U.S. hedge fund Mason Capital Management Thursday outlined its opposition to Telus’s (TSX:T) plan to consolidate its voting and non-voting shares into a single class.
Mason Capital is currently locked in a dispute with Telus over the company’s revived plan to consolidate stock on a one-for-one basis. The fund holds around 19 per cent of Telus voting shares and has also “sold short” some of its Telus shares.
“We have a large investment in the value of Telus’ voting rights, which we believe is substantial,” Mason Capital said in a document.
On a conference call, Mason Capital principal and co-founder Mike Martino said: “This is about voting control and governance. Voting shareholders have paid for that value. Telus is attempting to dilute voting control that shareholders have paid for. Mason Capital is attempting to protect the value of voting shareholders.”
Mason Capital is also challenging Telus’ stipulation that 50 per cent of shareholders should vote in favour of its proposal, as the investment firm maintains that a two-thirds majority is more appropriate.
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Based on previous share consolidation transactions, Mason’s Martino said that when all the facts are considered, this is the worst share consolidation deal for shareholders.
Mason Capital research analyst Ivan Ross said that Telus has made much of the fact that on February 21, both classes of its stock went up, which the company used to justify market reaction to the share consolidation scheme. He highlighted that the day Telus announced its “share collapse” scheme, it also unveiled an increase in dividends.
Historical analysis shows that Telus’s stock price has tended to increase whenever the company upped its dividend, he says, so it would be difficult to assess how much of the share price movement was positive reaction to the stock consolidation plan.
Mason Capital also commissioned academic and corporate governance expert Bernard Black of Northwestern University to look into Telus’s share consolidation plan. Black concludes that voting rights have value and that Mason Capital – holding both long and short positions – was not an “empty voter” – a charge that Telus had leveled against the U.S. firm.
“In fact, for a vote which turns on the value of voting rights, Mason has an economic interest in this outcome, and thus is not engaging in empty voting,” Black wrote in a document available to the media and Telus shareholders. “In my judgment, in proposing a share swap on terms which favor management’s own interests, Telus management has likely violated its fiduciary duty of loyalty by failing to treat both classes of common shares fairly.”
Indeed, Mason Capital said that amongst the biggest beneficiaries of the “share collapse” would be Telus CEO Darren Entwistle who would gain $944,397, and executive vice president and CFO Robert McFarlane who would net $718,370 from the stock consolidation, according to Mason’s calculations.
In a document distributed to the press and Telus shareholders, Mason Capital also highlighted that Telus shareholders would be losing 46 per cent of their voting power.