Decoupling Voting Rights from Economic Interest: The Case of Empty and Negative Voting

Author:David Marais
Position:BCL Candidate at University of Oxford, Commonwealth Scholar to the United Kingdom
Pages:180-204
© David Marais and Dublin University Law Society
DECOUPLING VOTING RIGHTS FROM
ECONOMIC INTEREST: THE CASE OF EMPTY AND
NEGATIVE VOTING
DAVID MARAIS
Introduction
Over the course of the last decade, sophisticated investors have employed
new and often complex investment strategies that purposefully circumvent
traditional legal concepts related to risk, equity and shareholder control
rights.
1
A prominent, and increasingly well studied example of such a
strategy, is negative decoupling. Negative decoupling occurs where a
shareholder holds voting rights in a company that are greater than her
economic interest in that particular company. Such an outcome is
particularly attractive to certain types of investors, specifically hedge funds,
who wish to retain influence over a company whilst reducing their risk
exposure.
The traditional proposition put forth is that shareholders should be
afforded control rights in the company in which they own shares, usually in
the form of voting rights.
2
Accordingly, these rights should be proportional
to the size of the shareholder’s equity stake in the company. This is captured
in the often cited expression, “one share, one vote.”
3
The theoretical and
policy arguments that support this view, will be discussed later in the article
in relation to the reduction of agency costs. Negative decoupling, however,
departs from the ‘one share, one vote’ principle. It allows a shareholder to
hold voting rights that are disproportionate to their equity stake. Decoupling
voting rights from the economic interest may create significant costs and
inefficiencies. To reduce these costs, it is submitted that policymakers
should aim to reduce, if not eliminate, the adverse effects of negative
BCL Candidate at University of Oxford, Commonwealth Scholar to the United Kingdom.
1
In the context of this artcle “sophisticated investors” are regarded as those who are not retail
or passive investors but rather those who are activist investors, most typically hedge funds.
2
Jonathan Cohen, “Negative Voting: Why It Destroys Shareholder Value and a Proposal to
Prevent It” (2008) 45 Harvard Journal on Legislation 237, at 239-240; Frank Easterbrook and
Daniel Fischel, The Economic Structure of Corporate Law (Harvard University Press, 1991),
at 73.
3
Easterbrook and Fischel, note 2; Cohen, note 2, at 239.
181 Trinity College Law Review [vol 18
decoupling without prohibiting other legitimate and socially beneficial
investment strategies.
This article explores the concept of negative decoupling, in both of its
iterations, namely, empty voting and negative voting. The article will
explore the mechanics behind decoupling, and the associated potential costs
and benefits before presenting the possible appropriate regulatory
responses. Emphasis will be placed on negative decoupling in the US and
EU contexts, with a limited discussion on regulatory responses in the UK.
Broadly speaking, the aim of the article is to explore and analyse negative
decoupling at both a conceptual and a policy level. In the pursuit of this aim,
the article will address the commercial and societal costs of negative
decoupling, whilst determining whether the purported benefits of negative
decoupling withstand closer scrutiny. Finally, the article will critically
evaluate two predominant regulatory proposals that address the adverse
effects of negative decoupling and analyse whether the proposals are
politically, legally and commercially viable.
The article is divided into four sections. The first section describes
negative decoupling against the theoretical justifications for giving
shareholders control rights based on notions of equity and risk. The second
section of the article discusses three of the most common ways shareholders
decouple voting rights from economic interests. The third section of the
article describes the potential benefits and costs associated with negative
decoupling. The fourth section critically evaluates two potential legislative
responses to negative decoupling. The final section concludes.
I. Traditional Corporate Law, Shareholders and Negative
Decoupling
A. Shareholders’ Control Rights: The One Share, One Vote Paradigm
Corporate law has traditionally recognised that shareholders should be
afforded a degree of control over how a firm is managed.
4
Shareholders
usually exercise their voting rights with respect to the appointment and
dismissal of the firm’s directors, as well as with respect to ex ante approval,
or ex post ratification of fundamental transactions such as mergers,
liquidations, and related-party transactions.
5
Voting rights therefore give
4
Jordan Barry, Hatfield John and Scott Kominers, “On Derivatives Markets and Social
Welfare: A Theory of Empty Voting and Hidden Ownership” (2013) 99 Virginia Law Review
1103, at 1111-1112.
5
Ibid.

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