AUSTIN, Texas—The Financial Times Friday published two articles on the impact of research by The University of Texas School of Law professors Henry Hu and Bernard Black and of Hu's speech to the Council of Institutional Investors on Sept. 19 on "Hedge Fund Activism and the New Vote Buying."
The lead article focuses on Hu's speech to the Council and has the following headline:
"Thesis on hedge fund tactics gives investors a shock - Professor's warning on 'empty voting' has big impact in the US, writes Ben White"
The story states that:
"His [Hu's] thesis [for his speech to the Council] was pretty astonishing. The basic legal and economic underpinning of the public corporation, he said, had been washed away. The link between economic ownership of shares and corporate voting power had been severed."
The second article, entitled "Concern in U.S. over 'empty voting,' " also by Ben White, reports increasing concern on the part of U.S. executives and institutional investors over how new equity derivatives and growth in share lending have broken the bedrock corporate governance connection between economic ownership of shares and voting rights.
The articles are available in their entirety on The Financial Times website at http://www.ft.com/.
About the Research
The term "empty voting" that appears in the headlines of both of the Financial Times articles was coined by Professors Hu and Black in a pair of articles on what they call the "new vote buying." Most publicly held corporations have long had a governance structure based on a proportional relationship between shareholder voting rights and the number of shares held. This concept of one share-one vote is familiar to everyone.
Hu and Black suggest, however, that the derivatives revolution and other recent capital market developments now allow hedge funds and other investors to readily "decouple" economic ownership of shares from voting rights. For instance, through financial engineering, a hedge fund with absolutely no economic interest in a company can nevertheless hold the most number of votes. They offer the first systematic attempt to analyzing this decoupling-the "new vote buying"-and its corporate governance implications.
The two UT Law professors believe that existing legal and economic theories of the public corporation presume a link between voting rights and economic ownership that can no longer be relied on. They have found that, since 2001, decoupling appears to have occurred in battles for the corporate control of public companies in (at least) Australia, Germany, Hong Kong, Italy, Japan, New Zealand, the United Kingdom, and the United States. Hu and Black develop a taxonomy of decoupling strategies, propose a near-term disclosure-based response and outline a menu of longer-term regulatory choices. One article by Hu and Black was published early this summer in the Southern California Law Review and another was published in September in Business Lawyer.
The articles are as follows:
Henry T. C. Hu and Bernard Black, The New Vote Buying: Empty Voting and Hidden (Morphable) Ownership, 79 SOUTHERN CALIFORNIA LAW REVIEW 811-908 (2006), also available at http://ssrn.com/abstract=904004
Henry T. C. Hu and Bernard Black, Empty Voting and Hidden (Morphable) Ownership: Taxonomy, Implications, and Reforms, 61 BUSINESS LAWYER 1011-1070 (2006), available at http://www.abanet.org/buslaw/tbl/home.shtml
Henry T. C. Hu holds the Allan Shivers Chair in the Law of Banking and Finance at The University of Texas School of Law and is interested in, among other things, the law and economics of corporate governance and corporate and international finance. Hu was chair of the Association of American Law Schools' Business Associations section in 1996. During 1997-98, he taught at Harvard Law School as the Bruce W. Nichols Visiting Professor. In 2000, he was appointed to the National Association of Securities Dealers' Legal Advisory Board, in 2001, to NASD Regulation's e-Brokerage Committee, and in 2006, to NASD's Market Regulation Committee. He is a member of the American Law Institute.
Bernard S. Black holds the Hayden W. Head Regents Chair for Faculty Excellence at The University of Texas School of Law, is professor of finance at UT's McCombs School of Business, and managing director of the Legal Scholarship Network. Before coming to Texas, he was professor at Stanford Law School (1998-2004) and Columbia Law School (1988-1998). He has been an advisor on company law, securities law, and corporate governance in Armenia, Brazil, Indonesia, Korea, Mongolia, Russia, Ukraine, and Vietnam.
About Professor Hu:
About Professor Black:
Professor Henry Hu Addresses the Council of Institutional Investors on Hedge Funds and Corporate Governance:
Research by Henry Hu and Bernard Black Featured in Investment News and
The Daily Telegraph (London):
Hedge Fund Voting Paper by Professors Henry Hu and
Bernard Black Discussed in Corporate Control Alert: