The TELUS Share Conversion Proposal

Darren Entwistle, President and CEO of TELUS CorporationCanadas second-largest

telecommunications companywas concerned as he and Monique Mercier, the firms chief legal
officer, entered the board meeting on May 8, 2012. The next day, at the firms annual general meeting,
shareholders were scheduled to vote on a proposal to eliminate the firms dual class structure by
converting its non-voting shares into voting shares on a one-to-one basis.



TELUS Corporation
Despite strong support from Entwistle, many large shareholders, the board of directors, and two
independent proxy advisory firms, the conversion was opposed by Mason Capital Management, a
U.S.-based hedge fund. Mason, which controlled almost 20% of the firms voting shares and had large
short positions in both the firms voting and non-voting shares, had filed a dissident proxy circular
recommending that shareholders vote against the proposal, primarily because of the one-to-one
exchange ratio. With the success of the vote increasingly in doubt, the board meeting would allow the
directors, a special committee of independent directors, and the financial advisors John Tuer and
Firas Kitmitto from Scotia Capital to discuss their options. More importantly, the board had to decide
whether to proceed with the vote, postpone it, or cancel it for good. If the board decided to postpone
or cancel the vote, they would then have to decide whether and how to address the dual-class share
structure in the future, and how to explain their decision to shareholders.
TELUS was incorporated in British Columbia, Canada in 1999, following a merger between BC
Telecom and Alberta-based TELUS Corporation. The company provided landline, wireless, internet,
and television services to both consumers and businesses. Entwistle became president and CEO in
2000 and that same year, he spearheaded the largest telecommunications (telecom) acquisition in
Canadian history when TELUS acquired Clearnet Communications of Toronto for almost C$7.0
billion. With Clearnet and several subsequent acquisitions, TELUS provided wireless telecom services
across the country.
By 2011, after a decade of growth, TELUS served 12.7 million customers: 7.3 million wireless
customers, 3.6 million wireline customers, 1.3 million internet subscribers, and approximately 500,000
TELUS TV subscribers. TELUS finished 2011 with revenues of C$10.4 billion and net income of C$1.2
billion (see Exhibits 1 and 2). This growth and financial performance continued into the first quarter
________________________________________________________________________________________________________________


of 2012: revenues were up 4%, and net income and earnings per share (EPS) were both up 6%.
Reflecting its financial performance, TELUS shares had earned total returns of more than 90% in the
previous two years. As one analyst noted, We believe TELUS is currently one of the best positioned
competitors in the Canadian telecom industry. We estimate management will be able to continue
delivering solid financial growth over the next twelve months[As a result,] TELUS represents an
attractive investment.1 In addition to driving financial performance, management was focused on
improving corporate governance. In 2011, the company had received two awards and two honorable
mentions from the Canadian Institute of Chartered Accountants for excellence in disclosure and
reporting.
Origins of the Dual-Class Structure
With the creation of the new share class, TELUS amended its articles of incorporation to include
coattail rights. These rights required that the two share classes be treated equally in future mergers
or acquisitions, and gave non-voting shareholders the option to convert their shares to voting shares
on a one-to-one basis if the Canadian government ever fully lifted the restrictions on foreign
ownership.5 In 2004, Verizon sold its interest in TELUS, causing total foreign ownership of TELUS to
fall below 20%.6
In early 2012, TELUS had 325 million shares outstanding: 175 million (54%) voting shares and 150
million (46%) non-voting shares. Both share classes were listed on the Toronto Stock Exchange
(TSX)the non-voting shares were also listed on the New York Stock Exchange (NYSE)and both
were trading above C$50. Exhibits 3, 4, and 5 show historical stock prices, historical spreads between
the two share classes, and other trading information (volumes and bid-ask spreads), respectively.
Exhibits 6 and 7 show share ownership by TELUS directors and by institutions, respectively. The
ownership positions of the firms officers and directors had been disclosed on a regular basis.

2
a TELUS reservation system required non-Canadian voting share buyers to contact a transfer agent to request a reservation
number. Within two hours, the buyer was then notified if voting shares were available. (Source: TELUS 1999 Annual Report.)
Where depository shares were concerned, TELUS was entitled to rely upon a declaration by CDS Clearing and Depository
Services Inc. as proof that the beneficial owner of the shares was Canadian.
b TELUS shareholder rights plan was triggered if an investor obtained over 20% of TELUS voting shares. The plan authorized
the board to issue a set of rights to each share class to purchase newly issued shares at a 50% discount. These rights were not
extended to the investor who had acquired over 20% of the company, thereby diluting his or her ownership interest.


