A Plumber's View - Voting Intermediated Shares
Introduction
“The existing
system of shareholder voting is crude, imprecise, and fragile. Gil Sparks, a
leading Delaware lawyer, estimates that, in a contest that is closer than 55 to
45%, there is no verifiable answer to the question ‘who won?’”[1]
That system,
explicated by Kahan and Rock in 2008, is largely the same system employed
today. This post updates the seminal work of Kahan and Rock, from whom the
quote came, by (1) briefly reviewing how shareholder voting in the United
States is crude, imprecise, and fragile,[2] (2) comparing the U.S. system to other
shareholder voting systems around the world to highlight practices that are
more precise and robust, (3) discussing technology that can increase the certainty
and validity of shareholder votes, and (4) suggesting regulatory reforms that
might alleviate some voting problems.
U.S.
Proxy Voting
This section reviews how
shareholder voting in the United States is dysfunctional. It starts by
presenting background necessary to understand the shortcomings in shareholder
voting: how stock is held, the law of share ownership and voting, and the basic
mechanics of a shareholder vote. The section then turns to three types of
problems that arise in shareholder voting: those that arise from systemic
complexity, from questions of ownership, and from divergence between economic
interests and voting rights.
How
Stock is Held – Intermediated Shareholding
Intermediated
shareholding refers to a chain of property rights in corporate shares,
extending from the Depository Trust and Clearing Corporation (“DTCC” or “DTC”)
and its subsidiary Cede & Co. (“Cede”), through DTCC’s members and those
members’ respondent banks,[3] ultimately to beneficial
shareholders, who are commonly thought of as a publicly-listed company’s stockholders.
Nearly all shares are owned through this intermediated structure. DTCC’s annual
reports from 2009 and 2017 provide the total value of active securities issues
held at DTCC as $40 trillion and $57 trillion, respectively.[4] These values account for most
of the total market capitalization of listed domestic companies in the entire
world, reported by the World Bank as $44.6 trillion in 2009 and $79.2 trillion
in 2017.[5]
Intermediated
shareholding took root from the “paper crush” of the 1960s. At that time, share
ownership was evidenced by physical, paper stock certificates, and when parties
bought or sold shares, the certificates were delivered to the buyer’s broker
and the buyer was then registered on the corporation’s shareholder list.[6] This paper-intensive
process lasted until the 1970s, by which time the flood of daily paper, administrative
errors, and inability to keep up with transactions bankrupted brokers and
consistently closed markets.[7]
The solution to
that labor intensive, time consuming, and error fraught process came in the
form of a central clearing party called DTCC and its subsidiary Cede. As a
result, share certificates were generally held permanently in a DTCC vault or in
DTCC’s electronic records (commonly referred to as being immobilized) and
registered in the name of Cede. Therefore, Cede “is listed as the record holder
for a vast majority of stock.”[8] However, while Cede holds
the shares and is the registered shareholder of record on the company’s
shareholder ledger, property law has developed, and contractual arrangements have
been established, so that the economic and legal benefits of shareholding flow
through to the underlying investors of the shares, referred to as “beneficial
owners.” Therefore, Cede does not enjoy the economic benefits of a shareholder
from its registration as a shareholder.
Beneficial
shareholders, also known as “entitlement holders,” have accounts with banks,
brokers, and other institutions (“custodians” or “securities intermediaries”).
Those custodians provide “asset safekeeping, trade processing and settlement”
services for their accountholders.[9] Some custodians have
accounts directly with DTCC. When a beneficial shareholder places a trade with
a counterparty at a different custodian, and both custodians have accounts with
DTCC, two things happen. First, the accounts of each trading party are changed
on the custodians’ books. For example, if retail investor Joe owns 500 shares
of Delaware Inc. stock in his account at Broker A and he sells his 500 shares
and the counterparty is retail investor Jane who has an account at Broker B and
who previously owned no Delaware Inc. shares, Broker A will change its records
to show that Joe now owns zero Delaware Inc. shares and Broker B will change
its books to show that Jane owns 500 shares. Second, DTCC registers the change
in shareholding on its books to reflect the shares held in the accounts of
Brokers A and B.[10]
Assuming no other shares in Delaware Inc. were traded at Broker A or B, DTCC’s
books would reflect a 500 share reduction in Delaware Inc. shares held in
Broker A’s account and an increase of 500 shares in Broker B’s account. The
simplest case, when a beneficial shareholder places a trade with a counterparty
at the same custodian (i.e., the same broker), that custodian will enter the
proper book-entries for its customers, and nothing changes at DTCC or on the
books of any other custodian.
Importantly, not
all custodians have accounts with DTCC and they must then use a custodian, or a
chain of custodians, who does have an account at DTCC to book the transaction.
Therefore, a beneficial shareholder might be two or three custodians removed from
a DTCC member. Any intermediary between DTCC and beneficial shareholders track
changes in stock ownership with new book entries, which flow up and down the
chain of intermediaries as needed. A simplified version of this chain of
intermediated shareholding is illustrated below:[11]
Muddled Legal Landscape – UCC, State Corporation Law,
and N(OBO)s
Property law
developed in response to intermediated shareholding, ensuring that beneficial
shareholders retain legally recognized economic interests in their accounts,
despite the fact that Cede is the shareholder of record, and economic and legal
rights pass through layers of intermediaries. Specifically, Uniform Commercial
Code (“UCC”) Article 8 provides that beneficial shareholders enjoy a
“securities entitlement”[12] in a “financial asset.”[13] The entitlement attaches
as soon as the custodian “makes a book entry indicating that the customer has
bought shares.”[14]
Beneficial shareholders do not enjoy an interest in any particular share or
other property, but rather “a pro rata interest in all like securities of the
intermediary held in common by all other customers who own the same security.”[15] In sum, beneficial
shareholders “jointly own an interest in a fungible mass, with no specific
shares attributed to any specific customer.”[16] An example is helpful to
illustrate how this works. If Broker A is recorded by DTCC as holding 100,000
shares of Delaware Inc. and Broker A’s records indicate that retail investor
Joe’s account owns 1,000 shares of Delaware Inc., then Joe has a securities
entitlement in 1% of the 100,000 shares held by Broker A.
While the UCC
ensures that the beneficial owner has an economic interest in the shares he
indirectly owns, state corporation law is not so sophisticated. In fact, state
corporation law is “straightforward.”[17] Whoever is registered on
the corporation’s stockholder record, i.e., Cede, is the legal owner of the
shares and thus holds the legal rights to vote, receive a dividend, sue, et
cetera. To confer these rights to the beneficial owner of the shares, DTC
passes these onto DTC’s accountholders, and those accountholders in turn pass
some or all of those rights on to their accountholders. Thus, with respect to
shareholder voting, DTC acts as the agent of its accountholders who in turn act
as the agent of their accountholders. As
a result, DTC passes voting rights to its participants, who then either pass
voting rights along, or vote the shares based on instructions from their
accountholders, who receive instructions from their accountholders. That chain
continues until the beneficial shareholder is reached. To continue the example
from the previous paragraph, DTC will pass its voting rights in Delaware Inc.
stock to Broker A via an omnibus proxy. Broker A then sends Joe proxy materials
and a voter information form (“VIF”) asking for his voting instructions, which
Broker A will follow with respect to 1% of their vote, when Broker A submits
its votes. If Broker A has a separate account for Broker B, who is not a DTCC
participant but holds stock on behalf of 100 beneficial owners, Broker A will execute
an omnibus proxy in Broker B’s favor, granting Broker B the right to vote those
shares.
