The Voting System Outline

A. Corporate Voting and the Collective Action Problem

Public Corporations and the Voting system

• When and how do shareholders vote

  • AGM

  • Special meetings – convene as prescribed by law/ written consent if permitted in co./ board called

• What do shareholders vote on

  • Election of directors

  • Things board cannot do on its own: merger, dissolution, changes to certificate of incorporation, action plan

    • Cleansing acts: sometimes things that board cannot do on its own

  • In public co. - say on pay, a non-binding vote on executive compensation

  • Resolutions under rule 14A(a)

• How many votes

  • One share on vote in general

• Required votes for passage

  • General rule: mergers and charter amendment – majority of shares entitled to vote

  • Everything else (other than election of directors) majority of shares voting

  • Election of directors: people with most votes get elected (but now most large co. requires majority of the votes)

• Record dates, record holders – how are votes collected

  • Proxy info given to shareholders Votes collected

  • Some co. have lawyers that is in charge of the mechanics of vote, complaining purposes, lopsided 90% would vote one way, hard task would be to get enough people to be bothered to vote

  • Complaints

    • Shareholders resolution 14A(a) – low level of complaining who gets to insert statement into the co. proxy statement

    • Intents complaint

    • Background

  • Record holders:

    • Previously shareholders himself would be the record holder (if certificate is lost can get another one)

    • Nowadays if you buy shares through banks no longer registered as the shareholder investment banks would act as intermediate record holders and passes voting instructions from the company to the owner

    • Record date – voting date vote still counts even if you sell the shares on the day you voted you vote will still count

Collective Action problem: cost of meaningful collective action paradigm/ model example

• Unlike co. wholly owned by a single shareholder (no costs of collective action)

• Co. held by 100,000 shareholders collective action costs are likely to be preclusive rational shareholders will never challenge board decisions/ inform themselves about co.’s performance beyond following the price of its stock Voting system largely a formality

  • Too many shareholders, who would pay no attention to what’s going on

  • So severe that it makes voting almost meaningless

  • Board likely to be dominated by top corporate officers (the insider directors), who control the board’s agenda and info

• Cost of acquiring info

• Benefits depend on

  • Likelihood that info will change one’s own vote

  • Likelihood that change in one’s own vote will change outcome (vote pivotal)

  • Change in value of stock if outcome is changed (= change in co. value x stake)

• Example 1

  • Assume a co. with value of $10B asked to vote on deal that may lower value by 5% (i.e. 500M)

  • You are suspicious and think chances of this happening are 40%. If you decide to become ‘informed’, you will know for sure

  • You own 0.1% of the stock (10M value) a lot of money, few would own so many in a co.

  • You think that likelihood that your vote is outcome determinative is 0.2%

  • Benefit of becoming informed

    • Likelihood deal is bad: 40%

    • Expected loss to company from bad deal: $500M x 40% = $200M

    • Your portion of expected loss: $200M x 0.1% = $200,000

    • But you only benefit from casting informed vote if vote is pivotal.

      • So expected benefit: $200,000 x 0.2% = 400 pretty low for $10 stake

      • $400 (~30 mins legal advice) most shareholders would not bother to vote

• Example 2

  • Assume co. that you own 3% other shareholders have raised questions about the deal, that you believe vote will be close and the likelihood that your vote is outcome determinative is 7%

  • Benefit of becoming informed is now: 200M x 3% x 7% = 420,000

  • Less severe if less diverse; more severe if more diverse

• S. 14(a) of the Securities Exchange Act (SEC) was designed to introduce more ‘democracy’ by promulgating a set of proxy rules to encourage informed shareholders to be able to vote knowledgeably in corporate elections

  • As most do not attend shareholder meeting in person to cast their votes, but give proxies

  • Proxy = authorization to vote on their behalf for a certain candidate/ proposal

    • vote authorisation to other people – to vote my share in a following way in the next AGM

    • co. distribute proxy statements – disclosure statement relating to the vote, recommendation on how to vote

    • seeking return of a proxy marked voting the way you want them to vote

    • before AGM, vote is mostly settled

How has the paradigm changed? [11/1]

• Reasons:

  1. Ownership structure changed

  2. People have observe that shareholders do not vote in accordance to their paradigm

     • Corporate election are less one-sided

• Changes relating to voting: considered more important now (than 30 years ago)

  • Increased concentration of ownership

    • companies are often held by large shareholders less severe collective action problem

  • Increased institutionalization of voting:

    • large banks, mutual fund companies (usually own 2-9% in a co.), own a lot of stocks in many companies

    • With economies of scope, a company can be helpful to another company

    • Professionally managed, with a lot of advisers

    • ISS would issue voting recommendations to institutional investors

    • Proxy advisors

• Shareholders’ precatory resolutions more likely to get implemented

  • Not all management proposals would get majority, sometimes it fails

• Hedge fund: unregulated mutual fund, smaller, only very rich people buy shares in them

  • Some are smaller and have more specialised investment strategies

  • Active hedge fund: figuring what co. will benefit from the input that would increase in stock price – some are friendly and some are not

• “Just say no” campaigns: shareholders vote against management

• Voting is taken more seriously - ,ore contested issues:

  1. Shareholders often win

  2. Low no. of no votes will embarrass the board motivate them to do things differently

     • Board react to how shareholders vote their...

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