shareholders.
Having successfully requisitioned a shareholders' meeting to consider Mason's resolutions, Mason sought through court applications to postpone both meetings, and to vary the interim court order relating to the required voting thresholds for approval of the new Telus proposal to provide for a higher approval threshold for the voting common shares. Telus applied to have both the Telus meeting and the Mason-requisitioned meeting proceed as a joint meeting.
The B.C. Supreme Court Master accepted Telus' application for a joint meeting. The Master rejected both Mason's request to vary the voting thresholds contained in the interim order to be used at the Telus shareholders' meeting and to postpone the shareholders' meetings. The shareholders' meetings accordingly proceeded on the basis of a joint meeting, with Mason appealing the Master's decisions.
At the shareholders' meeting, 99% of the votes cast by the holders of non-voting shares and 63% of the votes cast by common voting shareholders were in favour of the new Telus proposal. As the Court noted in the Arrangement Decision, excluding Mason's vote, 84% of the common shareholders who voted, voted in favour of the new Telus proposal.
In the Arrangement Decision, the Court determined that Mason's appeals from the Master's decisions on these matters would be considered in conjunction with the Court's consideration of approval of the Telus arrangement implementing the new Telus proposal.
DETERMINATION OF VOTING THRESHOLDS IN INTERIM ORDER
The Court indicated in the Arrangement Decision that obtaining the interim order is intended as a preliminary step towards the ultimate step of seeking court approval for the arrangement. In the Court's view, the appropriate voting thresholds were to be addressed at the arrangement fairness hearing, not at the interim order stage. The Court noted that to definitively set the voting thresholds at the interim order stage, proper service on all parties would be required. The Court cited earlier judgments that the BCBCA's provisions are to be applied in a fashion facilitating the fair and effective processing of the application in a manner consistent with their "real time" nature as business transactions. The Court indicated that the hearing for an interim order relating to an arrangement is not an opportunity for a stakeholder to "micromanage the process or cause undue delay and costs". The rights of those wishing to argue that statutory requirements as to voting thresholds were not met were preserved, to be heard at the fairness hearing where approval of the arrangement would be considered.
USE OF PROXIES
Proxies had been obtained by Telus and Mason with respect to the arrangement resolutions proposed by Telus for its new proposal. No proxies were sent to the shareholders by either Telus or Mason in relation to Mason's resolutions. This was because the initial Supreme Court decision had declared Mason's requisition for a meeting invalid, and the Court of Appeal decision overturning that decision was just prior to the meeting date. By the time the Court of Appeal released its reasons, it was too late to send out further information circulars and proxy forms specifically in relation to Mason's resolutions if the meetings were to proceed as scheduled. Mason argued that the proxies obtained by Telus management in connection with Telus' new proposal could not be voted with respect to Mason's resolutions.
The Court did not accept Mason's argument that the proxies obtained by Telus management in connection with Telus' new proposal could not be voted on Mason's resolutions. Mason argued the discretion contained in management's proxy form for "other matters which may properly come before the meeting" referred only to minor matters of procedure or matters ancillary to the new Telus proposal, which would not include Mason's resolutions. The Court, however, indicated that depending on the issues involved and the specific circumstances, there may be any number of "other matters" that may be brought before the meeting for which the proxies solicited can be used by management. In the Court's view, whether a matter "properly" comes before a meeting will depend on the particular circumstances of each case, depending on how substantive the matter is, whether the board has considered the matter, and what prior notice of such matter has been received by the shareholders. The Court also indicated that it may be appropriate to bring a matter before the meeting on the basis that it is so inextricably connected - but not necessarily procedurally connected or ancillary – to the matters which were raised in the notice of meeting that consideration by the shareholders of that "other matter" does not give rise to any element of unfairness or prejudice to shareholders.
In the Court's view, Mason's resolutions raised the very same issues that were raised by the new Telus proposal. Mason did not, in the Court's view, offer any evidence that the common shareholders did not understand the choices that were offered as between the Telus and Mason positions and whether they would have acted differently if they had received further information. In the Court's view, accordingly, the proxies that had been deposited in relation to the new Telus proposal were directly related to the issue raised by Mason's resolutions and, in these circumstances, the use of management proxies obtained by management in relation to the new Telus proposal with respect to Mason's resolutions was fair and reasonable.
