Equity and debt decoupling and empty voting II: Importance and extensions

University of Pennsylvania Law Review

Volumn 156, Issue 3, 2008, Pages 625-739

  Hu, Henry T C ^a   Black, Bernard ^a,b  

^a UNIVERSITY OF TEXAS AT AUSTIN   (United States)

^b UNIVERSITY OF TEXAS AT AUSTIN   (United States)

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[No Author keywords available]

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EID: 41249089104     PISSN: 00419907     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Review

References (401)

1. We developed the concepts of empty voting and hidden (morphable) ownership in several recent, related articles. Henry T. C. Hu & Bernard Black, The New Vote Buying: Empty Voting and Hidden (Morphable) Ownership, 79 S. CAL. L. REV. 811 (2006)
2. [hereinafter Hu & Black, Decoupling I (Law Review Version)], available at http://ssrn.com/abstract=904004 (article directed at legal academics);
3. Henry T. C. Hu & Bernard Black, Empty Voting and Hidden (Morphable) Ownership: Taxonomy, Implications, and Reforms, 61 BUS. LAW. 1011 (2006), available at http://ssrn.com/abstract=887183 (shorter version, directed at lawyers, judges, and regulators);
4. Henry T. C. Hu & Bernard Black, Hedge Funds, Insiders, and the Decoupling of Economic and Voting Ownership: Empty Voting and Hidden (Morphable) Ownership, 13 J. CORP. FIN. 343 (2007)
5. [hereinafter Hu & Black, Decoupling I (Finance Version)], near-final version available at http://ssrn.com/abstract=874098 (version directed at finance academics, with expanded theoretical discussion). Below, we refer where appropriate to the first article and, in some cases, the third, but assume general familiarity with this prior work.
6. See infra Part III.B.
7. The extensions of the decoupling framework to other shareholder rights and to decoupling by creditors were introduced in Henry T. C. Hu, Shareholder and Creditor Decoupling: Separating "Embedded Rights" and Contractual Rights from Economic Interests 1, 4, 20-21, 23 (10th Singapore Conference on International Business Law, Aug. 22-23, 2007) (Aug. 17, 2007 draft, on file with authors)
8. [hereinafter Hu, Shareholder and Creditor Decoupling],
9. and subsequentiy discussed in Henry T. C. Hu & Jay L. Westbrook, Abolition of the Corporate Duty to Creditors, 107 COLUM. L. REV. 1321, 1329-30, 1366, 1382-89, 1395-98, 1401-03 (2007)
10. [hereinafter Hu & Westbrook, Shareholder and Creditor Interests], available at http://ssrn.com/abstract=977582.
11. Henry T. C. Hu & Bernard Black, Debt, Equity, and Hybrid Decoupling: Governance and Systemic Risk Implications, 14 EUR. FIN. MGMT. (forthcoming 2008), available at http://ssrn.com/abstract=1084075
12. [hereinafter Hu & Black, Debt, Equity, and Hybrid Decoupling].
13. We seek throughout this Article to limit overlap with Decoupling I. We indicate in occasional footnotes, including this one, where to find further discussion of points addressed there. Unless there is specific need, we do not repeat citations that appear there or decoupling examples discussed there. On the goals served by linking voting and economic rights, see Hu & Black, Decoupling I (Law Review Version) (2006), supra note 1, at 850-54.
14. This discussion is based primarily on the M-Flex complaint against WBL, in the Delaware Court of Chancery, and a court order in the U.S. District Court for the Central District of California dismissing a different M-Flex complaint against Stark. See Complaint for Declaratory and Injunctive Relief, Multi-Fineline Electronix, Inc. v. WBL Corp., No. 2482-N, 2006 WL 4781677 (Del. Ch. Oct. 17, 2006); Order Granting Defendants' Motion To Dismiss First Amended Complaint, Multi-Fineline Electronix, Inc. v. Stark Master Fund Ltd., No. 06-0960 (CD. Cal. Dec. 4, 2006). We have assumed that M-Flex's factual allegations are correct. For subsequent developments, see Sarah Tolkoff, Freed from Deal, M-Flex Seeks To Diversify, ORANGE COUNTY BUS. J., July 2, 2007, at 3 (describing M-Flex's future after WBL shareholders voted against the merger with M-Flex);
15. and Multi-Fineline Announces WBL Shareholders Vote Against Accepting the MFS Technology Offer, REUTERS, June 26, 2007, available at http://www.reuters.com/article/inPlayBriefing/ idUSIN20070626083553MFLX20070626 (discussing the WBL shareholder vote against the merger).
16. Readers familiar with Decoupling I will recognize that the M-Flex/Stark/MFS pattern here is closely analogous to the Mylan/Perry/King Pharmaceuticals pattern discussed there.
17. We discuss the disclosure requirements for cash-settled derivatives in Hu & Black, Decoupling I (Law Review Version) (2006), supra note 1, at 864-75.
18. References in the remainder of this Article to equity swaps and other equity derivatives are to cash-settled derivatives, unless otherwise specified.
19. As to the distinction between exchange-traded derivatives and OTC derivatives, see Henry T. C. Hu, Misunderstood Derivatives: The Causes of Informational Failure and the Promise of Regulatory Incrementalism, 102 YALE L.J. 1457, 1464-65 (1993).
20. 15 U.S.C. § 78m (2000).
21. For the classic case involving disclosable hard stock parking, see United States v. Bilzerian, 926 F.2d 1285 (2d Cir. 1991). For an account of how stock parking was used in the 1980s, see CONNIE BRUCK, THE PREDATORS' BALL: THE JUNK-BOND RAIDERS AND THE MAN WHO STAKED THEM 320-29 (1988).
22. Our discussion of TD Ameritrade is based on Gaston F. Ceron, Ameritrade Gets Pressure from Funds for a Merger, WALL ST. J., June 6, 2007, at C3;
23. Kaja Whitehouse, David Enrich & Mara Lemos Stein, Activist Hedge Funds Use Derivatives To Target Larger Prey, DOW JONES NEWS WIRES, July 11, 2007;
24. and TD Ameritrade Holding Corp., Current Report (Form 8-K), at 1 (June 5, 2007).
25. Gregory Zuckerman, Concentration Proves Winner at Hedge Fund, WALL ST. J., May 14, 2007, at C1.
26. Id.;
27. Whitehouse, Enrich & Stein (2007), supra note 13.
28. See infra Part V.A. Nothing in the framework presumes that shareholder rights in general-or shareholder economic rights-are limited to those that would be possessed by a residual claimant. For discussion of the limitations of the "residual claimant" notion in characterizing shareholder rights,
29. see Hu & Westbrook, Shareholder and Creditor Interests (2007), supranote 3, at 1382-89, 1393-98.
30. Economic-only ownership, accompanied by morphable voting rights, is not truly "economic-only." We judged that this imprecision did not justify creating yet another term for this type of ownership, which would fall in between economic-only and full ownership.
31. We discuss these techniques in Hu & Black, Decoupling I (Law Review Version) (2006), supra note 1, at 858-59.
32. Joe Bacchus, Rockville-Based Corporate Governance Firm To Merge with RiskMetrics, DAILY RECORD (Baltimore), Nov. 2, 2006, available at 2006 WLNR 19183261;
33. Robert D. Hershey, Jr., A Little Industry with a Lot of Sway on Proxy Votes, N.Y. TIMES, June 18, 2006, § 3, at 6.
34. See, e.g., Chew v. Inverness Mgmt. Corp., 352 A.2d 426 (Del. Ch. 1976) (prohibiting transfer of voting rights);
35. Robert Charles Clark, Vote Buying and Corporate Law, 29 CASE W. RES. L. REV. 776 (1979) (discussing vote buying law and policy implications);
36. Michael D. Schmitz, Comment, Shareholder Vote Buying - A Rebuttable Presumption of Illegality, 1968 WIS. L. REV. 927 (same).
37. 447 A.2d 17 (Del. Ch. 1982).
38. Id. at 25.
39. Id. at 26.
40. More specifically, Schreiber defines vote buying as "a voting agreement supported by consideration personal to the stockholder, whereby the stockholder divorces his discretionary voting power and votes as directed by the offeror." Id. at 23.
41. As discussed infra in Part IV.C, there are bank regulatory and other limitations on borrowing shares for voting purposes in certain circumstances.
42. Lauren Cohen, Karl B. Diether & Christopher J. Malloy, Supply and Demand Shifts in the Shorting Market, 62 J. FIN. 2061, 2067-70 (2007).
43. We discuss the size of the share lending market infra in Part IV.C.1.
44. Alon Brav & Richmond D. Mathiews, Empty Voting and Efficiency (Nov. 14, 2007) (unpublished manuscript, on file with authors).
45. See, e.g., DEL. CODE ANN. tit. 8, § 160(c) (2001);
46. Am. Bar Ass'n Comm. on Corporate Laws, Changes in the Model Business Corporation Act-Amendments to Financial Provisions, 34 BUS. LAW. 1867, 1869, 1878 (1979).
47. For descriptions of these two non-decoupling-based strategies, see Dennis J. Block, Public Company M&A: Recent Developments in Corporate Control, Protective Mechanisms and Other Deal Protection Techniques, in CONTESTS FOR CORPORATE CONTROL 2007: CURRENT OFFENSIVE & DEFENSIVE STRATEGIES IN M&A TRANSACTIONS 7, 145-46 (PLI Corporate Law & Practice, Course Handbook Series No. B-1584, 2007).
48. We discuss the disclosure rules that apply to soft parking infra in Part III.C.
49. NYSE Euronext, Listed Company Manual § 312.03(c) (2007).
50. On voting of shares held by a subsidiary or otherwise controlled by the corporation, see JAMES D. COX, THOMAS LEE HAZEN & F. HODGE O'NEAL, CORPORATIONS §§ 13.16, 21.7 (1997). The risk of the shares losing voting power might increase if the corporation were to bind the dealer contractually to hedge through matched shares, to ensure that the dealer retained voting rights.
