Hedge Funds and Risk-Decoupling – The Empty Voting Problem in the European Union
Copenhagen Business School - Department of Law; University of Oxford - Faculty of Law
August 1, 2012
Seattle University Law Review, Forthcoming
Oxford Legal Studies Research Paper No. 52/2012
Negative risk-decoupling, otherwise known as empty voting, is a popular strategy amongst hedge funds and other activist investors. In short, it is the attempt to decouple the economic risk from the share’s ownership position, retaining in particular the voting right without risk. This paper uses three perspectives to analyse the problems created by negative risk-decoupling: an agency costs approach, an analysis of information costs, and a perspective from corporate finance. It shows how risk-decoupling is a type of market behaviour that creates significant costs for market participants, in particular existing shareholders and potential investors.
The paper then develops regulatory responses, envisaged particularly for EU level lawmaking, but also raises underlying issues on a more general level. Whilst several proposed regulatory tools are rejected, the paper prefers a solution that uses continuous transparency as the cornerstone. In addition, it suggests that in certain individual cases, national regulators should be empowered to suspend activists’ voting rights.
The paper concludes by offering a concrete legislative proposal, amending the European Transparency Directive.
Number of Pages in PDF File: 68
Keywords: empty voting, risk-decoupling, hedge funds, derivatives, securities lending, disclosure, disenfranchisement
JEL Classification: G30, G32, G34, G38, K22
Date posted: August 25, 2012 ; Last revised: March 7, 2013