Empty Voting: A European Perspective

Empty Voting: A European Perspective

by

Carl Clottens*

After analyzing the causes and dangers of “empty voting”, i.e. the decoupling of voting rightsand economic rights (risk) in listed companies, this article discusses measures to address thecurrent lack of transparency as well as other more far-reaching measures to prevent abuses.This article focuses on a number of EU directives and regulations in the fields of company andfinancial law which have been adopted or amended recently or which are currently beingprepared or reviewed. The main finding is that, so far, the European Commission has focusedits attention largely on the problem of hidden ownership (through cash-settled derivatives)–which is the mirror image of empty voting–but, wrongly, not on empty voting itself. Anumber of avenues for regulation, and their respective costs and benefits, are explored. Inaddition, relevant national developments for Belgium, France, Germany, the Netherlands,the UK and the US are considered.

Table of Contents ECFR 2012, 1–38

I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

II. Methods of Empty Voting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21. Stock lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32. Hedging (short selling, derivatives) . . . . . . . . . . . . . . . . . . . . . . . . . . 33. Record date capture and post record date trade . . . . . . . . . . . . . . . . . . 5

III. Problems of Empty Voting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

IV. Transparency of Empty Voting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91. Transparency Directive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92. Takeover Directive and Market Abuse Directive . . . . . . . . . . . . . . . . 143. Regulation on short selling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

V. Restrictions of Empty Voting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181. Common law remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192. Prohibition on stock lending and short selling . . . . . . . . . . . . . . . . . . 24

jut P:/0-Verlage/DEG/1_Zeitschriften/ECFR/ECFR_2012/ecfr_4_2012_6513/satzdaten/fahnen/2_Clottens.3dSeite 1 – 38 = 38 Seiten Fach 14 1. Lauf Seite 1

* Dr. iur. (KU Leuven); Research Fellow at the Jan Ronse Institute for Company Law, KULeuven; Guest Professor of company law, HU Brussels; Attorney at Eubelius Brussels.This article is based on the doctoral dissertation publicly defended at the KU Leuven on20 September 2011 and published in Dutch (Carl Clottens, Proportionaliteit van

stemrecht en risico in kapitaalvennootschappen, Antwerp, Biblo, 2012, 545 p.). Iwould like to thank prof. dr. Koen Geens for acting as my promoter and prof. dr. Hans DeWulf, Dirk Heremans, Jean-Marie Nelissen Grade, Jaap Winter and Marieke Wyckaertfor their comments on my thesis. Errors and omissions are mine alone.

3. Suspension or limitation of voting rights . . . . . . . . . . . . . . . . . . . . . 274. Record date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 305. Market abuse . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

VI. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

I. Introduction

The term “empty voting” was first coined in the US by Hu and Black todenounce the voting of shares in a stock company without bearing the under-lying economic risk of such shares1. In contrast with the observation made justthirty years ago by Easterbrook and Fischel that ”[i]t is not possible to sep-arate the voting right from the equity interest” and ”[s]omeone who wants tobuy a vote must buy the stock too”2, they rightly noted that in recent times thedivision of a share into voting rights and economic rights has become possible,or at least easier and cheaper, as a result of several innovations. These innova-tions, which will be elaborated on below (Part II), undermine the foundationsof the theory of “one share – one vote” and threaten the integrity of decisionmaking in the general meeting of shareholders, especially in listed companies(Part III). This paper calls for more transparency (Part IV). But since trans-parency is probably insufficient, further measures should be considered (PartV). We conclude by proposing a balanced mix of remedies after analysing theirrespective costs and benefits (Part VI). This analysis proceeds from a distinctlyEU perspective and focuses on a number of EU directives and regulations inthe field of company and financial law which have been proposed, adopted oramended recently or which are currently under review. We argue that emptyvoting should be regulated at the EU level. However, relevant national rulesand developments for Belgium, France, Germany, the Netherlands and theUK, as well as for the US, are also discussed.

II. Methods of Empty Voting

The most common methods to obtain empty votes consist of: (i) borrowingshares; (ii) buying shares and short selling equivalent shares or derivatives to


1 Henry T. C. Hu & Bernard Black, The New Vote Buying: Empty Voting and Hidden(Morphable) Ownership, 79 S. Cal. L. Rev. 811 (2006). See also Henry T. C. Hu &Bernard Black, Empty Voting and Hidden ownership: Taxonomy, Implications, and Re-forms, 61 Bus. Law 101 (2006); Henry T. C. Hu & Bernard Black, Hedge Funds, Insiders,and the Decoupling of Economic and Voting Ownership: Empty Voting and Hidden(Morphable) Ownership, 13 J. Corp. Fin. 343 (2007). See also infra, note 6.

2 Frank H. Easterbrook & Daniel R. Fischel, Voting in Corporate Law, 26 J. L. & Econ.

395, 410 (1983).

ECFR 4/2012Carl Clottens2

hedge their economic exposure; (iii) buying or borrowing shares and sellingthem between the record date and the general meeting of shareholders.

1. Stock lending

In reality stock lending entails a transfer of title from the lender to the bor-rower. The borrower becomes the owner of the shares in exchange for a fee andfor collateral. But the economic risk of (fluctuations in the price of) the sharesremains with the lender, since the borrower is under the obligation (i) todeliver equivalent shares at the closing date or at the lender’s first request(recall) and (ii) to pay any dividends or other income of the shares to thelender3. Repurchase agreements operate in a similar fashion.

Stock lending is generally useful since it provides liquidity in the financialmarkets. Stock lending was originally developed in order to overcome unex-pected complications in the settlement of transactions4. Before long, it was alsoused for purposes of short selling, i.e. the sale of shares without owning themin order to speculate on a drop in the share price before the closing date or inorder to hedge the economic risk of other (long) positions5. For institutionalinvestors, stock lending constitutes a considerable source of income. But froma corporate governance perspective, stock lending is a matter of concern sinceit can easily be used for purposes of empty voting. Stock lending typically hasno impact on the share price, unless the demand becomes so large that thevolume of shares available for other purposes gets under pressure. Thereforestock lending enables investors to obtain a voting stake without correspondingeconomic risk in a short time frame, at low cost and (as we will see in Part III)anonymously6.

2. Hedging (short selling, derivatives)

Short selling in itself does not bring about empty voting. The bona fide buyer(through the stock exchange) obtains full title to the shares, including voting


3 See e.g. ISLA, Global Master Securities Lending Agreement 2000, available at www.i-sla.co.uk.

4 Onnig H. Dombalagian, Can Borrowing Shares Vindicate Shareholder Democracy?, 42U.C. Davis L. Rev. 1231, 1267 (2008–2009).

5 Henry T. C. Hu & Bernard Black, Equity and Debt Decoupling and Empty Voting II:Importance and Extensions, 156 U. Pa. L. Rev. 625, 641 (2008).

6 This strategy was followed by the hedge fund Laxey Partners to push for the adoption ofa share buy-back program and other changes in the management of British Land (UK,2002): Hu & Black, supra note 2, at 817.

ECFR 4/2012 Empty Voting: A European Perspective 3

rights and economic rights. The lender of the shares bears the economic risk ofthe shares but has no voting rights7. The seller of borrowed shares has anegative exposure to the price of the shares, as a result of his obligationstowards the lender, but he has no voting rights. However, short selling influ-ences the incentives of the seller in voting other shares that he would hold orobtain8.

The economic risk of shares can also be hedged by taking short positions inderivatives which are referenced to the shares9. Derivatives (options, futures,swaps or contracts for difference) are financial instruments whose value isreferenced to, and thus derived from, the value of an underlying market var-iable (exchange rate, interest rate, commodity price, credit risk) or asset (shareprice or index). Derivatives can be used to create economic exposure to theprice of shares that is either similar or inverse to the risk profile of shares (longvs. short position), without actually owning the shares. The use of derivativesoffers several advantages over trade in the underlying shares (e.g. leverage as aresult of cheaper financing, tax avoidance, anonymity, possibility to goshort)10.

Derivatives serve several useful purposes in the financial markets. They allowan investor to transfer and redistribute (hedge) certain market risks to whichhe is exposed (e.g. credit risk, risk of fluctuations in the exchange rate, theinterest rate, or the price of shares or commodities), which is in itself useful.Conversely, derivatives can also be used to speculate on the direction of thesefuture fluctuations, which provides liquidity. Finally, derivatives can be usedto exploit arbitrary price differences between markets that are in some wayconnected. Arbitrage, by using long/short strategies, eliminates these randomdifferences and enhances the efficiency of share pricing. However, the (im-proper) use of derivatives also poses threats to corporate governance, becausederivatives allow certain risks to be hedged completely. This can have anadverse impact on the incentives of shareholders in exercising voting or otherrights attached to shares. Since derivatives by themselves do not confer votingor other rights, at least not formally, they are generally not covered by thetransparency rules, nor are they taken into account for the calculation of other


7 In practice, a problem of “overvoting” can nonetheless emerge, when the custodial bankdoes not inform the lender of the fact that his shares have been lent: Shaun Martin &Frank Partnoy, Encumbered Shares, 2005 U. Ill. L. Rev. 775, 779 and 794 (2005);Marcel Kahan & Edward Rock, The Hanging Chads of Corporate Voting, 96 Geo.

L. J. (1227) 1255–1263 (2007–2008).8 Hu & Black, supra note 6, at 641.9 These shares are then said to be “economically encumbered”, whereas in case of stock

lending they are “legally encumbered”: Martin & Partnoy, supra note 8, at 779–780, 798.10 FSA, Disclosure of Contracts for Difference, Consultation Paper 07/20, November

2007, 12.


thresholds in company law (e.g. the right to call a general meeting, the right tofile a derivative action, or the right to request an inspection of the companybooks).

3. Record date capture and post record date trade

The problem of empty voting is further aggravated by the record date system,in which the number of shares with voting rights held on a specified date sometime before the general meeting of shareholders determines the amount ofvotes that can be validly cast at the general meeting11. This creates additionalscope for empty voting, by allowing for the possibility of buying shares beforethe record date (record date capture) and selling them between the record dateand the general meeting (post record date trade)12. Shares can also be borrowedbefore the record date and sold short before the general meeting; this createsperverse incentives to vote against the company interest, because the share-holder as of record date can profit from a (provoked) sudden drop of the shareprice to buy shares in the market at a discount in order to return them to thelender13. This constitutes a major disadvantage of the record date system, ascompared to the traditional rule where the entitlement to attend the generalmeeting and to vote was determined at the (day of the) general meeting. Ashareholder could still buy shares just before the meeting and sell them after-wards, but he would normally suffer the negative impact on the share price of a


11 See art. 7 of Directive 2007/36/EC on the exercise of certain rights of shareholders inlisted companies, OJ L 184, 14 July 2007, 17–24 (hereafter Shareholders’ Rights Direc-tive).

12 Charles M. Nathan, ’Empty Voting’ and Other Fault Lines Undermining ShareholderDemocracy: the New Hunting Ground for Hedge Funds, in Practising Law Institute,PLI Order No. 9151, November 2006, (425) 430–433 and 438–439; François Barrière,La dissociation du droit de vote et de la qualité d’actionnaire, confirmation d’une rév-olution juridique par la voie réglementaire: les record dates, Bulletin Joly § 57, 279–281 (2007); AMF, Rapport sur les opérations de prêt emprunt de titres en périoded’assemblée générale d’actionnaires (Mansion Report), January 2008, 22; ShareholderVoting Working Group, Review of the impediments to voting UK shares (MynersReport), January 2004, 18.

13 This strategy was followed in the case of Henderson Land (Hong Kong, 2006): Hu &Black, supra note 2, at 834–835; Jonathan Cohen, Negative Voting: Why it destroysshareholder value and a proposal to prevent it, 45 Harv. J. on Legis. (237) 243(2008); Christoph H. Seibt, Verbandssouveränität und Abspaltungsverbot im Aktien-und Kapitalmarktrecht Revisited: Hidden ownership, Empty Voting und Kleinigkeiten,Zeitschrift für Gesellschaftsrecht (795) 800 (2010). For a mathematical model:Alon Brav & Richmond D. Mathews, Empty Voting and the Efficiency of CorporateGovernance, AFA 2009 San Francisco Meetings Paper, (http://ssrn.com/ab-stract=1108632).


suboptimal voting outcome, unless he had otherwise hedged the risk of hisshares or unless the market had not fully absorbed the information and re-flected it in the stock price before he sold his shares14. Obviously, this is not thecase with a sale before the general meeting. A post record date sale is suspectsince a shareholder who expects (to contribute to) an increase in value wouldnormally prefer to hold his shares, unless the sale can be explained by othermotives such as a sudden need for liquidity. In theory, the problem of postrecord date trade can easily be solved by a voting proxy from the seller to thebuyer, but in practice this is impossible when shares are traded anonymouslyon the stock exchange15.

