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    62 The Economic Structure of Corporate Law ‘mizing strategy under managerial liability is for firms to selfinsure by increasing their capitalization or purchase insurance, whichever is cheaper. In either ease, the incentive to engage in overly risky activities goes down, ‘The problem with managerial ibility is that risk shifting may not work perfectly. It is unlikely, for example, that managers who are liable for mass torts, with mammoth but uncertain expected libili- ties, could shift all of this risk. Because of the huge amounts i volved and the difficulty of monitoring, insurers are unwilling to assume the highest possible expected liability. To the extent that risk is not completely shifted, a legal rule of managerial liability ‘creates risk for a group with a comparative disadvantage in bearing. that risk. This ineficiency leads to both an increase in the compet- itive wage for managers and a shift away from risky activities. And there is no guarantee that the social costs of this shift away from risky activities will not exceed the social costs of the excessively risky activities in the absence of managerial liability ‘A final method of reducing the incentive to engage in overly risky activities created by limited liability isthe regulation of inputs. The regulation of nuclear power plants, for example, could be justified ‘asa response to the perverse incentives created by limited liability. ‘Again, however, there are costs associated with direct regulation of risk taking, Regulators have no better incentives than market par- ticipants {0 balance the social costs and benefits of engaging in ‘certain activities. Indeed the economic theory of regulation su ‘gests that many regulatory schemes arise in order to create, rather “defects” in markets. Thus the regulation of nuclear ‘power plants may have the purpose and effect of shielding other costs of regulation exceed the social costs of exces activities is an empirical question. The desirability of regulation cannot be established simply by identifying the potential incentive to engage in overly risky activities created by limited lability. Votes may not look much like contracts, but the structure of voting—who votes, using what institutions—is contractual, and efficient too. Why Do Shareholders Vote? “Why do shareholders vote?” is three questions in one. First, why do any investors have voting rights? Second, why do shareholders alone have voting rights? Third, why do shareholders exercise their voting rights? Our concern in this chapter is with publicly held corporations. We discuss voting in closely held corporations in Chapter 9. RULES AND Practices ( Dermits shareholders to cast multiple votes for a single candidate eve candint may idee ne teas Se ‘he vex ay vate pon by rs HY ma Del. Code 1810), 21, 2 8 De, Code 1102010),214 6 ‘64 The Economic Structure of Corporate Law Any of these power to vote, Although different sta ferent presumptive rules (for texample, votes may be cumulative unless provided otherwise), this does not detract from the status of the enactments as enabling statutes. 3,4 De, Code 410000), 1,14) & €, 2H. ik). The only exception concers ireiors elected by a ory of share with cumative voting. These directors ay be fired oat for yo Feasons or by x majo large enough o have prevented their election nil SSB Del Code 16. "Exchanges and the Regulation of Dual Class Common Stek,” $4 U. ON. L. Rev. 119 (9, See aio Greg Aare and Anette, Poulson, "Dual-Ciass Recap- laizations as Anitakeover Mechanisms: The Recent Evidence,” 20. Fin. Econ. (#8); Richard, Raback, "Coercive DualClass Exchange Offers, bd. at 153; Kenneth Lehn Jeffry Netter, and Annette Poulson, "Conslaating Corporate Conta "The. Choice. between Dusl-Clars Recaptaizations nad Leveraged Peyote" 264, Fa. Econ (1981). The volume ofa iteraure om stock with ie ferent voting rights oustngs the sgnfcance ofthe pporenon. See Roca J. Gilson, "Evatbating Dual Clas Common Stock: The Relevance of Substitutes.” 79 Vert. Rev. 40 (1987 defies N. Gordon, “Tis That Bood: Del Class Common ‘lock andthe Problem of Shareholder Chic,” 76 Cal. 1. Rev. 1 (188); Joel Seligman, “Equal Protection in Shareholer Voting Righis: The One Common ‘Share, Ove Vote Controversy” $4 Geo, Wash. L. Rev. 687 (1986 George W. Eee esd oer te pacers Libesincemibanet holders convey their snares and the allached votes toa trustee who at ae eas « Dla MeciRiatse WRG Tesora sles sonmon Ie. Ween ws snorted Oy eet ‘common law. When it was authorized by statute, the authorization was accompanied by etn ins Ma ad me_limi ‘Statutes also require the board of direc bmit other proposals to voters when, for example, a sucieat numberof voters or direttors request such a subis- 4, Some sts tn sles of vt by ste N.Y. Buk. Cop La se and eter sated soy hcl decom ahr Merch Monge & Crake, Del. ch. 74194 41998). Se Schreher Comey, 47-436 17 (Del. Ch Ia (dean the ssa in which ee ling peed). 