How Not to Buy Votes

Earlier this year, we explained how an activist could literally buy votes, say from other shareholders, in a proxy contest.

Also earlier this year, we saw a fascinating example of how to botch this. In the MASI-Politan proxy contest, MASI CEO Joe Kiani allegedly did something analogous to buying votes. He helped a friendly investor, RTW, acquire votes to support him in a BoD election, at least based on a lawsuit MASI filed a couple of weeks ago against Kiani. How this approach failed illustrates some interesting and relevant aspects of "empty voting" and vote buying.

Based on the facts and allegations in the lawsuit, empty voting itself appears legal, although some shareholders think it unseemly. Because it requires knowledge of the record date, only a company or at least insiders can do this. And, empty voting and possibly vote buying both require some disclosure.

What we know

At 28 pages, the complaint is a relatively easy and compelling read, so we'll really just summarize and comment here. Before MASI sued Kiani, we learned about the scheme through a couple of public letters from Politan to the MASI BoD (here and here). Then, Politan won a majority of the BoD at the September AGM, and could investigate it thoroughly. The complaint refers to internal documents and communications among Kiani, other MASI executives, MASI advisors, and RTW, so that investigation evidently succeeded.

The complaint is fascinating and revealing. It shows RTW twice acquired votes to influence the AGM result. First, MASI set the AGM for July 25, 2024, with a record date of June 13, 2024. After it looked like Politan would prevail in the BoD election, MASI moved the AGM to September 19, 2024 with a record date of August 12, 2024. Both times Kiani appeared to help RTW acquire votes in support of the MASI incumbents, of which Kiani was one.

First, Kiani allegedly disclosed the record date privately to RTW. Next, RTW bought MASI in block trades before the record date, increasing its long position from just under 3% to almost 10%. RTW also shorted those additional MASI shares. Finally, RTW voted its shares in favor of the MASI incumbents, then unwound both the long and short positions. Note, MASI disclosed the record date to all other investors after it had passed, when MASI filed preliminary proxy materials with the AGM date.

Politan first learned about all this in early July, when it observed unusual trading and proxy voting in MASI shares as it monitored the upcoming BoD election. A few days later, proxy advisor Glass Lewis recommended shareholders vote for the Politan nominees. Its report included troubling comments about how RTW contacted it to express its support for the MASI incumbents, and also how RTW evidently voted shares far beyond its reported 3% ownership.

Then, ISS also advised shareholders vote for the Politan nominees. At that point MASI moved the AGM date to September, and RTW did it all again - block buying, shorting, voting, unwinding. At the September AGM, Kiani and RTW combined to vote their 20% of the outstanding shares in favor of the MASI incumbents. In a tribute to Politan's superb thesis and MASI's deficient corporate governance, Politan overcame those shares and prevailed in the BoD election. Kiani lost his BoD seat and then immediately left MASI. The lawsuit quickly followed.

The lawsuit alleges Kiani and RTW violated both SEC disclosure and short-swing trading rules. First, it accuses Kiani and RTW of forming a group, with almost 20% of voting power, without proper disclosure on Form 13D. Second, it accuses Kiani and RTW of earning short-swing profits on its 20% position and failing to disgorge these to MASI. The complaint also mentions a Regulation FD violation, when Kiani disclosed the record dates to RTW. It does not, though, include that violation as a cause of action in the lawsuit.

So what?

RTW apparently engaged in "empty voting" rather than vote buying. It voted shares beyond its economic interest, because of the offsetting short positions. We might consider empty voting as a form of vote buying, as RTW spent money on votes in the form of share borrowing fees in its short positions.

Empty voting does not appear to violate any Federal or state law or regulation, or at least MASI did not accuse RTW of any such violations. We guess if MASI had some allegation about the illegality of empty voting per se, it would have included it prominently in the complaint. Instead, MASI accused RTW of failing to disclose its empty voting.

The direct consequences of the allegations appear minimal. The lawsuit seeks a declaration that Kiani and RTW formed a 13D group, and that they disgorge short-swing profits to MASI. The group declaration might help in finding they need to disgorge short swing profits. Only a 10% or greater shareholder faces disgorgement, and Kiani and RTW each held under 10%. Of course together (as a group!) they need to comply with that rule. We suspect the failure to disclose a 13D group itself wouldn't lead to any damages, since they lost the BoD election and further disclosure is moot.

Still, shareholders dislike empty voting, or at least Glass Lewis, as a representative of shareholder sentiment, criticized it. Its report called it out as a "highly inappropriate manipulation of the shareholder franchise."

Suppose Politan (or any other activist) tried this? Well, it would not know the record date. It could not itself or with a friendly shareholder acquire shares before the record date, vote those shares for its nominees, and then unwind the position. Only insiders with that knowledge could do so. Shorting that position also requires disclosure, in proxy materials.

Conceivably, Politan could have sought to purchase votes, say from someone like RTW. That doesn't depend on knowing the record date in advance, merely knowing how many shares RTW (or another shareholder) owns on the record date. Buying votes is likely as legal as empty voting, and probably would garner the same approbation from shareholders. It's not clear whether vote buying is a form of proxy solicitation, and thus would not need the same disclosure as ownership of shares or derivatives.

Of course, none of this is legal advice. Anyone considering empty voting or buying votes should consult their favorite securities attorney, and also let us know, we're eager to learn what activists think of the idea.