The Deconstruction Of Equity: Activist Shareholders, Decoupled Risk, And Corporate Governance University Press Scholarship Online

New investment techniques and new types of shareholder activists are shaking up the traditional ways of equity investment that informs much of our present-day corporate law and governance. Savvy investors such as hedge funds are using financial derivatives, securities lending transactions, and related concepts to decouple the financial risk from shares. This leads to a distortion of incentives and has potentially severe consequences for the functioning of corporate governance and of capital markets overall. Taking stock of the different decoupling strategies that have become known over the past several years, this book then provides an evaluation of each from a legal and an economic perspective. Based on several analytical frameworks, the author identifies the elements of equity deconstruction and demonstrates the consequences for shareholders, outside investors, and capital markets. On this basis, the book makes the case for regulatory intervention, based on three different pillars and comprising disclosure, voting right suspension, and ex-post litigation. The book concludes by developing a concrete, comprehensive proposal on how to address the regulatory problem. Overall, this book contributes to the debate about activist investment and the role of shareholders in corporate governance. At the same time it raises a number of important considerations about the role of equity investment more generally. Content: Cover The Deconstruction of Equity Copyright Table of Contents Preface Table of Cases Table of Legislation I. Introduction A. Context B. Structure II. Shareholders in Corporate Governance A. Costs of Voting and Apathy B. Blockholders C. Activist Shareholders and Hedge Funds D. The Financial Crisis and Recent Developments E. Shareholders and Risk-​decoupling F. Conclusion III. Risk-​Decoupling Strategies A. Negative versus Positive Risk-​decoupling B. Negative Risk-​decoupling: More Influence than Risk 1. Category 1: Financial derivatives 2. Category 2: Share lending 3. Category 3: Record-​date captureC. Positive Risk-​decoupling: More Risk than Influence 1. Contracts for Difference 2. CfD investments and their abuse 3. Case studies 4. Conclusion D. Empirical Evidence E. Related Situations Not Covered in This Book 1. Related risk-​decoupling strategies 2. 'One share, one vote' 3. Proxy advisors 4. Limited liability F. Summary IV. The Failure of Traditional Categories of Law A. Corporate and Securities Law B. Hedge Fund Regulation V. Problem Perspectives A. Outline and Relevance of the Problem B. Principal-​agent Perspective 1. Risk- decoupling and agency costs2. Possible reduction of agency costs? 3. Objection 4. Implications C. Information Costs 1. Information and transaction cost theory 2. Risk- decoupling and information costs 3. Summary and implications D. Corporate Finance 1. Debt versus equity 2. Risk- decoupling between debt and equity 3. Shareholders as residual risk- bearers 4. Implications E. The Market for Corporate Control 1. Harmful market impacts of CfD dealings 2. What is wrong with a general CfD disclosure obligation? 3. CfDs and the market for corporate control VI. Solutions A. Doing Nothing1. Persisting decoupling of voting rights 2. Self- regulation 3. Self- regulation of the hedge fund industry 4. Self- help in securities lending cases 5. Risk-​decoupling in existing legal frameworks 6. Conclusion B. Ban and Restriction 1. Ban on decoupling 2. Difficulties with the record-​date problem 3. Conclusion C. Transparency 1. Transparency as a response to decoupling problems 2. Legislative activity and reactions 3. Costs and critique 4. Key issues of a transparency regime 5. Co-​ordination with transparency of short selling 6. A concrete proposal: An integrated disclosure system7. Summary D. Disenfranchisement 1. A general prohibition to vote? 2. Case-​by-​case regulator's decision 3. Limitations of the approach 4. Summary E. Fiduciary Duties 1. Fiduciary duties as an established legal instrument 2. Individual disadvantages 3. Conclusion F. Results, Overview, and Assessment G. Positive Risk-​Decoupling-​An Alternative Regulatory Model Targeting CfD Abuse 1. Proposed regulatory structure 2. Reply to criticism 3. Efficiency of enforcement 4. Conclusion VII. The Federal Dimension A. Admissibility Activist shareholders, hedge funds, and other sophisticated players in the capital markets increasingly engage in ‘risk-decoupling’, a strategy referring to the unbundling of the formal shareholder position and its inherent economic risk. Using a range of techniques, investors engage in positive risk-decoupling strategies—essentially, the creation of a long economic position without formally owning the shares—and negative risk-decoupling—the creation of a short position alongside long equity exposure. These strategies are also referred to as ‘hidden ownership’ and ‘empty voting’, respectively. Regulators worldwide are on alert and risk-decoupling creates strong policy concerns, since risk-decoupled shareholders do not conform to the traditional expectations of corporate law and governance. Specifically, positive risk exposure may allow investors to circumvent disclosure laws for significant share blocks, thus pursuing unnoticed takeover attempts. Worse still, negative risk-decoupling may distort shareholders’ risk profiles and allow them to pursue idiosyncratic strategic objectives at the expense of other shareholders, outside investors, and market confidence generally. This book provides a comprehensive assessment of the risk-decoupling problem in a global and economic perspective. Informed by economic analysis, it develops a comprehensive regulatory response to risk-decoupling. The suggested approach uses three building blocks: first, risk-decoupling should be subject to substantial disclosure obligations. In some cases, regulators should be empowered to suspend risk-decouplers’ voting rights. Residual cases may be addressed by ex post court litigation. The book develops concrete regulatory tools for all three pillars. Together, these elements should help inform the worldwide debate on risk-decoupling and the integrity of capital markets New Investment Techniques And New Types Of Shareholder Activists Are Shaking Up The Traditional Ways Of Equity Investment That Inform Current Corporate Law And Governance. This Book Evaluates Different Risk-decoupling Strategies And Makes The Case For Regulatory Intervention, Developing A Comprehensive Proposal To Address The Regulatory Problem. Introduction -- Shareholders In Corporate Governance -- Risk-decoupling Strategies -- The Failure Of Traditional Categories Of Law -- Problem Perspectives -- Solutions -- The Federal Dimension -- Conclusion. Wolf-georg Ringe. Includes Bibliographical References (pages 235-263) And Index. Overall, this book contributes to the debate about activist investment and the role of shareholders in corporate governance. New investment techniques and new types of shareholder activists are shaking up the traditional ways of equity investment that informs much of our present-day corporate law and governance. Savvy investors such as hedge funds are using financial derivatives, securities lending transactions, and related concepts to decouple the financial risk from shares. This leads to a distortion of incentives and has potentially severe consequences for the functioning of corporate governance and of capital markets overall