The early votes that are coming in are heavily in favour of Telus Corp.’s plan to collapse its dual share structure on a one-for-one basis.
“It’s not unanimous, but it’s overwhelming,” chief financial officer Robert McFarlane said in an interview, citing both votes that have already been cast and institutions that have expressed their views.
Still, it’s not enough to guarantee a win for Telus in the May 9 vote. The telecommunication company’s plan requires the approval of two-thirds of the votes cast by holders each of Telus’s two classes of shareholders. Hedge fund Mason Capital has snapped up almost 20 per cent of one class, Telus voting shares, and pledged to oppose the plan.
As a result, the outcome depends largely on turnout. Many of the votes will come in during the final days before the May 9 vote. If turnout is low, Mason has a greater chance of blocking the proposal.
“Shareholders, particularly retail, are notorious for not exercising their voting franchise – despite it having so much value of course,” Mr. McFarlane said.
The value of that vote is the source of some debate. Mason Capital argues that the company should change the share exchange ratio to reflect the fact that voting shares have consistently traded at a premium to Telus non-voting shares over the years, suggesting the votes have value.
Telus argues that a one-to-one ratio is fair because of historical factors, and the company is steadfast in its position. It has the backing of two influential proxy voting advisory firms.
Mr. McFarlane took issue with a Streetwise column earlier this week that suggested that Mason might have a point, even if it is a hedge fund seeking short-term gains. (You can read that here.) The idea that there’s a discount for the non-voting shares that should be reflected is a “beginning orientation for almost everybody,” he said. But he stressed that investors have to look at the facts specific to Telus, and they indicate that a one-to-one ratio is appropriate.
He pointed to a number of factors, including the fact that both classes of shares have the same economic rights, the same dividend, that in a takeover both classes of shares must receive the same premium, and that in the company’s articles the one-for-one ratio is used elsewhere. The company has an automatic one-for-one conversion right if foreign ownership restrictions are lifted. Also, Telus wanted to use one-for-one when it planned in 2006 to convert to an income trust.
“That doesn’t mean that someone who has a view that ‘I’ve got voting shares, why don’t I get a premium?’ is ill-founded or wrong, but in the specific context of Telus, that’s what we believe is the fairest thing to do,” he said.
Telus’s contention has been that because of Mason’s strategy, this is a case of “empty voting” that regulators should not allow.
That is, Mason is voting a lot of stock, but because of the way it has bought some shares and shorted others, it doesn’t have a big exposure to ups and downs in the company’s share price.
Mason’s trade is constructed so that it makes money if the spread between the voting shares and non-voting shares widen, so it has an incentive to vote No. If the plan is blocked and both classes of shares fall, it will hurt long-term shareholders, but it won’t hurt Mason.
Mr. McFarlane called that a “shallow thing that should not be allowed under securities law.”
That’s the opposite of the standard hedge-fund strategy in such a one-for-one share collapse. The usual trade is to buy the cheaper non-voting shares and short the more expensive voting stock. The prices should converge, creating a profit. When the transaction closes, the hedge fund with that trade on can turn in the non-voting stock, collect the freshly minted voting stock in exchange and close out the short.
In that situation, a hedge fund would have no economic interest, but would be likely to vote for the transaction to ensure their short-term play was profitable. Indeed, some hedge funds were putting on that trade prior to Mason’s arrival on the scene.
When asked if he would be as concerned with such so-called empty voting if hedge funds were voting in favour of the Telus plan, Mr. McFarlane said he would not be.
“I think empty voting is bad in any event,” Mr. McFarlane said. “But you’re giving a specific question, would it be a big issue? No it wouldn’t because they would be voting in alignment with the vast majority – the overwhelming majority – of other shareholders. So there’s no divergence in interest. That is not the case at hand. The case at hand is they [Mason]can make money at the expense of our long-term shareholders.”