Empty Voting: Empty Promises

Jay M. Hoffman and Melissa Ghislanzoni of Miller Thomson in Toronto recently posted Empty Voting – Waiting for a Regulatory Response. While focused on Canada, the post applies equally to the US. The recent Telus decision of the British Columbia Court of Appeal “appears to signal a green light for the continuation of empty voting, at least until a regulatory response is implemented.” That case involved Mason Capital Management LLC, a US hedge fund. The Court found no violation of law, “to the extent that cases of ‘empty voting’ are subverting the goals of shareholder democracy, the remedy must lie in legislative and regulatory change.”

The post provides background on empty voting:

Empty voting can occur in various ways, including when an investor sells shares between the record date and the meeting date so that she no longer has an economic interest in the outcome of the shareholder vote but retains the ability to affect the outcome of the meeting. The chairman of the Canadian Society of Corporate Secretaries (as quoted in the August 2012 edition of Corporate Secretary magazine) has indicated that a five year plan is being developed with a view to rectifying certain Canadian proxy plumbing issues, including reducing the number of days required by statute between record dates and meeting dates. If implemented, this plan would reduce instances of empty voting arising due to the sale of shares between the record and meeting dates. Empty voting can also result when, prior to the record date of a meeting, an investor borrows shares, thereby acquiring the voting rights attached to such borrowed shares. The type of empty voting that triggers the most policy concerns arises when an investor employs hedging techniques that insulate against the economic risk of holding shares or that result in the investor having a large voting interest with a relatively small economic interest. Mason’s holdings in Telus gave rise to this latter type of empty voting.

The authors go on to discuss specifics of the Telus case and mention the chairman of the Canadian Society of Corporate Secretaries (as quoted in the August 2012 edition of Corporate Secretary magazine) who indicated that a five year plan is being developed to address some Canadian proxy plumbing issues, including reducing the number of days required by statute between record dates and meeting dates.

However, the authors point out that while such a change would reduce instances of empty voting arising due to the sale of shares between the record and meeting dates, it would be no deterrent to borrowing shares (with voting rights) or “hedging techniques that insulate against the economic risk of holding shares or that result in the investor having a large voting interest with a relatively small economic interest. Mason’s holdings in Telus gave rise to this latter type of empty voting.”

With Mary Schapiro exiting the SEC and Elisse Walter taking over on what currently looks like a short-term basis, that leaves the Commission with 2 Democrats and 2 Republicans, making rulemaking even more difficult. Unfortunately, proxy plumbing issues such as empty voting, blank votesclient directed voting, and disclosure of political contributions are likely to take a backseat to other issues. I hope these issues at least get fully addressed before the end of the Obama administration.

See also, Hedge Funds and Risk-Decoupling — The Empty Voting Problem in the EU,  A Theory of Empty Voting and Hidden Ownership,  Equity Decoupling and Empty Voting: The TELUS Zero-Premium Share SwapCanadian Court Addresses Continuing Use of Empty-Voting TacticsThe Dangers of Dual Share ClassesEmpty Voting and the Efficiency of Corporate Governance, and The Mechanisms of Voting Efficiency at the HLS Program on Corporate Governance.

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