Collapsing Dual Class Shares and the Oppression Remedy

Can a board of directors unfairly disregard the interests of one class of shareholders (e.g., voting) to the enrichment of another (e.g., non-voting)? It cannot. If it does, voting shareholders may properly claim that their interests have been unfairly disregarded or prejudiced under what is known as the “oppression remedy.” (This is a broad Canadian remedy granting a judge powers to make an order rectifying the matter complained of, which could include (according to the Supreme Court) preferring certain shareholders or “squeezing out” others.)

Telus Corp. appears to be attempting to collapse voting and non-voting shares without apparently acknowledging a relevant historical practice of around a 4-5% premium at which voting shares have been trading. The case is important as other companies with dual class shares may contemplate similar collapses. The Supreme Court of Canada, in BCE Inc. v 1976 Debentureholders, made it clear that the duty of directors is to act in the best interests of the corporation, but not by treating individual stakeholders unfairly. Indeed the duty “comprehends a duty to treat individual stakeholders affected by corporate actions fairly and equitably” (page 9). The corporation has duties as a “responsible corporate citizen,” the Court said. Directors need to have regard to “all relevant considerations.” [emphasis added.] Directors’ conduct will therefore be scrutinized as to how and why they treated certain stakeholders (including certain shareholders) the way they did.

Typically, non-shareholder stakeholders interact with the company via contract (a company is metaphorically a “nexus of contracts”). Shareholders, as residual claimants, cannot contract with the company in this fashion and therefore must rely on the board of directors to preserve and protect – and certainly not disregard – their economic interests. The board’s obligation is treat all shareholders fairly. It cannot prefer one shareholder at the expense of another.

Shareholders and other stakeholders do not have these duties and fairness obligations that directors have. They can – and do – act out of self-interest. This is their prerogative. A board, however, cannot. The Telus board and executives evidently have significant share ownership of non-voting shares, and, according to one expert report, “16 individuals on the board and in the executive office stand to benefit a total of $3,370,003.” The Ontario Securities Commission, in 2008, right before the financial crisis, proposed (but did not enact) a conflict of interest guideline governing, among other matters: divergences among shareholders; when directors cannot be considered impartial; and when an issuer enters into an arrangement that may benefit one or more of its officers and directors. The OSC went on to prescribe practices to address potential conflicts, including: directors who are not interested in the matter; terms of reference; and independent advice taken in regards to the transaction [e.g., fairness opinions in respect of shareholders’ interests]. The Supreme Court has also stated, in the BCE case, “Where conflicting interests arise, it falls to the directors of the corporation to resolve them in accordance with their fiduciary duty to act in the best interests of the corporation.”

We will see how this case plays out, but the red flags to me at least, are (i) the potential unfair treatment of one class of shareholders to the benefit of another; and (ii) the potential conflict of interest by the Telus board and certain executives. These are both legitimate questions and areas of inquiry.

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