51. Similar issues have been litigated in New Zealand and Australia, with regard to whether morphable economic ownership was covered by large shareholder disclosure rules. In both countries, appellate courts ruled that disclosure was not required. See Hu & Black, Decoupling I (Law Review Version) (2006), supra note 1, at 836-37 (Perry-Rubicon) and 840 (Glencore-Austral Coal).
52. Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 955 (Del. 1985);
53. Unitrin, Inc. v. Am. Gen. Corp., 651 A.2d 1361, 1373 (Del. 1995);
54. see also Meredith M. Brown & William D. Regner, The Duties of Target Company Directors Under State Law: The Business Judgment Rule and Other Standards of Judicial Review, in CONTESTS FOR CORPORATE CONTROL 2007: CURRENT OFFENSIVE & DEFENSIVE STRATEGIES IN M&A TRANSACTIONS, supra note 30, at 187, 193.
55. See Revlon, Inc. v. MacAndrews & Forbes Holdings, 506 A.2d 173, 180 (Del. 1986) (requiring close judicial scrutiny of transactions which result in a change of control, often referred to as "Revlon" scrutiny).
56. Our discussion of Portugal Telecom is based on information provided by knowledgeable Portuguese investment bankers and lawyers. See also Lisbon Shares Lower Midmorning Led by Telecoms Ahead of Portugal Telecom EGM, AFX INT'L FOCUS, Mar. 2, 2007 (stating that "PT management also intends to use 1.8 pet of the company's shares held by Barclays Bank to vote at the EGM [Extraordinary General Meeting] today").
57. Portugal Telecom Shareholders Turn Down Sonaecom Takeover Bid, PORT. BUS. DIG., Mar. 5, 2007.
58. For general information about the Sonaecom bid for Portugal Telecom, though not specifically about share parking, see, for example, Paul Betts, Low Ceilings, FIN. TIMES (London), Mar. 7, 2007, at 22;
59. Peter Wise, Investors Block Sonaecom Bid for PT Telecoms, FIN. TIMES (London), Mar. 3, 2007, at 19.
60. Our discussion relies on Claudio Loderer & Pius Zgraggen, When Shareholders Choose Not To Maximize Value: The Union Bank of Switzerland's 1994 Proxy Fight, J. APPLIED CORP. FIN., Fall 1999, at 91.
61. By way of comparison, U.S. companies sometimes enter into forward purchases of their own shares to hedge obligations under employee benefit plans. See Jim Rothwell, Common Derivatives and Their Uses-Equity Derivatives, in SWAPS AND OTHER DERIVATIVES IN 2006, at 51, 73 (PLI Corp. Law & Practice, Course Handbook No. B-1559, 2006). No one has suggested that the counterparty loses voting rights.
62. Our discussion of MOL is based on Austrian Oil Company Chief Interviewed on Likely Hungarian Merger, Russian Links, BBC MONITORING EUR., Aug. 17, 2007;
63. Budapest Stock Buyback News in Brief-MOL, OTP, HUNG. BUS. DIG., Aug. 27, 2007;
64. The Hungarian Defence, ECONOMIST, Aug. 11, 2007, at 58;
65. Hungarian MOL Willing To Buy into OMV, HUNG. BUS. DIG., Aug. 22, 2007;
66. Hungarian Stock Buyback News in Brief - MOL, OTP, HUNG. BUS. DIG., Aug. 17, 2007;
67. Karin Strohecker, OMVs Bid for MOL Seen with Slim Chance of Success, REUTERS (U.K.), Sept. 26, 2007, available at http://uk.reuters.com/article/oilRpt/idUKL2688797420070926;
68. Sandra Pointel & Katalin Toth, OMV Will Not Launch Takeover Immediately, But Pressure on MOL 's Management Could Increase, FT.COM, Sept. 26, 2007, http://www.ft.com/cms/s/2/af36860e6c2c-1dc- a0cf-0000779fd2ac,dwp_uuid=e8477cc4-c820-11db-b0dc-000b5df10621.html.
69. Act IV of 2006 on Business Associations, §§227, 285 (Hung.), available at http://www.irm.hu/?katid=265&id=294.
70. OMV Sends Declaration of Intent to Hungary's MOL, Would Offer HUF 32,000 per Share, PORTFOLIO.HU, Sept. 25, 2007, http://www.portfolio.hu/en/tool/ print.tdp?cCheck=1&k=1&i=13041.
71. For a description of the offer, see, for example, Guy Chazan, OMVs Bid Fails To Sway MOL, WALL ST. J., Sept. 26, 2007, at A8. MOL has not denied controlling the bank-held shares.
72. See Ed Crooks, OMVAsks Brussels'Approval for € 14bn Mol Bid, FIN. TIMES (London), Oct. 18, 2007, at 20.
73. See Brian Quinten, Continental Shifts, CORP. LEGAL TIMES, Aug. 2004, at 54;
74. cf. Jan van der Horst & Marleen van Uchelen-Schipper, The Netherlands (undated analysis, provided Oct. 29, 2007 by Prof. Joseph McCahery to Henry Hu) (describing how depositary receipts work under Dutch law).
75. Bill McIntosh, Court Nixes Stork Poison Pill, but Cancels EGM, HEDGEWORLD DAILY NEWS, Jan. 17, 2007, available at 2007 WLNR 962714.
76. Some foundations are apparendy being dismantled. See Dry Questions for Dutch Investors, FIN. TIMES EUR., Mar. 21, 2006, at 12, available at 2006 WLNR 4650147.
77. See Centaurus Alpha Master Fund Ltd. v. Stork N.V., College van Beroep voor het Bedrijfsleven [CBB] [court of appeal from decisions of public trade organizations], Amsterdam, 17 januari 2007, No. 15/2007 OK, available at http://zoeken.rechspraak.nl (search by docket number).
78. See, e.g., Block (2007), supra note 30, at 147 ("ESOP shares are likely to be voted or tendered in a manner consistent with management's interests.").
79. Joshua D. Rauh, Own Company Stock in Defined Contribution Pension Plans: A Takeover Defense?, 81J. FIN. ECON. 379, 381 (2006).
80. See Robert Hockett, What Kinds of Stock Ownership Plans Should There Be? Of ESOPs, Other SOPs, and "Ownership Societies,"92 CORNELL L. REV. 865, 885 (2007);
81. see also Theodore N. Mirvis, Takeover Law and Practice 2006, in WHAT ALL BUSINESS LAWYERS & LITIGATORS MUST KNOW ABOUT DELAWARE LAW DEVELOPMENTS 2007, at 147 (PLI Corp. Law & Practice, Course Handbook Series No. B-1599, 2007) (describing various plans designed to encourage employee ownership of stock, including non-ERISA Stock Employee Compensation Trusts).
82. See Block (2007), supra note 30, at 148;
83. Mirvis (2007), supra note 49, at 258.
84. See Mirvis (2007), supra note 49, at 258-60;
85. cf. Brown & Regner (2007), supra note 35, at 262-63 (noting that Delaware courts have similarly found proportional voting reasonable).
86. See, e.g., Lilli A. Gordon & John Pound, ESOPs and Corporate Control, 27 J. FIN. ECON. 525, 527-30 (1990);
87. Mirvis (2007), supra note 49, at 260.
88. NCR Corp. v. AT&T, 761 F. Supp. 475, 478-82 (S.D. Ohio 1991).
89. Id. at 482.
90. See supra note 35 and accompanying text.
91. Aquila, Inc. v. Quanta Servs., Inc., 805 A.2d 196, 199-202 (Del. Ch. 2002). The Chancery Court concluded that Quanta's decision to create the ESOP would likely not satisfy the second prong of the Unocal test for defensive tactics, that of a proportionate response to the threat posed by the Aquila bid. Id. at 207-08.
92. The Netherlands courts suspended the voting rights of both the ESOP and LVMH. Jan Willem van der Staay, Public Takeovers in the Netherlands, CORP. FIN., Jan. 2000, at 83.
93. See Kingsbridge Capital Group v. Dunkin' Donuts, Inc., Nos. 10907, 10809, 10825, 10829, 10831, and 10889, 1989 WL 89449, at *2 (Del. Ch. Aug. 7, 1989).
94. See Shamrock Holdings, Inc. v. Polaroid Corp., 559 A.2d 278, 281 (Del. Ch. 1989).
95. Cynthia Crossen & Karen Blumenthal, An Anti-Takeover Arsenal that Failed, WALL ST. J., Nov. 4, 1988, at B1.
96. See Brad J. Schwartzberg & Evan Weiner, Attracting and Retaining Key Employees by Offering Equity-Based Incentive Compensation, METROPOLITAN CORP. COUNS., June 2007, at 44.
97. See Janice Kay McClendon, Bringing the Bulls to Bear: Regulating Executive Compensation To Realign Management and Shareholders ' Interests and Promote Corporate Long-Term Productivity, 39 WAKE FOREST L. REV. 971, 1026 (2004);
98. Nazar Khodorovsky, Note, Inconsistent Obligations: Robinson v. United States or How an Agency Problem Whipsawed the IRS, 15 FED. CIR. BJ. 463 (2006).
99. See George G. Jones & Mark A. Luscombe, Changes to Tax Laws Boost Interest in Restricted Stock, ACCT. TODAY, Aug. 18, 2003, at 10, 11;
100. Stuart R Singer, Deferred Compensation for Executives Under Sec. 409A (pt. 1), TAX ADVISER, July 2006, at 402, 405.
101. The extent of empty voting by executives who receive restricted shares will depend on, among other things, the recipient's expectation that he will likely stay through the vesting period and the possibility that the recipient also holds employee stock options (which convey economic ownership without voting rights) and hence may not be an empty voter based on the recipient's full position.
102. On the growing popularity of restricted stock relative to stock options, see, for example, Jones & Luscombe (2003), supra note 63, at 10;
103. Harry Levitt & Bill Gardiner, Phantom Stock Plans: A Viable Alternative to Restricted Stock?, COMPENSATION & BENEFITS REV., July-Aug. 2004, at 19.
104. Hu & Black, Decoupling I (Law Review Version) (2006), supranote 1, at 816-17.
105. Id. at 839.
106. We thank Professor Dr. Theo Baums for providing information on this case. See Oberlandesgericht München [OLG München] [Munich Court of Appeals] Nov. 23, 2006, 2006 Zeitschrift für Wirtschaftsrecht [ZIP] 2370 (F.R.G.) (German decisions do not include party names).