III. Problems of Empty Voting

Although these developments have broadened the scope for empty voting, it isby no means a novel phenomenon. In its widest sense, the notion of emptyvoting covers all situations where someone, whether or not a formal share-holder, can exercise voting rights or voting discretion without being subject tothe economic risk of the underlying shares, or at least while being subject to arelatively (i.e. disproportionately) small risk (cf. the leverage as a result ofmultiple voting rights shares or pyramid structures)16. It is indeed useful todistinguish several degrees of empty voting. Partial empty voting is perhapsless of a problem because shareholders with a small or neutral economic stakein the company only have suboptimal incentives to act in the best interest ofthe company (infra, V.3). Negative voting, by shareholders having an inverseeconomic risk profile and thus an inherent conflict of interest in all companydecisions, presents by far the greatest potential for inefficiency and welfaredestruction17. Holders of a negative economic interest (net short position)have no incentive at all to exercise their voting rights in the best interest ofthe company. On the contrary, they will be inclined to vote in such a way as toprovoke a decline in the value of the company, because they profit both


14 See Frank H. Easterbrook & Daniel R. Fischel, The Economic Structure of Cor-

porate Law, 411, fn. 41 (1991).15 Nathan, supra note 13, at 430–431.16 Hu & Black, supra note 6, at 639. But see e.g. Miriasi Thouch & Thomas Amico, L’empty

voting, 2 Revue de droit bancaire et financier 7 (2008), who prefer a more narrowdefinition.

17 Cohen, supra note 14, at 239–240; Christine Osterloh-Konrad, Gefährdet “Empty Vot-ing” die Willensbildung in der Aktiengesellschaft?, 41 Zeitschrift für Gesell-

schaftsrecht 35, 42–43 and 74 (2012); EP, DG for Internal Policies, The use of share-holder voting rights during the general assembly of company shareholders, Study IP/A/ECON/2008-32, December 2009, 23.


directly from the decision itself (through the extraction of private benefits ofcontrol) as well as indirectly from the resulting drop in the share price.

What is troublesome about the modern techniques of empty voting described inPart II, besides the greater degree of discrepancy that they can create, is that thisdiscrepancy can be intentional instead of merely incidental18. This makes it allthe more likely that the empty votes will actually be used to influence the out-come of the voting process in the general meeting of shareholders, in a way thatwill not maximise shareholder value19. In addition, these modern techniques ofempty voting can be used not only by traditional corporate insiders owingfiduciary duties (directors and controlling shareholders20), but by all marketparticipants21. Activist shareholders, especially hedge funds, are accused ofusing these strategies in the pursuit of quick profit, often at the expense of thelong term interest of the company22. Yet they are not the only market playerswho engage in empty voting. Therefore, any measures against empty votingshould not be restricted to hedge funds23. The Directive on Alternative Invest-ment Fund Managers indeed does not contain any specific measures againstempty voting24. In a way, institutional investors are also responsible for emptyvoting (although, ironically, they are at the same time the greatest advocates of“one share – one vote”) by lending shares to third parties to increase their profitswithout having regard to the potential dangers in respect of the exercise ofvoting rights; as well as by routinely following the recommendations of proxyadvisors (e.g. ISS, Glass Lewis) in voting their portfolio of shares. The fact thatthese institutional investors knowingly and willingly take this risk cannot pre-vent third party effects. As a minimum, transparency of institutional investors’voting policy and lending policy seems warranted (infra, V.2).

As a result of the abovementioned methods, an artificial voting stake (i.e. amajority or blocking minority not backed by economic risk) can determinethe outcome of voting in the general meeting of shareholders. Similar prob-lems can arise in the exercise of other rights which are triggered upon reachingor crossing a certain threshold of voting rights (the right to call a general


18 Kahan & Rock, supra note 8, at 1264–1265.19 For present purposes we will assume that shareholder value is a proxy for the company

interest. For a discussion: Andrew Keay, Shareholder Primacy in Corporate law: Can itSurvive? Should it Survive?, 7 ECFR 369–413 (2010).

20 In Germany, minority shareholders owe fiduciary duties as well: see infra, V.1.21 Dombalagian, supra note 5, at 1258–1259. A classic example are so-called “zero-cost

collars”, i.e. a combination of put and call options that can be used by directors to limitthe economic risk of their shares at zero cost: Hu & Black, supra note 6, at 707.

22 Nathan, supra note 13, at 428–430.23 EP Study, supra note 18, at 31.24 Directive 2011/61/EU on Alternative Investment Fund Managers, OJ L 174 of 1 July

2011, 1–73.


meeting and the right to submit shareholder proposals, the right to file aderivative action, or the right to request an inspection of the companybooks)25. In the US, the Delaware Chancery Court has opened the door forempty appraisal26 and empty inspecting27. As for empty voting, however, theCourt has shown its willingness in principle to provide a remedy on the basisof vote buying doctrine (infra, V.1).

These problems arise primarily in listed companies28, although certain abusescan also present themselves in non-listed companies29. Stock lending and de-rivatives transactions are much easier and cheaper when the underlying sharesare publicly traded. The record date is mandatory for listed companies only. Inaddition, many rules for listed companies depend on thresholds (e.g. transpar-ency, takeovers). As these companies need to access the capital market forfinancing, they are obviously more concerned by a potential loss of investorconfidence in the integrity of shareholder voting. In addition, empty voting canalso affect the market for corporate control (merger arbitrage30). Empty votingis thus not purely a corporate governance issue, but also a matter of marketefficiency31. Therefore, it should be regulated at EU level in the first place.

The opposite situation of empty voting is where an investor (still) has moreeconomic exposure than (formal) voting rights as a result of a long position inderivatives (e.g. cash-settled equity swaps). This presents other problems,


25 Hu & Black, supra note 6, at 721 et seq. (e.g. empty suing, inspecting, appraisal, share-holder proposals). A related strategy is dividend arbitrage (see infra, V.4, fn. 190).

26 In re Appraisal of Transkaryotic Therapies, Inc., No. Civ.A. 1554-CC; WL 5173804(Del. Ch. 2 May 2007). See Nathan, supra note 13, at 432–433.

27 Deephaven Risk Arb. Trading Ltd. v. UnitedGlobalCom, Inc., No. Civ.A. 379-N; 2005WL 1713067 (Del. Ch. 13 July 2005). See Michael Lee, Empty Voting: Private Solutionsto a Private Problem, 2007 Colum. Bus. L. Rev. 883, 885–887 (2007).

28 ECGF, Statement on Empty Voting and Transparency of Shareholder Positions, 20February 2010, 1, no. 3; EP Study, supra note 18, at 29–30.

29 EP Study, supra note 18, at 30. A potential abuse in non-listed companies could takeplace when a squeeze-out is arranged through stock lending agreements. The GermanBundesgerichtshof has, however, rejected that view: BGH 16 March 2009, BGHZ 180,154; Osterloh-Konrad, supra note 18 at 41 and 77–80.

30 There is anecdotal evidence of empty voting strategies being used in the proposedmerger between Mylan Laboratories and King Pharmaceuticals (US, 2004), in the pro-posed takeover bid of Deutsche Börse for LSE (EU, 2005) and in the takeover battle forABN Amro (EU, 2007). See Hu & Black, supra note 6, at 674–675.

31 See in the same sense, with regard to transparency of shareholdings: MichaelC. Schouten, The Case for Mandatory Ownership Disclosure, 15 Stan. J. L. Bus. &

Fin. 127, 174–175 (2009). See with regard to the information obligations of listed com-panies: Gaetane Schaeken Willemaers, Le régime européen de transparence des sociétéscotées: analyse des objectifs et propositions de réforme, 108 Revue Pratique des Soci-

étés (257) 266 et seq. (2009).


which can be dealt with by increased transparency32. As it will be shown below(Part IV), the European focus so far has been almost exclusively on this pro-blem of “hidden ownership”.

IV. Transparency of Empty Voting

1. Transparency Directive

The Transparency Directive at present offers hardly any transparency ofempty voting positions established through the abovementioned methods(except maybe for post record date trade and in contrast to the transparencyof more traditional deviations of “one share – one vote”)33. Market partici-pants and supervisors agree that a reform of the current regime is appropriateand even necessary34. However, there is less agreement as to what constitutesthe best way to achieve more transparency and as to whether increased trans-parency alone can suffice to address empty voting.

As for stock lending, it is not clear which rules apply to begin with. In somemember states stock lending is treated as a temporary transfer of voting rights(art. 10(b) of the Transparency Directive), but most member states assume thatstock lending is covered by the general rule of art. 9 of the TransparencyDirective since it involves a transfer of title to the shares35. In this case, how-


32 But see Dirk Zetsche, Against Mandatory Disclosure of Economic-Only Positions Ref-erenced to Shares of European Issuers – Twenty Arguments against the CESR Proposal,11 EBOR 231–252 (2010) (denying that there would be a hidden ownership problemunder the current transparency rules because these situations would be caught under therules for acting on behalf); Soumyadri Chattopadhyaya, The Effectiveness of BeingInvisible: Hedge Funds, Hidden Ownership and Corporate Governance, 8 ECFR

305–333 (2011) (arguing that mandatory disclosure of economic only ownership canhave a deleterious effect on the financial markets).

33 ISS Europe, ECGI, Shearman & Sterling LLP, Report on the Proportionality Principlein the European Union, 18 May 2007, 9; EC, Impact Assessment on the Proportionalitybetween Capital and Control in Listed Companies, SEC (2007) 1705, Brussels, 12December 2007, 79; Schouten, supra note 32, at 178; Osterloh-Konrad, supra note 18at 44.

34 Mazars, Study conducted for the European Commission on the application of selectedobligations of directive 2004/109/EC, 2009, 126–127; CESR, Feedback Statement on theCall for evidence on the possible level 3 work on the Transparency Directive, CESR/08-66, February 2008, 2. See also Schouten, supra note 32, at 178.

35 EC Impact Assessment, supra note 34, at 78; EC staff working document, The review ofthe operation of Directive 2004/109/EC: emerging issues, Brussels, 27 May 2010,SEC(2009) 611, 81, no. 10.3; Mazars Study, supra note 35, at 124 and 125. But see ECGF,Statement on Empty Voting and Transparency of Shareholder Positions, 20 February2010, 2, no. 4 (argument based on art. 10(b) Transparency Directive).


ever, the fact that the borrower bears no economic risk (differently from abuyer) is not transparent36. A question also arises as to whether the lender hasto notify the shift from actual to potential voting rights when he reserves forhimself the right to recall the shares at all times37. In most member states thisonly requires an update at the end of each year38. The circumstance that thelender has no actual voting rights is thus not transparent39. Another question iswhether the borrower has to notify if the shares are subsequently sold or lentto a third party (e.g. for short selling). Most member states allow netting ofintra-day positions40. Some member states even grant an exemption if theshares are transferred before the end of the next trading day41.

As to derivatives, art. 13 of the Transparency Directive covers financialinstruments that result in an entitlement to acquire, on such holder’s owninitiative alone, under a formal agreement, shares to which voting rights areattached, already issued, of an issuer whose shares are admitted to trading ona regulated market42. The Transparency Directive does not cover instrumentswhich oblige the holder to acquire shares or give him the right to sell shares,because there is no direct link with underlying shares or the exerciseof voting rights. Economically, however, writing a put option is more orless equivalent to buying a call option: they both create a long exposure tothe underlying shares43, although they do so very differently with regard to


36 Schouten, supra note 32, at 173–174. See also AMF, Mansion Report, supra note 13, at 5and 9.

37 EC staff working document, supra note 36, at 81, no. 10.4; Mazars Study, supra note 35,at 124–125; CESR, Summary of responses to Questionnaire on transposition of theTransparency Directive, CESR/08-514 b, September 2008, 3, no. 14; CESR, FeedbackStatement on the Call for evidence on the possible level 3 work on the TransparencyDirective, CESR/08-66, February 2008, 2.

38 AFM, Wet op het financieel toezicht. Leidraad voor aandeelhouders, January 2012, 23;AMF, Mansion Report, supra note 13, at 5.

39 But see BaFin, Emittentenleitfaden, 28 April 2009, 140–142 and 166 (lender has to notifyif borrower has the right to transfer the shares to a third party).

40 CESR, Summary of responses to Questionnaire on transposition of the TransparencyDirective, CESR/08-514 b, September 2008, 5, no. 27.

41 FSA, Handbook. Disclosure and Transparency Rules, no. 5.1.3(6); AFM, Wet op hetfinancieel toezicht. Leidraad voor aandeelhouders, January 2012, 22–23. In Belgium,opposite short term transactions require only one notification of the net result (art. 19 ofthe Royal Decree of 14 February 2008).

