Introduction

Five years after the passage of the Sarbanes-Oxley Act, America's corporations are still considering how to deal with newly empowered shareholders. In addition to specific requirements designed to ensure that corporations comport themselves to minimum standards of corporate governance, American businesses are encountering greater and more sophisticated activist shareholders. The new standards, whether implemented through legislative directive, Securities and Exchange Commission ("SEC" or the "Commission") regulations, or the listing standards of the major exchanges, have resulted in greater oversight of management. This, in turn, has begun to establish a new equilibrium of corporate control between management and shareholders. The focus on governance practices of public companies after the implementation of Sarbanes-Oxley, including the expanded requirements and structures for issuers to communicate with investors, is designed to promote greater shareholder involvement.

At the same time that traditional shareholders are staking their claims to greater participation in the governance of their corporations, an interesting practice that allows other "investors" to borrow--or buy--the voting rights has begun to be employed more often. In effect, without owning any shares of a company, individuals and entities can attempt to affect the outcome of corporate actions that are put to a vote at shareholder meetings by borrowing
a large number of shares for a relatively nominal fee and then using those borrowed shares to cast a corresponding number of votes.

This Briefly will review some of the current developments in shareholder activism as it relates to opportunities to give a voice to shareholder interests. It will then review the mechanism by which "investors" are able to acquire disproportionate voting rights and discuss several options to address the relevant issues proposed by commentators and practitioners who oppose the strategy. As borrowed voting is enabled by many of the same structures that also support hedging and derivative trading, to the extent that any changes affecting borrowed voting are made, it is important that they not imperil other useful economic activity.

 Click here to view the full text of this Briefly as an Adobe Acrobat PDF.