This paper discusses the corporate governance implications of securities lending transactions in the European Union, in particular with regard to the exercise of voting rights by activist shareholders. When shares are on loan, both sides of the lending equation (i.e. that of the lender and the borrower) affect the exercise of voting rights: lenders must recall lent out shares in a timely manner if they do not want to lose the voting rights attached to them, and borrowers may employ stock borrowing practices to increase their voting power and manipulate voting outcomes. By analysing legal doctrine, consulting with practitioners and examining recent securities lending cases (such as Mediobanca/Generali), this paper highlights the ongoing risks that stock lending poses to corporate governance. Techniques such as negative risk-decoupling, record date capture and empty voting are analysed from the perspective of stock lending. It is found that securities lending can be as much a barrier to activism as it can be used to the advantage of activists. As a conclusion, some recommendations and guidelines for future regulation are included.
While some argue that “securities lending impedes fund voting participation”151 and “securities finance can be seen as a structural barrier to activism”152, this paper’s conclusions would not go this far. Not only can activists extract additional revenue by lending out part of their share portfolio, empirical research as well as the findings of practitioners show that recalls have become common practice and that fewer and fewer shares are lent out over the record date. Moreover, in the European Union, lenders have the advantage of exercising recalls in an informed manner at the time of announcement of the AGM (and are not confronted with ‘hidden agendas’ as in the US). On the other hand, stock lending techniques effectively prove to be a tool for shareholder activism, as the recent Mediobanca case illustrates. Although extending voting power by means of stock lending may be contrary to market best practices, it generally remains unprohibited.
The full paper is available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4232198