Securities lending as a barrier to (or an instrument for) shareholder activism and the role of intermediaries as lending agents
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.