The TELUS Share Conversion Proposal Harvard Case Solution & Analysis

The TELUS Share Conversion Proposal

Introduction:

The report presents a case about Telus Corporation, Canada’s second largest telecommunication company, which was considering eliminating the firm’s dual class structure by converting the non-voting shares into voting shares on a one-to-one basis. The strategy was opposed by Mason Capital Management; a US based hedge fund, which controlled almost 20% of the firm’s voting shares. Mason was against the proposal of one-to-one exchange ratio and filed a circular recommending that the shareholders vote against the proposal.

Background:

Telus Corporation was incorporated from the merger of BC Telecom and Alberta in 1999. The company offered wide range of telecom services to both the consumers and business. The company had achieved tremendous growth over the years and its financial performance continued to improve. Further, the organization had best practices for corporate governance, for which the company received two awards and two honorable mentions for excellence in disclosure and reporting.

The company had dual-class share structure in order to facilitate the control and ownership but later on; the company considered to treat the two class share equally in future potential decisions and gave non-voting shareholders the option to convert their shares to voting shares. Mason was against the proposal and filed a circular in order to influence shareholders to vote against the proposal. Mason’s action caused the company to reconsider the share conversion proposal

 

Problem Statement:

The management is concerned about the firm’s dual class structure of stock and considers eliminating the unnecessary arbitrage between these two classes but Mason did not support the organization’s strategy, which raises the need for management to reconsider its conversion strategy.

Case Analysis:

The report contains a detailed analysis of conversion proposal on the market value of shares and a further elaboration of Mason’s activity. The major areas covered in report, includes the following:

  • Evaluation of the conversion proposal
  • Mason’s perception against the proposal
  • Analysis of the investment strategy and alignment of Mason’s economic interest
  • Empty voters and their rights
  • Action of board of directors

Evaluation of the conversion proposal

Although, the economic compensation is same for both classes of shares but non-voting shareholders do not possess the ability to vote in the corporate matters, which keeps them separate from the voting shareholders. Further, the non-voting shares were traded at a discount as compare to common shares. Voting for the conversion strategy will improve the liquidity for voting and non-voting shareholders as demonstrated in Exhibit 10 that the share price for the voting and non-voting shareholders had been appreciated by 4% and 5.9% respectively from the date of announcement to the day before annual general meeting.

Further, the company had an excellent corporate governance structure and the organization also believes that proposed strategy will simplify the share structure and will be fair to all shareholders. This strategy will also be aligned with the best practices of corporate governance, which provides an opportunity to treat all shareholders equally and vote in corporate decisions.

Mason’s perception against the proposal

Mason had filed a case against the proposed strategy because it believed that the market value of voting shares are 4% to 5% more than the non-voting shareholders and as a result it would benefit the non-voting shareholders. Further, Mason also argued that collapsing the share structure would limit the extent to which the foreign investors could hold stock, which would decrease the liquidity of Telus shares

The concerns of the Mason were correct from the perspective of long­-term shareholders but it was not justifiable from the Mason’s view because Mason was an event driven hedge fund, which usually hold shareholding for relatively low period. Further, Mason had no long-term interest in the non-voting shares which determines that the perspective of Mason behind this action would be to generate sufficient funds from filing a case and pressurizing management to give a handsome premium above its purchase price..........................

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