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

Introduction

“The shareholder franchise is the ideological underpinning upon which the legitimacy of directorial power rests.” In the generation since Chancellor William Allen’s soaring vision in Blasius Industries, Inc. v. Atlas Corp., the “transcending significance” of the franchise has become corporate governance catechism. His hope, if not expectation, was that the rise of the institutional investor would help the franchise transition from an “unimportant formalism” to an important source of discipline. The Berle-Means separation of ownership and control is reduced and, so too, the classic principal-agent problems of corporate governance.

This catechism has motivational alignment as its foundational premise: the stockholders’ economic ownership will generally motivate them to vote in ways that promote their common interest—i.e., increasing the value of the shares. The premise assumes that the voting rights and economic rights of share ownership are inextricably linked—i.e., “coupled”—in the typical one share/one vote company.

Transformative institutional investor changes are increasingly severing that link. This “decoupling” is occurring in ways and with conceptual and legal consequences that are insufficiently recognized. Such decoupling could cause the incentives of an institutional investor with respect to a share of stock it owns to depart markedly from the corresponding incentives of a plain vanilla stockholder. Not only can the magnitude of the institutional investor’s incentives to vote in share-value-enhancing ways depart from that of a plain vanilla stockholder, but the very direction can depart as well. With directional misalignment, an institutional investor has incentives to use its voting rights to destroy—not enhance—share value.

Such voting misalignments are no longer limited to hedge funds intentionally deploying decoupling as a strategy and implementing it through esoteric, often derivatives-laden, financial stakes and novel uses for longstanding practices (e.g., share borrowing) that alter the funds’ organizational voting dynamics. As our 2023 article showed, decoupling-related motivational misalignments now also occur with surprising frequency at mainstream institutional investors. Here, the misalignments are not the product of strategy. Rather, they arise as byproducts of broader market developments, including (a) changes in financial stakes (e.g., the now-gargantuan size of certain asset managers and the rise of indexing); and (b) changes in a variety of “organizational voting dynamics” (e.g., the emergence of value-destructive versions of ESG-related voting).

Courts have recognized the possibility of departures from the foundational premise in a variety of ways. Their core response emerged long before these transformative institutional investor changes and relies on the judicial construct of a “disinterested” stockholder—in essence, a stockholder whose financial stakes incentivize them to vote or tender their shares in value-maximizing ways. In challenges to transactions otherwise subject to judicial review under enhanced scrutiny or entire fairness standards, Delaware courts have long given validating—“cleansing”—effect to uncoerced, informed stockholder votes to approve the transaction, but under this doctrine only the votes of “disinterested” stockholders count. The construct is embodied in two well-known lines of cases—the MFW line and the Corwin line. The construct is also often implemented in merger agreements by provisions that require approval by stockholders not “affiliated” with a controlling stockholder.

Recent Delaware cases, consequent corporate exits from Delaware, and Delaware statutory changes adopted in March 2025 notably illustrate the importance of the role of disinterested stockholder cleansing. In Tornetta v. Musk, Elon Musk had an unhappy encounter with this framework on January 30, 2024, when the Delaware Court of Chancery rejected his $55.8 billion Tesla pay package because a failure to fully inform the disinterested stockholders resulted in the application of the entire fairness standard. In its April 4, 2024, decision, In re Match Group, Inc. Derivative Litigation, the Delaware Supreme Court held, contrary to what some had believed, that application of the business judgment rule to all controller conflict transactions (not just freezeouts) requires approvals by both an independent special committee and disinterested stockholders. Musk cited Tornetta in suggesting Tesla’s subsequent reincorporation in Texas and The Trade Desk cited Match Group as a reason for its reincorporation in Nevada.

Responding to announced and prospective reincorporations, Delaware lawmakers filed Senate Bill 21 on February 17, 2025. Immediately characterized by outside observers variously as “landmark” and “transformative,” the bill was enacted in amended form on March 25, 2025 (as enacted, “SB 21”). Matters related to “disinterestedness” and controllers were among those at the core of the changes. Among other things, the legislation effectively reversed Match Group, thereby enabling disinterested stockholders to validate controller conflict transactions (other than freezeouts) without also requiring independent director approval and vice versa.

Yet even as the disinterested stockholder construct takes on greater doctrinal importance, factors unique to institutional investors have emerged that can systematically cause them to vote in ways that deviate from what their share ownership would seemingly motivate.

These biases first began appearing in force in the mid-2000s with hedge funds using decoupling to profit from the associated motivational misalignments. In 2006, an analytical framework for decoupling that one of us (Hu) co-developed showed how hedge funds crafted intricate financial stakes and also used certain organizational voting dynamics such as share borrowings to do so. In particular, the financial stakes involved complex holdings of shares they were voting (the “host company shares” or “host shares”), “coupled assets” (such as derivatives and short-selling arrangements as to host shares), and “related non-host assets” (such as derivatives and shares in a counterparty). Such financial stakes could, in an extreme case, even result in a hedge fund becoming what the analytical framework termed an “empty voter with a negative overall economic interest” in the host shares. That is, it would have the ultimate type of misaligned motivation: it would be incentivized to use its voting rights to destroy share value. The framework also showed how motivational misalignment could occur purely from an institution’s policies and practices—the institution’s organizational voting dynamics—rather than from its financial stakes. For example, a hedge fund can, in effect, buy votes through the simple expedient of tapping the longstanding share lending/borrowing market traditionally used to service the needs of short sellers. By borrowing shares just before the record date, the hedge fund can exercise the voting rights associated with those shares without having acquired any financial stake in those shares.

