Mason Capital succeeds: Appeal court confirms CDS' ability to requisition meeting by "empty voter"
In TELUS Corporation v. Mason Capital Management LLC, the British Columbia Court of Appeal considered the validity of a shareholder's requisition for a general meeting of shareholders. The Court clarified that a requisition made under s. 167 of the Business Corporations Act need not identify the beneficial owner of the shares used to call the meeting in order to be valid. In addition, the Court held that it had no authority under the Act to restrain a shareholder from requisitioning a meeting on the basis of its “net investment” or that its interests are not aligned with the economic well-being of the company.
The requisition concerned the capital structure of the respondent, TELUS Corporation (TELUS). TELUS has two classes of shares: common shares and non-voting shares. TELUS originally adopted this capital structure in order to comply with foreign ownership restrictions on its voting shares.
When foreign investment in TELUS decreased and the rationale for having non-voting shares disappeared, TELUS's board of directors explored the possibility of consolidating the company's share structure by exchanging the non-voting shares for voting shares.
TELUS ultimately announced plans to see the non-voting shares converted on a one-for-one basis to common shares. This announcement resulted in a narrowing of the price differential between the two classes of shares. Historically, the non-voting shares traded at a discount relative to the trading price of the common shares.
In response, the appellant, Mason Capital Management LLC, began acquiring common shares and hedging its position by short selling both common and non-voting shares. As a result, Mason's interests lay in widening the gap between the prices of non-voting and common shares.
Mason later requisitioned a general meeting pursuant to s. 167 of the Act, proposing that four resolutions be put before shareholders. The first was to amend TELUS's articles to prohibit the company from exchanging non-voting shares for common shares at a ratio of less than 1.08 non-voting shares per common share, with limited exceptions. The second resolution was identical to the first except that it specified a lower rate of exchange. The third resolution, which was to be considered only if the first two resolutions were not approved, was a non-binding recommendation to the directors that they not proceed with any exchange of shares at a ratio of less than 1.08 non-voting shares per common share. The fourth resolution mirrored the third resolution, but specified a lower rate of exchange.
Although Mason was behind the requisition, the requisition was formally made by CDS & Co., the nominee of CDS Clearing and Depository Services Inc. As the national securities depository, CDS was the registered shareholder of most of the common shares, which CDS held on behalf of numerous intermediaries, including on behalf of Mason. The requisition stated that CDS was the registered holder of a number of shares sufficient to requisition the meeting, and that CDS was operating under direction from a beneficial owner of the shares. The requisition did not identify Mason as the beneficial owner behind the requisition. However, on the day immediately following CDS's requisition Mason issued a press release announcing that it had requisitioned the meeting.
TELUS responded to the requisition by seeking and obtaining court orders preventing Mason from calling or holding the meeting. As discussed by our colleagues in an earlier post, the chambers judge held, among other things, that the requisition was improperly made because it did not fully identify the beneficial owner of the shares that were used to call the meeting, and, alternatively, that the proposed resolutions were contrary to TELUS' articles and the Act. Mason appealed.
The key issues on appeal were whether the requisition was improperly made because it did not identify the beneficial owner of the shares used to call the meeting, whether the resolutions were contrary to the TELUS's articles and the Act, and whether Mason should be permitted to requisition a meeting despite having a very limited net financial interest in the company due to its hedged position.
Mr. Justice Groberman, writing for the Court, concluded that CDS was capable of "requisitioning a meeting on behalf of the beneficial owner of shares that are deposited with it" and that there was no "requirement that the beneficial owners of shares be identified in a requisition". The basis of this conclusion was section 167(3)(b) of the Act, which provides that, in order for a requisition to be validly made, it must be signed by and include the names and mailing address of all of the requisitioning shareholders. "Shareholder" is defined in s. 1(1) of the Act to mean "any person whose name is entered in a securities register of a company as a registered owner of a share of the company". The Court observed that because the definition of "shareholder" includes registered owners, "the plain words of the statute dictate that CDS is entitled to requisition a meeting".