107. Our discussion of ABN Amro is based primarily on Louise Armitstead, Dutch Options Riddle, SUNDAY TIMES (London), July 22, 2007, §3, at 2;
108. Jane Croft, Fears that Hedge Funds Are Out To Block Fortis, FIN. TIMES (London), July 27, 2007, at 22;
109. Steve Goldstein, ABN Amro Declares Neutrality on Buyout Offers, DOWJONES BUS. NEWS, July 30, 2007;
110. Carrick Mollenkamp, Fortis Borrowing Surges: Backers, Opponents Work Toward Position To Influence Vote, WALL ST. J. EUR., July 27, 2007, at 18.
111. Armitstead (2007), supranote 69.
112. We discuss the U.S. rules in Hu & Black, Decoupling I (Law Review Version) (2006), supra note 1, at 867-75.
113. The relevant definition of beneficial ownership is in Securities Exchange Act of 1934 (Exchange Act) Rule 13d-3, 17 C.F.R. §240.13d-3 (2007).
114. We discuss the section 16 disclosure requirements for cash-settled derivatives in Hu & Black, Decoupling I (Law Review Version) (2006), supra note 1, at 873-74.
115. Exchange Act Schedule 14A, Item 7, 17 C.F.R. §240.14a-101 (2007) (requiring ownership disclosure in proxy statements). Other periodic filings do not indicate inside ownership.
116. See Henry T. C. Hu, Die Offenlegung anpassen, FINANZ UND WIRTSCHAFT, Sept. 19, 2007, at 1.
117. Haig Simonian, Victory Jitters Strike Swiss Industrialists, FIN. TIMES (London), Mar. 19, 2007, at 24.
118. Our discussion of Sulzer is based on Paul Betts, Locusts in Switzerland, FIN. TIMES (London), Apr. 25, 2007, at 26;
119. Carl Mortished, Deutsche's Zurich Offices Raided in Options Inquiry, TIMES (London), May 25, 2007, at 56;
120. and Haig Simonian, ZKB Head Quits in Row on Disclosure, FIN. TIMES (London), May 8, 2007, at 24.
121. Our discussion of Ascom and Unaxis is based on Ascom Plunges As Victory Divestment Ends Takeover Speculations, AFX INT'L FOCUS, May 24, 2007;
122. Chris Flood, Dexia "HiddenJewel"Highlighted FIN. TIMES (London), Jan. 19, 2007, at 36;
123. OC Oerlikon Owner Victory Holds 20.1 Pet Stake in Swiss Telecoms Co Ascom, AFX INT'L FOCUS, Jan. 17, 2007;
124. and Haig Simonian, Raiders Unnerve Swiss Regulator, FIN. TIMES EUR., Mar. 21, 2007, at 17.
125. Our discussion of Unaxis is based on Carl Mortished, Bodycote Board Rejects Fourth Takeover Approach from Sulzer, TIMES (London), Apr. 19, 2007, at 58;
126. Simonian (2007), supranote 76;
127. Simonian (2007), supra note 78;
128. Press Release, OC Oerlikon, Disclosure of Victory Interests in Accordance with Stock Market Rules (Apr. 14, 2005), available at http://www.oerlikon.com/ecomaXL/index.php?site=OERLIKON_EN_ad_hoc_release s_detail&udtx_id=135;
129. and OC Oerlikon, Disclosure of Shareholding Pursuant to Stock Exchange Act (July 11, 2007), available at http://www.oerlikon.com/ecomaXL/index. php?site=OERLIKON_EN_mandatory_notifications_detail&udtx_id=4432.
130. Our discussion of Saurer is based on OC Oerlikon, ANNUAL REPORT 2006: LIVING HIGH TECHNOLOGY 5 (2006), available at http://www.oerlikon.com/annualreport2006/downloads/ Oerlikon_Annual_Report_2006_e.pdf;
131. Andrew Bulkeley, U.K. 's Laxey Ends Saurer Feud, DAILY DEAL, Sept. 7, 2006;
132. Martin Gelnar, Saurer 1H Net Pft -40%: Plans To Stay Solo, DOWJONES INT'L NEWS, July 26, 2005;
133. Carl Mortished, Swiss Investigate VekselbergFirm Over Stake-Building in Engineer, TIMES (London), April 27, 2007, at 67.
134. Our discussion of Implenia is based on Implenia Says Views Laxey's Stake as Hostile, REUTERS (U.K.), Apr. 18, 2007;
135. Implenia Shares Fall, Laxey Exerts Pressure, REUTERS, July 23, 2007;
136. Strabag To Announce Next Week Purchase of Stake in Implenia, AFX INT'L FOCUS, June 20, 2007;
137. and Swiss Implenia Seen as Takeover Target for Hochtief, Strabag, Bouygues, AFX INT'L FOCUS, June 13, 2007.
138. Our discussion of Converium is based on Andrew Bulkeley, Converium Sues French Suitor, DAILY DEAL, Apr. 18, 2007;
139. Swiss Banking Commission Says Ebner, SCOT Acted as Team in Converium Takeover, AFX INT'L FOCUS, July 22, 2007;
140. Swiss Reinsurer Rejects Takeover Bid by French, INT'L HERALD TRIB., Feb. 20, 2007, at 16;
141. and Press Release, Swiss Fed. Banking Comm'n, Takeover Chamber of the SFBC Confirms TOBRecommendation IV Dated 9 June 2007 Regarding Converium (July 18, 2007).
142. See Loi fédérale sur les bourses et le commerce des valeurs mobilières [LBVM] [Federal Act on Stock Exchange and Securities Trading (SESTA)] Mar. 24, 1995, SR 954.1, art. 20 (Switz.), available at http://www.admin.ch/ch/f/rs/9/954.1.fr.pdf;
143. Ordinance de la Commission Fédérale des banques sur les bourse et le commerce des valeurs mobilières [OBVM-CFB] [Ordinance of the Swiss Federal Banking Commission on Stock Exchange and Securities Trading] June 25, 1997, SR 954.193, art. 13(3) (Switz.) (repealed 2007), available at http://www.admin.ch/ch/f/rs/9/954/93.fr.pdf.
144. Our discussion of these rules and the 2007 amendments is based on discussions with Swiss regulators and knowledgeable Swiss market participants, as well as Alexander Vogel & Christoph Heiz, Proposed Amendments of Swiss Disclosure Rules To Close Raider Loopholes, in EUROMONEY DERIVATIVES & RISK MANAGEMENT HANDBOOK 2007/08 (2007);
145. Georg G. Gotschev, The Duty To Disclose Significant Holdings in Listed Companies-The Federal Banking Commission Tightens the Regime, NEWSLETTER (Walder Wyss & Partners, Zurich, Switz.), July 2007;
146. Swiss Banking Commission To Tighten Disclosure of Shareholding Rules from July, AFX INT'L FOCUS, May 13, 2007 (mentioning Daniel Zuberbuehler's discussion of the need for this change in order to curb secretive takeovers);
147. Letter from the Swiss Fed. Banking Comm'n to Interested Persons (Apr. 18, 2007), available at http://www.ebk.admin.ch/e/aktuell/index.html (appending a table displaying proposed rule changes and commentary as of April 16, 2007);
148. and Press Release, Swiss Fed. Banking Comm'n, SFBC To Strengthen Shareholding Disclosure Rules (June 1, 2007), available at http://www.ebk.admin.ch/e/aktuell/index.html.
149. Swiss Fed. Banking Comm'n, New Provisions Regarding the Disclosure of Shareholders (Nov. 7, 2007), http://www.ebk.ch/e/aktuell/index.html; E-mail from Gérard Hertig to Henry Hu (Nov. 10, 2007) (on file with author) (describing the central features of these changes).
150. On the assets held by sovereign wealth funds, see Joanna Chung & Tony Tassell, The $2,500bn Question: How Sovereign Wealth Funds Are Muscling in on Global Markets, FIN. TIMES (London), May 25, 2007, at 11.
151. On their activities, see, for example, Norma Cohen, Rivals Grab Half of London Bourse, FIN. TIMES USA, Sept. 21, 2007, at 1;
152. Andrew Ross Sorkin, Carlyle To Sell Stake to a Mideast Government-20% of Buyout Firm To Be Owned by Capital of United Arab Emirates, N.Y. TIMES, Sept. 21, 2007, at C1;
153. John Willman, Big Spenders: How Sovereign Funds Are Stirring Up Protectionism, FIN. TIMES (London), July 30, 2007, at 7.
154. After findings by the Swedish Securities Council as to a breach of best practices and an earlier finding by the U.K. Financial Services Authority of a breach of securities rules, Borse Dubai's CEO conceded that it "ought to have included further information on the option contracts." Niklas Magnusson, Borse Dubai's OMX Bid Draws a New Reprimand, INT'L HERALD TRIB., Sept 11, 2007, at 14;
155. see also Jonas Bergman, Swedish Regulator Ends OMX Inquiry, INT'L HERALD TRIB., Sept. 4, 2007, at 16;
156. David Ibison, Bone Dubai Suffers Double Blow in Its Efforts To Take Over OMX, FIN. TIMES (London), Aug. 24, 2007, at 15;
157. Stanley Reed, The Battle for Sweden's OMX, BUSINESSWEEK.COM, Aug. 23, 2007, http://www.businessweek.com/globalbiz/ content/aug2007/gb20070823_153192.htm.
158. Hu & Black, Decoupling I (Finance Version) (2007), supra note 1.
159. Insider hedging was part of the reason for Hong Kong's 2003 disclosure reforms, as discussed in Decoupling I. Similar hedging is rumored to take place elsewhere. The value of diversification is substantial enough so that, with hedging opportunities now widely available, it would be surprising if partial insider hedging were not widespread.
