Kurz v. Holbrook: Shareholder Voting, Omnibus Proxies, and the Role of DTC: Vote Buying and the Separation of Ownership and Voting Rights
We are discussing Kurz v. Holbrook, 2010 Del. Ch. LEXIS 24 (Del. Ch. Feb. 9, 2010).
In analyzing whether the transaction constituted vote buying, VC Laster indicated that there needed to be either disenfranchisement or fraud. Disenfranchisement occurred where the acquisition “actually affect[s] the outcome of the vote” or “it alters the voting pattern in a critical way, such as through coercive tactics reminiscent of tender offer strategies from pre-Williams Act days.”
Mostly, though, the court was interested in the possible separation of voting rights from economic ownership. This has been a growing practical concern. Those seeking to influence the outcome of an election (perhaps by acquiring control) can enhance the possibility of victory by acquiring votes without actually purchasing the underlying shares. This can occur, for example, through the borrowing of stock (which is actually a purchase but guarantees that the shares will be sold back to the original owner, perhaps after the record date) or through the use of swaps and other derivatives.
VC Laster used the opinion to strongly emphasize the need for economic interests to align with voting rights, something he found hidden within legislative intent.
- A Delaware public policy of guarding against the decoupling of economic ownership from voting power can be seen in the 2009 amendment to Section 213(a), which now authorizes a board to set one record date for purposes of giving notice of a meeting of stockholders and a second, later record date for determining which stockholders can vote at the meeting. 8 Del. C. 213(a).
Thus, were “economic interests are fully aligned with voting rights do not raise concern, Delaware law does not restrict a soliciting party from buying shares and getting a proxy to bolster the solicitation's chance of success.”
Kurz acquired the economic interests in the shares. Even though actually title would not be transferred until a future date, he absorbed the economic risk associated with the shares. In those circumstances, the court concluded that there was no separation of economic ownership and voting rights. “Because Kurz now holds the economic interest in the shares, Delaware law presumes that he should and will exercise the right to vote.”
The analysis is fair enough. The mere fact that Boutros could not deliver all of the shares because of transfer restrictions did not prevent Kurz from assuming the economic risks associated with ownership, thereby allowing him to dictate how they were voted. Yet by emphasizing the negative -- the concern over the exercise of voting rights when the two interests are separated, facts not present in the case -- the opinion provided a clear basis for challenges to voting results where the two interests were not aligned. This is a tough issue and VC Laster may ultimately be right, but the matter did not have to be reached in such a clear fashion under the facts of this case.
For more on the entire system of beneficial ownership and the role of the depositories, see The Shareholder Communication Rules and the Securities and Exchange Commission: An Exercise in Regulatory Utility or Futility? The opinion and a number of primary materials are posted at the DU Corporate Governance web site.