The Court further concluded that s. 167(7)(d)(ii) also does not require the identity of the beneficial shareholder be revealed, on the basis that such provision of the Act does not require the directors to detect whether a requisition is inappropriate, but merely gives them the discretion to refuse to call a meeting where the primary purpose is to enforce a personal claim or redress a personal grievance. While there may be rare cases where the identity of the beneficial holder may be critical to weed out an inappropriate requisition, the Court noted, s. 167(7)(d)(ii) did not permit the Court to expand the requirements for a requisition beyond what is set out in the Act.
The Court then considered whether the proposed resolutions were inconsistent with certain provisions in the articles. In particular, one of the provisions set out certain rights, privileges, restrictions and conditions attached to the common shares and non-voting shares, but did not contemplate an exchange of one class of shares for the other (the "Rights Provision"). TELUS argued that the proposed resolutions were inconsistent with another provision in the articles, which provided that the Rights Provision could only be "deleted, amended, modified, or varied" by a special resolution of each share class. However, the Court held that because the Rights Provision did not purport to be the exclusive provision in the articles setting out the rights, privileges, restrictions, and conditions that attach to the shares, it could not be said that the proposed resolutions deleted, amended, modified, or varied the Rights Provision.
TELUS also argued that the proposed resolutions breached a provision in the articles which provided that each common share and non-voting share "shall have the same rights and attributes and be the same in all respects". However, the Court observed that, under the articles, there was "no existing right to exchange or convert non-voting shares to common shares, nor [would] the resolutions, if passed, create such a right". The matter was also not left in the discretion of the board of directors. Accordingly, the proposed resolutions did not affect any right or attribute of the non-voting shares.
In addition, the Court observed that the third and fourth resolutions, despite being purely advisory, were not precluded by the Act from constituting the subject of a requisitioned meeting. Section 167(1) of the Act provides that a shareholder may requisition a general meeting for the "purpose of transacting any business that may be transacted at a general meeting". In the Court's view, the phrase "transacting any business that may be transacted at a general meeting" has a wide ambit that includes advisory resolutions.
The Court then turned to the issue of whether Mason should be permitted to requisition a meeting despite the fact that its hedged position meant that it had a limited net financial interest in the company. Although the Court recognized that this was a "cause for concern", it observed that it was sufficient that a requisitioning shareholder hold the required number of shares to requisition a meeting pursuant to s. 167(2) of the Act. The Act did not provide the Court with the power to "look behind the shareholdings to determine whether the shareholding represents a 'material interest' in the company". The Court concluded by remarking that, to the extent that cases of "empty voting" are subverting the goals of shareholder democracy, "the remedy must lie in legislative and regulatory change." TELUS also attacked Mason’s empty voting position on the basis that s. 186 of the Act gives a court broad discretion to enjoin a meeting. While acknowledging it gives a court fairly broad authority to control the calling and conduct of a meeting, the Court found it does not allow a court to disenfranchise a shareholder on the basis that it is suspected of empty voting.
In the result, the Court allowed the appeal and set aside the orders of the chambers judge.
The Court’s decision has important implications. First, the Court's conclusion that it is not entitled to “look behind” a shareholder’s shareholdings should help to avoid the prospect of unwarranted court challenges based on shareholder motive. Subsequent to the decision of the chambers judge, it may have been open to interpret that a shareholder's rights could be restricted where its interests were perceived as being inconsistent with the best interests of the company.
The Court has also helpfully clarified the power to requisition a meeting for the purposes of considering advisory resolutions. By broadly interpreting s. 167(1) of the Act, the Court may have foreclosed future arguments that the meaning of the phrase "transacting any business that may be transacted at a general meeting" should be narrowly construed.
Clear rules are required to ensure a level playing field for management and dissidents. The Court's decision provides well-needed clarity with respect to the law and procedure that governs requisitions of shareholder meetings, and implicitly emphasizes that the provisions of the Act should generally be read in their ordinary sense where their language is clear and unambiguous.
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