Negotiating the Minefields of Corporate Vote‐Buying

• Date: 01 September 2007
• DOI: http://doi.org/10.1111/j.1467-8683.2007.00616.x
• Author: Loizos Heracleous,Luh Luh Lan
• Published date: 01 September 2007

Negotiating the Minef‌ields of

Corporate Vote-Buying

Luh Luh Lan* and Loizos Heracleous

Corporate vote-buying has received signif‌icant attention in the last decade, in several legal

cases that illustrate the f‌ine line between legitimate use of vote harnessing as a useful corpo-

rate strategic tool on one hand, and its negative connotations as a potential instrument of fraud

that attempts to disfranchise shareholders on the other hand. After a brief outline of the legal

history of corporate vote-buying and the rationale for the courts’ vigilance on this practice, in

both the United States and the United Kingdom, we outline some strategic reasons for vote-

buying that might make it a useful option in certain circumstances. Lastly we discuss key

principles that a board of directors should bear in mind when engaging in corporate vote-

buying, so that it can employ the practice productively and legitimately, keeping in mind

shareholders’ best interests and avoiding potentially costly and destructive legal challenges.

Keywords: Corporate governance, corporate vote-buying, United States, United Kingdom,

company law

Introduction

There was a lot at stake in the battle

between the pro-merger and the dissident

groups of the HP-Compaq merger. Not just the

US$18.9 bn deal itself, but also the traditional

HP way according to the dissidents, signif‌icant

restructuring at HP, as well as Carly Fiorina’s

job. If Fiorina failed, the dissidents, which

included Walter Hewlett, the son of the

company co-founder William Hewlett and

the sole HP director at that time to oppose the

deal, David W. Packard, the son of the other

co-founder, together with the staunch sup-

porters of the old HP way, were unlikely to let

her stay after the expensive and ugly proxy

battle. Then there was the high-drama law suit

where HP management was accused of having

lied to shareholders about their f‌inancial pro-

jections; and to have bought votes from a key

investor on the eve of the merger vote so that

they could push through approval of the

merger.

The vote result was less than 1 per cent in

favour of the pro-merger group; the crucial

difference was made by the 17m Deutsche-

Bank votes, which management allegedly

bought from the bank, under threat of sever-

ing further business ties with it. Carly Fiorina

and the pro-merger group emerged victorious,

both in the shareholders merger vote as well

as the lawsuit. Hewlett was ousted from the

HP board, leaving the company without a

member of the Hewlett or Packard families on

its board for the f‌irst time in its 63 year history.

The decision of the Delaware Chancery

Court1was pivotal. Although Fiorina and her

board eventually won at the trial, round one

was awarded to Hewlett, who brought the

action against the company contesting the

validity of the shareholder vote2after failing to

garner enough support to oppose the merger.

The defendants’ motion to dismiss Hewlett’s

claim was denied by the court. During the

motion hearing, the judge addressed the

alleged vote-buying that took place between

Deutsche Bank and the HP management,

laying down important guidelines which have

important implications for senior managers

and boards of directors contemplating vote-

buying to support their strategic decisions.

Legal cases such as the above have raised

interest in corporate vote-buying and high-

light the f‌ine line between its legitimate use as

*Address for correspondence:

NUS Business School, National

University of Singapore, 1

Business Link, Singapore

117592. Tel: +65 6516 3099;

E-mail: bizlanll@nus.edu.sg

NEGOTIATING THE MINEFIELDS OF CORPORATE VOTE-BUYING 969

Volume 15 Number 5 September 2007

© 2007 TheAuthors

Journal compilation © 2007 BlackwellPublishing Ltd, 9600 Garsington Road,

Oxford, OX4 2DQ, UK and 350 Main St,Malden, MA, 02148, USA