The governance world has been concerned about the possible abuses arising from so-called “stock lending”, particularly when it comes to voting rights. Many commentators have suggested that it should really be called “temporary stock selling” to better reflect the legal reality of loss of ownership rights. Whatever its name, the potential for abuse is there. By way of proof, the SEC has fined US hedge fund manager Perry Corporation $150,000 for a vote-buying abuse.
The case relates to the 2004 takeover of King Pharmaceuticals by Mylan Labs. It was a hotly contested takeover and Perry had a major equity interest in King. In order to improve the chances of closing the deal, Perry purchased Mylan shares so that they could vote in favour of the merger. As well as the share purchase, Perry hedged its bets in a bid to minimise its downside, and entered into a series of swap transactions. The net result was that Perry acquired almsot 10% of Mylan’s outstanding shares with full voting rights, but no economic risk and no ownership disclosure.
“By acquiring significant voting rights to Mylan shares without informing the marketplace, Perry illicitly increased its potential to profit from its merger arbitrage position,” said David Rosenfeld, Associate Director of the SEC’s New York Regional Office. “Perry’s failure to follow the disclosure obligations of the securities laws deprived the market of important and relevant facts.”
In the end the deal collapsed when Carl Ichan, a significant shareholder of Mylan, put forward a tender offer, which itself failed. There are no records of Perry’s final P&L position on the deal.
The nub of the issue, from a regulatory perspective, was whether Perry delayed the disclosure of its share purchase because it was “in the normal course of business”. The SEC decided that buying votes was not the normal course of business. Perry has agreed to pay the $150,000 penalty to settle the SEC’s charges without admitting or denying the Commission’s findings.