The Miracle of Short-Selling and Proxy Votes

The excellent Bloomberg Markets magazine has an interesting piece on a long-standing problem: How crummy short-selling bookkeeping by brokers can cause horribly screwed-up shareholder votes.

It happens like this. When you sell shares short it really means a broker has loaned shares to you,  and you then turn around and sell them to someone else. This process of loaning and selling short can continue on and on, however, to the point that multiple people are currently “owning” the same shares. Suppose then there is a proxy vote, however, and all those “owners” vote; you could easily have the same shares voted two or three times, completely messing up the vote tally.

While this might seem amusing, or maybe remiscent of a badly-run banana republic’s transition to democracy, in any tight proxy contest where every vote counts it is a problem that needs to be solved.

Here is the always wise Jim Chanos on the subject:

The most elegant solution is to have a market for votes in a company’s shares, every time a vote is needed. Anyone short the shares at that time, is also “short a vote” WHICH MUST BE COVERED (delivered against) IMMEDIATELY BEFORE SAID VOTE! The market place for votes would insure, that at a price, the net number of votes, would equate to the shares outstanding.

Related posts:

  1. Excellent reading on hedge funds and short-selling
  2. The Economics of Selling Stocks
  3. Insider Selling and Google
  4. Minimax, and the economics of “Survivor”
  5. Overstock, Biovail, and the Trouble with Short-Sale Constraints

Comments

  1. Don Riley says:

    I short the United States Congressional and Presidential votes. That way I’ll have no chance of getting bought-in !!!!!