160. See Enel Moves To Raise Stake in Endesa to 22 Percent with New Share-Swap Deal, ASSOCIATED PRESS, Mar. 2, 2007;
161. Italy Enel Exercises Equity Swap on Spain Endesa Stake, ANSA ENGLISH CORP. NEWS SERV., June 4, 2007.
162. See Peter Thal Larsen, RBS-Led Group Has Doubled ABN Stake, FIN. TIMES (London), Sept. 26, 2007, at 23.
163. Jonathan Birchall, Ackman Takes 9.6% Stake in Target To Push for Changes, FIN. TIMES (London),July 17, 2007, at 21;
164. Jared A. Favole & Mike Barris, With 9.6% Stake in Target, Ackman Fires Value Salvo, WALL ST. J., July 17, 2007, at C3;
165. Lisa Gewirtz-Ward & John E. Morris, Pershing Buys 9.6% Stake in Target, DAILY DEAL, July 17, 2007;
166. Hedge Fund Raises Stake in Target, REUTERS, Dec. 25, 2007.
167. Kara Scannell, "Broker Votes": Opponents May Win One, WALL ST. J., June 13, 2007, at C1.
168. Whitehouse, Enrich & Stein (2007), supranote 13.
169. Information on the Chandlers' plans to hedge is from a source familiar with the transaction. See also Michael Oneal & John McCormick, Tribune Co. Welcomes Zell to Board; Chandlers Exit, CHI. TRIB., May 10, 2007, § 3, at 1.
170. See James Quinn, No Resting on Their Laurels at the LSE, DAILY TELEGRAPH, Feb. 15, 2007, at 5. Information that the 23% position was held through derivatives was provided by a knowledgeable U.K. market participant.
171. Sarah Spikes, Funds' Battle with Stork Heats Up, FIN. TIMES (London), Nov. 24, 2006, at 24;
172. Press Release, Stork NV, Stork Requests Hearing of Witnesses Centauras and Paulson (Oct. 4, 2006), available at http://www.stork.nl/page.html? ch=DEF& id=4875&pr=200610/1079294.
173. Public Company News, SAINT PAUL PIONEER PRESS, Feb. 11, 2007, at 4D;
174. White-house, Enrich & Stein (2007), supranote 13.
175. Andrea Rothman & Heather Smith, Lagardere Shares Fall on EADS Insider Trading Report, BLOOMBERG, Oct. 3, 2007.
176. Information provided by a knowledgeable market observer.
177. See Adam Cohen, Wielding "Stichting" To Fight Takeovers: Dutch Tactic Allows Companies To Shelter Assets from Predators, WALL ST. J. EUR., May 22, 2006, at 4.
178. Istithmar PJSC, General Statement of Acquisition of Beneficial Ownership (Schedule 13D) (Feb. 16, 2006) (relating to Time Warner, Inc.).
179. Information on this transaction is from a private source.
180. Personal knowledge of Bernard Black, arising from participation as expert witness in arbitration between IPOC International Growth Fund Limited (Bermuda) and OAO "CT-Mobile" case before the Arbitration Institute of the Stockholm Chamber (2005-2006).
181. Barnet D. Wolf, Big Investor Wants Changes at Wendy's, COLUMBUS DISPATCH, Apr. 27, 2005, at IA;
182. Whitehouse, Enrich & Stein (2007), supra note 13.
183. Trian Fund Mgmt, L.P., General Statement of Acquisition of Beneficial Ownership (Schedule 13D) (Dec. 13, 2005) (relating to Wendy's International, Inc.).
184. Heather Smith, Bank Raid, FOCUS EUR., Summer 2006, at 32 (supp. to AM. LAW.).
185. This and a number of other Australian examples are summarized in TAKEOVERS PANEL (Ausd.), EQUITY DERIVATIVES: DRAFT GUIDANCE NOTE 2 (Sept. 10, 2007) and TAKEOVERS PANEL (Ausd.), DISCUSSION PAPER: EQUITY DERIVATIVES (Sept. 10, 2007).
186. Exar Corp., Definitive Proxy Statement, Contested Solicitations (Schedule 14A) (Oct. 3, 2005).
187. Dennis Fitzgerald & Heidi Moore, Movers & Shakers: Week of April 12, 2004, DAILY DEAL, Apr. 12, 2004.
188. Information provided by Professor Woochan Kim of KDI School of Management and Public Policy. Professor Kim is affiliated with PSPD (Peoples' Solidarity for Participatory Democracy), a Korean shareholder rights group, which reported the incident in a Korean language report in 2003.
189. ASHURST, INVESTMENT BANKING BRIEFING: USE OF CFDS IN PUBLIC M&A (May 2004), available at http://www.ashurst.com/doc/aspx?id_Content=926.
190. Tom Kirchmaier & Jeremy Grant, Financial Tunnelling and the Revenge of the Insider System (London Sch. Econ., Financial Markets Group Discussion Paper No. LSE 536, 2005), available at http://ssrn.com/abstract= 613945.
191. TAKEOVERS PANEL (Ausd.), DISCUSSION PAPER: EQUITY DERIVATIVES (2007), supra note 107, ¶ 44.
192. See Hu & Black, Decoupling I (Law Review Version) (2006), supra note 1, at 864-86.
193. See id. at 879-80.
194. FIN. SERVS. AUTH. (U.K.), DISCLOSURE OF CONTRACTS FOR DIFFERENCES: CONSULTATION AND DRAFT HANDBOOK TEXT (2007), available at http://www.fsa.gov.uk/ pubs/cp/cp07_20.pdf.
195. See SEC. & FUTURES COMM'N (H.K.), CONSULTATION PAPER ON THE REVIEW OF THE DISCLOSURE OF INTERESTS REGIME UNDER PART XV OF THE SECURITIES AND FUTURES ORDINANCE 1 (2005), available at http://www.sfc.hk/sfc/notes/ consult/EN/apps/som/direviewconsult.nsf/content/Download/1/$FILE/ Part%20XY%20Consulta tion%20Paper%20200105%20-%20English.pdf.
196. See TAKEOVERS PANEL (Ausd.), EQUITY DERIVATIVES: DRAFT GUIDANCE NOTE (2007), supra note 107;
197. TAKEOVERS PANEL (Austl.), DISCUSSION PAPER: EQUITY DERIVATIVES (2007), supra note 107.
198. The enthusiasm for disclosure reform is not universal. For instance, Singapore's Securities Industry Council has been more hesitant. See SEC INDUS. COUNCIL, CONSULTATION CONCLUSIONS ON REVISION OF THE SINGAPORE CODE ON TAKE-OVERS AND MERGERS (2007);
199. SEC. INDUS. COUNCIL, CONSULTATION PAPER ON REVISION OF THE SINGAPORE CODE ON TAKE-OVERS AND MERGERS (2006).
200. In Hong Kong, the initial uproar over the 2006 Henderson Land short sale/empty voting incident, discussed in Hu & Black, Decoupling I (Law Review Version) (2006), supra note 1, at 834-35, has not prompted further regulation, beyond the 2002 disclosure reforms.
201. See CORPORATE GOVERNANCE CODE MONITORING COMM. (Neth.), ADVISORY REPORT ON THE COMPANY-SHAREHOLDER RELATIONSHIP AND ON THE SCOPE OF THE CODE (2007), available at http://www.commissiecorporategovernance.nl/page/downloads/ Monitoring_Committee_Advisory_Report_May_2007.pdf;
202. Ministerie van Financien, Werkprogramma Corporate Governance 2008/2009
203. See, e.g., Kara Scanneil, How Borrowed Shares Swing Company Votes, WALL ST. J., Jan. 26, 2007, at Al [hereinafter Scannell, Borrowed Shares] (reporting Chairman Cox's statement that empty voting "is already a serious issue" and "is almost certainly going to force further regulatory response");
204. cf. Paul S. Atkins, SEC Commissioner, Remarks Before 9th Annual Alternative Investment Roundup (Jan. 29, 2007), available at http://www.sec.gov/news/speech/2007/spch012907psa.htm (offering an extended analysis of empty voting and vote morphing);
205. Sec. Exch. Comm'n, Roundtable on Proxy Voting Mechanics (May 24, 2007), available at http://www.sec.gov/ spodight/proxyprocess/proxyvotingbrief. htm (discussing share ownership and voting issues) ;
206. Ron Orol, SEC Holds Hearing on Proxy Rules, DAILY DEAL, May 28, 2007 (discussing SEC hearing relating to empty voting and hidden (morphable) ownership);
207. Kara Scannell, Hedge Funds Vote (Often): In Proxies, Borrowed Shares Fill Ballot Box, WALL ST. J., Mar. 22, 2007, at Cl (stating that Chairman Cox asked senior staffers to provide recommendations by year's end).
208. For example, Delaware Supreme Court Justice Jack Jacobs has stated that, "[s]hould an egregious case of empty voting abuse arise, that in turn may lead to legislation and to court decisions that would result in a new paradigm for share voting." Jack B. Jacobs, Paradigm Shifts in American Corporate Governance Law: A Quarter Century of Experience, CORP. GOVERNANCE ADVISOR, Sept.-Oct. 2007, at 1, 4.
209. See, e.g., Ben White, Concern in US over "Empty Voting, "FIN. TIMES (London), Oct. 6, 2006, at 29 (quoting John Wilcox of TIAA-CREF as saying that decoupling "under-mine [s] the most fundamental assumption in corporate governance");
210. Ben White, Thesis on Hedge Fund Tactics Gives Investors a Shock-Professor's Warning on "Empty Voting" Has Had Big Impact in the US, FIN. TIMES (London), Oct. 6, 2006, at 29 (noting the impact of decoupling analysis on institutional investors);
211. cf. Barry Burr, Editorial, "Morphing" Hedge Fund Ownership, PENSIONS & INVESTMENTS, Oct. 16, 2006, at 10 (endorsing our disclosure approach).
212. See Ron Orol, SEC Eyes Investors in Takeover Fights, DAILY DEAL, May 14, 2007 (reporting rumors as to possible new SEC disclosure rules to address decoupling).
213. The Takeover Code, Rule 8.3 (2006) (U.K.);
214. see also TAKEOVER PANEL (U.K.), DEALINGS IN DERIVATIVES AND OPTIONS (May 13, 2005), available at http://www.thetakeoverp anel.org.uk/new/consul tation/DATA//PCP200502.pdf (consultation paper).
