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Sunday, June 25, 2006

Hedge Funds And Takeovers

Hedge funds are increasingly becoming the swing voters in takeover battles. Iain Dey of the Daily Telegraph has a good report on this phenomenon:
With company takeovers running at record levels, hedge funds have emerged as the behind-the-scenes power brokers who hold the key to the independence of many of the UK's largest companies.

Within minutes of takeover talks being announced - and sometimes even before any public statement has been made - hedge funds snap up big stakes in the corporate combatants and often end up controlling about 30 per cent of the target company's shares, enough to decide the outcome of the battle for control.

Read the whole thing here.

In the Telegraph piece, Dey mentions research by Bernard Black and Henry Hu of the University of Texas. Here's the abstract for the piece referenced in the Telegraph piece, titled "Hedge Funds, Insiders, and Empty Voting: Decoupling of Economic and Voting Ownership in Public Companies":
Most U.S. public companies have a single class of voting common shares: voting power is proportional to economic ownership. Linking votes to shares gives shareholders an incentive to exercise voting power well, makes possible the market for corporate control, and legitimates managerial authority over property the managers do not own. Theory and evidence generally support linking votes to economic interest, although some models suggest that vote buying can sometimes be efficient. However, certain equity derivatives and other capital market developments now allow shareholders to readily decouple voting rights from economic ownership of shares. This decoupling (the new vote buying) is largely undisclosed and unregulated. Hedge funds are prominent users of decoupling. Sometimes they hold more votes than economic ownership (empty voting). Sometimes they hold undisclosed economic ownership (hidden ownership), often with the de facto ability to acquire the votes if needed (morphable voting rights). Insiders can also engage in empty voting. Over the past few years, new vote buying has affected shareholder votes and takeover battles on four continents.

This Article analyzes the new vote buying. We offer a framework for unpacking its functional elements. We propose a disclosure-based regulatory response which would integrate and simplify five existing, inconsistent share ownership disclosure regimes. We also develop a menu of longer-term substantive responses. Two companion legal articles (Hu and Black, 2006a, 2006b) discuss in greater detail the disclosure rules and other legal rules that affect new vote buying.

In a companion paper, directed at practicing lawyers, regulators, and judges, we provide additional details on current disclosure rules, our disclosure proposal, and other possible reforms. See Hu & Black, Empty Voting and Hidden Ownership: Taxonomy, Implications, and Reforms, http://ssrn.com/abstract=887183
You can find the full article on SSRN here.

HT: Abnormal Returns


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