42 See also recital 13 and art. 11 of the Implementing Directive 2007/14/EC (OJ L 69 of 9March 2007, 27) and CESR, Final Technical Advice on Possible Implementing Measuresof the Transparency Directive, CESR/05-407, June 2005, 60–70.

43 According to the “put/call parity” theorem: Anish Monga, Using Derivatives to Ma-nipulate the Market for Corporate Control, 12 Stan. J. L. Bus. & Fin. (186) 206–207(2006–2007). See also Martin & Partnoy, supra note 8, at 789.


risk and potential profits44. Furthermore, the fact that a shareholder hashedged his economic risk through a put option can affect his voting incen-tives.

Information on the measure of separation between voting and economicrights can be relevant both for market efficiency and corporate governance.Some authors have thus suggested a fundamental change of the transparencyrules, whereby the notification duty would be triggered by a double thresh-old of voting rights and/or economic interest45. According to the majorityview, however, the identity of investors with substantial “economic only”positions as a result of derivatives is only relevant when these persons haveinformal access to the voting rights attached to the underlying shares (oftenheld by the counterparty to hedge the risk of its short position). This viewwas adopted by the FSA in 200946 and followed by other member states innational reforms47. The proposal for amendment of the Transparency Direc-tive only deals with these situations of hidden ownership by extending thenotification duty to holders of long positions in cash-settled derivatives48. In2009 the Dutch Ministry of Finance held a public consultation on the pos-sible introduction of a notification duty in respect of all economic short


44 When buying a call option the risk is limited to the option premium, while the risk ofwriting a put option is the strike price times the number of the underlying instruments.Regarding the potential profit, the buyer of a call option may – theoretically – profitindefinitely, while the profit of the seller of the put is limited to the option premium.

45 Schouten, supra note 32, at 138–148; Seibt, supra note 14, at 829.46 FSA, Disclosure of Contracts for Difference, Policy Statement 09/3, Feedback on

CP08/17 and final rules, March 2009. See also FSA, Handbook. Disclosure and Trans-parency Rules (in particular DTR 5.3).

47 EC, The review of the operation of the Transparency Directive, May 2010, 73–76. Seeart. 5:45, par. 10 of the Dutch Law on Financial Supervision (Wft) (as of 1 January 2012);§ 25 a of the German Securities Trading Act (WpHG) (as of 1 February 2012). Under art.L 233-7, al. 2 of the French Commercial Code, cash-settled derivatives have to benotified to the AMF, but (for the time being) only on a separate, non-autonomous basis.

48 See recital 8 and art. 13(1)(b) of the Transparency Directive, as modified by the Proposalfor a Directive amending the Transparency Directive, Brussels, 25 October 2011,COM(2011) 683; EC, Report on the operation of Directive 2004/109/EC, SEC(2009)243, Brussels, 27 May 2010, 5, no. 13 and 7, no. 19; EC, The review of the operation ofthe Transparency Directive, May 2010, 15, no. 30 and 68–79; Pierre-Henri Conac, Cash-Settled Derivatives as a Takeover Instrument and the Reform of the EU TransparencyDirective, in The European Financial Market in Transition (49) 65–68 (H. S.Birkmose et al. eds., 2012). See also ESME, Views on the issue of transparency ofholdings of cash settled derivatives, November 2009; CESR, Proposal to extend majorshareholding notifications to instruments of similar economic effect to holding sharesand entitlements to acquire shares, CESR/09-1215 b, January 2010. But see Dirk Zet-sche, supra note 33.


positions49 on a non-autonomous50 and gross51 basis. But no further stepswere taken in this direction52.

Another solution would be to require more information to be providedupon reaching or crossing a classic threshold in terms of voting rights53.But the problem remains that these thresholds are too high (5% accordingto art. 9(1) Transparency Directive; lowered to 3% by the UK and Germany)and the notification periods too long, making it easy to escape notification orat least suspension of voting rights for lack thereof. In addition, this might bea disproportionate measure to solve a problem that only occurs around thegeneral meeting. More specific proposals were put forward to require share-holders holding more than a certain percentage of voting rights to indicate,in the run-up to the general meeting, to what extent and how they havehedged their economic risk54. In France a requirement was introduced forpersons, who, alone or in concert, hold more than 0,5% of voting rights as aresult of stock lending or an agreement with similar effect, to notify this tothe AMF and to the company on the record date at the latest (i.e. 3 daysbefore the general meeting in France). The information to be provided in-cludes the identity of the lender, the expiration date of the agreement and thevoting agreement if any. Failure to comply with this obligation results insuspension of the voting rights attached to the borrowed shares55. This rule


49 See Consultatiedocument Voorstel wijziging Wft uitbreiding meldingsplicht substan-tiële zeggenschap- en kapitaalbelangen met economische long posities, www.minfin.nl/Actueel/Consultaties/2009/09. This consultation document was delivered to the DutchParliament on 21 September 2009.

50 The notification duty would thus only be triggered when the economic long positionreaches a threshold.

51 Thus without netting long and short positions. Otherwise it would be easy to hide along position in shares using a put option which is out of the money. The Regulation onShort Selling, however, provides for a notification of net positions because this infor-mation serves a different goal (see infra, IV.3).

52 A recent Law of 1 December 2011 only introduced a notification obligation with respectto certain cash-settled derivatives.

53 EC staff working document, The review of the operation of the Transparency Directive,May 2010, 86, no. 10.19; Mazars Study, supra note 35, at 131.

54 ECGF, Statement on Empty Voting and Transparency of Shareholder Positions, 20February 2010, 2, no. 5; EC Impact Assessment, supra note 34, at 79; EP Study, supranote 18, at 33 and 34–35.

55 Art. L 225-116 of the French Commercial Code, as introduced by Law of 22 October2010. See also AMF, Rapport sur les opérations de prêt emprunt de titres en périoded’assemblée générale d’actionnaires, January 2008, 13. Contrary to the recommendationin this report, the voting rights are only suspended when the notification obligation isnot complied with. The French legislature thus has not taken a stance against emptyvoting per se: Hervé Le Nabasque, Commentaire des principales dispositions de la loi de


could be extended to include transparency of hedging56 or even post recorddate sales.

Several member states have recently introduced (France, Germany) or areconsidering (Netherlands) a notification duty of intentions upon reaching acertain threshold of voting rights (usually 10% or higher)57. As soon as ashareholder crosses this threshold, he has to indicate what goal he pursueswith his investment (e.g. the acquisition of control or influence over thecompany) and how the acquisition was financed (e.g. debt or equity, and,in case of debt, under which conditions and guarantees). A similar obligationexists in the US58. In 2008, the European Parliament called for the introduc-tion of a notification of intentions59. This was briefly considered60, but even-tually not included in the reform of the Transparency Directive. The existingnational regimes have scant attention for the question to which extent votingrights correspond with economic risk. In France, the notification has tomention which part of the acquisition was obtained through stock lending;the identity of the lender is not to be mentioned (at least not under thisrule61). In order to tackle empty voting, the notification duty should focusnot so much on the goal and financing of the acquisition (although especiallythe latter can reveal the time horizon of the investor) but rather on the issueof decoupling62.

However, this probably would not present an ideal solution. First, the thresh-old is set too high. In reality, the outcome of voting on contested agenda itemscan turn on smaller margins. Furthermore, the disclosure obligation is only


régulation bancaire et financière du 22 octobre 2010 intéressant le droit des sociétés et ledroit financier, 128 Revue des Sociétés 547, no. 40 (2010).

56 See e.g. the Dutch consultation proposal mentioned above.57 EC staff working document, supra note 36, at 95–96; EC, Report on more stringent

national measures concerning the Transparency Directive, SEC (2008) 3033, Brussels, 10December 2008, 11 and 28.

58 Section 13(d) Securities and Exchange Act 1934 and Schedule 13(d), 17 CFR 240.13d-101. See Michael C. Schouten & Mathias M. Siems, The Evolution of Ownership Dis-closure Rules Across Countries, 10 Journal of Corporate Law Studies 451, 477–478(2010).

59 EP, Resolution with recommendations to the Commission on transparency of institu-tional investors (K.H. Lehne, Committee on Legal Affairs), 23 September 2009,P6_TA(2008)0426. See also the preceding report of the EP, Department for Economicand Scientific Policy, Hedge funds: Transparency and conflicts of interest, 2007, 28.

60 EC staff working document, supra note 36, at 95–98; Mazars Study, supra note 35, at140–141.

61 But see art. L 225-116 of the French Commercial Code, discussed above.62 For a proposal that is similar but broader (covering all deviations from “one share – one

vote”): ECGF, Statement on Proportionality, 25 August 2007, 2; Paper of the ECGFWorking Group on Proportionality, June 2007, 25.


triggered by long positions (non-autonomous transparency). Also, failure tocomply is not always adequately sanctioned63. The enhanced sanction regimeof the Transparency Directive could overcome this64. Still, the most funda-mental flaw of this approach is that the explanations will tend to be vague orboiler-plate. For this reason, the Dutch proposal only requires a “yes/no”statement of objection to the company strategy65. Finally, a disclosure obliga-tion can hamper the market for control. This is especially the case when ashareholder who has indicated that he has no intention of obtaining control isforbidden from launching a public takeover bid. For this reason the UK doesnot seem to favour such a rule – although it has put in place a “put up or shutup” rule which can be triggered by mere market rumours or speculations66, aswell as a similar disclosure obligation which operates at the request of thecompany concerned67.

2. Takeover Directive and Market Abuse Directive

The Takeover Directive allows member states to provide for increased trans-parency during takeover bids68. In most member states, during the offer peri-od, the offeror, the offeree, the members of the board of the offeror or theofferee, persons acting in concert with them and persons holding at least 1% ofthe securities of the offeree, have to disclose any acquisition or disposal of


63 In Germany, no specific sanctions apply to a violation of § 27 a of the Securities TradingAct (WpHG), as introduced by the Law of 18 August 2008 (Risikobegrenzungsgesetz).

64 See art. 28bis and 28ter of the Transparency Directive, as introduced by the Proposal fora Directive of the European Parliament and the Council amending the TransparencyDirective, Brussels, 25 October 2011, COM(2011) 683. See also EC Communication,Reinforcing sanctioning regimes in the financial services sector, COM(2010) 716, Brus-sels, 8 December 2010. Under certain circumstances a misleading declaration can alsoamount to market abuse.

65 See Wetsvoorstel tot wijziging van de Wet op het financieel toezicht, de Wet giraaleffectenverkeer en het Burgerlijk Wetboek naar aanleiding van het advies van de Com-missie Corporate Governance Code van 30 mei 2007, Kamerstukken II, 2009–2010, no.32 014.

66 Takeover Panel, Put Up or Shut Up and No Intention to Bid Statements, ConsultationPaper PCP 2004/1, 25 February 2004. See also, for recent reform proposals: Consulta-tion Paper PCP 2010/2, Review of certain aspects of the regulation of takeover bids, 1June 2010, 66–79 and Code Committee Statement 2010/22, 21 October 2010, 11–13.

67 Section 793 Companies Act 2006.68 Art. 3(1)(d) of the Takeover Directive states the general principle that false markets must

not be created in the securities of the offeree, of the offeror or of any other companyconcerned by the bid. With a view to ensuring compliance with this principle, memberstates may lay down additional conditions and provisions more stringent than those ofthis Directive for the regulation of bids (art. 3(2)(b) Takeover Directive).


securities issued by the offeree, the offeror or the company whose securitiesare offered by way of consideration. In France, the offeror and the offeree areeven prohibited from trading in securities of the offeree altogether during theacceptance period and in the period from the publication of the intention tolaunch a bid and the publication of the bid; between the publication of the bidand the acceptance period, acquisitions are subject to restrictions69. However,this prohibition does not cover transactions in derivatives. In November 2005,the UK Takeover Panel extended its rules to dealings in derivatives (e.g. in-cluding cash-settled contracts for difference) by persons holding more than1% of the shares of the offeree or the offeror (unless the latter offers only acash consideration)70. Only economic long positions are taken into account forthe calculation of the threshold for disclosure71; but once the 1% threshold iscrossed, all transactions have to be notified, including short transactions72.Similar obligations existed already for the offeror, the offeree and concertparties73. In 2009, the Takeover Panel further clarified and improved severalaspects of the regime74. Since then, the disclosure obligation applies to anyonehaving an interest in securities of more than 1% at the beginning of the offerperiod (opening position disclosure), whereas before the obligation was onlytriggered by dealings during the offer period75. Besides, an extended compositedisclosure was introduced, whereby someone having an interest in securitiesof the offeree of more than 1% also has to notify dealings in the offeror andvice versa76. This makes Rule 8.3 suitable to detect strategies of merger arbi-


69 Art. 231–38 et seq. Règlement Général AMF; Bertrand Durupt & Carole Uzan, Inter-ventions en période d’OPA: projet de réforme, 14 Bulletin Joly Bourse 350 (2008).

