In a commentary in the Financial Post, Prof. Anita Anand analyzes the history of the merging of dual-share structures in Canada through the lens of the recent decision regarding Telus ("Telus win scores for shareholders," Oct. 18, 2012).
Read the full commentary on the Financial Post website, or below.
Telus win scores for shareholders
Merging its two classes of shares on a one-for-one basis is fair
The tale at Telus is well known by now: Telus has proposed to collapse its dual-class share structure whereby Telus non-voting shares would be exchanged for common (voting) shares on a one-for-one basis. An institutional shareholder, Mason Capital, opposed the arrangement transaction under which this would occur. Mason holds 18.7% of the common shares and 0.4% of the non-voting shares. Its net investment in Telus represents only 0.02% of Telus’s share capital.
Telus won the shareholder vote on Wednesday. Mason opposed the one-for-one ratio, arguing that the common shares historically are more valuable than non-voting shares and have traded at an average premium of 4.83%, which has reached as high as 15.23%. Thus, Mason argued that the Telus proposal would result in a loss of substantial value to holders of common shares.
It is true that in some instances, the collapse of dual-class share structures has resulted in a premium being paid to the holders of voting shares. But the first lesson we need to draw is that simply because x has historically occurred does not make x right. Rather, we need to look at the reasons that x has occurred and ask whether x should be permitted to continue.
Historically, Canadian regulators have permitted dual-class structures on the theory that without them, some Canadian businesses would not have full access to the equity capital markets, either because the entrepreneur/owner wants to retain control, or as in the case of Telus, regulatory requirements require that the business be controlled by Canadians. Dual-class structures were never designed to be a means of conferring additional value on the voting shares.
Further, non-voting shares have historically traded at a discount because the market hedged potential agency costs: Perhaps the board will treat holders of the voting shares preferentially, notwithstanding coattails and other protections that the articles may contain. Thus, premiums paid in past dual-class collapses, such as WIC, CHUM, Oshawa Foods and Magna have occurred relatively easily (i.e., some litigation, which ultimately did not thwart the transaction at issue).
Take Magna, for example, one of the largest sale-of-control transactions in Canadian history. Magna purchased all of the corporation’s preference shares — constituting 0.6% of the equity but 66% of the voting rights — owned by Frank Stronach’s holding entity, in exchange for US$300-million and nine million voting shares. The effect of the transaction was a significant premium paid to the Stronach Trust of approximately 1,800%.
Many market observers, including myself, had an issue with this unprecedented premium, despite the fact that a majority of minority shareholders ultimately approved the transaction. Simply because value has been extorted in the past does not mean that it is a practice that should be readily accepted. It is not in the public interest to allow such extortion of value to occur. One-for-one is fair.
Perhaps we need to look at why Mason is so concerned with the premium being attached to the conversion. Mason is an empty voter. To quote the affidavit of Henry Hu of the University of Texas Law School, prepared for Telus, Mason’s “18.73% voting right is literally a 1,000-fold multiple of its net economic interest.” Hu argues persuasively (citing the SEC and Delaware Court precedent, which were in turn based on papers that he has written with Bernard Black of Northwestern University Law School) that Mason “is clearly an empty voter.” And, as a result, the larger the spread between the two classes of shares, the larger Mason’s profit.
The question then becomes, given that Mason is an empty voter, should it be entitled to the same rights and protections as traditional shareholders whose rights are not “decoupled” in this way? The B.C. Superior Court had it right in stating that empty voters’ interests do not rest in the well-being of the corporation and their interests are therefore inconsistent with those of other, let’s say, traditional shareholders.
The problem is that our corporate statutes do not contemplate empty voting (hence differing opinions in the B.C. Courts on this case) and our securities regulation has been conspicuously silent on the issue. Provisions that aim to ensure that shareholders have a “voice” in the corporation are rendered meaningless if empty voters are permitted to utilize them to increase their arbitrage opportunities. Thus, there is much to be studied and addressed in business law reform. Until then, we should not be so quick to dismiss one-for-one on the basis of precedent alone.
Telus is a story of a corporation seeking to collapse its dual-share structure without extorting value from non-voting shareholders. From a governance standpoint, empty voters should not rule the day. This is one transaction that should be applauded.