215. TAKEOVER PANEL CODE COMM. (U.K.), DERIVATIVES AND OPTIONS REGIME: 2007 REVIEW (June 29, 2007).
216. FIN. SERVS. AUTO. (U.K.) (2007), supranote 116, ¶¶ 1.28, 5.33.
217. Id. ¶¶ 1.30, 5.35.
218. Id. ¶¶ 1.32, 5.51-5.53, 5.57.
219. HEDGE FUND WORKING GROUP, HEDGE FUND STANDARDS CONSULTATION PAPER PART 2: THE BEST PRACTICE STANDARDS 60 (Oct. 2007).
220. For background on this draft code of conduct, see Bertrand Benoit & James Mackintosh, German Support for Draft Hedge Fund Code Eases Industry Pressure, FIN. TIMES (London), Oct. 13, 2007, at 15;
221. James Mackintosh, London Hedge Funds Planning First Voluntary Code of Conduct, FIN. TIMES USA, Oct. 11, 2007, at 1.
222. HEDGE FUND WORKING GROUP (2007), supa note 129, at 47.
223. Id. at 61.
224. See Matthew J. Gardella, New SEC Rules for Stock Repurchases, INSIGHTS, Jan. 2004, at 19.
225. Rule 10b-18 and Purchases of Certain Equity Securities by the Issuer and Others, Securities Act Release No. 8160, Exchange Act Release No. 46, 980, 67 Fed. Reg. 77,594, 77,604 (proposed Dec. 10, 2002).
226. Regulation S-K, Item 703, 17 C.F.R. § 229.703 (2007); Purchases of Certain Equity Securities by the Issuer and Others, Securities Act Release No. 8335, Exchange Act Release No. 48,766, 68 Fed. Reg. 64,952 (Nov. 10, 2003).
227. Regulation S-K, Item 703, 17 C.F.R. § 229.703(a) (2007).
228. Security-based swap agreements" are not considered securities under Securities Act §2A(b)(1), 15 U.S.C. §77b-1(b) (2000), and Exchange Act §3A(b)(1), 15 U.S.C. § 78c-1 (b) (2000). Item 703 deals with a company's purchases of shares and related equity securities. Regulation S-K, Item 701, 17 C.F.R. § 229.701 (2007), addresses sales of unregistered securities. Item 701 might be implicated in some soft parking arrangements. However, we expect that the most likely forms will involve transactions in OTC equity derivatives. In part, this reflects the nature of the underlying soft parking transactions; in part, it reflects the reality that if a company can achieve the same soft parking end in two economically similar ways, it will often prefer the form that avoids disclosure.
229. See LOUIS LOSS & JOEL SELIGMAN, FUNDAMENTALS OF SECURITIES REGULATION 175 (5th ed. 2004).
230. Regulation S-K, Item 303(a) (4) (ii) (C), 17 C.F.R. §229.303(a) (4) (ii) (C) (2007).
231. Regulation S-K, Item 303(a)(4) (i), 17 C.F.R. §229.303(a) (4) (i) (2007).
232. SEC Form 8-K, Item 1.01 (a) (2006).
233. 17 C.F.R. §§230.408, 240.12b-20 (2007).
234. The Rule 10b-5 ban on insider trading covers corporate repurchases of shares, and presumably applies as well to the equity swaps hypothetical. A corporation's knowledge of the "true" distribution of votes may well be inside information. However, insider trading liability rests on the same materiality requirement that underlies the company's public filings. Moreover, the usual insider trading rule is "disclose or abstain." Here, the counterparty will often have the same information as the company. It thus seems unlikely mat insider trading rules will have much impact on corporate soft parking.
235. NYSE Euronext, Listed Company Manual §204.25 (2007).
236. Id. §204.09.
237. Id. §201.00; NASDAQ Marketplace Rule IM-4120 (2007).
238. See Exchange Act Rule 13d-1, Filing of Schedules 13D and 13G, 17 C.F.R. § 240.13d-1(a)(2007).
239. An exception to the requirement to attach related agreements might be appropriate for derivatives transactions that follow a standard, publicly available form contract.
240. We offer a specific reform proposal on share recall procedures infra in Part IV.C2. There may be additional benefits to greater transparency with respect to stock lending and borrowing. For instance, in September 2007, criminal charges were brought against former stock loan employees at a number of brokerage firms; prosecutors allege that because prices in the share loan market were so obscure, the employees could rip off their own firms by arranging for the firms to overpay when borrowing shares. See Floyd Norris, Stock Loans Are No Place for Secrecy, N.Y. TIMES, Sept. 28, 2007, at C1.
241. See Inst'l S'holder Servs., ISS Share Lending Flash Survey (2007) (PowerPoint presentation provided by Diana Bourke to Henry Hu) (discussing survey findings on institutional investors' voting and lending policies).
242. Kirchmaier & Grant (2005), supra note 112, at 18-22. There were rumors that the votes may have found their way to Pirelli.
243. 17 C.F.R. § 270.30b1-4 (2007); SEC Form N-PX (2003). For studies of the impact of this mutual fund rule, see Gerald F. Davis & E. Han Kim, Business Ties and Proxy Voting by Mutual Funds, 85 J. FIN. ECON. 552 (2007);
244. Martijn Cremers & Roberta Romano, Institutional Investors and Proxy Voting: The Impact of the 2003 Mutual Fund Voting Disclosure Regulation (Working Paper, 2007), available at http://ssrn.com/ abstract=982493.
245. We discuss Sulzer, and ZKB's role, supra in Part H.A.
246. We discuss OMV's bid for MOL supra in Part I.C.2.
247. We discuss Hyundai Elevator's use of decoupling to avoid Korea's holding company rules infra in Part V.A.
248. We discuss the Henderson Land case in Hu & Black, Decoupling I (Law Review Version) (2006), supra note 1, at 834-35.
249. We discuss Pershing Square-Sears Canada in Hu and Black, Decoupling I (Finance Version) (2007), supra note 1, at 352.
250. Hu and Black, Decoupling I (Finance Version) (2007), supra note 1, at 354-55.
251. Shaun P. Martin and Frank Partnoy have proposed eliminating all voting rights for anyone who hedges even part of their interest, but they did not propose specific implementation strategies. See Shaun Martin & Frank Partnoy, Encumbered Shares, 2005 U. ILL. L. REV. 775, 793-94.
252. We discuss and criticize their proposal in Hu & Black, Decoupling I (Law Review Version) (2006), supra note 1 at 888-90. A subsequent work proposes to reduce the gap between the record date and meeting date, and also suggests a second look at time-phased voting.
253. See Charles M. Nathan, "Empty Voting" and Other Fault Lines Undermining Shareholder Democracy: The New Hunting Ground for Hedge Funds, CORP. GOVERNANCE ADVISOR, Jan.-Feb. 2007, at 1, 8. On "overvoting" and other voting slippages due to technical problems in the voting architecture,
254. see Marcel Kahan & Edward B. Rock, The Hanging Chads of Corporate Voting 28-32 (Working Paper, 2007), available at http://ssrn.com/ abstract=1007065.
255. Overvoting involves a record owner which, having lent some of its shares, seeks to cast more votes than its remaining votable shares. See Kahan & Rock (2007), supra note 158, at 31.
256. For detailed overviews of the current system, see John C. Wilcox & John J. Purcell III, "Street Name" Registration & the Proxy Solicitation Process, in A PRACTICAL GUIDE TO SEC PROXY AND COMPENSATION RULES § 12-1 (Amy L. Goodman & John F. Olson eds., 3d ed. Supp. 2003);
257. Kahan & Rock (2007), supra note 158, at 4-39.
258. Hu & Black, Debt, Equity, and Hybrid Decoupling (2008), supra note 4.
259. One could argue that this power is already conveyed by a general provision such as section 212(a) of the Delaware General Corporation Law, which provides, "Unless otherwise provided in the certificate of incorporation . . . , each stockholder shall be entitled to 1 vote for each share of capital stock held by such stockholder." DEL. CODE ANN. tit. 8, § 212(a) (2001). However, one could also view this provision as conveying power to specify in the charter the voting rights conveyed by each share, not power to condition voting rights on attributes of the shareholder, such as whether the shareholder also holds coupled or related non-host assets.
260. On the risks posed by midstream charter amendments, see Lucian Arye Bebchuk, Limiting Contractual Freedom in Corporate Law: The Desirable Constraints on Charter Amendments, 102 HARV. L. REV. 1820, 1823 (1989);
261. Bernard S. Black, Is Corporate Law Trivial?: A Political and Economic Analysis, 84 NW. U. L. REV. 542, 567-68 (1990). A majority of minority requirement prior to going public is not feasible, but also not important. Most scholars believe that a pre-IPO charter provision is not likely to be seriously inefficient, because if it were, the insiders would expect to receive a lower price for their shares.
262. See, e.g., Robert Daines & Michael Klausner, Do IPO Charters Maximize Firm Value? Antitakeover Protection in IPOs, 17J.L. ECON. & ORG. 83, 91 (2001).
263. This proposal draws, in spirit, from the general "self- enforcing" approach to corporate law proposed in Bernard Black & Reinier Kraakman, A Self-Enforcing Model of Corporate Law, 109 HARV. L. REV. 1911 (1996).
264. NYSE rules do not allow time-phased voting. NYSE Euronext, Listed Company Manual § 313(A) (2007).
265. For empty voting by insiders - directly or through the corporation - the courts may already have the power to intervene. As the Delaware Supreme Court stated in MM COS. V. LIQUID AUDIO, INC., 813 A.2d 1118, 1127 (Del. 2003), the Delaware courts "have remained assiduous in carefully reviewing any board actions designed to interfere with or impede the effective exercise of corporate democracy by shareholders, especially in an election of directors." Our proposal would ensure that the courts have this power for insiders, and would extend it to voting by outsiders.
266. Parent could, for example, arrange for subsidiary 1 to be long 1 million shares of company X, while subsidiary 2 is short 1 million shares. Parent is thus fully hedged, yet if attestation is not at the parent level, subsidiary 1 could vote its 1 million shares.
267. NYSE Euronext, Listed Company Manual § 313(A) (2007). Examples of such plans include time-phased voting (longer-term shareholders get more votes per share) and capped voting (a cap on the number of votes by a single shareholder).