Our 2023 article showed that such misalignments now also occur with surprising frequency at mainstream institutional investors. These misalignments, however, arise as byproducts of broader transformative institutional investor changes that became especially important around the mid-2010s. On the financial stakes side, changes include the combined impact of the now-gargantuan size of certain asset managers and the rise of indexing, derivatives use, and market neutral and other “alternative” strategies. On the organizational voting dynamics side, such matters as the secular rise in the importance of non-value maximizing goals (including from certain extreme versions of environmental, social, and governance (ESG)-based investing and voting) do not affect an investor’s financial stake in the shares but can have a direct impact on the stockholder franchise’s foundational premise of a value-driven voting motivation. Other changes in organizational voting dynamics include a secular rise in share lending volumes, which was sparked by both a Securities & Exchange Commission (SEC) interpretive change and the growth of indexation, and a growing focus on share lending/borrowing decisions on voting outcomes.

This increasing institutional decoupling is yet more concerning because of modern share ownership and voting patterns. Institutional investors hold not only the vast majority of shares and hence of voting power but, because retail investors tend not to vote, an even higher percentage of the votes actually cast.

Our 2023 article also showed that the core legal response to such misalignments has not come to grips with institutional decoupling. Indeed, this failure of the disinterestedness doctrine to adapt now has startling consequences not only for the shareholder franchise but for the allocation of corporate power.

In particular, the longstanding judicial conception for when a stockholder should be considered “disinterested” reflects frozen assumptions at odds with modern institutional investor realities. This judicial construct, if applied in a rigid manner, would frequently disqualify the votes of major institutional investors. There would be a disruptive and completely unintended shift in voting power to, among others, individual investors—ironically, the very voters whose rational apathy and informational deficiencies Berle-Means and others have been concerned about. In addition, this would have the disruptive and unintended consequence of shifting power to activist hedge funds. But a dilemma arises: given the overwhelming dominance of institutional investor share ownership today, failing to apply the disinterestedness doctrine to institutional investors would effectively insulate the vast majority of votes from the core method for checking their legitimacy.

This new Article is the first work to suggest that problems with the foundational premise and the core legal response to these motivational misalignments run even deeper than as set out in our 2023 article. On the substantive side, the judicial construct of a “disinterested” stockholder has deleterious effects well beyond those we earlier identified, including de facto vote miscounts. On the procedural side, we show that the doctrine’s longstanding approach to implementation—e.g., evaluating whether a stockholder is in fact disinterested—imposes informational burdens that are effectively impossible to meet in the context of modern publicly held corporations. The need for a fundamental reconceptualization of the stockholder “disinterestedness” doctrine as to both the construct and the procedural architecture is compelling.

SB 21 does not diminish the need for such a comprehensive reconceptualization and, indeed, makes the reconceptualization more timely. On the substantive side, the legislation establishes, for the first time, a statutory definition of the term “disinterested stockholder” for purposes of determining whether challenged corporate actions are protected by safe harbors involving disinterested stockholder approval. However, neither the definition’s skeletal wording nor anything in the legislative history reflects any intent to modernize or otherwise modify the judicial construct. On the procedural side, the legislation nowhere touches the matter of implementation.

This Article breaks new ground by proposing a reconceptualization of a “disinterested stockholder” and offering a procedural architecture for implementing the new statutory definition. This substantive and procedural reconceptualization should help preserve properly motivated institutional investor voices and make disinterested voting workable.

As a substantive matter, the Article is the first to show that the disinterestedness doctrine not only causes inadvertent and unjustifiable shifts in power but will also cause de facto vote miscounts and distortions in voting outcomes. Moreover, the doctrine fails to recognize private ordering arrangements that can substantially mitigate or otherwise affect motivational misalignments. These problems arise in large part from the behavioral presumption animating the doctrine. One component of the behavioral presumption is that an investor’s voting decisions flow solely from its aggregate financial stakes—implicit in this is the belief that the pole star guiding the voting decisions of all investors is the desire to maximize the overall value of the investor’s aggregate portfolio (what, in the asset manager context, we term an “asset manager portfolio value maximization” pole star). The second component is that a binary determination of whether an investor is a disinterested stockholder maps only to one of two polar conclusions and consequences: either all or none of the investor’s shares are properly motivated and should be counted. Both components are conceptually dubious and at odds with market realities.

On the substantive side, we make four core moves. Two moves respond to fundamental flaws in these components, and the third is derivative of these moves. The fourth is a comprehensive and systematic conception of stockholder disinterestedness. Contrary to the first component of the behavioral presumption, investor-specific policies and practices—the “organizational voting dynamics” unique to an investor—can exacerbate, run counter to, or even overcome the effects of its financial stakes. We made this point in our 2023 article. In this Article, we show, among other things, the dramatic impact of one key organizational voting dynamic: an investor’s pole star for voting decisions.

The disinterestedness doctrine’s hypothesized pole star for voting decisions is radically different from the primary pole star of one Big Three asset manager that we examined (State Street Global Advisors (SSGA)) and materially different from that of another (Vanguard). Based in part on previously unexamined voting patterns, we are able to show that SSGA uses as its primary pole star what we term “host share value maximization.” Under this pole star, most of SSGA’s shares will always be voted in a manner consistent with the foundational premise, completely irrespective of its financial stakes. Vanguard uses as its primary pole star what we term “fund-by-fund portfolio value maximization.” Organizational voting dynamics apart from voting pole stars can also be important, including matters such as various voting divestiture arrangements (via, e.g., pass-through voting, mirror voting, and proxy advisors) and the complex effects of share lending/borrowing. Our reconceptualization’s first core move is to extend the disinterested analysis to also comprehend such institution-specific organizational voting dynamics.

Contrary to the second component’s all-or-nothing approach to the counting of an investor’s shares, an investor who does not qualify as a disinterested stockholder may nevertheless be voting some or all of its shares consistent with the foundational premise. The votes associated with these “disinterested shares”—such as when such votes are guided by a bona fide, publicly announced host share value maximization pole star—should be counted. Our reconceptualization’s second core move is that an investor’s failure to qualify as a “disinterested stockholder” should not silence the voice of that investor’s “disinterested shares.”