Therefore,
as a state law corporate matter, “[e]ven if communication with [beneficial]
owners could be simplified, solicitation of proxy or voting instructions still
must pass through each intermediary: to be legally valid, the power of agency
must bind each intermediary in an unbroken chain between the record owner[,
Cede,] and the beneficial owner.”[18] State law has not changed
in response to the immobilization and intermediation of shareholding.[19]
To complicate
matters further, the Securities and Exchange Commission (“SEC”) allows
beneficial owners, at the end of the daisy chain, to remain anonymous with
respect to the issuer. The SEC categorizes beneficial shareholders into two
buckets: Non-Objecting Beneficial Owners (“NOBOs”) and Objecting Beneficial
Owners (“OBOs”). NOBOs are beneficial shareholders who allow their brokers or
banks to disclose their identity to the issuer, while OBOs insist on anonymity
vis-à-vis the issuer. NOBO is the default shareholder position.[20] About 75% of retail
investors are NOBOs, while most institutional investors are OBOs.[21] As of 2004, 75% of all
shares held in street name were OBOs, and that percentage is now likely higher.[22]
The interactions
of federal securities law, state corporation law, UCC Article 8, and the
custodian daisy chain, provides the backdrop to our “crude, imprecise, and
fragile” voting system.[23]
Simple Mechanics of Corporate Voting
Under state
corporate law, the corporation must “look in the stockholders list [(“record”
or “ledger”)] for names and addresses, and second, send the materials to those
persons at those addresses.”[24] Slightly more fully: “The
corporation sends out proxy cards, a proxy statement, and the annual report to
its registered owners. The registered owners execute the proxy to indicate how
they wish to vote their shares. The proxies are then returned to a tabulator
(also known as an “inspector of elections,” or “inspector”[25]) who, after checking
their formal validity and comparing them to the share register, reports the
outcome to the board of directors.”[26]
As noted earlier,
intermediation creates a string of parties through whom voting communications
must pass to reach beneficial shareholders, who ultimately have voting rights. “To
eliminate the cost and delay that a series of one-to-one handoffs would entail,
both issuers and intermediaries assign power of attorney to Broadridge
Financial Solutions [(“Broadridge”)] to distribute disclosure information to
beneficial owners and to collect their voting instructions.”[27] The systemic result of
these delegations to Broadridge is represented below:[28]
Despite this
seemingly efficient delegation to Broadridge, the system remains complex.
Barrett provides a helpful overview of typical corporate elections.[29]
1.
When
an issuer announces a corporate election, it must identify intermediaries
holding its stock and ask them how many proxy material packages they require
for beneficial owners.[30] This is an iterative
process that may involve multiple layers of respondent banks and brokers.
2.
The
issuer issues an “omnibus proxy,” which confers voting authority to securities
intermediaries with respect to the shares in their DTC account on the record
date. Brokers and banks transfer their proxy authority, through power of
attorney, to Broadridge.
3.
The
issuer sends proxy disclosure packets to Broadridge for distribution, on behalf
of intermediaries, to beneficial owners. SEC regulations require that issuers
reimburse intermediaries for the cost of distributing these materials.[31] Broadridge sends required
disclosures concerning questions subject to a shareholder vote and a VIF. Beneficial
shareholders receive a VIF, rather than a proxy card, when their custodian
retains the legal right to vote shares or grant proxy authority and the
beneficial shareholders only have the right to instruct the custodian.[32]
4.
The
beneficial owner returns their VIF to Broadridge. The beneficial owner may
change their voting instructions up until the time polls close, and the
last-in-time instructions control.
5.
Broadridge
tabulates incoming VIFs, reporting continuously updated results to
intermediaries and the issuer. It is not customary for any party in this
process to issue written confirmation of received VIFs.
6.
Securities
intermediaries send Broadridge a proxy, or more often a series of incremental
partial proxies, indicating aggregated shares voted for and against each
proposal or director nominee. If the inspector of elections is a different
entity than Broadridge, [33]
Broadridge forwards the proxies collected in this way to the official inspector.[34]
7.
At
this point, the steps in an uncontested and contested election diverge. Sub-(a)
refers to uncontested elections while sub-(b) refers to contested elections.
a.
The
tabulator forwards collected proxies to the shareholder meeting, with
information about conflicting proxies, over-votes, and other problems.
b.
Each
faction, having obtained its proxies from Broadridge, delivers them to the
inspector, who takes them to a secure, neutral counting room. The counting of
votes and appointment of an inspector is governed by state, not federal, law.[35]
8.
-------------------------
a.
The
inspector oversees the validation and counting of proxies to verify legality of
the election.
b.
Proxies
from registered owners are segregated from intermediary proxies, and are sorted
into the same order as the stockholder list. Each of the inspector’s assistants
takes a group of proxies.
9.
-------------------------
a.
The
inspector examines proxies, excluding those that were not properly executed.
Since the outcome is predetermined, little effort is expended validating
proxies.
b.
The
inspector’s staff examines registered owners’ proxies and checks them against
the stockholder list, sorting them into categories: for management, for
opposition, conflicting, invalid (e.g., not on the list) and technically
invalid (e.g., no signature). Proxy counting begins.
10.
-------------------------
a.
The
inspector totals votes cast for the management slate of director candidates.
b.
The
inspector’s staff attempts to resolve partial proxies and revocations for each
intermediary, commonly asking for help from the intermediary itself. Proxy
counting continues.
11.
The
inspector totals the votes and certifies, in a report to the meeting chair, the
number of shares present and the votes cast for and withheld from the proposals
and candidates. Then, the meeting chair reports the vote count and announces
the outcome – for instance, that there was a quorum, that certain candidates
were elected, and that certain proposals were approved.
A stylized and simplified version of this process is drawn below:
Complexity Problems – Votes Not Cast, Not Counted, and
Not Verified
The complexity of
the voting system means that materials do not always arrive to beneficial
shareholders on time or at all. Under Delaware law, shareholder votes must
occur within 60 days of announcement of a shareholder meeting.[36] “For shares held in
nominee name, the following steps must occur before the materials are mailed
out: the issuer sends an inquiry to DTC; DTC responds; the issuer sends out
search cards to the custodians; the custodians respond; often this process has
to be repeated for multiple tiers of custodians; then, and only then, can the
issuer mail the materials to Broadridge, which then distributes them to the
shareholders.”[37]
Some votes that do
or should arrive are not counted. Kahan and Rock document a vote by a 9%
shareholder, who submitted their vote at 11:00 p.m. on the last voting day,
only to later learn that the tabulator had stopped counting votes at 4:00 p.m.
that day.[38]
One year, Unilever failed to receive votes from three major institutional
investors “because of a coding error by Institutional Shareholder Services,”[39] which served as a voting agent
for the institutional investors.
