Tuesday, 30 October 2012

BCCA Approves Shareholder Camouflage

Under the B.C. Business Corporations Act, and under other Canadian corporate statutes, every company must maintain a "central securities register" where it records the registered owners of the company's issued and outstanding shares.

For private companies, the persons listed in the securities register are generally the actual shareholders or persons who hold shares in trust for the beneficial shareholders.  For publicly traded companies, however, most of the issued shares are usually registered in the name of Canada’s national securities depository, CDS Clearing and Depository Services Inc. ("CDS").  CDS holds shares on behalf of intermediaries, such as brokerage firms and investment funds, who in turn hold and/or control shares on behalf of their investors or sometimes other intermediaries.

From a practical standpoint, CDS functions as an outsourced central securities register, recording share ownership and clearing and facilitating share trading and transfers pur, but not holding or controlling the shares on its own behalf.  As explained in TELUS Corporation v. Mason Capital Management LLC, 2012 BCCA 403, however, from the corporate law standpoint, CDS a bona fide registered shareholder with the appurtenant rights, including the right to call a general meeting.

Under s. 167 of the BCBCA, shareholders who "hold in the aggregate" at least 5% of the company's voting shares "may requisition a general meeting" of the company's shareholders.   The requisition "must be signed by, and include the names and mailing addresses of, all of the requisitioning shareholders".  Section 1(1) defines shareholder as “a person whose name is entered in a securities register of a company as a registered owner of a share of the company”.

Mason Capital Management, a New York investment fund, controlled 18.7% of TELUS's common shares and opposed TELUS's plan to allow 1:1 conversion of non-voting shares into common shares.  CDS, as the registered holder of more than 5% of TELUS's voting shares, issued a s. 167 requisition for a general meeting where resolutions seeking to prevent the 1:1 conversion would be discussed.  Although CDS did not disclose the identity of the beneficial shareholder on behalf of whom it was acting (saying only that the shareholder held 5.7% of the common shares), Mason publicly disclosed that it requisitioned this meeting.

Faced with the CDS requisition, TELUS obtained an Order declaring, inter alia, that the CDS requisition did not comply with the BCA because CDS did not identify the beneficial owners of the shares being used to call the meeting:.
[60]    The requisition must include the names and addresses of the requisitioning shareholders. Surely this information is there for the benefit of the shareholders who are entitled to vote at the general meeting and to assist the directors and company in dealing with the requisition.

[61] ... [CDS] is the registered holder of approximately 95% of the common shares in TELUS. What the statute requires is that the requisition be signed and contain the names and addresses of the requisitioning shareholders who hold in the aggregate the required number of shares. To interpret the [s. 167] provision otherwise would make it devoid of meaningful content.

[62]      Further, the obligation on the directors is only to call a general meeting if the provisions of ss. 167(2) and (3) are met. I do not know how the directors can ascertain whether the required threshold is met by a requisition naming only CDS & Co. and listing its address as the requisitioning shareholder.
The Court of Appeal, however, disagreed that the requisition was invalid and took what appears to be a hybrid view of the situation, narrowly interpreting the statute, but broadly considering the facts and the role of CDS.  With respect to s. 167, the Court found that "combined with the clear and precise definition of “shareholder” under the statute" ...
[50] ... the language of s. 167(3)(b) is clear and unequivocal – a requisition must be signed by a registered shareholder, and the registered shareholder’s address must be furnished. There are no requirements in the section to furnish the names of those beneficially entitled to shares, and the chambers judge erred in reading such requirements in.
With respect to policy considerations, however, the Court noted that TELUS became aware of (albeit not from the requisition), and was able to communicate with Mason as the requisitioning shareholder, and also took what appears to be judicial notice of CDS's duty to ensure that it is acting on appropriate instructions in requisitioning the meeting:
[43] I agree with the chambers judge that the apparent purpose of s. 167(3)(b) of the Act is to identify the requisitioning shareholder so that the company and its shareholders can ascertain whether that shareholder has the requisite holdings, and can communicate with it. I do not agree with his view that naming CDS, which is the “shareholder” under the statute, fails to accomplish these goals.

[44] TELUS was fully able to determine that CDS held more than the requisite shares to requisition a meeting. Further, as the correspondence in this case shows, TELUS was able to communicate with the requisitioning party using the address provided in the requisition.

[45] CDS, as Canada’s national securities depository, holds shares on behalf of numerous intermediaries who in turn hold them on behalf of numerous other intermediaries and beneficiaries. CDS’s responsibilities, both to keep proper records and to ensure that it only acts on appropriate instructions, may be onerous ones. In requisitioning a meeting under s. 167 of the Business Corporations Act, it must ensure that it is acting under instructions, and that those instructions come from persons who hold the requisite number of shares to requisition a meeting. These responsibilities, however, are entrusted to CDS and do not, under the Business Corporations Act, transfer to either the corporation that is being asked to hold a meeting or its shareholders.

On the one hand, the Court's reasoning makes sense for what undoubtedly was a very technical objection by TELUS.  On the other hand, it also appears to leave a number of important issues unaddressed, such as:
  • What if Mason did not publicly identify itself as the requisitioning party and TELUS was not able to communicate with Mason?  Can CDS validly act as an intermediary for an undisclosed beneficial shareholder?  If it can, what is the scope of its duties to provide information to the directors of the corporation so that they are able to exercise their discretion with respect to the requisitioned meeting?
  • To whom does CDS owe the "onerous" duties of ensuring that it only acts on appropriate instructions?  Would TELUS or its other shareholders have a cause of action against CDS if it acted on improper instructions?