268. Id.
269. Exchange Act § 14(a), 15 U.S.C. § 78n(a) (2000); Exchange Act Rule 14a-4, 17 C.F.R. § 240.14a-4 (2007).
270. See DEL. CODE ANN. tit. 8, § 160(c) (2001). On the complexities in determining whether a particular proposal has passed or received majority support,
271. see Janet Fisher & Mary Alcock, Voting at Annual Meetings, MERGERS & ACQUISITIONS CORP. GOVERNANCE REP. (Cleary Gottlieb Steen & Hamilton, N.Y., N.Y.), June-Sept. 2007, at 14, available at http://www.clearygotdieb.com/files/ tbl_s47Details%5CFileUpload265% 5C759%5CCG%20M& A%20and%20corporate%2020Governance%20Report.pdf.
272. A potential concern with a charter amendment approach is that the general potential for empty voting means that the vote on a charter amendment might itself be bought. We think this is an acceptable risk. Empty voting is still the exception and not the rule, and it is not clear why an attestation rule would be controversial enough to attract an empty voting effort, whether to support or defeat it.
273. We need not specify here the precise nature of those interests or of the company value at stake. For a discussion of three conceptions of the corporate objective and differences between actual and blissful shareholder wealth maximization and between shareholder wealth maximization and shareholder welfare maximization, see Henry T. C. Hu, Behind the Corporate Hedge: Information and the Limits of "Shareholder Wealth Maximization, "J. APPLIED CORP. FIN., Fall 1996, at 39, 40-43, 48-50.
274. See WILLIAM T. ALLEN, REINIER KRAAKMAN & GUHAN SUBRAMANIAN, COMMENTARIES AND CASES ON THE LAW OF BUSINESS ORGANIZATION ch. 12.10 (2d ed. 2007). For discussion of a counterexample,
275. see William A. Klein & John C. Coffee, Jr., BUSINESS ORGANIZATION AND FINANCE: LEGAL AND ECONOMIC PRINCIPLES 168-70 (10th ed. 2007). Some other jurisdictions impose greater duties on controlling shareholders.
276. See, e.g, Gambotto v. W.C.P. Ltd. (1995), 182 C.L.R. 432 (Austl.) (requiring majority shareholders to act in the best interests of their company) ; GAMBOTTO V WCP LTD: ITS IMPLICATIONS FOR CORPORATE REGULATION (Ian M. Ramsay ed., 1996).
277. See Jens Dammann, Majority Freezeouts 16-17 (Univ. of Tex. Law Sch., Law & Econ. Research Paper No. 114, 2007), available at http://ssrn.com/abstract=1013082.
278. See Warner Fuller, Restrictions Imposed by the Directorship Status on the Personal Business Activities of Directors, 26 WASH. U. L.Q. 189, 189 (1941) (discussing the restrictions of corporate directors' "freedom to engage in purely personal business activities"); cf. Golden Rod Mining Co. v. Bukvich, 92 P.2d 316, 320 (Mont. 1939) (addressing the situation of an outside director who was a competitor).
279. HEDGE FUND WORKING GROUP (2007), supra note 129, at 61.
280. Jonathan Cohen, Negative Voting: Why It Destroys Shareholder Value and a Proposal To Prevent It, 45 HARV. J. ON LEGIS. (forthcoming 2008), proposes a private right of action for shareholders harmed by voting with negative economic interest. In our view, this remedy is too mild, even assuming effective disclosure, because harm will often be hard to show.
281. For example, a dealer may hold shares to hedge an overall book of options positions, with calls held by some clients and puts held by others. In this situation, economic ownership will be split, and there may be no obvious person to pass voting rights to. The rights should then remain with the derivatives dealer. Our proposal focuses on situations where the locus of economic ownership is clear.
282. For the current rules, see NYSE Euronext, NYSE Rule 452 (2003), available at http://rules.nyse.com/nysetools/Exchangeviewer.asp? SelectedNode=chp_1_2&manual= nyse/nyse_rules/nyse-rules. For the proposed rule change,
283. see NYSE EURONEXT, REPORT AND RECOMMENDATIONS OF THE PROXY WORKING GROUP TO THE NEW YORK STOCK EXCHANGE (2006), available at http://www.nyse.com/pdfs/PWG_REPORT.pdf; NYSE Euronext, August 27, 2007 Addendum to the Report and Recommendations of the Proxy Working Group to the New York Stock Exchange Dated June 5, 2006, available at http://www.nyse.com/pdfs/PWGAddendumfinal.pdf. For the current status of the proposal,
284. see Sec. & Exch. Comm'n, Briefing Paper, Roundtable on Proxy Voting Mechanics (May 23, 2007), available at http://www.sec.gov/ spodight/proxyprocess/proxyvotingbrief.htm.
285. See Letter from Donald D. Kittell, Executive Vice President, Sec. Indus. Fin. Mkts. Ass'n, to Nancy M. Morris, Sec'y, Sec. Exch. Comm'n 2 (Mar. 30, 2007), available at http://www.sec.gov/comments/s7-03-07/s70307-20. pdf.
286. See supra Part I.C.3.
287. Hewlett v. Hewlett-Packard Co., No. 19513-NC, 2002 WL 818091, at *1, *8-9 (Del. Ch. Apr. 30, 2002).
288. See id. at *9 ("During the conference call [between Hewlett-Packard and Deutsche Bank], no one from HP used any threats or inducements regarding future business relationships . . . . Instead, [HP's executives] argued HP's case entirely on the merits.").
289. See John Hintze, Automation Has Greater Impact as Securities Lending Increases, SEC. INDUS. NEWS, May 8, 2006, at 16, 33.
290. RMA Securities Lending Industry Composite, Averages for the Period: 2nd Quarter 2007, available at http://rmahq.org/NR/rdonlyres/77B9BCC6-5FB2- 4961-884D-BAAB3ADAED2B/0/Survey2ndQtr2007.xls.
291. See FOCUS (World Fed'n of Exchs.), Sept. 2007, at 41, 42 tbl.1.1 (providing data on market capitalization).
292. Telephone Interview with Irving Klubeck, President, Sec. Lending Div., Sec. Indus. & Fin. Mkt. Ass'n, and Managing Dir., Pershing LLC (Oct. 23, 2007).
293. Peter Butler, Founder & CEO, Governance for Owners, Address at the International Corporate Governance Network Conference: Creating Value - Building Trust (July 7, 2006) (PowerPoint slides on file with authors) (providing data on shares borrowed as a percentage of shares outstanding and as a percentage of borrowable shares; one can combine the two percentages to estimate borrowable shares as a fraction of shares outstanding).
294. We discuss these efforts in Hu & Black, Decoupling I (Law Review Version) (2006), supra note 1, at 899-901.
295. Companies must inform record holders (under Exchange Act Rule 14a-13, 17 C.F.R. § 240.14a-13 (2007)) and exchanges (under exchange rules) of record dates in advance. They normally do not provide advance notice to shareholders. However, institutions can learn record dates from stock exchanges (the NYSE publishes them in a weekly circular) or from specialized services that provide this information. Jennifer E. Bethel, Gang Hu & Qinghai Wang, Institutional Investor Activism: Evidence from Voting and Daily Trading Around Mergers and Acquisitions 6-7 (Working Paper, 2007) (on file with authors).
296. A modest extension, which on balance we would not adopt, would be a "vote or explain" rule, under which institutions would have to either vote or explain why they did not. We expect that the explanations would soon become boilerplate.
297. See Ehud Kamar, Does Shareholder Voting on Acquisitions Matter? 37 n.32 (Working Paper, 2006), available at http://law.bepress.com/alea/16th/art64;
298. see also Bethel, Hu & Wang (2007), supra note 191, at 14-15.
299. See Cremers & Romano (2007), supra note 151.
300. See Yair Listokin, Management Always Wins the Close Ones (Working Paper, 2007), available at http://ssrn.com/abstract=980695. Soft parking may provide an alternative explanation; if managers anticipate a close vote, they may arrange for votes to be held by friendly hands, and then call in enough votes to win once they see how the voting is going.
301. We discuss this and other problems associated with stock lending practices in Hu 8c Black, Decoupling I (Law Review Version) (2006), supra note 1, at 895-98.
302. In a recent survey by Institutional Shareholder Services, 31 % of the institutions who do not currently lend shares indicated that they would do so "if there were an automated way to identify meetings for which they wanted to vote and to recall the shares to retain voting rights." Inst'l S'holder Servs. (2007), supra note 149, at slide 3.
303. For an extreme example where a broker-dealer routinely overvoted and apparently didn't try to limit its voting based on the shares it was entitled to vote, see In re Deutsche Bank Securities Inc., NYSE Request for Review of Exchange Hearing Panel Decision 05-45, at 2 (Feb. 2, 2006), available at http://www.nyse.com/pdfs/05-045.pdf (NYSE fines Deutsche Bank based on stipulated facts, including overvoting "on numerous occasions").
304. See Regulation T, 12 C.F.R. § 220.2 (2007) (defining the "exempted borrower" exemption for major broker-dealers). For a more detailed description of Regulation T, see Charles E. Dropkin, Developing Effective Guidelines for Managing Legal Risks - U.S. Guidelines, in SECURITIES FINANCE: SECURITIES LENDING AND REPURCHASE AGREEMENTS 167, 172-76 (Frank J. Fabozzi & Steven V. Mann eds., 2005).
305. See, e.g., BANK OF ENGLAND, SECURITIES BORROWING AND LENDING CODE OF GUIDANCE § 7.4 (Dec. 2004) (stating that there is a "consensus . . . in the market that securities should not be borrowed solely for the purposes of exercising the voting rights at [a shareholder meeting]"), available at http://www.bankofengland.co.uk/ markets/gilts/stockborrowing.pdf; PAUL MYNERS, SHAREHOLDER VOTING WORKING
306. GROUP, REVIEW OF THE IMPEDIMENTS TO VOTING UK SHARES 12-13 (Mar. 2005), available at http://www.investmentuk.org/press/2005/20050314-01.pdf (Myners Committee report, advocating greater industry safeguards to address stock lending);
307. cf. HEDGE FUND WORKING GROUP (2007), supra note 129, at 61 (recommending a ban on voting borrowed shares without economic interest, but not addressing the long shares, short equity swaps equivalent).
