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Telus case shows more disclosure needed for ‘empty voting’


No matter how bad something might look, it's only a crime if there's a law against it.

That's the conundrum that Telus Corp. faces in its battle with a U.S. hedge fund, and one that many other companies around the globe are likely to confront as regulators struggle with how to regulate so-called empty voting.

In Telus's case, the company is up against Mason Capital, which owns almost one-fifth of the company's voting stock. Mason has also sold short millions of shares, leaving it a very slim net long interest. Mason is using the votes on the shares it owns to fight Telus's plan to consolidate the two classes of stock into a single class on a one-for-one basis. Mason wants a ratio that favours the voting stock.

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Telus argues that Mason has no real interest in the overall health of the company, making Mason an empty voter. Mason, of course, disagrees. It has on its side one of the people who coined the term, who points to the fact that Mason has an economic interest in the share collapse's success or failure.

The fact is, it does not really matter, and that's the real issue. The Court of Appeal for British Columbia ruled Friday that "there is no indication that it [Mason] is violating any laws, nor is there any statutory provision that would allow the court to intervene on broad equitable grounds. To the extent that cases of 'empty voting' are subverting the goals of shareholder democracy, the remedy must lie in legislative and regulatory change."

In other words, the field is open until regulators write some rules. And there are no signs of that happening soon.

Many of the methods used by empty voters are the result of financial innovations in recent years that allow the vote to be "decoupled" from the underlying shares. That creates the potential to subvert the principle that the one thing unifying a shareholder base in a company is a desire for the company to do well.

"The statutes never contemplated anything like this happening," said Carol Hansell, a senior law partner at Davies Ward Phillips & Vineberg in Toronto, who has been looking into the issue for six years. (Full disclosure: Ms. Hansell's firm acts for Telus, not on the Mason file specifically but in a more general way. Telus has asked the firm to look into the empty voting issue.)

The problem starts with defining empty voting. The ability to short-sell stock has led to what Telus calls the empty voting. But there are many structures that lead to empty voting. You can own the stock but swap away your economic interest. You can use options or credit default swaps.

There are some far more prosaic examples – if you sell your stock in a company after a meeting's record date, you keep the vote for that meeting even though you no longer have an economic interest.

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So what can be done? Ms. Hansell is among those calling for a better disclosure system to identify votes that are deemed empty, which could lead to a system to "red circle the vote" of those using mischievous tactics. They could even be disenfranchised.

Similarly, in an August University of Oxford paper, law professor Wolf-Georg Ringe proposed a combination of disclosure and "allowing regulators to suspend voting rights in individual cases." His view is that shareholders should have to disclose anything that effectively modifies the long holding to reduce risk.

The U.S. Securities and Exchange Commission has sought comment on various remedies, such as pro-rating a shareholder's votes to reflect only a net long position, or banning empty voting altogether.

In Canada, changing voting rules promises to be terribly complicated. As Ms. Hansell notes, it's a problem for publicly traded companies, making it an issue for Canada's 13 securities regulators. But it also involves the voting thresholds for transactions such as mergers and corporate changes. That comes from corporate law, set by the federal government and provincial legislatures. Imagine the fun.

What's more, the impetus to change may be hard to come by, as the issue does not crop up very often. Or at least, as far as we know, Ms. Hansell points out. The disclosure regime in Canada allows much to be hidden. In other words, it could be happening a lot.

So the obvious place to start is with a demand for more disclosure.

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There's no way to create a list of banned empty voting tactics, because as Ms. Hansell notes, financial innovators will just create new ways. Instead, Mr. Ringe has the right idea, creating a rule that puts the onus on shareholders to disclose any structure that can lead to empty voting.

That transparency would at least give other shareholders, management and directors an idea just who is voting and how much weight their votes should be given. It's probably not enough, but it's a workable start.

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