9. For exam, # el. Cove 2 Te Forcxampe, el Code 18 Ge ear era. 1. For example 8 Del. Coe B10) eon eo 4 mayo al ook sotjstos gon, oapprove x ner) 12 Forts 8 Del Code 0% (although te board of decry be siven the power o amend the bys rah test te sae or rember afte poner toadop arse rpeaibyoes. 0) (etn nd 166 ‘The Economie Structure of Corporate Law if, for example, a given election could result in each voter ‘gaining of losing $1,000, and if each is sure that the election will ‘come out the same way whether or not he participates, then the voter's optimal investment in information is zero. And even if a voter thinks his vote will be dispositive, so that an investment up to $1,000 is warranted, that may be insufficient. If there are 1,000 voters, the effect on them as a group will be $1 million. A thousand dollars’ worth of information may be quite insufficient to make a $1 million decision; worse still, 1,000 people investing $1,000 each “pec weings 0 be bia rove in ym): 28 ters may awit treating by obuining signatures of # majonty). See alo SEC y, Transamerica Corp F24311 (84 Te conang Dace iw 5 req Seto | toast areolder’propona oe ts meting) Voting 67 ‘may mean that all of them are acting on inadequate information, even though a single investment in $10,000 worth of knowledge unless that stake is 100 percent. * Collective action problems may be overcome by aggregating the shares (and the attached votes eaate extensively 10 managers and almost 8 endorse their decisions. But this acquiescence should not lobscure the fact that managers exercise authority at the sufferance of investors. Vorine As Part oF Risk BEARING Yoting exists in corporations because someone must have the 1e- firm public, they almost always find it advantageous to sell claims that include votes, and thus ultimately the right to remove the insiders. Why do the insiders sell such claims? Why do investors ay extra for them? (They must pay something, or the insiders Would not expose themselves to the risk of removal.) ‘The reason it that shareholders are the residual claimants othe — ne] atesodi03 Jo aumBAIg STuOUOTT qT $9 69 Taion 70. The Economic Structure of Corporate Law ‘possible, however, when voters commonly are atleast people buy and sel in the market so thatthe shareholders of a given frm at given time are a reasonably, homogeneous, rou with ‘aly why only one class hols the controlling votes a atime but also why the law makes no effort to require firms to adhere to any ‘objective other than profit maximization (as constrained by partic- ular legal rules). ne final point on the elation betwete voting and residual ‘corporate action are divided proportionally among all shareholder, Even when gains are not proportionally divided, the aggregation of " isnot significant if coalitions can change. Does VoTING MATTER? ‘Whether voting serves the functions we have assigned itis neces- sarily an empirical question. There are no conclusive answers, but several considerations are suggestive. One is simply the survival of voti 15. Kenneth 1. Amow, Social Choice and Collective Values 2d ed. 196; Duncan Black, The Theory of Cmatices and Becton (1958). ated with substantial price premiums, and tactics that make take- ah gl pe nesters renlng inthe valve o oats price increase takes place when the market learns of the contest, and it persists even if the insurgents are defeated. Fourth, because the collective choice problem is the principal limit on the ability of the residual claimants to influence decisions Fifth, in the rare cases in which firms have outstanding issues of stock with identical rights to share in the profits but significantly ‘stock. Similarly, in proxy contests, the price of all stock falls on the record date, after which stock generally is sold without the buyer ‘acquiring a right to vote im the impending election." This premium {or voting rights probably represents the anticipated (and fully di- 16, See Jel and Poulsoe, supe pote 7; Ruback, supra ote 7. See leo Sanford 1. Grossman aod Olver D. Hart, "One Share-One Vote and the Marke for Corpo ‘ate Conta" 204, Fi. Econ. 175 1988). 