Our substantive reconceptualization’s third core move flows from the first two: the disinterestedness doctrine is effectively converted to a default rule. A variety of organizational voting dynamics an investor may choose to adopt could result in some or all of its shares being voted in a manner consistent with the foundational premise. Unlike the existing doctrine, our reconceptualization, by counting the votes associated with such disinterested shares, would facilitate private ordering that can substantially reduce the effect of motivational misalignments. Roughly speaking, an investor would be able to opt out of full application of the disinterestedness doctrine in a manner and to the extent the investor chooses.

Fourth, as a coda to our substantive analysis, we offer a comprehensive and systematic conception of stockholder “disinterestedness” and associated terminology, a yardstick more refined than the one we previously offered. Subject to a procedural mechanism that we propose, disinterestedness, as reconceived, would consider the effects of both (a) the investor’s “financial stakes” (i.e., its positive, negative, or zero “overall economic interest in the host shares” flowing from the investor’s holdings of “host shares,” “coupled assets,” and “related non-host assets”); and (b) the investor’s “organizational voting dynamics” (e.g., its voting pole star and pass-through, mirror voting, proxy advisor, and share lending/borrowing arrangements). Contrary to the existing construct of disinterestedness, under our yardstick, such organizational voting dynamics may result in votes associated with certain of the investor’s shares being counted (or not counted) completely irrespective of the investor’s financial stakes (i.e., irrespective of its “disinterested stockholder” status). Thus, as a general matter, (a) shares voted consistent with the foundational premise would be considered “disinterested shares” and would be counted but (b) votes not voted consistent with the foundational premise would be considered “interested shares” and would not be counted.

This Article’s foregoing yardstick and terminology for considering the direction and magnitude of misalignments build on and extend the approach set forth in the analytical framework for decoupling introduced in 2006 and applied in the disinterestedness context in our 2023 article. This Article introduces a term, “motivational alignment,” to capture an idea latent in this prior research and the terms “disinterested shares” and “interested shares” as core elements of our reconceptualization.

As a subsidiary substantive matter, we are the first to suggest that the relatively stringent judicial constraints on transfers of “decoupled” voting rights should be interpreted to limit not only misalignments in the direction of incentives when such transfers are outcome-determinative but also misalignments in the magnitude of such incentives. These constraints should extend beyond the disinterested shareholder context to cover even the exercise of statutory voting rights, as with director elections and merger votes.

As a procedural matter, this Article is the first to show that it is impossible for courts to carefully evaluate the disinterestedness of stockholders using the longstanding approach because of severe informational challenges. Existing doctrine imposes on defendants the burden of showing the “disinterestedness” of the requisite majority of stockholders. In a public company, that demonstration would necessitate stockholder-specific findings for thousands—or, in some cases, millions—of stockholders, both institutional and individual. Even leaving aside the sheer number of stockholders, this is an impossible task: there are massive gaps between the information needed and the information readily available, even as to the largest, most highly regulated institutional investors. Apart from the nature of the information required as to financial stakes and organizational voting dynamics, the need for synchronicity of the information cannot be met. As a practical matter, it is impossible for a court to assess the disinterestedness of a typical large institutional investor accurately based on information available publicly or through the host company, and voluntary and subpoenaed information cannot fill the gap.

If the disinterestedness doctrine cannot be applied, should any deference be accorded to the pertinent stockholder voting and tendering given the pervasiveness of motivational misalignments? Or should we simply ignore motivational misalignment issues on the ground that, somehow, the overall results are good enough?

This Article proposes a focused, multipronged, and cost-effective procedural solution to deal with both conceptual dilemmas, and it overcomes the daunting informational challenges posed by insistence on stockholder disinterestedness.

The procedural component of our reconceptualization begins with the adoption of an evidentiary presumption that stockholders are disinterested (in our reconceptualized sense). Failing to adopt such a presumption—requiring affirmative proof of disinterestedness—would have consequences for the stockholder franchise that are radical and unintended. Conditioning deference on the informationally impossible is tantamount to a blanket rejection of decades of precedent—and SB 21—giving validating effect to stockholder approval in important contexts. Such a striking diminution of the role of shareholder voting and corresponding enhancement of the role of judges and boards should occur, if at all, only after careful debate, and not by accident.

We also offer other, non-informational reasons for this presumption. Among other things, it is consistent with the incremental and thoughtful approach Delaware courts have undertaken elsewhere to respond to the voting challenges presented by decoupling.

The remaining elements of our procedural solution shore up the legitimacy of judicial reliance on stockholder voting. The Article outlines a workable process that can help identify instances where the disinterestedness of a stockholder vote is meaningfully compromised. Plaintiffs can rebut the presumption with respect to an institutional investor based on readily available public information, and if they also overcome a materiality filter with probability and magnitude components, the court may conduct an accurate and comprehensive assessment of an institutional investor’s disinterestedness. Even where an institutional investor’s financial stakes result in motivational misalignment, its organizational voting dynamics may overcome the effects of such financial stakes–based misalignment. For example, it could still be considered disinterested if it adheres to a fully disclosed, faithfully implemented host share value maximization policy.

In all but the most exceptional and outcome-determinative circumstances, therefore, this approach will avoid the need to gather and process the massive amounts of information such an assessment would require. This proposed process would provide a meaningful degree of validation to reliance on shareholder voting, thereby shoring up and enabling the continuation of established governance practice and corporate law doctrine.

Part I introduces the term “motivational misalignment” and shows the general relationship between the foundational premise for the stockholder franchise and the decoupling-based yardstick of a “positive overall economic interest” in host company shares. It also outlines the emergence and acceleration of systematic institutional investor motivational misalignments.

