Empty Voting Revisited: The Telus Saga

This blog has repeatedly reported on the use of empty voting strategies at the Canadian telecommunications provider Telus Corporation. (see, e.g., here and here). Empty voting – that is, the strategic separation of economic risk from voting rights – has been considered by courts, regulators and academics over the past years in various forms. The latest account is the case of Canadian telecommunications company Telus, which became the target of US hedge fund Mason Capital. After a lengthy battle in various courtrooms, the dust has settled around this conflict. The Telus saga sheds new light on how empty voting structures are used by businesses in practice and supports calls for regulatory activity. In my recent paper, Empty Voting Revisited: The Telus Saga, I analyze the various instances of this important legal battle and develop regulatory implications.

Canada-based Telus Corporation has traditionally had a dual share structure composed of voting shares and non-voting shares; the former having historically traded at a premium of about 5 % as compared to the latter. In early 2012, Telus proposed to consolidate both classes into one. Importantly, the proposal disregarded the historical price spread and intended to combine both classes on a one-for-one basis. When Telus announced this share consolidation plan, the market responded quickly, and the traditional market price difference between the two share classes narrowed. This prompted Mason Capital to invest in Telus as part of an arbitrage strategy which exploited the fact that the difference in price between voting and non-voting shares was ignored in the proposal. Mason invested long in voting-class shares and, at the same time, shorted both voting and non-voting class shares. Through this arbitrage strategy, Mason acquired an almost 20% ownership interest in Telus voting shares but had almost no economic interest in Telus. Further, due to its short sales of non-voting shares, it stood to reap a significant profit if the proposed share conversion failed. So different from most other shareholders, Mason intended to oppose the proposed consolidation plan from the beginning. If successful, the old market price spread was expected to re-emerge. Due to its complicated investment structure, Mason stood to benefit if this historical price difference were to re-emerge.

The ensuing courtroom battle between Telus and Mason is legion. The complicated story line involved (inter alia) two major court decisions. First, the Court of Appeal for British Columbia ruled on the validity of Mason’s request for a shareholder meeting (TELUS Corporation v Mason Capital Management LLC, 2012 BCCA 403). In essence, the Court upheld the request. Crucially, the Court held that Mason’s risk exposure and its potential status as ‘empty voter’ did not allow the Court to disregard the valid calling of the meeting. Two months later, the Supreme Court of British Columbia, in a separate proceeding, approved a ‘plan of arrangement’ (a restructuring mechanism under Canadian law), as proposed by Telus. The Court held that the ‘empty voting’ situation was indeed one of the factors that had to be taken into account for assessing the fairness of the arrangement (In re TELUS Corporation, 2012 BCSC 1919). These two somehow contradictory decisions are important because they illustrate how courts are struggling with responding to the empty voting problem more generally. As I explain in the article, only where the law provides for discretionary, substantive court control, Courts will be able to take the risk exposure of shareholders into account.

Empty voting ultimately calls for regulatory responses globally. As I elaborate elsewhere, regulators should be guided by two main principles: first, transparency: disclosure of significant empty positions is paramount to any market reaction; and secondly, regulators should introduce a right to disenfranchise risk-decoupled shareholders under certain circumstances (as opposed to a voting restriction ipso iure).

The full paper is available for download here.