Equity Decoupling and Empty Voting: The TELUS Zero-Premium Share Swap

The following post comes to us from Bernard Black, the Nicholas D. Chabraja Professor at Northwestern University School of Law and Kellogg School of Management and Professor of Finance at Kellogg School of Management.

In a series of articles, Henry Hu and I developed and defined the concept of empty voting. TELUS Corp. has separate classes of voting and nonvoting shares. It proposes to combine them, with a zero premium for voting shares. Mason Capital has taken a (long voting shares, short nonvoting shares) position, is thus long the value of TELUS voting rights, and is campaigning for a share-swap plan which assigns a reasonable value to those rights. TELUS has claimed that Mason is engaging in “empty voting”, and has persuaded a British Columbia court of this (TELUS is incorporated in BC).

I discuss here some aspects of this dispute. For a vote which involves the value of voting rights: (i) Mason has an economic interest in this outcome, and thus is not an empty voter; (ii) many other TELUS shareholders are empty voters, because they have negative or near-zero economic interest in TELUS votes; (iii) TELUS management is conflicted, because they hold mostly nonvoting shares; (iv) voting rights are valuable, and the market premium accorded to TELUS voting shares is a reasonable estimate of their value; in contrast, zero is not a reasonable value; (v) by valuing voting rights at zero, the TELUS board is likely violating its fiduciary duty to treat both share classes fairly; and (vi) if the TELUS voting shareholders reject the zero-premium share-swap, it would likely be a further breach of fiduciary duty for TELUS not to propose a swap on terms which assign a reasonable value to votes.

The TELUS proposal to combine two share classes illustrates a complexity lurking behind the concept of empty voting: The same position can be empty for one purpose, but not for another. In the case of TELUS, Mason Capital has an economic interest in the value of voting rights, but would be an empty voter for a matter that had a similar effect on both voting and nonvoting shares. In contrast, TELUS shareholders who hold both voting and nonvoting shares will have an economic interest in a matter that affects both classes similarly; but if they hold a larger percentage of the nonvoting shares than the voting shares, they will have a negative economic interest in the value assigned to voting rights: They will gain more from a low value, though higher value for their nonvoting shares, than they will lose through lower value for their voting shares.

The TELUS proposal also illustrates two common themes when management proposes a transaction in which they have a conflict: the plasticity of investment banker fairness opinions, and the frequency with which independent directors find a way to accept such a management proposal. Here, voting rights clearly have positive value, yet a special committee of independent directors approved valuing these rights at zero; and an investment banker blessed the transaction as fair to both share classes, even though it clearly favors the nonvoting shares over the voting shares.

The full article is available for download at here.

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  1. By Empty Voting: Empty Promises | Corporate Governance on Wednesday, December 5, 2012 at 9:43 am

    […] — The Empty Voting Problem in the EU,  A Theory of Empty Voting and Hidden Ownership,  Equity Decoupling and Empty Voting: The TELUS Zero-Premium Share Swap, Canadian Court Addresses Continuing Use of Empty-Voting Tactics, The Dangers of Dual Share […]

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