70 Note 2 under Rule 8 of the Takeover Code. See Panel on Takeovers and Mergers, Dealingsin Derivatives and Options, PCP 2005/1, 7 January 2005 and PCP 2005/2, 13 May 2005,and the response of the Panel to both consultations in RS 2005/2, 5 August 2005.

71 The expanded definition of “Interests in securities” (as of 7 November 2007) is as follows:”A person who has long economic exposure, whether absolute or conditional, to changes inthe priceof securities willbe treated as interested in those securities.A personwho only hasashort position in securities will not be treated as interested in those securities.”

72 The definition of “Dealings” henceforth comprises inter alia: ”(g) any other actionresulting, or which may result, in an increase or decrease in the number of securities inwhich a person is interested or in respect of which he has a short position” (emphasisadded). See also Takeover Panel, PCP 2005/1, 14, no. 7.4.

73 See Rule 8.1, 8.2 and 8.3 Takeover Code respectively.74 Takeover Panel, Extending the Code’s disclosure regime, PCP 2009/1, 8 May 2009 and

RS 2009/1, 16 December 2009.75 Takeover Panel, Extending the Code’s disclosure regime, PCP 2009/1, 8 May 2009, 11–

40 and RS 2009/1, 16 December 2009, 10; Takeover Panel, Derivatives and OptionsRegime: 2007 Review, PS 2007/15, 29 June 2007, 5–6. See also FSA, Disclosure ofContracts for Difference, Consultation Paper 07/20, November 2007, 36, no. 4.22.

76 Takeover Panel, Extending the Code’s disclosure regime, PCP 2009/1, 8 May 2009, 11–40; RS 2009/1, 16 December 2009, 10 et seq.


trage77. Still, notification is not required when the offer is exclusively in cash78.Yet merger arbitrage is also possible in that case. On the other hand, theTakeover Panel did not take up suggestions, at least for the time being, toconsider stock lending as dealings79, to extend the definition of interest insecurities to persons having only a substantial short position80, nor to lowerthe threshold for disclosure to 0,5%81.

Art. 6(4) of the Market Abuse Directive already provides for increased trans-parency as to company insiders. Persons discharging managerial responsibil-ities within an issuer of financial instruments (and persons closely associatedwith them) have to disclose the existence of transactions conducted on theirown account relating to shares of the issuer, or to derivatives or other financialinstruments linked to them. This notification contains a description of thefinancial instrument82. For lack of further clarification, all transactions in de-rivatives are covered, whether they are cash-settled of equity-settled. Unlikeunder the Transparency Directive, short transactions in derivatives have to benotified as well83. Stock borrowing is also included. In the pending proposalfor a Market Abuse Regulation, which is to replace the Market Abuse Direc-tive, the optional minimum threshold84 is made mandatory and increased from5.000 to 20.000 EUR85. In the US, a similar disclosure obligation exists forinsiders on the basis of economic (instead of beneficial) ownership86.


77 Such strategies were followed by hedge funds in Deutsche Börse’s bid for LSE (EU,2005) and in the merger of Mylan Laboratories with King Pharmaceuticals (US, 2004–2005). See Hu & Black, supra note 6, at 674–675.

78 Note 1 under Rule 8 Takeover Code does not provide any justification for this exemp-tion.

79 Takeover Panel, Extending the Code’s disclosure regime, PCP 2009/1, 8 May 2009, 48–71 and RS 2009/1, 16 December 2009, 38–47; Derivatives and Options Regime: 2007Review, PS 2007/15, 29 June 2007, 6. See also RS 2005/2, 5 August 2005, 41 et seq.

80 Takeover Panel, Extending the Code’s disclosure regime, PCP 2009/1, 8 May 2009, 72–74 and RS 2009/1, 16 December 2009, 48; Derivatives and Options Regime: 2007 Re-view, PS 2007/15, 29 June 2007, 6. See also RS 2005/2, 5 August 2005, 13.

81 Takeover Panel, Review of certain aspects of the regulation of takeover bids, PCP 2010/2, 1 June 2010, 31–35 and Code Committee Statement 2010/22, 22.

82 Art. 6(3)(d) of Commission Directive 2004/72/EC of 29 April 2004 implementing theMarket Abuse Directive, OJ L 162, 30 April 2004, 70–75.

83 Schouten, supra note 32, at 174.84 Art. 6(2) of Directive 2004/72/EC.85 Art. 14(3) of the proposal for a regulation on insider dealing and market manipulation

(market abuse), COM(2011) 651, Brussels, 20 October 2011; EC, Public consultation ona revision of the Market Abuse Directive, Brussels, 25 June 2010, 15.

86 Section 16(d) Securities and Exchange Act. For 10% shareholders, notification of eco-nomic ownership is on a non-autonomous basis: Hu & Black, supra note 6, at 653.


3. Regulation on short selling

The Regulation on short selling and certain aspects of credit default swapsprovides for transparency of significant net short positions in shares (as well assovereign debt and credit default swaps)87. Private notification to the compe-tent authorities is required when a net short position in relation to the issuedshare capital of a company that has shares admitted to trading on a tradingvenue (regulated market or MTF) reaches or falls below 0,2% of the issuedshare capital of the company concerned and each 0,1% above that88. Publicdisclosure is only required for net short positions that reach or fall below 0,5%of the issued share capital and each 0,1% above that89. These requirementsapply to persons domiciled or established within or outside the EU90. Theobjective of this transparency regime is quite different. Whereas the Trans-parency Directive is concerned with the exercise of control over the company,the Regulation on Short Selling aims at preserving market integrity and avoid-ing market abuse91. Hence a number of technical differences appear, mostnotably with regard to netting of long and short positions92 and the lowerthresholds for notification93. The transparency of economic long and shortpositions is thus not symmetrical. However, transparency of substantial netshort positions in shares can contribute to the prevention of empty voting.Indeed, the exposure to economic risk is also relevant for the incentives in theexercise of voting rights. Of course this measure can only reach the mostextreme situations of negative voting (supra, III), and not even all of them94.


87 Regulation 236/2012 of the European Parliament and the Council on short selling andcertain aspects of credit default swaps, OJ L 86, 24 March 2012, 1–24. The transparencyregime is in line with the earlier proposal by CESR (ESMA), Model for a Pan-Europeanshort selling disclosure regime, 2 March 2010, CESR/10-088. Yet the Regulation goesfurther by also providing for restrictions and even a ban on short selling under certaincircumstances (infra, V.2).

88 Art. 5 of the Regulation on Short Selling.89 Art. 6 of the Regulation on Short Selling.90 Art. 10 of the Regulation on Short Selling.91 CESR, Model for a Pan-European short selling disclosure regime, CESR/10-088, 2

March 2010, 11, no. 57.92 Art. 3(4) of the Regulation on Short Selling. See art. 13(1bis) Transparency Directive, as

introduced by the Proposal for a Directive amending the Transparency Directive, Brus-sels, 25 October 2011, COM(2011) 683.

93 See art. 9(1) of the Transparency Directive, which sets the initial threshold for notifi-cation at 5%. See also art. 3(1) of the Transparency Directive, as amended by theProposal for a Directive amending the Transparency Directive, Brussels, 25 October2011, COM(2011) 683, which allows the home member state to set lower notificationthresholds but no longer to impose other requirements that would be more stringentthan those laid down in the Directive.

94 Osterloh-Konrad, supra note 18, at 44, fn. 18.


Indeed, empty voting can also occur without a net short position: e.g. a share-holder can have adverse incentives (i.e. a conflict of interest) in the exercise ofvoting rights when he has borrowed shares of one company while having alarger stake in another company which is a party to a proposed merger (mergerarbitrage)95.

V. Restrictions of Empty Voting

In order to eradicate empty voting it does not suffice to make stock lendingand short selling more transparent. Unlike for “hidden ownership”, transpar-ency constitutes only a first step to prevent empty voting. Indeed, it does notprevent that shareholders can still exercise voting rights attached to shareswithout bearing the underlying economic risk. Of course, to some extentmarket participants will be deterred from engaging in empty voting as a resultof increased transparency96. When their hidden strategies are revealed, theybecome less attractive because other market participants can adapt their be-haviour accordingly. On the other hand, it should be noted that some marketplayers (e.g. hedge funds) are less concerned about their reputation than banksor other financial, commercial or industrial enterprises. But then again, forbanks and institutional investors the financial incentives to accommodatestock lending and short selling may simply be too strong to resist.

Insofar as empty voting is considered undesirable, restrictions or even a pro-hibition of empty voting are therefore inevitable97 . The idea that additionalmeasures are necessary seems to be gaining support in the US. Hu and Blackoriginally advocated increased transparency only, but in recent work they havemade a number of specific proposals for further regulation98. In the EU, thereare also proposals to address empty voting99, but they seem to have found littleresonance so far100. A number of avenues for regulation of empty voting areexplored hereafter.


95 In this situation an “indirect negative interest” is present: Osterloh-Konrad, supra note18, at 42 and 74. Hu and Black call this empty voting through “related non-host assets”.

96 Hu & Black, supra note 6, at 684, 694; Robert B. Thompson & Paul H. Edelman,Corporate Voting, 62 Vand. L. Rev. 127, 156–157 (2009).

97 In this sense: AMF, Mansion Report, supra note 13, at 3.98 Hu & Black, supra note 6, at 694–721. See also Cohen, supra note 14, at 251–252. But

see Lee, supra note 28, at 883–911.99 EC, The Review of the operation of the Transparency Directive, May 2010, 86–87;

Mazars Study, supra note 35, at 131–132. See also, more hesitant, ECGF, Statement onEmpty Voting and Transparency of Shareholder Positions, 20 February 2010, 2, no. 5.

100 EC, Feedback Statement, Summary of responses to the consultation by DG InternalMarket and Services on the modernisation of the Transparency Directive, Brussels, 17


1. Common law remedies

A first question is whether these new forms of empty voting can be addressedunder traditional common law remedies, which have proven more or lesssuccessful in the past in preventing deviations from “one share – one vote”(vote buying, law evasion, abuse of rights, fiduciary duties). Both in the USand in the EU, the merits and limits of these doctrines as ex post remediesagainst (abusive forms of) empty voting have been analysed.

Especially in the US, empty voting is primarily analysed in terms of votebuying101. However, the views are split on the question whether empty votingby means of stock lending or hedging can be addressed by this common lawdoctrine. These techniques do not easily fit within the classic definition of votebuying. Strictly speaking, no voting rights are bought but actual shares, theeconomic risk of which is shifted back to the lender or subsequently hedged ina separate transaction with one or more third parties102. So what happens infact is rather the opposite. Nobody is forced to vote in a certain way inexchange for a personal consideration. Further, there is not only controversyabout the applicability of vote buying doctrine, but also as to whether specificinstances of empty voting103 would pass the test developed by the Delawarecourts to assess the legality of vote buying (demanding absence of object orpurpose to defraud or disenfranchise the other stockholders and proof ofintrinsic fairness)104.


December 2010, 24. See also ECGF, Statement on Empty Voting and Transparency ofShareholder Positions, 20 February 2010, 2, no. 5. But see EP Study, supra note 18, at23–24, 36–38 (in favour of repressive measures against negative voting, which consti-tutes a form of market abuse).

101 Hu & Black, supra note 2, at 811, 861–862; Kevin C. Cunningham, Examination ofJudicial Policy on Corporate Vote Buying in the Context of Modern Financial Instru-ments, 64 N.Y.U. Ann. Surv. Am. L. 293–342 (2008).

102 Nathan, supra note 13, at 437; Monga, supra note 44, at 202; Hu & Black, supra note 6,at 640–641.

103 See e.g. with regard to the actions of Perry Corp. in the proposed merger betweenMylan Laboratories and King Pharmaceuticals: Jonathan J. Katz, Barbarians at theBallot Box: The Use of Hedging to Acquire Low Cost Corporate Influence and itsEffect on Shareholder Apathy, 28 Cardozo L. Rev. 1483, 1513–1515 (2006–2007);Monga, supra note 44, at 200–203. The case was dismissed at the plaintiff’s requestafter the cancellation of the merger plans: Marc Weingarten & Morgan O. Mirvis, Vote-Buying raises Questions under Anti-Fraud Rules, Practising Law Institute, PLIOrder No. 10160, September 2006, 407–413.