DELAY OF MEETINGS
The Court also rejected Mason's appeal of the Master's decision that the shareholders' meetings proceed as scheduled, and not be delayed as Mason proposed. Mason had applied to adjourn the meetings so Mason could send out a new information circular to shareholders and proxy forms for Mason's resolutions on the basis that the original Supreme Court decision, invalidating its shareholders' meeting requisition, later overturned by the Court of Appeal, negatively affected its ability to oppose the new Telus proposal and to solicit support for its own proposal in Mason's resolutions providing for a conversion ratio of more than one-to-one. The Court indicated that it will not lightly interfere with a shareholders' meeting properly called and in particular will not lightly order that such a meeting not proceed. The Court held that Mason's resolutions in substance raised the very same issues as the new Telus proposal. The respective positions of Mason and Telus were set out in substantial public documentation. The Court concluded there was no reason to delay the meetings and there would be clear prejudice to Telus and its other shareholders if the meetings were delayed.
APPROVAL OF THE ARRANGEMENT
The Court then turned to a consideration of approval of the arrangement implementing Telus' new exchange proposal. The court noted that the Supreme Court of Canada in BCE Inc. v. 1976 Debentureholders decision, described in our December 2008 Blakes Bulletin: Supreme Court of Canada Releases Decisions for Decision in BCE, was the leading authority relating to the approval of arrangements. The Court noted the BCE decision established a three-part test for the approval of arrangements: whether the arrangement is made in good faith, whether the statutory requirements were met and finally, whether the arrangement is fair and reasonable. In turn, in determining whether the arrangement is fair and reasonable, the Court was to consider whether there is a valid business purpose for the arrangement and whether or not the arrangement resolves objections in a fair and balanced way.
1. Good Faith Requirement
The Court concluded that the good faith requirement was met, as there was good reason to consider a different approach with respect to Telus' capital structure. The Court commented that an extensive and robust process to consider an arrangement can support the contention that the arrangement was put forward in good faith. Mason argued that the directors and officers of Telus were in a conflict of interest, as they stood to personally benefit from a one-for-one exchange as they had non-voting shares. The Court dismissed that objection on the basis that the interest of the Telus directors and officers could not be described as material. The Court also noted that, while the circular and press releases did not specifically advise the shareholders of the benefits to the directors and officers of the arrangement, the officers and directors shareholdings were publicly available. In the Court's view, it was for Telus' shareholders to decide whether to give any credence to the interests held by directors and management in relation to whether they would support or reject the arrangement.
2. Met Statutory Requirements
In considering whether the arrangement met statutory requirements, the Court rejected Mason's argument that the arrangement was amending the articles of Telus (which would require approval by two-thirds of the common shareholders voting at the meeting). The Court concluded that there would be no change or alteration in the rights or attributes of both types of shares, as both types of shares would continue to be part of Telus' authorized capital and the legal rights attributable to the non-voting shares or voting shares would remain the same. The fact that there would be no issued and outstanding non-voting shares following the arrangement was not, in the Court's view, relevant. Similarly, the Court concluded there was no "reclassification" of the non-voting shares to common shares, which would also have required articles of amendment.
Citing the BCE decision, the Court noted the arrangement provisions only apply to those whose legal rights, as opposed to economic rights, were affected. The Court also held that the legal rights of the common shareholders were not being affected by the arrangement, as they would remain as before. The common shareholders' legal rights were not affected as they had no legal right to prevent the dilution of their voting power by the exchange of non-voting into voting common shares.
The Court also accepted Telus' position that the arrangement only involved the non-voting shares and accordingly, no vote was required by the common shareholders and a majority vote was being provided to them on an ex gratia basis. The Court commented that where changes are being proposed to one stakeholder group (in this case, the non-voting shareholders), the company may as a matter of overall fairness require certain levels of support from others (in this case, the common shareholders), even though they are not legally affected by the arrangement.
3. Arrangement Fair and Reasonable
Valid Business Purpose. The Court indicated that there was considerable support for the arrangement towards achieving the benefits that would arise. That was, in the Court's view, overwhelming evidence of a valid business purpose of the arrangement. The benefits included an increase in the liquidity of Telus shares and thus the ability of Telus to attract investors which would contribute to Telus' ability to compete. As well, citing both the Canadian Pacific and the Magna decisions, the Court held that simplification of the share structure, recognized as a "good practice", could also be held to be a valid business purpose.
