Yesterday I wrote about empty voting - being able to vote shares without having an economic interest in the issuer of the shares or with having only a relatively miniscule interest in the issuer.
Today I will discuss pretty much the opposite: morphable shares which involves having an economic interest in the share issuer while not have a voting interest but pretty much having a "right" to get a voting interest.
This functions again largely through the swaps markets. A person who is long a swap is in the economic position of a shareholder but does not have voting rights. However, the counterparty who is short the swap pretty much invariably hedges the short position by holding an equivalent amount of the underlying security with the tantamont voting rights. (In fact, if the counterparty votes the shares it pretty much is an instance of "empty" voting as we discussed yesterday as the counterparty really has no economic interest in the issuer.)
However, what can often happen is that the party in the long position, at a given point in time (e.g. the date for being a shareholder of record for a critical vote) "morphs" the long swap position into a voting position by terminating the swap and acquiring the shares of the underlying security held as a hedge by the counterparty. Then, surprise, surprise the hithertofore unknown voter surfaces as a major player in, for example, a proxy fight.
This technique was employed by Perry Corporation which at one point had been a major disclosed shareholder (under New Zealand law) of Rubicon Ltd., a public New Zealand company. Perry offloaded 31 million Rubicon shares to 2 derivatives dealers and simultaneously took a long position in the shares in an equity swap with the dealers. This arguably put Perry's voting position in Rubicon below the 12.5% of Rubicon at which it would have been required to be disclosed under New Zealand.
Low and behold, to the surprise of all (well almost all), Perry reacquired the Rubicon shares by unwinding the equity swap just in time to vote (with a 16% position) at a key annual meeting to be held by Rubicon. In ensuing litigation, Perry lost the battle (at trial) but won the war (on appeal).
The reason this "works" in practice is that as an economic matter in thinly traded issues, which virtually all of these situations involve, the equity swap counterparty in the short position virtually always has to cover by being long the underlying security. In turn, when the party in the equity swap long position wants the vote it makes market sense for the counterparty to agree to unwind the swap and "sell" the underlying security back.
Does it work legally? Yes, general opinion is that in most countries (likely including the US) it does.
