The Lexpert Guides to the Leading US/Canada Cross-Border Corporate and Litigation Lawyers in Canada profiles leading business lawyers and features articles for attorneys and in-house counsel in the US about business law issues in Canada.
Issue link: https://digital.carswellmedia.com/i/138095
SHAREHOLDER ACTIVISM controversy and brought to the fore by the recent proxy battle between TELUS and Mason Capital is a case in point. The issue arose because the company's voting shares have historically traded at a premium to its non-voting shares. TELUS proposed to collapse the dual-class share structure, a move that would have eliminated the gap between the different classes of shares. While opposing the plan to collapse the share structure without assigning a premium to the voting shares, Mason also took long and short positions in both share classes. Ultimately, Mason controlled about 20 percent of TELUS's common shares, but its short-selling meant it held a much smaller economic interest. Empty voting issues can also arise where a shareholder sells shares after the record date, thereby retaining the vote without having an economic interest; in the case of securities lending transactions before the record date; and through derivatives and swaps. During the court proceedings relating to the ensuing proxy battle, TELUS cast Mason as an empty voter. Mason's real economic interest was not aligned with that of other sharehold- may not lie in the best interests of the company are free to pursue their activist goals. UNLIKE EMPTY VOTING, however, advance-notice policies have endured and passed the first Canadian judicial test of their viability as a proxy contest tool. Generally speaking, advance notice by-laws and policies require those intending to nominate a director or slate of directors to give issuers advance notice of their proposals. "Although such policies are relatively new in Canada, they have particular relevance here because otherwise dissidents have the ability to ambush shareholder meetings by making nominations at the meeting itself without providing advance notice to the company," says Jon Feldman of Toronto's Goodmans LLP. The validity of advance-notice policies has not been tested until recently, but the issue did make its way to court after Mundoro Capital Inc. gave notice of its AGM to be held in June 2012. Fifteen days before the meeting, the company announced that it had approved an advance-notice policy setting a deadline by which shareholders had to submit their nominations for directors. Northern Minerals Investment Corp., a Mundoro shareholder, responded by asking the BC Supreme Court to declare the advance-notice policies unenforceable. In turn, the company postponed the AGM for one month and advised that shareholders would be asked to approve the new policies on the postponed date. At the hearing, Mundoro challenged both the board's authority to implement the policy and to postpone the date of the AGM. The court dismissed the application, ruling that the board had the appropriate authority in each case. The ruling made it clear, however, that the decision was not a general endorsement of advance-notice policies and that their propriety would depend on the particular facts. In this case, there was evidence of good faith on the part of Mundoro's directors and of the policy's reasonableness. In particular, the directors were not attempting to influence a proxy contest and would be seeking shareholder approval of the policy. "The decision suggests that reasonable and good faith advance-notice policies can be consistent with and supportive of shareholder rights as opposed to a tool for board entrenchment," Feldman says. Whether these decisions will have significant influence on Canada's major companies, however, is not clear. To be sure, by February 2013, the number of companies proposing or adopting such policies had risen to 64 from approximately four dozen in November 2012. "Forty-two of the 64 were junior issuers," Bentley says, "but "LEGALLY SPEAKING, THE TSX CAN IMPOSE WHATEVER LISTING CONDITIONS IT WANTS, BUT INCREASINGLY THE EXCHANGE IS MOVING FROM ITS TRADITIONAL ROLE OF REGULATING SHARE ISSUANCES AND DILUTIONS AND GETTING INTO CORPORATE GOVERNANCE." ers, management alleged, because the US hedge fund's interest lay in seeing the plan fail and a widening gap in the trading price of the two share classes. The British Columbia Supreme Court commented negatively on empty-voting practices and suggested that companies might be entitled to reject a dissident's meeting requisition because of its economic motives. The BC Court of Appeal opined, however, that the issue was a legislative one and not for the courts to decide. To be sure, just what constitutes empty voting is a matter of considerable controversy. Indeed, Mason made a cogent argument that it was not in fact an empty voter. But the refusal of the BC Court of Appeal to intervene means that until regulators grapple with the issue, dissidents whose primary motives 26 | LEXPERT • June 2013 | www.lexpert.ca B-00-Features.indd 26 13-05-23 2:25 PM