Missing and
uncounted votes can wreak havoc on vote validity and outcomes. In 1993
Broadridge “experienced significant difficulties …, causing several firms to
struggle to meet quorum requirements or to postpone meetings ….”[40] Uncounted votes can be
either pro- or anti-management,[41] and either way they
undermine confidence in the validity of final results.
Even if votes are
cast and counted, their source often cannot be audited and verified. Any
attempt at verification is difficult simply because the shareholder list used
to count votes is just a compilation of the DTCC record, the issuer record, and
the records of multiple layers of intermediaries.[42] The records are
assembled, but “no effort is made to conduct an audit or reconcile inconsistent
share positions.”[43] Moreover, official
tabulators have little transparency into how “Broadridge and its customers–the
bank and broker custodians–adjust overvotes, revocations, and other problems
within its system ….”[44] And, “[e]ven less is
known about how often Broadridge makes clerical errors in compiling its proxy
based on the numerous voting instructions provided by beneficial holders or in
verifying that the person giving the instructions had proper voting authority.”[45]
Verification
problems also arise through the more granular complexity of how stock is held
and voted. Many custodians hold stocks (1) directly, (2) through other
custodians, and (3) for customers.[46] As noted above, they
submit partial proxies to Broadridge, voting only some of their shares.[47] Custodians vote partial
proxies because they do not always have voting instructions from all their
accountholders, or the custodian may not yet know how they want to vote shares
held in their own account. Custodians continue to submit partial proxies,
cumulating their votes and splitting their position between “for,” “against,”
and “abstain,” until they vote all the shares held in all different forms.[48] This voting method
requires attention to ensure that the custodian does not submit too many votes,
and some custodians inevitably over-vote their positions.[49] Many custodians submit
votes in batches without any associated customer account numbers, making it
impossible to verify whether the vote was for the custodian’s own account or
for a beneficial shareholder, and if it was for a beneficial shareholder, which
one provided the voting instruction.[50] Many respondent banks
have one account with their custodians, even though the respondent bank
represents many beneficial owners.[51] Therefore, even when the
votes submitted to Broadridge have an account number associated with them, it can
be difficult to trace the voting instructions back to beneficial owners through
the multiple tiers of intermediaries.
Ownership Problems – Lending Surprise and Over-voting
Two voting issues
arise when shareholders lend out their shares: lending surprise and over-voting.
Stock lending is
when a shareholder transfers title in a share to a buyer, who agrees to sell it
back to the shareholder at a later date. Buyers are often short-sellers, hoping
to take the lent share, sell it in the market at a high price, and buy it back
later at a lower price. Shareholders engage in lending because revenue from the
securities lending fee and interest on the cash, which is reinvested while the
share is on loan, is lucrative.[52] For example, CalPERS
makes well over $100 million annually through securities lending.[53] Investors like CalPERS
typically contract with their custodian bank or a third party to lend their
securities, so “the personnel in the institutional investor with responsibility
for voting the shares may not even be aware that the shares are out ‘on loan’.”[54] Therefore, all kinds
beneficial shareholders are not aware at any given time how much, if any, of
their interest in a corporation has been temporarily transferred to a buyer.[55]
This lack of
knowledge is problematic because the beneficial owner will be surprised that
they cannot vote shares that they think they own. If shares are out on ‘loan’
on the ‘record’ date for the shareholder meeting,[56] then the shareholder
whose shares have been lent out does not get to vote, even if title transfers
back to them before the vote is held. The ‘record’ shareholder’s interests
undoubtedly diverge from, and can even be antithetical to, the surprised
lender’s interests. Even in the best-case scenario, since institutional
investors are more likely to engage in share lending, and are also more likely
to engage with corporate voting, than other shareholders, the net effect of
share lending is to reduce informed engagement in the process.[57]
Share lending also
leads to over-voting. Standard brokerage agreements allow brokers to lend out
shares without notifying clients and, since shares are held in fungible bulk
with pro rata book-entry interests,[58] brokers do not attempt to
identify which customer’s shares they are lending. How this leads to over-voting
is illustrated by the following example:
Suppose
that Morgan Stanley has 1 million shares of Delaware, Inc. in its DTC account,
while Smith Barney has 500,000 shares in its account. A hedge fund customer
“borrows” 100,000 shares from Morgan Stanley and, to go short, sells them to a
customer of Smith Barney. Once that sale is completed, the DTC records will
show that Smith Barney has 600,000 shares, while Morgan Stanley now has 900,000
shares. … DTC’s omnibus proxy will transfer the right to vote 900,000 shares to
Morgan Stanley, and will inform Broadridge of this. Morgan Stanley, however,
will give Broadridge a list of all
its customers’ holdings in Delaware, Inc. for a total of 1 million shares.
Broadridge will then send out proxy materials according to the brokers’
customer lists, with the result that it will solicit voting instructions for more shares than are in fact
entitled to vote.[59]
To help mitigate
this issue, Broadridge provides an “Over Reporting Prevention Service” that
compares “a participant’s reported position to its DTC position, flags any
differences, and enables the participant to make appropriate adjustments.”[60] Still, it occurs with
some frequency. In uncontested votes, Broadridge resolves over-votes through an
opaque internal reconciliation.[61] There are no standard
practices for dealing with over-votes, so Broadridge can reconcile a vote
however they think best.[62] If too many votes are
submitted by a custodian in a contested election, the inspector may contact the
custodian and ask them to reconcile the difference between its submitted and
entitled votes.[63]
Some brokers refuse to do so, such as Deutsche Bank from 1998 to 2003 despite
(or maybe because of) the fact that Deutsche Bank had a habit of submitting far
too many votes.[64]
Reconciliation is
important. Although the question of how a custodian should reconcile an
over-vote remains unanswered,[65] failure to do so may lead
to invalidation of the custodian’s whole submission, or uncertainty about which
votes were actually counted by the inspector. Since there are no standard
tabulator practices for dealing with over-votes, tabulators “may respond … with
a variety of vote-counting procedures, including counting votes on a first
in-first voted or last in-first voted basis ….”[66] Beneficial shareholders
rarely receive notice of when, or even if, the tabulator received their votes.[67] Inspectors can also
invalidate all votes from a party that submits too many votes.[68] No result is ideal for
shareholders, who cannot be sure their votes were ever counted by their
custodian, Broadridge, or the tabulator (if different from Broadridge).
