Voting (Sincerely) in Corporate Law

Abstract

Voting is at the center of collective decision making within corporate law. While scholars have identified various problems with the voting mechanism, insincere voting - in the form of strategic and conflict of interest voting - is the most fundamental. As shown in this article, insincere voting distorts the voting mechanism at its root, undermining its ability to determine transaction efficiency. As further demonstrated, strategic and conflict of interest problems coincide with one another: Voting strategically often means being in conflict, and many fact patterns pose aspects of both problems. Nonetheless, although the solutions to both problems are different, in essence the problems are similar. In fact, all solutions to the problems of insincere voting are variations on two basic rules, namely, property rules and liability rules. Property rule protection, affords ex ante protection to minority shareholders who are being pressured to enter into a deal. Liability rule protection, affords ex post protection to the voter, allowing the transaction to take place without the consent of the minority while affording adequate compensation to them at a later date.

Keywords: Voting, strategic voting, conflict of interest, liability rules, property rules

JEL Classification: K22