17. Peter Dodd and erld B. Warne, “On Corporate Governance: A Study of roxy Contests." 11 J. Fin. Econ 401 (1983); Harry DeAngelo and. Linde DeAngelo, “Proxy Contents andthe Governance of Publicly Held Corporations BJ Fin, Econ £9 (199) (uacing the gain to subsequent contol tasiactors ‘he kind discussed in Chapters Sad 2) See also John Pound, "Proxy Contes the Eticiney of Sareolder Oversgh."20 J Fa. Econ 237 (1989. 1K Roald C. Leas. John J. McConnell, aad Wayne H. Mikkelson, “The Market Value of Control in Pull: Traded Corporations.” 11 J. Fin Econ. 439 (0980; Dodd and Warner supra note 17 See alo Haim Levy, "Economvc Evan: ‘ion of Voting Power of Common Stock,” 381. Finance 79 (133) wating premaim averaging 5 percent in Isl, ‘and 72 The Beonomic Structure of Corporate Law luted) value attributable to the opportunity of those votes to im- prove the performance of the corporation. It is not possible to attribute the premium to the privilege of those with votes to “di- vert” profits to themselves, because such diversions accrue (if at all) to insiders, while public investors who could not expect to get ‘such diversions are willing to pay the premium ‘This the evidence strongly sungess that votes are Imporan\ de spite the collective action problem, and that the voting process ‘enables firms to operate more efficiently State Rules Concerning Elections THE PRESUMPTION OF ONE SHARE, ONE VOTE, o ‘most all publicly traded shares in sub- stantial firms have one vote each, and that vote may be east for positions on an unclassified board. There have been persistent ar- David G, Davie, "The Efficiency of Public versus Private Firms ‘The Case of Aunal's Two Anes,” 14J.L. Bean. 169 (1971) (rms with \demiabieresiua claimants peospers relative fo fms without them), Note tha ‘elimi his comparison ofrms operating fr prot. 120. See Lease, McConnell, and Mickelson, supra ate 18 (fining ony thirty s- ‘ver of nosing oF unequally weighed voting common stock waded on any ex: ‘change rover the counter at ay ne between 140 and 978). On why they exit Stall se Fsehel, sopra note. Voting 73 ‘guments that this is not “democratic” because some people (those ‘with more shares) have more votes than others, ‘The presumptively equal voting right attached to shares is, how- ‘ever, a logical consequence of the function of voting we have di by distri ; although every share has the same holdup potential, the aggregate holdup value exceeds the value of the firm and thus makes negotiation very difficult ‘These considerations the statutory limits on the ‘establishment and duration of voting trusts and the fact thal in Practice such tnsts are wed only in closely held fms. Yo 74 The Economie Structure of Corporate Law that they feduce the value of the firm. (Chap and 8 discuss antitakeover laws in detail and present data about control share statutes and related developments.) No matter the source, the separation of control from the residual interest intro- dduces a substantial, and in public firms unnecessary, agency cost, ‘THE Prowisition oF Vore Buyinc It is not possible to separate the voting right from the equity in- lerest, Someone who wants to buy a vote must buy the stock too. The restriction on irrevocable proxies, which are possible only. when coupled with a pledge of the stock, also ensures that votes go, with the equity interest, The tisk of such shirking would reduce the value of investments in general, and the risk can be eliminated by tying votes to shares 21, We therefoce disagree with Deas Clark's argent that vote buying shod be permited if the purchaser has a substantial equity vteest ad hopes to pot ‘solely by appreciation in the valve ofthat interest, Robert Charles Crk, “Vote ‘Buying and Corporate Law.” 29 Cave West. Rev. 796 (1979) Clark dey ot ‘cus the agency cout robimsasocatd ith ch vote buying and he dots pot "ryt explain why vote buying eniverly condemned Voting 75 ‘One possible response is that the agency costs created would be liminated if the owner of 20 percent of the residual claims could obtain returns disproportionate to his equity interest. As long as there is a market in votes that parallels the market in shares, com. petition among vote buyers could be sufficient to compensate eq- ity investors for the value of the Gilution of their interests, ‘This is intriguing but, we think, unsatisfactory. Moreover, the collective choice problem would exert « strong influence over the market price of votes. Because no voter expects to influence the outcome of the election, he would sell the vote (which to him is unimportant) for less than the expected dilution