104 For a discussion of the landmark case of Schreiber v. Carney, 447 A.2 d 17 (Del. Ch.1982) and later developments: Thomas J. André, Jr., A Preliminary Inquiry into theUtility of Vote Buying in the Market for Corporate Control, 63 S. Cal. L. Rev. (533)545–547 (1990); Douglas R. Cole, E-Proxies for Sale? Corporate Vote-Buying in theInternet Age, 76 Wash. L. Rev. (793) 824–826 (2001); Joe Pavelich, The Shareholder


On the other hand, it cannot be excluded that vote buying doctrine would beconsidered applicable in a more functional approach105. In spite of technicaldifferences, there is no doubt that the underlying rationale of vote buying isalso present in situations of empty voting. In the case of Kurz v. Holbrookthe Delaware Chancery Court held that the courts have to provide a remedyon the basis of vote buying against detrimental forms of empty voting, i.e.when a shareholder uses empty voting to further his private interests to thedetriment of the company interest by forcing a decision which does notmaximise firm value106. The court suggested that the test amounts to ques-tioning whether the new forms of decoupling cause a misalignment betweenthe interest of the person concerned and the company. However, on the factsof the case, the court found no such misalignment since the defendant had nopersonal or contrary economic interest (e.g. due to a short position) and thusno reason to vote in a way that would not, in his opinion, maximise firmvalue.

In the EU, the prohibition of vote buying is generally considered absoluteand, notably in France and Germany, contravention can lead to (quasi)criminal sanctions107. Nonetheless, empty voting by means of stock lendingor derivatives is not considered a violation of this prohibition108. The sameapplies for states where the prohibition of vote buying is not legally en-shrined, like Belgium109 and the Netherlands110 . In addition, all EU coun-


Judgment Rule: Delaware’s Permissive Response to Corporate Vote-Buying, 31J. Corp. L. 247–265 (2005–2006).

105 Cunningham, supra note 102, at 321–323; Katz, supra note 104, at 1509 and 1513;Monga, supra note 44, at 203.

106 Kurz v. Holbrook, 989 A.2 d 140; 2010 WL 451029 (Del. Ch. 9 February 2010). SeeMichael C. Schouten, The Mechanisms of Voting Efficiency, University of CambridgeCentre for Business Research Working Paper no. 411, 2010, at 44–47, 50–51 and 53–54.

107 Art. L 242-9 of the French Commercial Code and § 405, par. 3, 6�-7� of the GermanCompany Law. See also art. 35(c) of the amended proposal for a Fifth Company LawDirective (OJ C 240/2, 9 September 1983, 24), where vote buying was listed as aseparate ground for nullifying voting agreements.

108 Jean-Marc Moulin, Le prêt-emprunt de titres et la question de vote en assemblée, 14Bulletin Joly Bourse 202, fn. 3 (2008); Katja Langenbucher, Aktien und- Kapi-

talmarktrecht 114 (2008); Holger Fleischer, Finanzinvestoren im ordnungspoliti-schen Gesamtgefüge von Aktien-, Bankaufsichts- und Kapitalmarktrecht, 37 Zeits-

chrift für Gesellschaftsrecht 185, 216 (2008); Osterloh-Konrad, supra note 18, at46.

109 Robby Houben, Het risicovrij aandeelhouderschap in een NV – Vragen vanuit hetverbod op leonijns beding en empty voting, 72 Rechtskundig Weekblad 1538, 1551,no. 23 (2008–2009).

110 Geert T.M.J. Raaijmakers, Synthetische aandelenbelangen in beursvennootschappen.Empty voting, vote stripping, hidden ownership, en vote trading, in Achter de scher-


tries tend to disallow the autonomous transfer of voting or other member-ship rights111.

The financial transactions that result in empty voting (stock lending, shortselling, post record date trade) are not prohibited as such. In fact, such ageneral prohibition does not seem desirable (infra, V.2). Nevertheless, a se-quence of lawful transactions can amount to legal avoidance (fraus iuris).Ordinarily, the decoupling of voting rights and economic rights will be a mereside-effect of an agreement, not its principal purpose112. However, if the agree-ment was entered into with the exclusive objective of creating an empty votingsituation, this could be considered an attempt to circumvent the prohibition ofvote buying or the prohibition of the autonomous transfer of voting rights113.The prohibition of legal avoidance (fraude à la loi) is a general principle ofBelgian114 and French law; in the Netherlands, this would amount to a viola-tion of the principle of reasonableness and fairness (redelijkheid en billijk-heid)115. However, any distinction depending on the largely subjective crite-rion of whether the transfer of voting rights is the principal object of theagreement or not is difficult to administer and offers little legal security. Inmost countries the autonomous transfer of voting rights is not legally pro-scribed, preventing a punishment for legal avoidance. In the US, the courtscould fashion an ad hoc solution on the basis of equity116. In the past, theDelaware courts have held that ”inequitable action does not become permis-sible simply because it is legally possible”117. But so far, this case law has onlybeen applied to directors, due to its potentially far-reaching implications. Be-


men van beursaandeelhouders 32–33 (G.T.M.J. Raaijmakers & R. Abma eds.,2007).

111 In Germany this so-called “Abspaltungsverbot” is laid down in § 717 of the Civil Code(BGB) and § 8(5) of the Company Code (AktG). See e.g. Seibt, supra note 14, at 814;Osterloh-Konrad, supra note 18, at 44–45.

112 Sophie Schiller, Les limites de la liberté contractuelle en droit des sociétés :

les connexions radicales, 389, no. 780 (2002) (with regard to classic contractualdeviations from “one share – one vote”).

113 Michel Germain, Le transfert du droit de vote, in La stabilité du pouvoir et du

capital dans les sociétés par actions, 139 (1990) (with regard to classic contractualdecoupling of voting rights and economic risk).

114 Cass. 14 November 2005 (O.N.P. v Carlam et al.), 191 Pasicrisie Belge 2241 (2005).115 Art. 2:8(1) Dutch Civil Code. See e.g. Geert T.M.J. Raaijmakers, Securities lending and

corporate governance, in Tussen Themis en Mercurius, 248 (NGB ed., 2005), http://ssrn.com/abstract=928312.

116 Katz, supra note 104, at 1517, n. 228; Monga, supra note 44, at 204.117 Schnell v. Chris-craft Indus. Inc., 285 A.2 d 430, 439 (Del Ch. 1971); Blasius Industries,

Inc. v. Atlas Corp., 564 A.2 d 651, 659 (Del. Ch. 1988); Williams v. Geier, 671 A.2 d1368, 1382–1383 (Del. 1996); Newman v. Warren, 684 A.2 d 1239, 1245 (Del. 1996).


sides, it would be far from easy for the courts to establish a workable precedenton de facto vote buying – even based on equity – for practical reasons.

The US case law on vote buying is closely related to the theory of fiduciaryduties. Indeed, historically, the vote buying doctrine developed from the no-tion that directors and, in some circumstances (in freeze-out mergers and inclosed corporations), controlling shareholders owe a fiduciary duty of loy-alty118. This common origin explains why vote buying doctrine traditionallyapplies to company insiders only119. In addition, the intrinsic fairness require-ment that is part of the Delaware test120 was borrowed from the duty ofloyalty. When the plaintiff has shown the presence of a conflict of interest ina decision or transaction, the burden of proof shifts to the defendant to provethat the decision or transaction was intrinsically fair, in spite of his personalinterest. In the current state of US law, fiduciary duties would add little to theprohibition of vote buying in addressing empty voting121. Indeed, what char-acterises the new forms of vote buying is that they are based on ordinarymarket transactions that can be undertaken as easily by outsiders (e.g. activistshareholders) as by traditional fiduciaries (supra, III). However, some scholarshave argued that the scope of the duty of loyalty should be extended to reachall shareholders with an opposite or disproportionate economic interest inshares122. They argue that the reasons for not imposing fiduciary duties onminority shareholders are outdated. Minority shareholders are no longer pas-sive and powerless, as the emergence of institutional investors shows. On theother hand, due to financial innovations, minority shareholders will moreoften have heterogeneous interests, making it less likely that they will act inthe company interest when they manifest themselves (as anecdotal evidence ofempty voting by hedge funds shows). The existing case law offers startingpoints for such an approach123.

The EU is less familiar with fiduciary duties, although similar notions existin Germany (Treupflicht)124 and the Netherlands (redelijkheid en billijk-


118 Cole, supra note 105, at 820–821.119 Hewlett v. Hewlett Packard Co. (Del. Ch. 2002). See Lee, supra note 28, at 891–893.120 Schreiber v. Carney, 447 A.2 d 17 (Del. Ch. 1982).121 Monga, supra note 44, at 203–204. See also (implicitly) Cohen, supra note 14, at, 237–

257.122 Iman Anabtawi & Lynn Stout, Fiduciary Duties For Activist Shareholders, 60 Stan.

L. Rev. 1255, 1286–1288 (2007–2008); Monga, supra note 44, at 203–204; Hu & Black,supra note 6, at 703 (limited to negative voting).

123 Smith v. Atlantic Properties, Inc., 422 N.E.2 d 798 (Mass. App. Ct. 1981) (abuse byblocking minority in the general meeting to prevent a dividend distribution).

124 BGH 1 February 1988 (Linotype), BGHZ 103, 184. See Marcus Lutter, Die Treuep-flicht des Aktionärs. Bemerkungen zur Linotype-Entscheidung des BGH, 153 Zeits-

chrift für das gesamte Handelsrecht und Wirtschaftsrecht 446–471 (1989).


heid)125. It is not clear to what extent these concepts apply to empty voting126

and whether this remedy is sufficient127. In Belgium and France, the theoryof abuse of rights (abus de droit) serves as a functional equivalent128. Theexercise of voting rights without a reasonable economic interest or with anegative interest (short position) could be challenged under these rules. Theabuse has to be manifest, but not necessarily intentional129. However, abuseof rights is limited to the exercise of voting rights and thus does not coverother acts or omissions outside the general meeting which establish an emptyvoting situation130. In addition, the theory can only address abuse of a ma-jority or blocking minority, i.e. instances where the voting outcome is ac-tually influenced131. To detect anomalies in voting behaviour, the economicinterest in shares (i.e. the divergence with voting rights) has to be transparent(supra, Part IV). The same is true for the voting results. Art. 14 of the Share-holders’ Rights Directive requires listed companies to publish the votingresults on the company website within 15 days after the general meeting.This information includes for each resolution at least: the number of sharesfor which votes have been validly cast, the proportion of the share capitalrepresented by those votes, the total number of votes validly cast as well asthe number of votes cast in favour of and against each resolution and, whereapplicable, the number of abstentions. This already clarifies to what extentthe outcome of voting was influenced by control-enhancing mechanisms(CEM’s). In order to alleviate the burden of proof in judicial proceedings


Unlike in the US, in Germany it is established that minority shareholders owe fidu-ciary duties to their fellow shareholders and to the company: BGH 20 April 1995(Girmes), BGHZ 129, 136. See Marcus Lutter, Das Girmes-Urteil, 50 Juristen Zei-

tung 1053 (1995).125 The obligation to act according to the demands of reasonableness and fairness is laid

down in art. 2:8(1) of the Dutch Civil Code and applies to shareholders both vis-à-visthe company and fellow shareholders.

126 Fleischer, supra note 109, 216–217; Seibt, supra note 14, at 817; Osterloh-Konrad, supranote 18, at 47–49; Langenbucher, supra note 109, at 168.

127 Seibt, supra note 14, at 833 (insufficient); Osterloh-Konrad, supra note 18, at 49 and74–75 (suitable only for excessive situations); Dirk Zetsche, Die Europäische Regulier-ung von Hedgefonds und Private Equity – ein Zwischenstand, 11 Neue Zeitschrift

für Gesellschaftsrecht 692, 697 (2009) (sufficient).128 EP Study, supra note 18, at 19–20.129 At least in Belgium. In Germany, it is debatable whether violation of a fiduciary duty

requires intent or is instead met with mere gross negligence: Osterloh-Konrad, supranote 18, at 48.

130 Paul-Alain Foriers, Les devoirs fiduciaires de l’actionnaire de contrôle, in Quid leges

sine cogitatione? Liber amicorum Jean-Marie Nelissen Grade 40, 47, no. 7 and51, no. 11 (Jan Ronse Institute ed., 2011).

131 Moulin, supra note 109, at 202, fn. 3; Cohen, supra note 14, at 254; Houben, supra note110, at 1551–1552.


based on abuse of voting rights, this information should be individualised(e.g. for the top 20% of largest shareholders it should be indicated how theyhave voted, i.e. whether they have voted and, if so, in what sense and withhow many shares)132. Due to the heavy burden of proof, the instances wheredecisions of the general meeting are declared null and void will be rare. Toobtain (additional) damages, the plaintiff will also have to prove that thevoting outcome had an impact on the stock price of the shares.

