March 01, 2005
corporate vote buying
Posted by David Skeel

The proposed acquisition by Mylan Labs of King Pharmaceuticals collapsed yesterday, but along the way it revealed a critical new problem in corporate voting.  But buying stock and contracting to sell it at the same time, hedge funds and arbitrageurs can effectively buy votes.  A hedge fund was accused of doing precisely this in the Mylan case -- of buying Mylan stock and hedging it at the same time, in the hopes of tipping a Mylan vote in favor of the King deal.  The hedge fund wouldn't be trying to promote the interests of other Mylan shareholders.  Quite to the contrary, it wanted (or allegedly so) to sell them down the river in order to benefit the hedge fund's stake in King.  If this kind of behavior is common, as many think it is, is has frightening implications for corporate democracy.  Shaun Martin and Frank Partnoy explore these kinds of concerns in detail in a fascinating article (forthcoming in U. Illinois L Rev and available on SSRN.Com) called "Encumbered Shares." (here)

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