A U.S. hedge fund that thwarted Telus Corp.'s share consolidation plan is using a legal tactic to force the Canadian telecommunications giant to reveal whether it remains in compliance with this country's foreign investment rules, while also increasing its ownership stake in t he Vancouver-based company.
Mason Capital Management LLC filed a petition with the Supreme Court of British Columbia on Tuesday in an effort to compel Telus to disclose more details about how shareholders voted on the telco's now-withdrawn proposal to eliminate its dual-class share structure.
Specifically, the hedge fund is seeking full access to the ballots cast by shareholders during advanced voting so that it can review the full gamut of information contained on those proxy forms. Also included in its court filing is the disclosure that Mason has increased its ownership stake in Telus's common shares to roughly 19.98 per cent, up from 18.7 per cent earlier this year – suggesting the hedge fund could remain a thorn in Telus's side for some time to come.
In its petition to the court, Mason claims that Telus has refused to provide key details about those proxies despite repeated requests for the information. Instead, Mason says it received heavily-redacted copies of the proxies that "obscured all information" relating to the proposed share conversion, making it impossible to determine how common shareholders voted on the proposal. Mason has previously argued that proxy data could reveal whether Telus is in breach of foreign investment rules that prevent non-Canadians from controlling more than 33.3 per cent of the voting shares of major telecommunications companies.
"Telus' refusal of access to the proxies to inspect them was unlawful," says Mason's court filing. "No effective administrative remedy being available, Mason brings this application to enforce its rights and require Telus to honour its legal obligations."
None of the allegations has been proven in court. Telus, meanwhile, indicated on Wednesday that it intends to fight the petition.
"This is just another tactic by Mason to try to advance their empty voting strategy in the interests of their own short-term profits at the expense of our other shareholders," said Telus spokesman Shawn Hall.
"We will oppose this filing. As this matter is before the courts we cannot comment further."
Telus's proposal had sought to convert each non-voting share into a common share on a one-for-one basis, but the company nixed that plan just hours before it was scheduled to be put to a shareholder vote at its annual general meeting in May. At the time, Telus said that Mason's staunch opposition made it apparent the proposal was doomed to fail – even though advanced voting, excluding Mason's stake, suggested that 92.4 per cent of shareholders supported the transaction. As part of its court filing, Mason alleges that claim is "incomplete and misleading."
"Since withdrawing the proposed arrangement, Telus has stated publicly on numerous occasions that it remains committed to a one-for-one share conversion and that it intends to reintroduce a new proposal in due course," adds the court filing. "The level of support for the proposed arrangement from holders of voting share is directly relevant in determining the likelihood of success of a future proposal by Telus to effect a one-for-one share conversion and could materially affect Mason's decision as to whether to increase or decrease its substantial position in Telus' securities."
The New York-based hedge fund had argued the one-to-one conversion ratio was unfair because it set the non-voting class up for an unjustifiable windfall because those shares have historically traded at a lower price. As of July 9, Mason controlled more than 34.94 million common shares of Telus, according to its court filing.
At the same time, Mason is still examining all options to maximize the value of its sizable ownership block. It has hired Blackstone Group LP to seek a potential buyer for its near 20 per cent voting stake and is in "active discussions" with a number of parties, including strategic and financial buyers based in North America and overseas, according to a person familiar with the talks.
In late June, Mason sent a letter to Telus's board of directors, pushing the telecom to provide the market with " full and plain disclosure of its current levels of foreign ownership and the steps it has taken to ensure compliance," suggesting proxy data suggest that Telus's foreign ownership levels may have been exceeded. In doing so, Mason cited a complaint made by Wind Mobile's parent company, Globalive Wireless Management Corp., to the federal telecom regulator alleging that Telus had potentially run afoul of foreign investment rules due to issues related to its failed share consolidation proposal.
For its part, Telus has said that allegations made by both Globalive and Mason are "completely unfounded and misleading," noting it filed its confidential annual report and statutory declaration with the CRTC on May 9 certifying its compliance with the ownership and control restrictions.
"Telus has been and continues to be fully compliant with foreign ownership restrictions, and have our own control processes in place to ensure we remain compliant," the company said in a statement earlier this month. "Telus has comprehensive control processes in place and our transfer agent updates our shareholder registry every day and obtains declarations from investors of their residency."
Dvai Ghose, an analyst with Canaccord Genuity, said that even if Telus is offside on foreign ownership, despite its rigorous controls, it has remedies at its disposal to correct the problem, adding those counter-measures have the potential to hurt Mason.
"The irony for us is that the whole issue of Telus and foreign ownership limits has only become an issue because of Mason's stake," Mr. Ghose wrote in a research note to clients. "Telus claims that as a result of Mason's actions, foreign ownership in Telus voting shares increased by 35 million from January 31, 2012. Consequently, the obvious solution of any breach in foreign ownership is to cancel Mason's buy orders or convert their Telus voting share position into non voters.
"In either case, such a remedy would reduce Mason's voting position in Telus, which would presumably make it easier for Telus to convert its non-voting shares into voting shares on a 1:1 basis as initially proposed."
Telus, meanwhile, has criticized Mason for being an "opportunistic" investor out to make a quick buck because of its use of "empty voting", which is voting without an economic interest, to defeat the original share proposal. Mason used a trading strategy that exploits the historical price gap between the two share classes despite having, at the time, less than a 0.25-per-cent net economic interest in Telus due to its short trades.
"Mason Capital is a New York hedge fund which recently used a very controversial 'empty voting' strategy, which is an affront to shareholder democracy and good corporate governance, as part of a trading strategy to earn a short-term profit at the expense of other Telus shareholders," the company said.
"Any comments or allegations they make should be viewed as self-interested, an attempt to drive the spread between our two share classes wider so they can exit their short and long investment positions in Telus without incurring a loss."