of his equity interest, He would reason that if he did not sell, otters would: he would then lose on the equity side but get nothing for the vote, Thus any positive price ‘would persuade him to sell Competition among those bidding for votes might drive the price up but not, ordinarily, all the way up to the value of the expected concern obviously does not apply to one who buys shares the day before the election, votes them, and sells the day after the elec tion—and so “buys” votes in common parlance. Such a person bears the gains or losses attributable to the election, and his con- duct is not unlawful in any state as vote buying, If state or federal law re- Strict the transfer of shares, then the sale of votes in a competitive 22 In woteselng games there i no core soation when gins are not eaially apportioned, and there may be no core saation even when they ae equally apo toned. See Lester G.Telser, "Voting and Paying for Public Goods Av Application the Theory of the Core." 227. Bean. Theory 376 (1982), f0rarelted dss 76 The Economic Structure of Corporate Law market is an attractive second CF ‘The only other situation in which buying the votes without the shares is advantageous is when the buyer is planning to dilute the interests of the other equity ‘owners, As we discuss in Chapter 5, investors would agree to prohibit such dilutions in order to ensure that all control changes increase value. Thus the legal rules tying votes to shares increase the efficiency of corporate organization, with the potential excep- tion of control contests in which the shares themselves cannot be sold. THE ABSENCE OF TENURE OF OFFICE Although members of boards of directors typically are elected for specific terms, they do not have tenure of office. Voters may call elections on short notice and oust the directors for any reason oF none, Delaware, the dominant corporate jurisdiction, has the least secure tenure ofall. 23, See Thomas J. André J, “A Preliminary Inge ato the uty of Vore ying the Market for Corporate Cote” 6) SCL Re $83 (195) 2 See note 8, spr, and for example, Campbell ¥. Loew's Ine. 36 Bel Ch 563,144 24859195) Compare Semel v.Cri-CrafTnustes, Ine. 285A 2d {47 (Do. 1971 (board may ot change he date of mecing soa to dsadantage the ‘opposition. Provision in Bylaws purporting to fish tenure of afice though ‘Sipermajonty vote requirement for ouse sometimes are suaned but they ae of ‘questionable electives m many sates. See Texas Partners v.Conrock Co. 8S 381116 (9 Ci 1982) (Deleware a) Voting 77 Even states that of officeholders in theory do not zm in practice. is 0 similar monitoring and reward system for THe Common Law RULES FOR THE ConDUCT OF ELECTIONS Unlike federal law, which we discuss in the next section, state law usually imposes no restrictions on'the conduct of elections apart from requiring the incumbents to furnish lists of shareholders to gents’ expenses if they win, and incumbents may reimburse insur gents even if they lose (although this is rare) It is sometimes said that incumbents may use the firm's resources to defend their posi- tions only if the dispute concerns corporate “policy” rather than “personal” matters. But it would be 2 poor director indeed who ould not find some element of policy inthe dispute. People do not wage proxy campaigns to eject directors just because they wear gaudy clothes; they object to how the incumbents run the firm. ‘Thus the distinction between policy and personal issues stated in the cases turns out to be no limit at al. All of these rules (or, rather, the lack of rules in all of these instances) are 25. Delavare hasan elaborate set of rules concerning the ccumtances unde which shareholder’ ts ust be frithed. See 8 Del. Coe #220, 2%. For example, Maly. Trans-Lux Daylight Sereen Petre Corp. 20 De. Ch 7% 17 A. 236 (984), Roseaeldv. Fairchild Engine & Aipane Corp. 309 NY 168,128 N. 8.2421 (1955), 78 The Economic Structure of Corporate Law have discussed, this reduces the agency costs that would arise if particular directors incurred expenses disproportionate to their ‘of the directors’ dec yemselves if they prevail and why incumbents may reim- burse unsuccessful insurgents. i may seem odd, however, that challengers are not reimbursed by the firm as a matter of course. There are substantial free-iding problems in mounting a campaign. . Because the firm appears to gain whether or not the insur enls prevail, it could be argued that the firm should pick up the ‘expenses of those who seek election to at least the same extent as it picks up the incumbents’ expenses. ‘There