Economic Interest Problems – Incidental Discrepancies
and Empty Voting
Separate and apart
from the issues created by intermediation, problems can arise from the
divergence between voting rights and economic interest because (1) shares are
bought or sold after the record date and before the vote, such that a person
gets to vote shares at a meeting that he no longer owns (or cannot vote shares
at the meeting despite owning shares), and (2) the beneficial shareholder is
hedged against company-specific risk.[69]
Sometimes the
divergence between voting rights and economic interest occurs “as an unintended
consequence of a transaction undertaken for other reasons.”[70] Those with voting rights
and no economic interest may fail to vote, cast a less-informed vote, or look
to the investor with the economic interest for instructions on how to vote.[71] Those with an economic
interest and no vote lose voice, and their omission from the voting process
adds uncertainty to the validity of, especially, close shareholder votes.
Divergence between
voting rights and economic interest also occurs intentionally, leading to ‘empty
voting.’[72]
Although the practical significance of empty voting is contested at a systemic
level, it can be important in individual transactions.[73] By way of example, in
late 2004 Mylan Labs agreed to
buy King
[Pharmaceuticals] in a stock-for-stock merger …. To help Mylan obtain shareholder
approval for the merger, Perry[, a large King shareholder,] bought 9.9% of
Mylan – becoming Mylan’s largest shareholder – but fully hedged the market risk
associated with its Mylan shares. Perry thus had 9.9% voting ownership of Mylan
but zero economic ownership. Including its position in King, Perry’s overall
economic interest in Mylan was negative. The more Mylan (over)paid for King,
the more Perry stood to profit.[74]
Clearly, empty
voting can “result in systematically inferior voting outcomes.”[75]
The previous section reviewed how
and why the U.S. model of proxy voting is complex and untrustworthy. Such
shortcomings are also unnecessary. Many other jurisdictions have structured
intermediated shareholding and corporate voting in ways that avoid many of the
issues discussed in U.S. voting.
There are three major points of
distinction between the U.S. and other national systems. First, legal
structures in other countries provide beneficial investors with more, or even
direct, rights in shares, as opposed to our system of securities entitlements.
Second, other countries provide issuers greater transparency about the identity
of beneficial investors. Third, voting materials in other countries are
distributed more directly from issuers to beneficial investors, and back, than
in the U.S.
The following subsections are
categorized by the legal structure of intermediated shareholding, starting with
full individual ownership of shares, and then moving to other structures. The
issues of transparency and voting mechanics, which can diverge between
countries with the same legal entitlements, are addressed within each
subsection.
Spain & France – Dematerialization, Direct
Registration, and Individual Ownership
Spain and France
share a model of direct share registration that is the most practical and
comprehensive way to deal with many of the problems that plague U.S. corporate
voting.
The first structural
difference between the Spanish/French and American models is that Spain and
France have “dematerialized” corporate shares. Whereas the U.S. immobilized
share certificates to alleviate the paper crunch in the 1970s, Spain and France
have done away with share certificates altogether, making pure book-entry mandatory
for public companies.[77] The same can be done in
the U.S. “U.C.C. Article 8 already permits uncertificated securities and
provides a legal structure for transfer. Under states’ corporate laws,
corporations may issue uncertificated equity securities. Uncertificated bonds
are already very common.”[78]
The second,
crucial, structural difference is that Spain’s (and France’s) version of DTCC,
IBERCLEAR, maintains a transparent book-entry registry for corporate shares in
the names of beneficial owners.[79] Thus, Spanish issuers
benefit from IBERCLEAR’s up-to-date list of all their beneficial owners. DTCC
has a similar, optional Direct Registration System (“DRS”), which has been in
operation since 1996; so the infrastructure to adopt the Spanish/French model
already exists.[80]
The creation and use of DRS are discussed in the next section.
The legal
difference between Spain and France, and America is also stark. Beneficial
investors in Spanish or French listed firms enjoy “full, individual” share
ownership, because their shares “are deemed to be located directly in the
investor’s securities account.”[81] Intermediaries like
IBERCLEAR and custodians have no ownership interest in the stock,[82] in contrast to Cede and
American custodians, which pass legal rights down the chain of intermediaries.
The individual ownership model is represented below:[83]
The individual ownership model also simplifies the voting process. In France, registered shareholders receive material directly from, and vote directly with, the issuer, whether or not the shares are held through an intermediary. In Spain, in contrast to many other countries, the primary mode of disseminating meeting notice and proxy information is through websites, in order to comply with Spanish law requiring “quick and non-discriminatory access” to meeting information for all investors.[84] Beneficial investors then vote directly with the issuer or pass voting instructions up their chain of intermediaries through IBERCLEAR’s participants. The voting processes for both countries are depicted below:[85]
Spain and France’s
individual ownership model solve a host of problems. IBERCLEAR’s real-time
registry of beneficial shareholders simplifies the creation of the
record-holder list. The lag between the record date and vote date in Spain is
only five days,[86]
compared to between 10 and 60 days for Delaware companies.[87] Shorter intervals between
the record voting dates reduce the possibility of lending surprise and
incidental empty voting.[88] Even with a shorter
turn-around, materials are more likely to arrive because intermediaries are
eliminated from many steps.[89] Verification of votes and
voting instructions is much simpler, since materials are sent directly from the
issuer to beneficial shareholders. Finally, since the record-holder list
continually updates, there is little risk of over-voting.[90]
Germany – Co-ownership
Germany has a
model that combines elements of the individual ownership and the American models.
Like America, shares are certificated, immobilized at a central securities
depositary (“Clearstream Frankfurt”), and held in fungible bulk. Like Spain and
France, Germany recognizes beneficial shareholders’ rights as direct
shareholders in the fungible bulk held at the central securities depositary.
Therefore, although it is not possible to identify a particular investor’s
specific holdings, that investor is still entitled to exercise and “enforce the
rights attached to the securities.”[91] The co-ownership model is
represented below:[92]
The German system
is also more transparent for issuers than America’s system. For years, German
corporations could request and obtain a complete list of beneficial
shareholders and the number of shares they owned from intermediaries.[93] The right of German
issuers to compel disclosure only augmented an already transparent system. Clearstream
Frankfurt’s direct registration system accounted for 50% of all shares issued
by DAX 30 companies in 2015, far higher than the participation rate in DTCC’s
DRS.[94] Updates to Clearstream’s
DRS are reported to issuers daily.[95] Recently, in mid-2018,
Germany implemented an even more transparent shareholder registry, requiring
that companies maintain a complete registry of beneficial shareholders who own
at least one share.[96]
Although the
shareholder records of German companies are transparent, the dissemination of
vote information remains intermediated and even incomplete, sometimes not
reaching beneficial shareholders. Issuers are required to send vote
communications to all registered shareholders, but neither the issuer nor
intermediaries have any obligation to pass communications or voting rights to
beneficial shareholders.[97] If voting information is
disseminated to beneficial shareholders, the shareholders can be authorized by
intermediaries either to return VIFs to the custodian, who then votes, or to
vote directly.[98]
Germany’s voting process is depicted below:[99]
England & Australia – Trusts
The intermediated
shareholding model in England and Australia looks more like America’s model,
but legal rights enter and pass down the intermediary chain through the legal
concept of trusts, rather than contract. Issuers deposit securities with
England’s version of DTCC, Euroclear (or “CREST”), or Australia’s version,
CHESS.[100]
However, unlike DTCC, which technically enjoys initial ownership via Cede, Euroclear
and CHESS simply hold the securities in trust for their participants, who are
the first level of legal shareholders.[101] Each intermediary then
holds the securities in trust for its accountholders, on down to beneficial
shareholders.[102]
Accountholders below Euroclear or CHESS’s participants have equitable interests
in the trust property of their custodian,[103] rather than property
interests in the shares like in France or Germany, or interests in securities
entitlements like in the U.S. The trust model is represented below:[104]
Holdings through
the trust structure are afforded roughly equivalent transparency in both
countries, which are similar to Germany’s rules before mid-2018. Australia’s
Corporations Act, section 672A lets issuers request that nominees disclose for
whom they hold shares.[105] Nominees must comply or they may be liable
for damages.[106]
Similarly, beneficial investors in England are not immediately visible to
issuers, but “public companies are entitled to obtain details of all persons
who are interested in their shares, including beneficial owners.”[107] However, unlike
Euroclear, CHESS offers a DRS option, allowing beneficial shareholders to
register with it directly and providing greater transparency for issuers.[108]
Australia’s voting
rules are very similar to those in the U.S.[109] Voting rights vest with
the registered shareholders, and intermediaries and beneficial shareholders
only receive rights granted in their trust agreement. Therefore, proxy
materials must be sent only to registered shareholders, who are mostly
custodian intermediaries. Materials sometimes must be passed down through
multiple tiers of intermediaries. When beneficial shareholders do vote, they
either send VIFs to their custodian or send their vote to the issuer, depending
on the terms of the beneficial shareholder’s trust agreement.
