Einde inhoudsopgave
The Decoupling of Voting and Economic Ownership (IVOR nr. 88) 2012/3.4.3
3.4.3 Vote Buying
mr. M.C. Schouten, datum 01-06-2012
- Datum
01-06-2012
- Auteur
mr. M.C. Schouten
- JCDI
JCDI:ADS597122:1
- Vakgebied(en)
Ondernemingsrecht / Rechtspersonenrecht
Voetnoten
Voetnoten
Henry G. Manne, Some Theoretical A,spects of Share Voting, 64 Colum. L. Rev. 1427, 1444 (1964).
Robert C. Clark, Vote Buying and Corporate Law, 29 Case W. Res. L. Rev. 776, 797 (1979); see also Thomas J. Andre, Jr., A Preliminary Inquiry into the Utility of Vote Buying in the Market for Corporate Control, 63 S. Cal. L. Rev. 533, 592 (1990) (examining how a bidder might purchase votes as the first step toward acquiring the entire equity interest in its target and concluding that 'assuming that [the bidder] increases share values, vote buying can lead to additional gains, the bulk of which are captured by the public stockholders'); Richard L. Hasen, Vote Buying, 88 Calif. L. Rev. 1323, 1349-53 (2000) (acknowledging the potential of efficiency gains from facilitating corporate vote buying); Levmore, supra note 17, at 138 (noting that an ability to purchase voting rights 'can provide a useful safety valve where defensive tactics go too far in blocking desirable takeovers'); Zvika Neeman & Gerhard 0. Orosel, On the Efficiency of Vote Buying When Poters Have Common Interests, 26 Int'l Rev. L. & Econ. 536 (2006) (building a model to examine the conditions under which vote buying may promote efficiency in an environment where voters have identical preferences and producing results suggesting that vote buying may prove beneficial in the market for corporate control).
Understandably, there is no empirical evidence on the cost of buying votes from other shareholders by instructing them how to vote, and much will depend on the specifics of the case. In addition to the consideration, the arbitrageui will have to incur the cost of finding one or more shareholders willing to sell their votes as well as other transaction costs.
Schreiber v. Camey, 447 A.2d 17, 26 (Del. Ch. 1982). In this section we focus on legal constraints imposed by case law, but the above legal constraints imposed by federal securities laws apply equally. See supra notes 127-28 and accompanying text.
See In re DCC Commc'ns, Inc. S'holders Litig., 1999 WL 1009174, at *8 (Del. Ch. Oct. 27, 1999) (stating that '[g]enerally speaking, courts closely scrutinize vote-buying because a shareholder who divorces property interest from voting interest, fails to serve the 'community of interest' among all shareholders, since the 'bought' shareholder votes may not reflect rational, economic self-interest arguably common to all shareholders'); Mike Burkart & Samuel Lee, One Share-One Vote: The Theory, 12 Rev. Fin. 1, 3 (2008) (noting that '[1] everaging a blockholder's voting power . . . enables her to take self-serving actions, such as diverting corporale resources for less productive private purposes'). In a recent decision, a District Court in the Southern District of New York expressed the same concern in the context of a bankruptcy proceeding, when creditors are substituted for shareholders when it comes to voting on key issues. The court found that DISH Network Corporation, a Chapter 11 debtor, '[d]id not purchase and vote its claim in order to gain financially by way of a distribution in this case. Rather . . . its purpose was as a strategic investor . . . .' In re DBSD N. Am., Inc., 421 B.R. 133, 139 (Bankt S.D.N.Y. 2009), aff 'd, 2010 WL 1223109 (S.D.N.Y. Mar. 24, 2010). Accordingly, the court concluded that DISH's votes, cast to reject the restructuring plan, should be disregarded per section 1126(e) of the Bankruptcy Code. Id. at *3.
See text accompanying supra note 104.
Schreiber, 447 A.2d at 25-26.
Id. Notice that the Schreiber court refers to voting agreements with 'the object or purpose' to defraud or disenfranchise other shareholders. Later courts seem to have focused less on intent and more on actual result. See, e.g., Kurz v. Holbrook, 989 A.2d 140, 178 (Del. Ch. 2010) (noting that 'vote buying should merit review only if it is disenfranchising, in the sense of actually affecting the outcome of the vote').
Kurz, 989 A.2d at 178.
Schreiber, 447 A.2d at 26. But see Kevin C. Cunningham, Examination of Judicial Policy on Corporate Vote Buying in the Context of Modern Financial Instruments, 64 N.Y.U. Ann. Surv. Am. L. 293, 328 (2008) (noting that 'intrinsic faimess as an inquiry in many recent cases has faded to the point that it is not even mentioned').
