Einde inhoudsopgave
The Decoupling of Voting and Economic Ownership (IVOR nr. 88) 2012/3.4.1
3.4.1 Share Trading
mr. M.C. Schouten, datum 01-06-2012
- Datum
01-06-2012
- Auteur
mr. M.C. Schouten
- JCDI
JCDI:ADS601714:1
- Vakgebied(en)
Ondernemingsrecht / Rechtspersonenrecht
Voetnoten
Voetnoten
Colleen A. Dunlavy, Social Conceptions of the Corporation: Insights from the History of Shareholder Voting Rights, 63 Wash. & Lee L. Rev. 1347, 1354-55 (2006).
See Levmore, supra note 17, at 143 (noting that 'corporate shareholders can purchase stock ... in order to demonstrate their preferences.'); see allo Sunstein, supra note 16, at 130 (noting that '[o]ne reason for the current success rate [of prediction markets] is that that accurate answers can emerge even if only a small percentage of participants have good information.... Deliberating groups often operate on a principle of 'one person, one vote'; but in a prediction market, intense preferences, based on really good information, can be counted as such.')
See Sanford J. Grossman & Oliver D. Hart, The Allocational Role of Takeover Bids in Situations of Asymmetric Information, 36 J. Fin. 253, 254 (1981) (noting that lijf an outsider has information which indicates that a profit could accrue from a change in managerial decisions [t]he only way he can make a profit from his information may be to buy the firm and change the production decision').
Standard & Poor's 500 Factsheet, September 30, 2010.
Jennifer E. Bethel, Gang Hu & Qinghai Wang, The Market for Shareholder Voting Rights Around Mergers and Acquisitions: Evidence from Institutional Daily Trading and Voting, 15 J. Corp. Fin. 129 (2009). The study shows that institutions buy shares in firms whose prices fall the most when the deals are announced, and shows a positive relation between buying by institutions and voting turnut and a negative relation between buying by institutions and investor support for merger proposals. Id. at 140. Although the data does not allow attribution of causality, one possible interpretation of these results is that institutional investors buy shares to influence the voting process such that proposals to enter into value destroying mergers are rejected. Id. at 135.
Id. at 136. The figure reports the difference in percentages between trading activity on each day (relative to shares outstanding) and the average daily trading activity for the twenty-day period surrounding the voting record date.
Kurz v. Holbrook, 989 A.2d 140, 180 (Del. Ch. 2010) (holding that 'Delaware law does not restrict a soliciting party from buying shares . . . to bolster the solicitation's chance of success.'), aff'd, Crown Emak Partners v. Kurz, 992 A.2d 377, 388-89 (Del. 2010).
Exchange Act Rule 13d-1(a), 17 C.F.R. § 240.13d-1(2005)(a) (2010).
Exchange Act Rule 16a-2, 17 C.F.R. § 240.16a-2(2010). Under this mle, company insiders (officers, directors, or shareholders with a stake that exceeds ten percent) are required to return any profits made from the purchase and sale of company stock if both transactions take place within a six-month period.
In the early 19th century, it was not uncommon for U.S. firms to award only one vote per shareholder.1 For individual shareholders of these firms it must have been difficult to leverage possession of superior information, other than through persuasion of other shareholders. Nowadays, the default rule is that each share conveys the right to exercise one vote. Consequently, a shareholder who wishes to leverage superior information can increase her influence simply by purchasing more shares and thus more votes.2
The clearest example of this strategy is the tender offer. By acquiring a majority of the shares and thereby, in principle, the majority of the votes, the shareholder who makes the tender offer will obtain the power to implement policies based on her superior information and reap the resulting capital gains.3 Yet, there is an important limitation to this arbitrage strategy: purchasing a majority of the shares of a public firm can be very costly.
A less costly alternative is the purchase of such a number of shares as needed to sway the vote, or at least to increase the probability that a majority of the shares will be voted for the correct option. Given that the average market capitalization of S&P 500 companies is approximately $21 billion, the costs are stil considerable.4 If the expected voter turn-out is seventy percent, an investor will have to buy some $147 million worth of shares to obtain an additional one percent voting power, plus transaction costs. To the extent the investor ends up with a portfolio that is less diversified and thus riskier than prior to the purchase, the strategy will be even costlier.
There is, nevertheless, some empirical evidence suggesting that institutional investors do engage in this type of arbitrage, which may be worthwhile especially in firms with a relatively small market capitalization. Jennifer Bethel et al. recently studied the market for voting rights in about 350 mergers and acquisitions between 1999 and 2005 and found that institutional investors are net buyers of shares around the voting record date, as shown in Figure 2. One possible explanation is that they buy shares to ensure that value-destroying mergers are rejected.5
Figure 2: Net Buying by Institutional Investors around Voting Record Dates
Source: Bethel et al. (2009)6
In terms of legal constraints, there are no direct constraints when purchasing shares in the spot market or, as Delaware courts have recently confirmed, when purchasing shares through an off-exchange transaction.7 There are significant indirect constraints, though. To name but a few: if the purchase results in more than five percent voting power, the shareholder may need to publicly disclose his position;8 if the purchase results in more than ten percent voting power, the shareholder becomes subject to short swing profit capture;9 and if the vote buying results in more than thirty percent voting power, in certain jurisdictions such as European Union Member States the shareholder will run the risk of triggering a mandatory bid obligation. In light of these legal constraints and the cost constraints mentioned earlier, it is worthwhile exploring alternative arbitrage strategies such as proxy solicitation.