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Institute of Corporate Directors shareholder activism conference – on the topic of empty voting


On Wednesday, May 22 Brian Canfield spoke to the Institute of Corporate Directors on the subject of shareholder activism and empty voting. I had the opportunity to attend and would like to share highlights from Mr. Canfield’s remarks with you.Sugar_Maple_Leaf

Although it’s not a common occurrence or a frequently discussed subject in Canadian business, Mr. Canfield encouraged leaders to inform themselves of the practice of empty voting, be aware of its potential impact to shareholder democracy and to push regulators to protect voting integrity in corporate Canada. This is a result of our own experience over the last year with the practice of empty voting.

In Part, Mr. Canfield said:

In February of 2012 TELUS announced a plan to move to a single class share structure. The plan sought to eliminate TELUS’ non-voting shares through a 1:1 exchange for voting shares subject to approval by shareholders of both classes. The non-voting share class was created in 1999 to allow a large US shareholder (GTE, which later became Verizon) to continue to hold a majority interest in TELUS while complying with Canada’s foreign ownership restrictions. After Verizon sold its interest, foreign ownership levels in TELUS stayed relatively constant, well below the permissible limits.  That stability, together with the benefits of a simpler share structure, caused shareholders and others to question the need for the non-voting class. After lengthy deliberations and considering the recommendations of its legal and financial advisors, the Board decided to eliminate the non-voting class through a plan of arrangement.  The expected benefits were enhanced liquidity and marketability associated with a single class of shares listed on the TSX and NYSE. It also represented best practices in good corporate governance by granting 46% of our shareholders, the non-voters, the right to vote.

Prior to our announcement in February 2012, Mason Capital (a U.S. hedge fund) was not a TELUS shareholder. By the end of March 2012, however, Mason was simultaneously long 33 million shares and short 32 million shares. Its net holdings were less than a million shares or .21% of TELUS’ issued and outstanding shares. Mason continued to decrease its net holdings during the course of our year-long battle. The result of Mason’s arbitrage plan was that it exercised voting control over nearly 20% of TELUS’ common shares while holding almost no net economic interest in TELUS. This was problematic as we required two thirds common share approval to proceed with our single class share structure.

The sudden appearance of this hedge fund meant that we were dealing with an activist  focused on controlling our shareholder vote for its own benefit. Mason Capital had no interest in TELUS, it didn’t even have an interest in the price of our shares. It only had an interest in the difference between the trading price of our two classes of shares.
Following the announcement of our plan to move to a single share class the historical price spread between the share classes immediately narrowed.  This prompted Mason Capital to implement an arbitrage plan to block our arrangement in order to profit on the re-establishment of the price spread.

In May 2012, when it became obvious that Mason’s arbitrage strategy was going to defeat the plan of arrangement, TELUS withdrew its proposal but announced that it remained committed to a single class share structure. By the end of August 2012, TELUS announced a revised plan of arrangement with a different approval threshold for the common shares which led to multiple legal proceedings, a drawn out proxy battle, extensive media coverage, combined shareholder meetings, and eventually a court order in February 2013 approving the arrangement.

Most TELUS shareholders have an interest in TELUS. They buy and hold their shares because they believe in TELUS. They vote their shares in the interests of TELUS because when TELUS benefits, they gain economically. This hedge funds had votes, but they were empty votes. Empty of any interest in TELUS. We knew the single class share structure was important because:
•    We listen to and value the views of our shareholders;
•    Mason Capital was not a shareholder – it was an opportunistic financial player;
•    A corporation’s true shareholders need to be protected from being held to ransom by opportunistic investors;
•    The nexus between the directors and the shareholders who elect them is critical to the corporation’s governance. Directors play a key role in advocating for protections against empty voting.

So while we were ultimately successful, it was an expensive and frustrating process with not one but two contested proxy fights. Today we have a single class of voting shares which trade on the TSX and NYSE and which have retrospectively produced globally-leading shareholder returns amongst all of TELUS’ peers.

Our battle with Mason highlighted a class of activist that should be distinguished from others.  For some time now investors have intentionally decoupled voting rights from economic interest through the use of derivatives, the share lending market and other means. This is the classic formulation of an empty voter: their votes are emptied of a corresponding economic interest. Mason, an investor with 1,000 times the voting power of its net financial investment in TELUS, clearly fit that description.

