July 23, 2008

The Members Respond: My $1 Million Idea of an Online Voting Exchange

A few weeks ago, I blogged about the idea of someone creating an online auction of voting rights for annual shareholder meetings. I asked members if they saw any legal hurdles to this potential project. Here are a few of the responses:

1. No Idea is New – Your idea reminded me of a long-ago attempt to divide up the bundle of rights that are represented by a share of common stock. Twenty years ago, American Express developed the idea of Unbundled Stock Units – “USUs” – under which a shareholder could exchange a share of common stock for a unit consisting of a 30-year bond, an Incremental Dividend Preferred Share, and an Equity Appreciation Certificate.

Amex said the USUs would let shareholders “choose between the various investment attributes of Share ownership.” It’s unclear from the prospectus what happened to the voting rights. I think you had to own all three parts of the USU to be able to vote. At the time, I recall that various commenters derided the concept because it separated out the rights of share ownership and USUs died on the vine. Here are the cover pages from the Form S-4 for the USUs.

2. Expect Screaming (and Lawsuits) – I think that state corporate legislatures, the SROs, proxy solicitation and advisory firms, underwriters, swap desks institutional investor-activists, academics and others will likely have 30 different views on the pluses and minuses of this, with plenty of lawsuits in between.

3. Practical Issues of Transferring Votes – One potential obstacle would be overcoming the trick of figuring out how the buyer would be able to get a proxy or voting instruction that ties into the record owner list. Perhaps what would trade would be the right to instruct the seller on how to vote the shares. Currently, exchanges prohibit trading of shares with proxies, so essentially the seller has to be selling the right to instruct the seller as to how to vote.

In particular, there would need to be a way for a broker to be instructed by the buyer (who might have a different broker) as to how to vote in time for the broker to instruct Broadridge to effect the instruction. I think this problem means you can’t just buy from the “market”; you have to know who your seller is (and the seller’s seller, if it’s a resale of the voting rights), unless you can find a way to create a proxy/instruction instrument that would itself trade.

Also, I don’t think management would be able to be a bidder as that would be vote-buying, unless they used their own money and not the issuer’s funds. The H-P case stands for the proposition that shareholders can buy votes, but management can’t (subject to an entire fairness test and maybe a shareholder vote).

July-August Issue: Deal Lawyers Print Newsletter

This July-August issue includes articles on:

– Distressed Debt Transactions: “Soup to Nuts”
– The SEC’s Cross-Border Proposal: Top Four Ways Deals Would Change
– The SEC’s New Cross-Border Guidance: Four “Don’ts” for Structuring Cross-Border Deals
– Follow-Up: How to Do a Deal Without Shareholder Approval: The Financial Viability Exception”
– Hedge Fund Attacks: Eight Lessons Learned from the In-House Perspective
– Jumping Through Standstills
– The Shareholder Activist Corner: Spotlight on Shamrock Activist Value Fund
– The Implications of CSX: Beneficial Ownership Reporting Through Total Return Swaps

Try a “Half Price for Rest of ’08” no-risk trial to get a non-blurred version of this issue for free.

What is the Reporting Chain for Your General Counsel?

Yesterday, a member posed a question in our “Q&A Forum” about whether some general counsels report to someone else other than the CEO. I agreed to do a poll:

Online Surveys & Market Research

– Broc Romanek