Interested Voting

Abstract

Corporate law is attentive to transactions with a controlling shareholder, but such transactions hardly cover all instances in which an interested shareholder may harm the corporation by casting a pivotal vote to pass a resolution. Interested votes cast by directors, managers, acquirers, cross-holders, arbitrageurs, institutional investors, hedge funds, and several other actors can be as detrimental as votes by a controlling shareholder. Yet, despite the ever-growing influence of shareholders in corporate governance, interested voting has received scant attention.

This Article is the first to offer a systematic mapping of interested voting based on type of shareholder and type of resolution. It categorizes existing policy approaches on interested voting as bright-line rules (which discount votes presumed interested ex ante) or as open-ended standards (which provide remedies for votes found ex post to be interested), and characterizes as “anything goes” the approach that leaves shareholders free to vote whichever way they please. Aside from policing controlling shareholders and, to a lesser extent, acquirers in M&A transactions, the law does not offer any remedies in several areas in which interested voting might occur, thus setting “anything goes” as the default regime for voting by non-controlling shareholders.

This Article evaluates whether and to what extent this “anything goes” regime is worrisome. While in some fields, like director elections and shareholder proposals, such an approach has the merit of limiting litigation rents, it is problematic in many others. In particular, M&A and other high-profile financial transactions subject to shareholder approval run the risk of being determined by an interested voter not aligned with the genuine preferences of disinterested shareholders. Deal data show that half of (the few) close merger votes pass because of votes by insiders. In these cases, deal outcomes might systematically be swayed by votes at odds with the common interests of shareholders and market failures would ensue. This is troublesome given the current phase of reconcentration of ownership of public corporations, which makes it easier than ever to assemble coalitions of repeat players such as insiders, institutional investors, and hedge funds. If left unchecked, “anything goes” might result in a reduction of wealth in the long run.

Keywords: Corporations, Shareholders, Shareholder Voting, Corporate Governance, Interested Shareholders, Interested Voting, Conflicts of Interest, Institutional Investors, M&A, Corwin, Disinterest, Shareholder Approval, Proxy Fights, Unocal, Controlling Shareholder

JEL Classification: D21, G30, G32, G34, G38, K22