In my paper, Hedge Funds and Risk-Decoupling — The Empty Voting Problem in the European Union, I address the implications of negative risk-decoupling, otherwise known as empty voting, for corporate governance and corporate finance, and I develop suggestions for a regulatory response. These suggestions are framed for the European context, but the underlying policy considerations may prove useful for other regulators worldwide, including the SEC.

Empty voting is a popular strategy amongst hedge funds and other activist investors. In short, it is the attempt to decouple the economic risk from the share’s ownership position, retaining in particular the voting right without risk. This paper uses three perspectives to analyze the problems created by such negative risk-decoupling: an agency costs approach, an analysis of information costs, and a perspective from corporate finance. It shows how risk-decoupling is a type of market behavior that creates significant costs for market participants, in particular existing shareholders and potential investors. Risk-decoupling strategies create both agency and information costs for investors. Furthermore, they generate challenges for traditional categories of corporate finance, aiming to extract the “best of both worlds”, debt and equity.

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