Telus looks to regulator in share-consolidation spat

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Telus Corp. is weighing whether to use a legal tactic to prevent a U.S. hedge fund from exercising its voting power to defeat the company's share-consolidation plan.

The Vancouver-based telecom giant has contacted the British Columbia Securities Commission to gauge the regulator's interest in holding a hearing regarding its complaints about Mason Capital Management LLC, The Globe and Mail has learned.

Telus is trying to eliminate its dual-share structure and give non-voting shareholders a vote. But New York-based Mason, which has amassed roughly 18.7 per cent of Telus's common voting shares, is trying to defeat the plan – a stance that has fuelled an escalating fight between the money manager and the company.

Mason is urging shareholders to vote against the plan, arguing the non-voting class will reap an unmerited windfall, since those shares have traditionally been cheaper to buy.

But while the fund purports to champion the interests of the voting class, Telus has accused it of being an opportunistic investor out to earn a quick buck by using a trading strategy that exploits the historical price gap between the two classes of shares.

While the fund is a large holder of voting shares, it is also short-selling the non-voting shares – meaning its economic interest in Telus is much less than its voting power of 18.7 per cent. Mason's bet is that it can stop the deal from happening, in which case the non-voting shares would likely fall, relative to the voting shares. As that spread widens, the hedge fund would profit.

To succeed, the share consolidation needs the approval of two-thirds of the votes cast by each class of shareholder.

In situations where there is a heavily contested deal, it is not uncommon for one party to ask a regulator to hold a hearing and rule on a legal motion to thwart an adversary. As a result, Telus could potentially seek a hearing at the BCSC, which is the lead regulator, in a bid to block Mason's votes from being counted on its proposal.

Although Telus has not filed a formal application for a hearing, its legal counsel has discussed it with the BCSC on an informal basis. While it remains unclear on what legal grounds Telus could attempt to block Mason, securities regulators in Canada have broad powers to limit activities that are considered to be "contrary to the public interest" even if the activity does not breach a specific securities law.

Mason, though, has fully disclosed its position (including longs and shorts) as required by law. So Telus' decision to contact the BCSC signals it is anxious about its proposal being defeated at its annual meeting on May 9. Telus declined to comment.

Some in the regulatory community, though, do not anticipate a securities hearing because the dispute will likely be an issue at the court approval process under corporate law. The company is expecting its proposal will be completed through a court-approved plan of arrangement.

Since Mason is in a realistic position to block the plan if it has allies or if voter turnout is low, Telus is working furiously to secure as many favourable votes as possible. "While Mason has less than a 0.25 per cent net economic interest in the company due to its short trades, it controls the votes of almost 19 per cent of the Common Shares and has announced it will vote against the proposal – a tactic called empty voting," the company said Wednesday in a statement. "Empty voting – voting without an economic interest – makes a mockery of the well-established governance principle of voting in proportion to one's economic interest in a corporation."

Although the Ontario Securities Commission declined to comment on Telus's dispute with Mason, it is examining the issue of empty voting, and the related issue of hidden ownership, as policy matters.

"We are looking at these issues from a policy perspective as part of our analysis of the shareholder voting system but it is always open to [a] securities commission, in the appropriate circumstances, to intervene on public interest grounds," said Naizam Kanji, the OSC's deputy director of corporate finance.