While company founders often created dual-class share structures to facilitate the concentration of
ownership and control, TELUS had formed its dual-class structure to comply with Canadian
regulations on foreign ownership of telecom firms. In 1993, the Canadian government limited foreign
ownership of telecom companies to 20% of common shares in operating companies and 33.3% in
holding companies.2 The 1999 merger between TELUS and BC Telecom initially violated this
restriction as U.S.-based Verizon (through GTEs previous ownership position in BC Telecom) and
other foreign investors owned approximately 34% of the new company.3 To comply with ownership
restrictions, TELUS created a dual-class structure of common (voting) and non-voting shares and
implemented a declaration and reservation systema for tracking purchases of common shares by non-
Canadians. Aside from enfranchisement (i.e., the ability to vote on corporate matters such as the right
to elect directors, appoint auditors, amend articles of incorporation, approve aspects of executive
compensation, and approve certain mergers and acquisitions), the two classes had equal economic
rights: they had the same dividends and other cash flow rights. Despite their non-voting status,
non-voting shareholders had been able to vote on a shareholder rights plan in 2000b and on adopting
amendments in 2005 relating to compliance with radiocommunications and broadcasting acts.4


In March, the Canadian government announced that it would lift foreign investment restrictions
on telecom companies with less than 10% market share by revenue.7 Although this change did not
apply to TELUS and its major competitors, Bell Canada Enterprises (BCE) and Rogers
Communications, Inc. (RCI), which had a combined market share of 90%,8 some industry observers
saw the announcement as a signal that further liberalization was likely.9
TELUS Share Conversion Proposal10
Entwistle and his team first began to contemplate the idea of collapsing the dual-class structure in
late 2011 based on shareholder requests. Because both management and the board believed that
enfranchisement of all shareholders was a principle of good corporate governance, the idea gained
traction. Furthermore, foreign ownership levels had dropped to between 10% and 15%, which put
into question the need for a dual-class structure from a compliance perspective. c Over the next two
months, Entwistle and his team began to analyze the idea in greater detail, speaking with legal
advisors and reviewing comparable transactions in order to prepare for a discussion with the board.
After receiving an initial presentation, the board decided it needed to learn more about the
conversion process. The full board appointed a special committee of six independent directors on
January 25, 2012, and asked them to assess whether collapsing the share structure was appropriate,
how such a transaction might be implemented, and what effects it might have. The committee
evaluated the following factors:



The historical trading price and volumes of the two share classes;
The effect of the conversion (or exchange) ratio on the stock price, dividends, trading volume,
and EPS; and
The impact of the conversion on both shareholder groups.






On February 6, the special committee hired Scotia Capital (Scotia) to provide an independent
fairness opinion on a possible conversion from the perspective of both voting and non-voting
shareholders. Scotias primary responsibilities were to recommend an appropriate conversion ratio
and to assess the likely impact a conversion would have on trading liquidity and share prices. Scotia
made three presentations to the special committee in which they discussed three possible conversion
ratios: converting non-voting shares into voting shares at a ratio based on the historical trading
prices of the two classes of shares (approximately 1.045-to-1.0); converting at a ratio of one-to-one; or
converting at a ratio somewhere between these two endpoints. In the end, Scotia concluded that a
one-to-one conversion ratio was fair to all parties and the most likely to be supported by both
shareholder classes based on the following factors:11
The non-voting shares came into existence solely as a result of a large foreign shareholder.
Both share classes were entitled to the same dividends, and according to the articles of
incorporation, in the case of dissolution, both classes would receive the same benefit.
According to TELUS articles of incorporation, non-voting shares would be converted to
voting shares at a one-to-one ratio if foreign ownership restrictions were lifted.
The companys coattail provisions dictated that non-voting shares could convert to voting
shares at a one-to-one ratio in an acquisition.
c The company also had other ways of addressing foreign ownership levels, such as certification through its reservation
system, vote suspension, and ultimately disposition.

3



After conversion, the EPS and dividends paid on each share would not change.
A unified shareholder class would improve corporate governance and trading liquidity.
Scotia also reviewed 22 share unification transactions of Canadian companies (see Exhibit 8). Out
of the 17 transactions that had occurred since 2000, 15 of them had used a one-to-one conversion
ratio. Moreover, all 13 transactions involving firms with coattail provisions used a one-to-one ratio.
After reviewing Scotias proposal and analysis, the special committee voted unanimously to
recommend the proposal to the full board with a one-to-one conversion ratio. The board approved
the proposal and announced it on February 21. TELUS set the record dated for March 27 and
scheduled the vote for the annual meeting on May 9. Because the proposal amended the firms
articles of incorporation, each shareholder class had to approve the proposal by a two-thirds majority
(i.e., 66.6% of the shares in each class). Commenting at the time, Entwistle stated:
This proposed share conversion is responsive to shareholder feedback, resulting in
enhanced trading liquidity and the extension of voting rights to all TELUS shareholders.
Notwithstanding the fact that both classes of shares are entitled to the same dividend, are
widely held and have similar liquidity, our Non-Voting Shares have historically traded at a
discount to our Common Shares. The approval of this proposal will eliminate this price
discount. TELUS believes the proposed simplification of our share structure to a single class is
beneficial and fair to all shareholders, and consistent with good corporate governance.12