Part II analyzes stockholder voting contexts and the importance attached to the matter of an investor’s overall economic interest in the shares. Notwithstanding the appeal of the foundational premise, those contexts vary widely in their deference.

This Part begins with the context in which the courts most actively apply the principle of motivational alignment: namely, where they assess whether shareholder votes are “disinterested” to determine the standard of judicial review in certain contexts. We analyze the foregoing from the standpoint of the longstanding judicial construct. (Part II.A.1) We then turn to SB 21’s statutory definition of “disinterested stockholder.” (Part II.A.2)

This Part then shows that, in the context of the exercise of statutory voting rights (such as director elections and merger votes), while the matter of economic interest is generally unimportant, there are exceptions. (Part II.B)

Parts III through V are at the core of this Article. They show the need for, and offer, a reconceptualization of “disinterestedness” in both its substantive and procedural aspects. This reconceptualization would enhance the role and value of disinterested voting and make possible a faithful implementation of the March 2025 disinterested voting statutory safe harbor notwithstanding extraordinary informational challenges.

On the substantive side, Part III shows how the existing disinterestedness doctrine’s monolithic focus on financial stakes and failure to consider highly institution-specific organizational voting dynamics can lead to de facto vote miscounts, distortions in voting outcomes, and unjustifiable shifts in voting power from institutional investors. One such organizational voting dynamic is the policy that an institution adopts to guide its voting behavior—its voting pole star. We show the wide-ranging impact of striking differences among the voting pole star that existing doctrine implicitly assumes that all investors follow, SSGA’s “host share value maximization” pole star (with “house view” implementation), and Vanguard’s “fund-by-fund portfolio value maximization” pole star (with “house view” implementation). We also show the effects of other kinds of important organizational voting dynamics.

Our substantive reconceptualization of “disinterestedness,” by systematically considering both the financial stakes and organizational voting dynamics of a stockholder, not only avoids such problems but also facilitates private ordering that can significantly mitigate the effects of motivational misalignments. Part III.D offers the coda: a succinct formulation of our more comprehensive and nuanced conception, one that also folds in organizational voting dynamics and introduces the concepts of “disinterested shares” and “interested shares” to supplement the doctrine’s notion of “disinterested stockholder.” Part III.E deals with an ancillary substantive issue: the special circumstances in which we believe that votes arising from transfers of decoupled voting rights should not be recognized, whether in the disinterested stockholder context or in the exercise of statutory voting rights.

On the procedural side, Part IV shows that a straightforward application of the existing disinterestedness doctrine in the context of public companies imposes on defendants a burden of producing information that is impossible for them to meet.

Parts V.A–V.C set forth our proposed reconceptualization of the procedural aspects of the doctrine, which responds to these daunting informational challenges. Part V.D offers a brief afterword on a November 18, 2024, working paper posted on the Social Science Research Network (SSRN) by Professors Marcel Kahan and Edward Rock after this Article was already into editing at The Business Lawyer.

I. Motivational Alignment, the Foundational Premise, and the Rise of Decoupling

A. Motivational Alignment and the Foundational Premise

1. Overview

According to the Delaware courts, “[w]hat legitimizes the stockholder vote as a decision-making mechanism is the premise that stockholders with economic ownership are expressing their collective view as to whether a particular course of action serves the corporate goal of stockholder wealth maximization.” Consistent with longstanding business practices and economic theories, this premise assumes that the economic and voting rights of shares are coupled and cannot be unbundled from each other.

Beginning around the mid-2000s, however, sophisticated, lightly regulated hedge funds began using derivatives, the share borrowing/lending market, short selling, and other means to decouple economic and voting rights. Hu & Black, 2006 Decoupling I (Southern Cal.) explained how such decoupling can arise and how it posed unprecedented complexities for classic law-based and market-based mechanisms of corporate governance. The 2006 article introduced an analytical framework for decoupling and associated terminology that was subsequently extended and refined. Delaware courts have used the framework and its terminology in considering decoupling and the stockholder franchise—early, as in the 2010 Delaware Supreme Court opinion, Crown EMAK Partners, LLC v. Kurz, and most recently in the 2023 and 2024 Delaware Chancery Court opinions, Delman v. GigAcquisitions3, LLC and Electric Last Mile Solutions Inc. Shareholder Litigation on decoupling-rooted misalignments in “de-SPAC” merger voting.

For instance, an investor can, without the consent or knowledge of the company, unilaterally create materially greater voting power than its economic interest. An investor can elect to effectively depart from the standard one share, one vote structure established by statute and charter and normally presumed to be applicable to everyone. If a person with a 100,000-share long position in the company sells short 30,000 shares (or, e.g., buys put options), that person has a positive net economic interest in the company’s shares—i.e., 70,000 shares. But the 100,000 votes by that person (termed an “empty voter”) have been “emptied” of 30 percent of the corresponding economic interest, and the magnitude of his incentives to vote in favor of value-enhancing actions is thus substantially less than that of a person who simply holds a 100,000-share long position.

If this person instead sells short 150,000 shares, even the direction of his voting incentives changes. Gains from his short position of 150,000 shares would outweigh corresponding losses from his long position of 100,000 shares, and his economic incentive is to vote in value-destructive ways.

As the foregoing examples demonstrate, the term “motivational misalignment” can refer to decoupling-related distortions in both the magnitude and the direction of voting incentives. Moreover, such misalignment arises in two distinct ways. The first involves the impact on incentives flowing from its financial stakes in or directly related to the host company shares. Thus, by reason of an investor’s financial stakes, its “overall economic interest” in the host shares may be loosely characterized as positive, negative, or zero.

