Telus's teachable moment

May 9, 2012

There's a lesson for companies watching Telus Corp., which has just been foiled in its plan to collapse a dual-class share structure by the hardball tactics of a hedge fund: Assume the other side is going to play rough and be prepared.

Telus withdrew its plan after hedge fund Mason Capital Management accumulated a blocking position. Mason bought almost 20 per cent of one class of shares to gain votes, then sold other shares short to hedge its position. The way Mason set up its holdings, it would profit from Telus's failure to pass the measure.

Mason had time to build the position because Telus announced the plan for the collapse long before the record date for the company's annual meeting. (A shareholder buying stock after the record date for a meeting does not have the right to vote at the meeting.) That gave the hedge fund time to see the opportunity and act on it.

In the future, one option for companies worried about such a tactic is to set the record date of the vote for the plan as close as possible to the announcement date, or even on the announcement date. That would freeze the shareholder list earlier, which wouldn't allow an interloper like Mason to accumulate the kind of trading position necessary to pull the same trick.

Securities lawyers say there's no reason in law not to make the record date the same as the announcement date of the details of a meeting. Some companies have limitations in their articles requiring a minimum period of notice, such as 10 days before the record date, but even that would be much less than Telus provided.

The company announced its plan in mid-February. The original record date was more than a month later, in late March, and Telus then moved it back a few more days to early April.

Had Telus gone with just 10 days, Mason would have been hard pressed to accumulate its stake.

Telus has never given any indication it would consider using a record date that's set quickly after the announcement. There's a sense among some people who run companies that such a move would be not quite cricket, because the general custom is to give a substantial period of notice.

But one could argue that a company that sets an early record date is advancing the interests of existing shareholders by freezing the shareholder list when it's largely composed of long-term shareholders, before short-term investors have a chance to move in.

It's a tactic more companies may have to explore as a way of avoiding proxy contests created by short-term players pouncing when they see an opening because of a corporate initiative.

Telus will argue, of course, that the real lesson is about the perils of empty voting – shareholders voting when they don't have a matching economic interest. Telus has called on regulators to crack down. But in the meantime, companies need to stop bringing knives to gunfights.

Of course, Telus may have missed its chance to use the quick-record tactic. It can only be successful now if Mason sells its Telus voting shares. And that may not happen. Mason says there's every chance it will stick around.

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