2. Prohibition on stock lending and short selling

An obvious response to empty voting would be to ban or to restrict stocklending and short selling at least around general meetings of shareholders133.Yet it would be difficult to put an end to these practices, which are by nowwell-established. Moreover, a general ban would not appear desirable to theextent that the market for empty votes is only a (small) part of a vast marketfor stock lending and derivatives, which in general performs a useful andeven vital role134. Nonetheless, these practices are already subject to certainrestrictions and under exceptional circumstances they can even be prohib-ited.

In general, stock lending is only subject to soft law, such as standard con-tracts135 and best practice codes developed by the financial sector136. The bor-


132 AMF, Pour l’amélioration de l’exercice des droits de vote des actionnaires en France, 15September 2005, 35 (with regard to loyalty shares with double voting rights); ECGF,Statement on Proportionality, 25 August 2007, 2–3; Paper of the ECGF WorkingGroup on Proportionality, June 2007, 26; Lee, supra note 28, at 806–807; Eddy Wy-meersch, One share, one vote ou proportionnalité du droit de vote des actions, in Liber

Amicorum Guy Keutgen 209, 224–225 (2008).133 Martin & Partnoy, supra note 8, at 799; Hu & Black, supra note 2, at 902–906; Raaij-

makers, supra note 116, at 241–255, no. 4.2; EP Study, supra note 18, at 35.134 Seibt, supra note 14, at 825–826; Thompson & Edelman, supra note 97, at 158; Dom-

balagian, supra note 5, at 1260–1270; Monga, supra note 44, at 214–215.135 See e.g. ISLA, Global Master Securities Lending Agreement 2000, available at www.i-

sla.co.uk.136 See e.g. ISLA, Securities Lending and Corporate Governance, 4 July 2005; Securities

Lending and Repo Commission, Stock Borrowing and Lending Code of Guidance,July 2009; Hedge Fund Working Group, Hedge Fund Standards: Final Report, January2008. See also ICGN, Securities Lending Code of Best Practice, 6 July 2007, availableat http://www.icgn.org; Lintstock Ltd., Share lending vis-à-vis voting: A report com-missioned by the International Corporate Governance Network, 28 May 2004; My-ners Report, supra note 13; AMF, Pour l’amélioration de l’exercice des droits de votedes actionnaires en France, 15 September 2005.


rowing of shares for the primary purpose of exerting influence or gainingcontrol without sharing the risks of ownership is a violation of best practicesand thus ill-advised. The exercise of a vote by a borrower, who has, by privatecontract, only a temporary interest in the shares, can distort the result ofgeneral meetings and ultimately undermine confidence in the market137. Theborrower should only vote the borrowed shares with the express permissionof the lender and in accordance with his instructions138. An alternative (andpreferable) solution would be to require the borrower to give a voting proxy tothe lender139. The lender cannot reserve the right to vote, unless the transactiontakes place after the record date. However, the lender can recall the lent sharesand, in particular when a resolution is contentious, he should automaticallyexercise this right unless there are sound economic reasons for not doing so140.Of course this requires that the agenda of the general meeting is disclosed sometime before the record date, which poses a problem particularly in the US(infra, V.4). Obviously, this solution is not possible when the shares have beensold to a bona fide third party141. A subsequent buyer acquires the share withvoting rights. He will have no idea that his shares had previously been bor-rowed from someone else. And of course votes can only be cast once for eachshare142. So basically, it is left up to the market to prevent abuses. Especiallyinstitutional investors, who are the principal lenders of shares, should be awareof the consequences of stock lending as regards the exercise of voting rightsand the dangers that this entails143. Their fiduciary duty towards beneficialholders to maximise the return on investment requires them to balance theextra income from stock lending against the potential for abuse and conse-quent value destruction144. An obligation to recall lent shares systematicallywould most likely go too far, because it would lead to a temporary shortage of


137 ICGN, Securities Lending Code of Best Practice, 6 July 2007, 3, no. 7.138 ICGN, Securities Lending Code of Best Practice, 6 July 2007, appendix II (guidance on

best practices), 8, no. 2.3. There is little support for a recommendation at the EU level:EC, Fostering an appropriate regime for shareholders’ rights: Synthesis of commentson the third consultation of the DG Internal Market and Services, September 2007, 9.

139 AMF, Mansion Report, supra note 13, at 12.140 Myners Report, supra note 13, at 20.141 ICGN, Securities Lending Code of Best Practice, 3, no. 7 (best practice) and 8, no. 1.3

(guidance).142 Myners Report, supra note 13, at 20.143 ICGN, Securities Lending Code of Best Practice, appendix II (guidance on best prac-

tices), 8, no. 2.2. See also ECGF, Statement on Empty Voting and Transparency ofShareholder Positions, 20 February 2010, 2, no. 6.

144 ICGN, Securities Lending Code of Best Practice, 2. On the dilemma of institutionalinvestors with regard to stock lending: Raaijmakers, supra note 116, at no. 3.3 and 4.2.These is some empirical evidence that institutional investors are willing to give uprevenue from stock lending in order to exercise voting rights: Reena Aggarwal, PedroA. C. Saffi & Jason Sturgess, The Role of Institutional Investors in Voting: Evidence


shares available for stock lending around general meetings (for benign pur-poses of clearing and settlement, and short selling145), which could adverselyimpact liquidity and the stock price146. As a minimum, institutional investorsshould (be legally required to) establish a clear lending policy147, in light oftheir voting policy148.

The Regulation on Short Selling also provides for restrictions or even a banon short selling under certain circumstances, and thus goes beyond the puretransparency approach of CESR (ESMA)149 and the FSA (UK)150. Indeed, astransparency of the general volume of short transactions or of individualshort positions offers insufficient guarantees against irrational behaviour onfinancial markets (e.g. “herding behaviour” and “noise trading”) a combina-tion of transparency measures and certain restrictions probably constitutesthe best regulatory strategy151. The Regulation on Short Selling introduces alocate rule to limit naked short selling152. Furthermore, the competent na-tional authorities can prohibit both naked and covered short selling in excep-tional circumstances, e.g. in case of adverse events or developments whichconstitute a serious threat to financial stability or to market confidence153 orin case of a significant fall (of 10% or more) in the price of a financialinstrument on a trading venue during a single trading day in relation tothe closing price on that venue on the previous trading day (circuit-break-


from the Securities Lending Market, May 2011, http://ssrn.com/abstract=1688993, at34–35.

145 A possible solution would be to allow naked short selling in that short time period: Hu& Black, supra note 6, at 710, 714.

146 Raaijmakers, supra note 116, at no. 4.1; Dombalagian, supra note 5, at 1270.147 ICGN, Securities Lending Code of Best Practice, 6 July 2007, 3, no. 3 (best practice).148 EC Communication, Modernising Company Law and Enhancing Corporate Gover-

nance in the European Union – A Plan to Move Forward, COM (2003) 284, Brussels,21 May 2003, no. 3.1.1. The proposal was reiterated in the Report of the ReflectionGroup on the Future of EU Company Law, Brussels, 5 April 2011, 48–49.

149 CESR, Model for a Pan-European short selling disclosure regime, 2 March 2010,CESR/10-088. See supra, VI.3.

150 FSA, Extension of the short selling disclosure obligation, Consultation Paper 09/15and Policy Statement 09/10, June 2009.

151 Emilios Avgouleas, A New Framework for the Global Regulation of Short Sales: WhyProhibition is Inefficient and Disclosure Insufficient, 16 Stan. J. L. Bus. & Fin. 367(2010) (criticising the approaches of the SEC and the FSA). But see ESME, Position onShort Selling, Brussels, 19 March 2009, 28 (information on the general level of shortselling, on an anonymous basis, would suffice). See also Jennifer Payne, The Regulationof Short Selling and its Reform in Europe, 13 EBOR (2012) (forthcoming).

152 Art. 12 of the Regulation on Short Selling.153 Art. 20 of the Regulation on Short Selling. Any measure shall be valid for a (renewable)

period not to exceed three months (art. 24).


er)154. In the US, the delivery rule and uptick rule – two restrictions that hadexisted since 1938 but had been relaxed in 2007 – were restored in responseto the financial crisis155. By contrast, the temporary transparency measurewas not renewed upon expiration, due to intensive lobbying from the hedgefund industry.

3. Suspension or limitation of voting rights

A general prohibition of stock lending and short selling is not desirable, be-cause these practices perform an important function in the financial markets,whereas empty voting is primarily a corporate governance problem. An alter-native regulatory strategy would be to intervene directly in the voting rights ofshareholders to the extent that these voting rights exceed the level of economicinterest (risk-bearing), by means of a suspension, limitation or prohibition of(the exercise of) voting rights attached to borrowed shares or shares of whichthe risk has been hedged through derivatives. This approach constitutes amiddle way between a prohibition of stock lending and short selling, whichis unduly radical, and increased transparency, which is inadequate. This sol-ution is also the most consistent in light of the principles156. Indeed, in a way itis an extension of the breakthrough rule laid down in art. 11 of the TakeoverDirective157.

However, proposals for a suspension of voting rights attached to borrowedshares158 do not take into account that “lost votes” can be potentially asharmful as actual abusive voting159. Indeed, when these suspended votingrights are not taken into account for the calculation of the quorum or (quali-fied) majority thresholds this can leverage the position of the majority orminority shareholders. In any case, a suspension of the voting rights ofborrowed shares would not prevent the same result from being reached


154 Art. 23 of the Regulation on Short Selling.155 Douglas M. Branson, Nibbling at the Edges – Regulation of Short Selling: Policing Fails

to Deliver and Restoration of an Uptick Rule, Bus. Law. 67–94 (2009).156 See EP Study, supra note 18, at 21; EC, The review of the operation of the Transparency

Directive, May 2010, 87, no. 10.25; Mazars Study, supra note 35, at 132.157 The rationale of this rule was defined in the Report of the High Level Group of

Company Law Experts on Issues Related to Takeover Bids, Brussels, 10 January2002, 21–22.

158 See e.g. AMF, Mansion Report, supra note 13, at 13. However, the French legislaturedid not follow this recommendation (see supra, fn. 56). See also Gregor Bachmann,Rechtsfragen der Wertpapierleihe, 137 Zeitschrift für das gesamte Handelsrecht

und Wirtschaftsrecht 596, 618 (2009).159 ICGN, Securities Lending Code of Best Practice, 6 July 2007, appendix II (guidance on

best practices), 8, no. 2.1.


through hedging or post record date sale160. Prohibiting the exercise of votingrights in all instances where an investor is protected from (downward) fluc-tuations in the price of shares as a result of derivatives is easier said thandone161. In practice, this requires transparency of empty voting positions(supra, Part III) and intervention ex post by the courts to enforce the pro-hibition by imposing sanctions such as nullity of company resolutions and/or damages. This involves substantial costs as a result of the delay and thelegal insecurity about the validity of resolutions of the general meeting162.Moreover, the calculation of the exact level of economic interest is not al-ways straightforward (e.g. for options); but here the transparency rules canprovide guidance.

In the US, several authors have proposed to outlaw at least negative voting,which is the most detrimental form of empty voting (supra, Part III)163. Thiscould be dealt with in a legal rule for shareholders’ conflicts of interest sincethe exercise of voting rights by shareholders with a reverse economic interestas a result of a net short position (or as a result of a larger stake in anothercompany which is a counterparty to a transaction with the company164)presents a danger for violation of the interest of the company and the fellowshareholders. The rules for conflicts of interest of shareholders have hardlybeen harmonised in the EU. The Accounting Directives only requires infor-mation on important transactions with related parties to be provided in theannual report165. Only few member states provide for transparency on an adhoc basis (e.g. Belgium)166 or for a suspension of voting rights (e.g. Germany,


160 Hu & Black, supra note 6, at 703; Cohen, supra note 14, at 253; Moulin, supra note 109,at 203.

161 David Skeel, Behind the Hedge – In the Untamed World of Hedge Funds, Rigged Dealsand Manipulated Markets Help the Wealthy Thrive While Ordinary Investors Wither,Legal Affairs, November 2005, 33.

162 Cohen, supra note 14, at 252. See also AMF, Mansion Report, supra note 13, at 13–14.163 Martin & Partnoy, supra note 8, at 793–794; Hu & Black, supra note 6, at 701–703. See

also Skeel, supra note 163, at 28 et seq. (advocating a general prohibition). But seeCohen, supra note 14, at 254 et seq. (advocating a private right of action for damagesin case of negative voting rather than a prohibition).

164 But see Osterloh-Konrad, supra note 18, at 74–75 (less supportive of a prohibition onvoting with an indirect negative interest, because the interest of the company is hard todetermine ex ante in these cases).

