B.C. Supreme Court Enters the Dual-Class Share Debate

Activist hedge funds faced a big setback last week when the B.C. Supreme Court issued its ruling in Telus Corp. v. CDS. The ruling spoke broadly about issues around “empty voting” — the practice of exercising a large voting stake in the absence of any significant economic stake (often to the detriment of other shareholders).

Darren Entwistle, President and CEO of Telus Corporation, delivers his speech to shareholders during their annual general meeting in Edmonton May 9, 2012. REUTERS/Dan Riedlhuber

The ruling has broad ramifications in Canada, given the pervasiveness of dual-class shares in this country. In contrast to the U.S., where shareholder democracy is taken more literally, Canadian regulators have long supported share structures that allow founding entrepreneurs and families to retain control of their companies despite holding very little economic interest.

There are arguments on both sides of the issue. Shareholder activists argue that “one share, one vote” must be the underlying principle behind shareholder democracy. Others, meanwhile, argue that the continuity provided by strong leadership (by a founding family, say) contributes more to a corporation’s long-term success than the empowerment of investors who may only be in it for the short term.

Whatever side you happen to be on, there can be no doubt that things are changing. Canadian corporations are, one by one, doing away with their dual-class shares in the effort to appeal to a loftier brand of corporate governance. Most notable among these has been the restructuring of Magna International, where founder Frank Stronach was paid a princely sum to part ways with his controlling stake.

Telus, too, was committed to doing away with non-voting shares. The corporation had expressed its commitment to converting non-voting shares to common shares on a one-to-one basis. Mason Capital Management, a hedge fund that had acquired a 20% voting interest in the company, wanted that conversion to come at a premium for non-voting shareholders. And so it requisitioned a meeting to pursue that goal.

Telus petitioned the court to prevent the meeting, and on Sept. 11 the court came down hard on Mason Capital, ruling in favour of Telus on grounds that the requisition did not comply with the B.C. Business Corporations Act.

But the court didn’t stop there, taking the opportunity to comment more broadly on Mason’s attempt to skew the shareholder vote in its favour (and to the detriment of non-voting shareholders). This may not have been a perfect example of empty voting, but it brought the issue to mind for the court:

When a party has a vote in a company but no economic interest in that company, that party’s interests may not lie in the wellbeing of the company itself. The interests of such an empty voter and the other shareholders are no longer aligned and the premise underlying the shareholder vote is subverted.

It’s important to note that this commentary had little bearing on the court’s decision to reject the meeting requisition, which was instead based on an application technicality (along with wide discretion afforded to the courts within the BCBCA).

Still, the court’s willingness to address the issue, despite the widespread prevalence of dual-class share structures in this country, is good news not only for those seeking more literal shareholder democracy, but also to corporate boards looking to fend off the advances of aggressive hedge fund investors.

It’s probably not such good news, however, for the many corporate families that continue to vote with little economic interest.

Torys has posted a bulletin on this article (here), as well as Norton Rose (here) and Stikeman Elliott (here).

-David Dias

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