4
Four weeks later, on March 21, a research analyst from Mason Capital Management (Mason), a
New York-based hedge fund, called TELUS to say that it owned a large number of shares and would
not support the conversion proposal unless the conversion occurred at a premium for the voting
shares.15 TELUS management had become aware that a large number of voting shares had moved to
non-Canadian shareholders through the reservation system. The following day, TELUS issued a press
release moving the record date back to April 3 and noting that the level of foreign ownership had
increased significantly. In an interview, CFO Robert McFarlane stated, TELUS could go above the
[33.3%] foreign-ownership limit and there may be a number of foreign trades that the
telecommunications company cant approve as a result . . . there has been a massive attempt, or a
significant attempt, by hedge funds to purchase voting shares in a short-term trading tactic to go
against the proposal.16
d The record date was the date on which one had to own shares in order to be eligible to vote in the upcoming plebiscite.

In addition to announcing the share conversion proposal, TELUS announced it was increasing its
dividend by 5% (the fifth increase in less than two years). Analysts reacted positively to the
conversion proposal. For example, analysts at Desjardins Capital Markets said, We believe this
simpler share structure goes a long way toward raising the companys corporate governance
standing, and should improve overall liquidity in the shares. Hence, we expect that shareholders of
both classes will vote to approve this proposal. 13 Other analysts from Canaccord Genuity said, We
believe that the proposed collapse would, if approved, create value for all shareholders through
increased trading liquidity and the elimination of unnecessary arbitrage between the two classes
some voting shareholders may want a more favorable exchange ratio. However, we believe that both
classes of shareholders could benefit from improved trading liquidity 14 On the day of the
announcement, the voting shares closed up 2.4% while the non-voting shares were up 5.5%. In
comparison, the two major competitors, BCE and RCI, were up 1.2% and 1.0%, respectively, while the
TSX was up 0.6% that day. Exhibits 9 and 10 show TELUS stock price performance in 2012.


Mason Capital Management
Michael Martino and Kenneth Garschina co-founded Mason in 2000. Martino, formerly a risk
arbitrage researcher at Oppenheimer & Company, got his MBA from New York Universitys Stern
School of Business.17 The founders created an event-driven hedge fund, meaning they sought to
invest in companies on the verge of strategic or structural change. For example, Mason had invested
in Kaman Corporation, a U.S. aviation company, when it tried to unify its dual-class structure and
redistribute voting rights.18,19 After buying 8.3% of the voting shares, Mason started a bidding war
with Kamans board of directors and tried to buy all of the voting shares, most of which were owned
by the Kaman family. In the end, the board bought back all of the voting shares for approximately
three times its original offer, giving Mason a handsome return on its investment.20
On April 10, Mason announced that it owned 33 million voting shares (18.7% of the total
outstanding) and more than 600,000 non-voting shares (0.4% of the total outstanding) as of March 31.
At the same time, Mason revealed that it had obligations to return (i.e., it was short) nearly 11
million voting shares and 21.7 million non-voting shares to lenders (see Table A).e At the time,
Mason had approximately $8 billion in assets under management.21
Table A
Position
Long
Short
Net
Masons Holdings as of March 31, 2012
Voting Shares
32,722,329
-10,963,529
21,758,800
Non-Voting
Shares
602,300
-21,672,700
-21,070,400


