Hedge Funds and Risk-Decoupling: The Empty Voting Problem in the European Union

Wolf-Georg Ringe

Research output: Working paperResearch

Abstract

Negative risk-decoupling, otherwise known as 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 analyse the problems created by 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 behaviour that creates significant costs for market participants, in particular existing shareholders and potential investors.

The paper then develops regulatory responses, envisaged particularly for EU level lawmaking, but also raises underlying issues on a more general level. Whilst several proposed regulatory tools are rejected, the paper prefers a solution that uses continuous transparency as the cornerstone. In addition, it suggests that in certain individual cases, national regulators should be empowered to suspend activists’ voting rights.

The paper concludes by offering a concrete legislative proposal, amending the European Transparency Directive.
Original languageEnglish
Place of PublicationOxford
PublisherUniversity of Oxford
Number of pages66
Publication statusPublished - 2012
SeriesOxford Legal Studies Research Paper
Number52/2012

Cite this

Ringe, W-G. (2012). Hedge Funds and Risk-Decoupling: The Empty Voting Problem in the European Union. Oxford: University of Oxford. Oxford Legal Studies Research Paper , No. 52/2012