This commentary was first published in the Financial Post on April 28, 2012.
The collapse of Magna’s dual-class share structure in 2011 via an insider bid for Frank Stronach’s holdings raised eyebrows because of the unprecedented pay out of an 1,800% premium that Mr. Stronach (through a private holding company) received in the transaction. Dual-class structures are once again in the spotlight with the recent proposal by Telus to eliminate its dual class structure. It was clear that Magna concerned securities regulators at least from a disclosure standpoint. By contrast, regulators have been conspicuously silent on the Telus transaction.
Under the terms of the Telus proposal, which goes to a shareholder vote on May 9, each non-voting share would be converted to a common share on a one-for-one basis. The two classes of shareholders will vote separately on the transaction. Two-thirds approval from each class is required in order for the votes to pass. Thus, a concern about shareholder participation that existed in previous dual class transactions, such as Canadian Tire, falls away since shareholders in each class have a vote.
Yet the Telus proposal, and in particular the actions of certain investors, raise investor protection issues. Let’s start with hedge fund Mason Capital, which is vigorously opposing the plan. Mason has acquired almost 20% of Telus’s common shares. While in and of itself, its acquisition of Telus shares seems benign, one must consider that while Mason holds a significant percentage of common shares, it owns less than 0.25% net economic interest in the underlying company. Mason is playing an arbitrageur’s game: trying to leverage profit from the existence of the dual-class structure without a concern for what is best from a corporate-governance standpoint.
The first and perhaps most fundamental issue is whether such a bifurcation between value and vote should be permitted. From a corporate law standpoint, shareholders who purchase and sell shares for profit only without concern for the underlying governance of the corporation undermine the principle of shareholder democracy on which corporate law is founded.
The second crucial issue concerns the lack of prompt disclosure relating to how Mason acquired its Telus shares. As a policy matter, non-transparent borrowing and lending of stock over the course of the record date undermine shareholder democracy and raises investor protection concerns. If such activities are permitted, proper disclosure about such trades must be made; the current system based in part on the “alternative monthly report” (AMR) is inadequate. In particular, the rules provide broad latitude for hedge funds to use the AMR system when they are not passive investors. More regulatory focus is needed with regard to the disclosure obligations of active versus passive investors.
Do securities regulators have public interest concerns about these issues? The Ontario Securities Commission has in the past; it intervened in Sears when a mandatory vote was being determined by empty voters receiving collateral benefits. Telus is a British Columbia company; presumably the lead regulator is the B.C. Securities Commission. The Telus transaction, and the apparent absence of a regulatory response to it, may be one consequence of having no national securities regulator. While one commission may be concerned about particular transactions and market players, others may not share similar investor-protection concerns.
Ultimately, the issue must be one about the regulation of hedge funds and similar investors who by their actions attempt to circumvent the spirit of both corporate and securities law. Numerous issues come to mind: bifurcation of vote and value, the lack of transparency and disclosure, regulation of market players such as hedge funds. The Telus transaction to abolish its dual-class share structure, a positive move for investors generally, has brought these concerns to the fore: Who is going to do something about them now that the transaction is at risk of failure? Securities regulators need not wait for an application from an issuer to act in the public interest.