Another way involves the impact on investor incentives flowing from that investor’s particular policies and practices related to voting—its “organizational voting dynamics.” Such dynamics, as illustrated below, can affect voting incentives independent of the investor’s financial stakes (i.e., its overall economic interest in the host shares).

Assessment of an investor’s overall voting motivation—its “motivational alignment”—must take into account the combined effect of its financial stakes and its organizational voting dynamics.

We now briefly discuss the impact of financial stakes and organizational voting dynamics at a conceptual level and, in Part I.B.1, illustrate how hedge funds have used decoupling and motivational misalignment as a strategy.

2. Financial Stakes: Decoupling Framework’s “Overall Economic Interest in Host Shares”

Normally, an investor’s financial stakes in the host company will incentivize the investor to vote in ways that would enhance the value of the shares of the host company (the “host shares” or “host company shares”). As illustrated above, however, this is not necessarily the case: the investor’s financial stakes can alter both the magnitude and direction of the incentives associated with those shares. The following methodology analyzes the investor’s “financial stakes,” that is, its “overall economic interest in the host shares” flowing from the net effect of its holdings of (a) “host shares”; (b) “coupled assets”; and (c) “related non-host assets”:

A person’s overall economic interest in the host shares flows from the combined effect of their holdings of the following:

• (a) Host shares;
• (b) Coupled assets—rights that directly relate to the host shares and directly increase or decrease economic exposure to the shares (e.g., derivatives positions in host shares and short-selling arrangements as to host shares); and
• (c) Related non-host assets—derivatives positions in or holdings of shares of another company, whose value is directly related to the value of the host shares (e.g., if the host company is planning to acquire a target in a share-for-share merger with a fixed exchange rate, derivatives positions in and holdings of shares of the target are related non-host assets).

Generally speaking, if the person has a (material) positive overall economic interest in the host shares, the combined effect of that person’s financial stakes would incentivize him to vote in ways that promote the value of the host shares, while a person with a (material) negative overall economic interest in the host shares would be incentivized to vote in ways that destroy the value of the host shares. A person who has a zero (or immaterially different from zero) overall economic interest would be indifferent to changes in the value of the host shares.

In many situations, no related non-host assets are at issue: the financial stakes consist of only host shares and coupled assets. In this circumstance, the decoupling framework would loosely characterize a person’s financial stakes as resulting in that person having a positive, negative, or zero “net economic ownership.” The “empty voter” we referred to earlier who holds 100,000 shares and sells short 30,000 shares continues to have a positive net economic ownership and generally is motivated to vote in value-enhancing ways. But that motivation is less in magnitude than that of a shareholder who simply holds 100,000 shares. If, on the other hand, this stockholder sells short not 30,000 shares but 150,000 shares (or holds a large put option position), then that person is not merely an “empty voter,” but the extreme kind of an empty voter referred to by the analytical framework as an “empty voter with negative economic ownership.” This extreme empty voter has incentives to vote in value-destructive ways: the very direction of their motivations is contrary to those of a stockholder who simply holds 100,000 shares.

3. Organizational Voting Dynamics: Decoupling Framework’s “Record-Date Capture” as an Example

As explained in Hu & Black, 2006 Decoupling I (Southern Cal.), a person can become an empty voter, independent of their overall economic interest in the host shares, using a new strategy (the “record-date capture strategy”) for buying votes that takes advantage of share lending arrangements historically used merely to service the needs of short sellers.

The strategy is to borrow host shares in the share lending market just before the record date and return the host shares shortly after it. Since the borrower is the record owner, the borrower can vote the borrowed shares. But the lender retains the entire economic interest in those shares. This is because in a typical share lending arrangement, the borrower contracts with the share lender to (a) return the shares to the lender at any time at the election of either side; and (b) pay to the lender an amount equal to any dividend or other distributions the borrower receives on the shares. The borrower now holds votes without any economic ownership in those shares, while the lender continues to have complete economic ownership but no longer has any associated votes. Despite being an empty voter with exactly zero economic interest in the host shares, the borrower has as much voting power as it desires through the simple expedient of paying borrowing fees for a few days around the record date.

Such share borrowings have an impact from the standpoints of the borrower, lender, and overall voting outcomes. A borrower can use such bought votes to advance other interests it has in the host shares. If that interest is negative, it can use its bought votes in ways that it believes would destroy share value. If, on the other hand, that interest is positive, the borrower would be motivated to use its bought votes to enhance share value. That is, the borrowed shares can give effect to the borrower’s motivations that flow from its financial stakes in the host shares.

As for the lender, its incentives in voting the shares it has not lent are subtly impacted. During the pendency of the loan, the lender gives away the voting rights of the loaned shares but retains full economic interest in those shares. Thus, when the lender votes the shares, it has not lent, the lender has an economic interest that is in excess of its votes: it is the opposite of an “empty voter.” This imbalance should offset in full or in part, for instance, the negative incentive flowing from, e.g., the financial stakes in the form of put options on the host shares.

Share borrowings can also affect voting in more indirect ways, such as through their “denominator” effects to be discussed in Part III.C.3.

In other words, determining the borrower’s or lender’s motivational alignment depends not only on its financial stakes (i.e., the overall economic interest in host shares) but also on the impact of other factors, such as its share borrowing/lending decisions. In our 2023 article, we characterized certain institution-specific voting-related policies and practices that must be considered in evaluating the “emptiness” of an institution’s shares as the institution’s “organizational voting dynamics.” We believe share lending/borrowing policies fall within the meaning of this term.

In sum, the decoupling framework showed that determining the overall motivational alignment of institutional investors must take into account the combined effect of (a) the investor’s “financial stakes” (i.e., the investor’s positive, negative, or zero “overall economic interest” in the “host shares” (flowing from the investor’s holdings of “host shares,” “coupled assets,” and “related non-host assets”)); and (b) the investor’s “organizational voting dynamics” (e.g., share borrowing/lending).