308. As we discuss above, if an empty voter both buys shares and takes the short side of an equity swap with a single dealer, the dealer can hedge by selling shares short to the hedge fund; thus, there may well be no direct market impact. If the empty voter must buy shares from one dealer and hedges with another, both sides must engage in market transactions, incurring trading and market impact costs. The two dealers will enter into offsetting transactions, but their actions will not be coordinated, so each side's trades will move the market to some extent.
309. See Susan E.K. Christoffersen, Christopher C. Géczy, David K. Musto & Adam V. Reed, Vote Trading and Information Aggregation, 62 J. FIN. 2897 (2007).
310. If naked shorting were to be allowed, who has voting rights - the lender who has recalled the shares or the counterparty to whom a short seller has sold shares? The only realistic answer is both. In an anonymous market, the counterparty cannot even be found. This does not trouble us. Both are economic owners. Both have the right incentives, subject to their other holdings. One loses some ex ante certainty about the number of votable shares, but this is not a significant departure from the current environment, when the number of shares that will be voted is unknown ex ante.
311. See Amanda Gerut, Emerging Practices in Securities Lending and Proxy Voting Nexus, BOARDIQ Apr. 3, 2007, available at http://www.riskmetrics.com/press/articles/040307boardiq.html (quoting an industry expert as saying that "[y]ou can't ignore a page one story in The Wall Street Journal," referring to a story by Scannell, Borrowed Shares (2007), supra note 122, which is based on Decoupling I (Law Review Version));
312. cf. Inst'l S'holder Servs. (2007), supra note 149, at slide 1 ("Securities lending and the impact on proxy voting policies and practices are gaining increasing exposure in the corporate governance industry.").
313. Gerut (2007), supra note 204.
314. HEDGE FUND WORKING GROUP (2007), supra note 129, at 61.
315. See Seidman & Assoes., L.L.C. v. G.A. Fin., Inc., 837 A.2d 21, 25-28 (Del. Ch. 2003) (invalidating 230,000 otherwise valid votes because of a 0.3% overvote). Vote tabulators can sometimes resolve overrates by contacting the record owner and getting corrected data, but this effort is sometimes not made and, even when made, sometimes fails.
316. See DEL. CODE ANN. tit. 8, § 231 (d) (2001) (providing that "inspectors may consider other reliable information for the limited purpose of reconciling proxies and ballots" where overvoting is suspected).
317. See J. Robert Brown, Jr., The Shareholder Communication Rules and the Securities and Exchange Commission: An Exercise in Regulatory Utility or Futility?, 13 J. CORP. L. 683 (1988). For a recent return to this theme,
318. see David Donald, The Rise and Effects of the Indirect Holding System: How Corporate America Ceded Its Shareholders to Intermediaries (Working Paper, 2007), available at http://ssrn.com/abstract=l 017206.
319. 3aKOH 06 [Law on Joint Stock Companies of the Russian Federation], Federal Law No. 208-FZ, art. 51, Ros. gaz., Dec. 29, 1995, latest amendments published in Ros. gaz., Jan. 11, 2006;
320. see also BERNARD S. BLACK, REINIER KRAAKMAN & ANNA TARASSOVA, A GUIDE TO THE RUSSIAN LAW ON JOINT STOCK COMPANIES 325-26 (1998).
321. See Business Roundtable, Request for Rulemaking Concerning Shareholder Communications (Petition 4-493) (Apr. 12, 2004), available at http://www.sec.gov/rules/petitions/petn4-493.htm (recommending that the SEC "consider requiring brokers and banks to provide companies with contact information for all beneficial owners, and permit companies to mail proxy materials directly to all beneficial owners").
322. See, e.g., Vladimir Atanasov, Conrad S. Ciccotello & Stanley B. Gyoshev, Learning from the General Principles of Company Law for Transition Economies: The Case of Bulgaria, 31 J. CORP. L. 1003 (2006).
323. Exchange Act Rule 14b-1, 17 C.F.R. § 240.14b-1 (2007).
324. For instance, annual turnover rates on the New York Stock Exchange increased from about 20% in 1966 to about 73% in 1987 and 88% in 2000. See Henry T.C. Hu, New Financial Products, the Modern Process of Financial Innovation, and the Puzzle of Shareholder Welfare, 69 TEX. L. REV. 1273, 1302-03 (1991);
325. W. Scott Bauman, Robert E. Miller & E. Theodore Veit, Managing Portfolio Turnover: An Empirical Study, 44 Q.J. BUS. & ECON. 15, 15 (2005).
326. If voting rights are limited by reference to economic ownership, then major shareholders who voted before the record date and attested to economic ownership at that time, would presumably need to reattest, or correct a prior attestation, as of the record date. One form of attestation could be "I have, and at the record date will have, economic ownership the shares for which I have voting rights," thus allowing for unhedged trading between the attestation date and the record date.
327. In the U.K., see Companies Act, 2006, c. 46, § 327(2) (Eng.). German law does not use the concept of a record date for registered shares; shareholders as of the meeting date can vote. Aktiengesetz [AktG] [Stock Corporation Act], Sept. 6, 1965, BGBl. I at 1089, last amended by Gesetz, July 16, 2007, BGBl. I at 1330, § 67(2) (F.R.G.). Thus, the minimum time is set by the share trading settlement period, currentlyy two business days. In practice, a somewhat longer period is sometimes needed to allow the company to update its share register. UWE HÜFFER, AKTIENGESETZ 334 (7th ed. 2006). Germany also allows bearer shares; for these shares the time gap is three weeks. Aktiengesetz § 123(3). On the French system, see Decree No. 06-1566 of Dec. 11, 2006, Journal Officiel de la République Française [J.O.] [Official Gazette of France], Dec. 12, 2006 (amending Code de Commerce art. R225-85);
328. Jean-Paul Valuet, Le décret du 11 décembre 2006 sur les sociétés commerciales, 2007 REVUE DES SOCIETES 227, 233-34. On Spain, which uses a two-level dematerialized system of shareholding with record owners as the first level and economic owners as the second level,
329. see Kahan & Rock (2007), supra note 158, at 36.
330. See also Nathan (2007), supra note 158, at 8 (proposing to compress the time between record and meeting dates).
331. Council Directive 2007/36, art. 7.2, 2007 O.J. (L 184/17) (EC), allows companies to dispense with a record date if they can identify shareholders on the meeting date. Article 8.1-2 of the Directive requires companies to offer shareholders direct electronic voting at a meeting "subject only to such requirements and constraints as are necessary to ensure the identification of shareholders and the security of the electronic communication."
332. DEL. CODE ANN. tit. 8, § 213(a) (2007).
333. This approach is consistent with the current European approach. See Council Directive 2007/36, supra note 217, at art. 5.1 (minimum period for notice of a general meeting, including the agenda, of either fourteen or twenty-one days).
334. We contemplate a default corporate law provision, changeable in a company's charter, which would provide for a variety of types of voting instructions that can remain valid despite changes in the number of shares owned, and create procedures for handling the most common sources of conflict between voting instructions and actual ownership.
335. See Listokin (2007), supra note 195, at 2.
336. Sections A and B expand on related discussions in Hu, Shareholder and Creditor Decoupling (2007),
337. supra note 3, at 1, 4, 20-21 & 23;
338. and Hu & Westbrook, Shareholder and Creditor Interests (2007),
339. supra note 3, at 1321, 1329-30, 1366, 1382-89, 1395-98, 1401-03.
340. See, e.g., Hu (1991), supra note 214, at 1288-1300 (proposing the concept of shareholder "maximization rights").
341. On shareholder rights to sue for fiduciary breaches, see, for example, MELVIN ARON EISENBERG, CORPORATIONS AND OTHER BUSINESS ORGANIZATIONS 258-75, 9121039 (9th ed. 2005).
342. See DEL. CODE ANN. tit. 8, § 220 (2001).
343. See Exchange Act Rule 14a-8, 17 C.F.R. § 240.14a-8 (2007).
344. See DEL. CODE ANN. tit. 8, § 262 (2001) (appraisal rights);
345. id. § 170 (dividends);
346. id. § 271 (liquidation).
347. Deephaven Risk Arb Trading Ltd. v. Unitedglobalcom, Inc., No. 379-N, 2005 WL 1713067 (Del. Ch.July 13, 2005).
348. Deephaven, 2005 WL 1713067. In Deephaven, a shareholder first borrowed shares in one account, then "sold" these shares to its own account with a different dealer. The Delaware court found that this created ownership in the second account and allowed a suit to proceed.
349. Exchange Act § 10(b), 15 U.S.C. § 78j(b) (2000).
350. DEL. CODE ANN. tit. 8, § 211 (2001).
351. Exchange Act Rule 14a-8(b), 17 C.F.R. § 240.14a-8(b) (2007).
352. Exchange Act Rule 14a-9,17 C.F.R. § 240.14a-9 (2007).
353. In re Appraisal of Transkaryotic Therapies, Inc., No. 1554-CC, 2007 WL 1378345 (Del. Ch. May 2, 2007).
354. See DEL. CODE ANN. tit. 8, § 262 (2001).
355. The investor held shares through a record owner, and thus ultimately through Cede & Co., which is the first-tier record holder for most banks and brokers. The court limited the number of appraisable shares to thie number held of record by Cede & Co. which were voted against the merger or not voted. This is a loose limit because Cede & Co. holds of record a large fraction of the shares in most public companies, and a significant percentage of diese will go unvoted in a typical merger.