England’s voting
process is largely the same, even though English law provides the option for
more direct voting communication between issuers and beneficial shareholders,
because the option to enable direct beneficial shareholder communications is
not used[110]
in practice.[111]
Despite the familiar presence of intermediary
chains passing along voting materials, both England and Australia require that
the record and meeting dates be no more than 48 hours apart.[112] The voting processes for
both countries are depicted below:[113]
Technological
Solutions
In addition to
potentially borrowing processes from other jurisdictions, there are also
practical technological solutions that can help alleviate some or most of the
problems with corporate proxy voting.
Direct Registration
Reliable infrastructure,
proven to simplify proxy voting by disintermediating securities holding,
already exists. DTCC has a Direct Registration System (“DRS”) that “enables
investors to elect to hold their assets in book entry form directly with the
issuer,” which “provides investors with an alternative to holding their
securities in certificate or ‘street’ form.”[114] There are no legal impediments to
using the DRS. All states’ laws allow corporations to issue shares without
paper certificates.[115] There are no issuer
capability impediments to using the DRS. All U.S. stock exchanges require that
issuers be capable of participating in the DRS.[116] And DRS is not new and
novel. Industry participants discussed direct registration as a component of
reducing settlement times to T+3 in the 1980s and early 1990s.[117] Although the
“elimination of certificates was not necessary … to achieve a shorter
settlement cycle,” an operational DRS was eventually approved by the SEC in
1996,[118]
and came online in November of that year.[119]
However, DRS “is
little used.”[120]
One reason is because brokers’ internal systems are often better suited for the
needs of investors who trade frequently or who require prompt execution of
trades, even though DRS “[s]upported the industry move to T+2”, which is
current standard practice, “and will support the move to T+1.”[121] Trading directly
registered shares requires that the shares first be transferred and
re-registered with a broker before getting traded.[122] Therefore, investors
cannot “buy or sell at a specific market price or at a specific time. Instead,
the company will purchase or sell shares … on a daily, weekly, or monthly basis
– and at an average market price.”[123] The time for this extra
step might have a material financial impact. Another reason for the lack of
direct registration is that each transfer from the issuer’s books, through the
DRS, to the broker, “will generate a fee for DTCC and the broker,”
incentivizing rational shareholders seeking liquidity to “avoid direct
holding.”[124]
Finally, shareholders who wish to remain anonymous vis-à-vis the issuer cannot
participate in direct registration, unless they designate a nominee to hold
their shares for them.[125]
Opposition to a
wholesale change to a direct registration system comes from entrenched
interests. Broadridge has a monopoly over information processing in the current
system, which it loses with universal direct registration.[126] Brokers also oppose
change. They will oppose any DRS that eliminates their client relationships,
and they may even oppose a multi-tier system because it will make the lucrative
securities-lending business more costly, since customers’ specific securities
would become identifiable.[127]
Direct Online Proxy Delivery
The internet provides
another potential solution, but its efficient use requires legal reform. The
Business Roundtable provided a framework for such reform in a letter to the SEC
in 2004.[128]
First, the
Business Roundtable recommended that the SEC require that agents “pass voting
rights directly to beneficial owners by executing omnibus proxies in their
favor.”[129]
DTCC already sends omnibus proxies to its participants, and they in turn “are
already required to execute omnibus proxies to pass voting rights to respondent
banks.”[130]
Completing the chain of voting rights directly to beneficial owners, instead of
sending out voting instruction forms, “would simplify the voting and tabulation
process” by letting shareholders vote directly, rather than sending their votes
back through intermediaries. Issuers could then expand the use of their
internet voting systems from record holders to all beneficial owners.[131]
Full
implementation of this revised voting structure requires implementation of the
Business Roundtable’s second recommendation: that the SEC eliminate the
distinction between NOBOs and OBOs. Eliminating the distinction would allow
issuers to communicate directly with all their beneficial shareholders, except
those who take other steps, such as creating a nominee account, to retain
anonymity.[132]
The Business Roundtable contends that this will place more of the costs of
anonymity on those who wish to remain anonymous, rather than imposing severe
systemic costs on issuers and other shareholders. Even still, under SEC rules,
companies may only send certain communications directly to NOBOs. Proxies must
still be distributed by intermediaries.[133]
Therefore, the
Business Roundtable also recommended that the SEC allow issuers to deliver
proxy materials directly to shareholders.[134] This would replace the
current “notice and access” model,[135] where notice must travel
from the issuer through intermediaries to the beneficial owner, with one where
the issuer would send proxy material directly to beneficial owners via email or
mail. Direct proxy delivery was considered by the SEC in 1982, and rejected
because technical and cost barriers were too high.[136] Clearly, the
capabilities and costs of information technology have transformed since 1982.
However, state corporation law remains an impediment to this third
recommendation. It recognizes the registered shareholder as legal owner, and
shares are registered with Cede & Co., which transfers rights to its
participants. Until the law changes “communication will remain disrupted and at
best indirect,” because every intermediary in the chain must affirmatively
delegate voting rights through to beneficial shareholders.[137]
Distributed Ledgers
The most promising
technology of all is distributed ledgers (“DLT”), the most famous type of which
is blockchain.
