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Money for votes

Someone sent this to me and I can’t not share it with you:

As a former corporate equity derivatives structurer I have, over the years, thought about ways to separate shareholder voting from economic ownership, and to trade the votes separately. One obvious set of solutions is: You are an activist hedge fund, you buy 10 million shares of stock (which gives you the votes and the economic ownership), and then you sell 9 million shares through a derivative (which reduces your economic ownership but not, generally, your voting rights). So, like, buy 10 million shares in the cash market, and then write a 9-million-share total return swap or put/call combo or whatever. Then you own 1 million shares economically, but you have 10 million votes.

I think that this occasionally happens, but my impression is that US activist hedge funds are more likely to do the opposite, acquiring economic exposure to more shares than they actually own. (By buying total return swaps or call options or whatever.) This is partly for regulatory reasons (buying a bunch of actual shares triggers disclosure and antitrust obligations that derivatives can avoid) and partly for leverage reasons (buying a lot of shares for cash takes a lot of cash, while buying/selling with derivatives doesn’t take/generate as much cash.) If you are going to spend money on research and lawyers and proxy fights to do an activist campaign, you want a lot of economic exposure, not just a lot of votes.

There is another set of quasi-solutions around stock lending: If you do not value shareholder voting at all, you can just lend out your shares to short sellers and not recall them for votes, which is a way of exchanging your voting rights (which you don’t care about) for money (in the form of stock lending fees).

But I guess the most obvious solution is just, like, go around paying retail shareholders for their votes? With some intermediary to aggregate them and take care of the mechanics [7] The Shareholder Vote Exchange people are not wrong that, if someone is willing to pay you $5 to control all your votes on all your shares for all of this proxy season, you should take the money, because $5 is more than zero and voting your shares is (1) worthless to you and (2) surprisingly annoying. Retail investors stereotypically don’t vote, and that is normally rational, so paying them any amount of money for their votes seems like a win for them.

On the other hand, who would pay? If it is irrational to vote your own shares, it is even more irrational to pay to vote someone else’s, virtually all of the time. You could imagine some sorts of activist campaigns in which it would be expressively valuable to buy some votes: If you submitted a nonbinding shareholder proposal asking some company to have more, or less, diversity, then presumably you care about sending a message, and you might feel good about spending some of your own money to buy votes to make your proposal look more popular.

But surely the real high-dollar case for buying shareholder votes is in contested proxy fights, where some activist investor has millions of dollars on the line and wants to get its own slate of directors elected. (Also in contested takeovers.) And there I just have trouble imagining big activist shareholders buying votes in proxy fights this way, in part because the disclosure and reputational issues seem like they’d be a mess. The distinguishing feature of proxy fights and hostile takeovers is that everyone sues everyone else about everything, and also “bedbugs” them to the US Securities and Exchange Commission, calling up the SEC to say “hey did you notice our opponents doing something illegal?” Can you imagine the hay that some corporate managers would make out of an evil activist hedge fund buying votes?

And in fact Shareholder Vote Exchange’s current list of auctions seems to be headed by pretty routine annual meetings for companies like Visa Inc. and Intuit Inc., none of which have proxy fights ongoing. Still, fun idea!

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7. I have no idea what the mechanics are here — like, how do they make sure that the vote sellers actually vote the way they are supposed to? — though I suspect it’s not too hard. They say they work with a bunch of brokers’ systems. View in article