Saturday, May 20, 2023

Retail Corporate Governance

There’s been a lot of thinking recently about retail shareholder power.  The meme stock phenomenon, and the popularity of platforms like Robinhood, showed that retail shareholders can in sufficient numbers have a real influence over corporate behavior.   This had led authors like Sergio Alberto Gramitto Ricci and Christina Sautter to argue that we may be witnessing a revolution as retail shareholders assert themselves, bringing perhaps concerns about ESG and sustainability the fore.

A while back, Jill Fisch proposed that retail shareholders be given access to the type of electronic tools available to institutional shareholders so that they could create standing voting instructions, allowing them to cast ballots in corporate elections automatically according to predefined preferences.  That vision appears to close to realization; today, there are new programs that make it easier for retail shareholders to cast ballots, including in accordance with preset preferences.  As I understand the Iconik service, for a monthly fee, you can set your preferences and have the app automatically vote them – or you elect to follow the instructions provided by a third party provider like As You Sow or Third Act.  If you do that, it’s free.

And of course, we know that mutual fund companies are proposing to give more voice to retail shareholders through various kinds of pass-through voting experiments.  There are now voting platforms being developed that allow automatic voting in this context, as well.

Which is why it’s really interesting to watch what happening right now in In re AMC Entertainment Holdings Stockholder Litigation pending in Delaware.  As you probably know, AMC became a meme stock; AMC wanted to take advantage of the enthusiasm by selling more stock; its charter did not authorize any new stock issuances; retail shareholders either did not want to vote to amend the charter or simply did not pay attention to the vote; AMC found a workaround by using the blank check provision in its charter to issue new voting preferred stock; AMC held another shareholder vote, and – with the preferreds voting – the charter was amended to authorize the issuance of more common, which the preferred could then convert into.

A class of AMC common stockholders sued, arguing that this violated their rights, and now the parties have agreed to a settlement that VC Zurn will consider.

Now, because AMC stock is held by a particularly online set of investors, retail holders began writing to the court with their views of the settlement (usually negative).   (I also wonder whether Chancery’s moment in the spotlight during Twitter v. Musk contributed to retail shareholders’ participation.)  In response, VC Zurn formally set up a procedure for them to submit their comments, and boy, have they.  You can read the letters on the docket; some have taken further action, like moving to intervene, seeking access to discovery, and objecting to the special master.  Interestingly, last night the special master recommended that discovery access be granted, and there may be a telephonic hearing on any objections to be held later this morning.

But here’s the thing.  While some of the letters inspire a lot of sympathy – many investors appear to have endured significant losses – a lot of the comments are, well, uninformed, to put it mildly.  There are some fairly odd conspiracy theories floating around regarding AMC shares, and, in particular, something about an inflated share count and “synthetic” shares that are improperly voting.  Many of the objecting shareholders buy into those theories.  For example, in a report filed on May 17, the special master recommended against one shareholder’s attempt to intervene, which was predicated on the “synthetic share” theory.

So this is the elephant in the room:  What does this tell us about the wisdom of encouraging greater retail involvement in corporate governance?  While no doubt some retail shareholders are highly informed, many are not, and if AMC demonstrates anything, it’s that in some cases, the technological tools that enable retail shareholders to coordinate and share information may also cause the rapid spread of misinformation.

You can actually see that in the Netflix documentary Eat the Rich: The GameStop Saga.  The retail shareholders profiled had a sense of mission in attacking short sellers, but they also seemed to be very unclear as to what short sellers actually do. For example, they were under the misimpression that short sellers – rather than private equity firms – had bankrupted Toys R Us.

To be fair, Ricci and Sautter anticipate this, and in other work they propose various forms of investor education.  And Jill Fisch, in her paper on GameStop, argued that while misinformation was possible, in general, concerns might be exaggerated and investors generally tended to place greater weight on more reliable sources.

The investors who have filed letters in the AMC case may therefore be outliers; after all these are the ones who object to the settlement, and may not be representative of the ones who do not object.

Then again, Dhruv Aggarwal, Albert Choi, and Yoon-Ho Alex Lee have found that meme stock traders are, well, traders – not voters, which suggests their rise does not herald a corporate governance revolution.  Of course, these authors also recognize that meme stock traders may not be representative of retail investors generally, but if meme stock investors are not representative of retail investors as a whole, then the meme stock phenomenon itself may not tell us much about potential retail participation in corporate governance in the first place, and we’re back where we started.

Ann Lipton | Permalink


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