Empty Voting: A Challenge to Shareholder Democracy?

| Patrice S. Walch-Watson

British Columbia’s Supreme Court issued a decision earlier this week in TELUS Corporation v. CDS Clearing and Depository Services Inc. that comments negatively on "empty voting," a topic attracting attention in the face of growing shareholder activism. The Court’s decision suggests that the economic interests of a shareholder may be relevant to its ability to requisition a shareholder meeting.

TELUS has voting and non-voting classes of shares. Since February 2012, TELUS has been seeking to collapse its dual-class share structure. Mason Capital, a U.S.-based hedge fund, has opposed TELUS’s plans. TELUS’s voting shares have historically traded at a premium relative to its non-voting shares, a gap that will disappear if TELUS succeeds in collapsing its dual-class share structure. In the face of TELUS’s plans, Mason took long and short positions in the two share classes. As a result, it was alleged that Mason’s real economic interest in TELUS lies in seeing the company’s plans fail and the spread in the trading price of the two classes widen. Mason has sought to use its voting rights to defeat TELUS’s plans.

The parties ended up in court after Mason caused CDS to requisition a meeting of TELUS’s shareholders to consider resolutions that would, if approved, affect TELUS’s proposed conversion. TELUS’s board refused to call this meeting on the basis that the requisition was defective due to irregularities. TELUS also alleged that the requisition was invalid because Mason is an "empty voter." Empty voting describes a situation in which an investor has entered into arrangements that decouple the investor’s economic interest in shares from the voting interest, giving that investor an ability to exert a level of voting control in the company that does not correspond with the investor’s underlying economic interest. That can happen in a number of ways, but the typical situations include selling shares after the record date (i.e., the shareholder retains the vote but has no economic interest in the issuer); securities lending before a record date where the borrower obtains the voting rights; and through derivative or swap transactions.

 In this situation, Mason exerted voting control over approximately 20% of TELUS’s common shares, while holding a much smaller net economic interest, because of its short selling activities.

The B.C. Court agreed with TELUS that Mason’s requisition failed to comply with statutory requirements and so the requisitioned meeting did not need to be held. Making some pointed comments about empty voting (while unnecessary for the decision), the Court said that "the practice of empty voting presents a challenge to shareholder democracy" because "the interests of such an empty voter and the other shareholders are no longer aligned and the premise underlying the shareholder vote is subverted." The Court stated that, in appropriate circumstances, a concern about empty voting may justify a board’s refusal to call a shareholders’ meeting in response to a requisition.

Although the Court ultimately side-stepped the question whether Mason’s financial interest in TELUS justified the Court’s intervention, the decision opens the door for companies to challenge a dissident’s request for a shareholder meeting on the basis of the dissident’s underlying economic motives. The Court considered that the motivations of the dissident shareholder are relevant to whether a meeting needs to be called in response to a requisition, and the decision suggests that a court may refuse to order that a requisitioned meeting be held if the interests of the dissident are no longer "aligned with those of other shareholders." This could include empty voting, but also other circumstances in which there is a mismatch between the dissident’s economic interests and the overall interests of shareholders.

Mason has indicated that it will appeal the decision.

Securities regulators in Canada and the United States are also considering these issues. The U.S. Securities and Exchange Commission released proposals in 2010 to address empty voting, and the Ontario Securities Commission is considering these issues in the context of the proxy voting system review outlined in its Statement of Priorities for 2012–2013.



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