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Telus foe Mason is no ‘empty voter,’ says prof who coined term

The judge agreed with Telus that Mason Capital is indifferent to the telco’s overall success.

Michelle Siu/The Globe and Mail

One of the professors who coined the term "empty voting" is refuting Telus Corp.'s claims that foe Mason Capital is engaging in the dubious practice. However, he says, plenty of other shareholders of the phone company are.

Mason and Telus are facing off over Telus's plan to collapse its two classes of shares on a one-for-one basis. Mason has set up a trade whereby it has bought millions of voting shares, and shorted millions of other shares, including a large chunk of non-voting stock.

That trade allows Mason to profit if the Telus plan fails, or if Telus is forced to change the exchange ratio to one that reflects the historical trading differential between the two classes of stock. Generally, the voting shares have been worth more in the open market than the non-voters, and Mason argues the ratio should reflect that.

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A vote on the share collapse, by holders of voting shares, is scheduled for next month.

Telus has steadily claimed in its campaign for the collapse that Mason is engaging in so-called empty voting, in which a shareholder has votes but no economic interest, because the money manager is indifferent to the overall value of Telus. Because Mason's position in voting and non-voting stock is offsetting, Mason does not gain or lose if the value of the whole company rises or falls.

Telus has it wrong, says Bernard Black of the Northwestern University Law School and Kellogg School of Management. Because Mason has an economic interest in the specific issue being voted on, it is wrong to say the money manager is an empty voter, Mr. Black says.

"Having co-invented the term "empty voting," I should be well positioned to explore what it does and does not mean," he says in an analysis attached to Mason's recently filed circular urging Telus shareholders to block the company's latest plan to push through the share-class collapse.

"Mason has an economic interest in this outcome, and thus is not an empty voter," he says in the paper. (On the topic of economic interests, Mason paid Mr. Black to prepare the analysis, though he says in the paper "the views expressed in this paper are my own, not those of Mason Capital.") Mr. Black and Henry Hu, a fellow academic, define empty voting "as a situation in which investors have greater voting than economic ownership." For the Telus analysis, Mr. Black said he would "use the term 'empty voting' here in a narrower sense, to mean voting without a significant economic interest in the issue being voted on, or even a negative economic interest in that issue."

Whether Mason wins or loses on its trade depends on the outcome of the vote on the share-collapse plan.

"Mason has an economic interest in this outcome, and thus is not engaging in empty voting," he wrote, noting however that Mason would be considered an empty voter on other issues that came up for a poll.

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Interestingly, he concludes that there are plenty of empty voters who will be attending the Telus meeting.

They are shareholders who own more non-voting than voting shares, who stand to gain by the share swap because it transfers value from voting shareholders to non-voting shares and shareholders who own about the same percentage of each class, because it's a wash for them.

"Any shareholder who owns a larger percentage of non-voting than of voting shares will gain from a plan that assigns zero value to voting rights, and thus has a negative economic interest in the value of voting rights specified in the share swap plan.

The lower this value, the better for these shareholders. Shareholders who own similar percentages of both classes of shares are also empty voters: they are roughly indifferent to the value assigned to voting rights. A significant proportion of the TELUS voting shareholders turn out to have either a negative or near zero economic stake in the value assigned to voting rights."

The counter-argument from Telus has been that shareholders who are long Telus, regardless of the class of stock, should have an economic interest. That's because, the company says, the collapse would be good for the company's overall value, by improving corporate governance and liquidity. So any shareholder who is generally long Telus shares should benefit from supporting it.

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