Distributed
ledgers are “nothing but a registration of a chain of ownership.”[138] DLT relies on networked
computers to verify transactions, thereby maintaining a trustworthy ledger that
does not require trust between trade counterparties nor reliance on a central
clearing party. The ledger itself is “stored across many servers, which
communicate to ensure the most accurate and up to date record of transactions
….”[139] This distributed ledger
is a major change from current shareholding infrastructure. Today, every
intermediary maintains their own ledger, reflecting the holdings of their
accountholders. In a DLT network, every participating institution has access to
the same ledger, reflecting the holdings of all accountholders at all
institutions.[140]
The following two illustrations show the difference between today’s ledgers and
a DLT ledger. The first shows the steps required for a street name investor to
trade with another street name investor through their custodians (“Account
management institutions” in the illustration) and DTCC (“Book-entry transfer
institution” in the illustration):[141]
The second
illustration shows how that same trade is booked through a DLT network:[142]
DLT can be
implemented by either a single party, who dictates the network’s structure,
purpose, and function, or the administration of a DLT network can itself be
decentralized, allowing “the public and users to have a say in how it’s
structured and run.”[143]
Blockchain is a
specific form of DLT. Computers in a blockchain network solve algorithms to
verify transactions, and the transactions are then added to the ledger. A
sufficiently large sequence of transactions, a “block,” is then
cryptographically added onto the “chain” of transactions existing in the
ledger. Therefore, blockchain ledgers cannot be changed once they are
encrypted.[144]
Securities can be
legally issued on DLT. Overstock conducted the first securities offering using
blockchain in 2016.[145] Securities issued on a
DLT can fall within UCC Article 8’s definition of uncertificated securities.[146] And the SEC recently
published a Framework for “Investment
Contract” Analysis of Digital Assets, providing guidance on uncertificated
DLT securities offerings.[147]
DLT is already in
early-stage testing and implementation in markets around the world. NASDAQ and
Deutsche Borse began investigating blockchain in 2015.[148] That same year, more
than 50 financial institutions, including Goldman Sachs, J.P. Morgan Chase, and
Bank of America, created a consortium called R3, which “is an enterprise
blockchain software firm” that now has offices and operations around the world.[149] DTCC contracted with IBM
and DLT startup Axoni[150] in early 2017 to
transform its Trade Information Warehouse, the basis for DTCC’s derivatives
market, into a DLT network.[151] DTCC’s network entered
its first public test phase in late 2018.[152]
DLT could “make
intermediaries obsolete or pave the way for new, more efficient … securities
settlement.”[153]
For example, on April 5, 2019, R3, Barclays, and Royal Bank of Scotland
completed a test trial demonstrating that real estate settlement can be reduced
from three months to less than three weeks using DLT.[154] Settlement of securities
transactions might become faster because distributed networks allow “[d]irect
reconciliation” between computers, as opposed to the current model which
requires “a great deal of reconciliation” by custodians.[155] Therefore, “DLT could [also]
do away with the need for dedicated systems run by intermediaries.”[156] Theoretically, “if two
[computers] make a matching declaration in the distributed ledger, the entry in
the distributed ledger could be simultaneously interpreted as the trade, clearing,
settlement and accounting.”[157]
Most
optimistically, DLT can be used to collect votes, in addition to simplifying
the voting process by reducing settlement lag and the number of intermediaries.
Securities owners registered on the ledger would receive tokens in advance of a
vote, which “they could transmit to addresses on the blockchain to register
their preferences.”[158] In fact, NASDAQ Talinn
(Estonia) “announced a pilot program for blockchain voting,” in February 2016.[159]
Regulatory
Reforms
In such a complex system there are
ample opportunities for reform.
Some reforms are relatively simple
and will not fundamentally change the system, even though they increase
beneficial shareholder awareness and participation. The SEC could eliminate the
NOBO/OBO distinction, in line with the Business Roundtable’s suggested reforms,
thereby increasing transparency for issuers. States or the SEC could require
that meeting notices and vote information be posted on issuers’ websites or
other online bulletins, as in Spain. States might standardize the
reconciliation procedures at Broadridge and other tabulators, and either the states
or the SEC can require that reconciliation procedures be published to improve
transparency.
Other potential reforms change the
fundamental nature of intermediated shareholding in the U.S. For example, beneficial
shareholders could enjoy proprietary rights in shares, as in Spain, France, and
Germany, as opposed to rights in securities entitlements. Or regulators might give
issuers coercive capacity to demand lists of beneficial owners from
intermediaries, subject to non-compliance penalties, a power enjoyed by issuers
in many foreign jurisdictions. Perhaps the most promising and comprehensive
reform would be to move from certificated immobilized shares to dematerialized
shares, owned individually, as reflected in customers’ bank or broker accounts.
Beneficial shareholders or their nominees would also be the registered
shareholders, and “intermediaries would process and communicate trading information,
not own securities and information about ‘beneficial’ owners.”[160] The legal change can be
accomplished without “a radical redesign of settlement infrastructure,”[161] especially since DRS
already exists in the U.S. and similar versions are in operation around the
world. Additionally, after DLT is implemented, it can provide near
instantaneous settlement and recognition of beneficial shareholder’s interests
if both issuers and intermediaries participate in the same DLT networks.
A third type of reform – some form
of audit requirement – is not necessarily simple nor fundamental with respect
to its impact on intermediated proxy voting. There are at least three versions
of audit requirements that could be put in place. First, regulators could
require that intermediaries or tabulators inform beneficial shareholders when
their voting instructions arrive and/or when their proxies are counted. Second,
regulators could simply require that tabulators be able to ascertain the origin
of votes. Third, Delaware or other state judges could place the burden of
persuasion, when attempting to prove that a proposition passed, on the
proponent, thereby encouraging parties to enhance their vote auditing
capabilities.[162]
Under the first two versions of an audit requirement, issuers, DTCC, and custodians
are incentivized to develop the mechanisms for providing the required
transparency. Under the third version, activist shareholders also have
incentives to improve audit trails.
Despite the complexity and opacity
of U.S. corporate voting, audits are possible. The Securities Industry End to End Vote Confirmation Steering Committee
concluded in 2016, after four years of testing, that end-to-end vote
confirmation is viable.[163] Broadridge now offers a
vote confirmation service, called ProxyEdge.[164] Advances in audit
validity could come through any number of channels. It might be facilitated by technological
change, such as DLT; legal arrangements, like authorizing beneficial shareholders
to both receive information directly from issuers and vote online; and industry
standards, like custodian and tabulator vote reconciliation practices.
Moreover, if the SEC promulgated the audit requirement, that might spur states,
like Delaware or others looking to attract corporations, to reform their
corporate codes to facilitate vote transparency. With the right incentives,
transparency and accuracy can quickly become hallmarks of U.S. corporate
voting.
[1]
Marcel Kahan and Edward Rock, The Hanging
Chads of Corporate Voting, 96 The
Georgetown L.J. 1227, 1279 (2008).
