Vote Buying

aka Empty Voting

Summary

Addresses practices that decouple voting power
from economic ownership

Focus of increasing critical attention as activist shareholders - including hedge funds - sway voting
using financial techniques

Commentary

Professor Hu has found 20 examples of empty voting in corporate proxies worldwide

Securities lending and impact on proxy voting policies and practices are gaining increasing exposure in corporate governance industry
Survey conducted in first quarter of 2007

RiskMetrics Group reports that share lending has generated almost $2 billion in annual revenue for U.S. pension and mutual funds

Developments

U.S. Department of Labor (DOL)

Response to concerns about use of pension plan assets by plan fiduciaries to further public policy debates and political activities
Under section 404(a)(1)(A) and (B) of ERISA, plan fiduciaries must act solely in the interest of participants and beneficiaries and for the exclusive purpose of paying benefits and defraying reasonable administrative expenses. In our view, plan fiduciaries risk violating the exclusive purpose rule when they exercise their fiduciary authority in an attempt to further legislative, regulatory or public policy issues through the proxy process when there is no clear economic benefit to the plan. In such cases, the Department would expect fiduciaries to be able to demonstrate in enforcement actions their compliance with the requirements of section 404(a)(1)(A) and (B).

ERISA provisions require plan fiduciaries act in accordance with duties of prudence and loyalty

Mylan Labs - King Pharma Perry Corp - Carl Icahn

Carl Icahn accused rival investor of vote buying

Icahn invested in Mylan Labs to profit from breaking up
it's acquisition of King Pharma
Perry Corp was already invested in King Pharma
Perry wanted its acquisition by Mylan Labs to go through

To offset Icahn's 9.9% Mylan "no" vote,
Perry bought a 9.9% in Mylan and simultaneously
arranged to short sell an equivalent amount
Thus, Perry captured the vote
without having an economic interest in Mylan

Perry Corp became target of SEC investigation

Reports control of voting of 9.89% of Mylan's shares
But used derivatives to short sell
an equivalent number of shares opaque disclosure
Captured voting rights to support acquisition of King
without having an economic position in Mylan
Perry owns 7 million King shares

Icahn sued Perry over vote buying

Lawsuit overtaken by events

Challenge to shareholder vote approving merger of
Compaq with Hewlett-Packard
Alleged that Deutsche Bank switched its vote of 17 million shares as the result of a combination of inducement and coercion orchestrated by HP's management
"Absent measures protective of the shareholder franchise like those taken in Schreiber, this Court should closely scrutinize transactions in which a board uses corporate assets to procure a voting agreement."
Denied HP's motion to dismiss the plaintiffs' vote-buying claim

Seminal Delaware case on vote-buying
Vote-buying is illegal per se if "the object or purpose is to defraud or in some way disenfranchise the other stockholders"
Opinion's discussion of vote buying
Summary

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