is nonetheless a substantial problem with allowing chal- lenges at the firm's expense. The firm’s offer to pay for the contest ‘may become an attractive nuisance. There are always publicity seekers willing to stand for office on someone else's money. An coffer to pay for the contest is worthwhile only if, in its absence, significant numbers of otherwise beneficial contests will be sted, ‘and even then only if there is a good way to distinguish plausible challengers from frivolous ones. ‘We may put the difficulty of weeding out frivolous candidates to fone side. Almost all proxy contests are waged by owners of sub- Voting 79 stantial blocks or by former officeholders, and it is precisely such ‘people who do not need the lure of automatic compensation by the firm in order to make the contest worthwhile. Issue Voting We consider these aspects of issue voting below. FUNDAMENTAL CORPORATE CHANGES ‘The corporate law of every state provides that the business of the ‘corporation shall be managed by, or under the direction of, the board of directors ordinary business decisions statute requires the midterm ‘lection as a partial response to the collective action problems that make it difficult for shareholders to organize to oust directors be- tween elections. The right to vote is simply an additional moni toting device possessed by the residual claimants when the stakes 21.8 Del. Code $22 (sharchoders’ approval required for amendments to the ‘etifente of incorporation); 1251 (shareholers approval required for mera) {21 ahareholders' approval required for sales of assets); 1275 (shareholrs ap oval required for dation). 80 The Economic Structure of Corporate Law are high enough. Although shareholders approve almost all mergers, this may be attributable to advance consent by institu: tional investors, consent that would not be necessary if there were no right to vote CHARTER AMENDMENTS tender offer. Because these amendments reduce the probability that the firms’ shareholders will be the beneficiaries ofa tender offer at significant premium over market price, they reduce shareholders’ wealth on average. (Chapter 7 summarizes the data: see also note 7 in this chapter.) customary adherence to the Wall Street Rule (vote with manage- ‘ment or sell your shares) and vote against “shark-repellent” amend- ments. The more shares held by institutions, the less likely an ‘antitakeover amendment’s adoption—and the less. damaging the ‘amendments that are adopted. SHAREHOLDERS’ VoTING WHEN Ir Is Nor REQUIRED (Our analysis thus far has focused on v “Shack Repeats and Stock Prices: The Elects of Antiakeover Amendments Since 1980 (198) James A. Beckley, Ronald C. Leas, and Ciford W. Sat Jt, “Ownership Siruture and Voting on Antiakeover Amendments.” 20 J. Fin. Econ, 267 (1988); Paul H. Malatesta and Ralph A. Walling Polson Pil Secures: ‘Stockholder Wealth, Proftaiity, and Oweship Stace.” 20. Fie, Econ. 307 98, Voring 81 tions between a director oF officer and 1 corporation will not be ‘oid or yoidable, despite the conflict of interest, ifthe transaction is approved by a vote ofthe shareholders.» Similarly, « merger will more likely survive a judicial challenge if tis approved by 3 ma- jority of the shares not held by the acquirer. shareholders’ ratiiation is minimized, however, by the common Jaw rule that shareholders cannot ratify fraud” and the tendency of, courts to scrutinize whether selfinterested transactions are beneficial to firms. Again, the survivorship principe suggests that there isa net benefit of legal rules encouraging shareholders’ ap- proval of certain transactions (although the rules here are less well entrenched and consistent than in the case of fundamental corpo: rate changes) Federal Regulation of the Proxy Machinery Firms have incentives to locate in states that enable them to adopt voting. procedures that promote the wealth of investors (see ‘Chapter 8). 