[2]
There are several in-depth, publicly available articles describing
intermediated shareholding and the proxy voting process from which this memo
draws, including: Kahan and Rock, supra
note 1;
Concept Release on the U.S. Proxy System, Exchange Act Release No. 62495, 2010
WL 2779423 (July 14, 2010) [hereinafter Proxy Plumbing Release], available at http://www.sec.gov/rules/concept/2010/34-62495.pdf;
David C. Donald, Heart of Darkness: The
Problem at the Core of the US Proxy System and Its Solution, Centre for Fin. Reg. and Econ. Dev. Working
paper No. 1 (Oct. 20, 2010); Richard W. Barrett, Elephant in the Boardroom?: Counting the Vote in Corporate Elections,
44 Valparaiso Uni. L. Rev. 125
(2009); George S. Geis, Traceable Shares
and Corporate Law, Uni. of Virginia
School of Law Public Law and Legal Theory Research Paper Series 2018-13
(Feb. 23, 2018). Reference these sources for greater depth and nuance.
[3]
Respondent banks are banks that have client accounts at DTCC-member, or other,
banks.
[4]
Donald, supra note 2, at 15 (listing
DTCC’s holdings in 2009 at $33.9 trillion); Depository
Trust & Clearing Corporation, Annual Report 2017 at 69 (2017).
[5]
Market capitalization of listed domestic companies (current US$), World Bank Group, https://datacatalog.worldbank.org/public-licenses#cc-by
(last visited Apr. 10, 2019).
[6]
All corporations keep a list or record of their “registered” shareholders.
[7]
Geis, supra note 2, at 6.
[8]
Geis, supra note 2, at 9.
[9]
Kahan and Rock, supra note 1,
at 1239.
[10]
After netting.
[11]
Kahan and Rock, supra note 1,
at 1241.
[12]
Securities entitlements are “the rights and property interest of an entitlement
holder with respect to a financial asset ….” U.C.C. § 8-102(a)(17).
[13]
Kahan and Rock, supra note 1,
at 1242. A financial asset is “(i) a security; (ii) an obligation of a person
or a share, participation or other interest in a person or in property or an
enterprise of a person, which is, or is of a type, dealt in or traded on
financial markets, or which is recognized in any area in which it is issued or
dealt in as a medium for investment; or (iii) any property that is held by a
securities intermediary for another person in a securities account if the
securities intermediary has expressly agreed with the other person that the
property is to be treated as a financial asset under this Article.” U.C.C. §
8-102(a)(9).
[14] Id.
[15] Id.
[16] Id. at 1243.
[17] Id. at 1236.
[18]
Barrett, supra note 2,
at 152.
[19]
“The corporation ought not to be involved in possible misunderstandings or
clashes of opinion between the non-registered and registered holder of shares.
It may rightfully look to the corporate books as the sole evidence of
membership.” Salt Dome Oil Corp. v.
Schenck, 41 A.2d 583, 589 (Del. 1945).
[20]
FAQs Regarding the SEC’s NOBO-OBO Rules and Companies’ Ability to Communicate
with Retail Shareholders, KattenMuchinRosenman
llp, https://www.kattenlaw.com/nobo
(Jan. 4, 2010).
[21] Id.
[22]
Bus. Roundtable, Request for Rulemaking
Concerning Shareholder Communications, Letter to SEC dated April 12, 2004,
http://www.sec.gov/rules/petitions/petn4-493.htm#P45_11983.
[23]
Kahan and Rock, supra note 1,
at 1279.
[24]
Donald, supra note 2, at 20. See any
of the papers in note 2 for more detail about the mechanics of corporations
setting up shareholder votes.
[25]
Proxy Plumbing Report, supra note 2,
at 23.
[26]
Kahan and Rock, supra note 1,
at 1236.
[27]
Barrett, supra note 2,
at 153.
[28]
Kahan and Rock, supra note 1,
at 1246.
[29]
Barrett, supra note 2,
at 153–58 (some footnotes omitted).
[30] 17 C.F.R. §§ 240.14a-13(a)–(a)(1)(i)(A);
240.14a-13(a)(4)–(5); 240.14a-13, Note 1.
[31] 17 C.F.R. § 240.14b-1(c)(2)(i);
240.14b-2(a)(5)(c)(2)(i).
[32]
John C. Wilcox, John J. Purcell III, & Hye-Won Choi, “Street Name” Registration & The Proxy Solicitation Process, in A Practical Guide to SEC Proxy and Compensation
Rules 12-10 (Amy L. Goodman & John F. Olson eds., 3rd ed.
Supp. 2007).
[33]
Broadridge serves as official tabulator for about 1,800 public companies.
Recommendations, Impartiality in the Disclosure of Preliminary Voting Results, Investor Advisory Committee 7 (Oct. 9,
2014), https://www.sec.gov/spotlight/investor-advisory-committee-2012/impartiality-disclosure-prelim-voting-results.pdf.
[34]
Official tabulators are often issuers’ transfer agents “because most major
transfer agents have the infrastructure to communicate with registered holders,
proxy service providers, and securities intermediaries, while also being able
to reconcile the identity of voters that are registered owners and the number
of votes to the issuer’s records.” Proxy Plumbing Release, supra note 2, at 24.
[35]
For example, Delaware corporations that list shares on a national exchange or
have more than 2,000 record shareholders must appoint inspectors of election
for any shareholder meeting. Del. Code
tit. 8 § 231(a) (2009). There are no statutory requirements for inspectors’
qualifications or independence.
[36]
Kahan and Rock, supra note 1,
at 1249.
[37] Id.
[38] Id. at 1251.
[40]
Dale A. Oesterle & Alan R. Palmiter, Judicial
Schizophrenia in Shareholder Voting Cases, 79 Iowa L. Rev. 485, 510–11 (1994).
[41] See Kahan and Rock, supra note 1,
at 1250–51.
[42]
John C. Wilcox, Shareholder Nominations
of Corporate Directors: Unintended Consequences and the Case for Reform of the
U.S. Proxy System, in Shareholder Access to the Corporate Ballot
6 (Lucian A. Bebchuk ed., 2004).
[43] Id.
[44]
Kahan and Rock, supra note 1,
at 1254.
[45] Id.
[46] Id. at 1253.
[47] Id.
[48] Id.
[50] Id. at 1254.
[51] Id.
[52]
Fully Paid Securities Lending, BNY Mellon, https://www.pershing.com/what-we-provide/investment-solutions/topics/fully-paid-securities-lending
(last visited Apr. 10, 2019) (advertising the benefits of share lending for
brokerage account holders as participation in the loan fee and interest earned
on the cash collateral).
[53]
Press Release, Cal. Office of Pub. Affairs,
CalPERS Approves Investment Contracts – Asset Allocation, Supplemental Savings,
Securities Lending (June 19, 2006), available
at http://www.calpers.
ca.gov/index.jsp?bc_/about/press/pr-2006/june/approves-investment-contracts.xml.
[54]
Kahan and Rock, supra note 1,
at 1256.
[55] Id.
[56] The record date is the day on which the official shareholder
list is frozen to decide who gets to vote in the upcoming election.
[57]
Kahan and Rock, supra note 1,
at 1256–57.
[58]
UCC Article 8, discussed supra page
2.