165 See art. 43(1)(7 b) of the Fourth Company Law Directive for single company accounts.For consolidated accounts, art. 34(1)(7 b) of the Seventh Company Law Directive andthe International Accounting Standards Regulation 1606/2002 (IAS 24) apply. Therecent (2006) changes to these two directives extend disclosure on related party trans-actions (previously only covering transactions between a company and the company’saffiliated undertakings) to cover other types of related parties provided that the trans-actions are material and not carried out at arm’s length.

166 Art. 524 of the Belgian Company Code.


France, UK)167. However, this could change in the future168. The harmonisa-tion or at least the greater convergence of the sanctioning regimes in thefinancial services sector (e.g. in the Transparency Directive, Market AbuseDirective and MiFID) is also on the political agenda169.

As for other degrees of empty voting, it is not clear where the line should bedrawn170. When a shareholder who is exposed to risk, no matter how small(partial empty voting), is exempt, this would open the door to evasion, whereasthis situation hardly differs from the situation where a shareholder has com-pletely hedged his risk (neutral voting). On the other hand, it would not beconsistent to demand strict proportionality, when multiple voting rights sharesand other CEM’s are still – at least de facto – permitted171. Therefore, in the US,the suggestion has been made to leave it up to the companies themselves toregulate (partial) empty voting in their articles of association by introducing aground for suspension of voting rights in the articles of association172. Share-holders holding more than a certain percentage (e.g. 1%) of the voting rightswould not be allowed to cast more votes than an amount corresponding to theirunderlying economic interest. To this end, they would have to attest that theirvoting rights as of the record date do not exceed their economic interest withmore than a certain percentage (e.g. 20%)173. At present, some EU memberstates do not allow companies to create a ground for suspension or limitationof voting rights without express legal basis174. Moreover, it remains doubtful


167 Art. 136(1) of the German Company Law. However, empty voting is not covered bythe current rule: Seibt, supra note 14, at 833–834. In France (art. L 225-40 of theCommercial Code) and in the UK (FSA Listing Rule 11), conflicted transactionsrequire shareholder approval, whereby the interested party must abstain from voting:EC Impact Assessment, supra note 34, at 61–62.

168 ECGF, Statement on Related Party Transactions for Listed Entities, 11 March 2011.See also OECD, Related Party Transactions and Minority Shareholder Rights, 4 April2012. But see Report of the Reflection Group on the Future of European CompanyLaw, Brussels, 5 April 2011, where no particular mention is made.

169 EC Communication, Regulating financial services for sustainable growth, SEC(2010)301, Brussels, 2 June 2010, 6; and EC Communication, Reinforcing sanctioning re-gimes in the financial services sector, COM(2010) 716, Brussels, 8 December 2010. Thisresulted e.g. in a proposal for a Directive on criminal sanctions for insider dealing andmarket manipulation, COM(2011) 654, Brussels, 20 October 2011.

170 Martin & Partnoy, supra note 8, at 792–794; Monga, supra note 44, at 215; Nathan,supra note 13, at 434–435 and 441.

171 Monga, supra note 44, at 215.172 Hu & Black, supra note 2, at 870–871. See also Hu & Black, supra note 6, at 697–701.173 Hu & Black, supra note 6, 697–701.174 See e.g. for Belgium: Koen Geens & Marieke Wyckaert et al., De vennootschap –

Algemeen deel, 282, no. 155 (2011); François T’Kint, Les actions et le droit de vote, 88Revue Pratique des Sociétés (242) 243, no. 2 (1989). But see art. 2:117(3) of theDutch Civil Code.


whether a modification of the articles of association to that effect will be im-plemented voluntarily by controlling shareholders, unless motivated by theirself-interest (as a protection against hostile takeover bids)175.

By contrast, it does not seem appropriate to grant voting rights to all personswho bear a similar economic risk as shareholders without formally having titleto shares (as a result of a long position in derivatives), because the total numberof voting rights would become undefinable and indeed possibly infinite, thusposing a threat of legal insecurity and/or manipulation of the voting process176.However, some US scholars have suggested that the voting rights of shares heldas collateral by the short party in bilateral derivatives transactions with anidentified counterparty be voted only upon instruction of the party with thelong leg177. The objective is to prevent empty voting by the party with the shortside (the risk of which is usually hedged by holding the underlying shares) byformalising the informal voting rightsof theparty with the longside (supra, IV.1,for an extension of the transparency rules to cover these situations of “hiddenownership”). In practice, this solution of reconnecting votes to economic in-terest is already applied in other situations such as record ownership, where theultimate beneficiary has the right to give binding voting instructions to therecord owner178. All other situations, where votes cannot readily be matchedwith the underlying shares in the absence of an identifiable counterparty, wouldremain unregulated because of the high costs of legal intervention179.

4. Record date

In listed companies, the right to attend the general meeting and to vote isdetermined as of the record date. Art. 7 of the Shareholders’ Rights Directivebans all requirements of share blocking, which constitute an obstacle to votingespecially by institutional investors. The record date is communicated togeth-er with the agenda in the notice of meeting and needs to be situated at leasteight days after the notice of meeting (or six days in case of a second notice)180.


175 Bruce H. Kobayashi & Larry E. Ribstein, Outsider Trading as an Incentive Device, 40U.C. Davis L. Rev. (21) 39–40 (2007); Lee, supra note 28, at 907.

176 Martin & Partnoy, supra note 8, at 804; Osterloh-Konrad, supra note 18, at 62. But seeEP Study, supra note 18, at 21.

177 Martin & Partnoy, supra note 8, at 804–805; Hu & Black, supra note 6, at 703–704.178 Under NYSE Rule 452, the record owner can only exercise voting discretion on

routine matters but not on important matters if the beneficiary has not given votinginstructions. See Hu & Black, supra note 6, at 716–718; Kahan & Rock, supra note 8, at1250.

179 Martin & Partnoy, supra note 8, at 804–805; Hu & Black, supra note 6, at 705.180 Art. 5(3)(c) of the Shareholders’ Rights Directive.


This allows institutional investors sufficient time to recall lent shares in orderto vote at the general meeting (supra, IV.3). The record date cannot be situatedmore than 30 days before the general meeting181. The downside of the recorddate system is that it creates scope for empty voting (supra, II.3). A return tothe system of mandatory blocking of shares until the general meeting haspassed would solve the problem of post record date trade. However, it offersno solution since it deters institutional investors from voting and these lostvotes can also leverage the voting power of the other shareholders in an arti-ficial way.

In the future, registration for the general meeting should be possible in “realtime” as a result of technological developments that facilitate further dema-terialisation of shares and the electronic share register182. A record date wouldthen be redundant. Art. 7(2) of the Shareholders’ Rights Directive alreadystates that member states need not impose the record date system on compa-nies that are able to identify the names and addresses of their shareholdersfrom a current register on the day of the general meeting. In a system where theshare register is permanently kept up to date, it would still be possible toprovide for a rule that votes can only be cast with shares held on the recorddate and continuously thereafter at least until the general meeting (infra,V.4)183. The traditional objections against share blocking do not apply here,because the record date can be situated closer to the general meeting andbecause this rule would not lead to factual non-transferability of shares butonly to a loss of voting rights.

For the time being, it is advisable to set the record date as close to the generalmeeting as possible to limit the scope for empty voting184. In France the recorddate is set at three days before the general meeting, precisely because, given thenormal period of three days for the settlement of transactions (which entailstransfer of ownership), a shareholder who would sell his shares immediatelyafter the record date would still – at least formally – be the owner on the day ofthe general meeting185. In the UK the record date is set at two days before thegeneral meeting186.


181 Art. 7(3) of the Shareholders’ Rights Directive.182 Nathan, supra note 13, at 439. For a discussion of specific proposals for the US: Kahan

& Rock, supra note 8, at 1271–1279.183 Kahan & Rock, supra note 8, at 1277–1278.184 Hu & Black, supra note 6, at 718–721; Kahan & Rock, supra note 8, at 1270. But see EC,

Fostering an appropriate regime for shareholders’ rights, synthesis of comments, Sep-tember 2007, 9, no. 4; Jaap Winter, Level playing fields forever, in De nieuwe macht

van de kapitaalverschaffer 121, 138 (2007).185 Barrière, supra note 13, at 280. See also AMF, Pour l’amélioration de l’exercice des

droits de vote des actionnaires en France, 15 September 2005, 22, no. 5.186 Section 327(2) of the UK Companies Act 2006; Myners Report, January 2004, 17.


However, in other member states the time gap between the record date and thegeneral meeting is wider187. Many Dutch authors seem to favour this solu-tion188, because it would allow to distinguish stock lending for purposes ofempty voting and dividend arbitrage189. Empty voting is considered less of aproblem than dividend arbitrage190. Yet, empty voting can occur in any generalmeeting, whereas dividend arbitrage is usually only an issue at the annualshareholders’ meeting. Besides, dividend arbitrage can be addressed by remov-ing the ex-dividend date from the date of the general meeting191.

In the US, the record date is usually 30 to 60 days ahead of the general meet-ing192. This is due to the complicated system of custodial ownership. Therecord date serves at the same time to determine who is entitled to receive anotice of meeting; and compliance with the proxy rules simply requires moretime193. Therefore, it is not possible to set the record date closer to the generalmeeting without a fundamental reform of the system. If not, voting instruc-tions or proxy’s would not arrive in time. Another notable feature of the USsystem is that the agenda is not disclosed on the record date194. Moreover, eventhe record date itself is usually not disclosed beforehand195. All this has several


187 See e.g. art. 536(2) of the Belgian Company Code (14 days); § 123(3) of the GermanCompany Law (21 days).

188 Raaijmakers, supra note 111, at 64–65; Rients Abma, Het stemproces van institutionelebeleggers, in Achter de schermen van beursaandeelhouders 73, 121–123(G.T.M.J. Raaijmakers & R. Abma eds., 2007); Anatoli Van Der Krans, De virtuele

aandeelhoudersvergadering, 35 (2009); Winter, supra note 185, at 138. See also EC,Fostering an appropriate regime for shareholders’ rights, synthesis of comments, Sep-tember 2007, 9, no. 4.

189 Special tax refunds for domestic shareholders in connection with dividends made itinteresting for quite some time to shift shares from foreign to domestic shareholdersaround the general meeting (or, to be more precise, the ex-dividend date), and to splitthe advantages of the tax refunds between these shareholders.

190 Van Der Krans, supra note 189, at 34 and 74.191 Abma, supra note 189, at 123; AMF, Mansion Report, supra note 13, at 6; EP Study,

supra note 18, at 36; Hu & Black, supra note 6, at 715.192 In Delaware the record date can be no more than 60 nor less than 10 days before the

date of the general meeting (Section 213 of the Delaware General Corporation Law).193 For an overview of the voting process in the US (Delaware) and an analysis of its

shortcomings: Kahan & Rock, supra note 8, at 1227–1270.194 Both the timing and the content of the information to be provided to the shareholders

in advance of the general meeting is largely a matter of state law in the US.195 Professional investors can however obtain this information (against payment): Jennifer

E. Bethel, Gang Hu & Qinghai Wang, The Market for Shareholder Voting RightsAround Mergers and Acquisitions: Evidence from Institutional Daily Trading andVoting, 15 J. Corp. Fin. 129–145 (2009); Susan E. K. Christoffersen, ChristopherC. Geczy, David K. Musto & Adam V. Reed, Vote Trading and Information Aggre-gation, 68 J. Finance 2897 (2007).


disadvantages: institutional investors cannot deliberately recall shares with aview to voting on specific agenda items, the board can choose the record datestrategically in an attempt to influence the outcome of the voting process, andactivist shareholders have an advantage because they can apply empty votingstrategies with regard to agenda items they have proposed, whereas the generalpublic can only predict the usual agenda items196. As from August 2009,section 213(a) of the Delaware General Corporation Law explicitly allowsthe use of a separate record date for determining who is entitled to vote, afterit was established on an earlier date who is entitled to receive a notice ofmeeting197. This reform, which addresses empty voting concerns, is likely tobe followed by other states198.