See Kurz, 989 A.2d at 181 (finding that Kurz had no reason to vote 'other than in the manner he thinks would best maximize the value of EMAK as a corporation' and concluding that the voting of the relevant shares therefore was not a legal wrong).
The Delaware Supreme Court approves of Vice-Chancellor Laster's general treatment of vote buying in Kurz, but seems to take a somewhat less nuanced approach by holding that in the case at hand there was no improper vote buying (merely) 'because the economic interests and the voting interests of the shares remained aligned since both sets of interests were transferred' by the vote buying agreement. Crown Emak Partners, L.L.C. v. Kurz, 992 A.2d 377, 390 (Del. 2010).
In the absence of legal barders, a market for votes could emerge. The proposition that a market for corporate votes could yield significant benefits was made by Henry Manne in 1962. Manne, supra note 133. The idea is still very much alive. See Levmore, supra note 17, at 137-39; see also infra note 151 and accompanying text. A market for votes could be facilitated by new legal rules, for example rules ensuring that the vote seller's vote is cast in accordance with the vote buyer's preference, and, more generally, rules aimed at minimizing transaction costs.
The third and final arbitrage strategy examined here is vote buying. The potential of vote buying as a strategy to leverage superior information was recognized early on. In his classic 1962 essay, Henry Manne observed that the market for votes serves the critical function of causing votes to move into the hands of those shareholders "who know how to use [them] most profitably."1 In a similar vein, Robert Clark noted that vote buying "may be the cheapest or most feasible way for a person sincerely interested in shareholder welfare to achieve results that benefit the corporation as a whole."2 What are the cost constraints and legai constraints to this strategy?
The costs will largely depend on the consideration to be paid to the shareholder who agrees to vote as instructed. The consideration will be a function of the number of votes that need to be bought in order to become the pivotal voter or at least to significantly increase the probability that a majority of the shares is voted for the correct option. This, in turn, will depend on the number of shares initially held and other factors such as the likely turnut, the judgment of other shareholders on the question of which is the correct option, and the preference distribution. It appears that in absolute terras, the costs of buying votes, although not insignificant, need not be insurmountable either.3 Whether it is worthwhile to incur the costs will depend on whether they are exceeded by the expected benefits, in the form of a capital gain on the shares initially held, if the correct option is chosen (adjusted for the probability that the correct option will not be chosen). This suggests that vote buying will generally be worthwhile only for shareholders with a sizeable stake.
Turning to legal constraints, courts have long harbored suspicions toward vote buying because, as the Delaware Chancery Court put it in the landmark case of Schreiber v. Carney, "vote buying is so easily susceptible of abuse."4 As in the debate on whether it is efficient that firms' capital structures reflect the principle of one share-one vote, the concern is that leveraged voting power enables shareholders to take self-serving actions to the detriment of other shareholders.5 A shareholder may, for instance, buy votes to secure shareholder approval of a transaction with a related party that has not been entered into at arm's length—an extension of the example of conflicted voting by a controlling shareholder offered in the previous section.6
At the same time, courts have recognized that vote buying may be accomplished for laudable purposes, which is why vote buying is not always considered illegal per se.7 Nevertheless, significant legal barriers remain. To begin, Schreiber implies that vote buying will be considered illegal per se if the vote buying agreement defrauds or disenfranchises the other shareholders.8 Other shareholders will be considered disenfranchised when the bought votes deliver the swing votes.9 This is problematic from an arbitrage perspective because the arbitrageur's very purpose will be to determine the outcome of the vote.
Even if the vote buying does not disenfranchise shareholders, Schreiber implies that the court will have to apply an intrinsic faimess test.10 A recent decision of the Delaware Chancery Court suggests that the test boils down to the question of whether the disproportionality between economic interest and voting interest resulting from the vote buying causes a misalignment between the vote buyer's interest and the general interest of the other shareholders, which is to maximize shareholder value.11 This is encouraging from our perspective because the interest of the arbitrageui will be to maximize shareholder value.12 Still, until courts have explicitly sanctioned vote buying with the purpose of increasing the probability that a majority of the shares is voted in favor of the correct option, the arbitrage strategy of vote buying entails significant litigation risk given the legal uncertainty and the interests at stake.13
Overall, the conclusion that emerges is that opportunities to leverage superior information through voting arbitrage are limited. This is problematic in a world where shareholders have limited information, bounded rationality, and heterogeneous preferences.