Activist investors continue to aggressively exploit a variety of techniques — including hedging, securities borrowing, total return swaps and other contractual arrangements — to avoid public disclosure of their investments and to obtain governance rights out of proportion with their economic stakes. We have long warned against these abuses, which are not confined to the U.S. market but are truly a global phenomenon. Courts, including the Supreme Court of Delaware, have emphasized that corporate voting rights and economic interests should not be “uncoupled” but should travel together. The SEC is considering regulating the use of derivatives in its “proxy plumbing” initiative, and we have encouraged it to focus on “empty voting” abuses.
A recent case in Canada illustrates the problems with the current system. In TELUS Corp. v. CDS Clearing and Depository Services Inc., a U.S.-based hedge fund, Mason Capital, amassed a voting position of almost 20% in TELUS, a Canadian telecommunications provider with a dual-class capitalization. Mason hedged its entire position by shorting TELUS’s non-voting shares. Although Mason was the company’s largest voting shareholder, it would be unaffected whether TELUS shares increased or decreased in value, but rather stood to profit if the price differential between the voting shares and the non-voting shares widened. Mason used its (empty) voting position to defeat TELUS’s plan to collapse its dual class share structure, and sought to call a shareholder meeting to approve resolutions requiring a minimum premium for any conversion of non-voting shares into voting common, which would be advantageous for Mason, but not necessarily for other shareholders whose economic interests are aligned with their voting rights.
The Supreme Court of British Columbia agreed with TELUS that Mason’s application for a shareholder meeting was invalid. Although it relied on technical grounds for its decision and did not have to address the empty-voting issue, the Court was highly critical of the technique. Citing to the controversial Mylan-King situation in the U.S. a few years ago, the Court summarized the problem succinctly:
“The practice of empty voting presents a challenge to shareholder democracy. Shareholder democracy rests on the premise that shareholders have a common interest: a desire to enhance the value of their investment. Even when shareholders have different investment objectives, the shareholder vote is intended to reflect the best interests of the company in the pursuit of wealth maximization. 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.”
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. 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.