Negative Voting : Why it Destroys Shareholder Value and a Proposal to Prevent it

The expansion of the derivatives and stock loan markets has permitted investors a great deal of flexibility in structuring their voting rights in and economic ownership of corporations. Some investors have used this flexibility to engage in a practice I label quot;negative voting,quot; which involves establishing negative net economic exposure to a corporation's share price and voting the corporation's shares in the manner that best decreases share price. This practice represents corporate governance at its worst, for it results in the complete misalignment of voting and economic interests.Current U.S. securities laws allow entities to establish large negative voting positions without disclosure. This loophole in regulation permits negative voters to profit by compelling corporations to choose wealth-destructive options. The more wealth-destructive the option, the more appealing that option is to the negative voter.This Note first evaluates three separate proposals that would serve to curtail negative voting. None of these proposals target negative voting alone. Instead, they address the broader phenomenon of misaligned voting and economic interests. If all forms of misalignment were equally problematic, broad approaches such as these might well be appropriate. However, one form of misalignment - negative voting - has more potential for wealth destruction than do its cousins. For that reason, negative voting should be the primary focus of remedial legislation.This Note concludes by offering a proposal that gives negative voting the attention it deserves, while aiming to spare innocent parties the costs of deterrence. The creation of a private right of action - whether by a federal or state body - would have a minimal impact on current derivatives and stock loan markets while providing a direct remedy to those who are harmed by negative voting. Here, the most narrowly-tailored legislative approach is probably the best