However, the foregoing calculus and analysis represent only a first cut. In this Article, we will examine a wide range of organizational voting dynamics in Parts III.A–III.C. Importantly, Part III.D offers a reconceptualization of disinterestedness rooted in a more refined version of this calculus, a version that reflects concepts such as “disinterested shares” and that operates in tandem with the procedural approach advanced in Part V.

B. Transformative Institutional Investor Changes and Decoupling

This Article focuses on institutional investors and discusses retail investors largely as an incidental matter. First, institutional investors now hold a large majority of shares. As of 2022, institutional investors held 59 percent of shares, even when the direct holdings of households are combined with holdings of nonprofit organizations. Second, with the possible exception of certain meme stocks, few retail investors vote—and those who do vote may not necessarily be representative. In the 2022 proxy season, retail investors voted 29 percent of the shares they owned while institutional investors voted 82 percent of their shares. Third, related to this, SB 21 has established a “majority of votes cast” standard for voting by disinterested stockholders; the impact of non-voting individual investors on voting outcomes is thus reduced. Fourth, individual investors are unlikely to have the coupled asset, related non-host asset, and organizational voting dynamics complexities that are at the core of this Article.

1. Hedge Funds—Decoupling and Motivational Misalignment as Strategy

In the mid-2000s, sophisticated, lightly regulated hedge funds began to deploy decoupling as a strategy to further their economic interests.

Sometimes they did so using techniques on the organizational voting dynamics side. Laxey Partners, a hedge fund, used the record-date-capture strategy to obtain 42 million votes that would augment the votes derived from its shareholdings in British Land, a property company. Laxey had sought a breakup of British Land and opposed the reelection of British Land’s chairman.

Sometimes, hedge funds used decoupling techniques on the financial stakes side. In one well-known example, Perry Corp., a hedge fund, owned 7 million shares of King Pharmaceuticals. In late 2004, Mylan Laboratories agreed to buy King in a stock-for-stock merger at a substantial premium, but Mylan’s shares dropped sharply when the deal was announced. To help Mylan obtain stockholder approval, Perry bought 9.9 percent of Mylan shares (Mylan was thus the “host company”). By holding derivatives positions directly related to Mylan shares—coupled assets—Perry fully hedged the market risk associated with Mylan shares. Under the analytical framework’s methodology for assessing an investor’s “overall economic interest” from its financial stakes, Perry’s overall economic interest flowed from the net effect of:

• a) Host shares (9.9 percent of Mylan shares);
• b) Coupled assets (enough derivatives-based hedges to eliminate its exposure to the market risks of Mylan shares); and
• c) Related non-host assets (7 million King shares).

The net effect of Perry’s financial stakes—i.e., (a), (b), and (c)—was that the more Mylan (over-)paid for King, the more Perry would profit. Because of Perry’s coupled assets (i.e., the hedges on Mylan shares) it was indifferent to the price of Mylan shares, but because of Perry’s related non-host assets (i.e., the King shares), it would benefit from Mylan overpaying for King. Thus, Perry had a “negative overall economic interest” in Mylan shares: the impact of a transaction harmful to the economic returns on Mylan shares would be beneficial to Perry.

2. Mainstream Institutional Investors—Decoupling and Motivational Misalignment as By-product

Our 2023 article showed that the impact of decoupling on voting incentives has spread from aggressive hedge funds to mainstream institutional investors such as the Big Three asset managers. Unlike the hedge funds’ strategic use of decoupling and misalignment to further their economic interests, the decoupling observed in mainstream institutional investors arose not as a strategy but as a by-product of broader market developments related to their financial stakes and organizational voting dynamics. While the changes have been occurring for some time, the overall impact of such changes seems to have accelerated around the mid-2010s.

a. Financial Stakes

As for changes in financial stake patterns involving mainstream institutional investors, we paid most attention to conflicts associated with “related non-host assets.” These conflicts arise from the combination of (a) the increased and absolute size of large institutional investors; (b) the rise of passive management (i.e., indexed funds, direct indexers, and closet indexers); and (c) an overarching belief in diversification. Institutional investors in public companies (especially companies included in popular indexes) will often hold both host shares and related non-host assets in the form of shares of companies with interests contrary to those of the host company. Indeed, in the event of concurrent ownership, it will frequently turn out that in merger votes and tender decisions, institutional investors will thereby have either a zero or negative overall economic interest in the host shares.

Vice Chancellor Laster’s thoughtful opinion in In re CNX Gas Corp. Shareholders Litigation illustrates this problem. A key issue was whether T. Rowe Price, which held about 37 percent of the minority shares in CNX and “roughly equivalent equity interests” (in percentage terms) in the controller/offeror (CONSOL) and the host/target (CNX) (6.5 percent and 6.3 percent, respectively), was “disinterested” for purposes of whether the controller’s tender offer satisfied a majority-of-the-minority tender condition. The court reasoned that this near-equivalence in percentage holdings in the two companies meant that it had “materially different incentives” than a stockholder invested in only CNX, “thereby calling into question the effectiveness of the majority-of-the-minority condition.”

In our 2023 article, following this logic, the “disinterested” status could also be questioned for BlackRock, Vanguard, and SSGA—the “Big Three” asset managers. T. Rowe Price’s ownership percentage ratio in CNX and CONSOL was 1.00:1.03, meaning that it had a near-zero overall economic interest in CNX. In contrast, at least based on 13F filings, the Big Three’s pertinent ownership stakes were far more lopsided in favor of CONSOL. In contrast to T. Rowe Price, their overall economic interest in host (CNX) shares was decidedly negative.