Source: Alternative Monthly Reporting System Report, Submitted by Mason
Capital Management, Canadas security regulatory authorities database:
SEDAR, April 10, 2012, accessed via SEDAR in August 2013.
Essentially, Mason was long the voting shares and short the non-voting shares, a position that
surprised many people.22 Mercier explained,
Even before the announcement, we knew hedge funds would be trading in our stockmost
likely a classic pair trade of being long the non-voting shares and short the voting shares to
capture the likely price increase in the non-voting shares at a successful conversion. But with
hedge funds, you have to scratch your head and think carefully; you have to think that the
unlikely or the impossible might happen. We and the other hedge funds didnt expect the
trade that Mason put onbeing long the voting shares and short the non-voting. But as soon
as we got wind of it, we immediately recognized the danger of having an empty voterf
casting votes at the annual meeting.
e In Canada, a shareholder had to publicly disclose its ownership if it owned 10% or more of a public company. The threshold
in the U.S. was 5%. Source: http://www.canadianmergersacquisitions.com/ 2012/06/01/5-things-us-activist-investors-need-
to-know-about-canada/, accessed July 2013.
f (A)cademics have defined empty voting as a situation where the voting rights of investors exceed their economic stake in
the company. This can happen in several situations, such as when an investor might sell shares after the record date for a
vote but before the actual vote. As a result, the investor would be able to vote on corporate matters despite having little or

Total Shares
33,324,629
-32,636,229
688,400
5

Proxy Fight
On April 20, Mason filed a dissident proxy circular recommending that common shareholders
vote against the conversion proposal for both substantive and procedural reasons. Regarding the
substance of the transaction, Mason contended that the right to vote and, therefore, to control the
direction of the company, had been valued by the market at a 4% to 5% premium over the years. As a
result, converting on a one-to-one basis would confer a windfall benefit on holders of Non-voting
Shares.23 Mason also argued that collapsing the share structure would limit the extent to which
foreign investors could hold stock, which would actually decrease the liquidity of TELUS shares. The
hedge fund explained that with two classes of stock, foreign investors could buy an unlimited
number of non-voting shares plus up to 33% of the voting shares equal to 64% of total shares.g With a
unified class structure, foreign investment would be limited to only 33.3% of total outstanding shares.
Not only would the conversion cause liquidity to fall, according to Mason, it would also require
foreign investors to divest approximately 2.8 million shares.
On procedural grounds, Mason questioned the decision-making process because the special
committee had hired financial advisors (Scotia) which had prior working relationships with TELUS
instead of completely independent advisors. 24 Mason also argued that the special committee
should have requested two fairness opinions from two independent sources, one for the voting
shareholders and one for the non-voting shareholders.25 Finally, Mason questioned the boards
independence, noting that the directors had greater economic interest in the non-voting shares.
Mason concluded by stating they would consider a revised proposal if it offered an appropriate
premium for voting shares, but did not state how large a premium would be acceptable. Mercier
reacted to this suggestion:
Independent Proxy Advisory Firms Weigh In
On April 24, 2012, TELUS announced that the two leading independent proxy advisory firms,h
Institutional Shareholder Services Inc. (ISS) and Glass, Lewis & Co. (Glass Lewis) were
recommending that shareholders approve the proposal. In response, Mason issued a press release
stating that ISS and Glass Lewis had drawn their conclusions prematurely and should review
Masons dissident proxy circular before making final recommendations.26 ISS and Glass Lewis both
withdrew their reports and issued revised reports several days later. While both firms still
recommended that shareholders approve the proposal, they did identify some concerns. ISS wrote:

6
no economic interest in the company. Empty voting could also occur if an investor used short sales or derivatives (e.g., put
options) to reduce his/her economic exposure while maintaining the voting position of the long position. Source: Julius
Melnitzer, Empty voting clouds shareholder rights law; Solution elusive, Financial Post, November 14, 2013, accessed via
Factiva in July 2013.
g The 64% = [175 million voting shares * 33.3% + 150 million non-voting shares] / 325 million total shares.
h Independent (or third-party) proxy advisory firms assisted institutional investors in casting their votes in shareholder
elections and shareholder proposals by analyzing proposals and making recommendations.
This document is authorized for educator review use only by PR Bhatt HE OTHER until February 2015. Copying or posting is an infringement of copyright. Permissions@hbsp.harvard.edu or
617.783.7860

We had already considered different conversion ratios and there was no reason to second-
guess or revisit the boards reasoning simply to please an empty voter. Mason did not hold any
shares in TELUS at the time we announced the proposal, so if we had changed course, it would
have been to please a short term shareholder at the expense of what our long term
shareholders wanted. For us, it was a matter of principle to stick to the one-to-one ratio.


