Equity and Debt Decoupling and Empty Voting II: Importance and Extensions
Henry T. C. Hu
University of Texas at Austin - School of Law
Bernard S. Black
Northwestern University - Pritzker School of Law; Northwestern University - Kellogg School of Management; European Corporate Governance Institute (ECGI)
as published in University of Pennsylvania Law Review, Vol. 156, pp. 625-739, 2008
ECGI - Law Working Paper No.
U of Texas Law, Law and Econ Research Paper No. 122
We extend our prior work on how both supply (including the emergence of OTC equity derivatives and growth in share lending) and demand (including the growth of hedge funds) factors now facilitate the large-scale, low-cost decoupling of shareholder voting rights from shareholder economic interests. Both inside and outside shareholders, as well as corporations themselves, can engage in what we termed empty voting - voting while holding greater voting power than economic ownership. Shareholders can also have hidden (morphable) ownership - economic ownership, ostensibly without voting rights, which remains undisclosed under current disclosure rules, but can quickly morph to include voting ownership as well. These forms of decoupling pose important risks to the one-share-one-vote paradigm that underlies conventional models of corporate governance and shareholder voting.
We extend our prior work in five primary ways. First, we treat decoupling of voting rights from economic ownership of shares (empty voting and hidden ownership) as special instances of a more general pattern-investors, and corporations themselves, can unbundle the package of rights and obligations which have traditionally been associated with equity (equity decoupling) as well as debt (debt decoupling). Second, we provide evidence that equity decoupling is an important worldwide phenomenon, which adds urgency to the need for disclosure and perhaps other reforms. Third, we go beyond decoupling by shareholders, and examine decoupling strategies that corporations can use to fend off changes in control. Fourth, we expand our integrated equity ownership disclosure proposal to address corporate decoupling, and propose responses to empty voting which go beyond disclosure, including constrained corporate power to limit the voting rights of empty voters, condensing the period from record date to shareholder meeting date, and encouraging institutional investors to recall and vote lent shares. Fifth, we sketch several extensions of our decoupling framework to (a) the full range of shareholder rights and obligations, (b) debt decoupling, and (c) the possible revival of the street sweep takeover strategy.
Number of Pages in PDF File: 116
Keywords: bank regulation, bankruptcy, corporate governance, credit default swap, creditor rights and obligations, derivative, disclosure, empty voting, equity swap, financial innovation, hedge fund, housing finance, insider, SEC, securitization, shareholder rights and obligations, takeover, voting
JEL Classification: G14,G18,G20,G21,G24,G28,G30,G32,G33,G34,K22,L20
Date posted: November 20, 2007 ; Last revised: March 11, 2008