29. Bel. Code F144 50. For example, Kerbs ¥, California Eastern Airways 39 el. Ch 474, 1844.24 (2 (962; Continental Secuniies Co, ¥, Belmont 06 N.Y. 7.996 E. 138(1912) 31. See Adolph A. Bete and Gardiner C. Means, The Modere Corportion and Private Property (1933). See generally Symposium, Corporations and Private Prop- fey, 264.1, & Econ. 235-496 (198), asesing he ngicance of ths Bo, 82 The Economic Structure of Corporate Law Voting 83 Managers still are rarely displaced by voters; managers’ recommendations on fundamental corporate closure provisions designed to informed even if changes, amendments of bylaws, or other matters are rovtinely there is no contested election: (2) provisions requiring disclosure by followed: shareholders’ proposals do well if they receive 5 percent rival groups inthe event of « proxy fight to ensure that shareholders of the vote. will be adequately informed and able to vote inteligently; (3) a {general antfraud provision prohibiting the use of fase or mis- leading statements in cases where proxies are solicited; and (4) a provision allowing shareholders, subject to certain exception, to ‘communicate with other shareholders by placing « proposal in the proxy materials ‘The proxy rules displace private arrangements with respect to both the issues on which shareholders are entitled to vote and the information they are entitled to have. Regulation is not ented to the same presumption of efficiency as long-standing voluntary ar- rangements. The more plausible explanation for the disparity between the rhetoric of shareholders" democracy and the conduct of share ‘THe BEHAVIORAL ASSUMPTIONS OF THE Proxy RULES fabidees thease vest het Te afe, however, good reasons why 32 1S USC. #7. Me implementing ele oper 17 CF.R 1240.46. The See mah wen? = ein ot 114 wan enpercd the Hove Report “Managenests properties Feetore would choose 10. lt both the scope of voting and the ‘evual by te iorsshc pati shel wa bs petierdes reteesne oeeeties by formation supplied: rational ignorance implies delegation implies ‘the misuse of corporate proxies, Insiders having litle of no substantial interest in Jess voting; and the costs of information imply limits on disclosure {te properties hey manage hve ois ete hl conta without a neque {0 investors who won't act on information even if they posses it Ainclonare of the iter and withot am deat explanation othe management It is interesting to compare the regulation of proxy voting wi ‘poticies they intend to pursue. Insiders have at times solicited proxies without (airty ad fare te reasltion. of peony ellng ith ‘Storming he ecole of he proses for wich he pose ire oe ved 3h have mad sich poses take om the wocdbees forthe ow oh sane the vale property ahs" H.R. Rep. No. 138 7d Cong M Senta ro 2. The greater the maby of he sl o ext option, the less dele isthe orig or voice option, See Abert O. Mirchman, Ext, Volce, and Layaly (1) "vis ifcl co imagine a mae eetive ent option than the market i bares. he 84 The Economic Structure of Corporate Law the regulation of union elections in labor law. The National Labor Relations Board has long regulated parties’ statements in union elections, acting om the belief chat employees are attentive to elec- tion campaigns and that the exercise of their free choice is easily affected by campaign propaganda. Research strongly suggests, however, that employees do not pay careful attention to election campaigns and are not easily misled by rhetoric." If words do not mislead employees—if, indeed, they do not even pay attention to ‘campaigns that strongly affect their future—how much less is the ‘concern for sophisticated investors in stocks, investors for whom, because of the exit option, voting is much less important than for the employees? jecause it is $0 easy to sell one’s shares, and because ‘ianagers Must set attractive terms for new securities (including. terms for voting) if they are to maximize their returns, there is no ‘good reason to think that the voting rules designed by the firms themselves will be inferior to those the SEC prescribes.» IMPLICATIONS OF THE ASSUMPTIONS UNDERLYING THE Proxy SYSTEM Many specific legal rules and doctrines are based on the behavioral assumption of the interested and attentive shareholder. In this sec- “4, Jus G. Getman, Stephen 8. Goer and Jeane B. Herman, Union Rep: resentation Elections Law and Reality (191). Compare the ails questioning the Imethoolony im 26 Stan Re 161-120 (1976) with the author defense, St ‘en B,Goldtery, Jul G. Getman and Jeanne M. Bret, “Uni Representation lectins: Law and Realty: The Authors Respond othe Cees,” 79 Mich. Rev. 04 180, 35, See also John Pound, "Proxy Voting and the SEC: The Case for Drege: tion” 26. Fin. Econ. (191, concluding long our ines that the proxy rales is Voting 85 tion we discuss some of these rules and doctrines and also analyze them under more reasonable assumptions of shareholders’ be- havior. . lity would be not to reg ‘ulate the content of speech and rely instead on the marketplace of ideas and the incentives of parties to disclose the optimal amount of information. Corporate elections then would approach political clections, where the value of the vote is greater given the lesser