356. Transkaryotic, 2007 WL 1378345, at *5.
357. See Anita Raghavan, Happy Returns: How Lehman Sold Plan To Sidestep Tax Man-Hedge Funds Use Swaps To Avoid Dividend Hit; IRS Seeks Information, WALL ST. J., Sept. 17, 2007, at Al;
358. Anita Raghavan, Hedge Funds Could Lose Offshore Shelter: Senate Panel Weighs Targeting Derivatives by Change in Tax Rules, WALL ST. J., Oct. 1, 2007, at Cl;
359. Jeffrey L. Rubinger, Tax Planning Strategies with Equity Derivatives, FLA. BAR J., Apr. 2002, at 45, 49.
360. See Chris Hughes, Dividends - The Accidental Asset Class, FIN. TIMES (London), July 12, 2007, at 15.
361. Deephaven Risk Arb Trading Ltd. v. Unitedglobalcom, Inc., No. 379-N, 2005 WL 1713067 (Del. Ch. July 13, 2005).
362. Clayton Act § 7A, 15 U.S.C. § 18a (2000).
363. 16 C.F.R. § 802.9 (2007); see also Malcomb Pfunder,
364. Clayton Act § 7A(a), 15 U.S.C. § 18a(a) (2000).
365. For discussion of these laws, see STEPHEN M. BAINBRIDGE, CORPORATION LAW AND ECONOMICS § 12.12 (2002).
366. See IND. CODE ANN. §§ 23-1-42-1, 23-1-42-2, 23-1-42-9 (West 2005).
367. DEL. CODE ANN. tit. 8, § 203 (2001).
368. This discussion is based on a series of reports by the Korean Center for Good Corporate Governance: Hyundai Elevator Again Enters into a Complicated Derivative Deal, ISSUE REP. (Ctr. for Good Corporate Governance, Seoul, Korea), Oct. 26, 2006;
369. Hyundai Group Avoids Being Subject to "Holding Company Regulations ": What Is Its Impact?, ISSUE REP. (Ctr. for Good Corporate Governance, Seoul, Korea), Sept. 19, 2007;
370. Hyundai Group Faces Possible Holding Company Conversion, ISSUE REP. (Ctr. for Good Corporate Governance, Seoul, Korea), May 3, 2007.
371. Hyundai Group Avoids Being Subject to "Holding Company Regulations": What Is Its Impact? (2007), supra note 247.
372. Investment Company Act § 3(a)(1)(C), 15 U.S.C. § 80a-3(a) (1) (C) (2000); see also Meredith M. Brown, Michael P. Harrell & William D. Regner, Internet Incubators: How To Invest in the New Economy Without Becoming an Investment Company, 56 BUS. LAW. 273, 274 (2000);
373. John S. Dzienkowski & Robert J. Peroni, The Decline in Lawyer Independence: Lawyer Equity Investments in Clients, 81 TEX. L. REV. 405, 494-95 (2002).
374. Investment Company Act § 3(a)(1)(C), 15 U.S.C. § 80a-3(a) (1)(C) (2000).
375. Investment Company Act § 3(a)(2), 15 U.S.C. §80a-3(a) (2) (2000). The definition of investment security depends on the definition of "security." Investment Company Act §2 (a) (36), 15 U.S.C. § 80a-2(a)(36) (2000), copies the definition of security in Securities Act § 2(a)(1), 15 U.S.C. § 77b(a)(1) (2000), and courts have accordingly interpreted the terms similarly. See, e.g., SEC v. Nat'l Presto Indus., Inc., 486 F.3d 305, 309-10 (7th Cir. 2007). Thus, it is not illogical to extend the parallelism one step further. Securities Act § 2A(b)(1), 15 U.S.C. § 77b-1(b) (2000), has been amended to state that a security "does not include any security-based swap agreement." There was no parallel amendment to the Investment Company Act. Nonetheless, a court might interpret the Investment Company Act definition similarly; if so, equity swaps and perhaps other derivatives would fall outside the Investment Company Act definition. We know of no court decisions on point.
376. Alfa owned part of a Turkish cell phone company, Turkcell, which owned part of Kyivstar. After the arbitration decision, Alfa sold half of its stake in Turkcell. See Timofei Dzyadko, Sold to Hold, VEDOMOSTI, Dec. 4, 2007 available at http://www.vedomosti.ru/newspaper/article. shtml?2007/12/04/137331;
377. Number Portability To Stay, Says Court, TURKISH DAILY NEWS, Dec. 5, 2007, available at http://www.turkishdailynews.com.tr/article.php?enewsid=90435.
378. See Hu & Black, Debt, Equity, and Hybrid Decoupling (2008), supra note 4.
379. For a loan participation example involving decoupling of economic interest from control rights, see AutoStyle Plastics, Inc. v. MascoTech, Inc. (In reAutoStyle Plastics, Inc.), 269 F.3d 726, 736-37 (6th Cir. 2001).
380. Repackaging can also result in conflicts of interest. For example, CDO repackagers sometimes retain part of the securities they create. Citibank retained $43 billion in highly rated, senior tranches (only to later take a $10 billion write-off). Cracks in the Edifice, ECONOMIST, Nov. 10, 2007, at 89. If Citibank retained control rights for the underlying debt, it might face a conflict between actions that would benefit its own position and actions that would benefit more junior tranches.
381. See Lingling Wei, Investors Look to Loan Servicers, WALL ST. J., Jan. 4, 2007;
382. Lingling Wei, Ruth Simon & James R. Hagerty, Subprime Woes Weave Tangled Web, WALL ST. J., June 29, 2007, at Cl.
383. See, e.g., In re Foreclosure Cases, Nos. 3:07CV043, 07CV085, 07CV138, 07CV237, 07CV240, 07CV246, 07CV257, 07CV286, 07CV304, 07CV312, 07CV317, 07CV343, 07CV353, 07CV360, 07CV386, 07CV389, 07CV390, and 07CV433, 2007 WL 4056586 (N.D. Ohio Nov. 15, 2007); In re Foreclosure Cases, Nos. 1:07CV2282, 07CV2532, 07CV2560, 07CV2602, 07CV2631, 07CV2638, 07CV2681, 07CV2695, 07CV2920, 07CV2930, 07CV2949, 07CV2950, 07CV3000, and 07CV3029, 2007 WL 3232430 (N.D. Ohio Oct. 31, 2007) (rejecting foreclosure claims); cf. Gretchen Morgenson, Foreclosures Hit a Snag for Lenders, N.Y. TIMES, Nov. 15, 2007, at C1 (noting that lawyers for troubled homeowners may use this opinion to resist foreclosures on other loans).
384. In this Article, we leave aside several other ways in which debt decoupling may affect systemic risk, such as the impact of such decoupling on the initial credit decision and the impact of informational asymmetries with respect to the risk/return characteristics of the many complex securities that are often created.
385. Apart from Hu, Shareholder and Creditor Decoupling (2007), supra note 3,
386. and Hu & Westbrook, Shareholder and Creditor Interests (2007), supra note 3, the only academic discussions we are aware of that consider the possibility of empty crediting and negative creditor economic ownership are short discussions in Frank Partnoy
387. & David A. Skeel, Jr., The Promise and Perils of Credit Derivatives, 75 U. CIN. L. REV. 1019, 1034-35 (2007), and an early stage working paper,
388. Douglas Baird & Robert Rasmussen, AntiBankruptcy (Working Paper, Dec. 2007) (on file with authors).
389. See 11 U.S.C. § 1126(c) (2000).
390. See, e.g., Eric B. Fisher & Andrew L. Buck, Hedge Funds and the Changing Face of Corporate Bankruptcy Practice, AM. BANKR. INST. J., Dec. 2006-Jan. 2007, at 24, 24; Living on the [H] edge: New Ethical Challenges, Panel Discussion at the 81st Annual National Conference of Bankruptcy Judges (Oct. 11, 2007) (summary paper on file with authors) (stating that "[t]he presence of credit default swaps may fundamentally change the economic interest of lenders").
391. FED. R. BANKR. P. 2019(a) ("[E]very entity or committee representing more than one creditor or equity security holder . . . shall file a verified statement [including] . . . the amounts of claims or interests owned by . . . the members of the committee . . . , the times when acquired, the amounts paid therefor, and any sales or other disposition thereof."). Common practice, however, is not to disclose purchase dates or amounts paid. Mark Berman, Will the Sunlight of Disclosure Chill Hedge Funds?, AM. BANKR. INST. J., May 2007, at 24, 25 n.13.
392. Compare In re Nw. Airlines Corp., 363 B.R. 701, 704 (Bankr. S.D.N.Y. 2007) (disclosure required), with In re Scotia Dev. LLC, No. 07-20027-C-11, 2007 WL 2726902, at *1 (Bankr. S.D. Tex. May 29, 2007) (disclosure not required). For discussion of the Northwest Airlines cuse, see Berman (2007), supra note 262.
393. See Evan D. Flaschen & Kurt A. Mayr, Bankruptcy Rule 2019 and the Unwarranted Attack on Hedge Funds, AM. BANKR. INST. J., Sept. 2007, at 16, 16 (arguing that there is no policy reason to require disclosure for ad hoc committees, but not official committees). In theory, a sophisticated bankruptcy trustee could condition appointment of a creditor to an official committee on disclosure of coupled assets.
394. See Gillian Tett & Paul J. Davies, Unbound: How a Market Storm Has Seen Derivatives Eclipse Corporate Bonds, FIN. TIMES, Aug. 8, 2007, at 11 (explaining that the market for credit default swaps is now ten times larger than the dollar amount of underlying bonds);
395. Richard Beales, Uncertain Road Ahead for Delphi, FIN. TIMES (London), Nov. 8, 2005, at 45 (describing the bankruptcy of Delphi, which had $2 billion of outstanding bonds, but ten times that amount in outstanding credit derivatives).
396. See Hu & Black, Decoupling I (Law Review Version) (2006), supra note 1;
397. supra Part IV.B.
398. For a discussion of this and other street sweeps, see Dale A. Oesterle, The Rise and Fall of Street Sweep Takeovers, 1989 DUKE L.J. 202, 205-12.
399. See Acquisitions of Substantial Amounts of Securities and Related Activities Undertaken During and Following a Tender Offer for Those Securities, Exchange Act Release No. 24,976, 52 Fed. Reg. 37,472 (proposed Oct. 7, 1987).
400. 15 U.S.C. § 18a (2000).
401. See Carrick Mollenkamp et al., For Hedge Funds, Hunting in Packs Pays Dividends: Financier Hohn Sparks Battle for ABN Amro, Gets Help from Allies, WALL ST. J., Sept. 19, 2007, at Al.