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.
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PROXY BATTLES In each case, the challenge was brought by a US hedge fund. New York's Pershing Square Capital Management took on Canadian Pacific Railway, a Canadian icon whose share price had languished for six years. The bitter and at times highly personal fight took seven months, but Pershing won the board and management changes it was seeking. New York hedge fund JANA Partners LLC also came north, waging an acrimonious and ultimately unsuccessful 10-month campaign to force the management of Canadian fertilizer giant Agrium Inc. to break up the company. Most recently, New York-based Mason Capital Management LLC fought a drawn-out contest with Telus Inc., one of Canada's large telecommunications companies, over the company's planned conversion of its dual-class share structure in a court battle that turned into open warfare over empty voting. Well-capitalized US hedge funds with a track record in successful activism have definitely changed the tone, says Kent Thomson, head of the Litigation Department at Davies Ward "THE HALLMARK pronouncement from a Canadian court on empty voting — a growing controversy. TELUS FOUND ITSELF in a proxy fight in 2012 as a result of its outdated share structure. The Vancouver-based telecommunications giant had acquired a company more than a decade earlier that had a large foreign shareholder base. The acquisition pushed its foreign ownership to over 33 percent. Federal law in Canada requires telecommunications companies to maintain at least two-thirds Canadian share ownership so, to get around the problem, Telus created a dual-share structure. Foreign investors were given non-voting shares, which normally traded at a discount of about 5 percent. By 2012, the largest foreign investor had long since sold off its position and with its foreign ownership down around 20 percent, Telus no longer needed a dual-share structure. The company decided to consolidate the shares to improve liquidity, especially on the New York Stock Exchange where only the non-voting shares were traded. It announced it would convert the shares on a one-for-one basis — potentially a windfall for holders of the non-voting stock. The plan needed a special majority of two-thirds of both classes of shareholder because it involved amending the company's articles. The price difference between the two classes of share immediately narrowed with the announcement. In New York, Mason saw an opportunity to arbitrage the situation. The hedge fund started buying common shares and shorting the equivalent value of non-voting shares. It built its position to about 19 percent of Telus's voting stock. It also borrowed almost 11 million common shares and 21.5 million non-voting shares for the short-sale and hedging strategy. Borrowing shares just before the record date and repaying them immediately after can be used to pull together a large voting position at very little cost. Mason intended to use its position to vote against the arrangement, and profit from the premium historically attached to the voting shares when the unified share proposal was defeated or withdrawn. The company went on the offensive, portraying the hedge fund as an "empty voter" that was using financial engineering to vote nearly C$2 billion worth of stock with only a C$25 million net economic stake. Still, as Mason hoped, the 19 percent stake was enough to scupper the plan. Telus withdrew the proposal on May 8, but said it remained committed to the idea. It would just find another way to get it done. Stepping back, it could be argued that the real arbitrage by Mason was of Canadian securities rules. OF RECENT CANADIAN PROXY BATTLES IS THEY'RE NASTY, BRUTISH AND LONG. RECENT DEVELOPMENTS HAVE ENCOURAGED A VERY AGGRESSIVE AND LITIGATION-FOCUSED RESPONSE." Phillips & Vineberg LLP, who acted in all three cases. "There's a willingness to engage in battles and to challenge conventional wisdom, and to pursue matters through proxy battles and through the courts if necessary to try and effect change." It's no accident of geography that US shareholder activists are coming across the border, says Pasparakis. "US funds, in particular, have come to Canada and begun to pursue proxy battles because of the laxer rules in Canadian securities laws that make them more desirable." The threshold at which investors have to disclose their holding to regulators is 5 percent in the US. In Canada, it is 10 percent, giving activists more time before being forced to decloak a position. Canadian regulators are looking at changing that to match US requirements. But for now, anyone looking for a primer on how Canada's more shareholder-friendly rules can be used to advantage need only look no further than the recent high-stakes battle in Telus. The contest saw Mason use what Thomson describes "financial engineering" to mount its attack, leading to the first 28 | LEXPERT • December 2013 | www.lexpert.ca