Reconceptualizing Shareholder "Disinterestedness": Transformative Institutional Investor Changes and Motivational Misalignments in Voting

The foundational premise of the shareholder franchise is that coupling economic interest in shares with the voting rights associated with those shares will generally motivate shareholders to exercise the vote to promote share value. The doctrine of considering only the votes of “disinterested shareholders” in judicial review of certain transactions, also often implemented in provisions in merger agreements requiring approval of “unaffiliated” shareholders, pivots on whether the investor has the requisite motivational alignment. Specifically, in challenges otherwise subject to judicial review under enhanced scrutiny or entire fairness standards, Delaware courts have long given validating effect only to uncoerced, informed votes of “disinterested” shareholders.

Radical changes in institutional investor financial stakes and investor-specific policies and practices have significantly increased the extent and complexity of the decoupling of the economic rights of shares from their voting rights. The “disinterested shareholder” construct remains unchanged, reflecting frozen assumptions at odds with new market realities. We show that rigid application of the existing doctrine would all too often disqualify or effectively miscount the votes of institutional investors that are in fact perfectly consistent with the foundational premise. Such effects lead to an inadvertent, completely flukish, shifting of power to individual investors—precisely the group at the core of Berle-Means concerns—and to activist hedge funds.

This Article proposes to reconceptualize “disinterestedness” in both its substantive and procedural aspects, in a fashion that could preserve institutional investor voice and make the concept of disinterested shareholder voting workable.

Substantively, we advocate a reconceptualization of what “disinterestedness” means. This consists of three core moves. First, instead of focusing exclusively on an institutional investor’s overall economic interest in its aggregate financial stakes, we would consider as well the effects of institution-specific policies and practices—its “organizational voting dynamics” —that can mitigate, exacerbate, or otherwise alter the effects of its financial stakes. We show that, for example, the pole star an institution uses to guide its voting decisions, various voting divestiture arrangements (via, e.g., pass-through voting, mirror voting, and proxy advisors), and share lending/borrowing can align (or misalign) voting with the goal of share wealth maximization. Second, we show that, instead of categorically counting or not counting an investor’s votes depending on its status as a “disinterested shareholder,” those shares held by an investor which are voted consistent with the foundational premise should be counted as “disinterested shares.” We show the wide-ranging impact of such a move based on the striking differences among the voting pole star that existing disinterestedness doctrine implicitly assumes all investors follow, State Street’s actual “host share value maximization” pole star and transaction-specific voting patterns, and Vanguard’s actual “fund-by-fund portfolio value maximization” pole star and transaction-specific voting patterns. Third, our reconceptualization’s incorporation of institution-specific organizational voting dynamics converts the existing doctrine to more of a default rule. This would encourage private ordering—such as the adoption of a bona fide, publicly announced “host share value maximization” pole star—that would warrant recognition as a basis for treating certain votes as disinterested regardless of an investor’s financial stakes.

We also advocate a reconceptualization of the doctrine’s longstanding process for evaluating disinterestedness. The current doctrine imposes on defendants the burden of showing the disinterestedness of the voting shareholders. In a public company, that burden would require shareholder-specific findings for thousands, in some cases, millions of shareholders. This is impossible. The granular and synchronous information needed dwarfs the information that is readily available, and voluntary and subpoenaed information cannot fill the gaps. We offer a workable, if imperfect, resolution of the tension. We propose that disinterestedness be presumed, and the presumption be rebuttable through the use of readily available public information. Full evidentiary review of disinterestedness, including consideration of organizational voting dynamics, would be allowed unless an investor’s holdings were clearly too insignificant to affect a vote or to influence the overall outcome of a shareholder vote or its vote resulted from a disclosed, fully implemented policy of host share value maximization as the pole star for voting decisions.