AUSTIN, Texas—The lead front-page story in The Wall Street Journal Friday is on the phenomenon of “empty voting” in corporate governance and credits Professors Henry T. C. Hu and Bernard Black of The University of Texas Law School with coining the term. The story refers repeatedly to their May 2006 Southern California Law Review article, “The New Vote Buying: Empty Voting and Hidden (Morphable) Ownership.”
Professors Hu and Black use the term “empty voting” to refer to hedge funds and other investors holding more votes than economic ownership. In an extreme case, an investor can have no economic interest – or a negative economic interest – in a company, and yet hold a significant number of votes. The traditional notion of “one share-one vote” would no longer apply when, for instance, an investor uses “equity swaps” (or other derivatives) or the share lending market to “buy” votes.
In addition, based on WSJ reporter Kara Scannell’s interviews with Professor Hu, The Wall Street Journal story quotes Professor Hu as saying, among other things:
“You have this whole superstructure built on this notion that there is this coupling of economic interest and voting power. With these financial innovations, you’re screwing around with the foundation.”
The story also quotes Securities and Exchange Commission Chairman Christopher Cox on the need to address such issues. On Wednesday (Jan. 24), the Financial Times (London) reported on a speech by SEC Commissioner Paul Atkins, and noted that Commissioner Atkins’ warning on these hedge fund tactics “mirrors concerns expressed last year” by Professors Hu and Black. Professor Hu and Black’s research constitutes the first systematic attempt to address what they refer to as the “new vote buying” and its corporate governance implications.
Friday’s story in The Wall Street Journal story is illustrative of the attention their research is receiving, here and abroad. For example, the Financial Times has published a number of stories discussing this new research, including Ben White, Thesis on hedge fund tactics gives investors a shock – Professor’s warning on ‘empty voting’ has big impact in the US, FIN. TIMES (London), Oct. 6, 2006, at 21 and Ben White, Concern in US over ‘empty voting’, FIN. TIMES (London), Oct. 6, 2006, at 21. In an editorial on October 16, 2006, Pensions and Investments endorsed greater hedge fund transparency as to share ownership, largely based on the professors’ research. See Barry B. Burr, ‘Morphing’ hedge fund ownership, PENSIONS & INVESTMENTS, Oct. 16, 2006, at 10.
The Wall Street Journal story is available at:
The Southern California Law Review article and two companion articles are downloadable 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), also available at http://ssrn.com/abstract=887183
Henry T. C. Hu and Bernard Black, Hedge Funds, Insiders, and the Decoupling of Economic and Voting Ownership: Empty Voting and Hidden (Morphable) Ownership, 13 J. CORP. FIN. – (forthcoming 2007), also available at http://ssrn.com/abstract=874098
About Professors Hu and Black:
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:
Professors Henry Hu and Bernard Black Featured in The Financial Times
(London) on the Impact of Their "Empty Voting" Research:
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: