One of the most respected merger law firms in the United States has weighed in on the issue at the heart of Telus Corp.’s battle with a hedge fund, calling the practise of so-called empty voting “deeply pernicious.”
New York-based Wachtell, Lipton, Rosen & Katz issued a memo on the Telus situation earlier this week urging regulators to clamp down on the practise.
Mason Capital Management LLC has built a trading position where its profit or loss is based not on the value of Telus, but on the disparity between two classes of Telus shares. Mason’s position is constructed so that even though it has little or no economic exposure to the ups and downs of Telus, the money manager does control a huge block of votes. Mason is using those votes to try to stop a Telus plan to collapse the two classes of stock into one class on a one-for-one basis, in a bid to increase the spread between the price of each class of stock.
That ought not to be allowed, lawyers from Wachtell, Lipton wrote. The firm says it has “long warned against these abuses” and is advocating that U.S. regulators at the Securities and Exchange Commission address the idea of empty voting.
A court in British Columbia had harsh criticism for Mason and its use of the practise, though the court did not rule on the issue.
“British Columbia’s Supreme Court has correctly identified the deeply pernicious nature of a shareholder exercising the fundamental voting franchise for reasons entirely at odds with promoting the interests of the company or the value of the shares to which the voting rights belong,” Wachtell Lipton’s lawyers wrote. “We continue to urge the SEC to undertake comprehensive regulatory reform to address the ongoing abuse of derivative and other arrangements by investors who seek to avoid public disclosure of their investments or their true nature or to obtain influence over company governance and policy without commensurate economic exposure.”