In two of his columns this week, Matt Levine highlighted this new company that purports to facilitate vote buying. It invites passive retail holders to sell their votes to interested buyers. Though the site itself mentions that buyers might be interested in influencing board selection, advancing ESG initiatives, or affecting takeover/merger decisions, in communications with Matt Levine, the company apparently emphasized the potential to use bought votes to obtain a quorum. (As we all know, retail-heavy companies – especially SPACs – have had trouble with that recently).
What no one seems to be talking about is whether any of this is actually legal, and the answer is – maybe? Maybe not?
Delaware does not prohibit vote buying outright. First, it draws a distinction between (1) where the company uses company resources to buy a vote; (2) where a third party uses its own resources to buy a vote.
The first is more troubling, because it raises the possibility of conflicted transactions. For example, in Hewlett v. Hewlett-Packard, 2002 WL 549137 (Del. Ch. 2002), the plaintiffs alleged that HP allocated business to Deutsche Bank in order to persuade Deutsche Bank to vote shares held in its asset management arm in favor of a merger. The court held that “Management… may not use corporate assets to buy votes in a hotly contested proxy contest about an extraordinary transaction that would significantly transform the corporation, unless it can be demonstrated… that management’s vote-buying activity does not have a deleterious effect on the corporate franchise.” Historically, there have been scenarios where management sought to buy votes to entrench their positions. See Macht v. Merchants Mortgage & Credit Co., 194 A. 19 (Del.Ch. 1937).
But not every scenario is like that. In Schreiber v. Carney, 447 A.2d 19 (Del. Ch.1982), the company wanted to reorganize, and pretty much everyone agreed the reorganization would be beneficial, but the proposal would have debilitating adverse tax consequences for one large blockholder. The blockholder agreed to vote in favor, but only if the company loaned it sufficient funds to exercise certain warrants that would eliminate the tax problem. When the transaction was challenged by a company shareholder, the Delaware Court of Chancery agreed this was vote buying, but not impermissible vote buying – the facts were fully disclosed, the deal was conditioned on approval by the remaining stockholders, and the purpose of the arrangement was not to defraud or disenfranchise the other stockholders but to further their collective interest.
What about third party vote buying? That doesn’t use corporate resources at all.
Nonetheless, Delaware has expressed concern about it because it decouples the vote from economic interests in the shares. See Crown EMAK Partners v. Kurz, 992 A.2d 377 (Del. 2010). What if, for example, someone were to short the shares and then use bought votes to vote for a value-decreasing transaction? Now, I’m not exactly sure how this would be economical – especially for retail votes – because you’d have to pay the shareholders enough to compensate them for the lost value of their shares, but maybe retail shareholders aren’t savvy enough to make those calculations and will sell their votes cheap. As a result, the Delaware Supreme Court, affirming the findings of VC Laster, suggested that arrangements which decouple the vote from the economic interest are illegitimate. Id. at 390 (“We hold that the Court of Chancery correctly concluded that there was no improper vote buying, because the economic interests and the voting interests of the shares remained aligned….”) .
That said, the whole set of rules is kind of muddled because of the obvious fact that there are plenty of ways, short of outright vote buying, to obtain votes without being exposed to the economic risks of the shares. Whole articles have been written on the subject, with various proposed reforms.
What this tells me is that if companies buy votes in order to obtain a quorum, that might be permissible under Schreiber, but you’d kind of have to assume the lack of a quorum wasn’t somehow a deliberate choice by shareholders, and that the final vote in fact advanced their collective welfare.
As for third party vote buying, I mean … I’m honestly not sure, but it doesn’t look good, because the economic interest in the shares remains with the seller. Even if the buyer also has an economic interest through their own share ownership, they’re by definition obtaining votes that exceed their economic interest. And if the buyer has no economic interest – if it’s just buying votes because it has other reasons for wanting the corporation to behave a certain way – well, big flashing warning signs.
Anyway, I’ll conclude by pointing out that there’s a case for permitting vote buying, if the sellers are uninformed/retail, and the buyers are long term wealth-maximizing institutional holders.