Conflicted Mutual Fund Voting in Corporate Law
42 Pages Posted: 28 Jun 2019
Date Written: June 27, 2019
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.
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