"Empty Voting" Catches Regulators' Attention
Reuters recently ran an article examining the practice of “empty voting.” The practice of “empty voting” entails borrowing shares prior to a record date, which then gives the borrower voting rights. Once the record date has passed, the borrower returns the shares and effectively controls a large number of votes without a continuing economic interest in the company.
Critics of “empty voting” argue that this creative share borrowing seriously threatens corporate governance, and breaks the link between share ownership and economic interest. These critics have advocated fixing the disclosure system to make this practice more transparent. In particular, critics are concerned with the potential that “empty voting” can be used to manipulate voting outcomes. For example, hedge funds are now borrowing shares, while at the same time simultaneously shorting the stock. The hedge funds can then use their “empty votes” to negatively impact the company, thereby ensuring and increasing profits from their short sales.
Fueling the practice of “empty voting” is a booming business in lending shares. That business has nearly doubled over the past five years and now earns a reported $8 billion a year for big brokerages and banks alone.
Both share lending and “empty voting” have caught the attention of regulators, who realize now more than ever the importance of protecting the efficacy of shareholder voting as a means to ensure and improve corporate governance. SEC Chairman Christopher Cox recently disclosed that while no firm plans are yet in place, the SEC will almost certainly take further regulatory action to protect investors’ interests from these relatively new phenomena.
