ISS backs Telus in its tussle with U.S. hedge fund

* ISS recommends shareholders back Telus plan

* Telus voting, non-voting shares up on the TSX

TORONTO, Oct 1 (Reuters) - Telus Corp said on Monday that proxy advisory firm Institutional Shareholder Services (ISS) has recommended shareholders vote in favor of Telus's plan to exchange non-voting shares for voting shares on a one-for-one basis.

The well-known advisory firm, relied upon by institutional investors for advice on significant shareholder votes, said the move would improve the Canadian telecom company's governance regime and it would result in increased trading liquidity.

"This recommendation from a trusted neutral expert on corporate governance and proxy voting confirms that Telus's proposal is fair and beneficial to all shareholders," Telus Chief Executive Darren Entwistle said in a statement.

Telus has been locked in a war of words for months with its largest shareholder, Mason Capital, over the proposed plan. The U.S. hedge fund argues that voting shareholders paid more, on average, for their stock and should be compensated as the two classes of shares merge.

Investors will vote on the matter at an Oct. 17 meeting.

Mason said it is puzzled by the fact that ISS recommended that shareholders back the Telus plan, despite recognizing Mason's core arguments in its report.

Last week, Mason filed a dissident proxy circular to block the Canadian telecom company's plan.

Telus argues that Mason is attempting to cause confusion and drive apart the prices of Telus's share classes so that it can profit from its trading strategy.

Telus says that Mason has only a 0.02 percent stake in the company once its short position is subtracted from the shares it owns. Mason's recent disclosure indicates that it has shorted 14.7 million voting shares and 18.0 million non-voting shares, while owning 32.8 million voting shares.

If Mason succeeds in its move to set a minimum premium price in the case of a share consolidation, the spread between the voting and non-voting shares would likely widen. If the price of the non-voting shares drops and that of the voting shares rises, Mason would will stand to reap big rewards.

Telus voting shares were up 1.1 percent at C$62.71 on Monday morning on the Toronto Stock Exchange, and its non-voting shares were up 1.2 percent at C$62.23.

($1=$0.98 Canadian)

(Reporting by Euan Rocha; Editing by Peter Galloway)

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Keywords: TELUS ISS/