availability ofthe exit option, yet speech is unregulated, ‘The behavioral assumptions underlying federal proxy regulation are most clearly evident in the shareholders’ proposal rile. Rule Ma-8 ofthe federal proxy rules provides that a publicly held corpo: ration must include any shareholder proposal that does not fit within one of the exceptions to the rule. ‘But this argument stands the 86 The Beonomic Structure of Corporate Law rationale for shareholders’ voting—and federal proxy regulation— Among contemporary proposals, fewer ask firms to abandon profitable but hazardous activities and more ask firms to abandon devices that protect the managers, such as poison pills. For reasons developed in Chapter 7, we are sympathetic to the merits of such proposals. Still, whatever costs takeover defenses create have not altered the cost-benefit ratio forthe shareholders’ mecha ‘or by state law. Provosep REFORMS OF THE PROXY SysTEM Because proponents of federal regulation ignore the economic real- ities of shareholders’ voting and instead assume that shareholders ‘demand more involvement in the corporate decision-making pro- ‘cess, they also assuime that the shareholders enduring indifference to voting is attributable to defects in the regulatory process. Increased Disclosure we have emphasized, there is tno evidence that shareholders have any interest in this information. Voting 87 toa fear of tigation, adverse publicity, or regulatory fervention, managers may simply decide that the costs of disclo- ‘sure may exceed the expected benefits from the activity. Greater Access to the Proxy Machinery ‘Another common explanation for shareholders’ apparent lack of interest in corporate decision making is that they lack the ability to paticipat meaningfully in the electoral process ‘The only defect in the current system that proponents of greater shareholders’ access to the proxy machinery have identified, how- ver, is that it is inconsistent with the behavioral assumption of the interested and informed shareholder. If this assumption is incor- rect, there is no basi for concluding that shareholders should have Control over the nomination process. On the contrary, Unless they have no i increasing administrative costs), the 88 ‘The Economic Structure of Corporate Law jlders Increased Involvement by Institutional Investors ‘The largest shareholders of many corporations are financial institu tions that invest and manage funds for the benefit of smaller in- vestors. These institutions typically possess sole or shared au- thority for the voting of shares. In this capacity, institutional investors have been criticized for investing insuficent resources in deciding how 10 vote. ‘The impression one gets from this rather dismal literature is that institutional investors are disserving their beneficiaries by not taking their voting responsibilities more seriously. Money managers who do not make sound decisions regarding the costs of establishing more elaborate voting procedures in relation to the benefit of such procedures would not be able to attract invest- ‘ment dollars. Institutional investors thus have every incentive 10 54. SEC Swif Report on Corporate Accountblty. Commitee rat, Senate Commitee os Bathing, 9th Cog. 2d Sess. «2 (1980). "8 Myron P. Curzan and Mark L. Pelesh, "Reviaizing Corporate Democracy: ‘Conta af nvesument Managers" Vig on Social Responsbity Proxy Ioues."93 Hears L.Rev, 67, 634 (1980, Voting 89 ‘expend the optimal amount on voting procedures. Indeed, the prac- tice of institutional investors’ voting against antitakeover amend- ments suggests that such investors vote against managements when {nisin their interest to do so. Their perceived unwillingness to make ‘more exacting judgments" is no doubt 1 ‘the economics of shareholders’ Aoting Like greater shareholders’ access to the proxy machinery, pass-through voting will lead o higher agency costs and lower share prices, to the detriment of investors. Economic analysis vindicates the current state of the aw, dio [9990e¥¢] $619°16 029P—990.6L'9¥2 1661 (za9IpLaN STILL “HL °W fotued ‘Taqosty “"T“seieig parry —soruouods yeusdeuNN °Z soreig pauy—sivadse s1uouosg—met worres0ds0- “| (1d) 8-6ESE7-¥L9-0 NEST (Wolo) X-BESEC-¥L9-0 NEST “xepur sopnyouy wo “d “rewostg “a 1a1ue, ue yoouquorseg “H ued / we] atesods09 30 asnyonsts onwoUosa a4, 861 H Aue “Yooqierse, biog wonoangnd wi SinBojoi7 ssa18u0. fo kavsqry 9661 ‘uonspa yoeqioded ssaug Auss9Atun, pueAzepY ISIL1 siagaudsnowaud yo wo 01 soaps sureuas wonioo i panes

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