BC Court Decision: Empty Voting Shares And Anonymous Requisitioning

The Supreme Court of British Columbia has now (September 11, 2012) addressed the issue of “empty voting,” the uncoupling of voting power from any underlying economic interest. We must immediately add, though, that it has addressed the question only in an oddly sideways manner, after essentially disposing of the case before it on another more technical ground. Nonetheless, this decision might be a stage in the continued percolation of this issue into a matter of broad public and judicial concern in North America.

The percolating began in an academic context. Henry Hu and Bernard Black wrote a seminal law review article on “empty voting” in 2006, warning that the proliferation of fancy derivatives “now allow both outside investors and insiders to readily decouple economic ownership of shares from voting rights,” and that this spells trouble for the reigning model of corporate governance.

The Canadian case, TELUS Corp. v. CDS Clearing, arose out of the intersection of that concern and a very different issue, the mechanics of clearing and settlement at modern exchanges.

The Facts and Proceedings

On February 21, 2012, TELUS, a telecommunications concern headquartered in British Columbia, proposed to simplify its corporate structure, eliminating the non-voting class of stock, converting each share of that class into voting stock with a simple one-for-one exchange.

A U.S. based hedge fund, Mason Capital, was in a position to use its own voting power to prevent the elimination of that class of shares. This was relatively easy: the change would have amended the articles of incorporation, and this would have required a shareholder vote of two thirds of both classes of stock, voting separately.

Mason was only the beneficial owner of the stock in question; the “registered shareholder” was CDS, the securities clearinghouse which is also the registered holder of almost all outstanding TELUS shares (95 percent). The catalyst for this litigation was a requisition for a general meeting of TELUS shareholders, a meeting at which certain resolutions restricting the company’s ability to restructure its share classes were to be considered.

This requisition was submitted by CDS as the registered shareholder on August 1, purportedly on behalf of an unidentified beneficial owner of 10 million common shares. The following day, Mason issued a statement that it was the beneficial shareholder in question. So Mason hadn’t stayed anonymous long, but the absence of its name on the CDS petition was nonetheless a critical point for the court.

TELUS replied by filing this lawsuit seeking an order declaring the requisition invalid. They have now received that order.

Arbitrage and Hedging

One plausible explanation of Mason’s position is that eliminating the non-voting shares would also eliminate the possibility of arbitrage between the two classes of shares. At any rate: Mason had a short position on the non-voting shares that hedged the whole of its long position in the voting shares, and since the prices of the two classes of shares rise and fall together, this is an effective hedge. Mason has, as the court’s opinion put the point, “voting control over approximately 20% of the Common Shares, while holding a relatively small net economic interest in TELUS.”

That 20 percent is most of what it needs for the total of 34 percent necessary to block any restructuring of this share structure.

In considering the case before it, the court assumed, though it does not decide, “that CDS can requisition” a shareholders’ meeting to consider certain resolutions “on behalf of a participant or beneficial shareholder” such as Mason. The court asserted, though, that if it can do so, the requisition “must identify the beneficial shareholders behind the requisition.” The requisition in this case did not.

The court might have ended its inquiry there, but it went further to consider the principles that would have applied had Mason been the requisitioning party, or had CDS’ requisition been proper.

Obiter Dictum

As to the issue of empty voting, the pertinent statute says, “A requisition under this section may be made by shareholders who, at the date on which the requisition is received by the company, hold in the aggregate at least 1/20 of the issued shares of the company that carry the right to vote at general meetings.” TELUS argued that this should be construed to require “a significant economic interest in the shares that it purports to vote.”

The court seemed inclined to agree, and noted that another section of the statute “gives the court broad discretion to make orders relating to the calling, holding and conducting of meetings ‘for any … reason the court considers appropriate.’” Nonetheless, that is all obiter dictum (the legal Latin for “irrelevant stuff”) , not an actual holding.

Mason wasn’t the requisitioning party, and the Hon. Mr. Justice Savage confines himself in the end to an order saying that the CDS, which was the requisitioning party, was not in compliance with the statutory requirements. There will be no meeting on Mason’s proposed resolutions.