We have talked occasionally about a
company called the Shareholder Vote Exchange, which briefly
offered retail shareholders the opportunity to sell their
shareholder votes. The idea was that retail shareholders tend not
to vote their stock, and if you could set up a system where
somebody (an activist shareholder running a proxy fight, or a
company trying to fend off the activist) could pay them like 25
cents per share for their votes, then (1) that’s found money for
the retail holders and (2) maybe it makes proxy fights more
competitive, or more efficient, or something.
This struck me as more of a fun
thought experiment than a real business, and in fact SVE shut
down in April after a
pretty brief run. Meanwhile in the real world, institutional
investors do have ways of buying. The dynamic is, roughly:
-
Some people — activists and
management in proxy fights and hostile takeovers — care quite
a lot about votes.
-
Other people — index funds, for
instance — maybe don’t.
-
The stock lending market is where
they meet to exchange cash for votes.
That is, intuitively, the stock lending
market lets active investors borrow stock from people (mutual
funds, exchange-traded funds, retail investors with margin
accounts, etc.) who own it. The owners keep the economic ownership
of the stock (if the stock goes up or down, they make or lose
money), but, while they have loaned out the stock, they can’t vote
it. The borrowers pay the owners a fee to borrow the stock.
You can use this to pay for votes.
Conceptually, there are several economically equivalent ways to do
this:
-
The simplest form is that you
borrow the shares from their owners, pay a lending fee, hold
the shares, vote them, and then return them to the lenders.2
-
More plausibly, you could “short
against the box”: You buy shares, and you also borrow shares
and sell them short. Buy 10 million shares (and get their
votes), and at the same time borrow and short 10 million
shares to hedge. You have no economic position, but you have
10 million votes.
-
You could do the same thing with
derivatives: Buy 10 million shares (and get the votes), then
enter into a swap where you short 10 million shares to hedge.
(And then your swap counterparty, a big bank, presumably
borrows and shorts shares to hedge the swap.)
In the first example, you neither buy nor
sell shares, so you are flat, but you borrow the votes. In the
second example, you both buy and sell shares, so you are flat, but
you get the votes from the shares you buy. In the third example,
you buy shares for cash and short them synthetically. They all
come to the same place: You own no shares economically, but you
get to vote them.
I am not sure that this actually
happens a whole lot. When we first talked about SVE, I
wrote:
|
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.
… 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.
|
Still there is no particular reason to
think it is impossible, particularly if buying the votes is cheap.
A hedge fund called Politan Capital Management has been having a
complicated activist
proxy fight with a company
called Masimo Corp., and its latest
filing features a
letter alleging “empty
voting”:
|
We have observed that a brokerage
firm associated with an investor who is a friend of [Masimo
Chairman Joe] Kiani voted a major position – approximately 9.9
percent of the company’s outstanding stock – in favor of the
company’s nominees. The number of shares voted at this
brokerage firm exceeded the shares publicly reported to be
owned by this investor by several multiples. That excess
amount was accumulated at the brokerage in the period running
up to the record date and then disposed of out of the same
brokerage right after the record date. These share movements
corresponded almost exactly with movements in and out of
brokerages associated with firms that lend shares in the
market. Further, in the same period of these share movements,
the short interest in Masimo stock increased by similar
amounts.
Upon reviewing this data, which was
first made available to us on Monday, July 1, we believe it is
likely that this investor has engaged in a pattern of trading
that is known as “record date capture” and “empty voting” that
provides the investor the ability to vote shares of which they
do not have economic exposure. This trading strategy involves
purchasing shares to be able to hold them on the record date
and therefore be entitled to vote them, while simultaneously
borrowing and shorting an equivalent number of offsetting
shares in order to eliminate economic exposure to the stock.
In these instances, the position is closed shortly after the
record date, once the right to vote has been secured. Empty
voting at this scale threatens to distort corporate democracy
at Masimo, as a stockholder whose votes are divorced from
their economic interests may not vote in a manner that is in
the best interests of the company and all its stockholders.
|
This is a thing that academics, and
people involved in proxy fights, like to complain about, but it
does not actually seem to be a requirement of US shareholder
voting that your economic interest match your voting rights.3 If
people are willing to lend you their stock so you can vote it, I
think you can just do that?
* * *
2. This is sometimes
called “record
date capture,” and it strikes me as odd; my impression is that
US stock borrow desks will lend you shares to short but not to
vote. I am not sure I have heard of it happening in the US. (The
paper I link to in this footnote cites a UK example.) In any case
the other two examples are clearly feasible in the US and roughly
equivalent to the simple form.
View in article
3. Ask Shari Redstone.
View in article
