Question

Empty Voting
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
public comment

Question :

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?

Answer 1

Empty voting: Simply, the terms signifies a situation when some people or entities have voting rights greater than their economic interests in a company. This is primarily favored by some "activist hedge funds" to improve their voting powers without invested a lot of money.

It can be done in a lot of ways, take for example in SEC's statements, if a holder of shares buy a put option to sell those shares, the holder retain voting rights on all of those shares, even if he has bypassed some of his economic interests.

It can also be done if a shareholder sells its share post record date of a shareholder meeting, but before the meeting. So in this case, the shareholder retains the right to vote, even when he does'nt actually have economic interest in those shares.

Real life example of empty voting (https://dealbook.nytimes.com/2012/04/26/the-curious-case-of-the-telus-proxy-battle/) : The prominent case of Telus Corporation/Mason Capital is the perfect example of empty voting. Back in 2012, when the former had announced it would remove its dual class share structure. Notably, both the classes were similar, except one had voting rights. The fund house - Mason Capital's strategy to short the voting shares through buying the non voting shares were into jeopardy as the hedge fund had comfortably placed itself without having much economic interests in the company.

Yes, regulators should restrict this practice as those entities try to have controlling powers without having economic interests. Some regulators already found out the loopholes and started rectifying them for fair trades.