Perhaps the best, albeit indirect, evidence related to the extent and growth of the related non-host problem comes from the 2021 Backus et al. study of common ownership of S&P 500 constituent stocks for the period 1980–2017. Relying on three measures of overlapping ownership that they termed “profit weights,” the authors identified a relatively steady rise from 1980 to 1999, a relatively static overlap from 1999 to 2009, and then a resumption of a steady rise from 2009 to 2017. They attributed the increase to the rise of indexing and diversification and the increased concentration of assets in the largest asset managers, notably the Big Three.

Additionally, they tried to track a measure that correlates more closely with the related non-host asset incentive problems identified in the analytical framework for decoupling. This measure, which they call “tunnelling,” showed a “striking increase” in frequency between 1993 and 2002 and again in the period 2015–2017.

As shown below, statistical measures of the root causes of the related non-host asset problems suggest an inflection point in the early to mid-2010s.

(i) Increase in Passive Investment, with Inflection in Mid-2010s

A 2024 academic study analyzing the percentage of the U.S. stock market owned by passive investors over a two-decade period found that consistent year-by-year percentage increases started occurring from 2015 and reached 33.50 percent in 2021, the last year examined. More recent Morningstar data suggest that by the close of 2023, assets in passively managed mutual funds and exchange traded funds (ETFs) for the first time exceeded their actively managed counterparts. In 2024, their market share advantage increased.

(ii) Increase in Size and Market Share of Largest Asset Managers: Inflection in Mid-2010s

In the mid-2010s, the largest asset managers began to substantially increase their absolute size and market share. In terms of absolute size, from 2009 to 2015, BlackRock’s assets under management (AUM) rose modestly from $3.35 trillion to $4.65 trillion. In the latter half of the 2010s, BlackRock experienced more marked growth. From 2016 to the second quarter of 2023, BlackRock’s AUM rose from $5.15 trillion to $9.43 trillion. Between 2010 and 2015, SSGA’s AUM rose from its low of $1.84 trillion in 2010 to its high of $2.45 trillion in 2014. However, from 2016 to 2023, SSGA nearly doubled its 2014 high, increasing AUM from $2.47 trillion to $4.13 trillion. Vanguard’s AUM sat at $991.9 billion in 2005. By 2021, that number rose to $7.3 trillion, then to $8.1 trillion in 2022.

The largest asset managers have also increased their market share. Specifically, the share of mutual fund and ETF assets managed by the five largest firms rose from 35 percent at 2005 year-end to 55 percent at 2022 year-end. A pronounced jump—a 9 percent increase—occurred between 2015 and 2020.

b. Certain Organizational Voting Dynamics

Recent trends in organizational voting dynamics have affected institutional investors’ motivational alignment. We discuss two examples here.

(i) Shift Away from Share Value Enhancing Motivated Voting

Our 2023 article focused on increased institutional investor consideration of non-shareholder-centric investing and voting behavior. Although enthusiasm for such consideration continues to fluctuate, the debate over shareholder primacy has been intensifying, often under the broad, ambiguous rubric of “ESG.” Some of the debate participants view taking into account ESG considerations as being conducive to maximizing shareholder wealth as classically construed, while others call for ESG-oriented behavior even when doing so would undermine the value of host shares.

Notwithstanding constraints such as those flowing from trust fiduciary law’s “sole interest rule” and the longstanding Delaware shareholder primacy model, there is concern that some institutional investors—or certain of the portfolios managed by these investors—engage in voting and other behavior that promotes non-shareholder interests even when doing so harms the value of the host shares. Observers have been concerned not only about certain investors concerned about the environment but also investors with idiosyncratic incentive structures such as public pension funds.

U.S. sustainable investment strategies grew from accounting for $11.995 trillion in 2018 to $17.081 trillion in 2020. Global ESG ETF assets grew considerably. Between 2009 and 2015, global ESG ETFs assets fluctuated between $11 and $16 billion. However, in 2016 they jumped to $23 billion, and they have increased every year since, reaching $480 billion in November 2023. The substantial assets in the “sustainable investing” market appear to create an environment in which some institutional investors are incentivized to prioritize ESG considerations over maximizing share value.

Two important caveats, however: first, the above ESG data warrant a degree of skepticism, due to potential greenwashing and changes in research methods affecting the calculation of data on sustainable investing assets. Second, more importantly, the decided break from the secular trend in favor of ESG-influenced investing and voting in the past year or two deepened with the election of Donald Trump. This will be discussed in Part III.C.2.

(ii) Changes in Share Lending and Borrowing

Although the Laxey hedge fund’s use of share borrowing to acquire 8 million votes with no accompanying economic interest occurred in 2002, the International Corporate Governance Network felt compelled to remind its members in 2016 that “[i]nstitutional investors should recognize that if shares are lent out, they temporarily lose their rights for the duration of [the] loan.” As discussed below, institutional investors are increasingly aware that their share lending and recall decisions could prove decisive to voting outcomes.

At the same time, two factors have made more shares available for lending, thereby presumably making it cheaper and easier for activist funds to buy votes. First, a 2019 change in SEC guidance clarified that fees from share lending were an approved basis for investment advisers to decline to vote. After this clarification, institutions supplied 58 percent more shares for lending immediately before meetings. Second, the rise of indexation has contributed to an increase in supply. Stocks with high index ownership saw a marked increase in shares available for lending before votes in contested elections.

II. The Existing Legal Responses to Decoupled Voting Rights

As previewed above, the principle that stockholder voting rights should be exercised by persons having a positive overall economic interest in the shares and to a commensurate extent is expressed in substantive corporate law in a variety of contexts. Those contexts vary widely, however, in the degree of adherence to that principle. This Part begins with the context in which the courts most actively apply that principle of motivational alignment: namely, where they assess whether the votes are from stockholders that are “disinterested” in order to determine whether some proposed transaction or policy should be evaluated under a more lenient standard of judicial review.

