The debate over so-called empty voting has more fuel after a much-anticipated decision from a judge in the case of Telus Corp. and its fight against hedge fund Mason Capital, but there is still a lingering lack of clarity on just what is allowed.
Mason put on a trading position that would enable it to benefit from the failure of a Telus proposal to collapse the company’s dual class share structure on a one-for-one basis. Mason did it by buying shares of one class and selling short shares of the other class. The hedge fund's hope is to force a conversion ratio that favours the shares that it bought, and it sought to call a shareholders meeting that would enshrine such a ratio in the articles of Telus.
The result of Mason’s strategy was that the hedge fund had a large voting position without a corresponding economic interest, Telus argued, calling Mason’s position an example of empty voting.
That was one of a number of arguments Telus made in its attempt to have a British Columbia court stop Mason’s plan to call its own shareholder meeting to force a favourable conversion ratio on Telus.
The good news for Telus is the company won. The bad news for people following the empty voting debate is that the judge, having already decided the case in Telus’s favour, took a pass on an outright ruling on whether empty voting was a reason to stop a meeting by a dissident.
The judge, Mr. Justice John Savage of the Supreme Court of British Columbia, went on at length about the dangers of empty voting. He called it a “challenge to shareholder democracy” because it creates a situation where shareholders’ interests are not aligned. He disagreed with Mason’s contention that the empty voting argument is “irrelevant.” And he found that a court does have the power to consider empty voting when looking at a request to hold a shareholder meeting, saying that a court has broad powers to look at the motivations behind a meeting requisition.
Then he declined to rule in this particular matter, saying that “in light of my findings regarding the validity of the requisition, it is unnecessary to consider whether the Court ought to exercise its jurisdiction in this case.”
Still, the judge’s language on empty voting, even lacking an explicit ruling, will probably make it a lot less likely that anyone attempts a similar tactic anytime soon.
So how did Telus win? In large part because Mason’s shareholder requisition for a meeting did not properly identify the hedge fund as the real owner of the shares.