As an empty voter, however, Mason was unique. Mason’s interests were clearly not aligned with the well-being of TELUS or the value of TELUS’ shares. In fact, Mason’s arbitrage plan placed its interests squarely in widening the gap between the prices of non-voting and common shares.  Mason sought to defeat TELUS’ arrangement expecting the result would cause the prices of all TELUS shares to fall but with the non-voting share price falling further than the common share price.  In this scenario, common shareholders, non-voting shareholders and even combination shareholders would lose wealth but, in contrast, Mason would profit. Mason therefore had an interest in TELUS’ arrangement which conflicted with the interests of all other shareholders.
When an activist employs an empty voting strategy with a view to destroying shareholder wealth, then that person represents an extreme category of investor that warrants an equally strong response by the targeted company.

We can debate the borders that define this extreme category of empty voters and for those who enjoy that exercise I highly recommend the series of academic articles published by Professors Hu and Black in 2006 and 2007 .  But, for the purposes of our discussion, let’s agree that the extreme empty voter is the investor that has an economic interest which runs opposite to the direction from the return on shares.

In TELUS’ case, it faced an opponent that had placed itself in a position where the well-being of the company or the value of the company’s shares were of limited concern to it. So what should directors do and be concerned about when faced with such a situation?
•    We threw an enormous amount of management time at this issue
•    We engaged the best counsel
•    We developed and implemented a winning legal strategy
•    And we talked to our shareholders

I believe the reason we were able to see this issue through in the interests of shareholders was because we were well grounded from a governance perspective. We have a highly skilled independent board of directors and an effective decision making process. Our directors were keenly alert to the views and concerns of our shareholders, have a good relationship with management, and have confidence in our CEO and in his financial and legal team. As a result of all of this, we were able to face this challenge as a team, working in the interests of TELUS and its shareholders.

After the dust settled, we looked at what steps we could take to protect TELUS and its shareholders from having the shareholder agenda highjacked again.  We undertook certain corporate steps and initiated discussions with regulators and legislators. But the truth of the matter is that the financial market strategies employed by Mason Capital are light years beyond anything that the regulators or legislators would have contemplated. There are real limits on what one issuer alone can do.
That’s where you come in.

If you are a director of a public company, I ask that you send an email to your CEO and Chief Legal Officer. Tell your CEO that you want him or her to understand the implications of empty voting and be prepared to address it at the Canadian Council of CEOs. Ask your CLO to support our change initiatives that seek to ensure only true shareholders are making shareholder decisions and to join TELUS in supporting efforts by the Canadian Securities Administrators and the Canadian Society for Corporate Secretaries aimed at improving the integrity of the voting process. We will also share with your team ways to modernize your articles and bylaws to afford you the best protections against empty voting, a step we have recently undertaken at TELUS.

If you are an investor, understand that you may be playing a role in facilitating empty voting. Send an email tonight to your chief legal officer (or to your broker or custodian) and tell them you don’t want your shares to be used in that fashion. Tell them that if lending or borrowing shares is part your program, you want assurance that the shares being borrowed or lent do not surrender the vote to be used by investors who have no real ownership interest.

Let me tell you again why I think empty voting is an issue that is worthy of your attention.  As evidenced by TELUS’ experience, it is a real threat at work in our financial markets. Directors in this room consider the views of their shareholders important and empty voters seek to stifle that voice by highjacking the shareholder vote. By doing nothing, not only do you stand to lose the views of your shareholders but also the integrity of our shareholder voting system. For these reasons I ask that you add your voice against the practice of empty voting.

I encourage you to post your thoughts on empty voting in the comments.

(Brian’s full speech available here: Brian Canfield – Institute of Corporate Directors speech).


[1]Henry T. C. Hu and Bernard Black, The New Vote Buying: Empty Voting and Hidden (Morphable) Ownership, 79 SOUTHERN CALIFORNIA LAW REVIEW 811-908 (2006), Henry T. C. Hu and Bernard Black, Empty Voting and Hidden (Morphable) Ownership: Taxonomy, Implications, and Reforms, 61 BUSINESS LAWYER 1011-1070 (2006)