Objections Resolved in Fair and Balanced Way. The Court, reflecting BCE, stated the arrangement must pass the test of being both procedurally and substantively fair and reasonable.
Procedural Fairness. The Court concluded that the arrangement had been brought forth in a procedurally fair manner as related to Mason. Mason did not have a lack of opportunity to adequately explain and advocate its position to Telus' shareholders. The Court was of the view that Mason had a fair opportunity to solicit proxies and that the use of the Telus management proxies for both the new Telus proposal and the Mason resolutions was fair.
"Empty Voter". As part of its consideration of the fairness and reasonableness of the arrangement, the Court accepted that Mason was entitled to assert its shareholder rights in connection with the arrangement proceedings, notwithstanding its so-called "empty voter" position. However, the Court did comment that Mason's status as an empty voter was a factor to be considered within the context of the overall factors in considering Mason's objection to the arrangement and whether the arrangement resolved objections in a fair and balanced way.
Substantive Fairness. In looking at whether the arrangement was substantively fair, and whether the objections of those whose rights were being arranged were resolved in a fair and balanced way, the Court commented that in any given circumstance there were any number of possible transactions that fall within a range of fairness and reasonableness. The Court commented that it must engage in an objective and substantive review of the terms and the impact of the arrangement and satisfy itself that the arrangement is within the range of fair and reasonable alternatives such that conflicting interests between different stakeholder groups are fairly balanced in all the circumstances.
The decision cited the non-exhaustive list of "indicia of fairness" set out in the BCE decision, including the "considerable weight" given to a shareholder vote. The Court also noted that weight be given to the conclusions of a special committee, if it was independent and reputable, fairness opinions and other independent opinions relating to the arrangement.
The Court noted that the Special Committee gave careful consideration to the exchange ratio issue, including fairness to common shareholders as a separate class. The Court also noted that the financial advisor, in its fairness opinion on the exchange ratio, demonstrated that all relevant matters had been considered, including the appropriateness of the one-for-one exchange ratio, and that the fairness of the arrangement to the common shareholders was specifically considered.
The Court also referred extensively to the opinions of ISS, and Glass Lewis, the proxy advisory firms that recommended that shareholders vote in favour of the new Telus proposal. The ISS opinion referred to the fact that the articles of Telus provided for a one-to-one conversion ratio on certain triggering events. If either of the triggering events seemed even marginally possible, non-voting shareholders would have little incentive to approve a dual class share collapse at any ratio other than one-for-one or lower, while at the same time, common shareholders would never agree to a ratio below one-for-one because they could similarly wait for a triggering event and an exchange ratio of one-to-one. As well, ISS noted the non-voting shareholders had little incentive to "pay" for voting rights, as these would mean little given that the shares were widely held. The Court also referred to the fact that the common shareholders could have no reasonable expectation that further common voting shares would not be issued, resulting in a dilution of their position, which was the result of the exchange of non-voting shares into voting common shares.
As in BCE, the Court indicated that, while the common shareholders' economic interests might be negatively affected, only legal interests are to be considered in connection with assessing the substantive fairness of the arrangement. The Court noted that the arrangement processes of the BCBCA clearly contemplate that changes may have an adverse impact on the rights of particular individuals or groups, and the proportionality of the compromise of the arrangement must be considered. The Court concluded that it was satisfied that there had been a thorough consideration of the balancing of the interests of the common shareholders in relation to the dilution of their voting power and the payment of a premium, and that that had been weighed against the interests of the non-voting shareholders and the benefits to be achieved by all shareholders.
The Court also referred to the "win-win" result that had been demonstrated to some degree by the increase in both share prices in anticipation that the arrangement would be approved.
The Court also noted that approximately 84% of the common shareholders, excluding Mason, supported the arrangement. While Mason's vote was to be considered, it was, in the Court's view, a relevant consideration that Mason's votes were cast for the purposes of a market play that had nothing to do with the interests of Telus or its shareholders collectively. The Court noted that the shareholders, including the common shareholders who had had a real economic interest in Telus, had overwhelmingly supported the arrangement.
The Court accordingly approved the arrangement notwithstanding Mason's objections.
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.