This proposal represents another meaningful step forward in the companys governance
regime, in resuscitating the principle that voting rights should be commensurate with
economic interest. The proposed exchange ratio, however, in veering off from the well-
established, enduring market ratio, is a cause for concern [However,] as the proposed
transaction would align voting rights with economic interest, offers shareholders meaningful
economic opportunity through increased trading liquidity and a dual listing on the NYSE, and
has been ratified by a strong market responseand as the companys Articles effectively
preclude any exchange ratio other than the proposed one-for-one exchangea vote FOR the
proposal is warranted.27
The Glass Lewis report read:
Mason has indeed raised some valid points regarding the terms of the proposed
Conversion. . . .[T]he Companys common shareholders have historically paid a premium
share price, and accordingly, may recognize some economic shortcomings as a result of the
Conversion. However, we believe any short-term costs will be outweighed by the overall
benefits of a simplified share structure and [that the] improvement in corporate governance
resulting from the Conversion [is] in the long-term best interests of both common and non-
voting shareholders.28
After reading the reports and seeing the approval recommendations, the TELUS team breathed a
sigh of relief. Mercier explained, We know how influential the independent proxy advisory firms
can be, and we had worked very hard to demonstrate that our proposal was beneficial for
shareholders and part of our efforts to be a leader in good corporate governance.
The Annual Shareholder Meeting

TELUS needed high voter turnout in order to achieve a two-thirds majority, as Mason was sure to
cast its 33 million common shares against the proposal.29 TELUS CFO McFarlane added, Retail
shareholders in particular are notorious for not bothering to vote. . . . Even if you have 90% of non-
Mason people vote yes for the proposal its possible that the proposal gets defeated because only 60%
or 65% of [shareholders] bother to vote.30
To persuade shareholders to vote for the proposal, TELUS sent letters to shareholders, hired a
proxy solicitation firm (to call and e-mail shareholders, and provide information regarding the
proposal), gave presentations, called institutional shareholders, and issued a series of press releases
about the proposal. In addition, TELUS hired the Canadian Imperial Bank of Commerce (CIBC) as
soliciting dealer manager to form and manage a group of brokers to solicit proxy votes in favor of the
proposed conversion from retail common shareholders.31 As compensation for the extra work, TELUS
promised to pay the brokers ten cents for each favorable vote if the conversion was approved.32 This
method of increasing voter participation was fairly common in Canada during proxy fights. But
Martino thought otherwise, [TELUS] tactics are particularly hypocritical in light of . . . us[ing] the
companys money to pay for shareholder votes, but only those that are in favor of its proposal. This
conduct is abusive of TELUS shareholders such as Mason who disagree with managements
position.33
As the annual meeting date approached, Entwistle and Mercier received word that at least one
other major shareholder might vote against the proposal. Mercier recalled:

7

We realized quite quickly that we were going to need a Plan B. On the one hand, Darren
and the board were very convinced the proposal was the right thing to do and that the one-to-
one conversion ratio was fair and made sense. But on the other hand, we were facing a possible
defeat and needed to respond. We decided to convene an emergency board meeting and asked
counsel and Scotia to develop some alternatives for the special committee to consider at the
meeting.
At the emergency board meeting on April 17, legal counsel suggested that there might be a way to
restructure the proposal as an exchange (rather than a conversion) that would affect the rights of the
non-voting shareholders without amending the articles of incorporation. This would allow a change
in the approval thresholds needed by both share classes to 50% of voting shareholders and 66.6% of
non-voting shareholders. This alternative, however, would have some tax disadvantages for
employee option holders and meant that references to the non-voting shares would remain in the
corporate articles (even though there would not be any non-voting shares outstanding after the
exchange).
In connection with this alternative plan (Plan B), Scotias Tuer and Kitmitto described three
options for the board to consider: first, cancel the vote and withdraw the conversion proposal for
good; second, withdraw the proposal just prior to the annual meeting if it were unlikely to succeed
and announce Plan B at the meeting to prevent the spread from widening and Mason from profiting
from the trade; or third, withdraw the proposal just prior to the annual meeting and remain silent as
to future plans. Then, when Mason had exited its position, the board could introduce Plan B with a
short window between the announcement and the record date. Although the board discussed these
options in detail, they did not make a final decision during the meeting.
The outcome of the vote remained uncertain as the meeting date drew closer and the votes started
coming in. In a research report dated May 7, two days before the annual meeting, one analyst noted:
On May 8, the day before the annual meeting, all options were still on the table. With time
running out, the special committee and then the full board had to decide whether to proceed with or
cancel the shareholder vote. If they decided to cancel the vote, they had to decide which option to
pursue and how to explain their decision to shareholders the next day.

8

. . .the Mason position has created considerable uncertainty. . .While we believe that the vote
may be too close to call, in our view, TELUS proposal may well be accepted. . .the vast
majority of long-term shareholders that we have spoken with are in favor of the collapse due
to increased trading liquidity if [the proposal] is rejected we would expect TELUS to
reintroduce its proposal at a later date... In summary, we are much more interested in TELUS
operating fundamentals than its share structure. 34