Question: empty voting the general principle of oneshareonevote relies on the...
The general principle of one-share-one-vote relies on the view that shareholders with the
largest economic interest in the company’s success should have the largest say in any decision.
But in recent years there have been an increasing number of instances where the votes
controlled by hedge funds or other activist investors have been proportionately much larger
than their economic interest in the company.
There are several ways that this divergence between control rights and cash-flow rights can
occur. For example, if one investor borrows stock from another, the borrower generally
acquires the voting rights, but has no economic interest in the company. If the borrower then
shorts the stock, he has an incentive to vote for policies that reduce company value.
A split between voting power and economic interest can also result from derivatives activity.
For example, if a shareholder hedges her position by buying put options, she retains her voting
rights even though she no longer has an interest in the prosperity of the firm.
This decoupling of voting power and economic interest has been termed “empty voting;” the
shareholders votes have been “emptied” of any economic interest. The problems that can
result from empty voting are illustrated by the case of Perry Corporation, a hedge fund. In 2004
Perry owned 7 million shares of King Pharmaceuticals. Then Mylan Labs agreed to buy King in
exchange for shares, at which point Mylan’s shares fell sharply. Perry’s response was to buy
9.9% of Mylan stock but to fully hedge this shareholding. This gave Perry considerable influence
on Mylan without any economic exposure. As a result, Perry’s interests diverged from those of
other Mylan’s shareholders. The more that Mylan paid for King Pharmaceuticals, the more that Perry profited.1
In 2010 the SEC reacted to concerns about the possible dangers of empty voting by seeking
Discusses the issue of the empty voting. Can you provide any example of the situation when “empty voting” was used to achieve some corporate goals? Do you think the regulators should restrict this practice?