Empty Voting: Private Solutions to a Private Problem

Abstract

“Empty voting” describes the process through which a shareholder separates and sells off the economic interest in a share, retaining only the voting rights. Empty voting can currently be accomplished through a variety of techniques. These techniques include using accompanying short sales to offset the long position, using options to hedge away some or all of the economic exposure, entering into swap agreements that trade the economic fluctuations of the shares for other cash flows, or through “record date capture,” in which the empty voter temporarily borrows shares in order to vote them. In all of these instances, the empty voter retains little or no economic stake in the corporation, which distorts the empty voter’s incentives to vote in the corporation’s best interests. In extreme cases, such as when the empty voter is economically short, the empty voter may stand to personally gain from the corporation’s loss. By separating decision-making power from the economic investment in a corporation, empty voting may undermine the assumption that shareholder votes will accurately reflect the economic interests of the corporation–an assumption that has largely justified the law’s deferential stance towards shareholder voting outcomes. This apparent disconnect between the effects of empty voting and judicial perceptions of corporate democracy has prompted many commentators to suggest that existing legal doctrine is poorly equipped to respond to the issues raised by empty voting. This Note attempts to re-examine the concerns raised by empty voting. Ultimately, this Note takes the position that while empty voting poses real concerns, it may not be as problematic as some commentators have suggested. Although some issues do remain, many of the more extreme dangers may be adequately addressed under existing law. While acknowledging that some public sector regulation would be beneficial, this Note argues that many of the unaddressed problems posed by empty voting are ones that private institutions have both the ability and the incentive to solve. Based on these assessments, this Note suggests some possible private sector solutions.