[59]
Kahan and Rock, supra note 1,
at 1259.
[60]
Letter from Donald Kittel, Executive Vice President, Sec. Indus. Assoc., to
Anand Ramtahal, Vice President of Member Firm Regulation, NYSE 2 (Apr. 26,
2005), available at http://www.sifma.org/regulatory/comment_letters/comment_letter_archives/6136.pdf
[hereinafter SIA Letter] (as of 2004, 100 brokers representing more than 90% of
street positions used the service).
[61]
Kahan and Rock, supra note 1,
at 1260 fn. 132.
[62] Id. at 1262.
[63] Id. at 1260.
[64] Id. at 1260–61 (recounting that Deutsche
once submitted over 8.5 million votes when it was only entitled to cast 4.3
million; and in another instance cast almost 11.2 million votes when it was
only eligible to cast about 6.7 million. Over-voting occurred in 12 of 15 and
11 of 12 instances tested over two time periods).
[65]
Kahan and Rock, supra note 1,
at 1262.
[66] In re Deutsche Bank Securities Inc.,
NYSE Decision 05-45, para. 11 (Feb. 2, 2006).
[67] Supra page 7, list point 5.
[68] E.g., Id.; Seidman & Assocs.,
L.L.C. v. G.A. Fin., Inc., 837 A.2d 21, 24–25 (Del. Ch. 2003) (invalidating
proxies for 233,376 shares when unable to resolve an 824-share overvote).
[69]
Kahan and Rock, supra note 1,
at 1263.
[70] Id. at 1264.
[71] Id. at 1264–65.
[72]
Henry T.C. Hu & Bernard Black, Empty
Voting and Hidden (Morphable) Ownership: Taxonomy, Implications, and Reforms,
61 Bus. Law. 1011 (2006).
[73]
Kahan and Rock, supra note 1,
at 1265.
[74]
Hu and Black, supra note 55, at 1015.
[75]
Kahan and Rock, supra note 1,
at 1267; but see Onnig H.
Dombalagian, Can Borrowing Shares
Vindicate Shareholder Primacy?, 42 Uni.
of Cal. Davis L. Rev. 1231 (2009).
[76]
This section covers Spain, France, Germany, the UK, and Australia. For more
countries, including China and Japan, see
Transparency of Share Ownership, Shareholder Communications and Voting in
Global Capital Markets, Computershare/Georgeson
(Mar. 2015).
[77] E.g., Kahan and Rock, supra note 1,
at 1274; Securities Registration System, iberclear,
http://www.iberclear.es/ing/Services/Securities-Registration-System
(last visited Apr. 11, 2019).
[78]
Kahan and Rock, supra note 1,
at 1278.
[79] Id. China and Brazil also have so-called
“transparent” shareholder registries. Luc Thevenoz, Who Holds (Intermediates) Securities?
Shareholders, Account Holders, and Nominees, XV Uniform
Law Review 845, 846 (2010).
[80] Infra, page 9.
[81]
Legislative Guide on Intermediated Securities, Unidroit
17 (2019), available at https://unidroit.org/instruments/capital-markets/legislative-guide.
[82] Id.
[83] Id.
[84]
Transparency of Share Ownership, Shareholder Communications and Voting in
Global Capital Markets, Computershare/Georgeson
23 (Mar. 2015).
[86]
Art. CIV of the Public Companies Act.
[88]
Kahan and Rock, supra note 1,
at 1268.
[89] Id.
[90] Id. at 1277. Some risk still exists if
intermediaries enter trades incorrectly or slowly. Iberclear demands that
intermediaries “keep the detailed register up to date at all times, by entering
every single trade performed by the entities with third parties, or on the
orders of the latter, that impacts the ownership or availability of the
securities ….” Securities Registration System, iberclear,
http://www.iberclear.es/ing/Services/Securities-Registration-System
(last visited Apr. 11, 2019).
[93]
Dirk Zetzsche, Shareholder Passivity, Cross-Border Voting and the Shareholder
Rights Directive 38 (July, 2008).
[94]
Transparency of Share Ownership, Shareholder Communications and Voting in
Global Capital Markets, Computershare/Georgeson
16 (Mar. 2015).
[95] Id.
[96]
Andreas Jurgens, News Update on GmbH Shareholders’ List, ReedSmith (Sept. 10, 2018), https://www.reedsmith.com/en/perspectives/2018/09/news-update-on-gmbh-shareholders-list;
Andreas Jurgens, New Legal Requirements For GmbH-Shareholders’ List, ReedSmith (July 10, 2017), https://www.reedsmith.com/en/perspectives/2017/07/new-legal-requirements-for-gmbh-shareholders-list.
[98] Id.
[99] Id.
[100]
Central securities depositories, Fin.
Conduct Auth., https://www.fca.org.uk/markets/central-securities-depositories
(last updated Nov. 22, 2018); Computershare/Georgeson,
supra note 94, at 4.
[102]
Id.
[103]
Id.
[104]
Id. at 20.
[106]
Id.
[107]
Bus. Roundtable, supra note 22.
[110]
As of 2015.
[112]
Paul Myners, Report to the Shareholder Voting Working Group (Jan. 2004), available at http://www.shareholdercoalition.com/sites/default/files/Myners%20Report%201-04_0.pdf;
Computershare/Georgeson, supra note 94, at 5.
[114]
Direct Registration System, The
Depository Trust & Clearing Corporation, http://www.dtcc.com/settlement-and-asset-services/securities-processing/direct-registration-system
(last visited Apr. 4, 2019).
[115]
Barrett, supra note 2,
at 165.
[116]
SEC Release No. 34-54289, Order Granting Approval to Mandate Listed Companies
Become Eligible to Participate in DRS (Aug. 8, 2006), 71 Fed. Reg. 47278 (Aug.
16, 2008) [File No. SR-NYSE-2006-29] (setting a DRS implementation deadlines
for issuers and exchanges, including a final deadline for all listed stocks to
achieve DRS compatibility by Jan. 2008, later extended to Mar. 2008); e.g., NYSE Listed Company Manual, §
501.00(B).
[117]
Concept Release, Transfer Agents Operating Direct Registration System, Exchange
Act Release No. 34-35038, 59 Fed. Reg. 63652, 63653 (Dec. 8, 1994). T+[x]
refers to the number of days after a trade is placed that it settles. T+3 means
that a stock trade settles three days after it is placed.
[118]
SEC Release No. 37391, Order Granting Approval to Establish DRS (Nov. 7, 1996),
[File No. SR-DTC-96-15] (approving establishment of DRS to provide
cost-efficient transfers, prompt settlement of trades, and reduction in
problems related to lost or stolen certificates).
[119]
Donald, supra note 2, at 37; Concept
Release, Transfer Agents Operating Direct Registration System, Exchange Act
Release No. 34-35038, 59 Fed. Reg. 63652, 63653 (Dec. 8, 1994).
[120]
Barrett, supra note 2,
at 165.
[121]
Direct Registration System, supra
note 4.
[122]
SEC, Holding Your Securities – Get the
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