Empty Voting: Cause for Concern, but B.C. Court Will Not Intervene

The British Columbia Court of Appeal has reversed the lower court’s decision in TELUS Corporation v. CDS Clearing and Depository Services Inc., giving Mason Capital, a U.S.-based hedge fund, the green light to proceed with a shareholders’ meeting at which it will submit proposals regarding the collapse of TELUS’s dual-class share structure.

The British Columbia Supreme Court’s initial decision prevented the shareholders’ meeting from being held on the grounds of defects in a requisition, and it commented negatively on the phenomenon of "empty voting." The Court of Appeal found that the meeting was properly called and also observed that while empty voting is a concern, it is one that should be addressed through legislative changes rather than by the courts.

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 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 lay in seeing the company’s plans fail and the spread in the trading price of the two classes widen. Mason sought to use its voting rights to defeat TELUS’s plans and caused CDS, as the registered holder of its shares, to requisition a meeting and put resolutions before shareholders that would deal with the economic consequences of collapsing the dual-class share structure by requiring that the holders of voting shares be paid a premium.

In the initial decision that held that Mason’s requisition of the shareholders’ meeting was defective, the Supreme Court considered the issue of empty voting and an allegation that Mason’s economic interests were not aligned with those of other shareholders. It suggested that it may be open to companies to reject a dissident’s meeting requisition on the basis of its economic motives.

The Court of Appeal acknowledged that there were concerns about the extent of Mason’s hedging and the fact that its interests were not aligned with the company’s; but the Court also said that absent a breach of the law or a statutory basis for intervening on equitable grounds, it could not prevent a properly requisitioned shareholders’ meeting from being held on the basis of those concerns. The Court said that the problem of empty voting and the subversion of shareholder democracy must be remedied by the legislature and not the courts. As we noted in our earlier bulletin on this case, securities regulators in Canada and the United States are currently considering these issues.



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