Sometime in 2013, TELUS announced a proposal to convert the firm's non-voting shares into voting shares on a one-to-one basis. The proposed conversion would seek to eliminate the firm's dual-class structure. As the proposal was opposed by Mason Capital Management, a New York-based hedge fund, TELUS was challenged on how to proceed with the conversion.
Lucy White, Benjamin C. Esty, Lisa Mazzanti
Harvard Business Review (214001-PDF-ENG)
October 23, 2013
Case questions answered:
- As a common (voting) shareholder, would you vote to approve the conversion proposal at the May 9th Annual General Meeting? How would you vote if you owned non-voting shares?
- Why does Mason Capital oppose the conversion proposal? Are their concerns about the proposal valid?
- Analyze Mason’s investment strategy. Under what scenarios do they make money? To what extent are Mason’s economic interests aligned with other TELUS shareholders’ interests?
- TELUS’ Chief Officer Monique Mercier refers to Mason as an “empty voter” (p. 5). What is an “empty voter”? Should an “empty voter” be allowed to vote in corporate matters?
- What should the TELUS board of directors do: proceed, postpone, or cancel the vote? How would you explain your decision to shareholders?
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The TELUS Share Conversion Proposal Case Answers
The case discusses the TELUS Share Conversion Proposal. Telus announced a proposal to eliminate the dual-class structure of the company, converting the non-voting shares into voting shares on a one-to-one basis.
Telus had previously formed this dual-class structure in order to comply with Canadian regulations regarding foreign ownership of Telecom companies. These shares, apart from possessing different voting privileges, had identical economic rights.
Telus began contemplating the idea of collapsing this dual share structure in response to shareholder demand and with the idea that enfranchising all shareholders was an improvement in the company’s governance.
Using an independent advisor’s expertise (Scotia Capital), Telus concluded that a one-to-one conversion ratio would be fair to all parties. The conversion proposal would thus be brought to vote in front of shareholders at the annual meeting on May 9th, 2012.
We now proceed in the analysis of whether it would be a favorable or unfavorable proposal for each shareholder class. Clearly, a non-voting shareholder would be favorable to conversion with a 1:1 ratio; however, it is unclear whether this would create or destroy value for the voting shareholders.
A non-voting shareholder would have no justifiable reason to oppose the conversion, as he would become enfranchised and in possession of a more liquid and (likely) more valuable stock, without any clear downside.
On the other hand, an increase in the liquidity of the stock and an improved corporate governance model would probably not be sufficient to compensate for the immediate losses a voting shareholder would face.
According to the provided exchange rate model, TELUS Share Conversion Proposal would cause a transfer of wealth of around 170 million from voting to non-voting shareholders, causing the former a loss in the order of 1.75%, ceteris paribus.
Moreover, the aforementioned increase in the stock’s liquidity after the conversion, considered by the management as a major…
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