Vice-Chancellor Laster of the Delaware Chancery Court has made some interesting remarks on vote buying in a recent decision regarding a proxy contest. Kurtz v. Holbrook., C.A. No. 5019-VCL (February 9, 2010). A couple of highlights:
Recent scholarship has cast light on shadowy aspects of the voting process and techniques by which voting rights can be manipulated. I regard the concept of vote buying as broad enough to encompass these practices. When they prove deleterious to stockholder voting, this Court can and should provide a remedy. (...)
As recognized by Schreiber, third-party vote buying should merit review only if it is disenfranchising, in the sense of actually affecting the outcome of the vote. 447 A.2d at 25-26. Vote buying is disenfranchising when it delivers the swing votes. (...)
What legitimizes the stockholder vote as a decision-making mechanism is the premise that stockholders with economic ownership are expressing their collective view as to whether a particular course of action serves the corporate goal of stockholder wealth maximization. Policing third-party vote buying [flows] from the legitimating conditions necessary for meaningful stockholder voting, which also include the absence of coercion and the presence of full information about the material facts. (...)
Because transactions in which 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 does not have any competing economic or personal interests that might create an overall negative economic ownership in EMAK. (...)
I do not believe that Kurz has any reason to vote other than in the manner he thinks would best maximize the value of EMAK as a corporation. I therefore conclude that the voting of the Boutros shares is not a legal wrong. I agree with the defendants that Kurz primarily wanted the voting rights carried by the shares, not the shares themselves. Unlike the defendants, I do not perceive anything illicit in that fact given the nature of the transaction as a whole.
The conclusion seems to be that in principle, vote buying is OK as long as a corresponding economic interest is acquired, which is generally the case if shares are purchased. If votes are bought but no corresponding economic interest is acquired, for example because it is hedged away, and the votes are used to swing the vote, this may, depending the circumstances, constitute a legal wrong. Following the New York district court's decision in CSX, the Chancery Court's decision therefore constitutes another powerful reminder that investors contemplating to use derivatives to swiftly or cheaply acquire corporate control should think twice.
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