Despite the ever-growing influence of institutional investors and shareholders generally in corporate governance, interested voting is not fully explored. While corporate law is indisputably attentive to transactions with a controlling shareholder, such transactions hardly cover all instances in which an interested shareholder may harm the corporation by casting a pivotal vote determining the outcome of a resolution. Especially in this current phase of reconcentration of corporate ownership, a deeper investigation is long due.
In a new paper, Interested Voting, I organically analyze different types of resolutions impacted by interested voting, the most typical interested shareholders, current regimes attempting to tackle the phenomenon, and possible policy fixes in areas not covered by an existing regime.
Taxonomies of interested voting
The paper presents taxonomies of interested voting based on type of shareholder resolution and type of shareholder. On the first front, I look at M&A transactions, director elections, changes to the organizational documents, and non-binding resolutions like shareholder proposals and say-on-pay votes. On the other front, I describe several types of shareholders that can be prone to interested voting. Some, like directors, managers, and controlling shareholders, are the usual suspects. But some other shareholders can be as problematic: significant shareholders, acquirers, parties to a voting agreement, cross-owners, institutional investors, shareholder activists, arbitrageurs, employees, and various types of activists (climate, labor, and political).
Regimes addressing interested voting and the “anything goes” default
Policy approaches on interested voting can be categorized as bright-line rules, open-ended standards or “anything goes.” In the first two cases, the law puts in place safeguards to ensure the outcome of the vote is not tainted by interested voting. There are examples of an interventionist approach under existing law: sometimes the law requires disinterest as a precondition for the validity of the resolution (almost always by not counting certain presumptively interested votes), other times, disinterest is a precondition—one of many—for shifting the standard of review in fiduciary duty litigation in the defendant’s favor.
The other, opposite approach can be described as “anything goes:” non-controlling shareholders can behave and vote as they please to further any of their interests, whether aligned or compatible with the interest of the group. Scant scholarly engagement, coupled with objective difficulty in defining what should constitute sanctionable interested voting, have contributed to a legal system that, aside from policing controlling shareholders and, to a lesser extent, acquirers in M&A transactions, does not offer any remedies in several other areas in which interested voting might occur. Thus, de facto, our system establishes “anything goes” as the default regime.
The unclear contours of interested voting
To be sure, addressing interesting voting is a complex task, especially because it is not easy to determine what type of misalignment should trigger remedies. For one, shareholder interests may be heterogeneous. Without one single common interest for the shareholder group to align to, it might be difficult to say what creates a sufficient conflict or misalignment to constitute interested voting. Shareholders may have different investment horizons or strategies: the interest of a mutual fund with a long-term strategy may be misaligned with the interest of a merger arbitrageur; the interest of an impact investor with a green strategy may be misaligned with the interests of a hedge fund activist. To complicate things further, institutional investors care less to maximize the value of the single company, as opposed to maximizing the value of their portfolio.
Moreover, at this historical juncture, the very fact that directors and officers must manage the corporate enterprise in the exclusive interest of shareholders is called into question by stakeholderism. If corporate fiduciaries may depart from a norm of shareholder wealth maximization, why can’t shareholders do the same?
Finally, regulating interested voting goes against the idea that investors are generally free to cast votes whichever way they want—just like they are free to manage their investment. Courts and scholars carve an exception to this tenet only for controlling shareholders, de facto creating a dual regime based on the never crystal contours of control: in its presence, heightened scrutiny applies, otherwise shareholders can freely vote the way they please. In this regard, the paper questions this approach.
The limits of only policing controlling shareholders
While controlling shareholders are on the radar because of their inherent power to determine the outcome of the vote (and of an overall transaction), episodic pivotal voting by non-controlling yet interested shareholders is as problematic because of they too have power to determine the outcome of the vote in a direction that may harm the corporation. Further, the smaller stakes held by non-controllers are more troublesome in terms of misalignment and incentives to cast interested votes because the loss of any such shareholder qua shareholder is typically smaller and thus, all else being equal, easier to offset with the nonproportional gains the shareholder can extract via interested voting. Moreover, if non-controllers’ votes are never challenged, potentially pivotal shareholders would take solace from knowing they are beyond the law’s reach and would act accordingly. In other words, in an “anything goes” environment, such shareholders would be free to plan around and coalesce with others, thus exacerbating the risk that they will be pivotal and thus detrimental to the corporation. This is worrisome considering the ongoing reconcentration of ownership structures of U.S. corporations.
Assessing “anything goes”
Because of the apparent nature of “anything goes” as a default regime, the paper illustrates its implications. To be sure, in certain fields, like stand-alone director elections and shareholder proposals, such an approach makes sense because it avoids unnecessary litigation costs and rents.
However, in some other fields tailored approaches come at a premium, because “anything goes” would leave investors unprotected: regulating interested voting can curb certain market failures if voting outcomes could otherwise systematically be swayed by votes at odds with common interests of shareholders—in the long run, this would result in a reduction of wealth, especially if certain interest groups could organize and take advantage of such a lax approach. Fields currently subject to “anything goes” that would benefit from a tailored approach include M&A transactions, both hostile (where each of the competing groups—acquirers and incumbents—are potentially interested and can sway an inefficient outcome to their favor) and friendly (for similar reasons, except that such groups are not competing but in fact allied). But M&A is not the only field that needs attention: any important transaction with money on the table (a recapitalization, a spin-off, and so forth) that for one reason or another is subject to a shareholder vote gives interested shareholders a chance to extract value.
Moreover, if “anything goes” is really the default law of the land, we must confront with some troublesome realities: (i) nearly half of close-vote transactions pass thanks to interested voting (and the paper suggests that future research investigate whether and to what extent “anything goes” has repercussions on the cost of capital of public corporations); (ii) insiders and other repeat players like index funds and hedge funds (especially arbitrageurs) are more likely to cyclically be pivotal, undetected interested voters and take advantage of a lax regime (this is particularly problematic in our age of reconcentration of corporate ownership); and (iii) the corporate law system would have less basis to justify certain doctrines (Unocal, Blasius, C & J Energy, and Corwin) on shareholders’ ability to vote for their preferred solution if in fact votes might be easily tainted by interested voting.
The full paper is available here.