Some authors rather object to the fact that shareholders can exercise votingrights in spite of the temporary nature of their investment199. They question,in essence, whether a shareholder who runs economic risk only for a shortterm should be entitled to the same voting rights as a long term investor200.On both sides of the Atlantic, proposals have been made to introduce a“waiting period” for the exercise of voting rights in the general meeting201.Such a rule cannot prevent shares from being borrowed or hedged, but itwould make empty voting more expensive, hence less attractive, since shareswould have to be borrowed or hedged over a longer period of time202. Awaiting period would also offer protection against surprise takeovers usingcash-settled derivatives, because the waiting period would only start whenthe investor obtains formal title to the shares upon the settlement of hisderivative positions. To prevent the rule from being used merely as a pro-tection against takeovers, a threshold could be introduced above which therule would not apply (breakthrough)203. The UK Takeover Panel has con-sidered the possibility of suspending the voting rights of shares acquiredduring a takeover bid automatically for the duration and purposes of such


196 Kahan & Rock, supra note 8, at 1270; Hu & Black, supra note 6, at 715.197 See Dombalagian, supra note 5, at 1285; Schouten, supra note 32, at 171, fn. 215.198 The Committee on Corporate Laws, ABA Section of Business Law, Changes in the

Model Business Corporation Act – Proposed Amendments to Shareholder Voting Pro-visions Authorizing Remote Participation in Shareholder Meetings and BifurcatedRecord Dates, 65 Bus. Law. 153–160 (2009) and 66 Bus. Law. 1119, 1121–1123(2010) (discussion of proposal for a new § 7.07(e) MBCA).

199 Moulin, supra note 109, at 203; Monga, supra note 44, at 216.200 This rationale underlies also the proposals for time-phased voting rights (loyalty

shares). See e.g. Report of the Reflection Group on the Future of EU CompanyLaw, Brussels, 5 April 2011, 46–47.

201 Nathan, supra note 13, at 440; Moulin, supra note 109, at 203; Seibt, supra note 14, at834.

202 Nathan, supra note 13, at 440; EP Study, supra note 18, at 35.203 Moulin, supra note 109, at 203.


bid in order to prevent market speculation204. However, this proposal metwith resistance based on the principle of equal treatment of holders of thesame category of shares205 and the “one share – one vote” principle206.Although the Takeover Code regards provisions in articles of associationwhich lay down a qualifying period as highly undesirable207, the Panel ap-pears less unreceptive to this measure, at least in light of the principle ofequal treatment, subject, however, to the condition that the legislature woulddecide to introduce it as a general (mandatory or optional) rule, since short-termism of shareholders also poses problems outside takeover situations208.

5. Market abuse

Art. 1(1) and 2–4 of the Market Abuse Directive ban insider dealing. Theprohibition also applies to financial instruments that are not admitted to trad-ing on a regulated market in a member state, but whose value depends on afinancial instrument admitted to trading on a regulated market in at least onemember state, or for which a request for admission to trading on such a markethas been made (art. 9(2) Market Abuse Directive). Therefore, the Directivealready offers protection against the circumvention of the prohibition bymeans of derivatives209. The proposal for a Market Abuse Regulation furtherextends the scope of application to financial instruments admitted to tradingon a MTF or OTF, and financial instruments traded elsewhere (OTC) butwhose value relates to such financial instruments210.

Under certain circumstances empty voting can occur together with insiderdealing. The question arises, however, whether knowledge by a shareholderabout his own decision or intention with regard to the exercise of voting rightscan constitute inside information by itself. Recital 30 to the Market AbuseDirective grants a safe harbour for the acquisition or disposal of financialinstruments, whereby a person carries out his prior decision to acquire or


204 Takeover Panel, Review of certain aspects of the regulation of takeover bids, PCP2010/2, 1 June 2010, 20–30.

205 General Principe 1 of the Takeover Code.206 Takeover Panel, Review of certain aspects of the regulation of takeover bids, Code

Committee Statement 2010/22, 7, no. 4.5.207 Rule 22, note 1 of the Takeover Code.208 Takeover Panel, Review of certain aspects of the regulation of takeover bids, PCP

2010/2, 1 June 2010, 28–29 and Code Committee Statement 2010/22, 7, no. 4.6.209 Joseph-Benjamin Mojuyé, Le droit des produits financiers dérivés (swaps, op-

tions, futures . . .) en France et aux États-Unis 372–386 (2005).210 Recital 18 and art. 2 of the Proposal for a Regulation of the European Parliament and of

the Council on insider dealing and market manipulation (market abuse), COM(2011)651, Brussels, 20 October 2011.


dispose of these instruments. Since the acquisition or disposal of financialinstruments necessarily involves a prior decision taken by the person whoundertakes one of these operations, the carrying out of this acquisition ordisposal should not be deemed in itself to constitute the use of inside infor-mation. However, it is less certain whether this reasoning would apply to otheractions that are undertaken after the acquisition, e.g. the exercise of votingrights in a certain way211 or the launch of a public takeover bid212. Theseintentions are not ipso facto executed by the acquisition of financial instru-ments. Therefore, when these intentions, which are likely to have a significanteffect on the price of financial instruments, are already of a sufficiently precisenature at the moment of the acquisition, this would constitute inside informa-tion.

In contrast to insider dealing, the prohibition of market manipulation (art. 1(2)and 5 of the Market Abuse Directive) presently does not cover derivatives.However, the proposal for a Market Abuse Regulation extends the scope ofthe prohibition to related financial instruments that can influence the value offinancial instruments traded on a regulated market, MTF or OTF, even whenthese derivative instruments themselves are traded on another trading venue orover the counter. Another innovation is the inclusion of a prohibition againstattempting to engage in market manipulation, making it unnecessary to provethat the market was actually misled or influenced by transactions, orders ordissemination of information213. For insider dealing this was already the case.

Market manipulation relates, firstly, to transactions or orders to trade whichgive, or are likely to give, false or misleading signals (art. 1(2)(a) Market AbuseDirective). The prohibition envisages manipulation of the market, of tradeitself. In cases of empty voting, it is not so much the transaction in financial


211 See, affirmative: Raaijmakers, supra note 111, at 36. But see, more hesitant: Houben,supra note 110, at 1553–1554.

212 Christian Cascante & Cornelia Topf, Auf leisen Sohlen? – Stakebuilding bei der bör-sennotierten AG, 54 Die Aktiengesellschaft 53, 54–56 (2009); Daniel Ohl, L’uti-lisation de dérivés formés sur des actions pour prendre le contrôle d’une société cotée, 15Bulletin Joly Bourse 332, 338 (2009). This situation is to be distinguished from theuse of inside information by launching a public takeover bid for the purpose of gainingcontrol of that company or proposing a merger with that company – which should notin itself be deemed to constitute insider dealing (recital 29 of the Market Abuse Direc-tive).

213 EC, Public consultation on a Revision of the Market Abuse Directive, Brussels, 25June 2010, 5–7 and questions no. 2–3, http://ec.europa.eu/internal_market/securities/abuse/index_en.htm. See also recital 19–20 of the Proposal for a Regulation on insiderdealing and market manipulation (market abuse), COM(2011) 651, Brussels, 20 Oc-tober 2011. In France the sanctioning powers of the AMF were already extendedaccordingly: art. L 621-15(II)(c) of the Monetary and Financial Code, as amendedby Law of 22 October 2010, JO 23 October 2010.


instruments that influences the stock price, but rather another fact, such as theadoption or obstruction of a decision in the general meeting214. The trans-actions creating an empty voting position are indeed meant to avoid anyinfluence on the stock price by actual purchases of shares215. Stock lendingand trade in derivatives will only have a marginal, indirect impact on the priceof the (underlying) shares (supra, Part II.1 and II.2). Moreover, it is doubtfulwhether the signal emanating from empty voting is false or misleading. Theempty votes are presumably valid because they are cast by the person who haslegal title to the shares (albeit without bearing the economic risk). These votes,in turn, create a new fact (decision) for the company which is neither false, normisleading. Secondly, the mere fact that stock lending does not involve atransfer of economic interest is not sufficient to qualify it as fictitious devicesor any other form of deception or contrivance (art. 1(2)(b) Market AbuseDirective). Finally, the fact that the artificial or temporary nature of a share-holding is kept secret or the fact that the formal, legal position is notifiedwithout mentioning that the economic interest is in reality much smaller doesnot seem to qualify as dissemination of false or misleading information (art.1(2)(c) Market Abuse Directive) as long as there exists no legal obligation todisclose this (supra, IV).

The Market Abuse Directive offers limited protection: in its present form, itdoes not seem to prohibit empty voting as such; in any case, the current rulesare not adapted to this relatively recent phenomenon and the qualification asinsider dealing or market manipulation appears artificial. In addition, the en-forcement of the rules is impaired by the current lack of transparency (supra,IV). However, as empty voting does not pose any specific problem of insiderdealing or market manipulation, it does not appear to be appropriate to ad-dress empty voting in the framework of the Market Abuse. In any event theproposed changes to the Market Abuse Directive (and its replacement by aRegulation) can be useful to prevent market abuse more effectively.

VI. Conclusion

Although empty voting is not a new problem, it used to be largely theoretical.Due to financial innovations, voting rights and economic rights can nowadaysbe decoupled very easily by transactions in (derivative) financial instruments.Because these instruments are widely available at low cost, this puts pressureon the “one share – one vote” principle and threatens the integrity of decision-making in the general meeting of listed companies. Not only can shareholders


214 Raaijmakers, supra note 111, at 34–35.215 Ibid., at 9; Seibt, supra note 14, at 826.


exercise voting rights attached to shares without bearing any economic risk,but in extreme cases they can even exercise voting rights with an oppositeeconomic interest (short position). EU company and financial law is simplynot adapted to this new reality as many rules still implicitly assume that votingrights and cash flow rights (economic risk) run parallel.

The most acute problem is that the transparency rules are currently notadapted. Also the pending proposal to reform the Transparency Directive isinsufficient. It should not focus merely on the subject of informal votingrights. Information about the economic interest in shares (i.e. to which extentpersons who can exercise voting rights attached to shares or voting discretionare subject to risk) is necessary, at least around the general meeting216, in orderto estimate the true magnitude of the phenomenon217, to enable self-regulationby the market218 and to allow for the punishment of abuses219.

Although it is probably too early to take a final stance, considering the in-sufficient level of transparency, it seems far from certain that transparency willsuffice to prevent abuses of empty voting. When the legislature remains silent,it will be up to the courts to fashion a solution. In the US as well as in the EU,the common law offers some starting points, but the classic doctrines seem tobe generally insufficient to combat the empty voting phenomenon in a sat-isfactory way. Intervention by the courts would offer more flexibility to ad-dress new forms of decoupling; on the other hand, this comes with a higherlevel of legal insecurity, whereas the capital markets need clear rules. In addi-tion, these common law doctrines, which can differ greatly between countries,are less suitable for harmonization220. Finally, judicial remedies only offer expost protection and thus have limited deterrent force.

When empty voting is considered undesirable, it is probably up to the (EU)legislature to provide measures. Unfortunately there is no ready-made solu-tion. A general prohibition of stock lending and/or short selling does not seemdesirable, because these practices also perform other important and beneficialfunctions in financial markets, whereas empty voting is primarily (althoughnot exclusively) a corporate governance issue. The abolition of the record datesystem for the general meeting of listed companies can eliminate post recorddate trade, but this presents no ideal solution either, given the existing possi-


216 Schouten, supra note 32, at 175.217 So far only anecdotal evidence is available.218 When the higher agency cost of empty voting is reflected in the stock price, this will

increase the cost of capital.219 Transparency can alleviate the burden of proof in judicial or administrative proceed-

ings or provide data that can be useful for the implementation of additional legalmeasures if any.

220 Seibt, supra note 14, at 833.


bilities of hedging the economic risk of shares through derivatives. The in-troduction of a waiting period for the exercise of voting rights can make emptyvoting strategies more expensive, but not prevent them altogether. In addition,this measure hinders hostile takeovers (in a similar way as loyalty shares). Aprohibition to exercise voting rights is most advisable for situations of negativevoting, by persons having a net short position in shares, because they present aconflict of interest in respect of all company decisions. In these extreme sit-uations protection ex ante by legislative measures is warranted221. As for allother situations, the benefits of regulatory intervention probably do not out-weigh the costs. In any case, there seems to be little point in ruling out anydiscrepancy between the level of voting rights and risk-bearing (partial emptyvoting) when existing control-enhancing mechanisms (shares with multiplevoting rights, voting agreements, pyramid structures, etc.) are left untouched.This brings us back to the highly controversial issue of “one share – one vote”,for which EU harmonisation has proved to be extremely difficult222.


221 See e.g. Wolfgang Zöllner, Die Schranken mitgliedschaftlicher Stimmrechts-

macht bei den privatrechtlichen Personenverbänden 174 (1963).222 See Koen Geens & Carl Clottens, One Share One Vote: Fairness, Efficiency and EU

Harmonisation Revisited, in The European Company Law Action Plan Revisited,145–189 (K.J. Hopt & K. Geens eds., 2010), available at http://ssrn.com/ab-stract=1547842.


Empty Voting: A European Perspective

Documents

Transcript of Empty Voting: A European Perspective