Sell Your Proxy Votes? Good Idea, We Say, But Lots Of Practical Problems

Shareholder Vote Exchange, which was featured in a January 22 WSJ article, was started in 2021 by Preston Yadegar, 25 years old, a 2020 BU graduate whose venture has been funded so far by friends and family but who says that talks are underway with potential investors. Andrew Shapiro, the activist investor founder and managing member of Lawndale Capital Management is an advisor to the Vote Exchange board.

The “auction market” – where rates are currently at one-cent per vote and where 200,000 votes have been sold to date – is clearly legal in Delaware – and not illegal in any state we know about – but “The catch is that the buyers could run into trouble, especially if they are the company itself” the article opines.

But we’d say – after noting that vote-buying has gone on since there first were publicly owned companies - and has been going on ever since – is that neither the current “Vote Exchange System” (which relies entirely on an ‘attestation’ from the seller that he or she has a “net long position” of “x shares” on the record date) - nor the current “proxy plumbing system” - have any reliable ways to assure that the votes being “sold” are legally valid. Nor can the existing “systems” ensure that the votes will actually get into the final vote count.

The article fails to note that votes are currently being bought by buyers who “borrow the shares” from brokers – usually for a cash fee that depends on supply and demand – and that almost all of these shares actually belong to individual investors with margin accounts, where the terms allow the broker to lend the shares out (for cash) but do not require the broker to share the proceeds with the unwitting owners. This is a HUGE moneymaking business for brokers – and for many institutional investor owners too, although we would also opine that if an ERISA fiduciary does not recall stocks loaned over a record date, and earns a fee instead of voting, they are likely in serious breach of their fiduciary duties. A  January 23 WSJ story, reporting on a hack of Equi-Lend Holdings “handled transactions $2.44 trillion in December alone.”

Then, to add insult to injury, most broker lenders automatically issue voting credentials to the borrowers – as well as to the legal owners – a MAJOR flaw in the proxy plumbing process – so that many duplicate votes can cancel each other out! The only time an alarm bell rings is if the broker votes more than 100% of its record date position – which rarely happens because individual investor voting is so low (usually around 10% on average, and NOT the 30% cited in the WSJ article,) But if it DOES happen – no one really knows whose votes are cast out: the buyers’? - or the borrowers’??? The “over-votes” are simply withdrawn, without any real account-by-account reconciliation to enfranchise the owners.

Bottom line - the only truly legal – and truly effective way to sell one’s votes at present is to have the shares transferred to registered form – and then to execute an “Irrevocable Proxy” to the buyer – for transmission, while the polls are still open - to the proxy tabulator.

We are 100% in favor of a system that would let share owners sell their votes to the highest bidder – AND to receive the proceeds, which, in a proxy fight or tender offer, can be worth MUCH MORE than a penny a vote. Allen Media Group is currently offering $28.58 per voting share of Paramount Global - a premium of $7.05 per share over the $21.53 bid for non-voting shares - a 32.7% premium!

We would also argue that such an auction is precisely the right way to determine the real economic value of a vote when the fate of the company is on the line. 

As to potential problems for issuers who may decide to buy votes against a potential plunderer – or to simply assure that its own agenda will be pursued – the fears here are bogus: The risk of being sued by disaffected parties is no greater or no less than it always is. And directors clearly have the right to act as they decide, and  strong legal protections for doing so - as long as they have exercised due care. 

Good luck with this, we say to the Shareholder Vote Exchange – but recognize that you are going up against a Wall Street cartel that is making billions of dollars a year from “Securities Lending Programs.”