Conflicted Mutual Fund Voting in Corporate Law

42 Pages Posted: 28 Jun 2019

See all articles by Sean J. Griffith

Sean J. Griffith

Fordham University School of Law; European Corporate Governance Institute (ECGI)

Dorothy S. Lund

University of Southern California Gould School of Law

Date Written: June 27, 2019

Abstract

Recent Delaware jurisprudence establishes a disinterested vote of shareholders as the pathway out of heightened judicial scrutiny. The stated rationale for this policy is that shareholders, the real party at interest, are better protected by the ballot box than by the courtroom. As long as informed, disinterested shareholders with an economic stake in the outcome of the vote can effectively express their preferences through voting — the court need not scrutinize the underlying transaction. Rather, it can defer to the outcome under the business judgment rule.

But shareholder voting is not always as direct as this reasoning implies. Instead, voting outcomes increasingly are determined not by those holding the ultimate economic interest but rather by institutional intermediaries who buy, hold, and vote shares on behalf of someone else. In this setting, there are several predictable circumstances under which institutional voting interests will depart from those of the underlying investors.

This Article develops a typology of institutional investor conflicts of interest. We focus on mutual fund intermediaries, which are the key deciders of corporate elections and represent the interests of millions of investors when voting. We describe and document instances of Cross-Ownership Conflict (situations in which funds have interests on both sides of a transaction), Corporate Client Conflict (situations in which funds have an interest in currying favor with the managers of portfolio companies), and Uniform Policy Conflict (situations in which fund sponsors enforce a uniform voting policy irrespective of individual fund objectives).

Our account provides a basis to reevaluate corporate law’s retreat from heightened judicial scrutiny. When mutual fund voting is subject to the conflicts we describe, the real parties in interest have not necessarily spoken in favor of the transaction. As such, courts should consider a broader set of conflicts when deciding whether the protection of the business judgment rule is warranted.

Suggested Citation

Griffith, Sean J. and Lund, Dorothy S., Conflicted Mutual Fund Voting in Corporate Law (June 27, 2019). Boston University Law Review, Vol. 99, No. 1151, 2019. Available at SSRN: https://ssrn.com/abstract=3411058

Sean J. Griffith

Fordham University School of Law ( email )

150 West 62nd Street
New York, NY 10023
United States

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Dorothy S. Lund (Contact Author)

University of Southern California Gould School of Law ( email )

699 Exposition Boulevard
Los Angeles, CA 90089
United States

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