This Part next examines the exercise of statutory voting rights more generally and the extent to which, in that context, existing law declines to give effect to votes by stockholders lacking a positive overall economic interest in their shares. Surprisingly, the answer is not much, despite persistent recitation of the motivational alignment principle. In only occasional circumstances (vote buying and irrevocable proxies) do courts decline to give effect to formally valid votes, and even in those circumstances that remedy is explicitly or tacitly limited to instances in which bought votes or votes by irrevocable proxy are outcome-determinative.

A. The Core Response: The “Disinterested” Stockholder Construct

1. The Judicial Construct of Stockholder Disinterestedness and Its Role

Despite the changes in investment strategies discussed in Part I, the courts have consistently relied on stockholder voting to determine whether some proposed transaction or policy should be evaluated under a more lenient standard of judicial review. This occurs in two doctrinal settings, voluntary majority-of-the-minority approvals and statutory merger votes, which, while distinct, both rely on the proposition that the voting shareholders are disinterested.

In the first setting—transactions in which directors or controlling stockholders have conflicting interests and the transaction is initially subject to strict judicial scrutiny to determine “entire fairness”—courts may choose to apply a less demanding standard—either shifting to plaintiffs the burden of proof on the question of fairness or applying the deferential business judgment rule if the transaction is approved by a majority of fully informed, uncoerced disinterested stockholders. In this first litigation setting, it is the corporation’s directors and controlling stockholders who are the defendants who seek to establish and rely on such approval, and the relevant shareholder vote—typically framed as the vote of holders not “affiliated” with the conflicted directors or controller—has been established voluntarily and not mandated by statute.

Irrespective of how the agreement defines “affiliated,” the validating effect of the vote depends on a determination that the “unaffiliated” voting stockholders are “disinterested” in the sense used by the judicial construct. In MFW itself, for example, the going private merger agreement required approval by a majority of the outstanding shares held by the “Public Stockholders,” defined as all stockholders “excluding M&F [the controlling stockholder] and its Affiliates.” That approval was deemed to satisfy a requirement of approval by disinterested stockholders. Accordingly, limiting the vote to “unaffiliated” or “minority” stockholders may not achieve the validating effect contemplated by MFW, and practitioners have therefore cautioned that care should be taken also to exclude from the vote shares owned by holders with significant potentially conflicting non-stock economic relationships or interests in the controller, even if they are not affiliates of the controller.

MFW involved a transaction in which a controlling stockholder was taking the company private. In that situation, the Delaware Supreme Court held that the approval of both the fully informed, uncoerced disinterested stockholders and a special committee of independent and “disinterested” directors were needed to avoid entire fairness review. MFW, however, did not address the situation of controlling stockholder transactions that did not involve a freezeout merger.

To also require such dual MFW protections in non-freezeout situations would result in making it costly to avoid entire fairness review in a wider range of situations. This occurred with the 2024 Match Group decision. The Delaware Supreme Court held this dual protections not only applied in the going private context, but to any transaction in which a controlling stockholder stands on both sides of a transaction and receives a “non-ratable” benefit. Among other things, the Delaware Supreme Court pointed out language in MFW referring to the need for the “dual statutory protections of disinterested board and stockholder approval” because “both protections are potentially undermined by the influence of the controller.”

In the second setting, where a merger involving a sale of the company is initially subject to enhanced judicial scrutiny under Revlon, approval by disinterested stockholders exercising their statutory right to vote on the merger shifts the standard of judicial review to the deferential business judgment rule. In this second litigation setting, it is the selling company and its directors who are the defendants who seek to establish and rely on such approval (although the acquirer, as the new owner of the selling corporation, also has a significant interest in validating the transaction, even if it is not a named defendant).

The judicial construct of a “disinterested” stockholder is key. Under cases like MFW and Corwin, the validating effects must arise from the uncoerced, informed votes of “disinterested” stockholders. The votes of other stockholders do not count. Corwin articulated the underlying policy for this requirement: “there is little utility to having [judges] second-guess the determination of impartial decision-makers with . . . an actual economic stake in the outcome (in the case of informed, disinterested stockholders).” This policy view is a corollary of the foundational premise of the stockholder franchise as expressed by Delaware courts: the “rational, economic self-interest arguably common to all shareholders” is the legitimizing underpinning for the stockholder franchise.

Indeed, as shown in our 2023 article, the judicial construct deems a stockholder to be disinterested only if it has an “economic self-interest arguably common to all shareholders.” That is, it would, like all plain vanilla stockholders, benefit from an increase in economic returns from holding shares—i.e., a positive overall economic interest in the shares. Corporate law’s general use of the term “interested” in the stockholder context refers to a stockholder who “may derive pecuniary interest from one particular result or is otherwise unable to be fair-minded, unbiased, and impartial.” The troublesome “interest” contemplated is, in effect, idiosyncratic to that specific stockholder.

The materiality of the stockholder’s interest also matters for the purposes of the judicial construct. We showed that law and common sense suggest stockholders with an overall economic interest of zero or close to zero should not be entitled to deference. We offered an approach to determining when that interest should be deemed material enough to qualify as an “actual economic stake.”

Voting decisions may be affected not only by interests in the company but also, of course, by relationships with the company. Relationships with the company, whether economic or non-economic in nature and whether current or prospective, can be pertinent in many ways. On the economic side, the desire to retain or obtain rewarding asset management responsibilities may affect how an institutional investor votes, although internal conflict of interest rules, norms, reputational incentives, and regulation may temper the effect of such incentives. Non-economic, “soft” relational matters such as friendships, familial ties, social status, and ego satisfaction, may also matter.

A more comprehensive approach to considering stockholder disinterestedness in voting would also consider such relationship matters. Indeed, SB 21 invites judicial efforts to consider such other matters in the disinterestedness context and they may sometimes prove independently dispositive.

This Article’s focus, however, is not on such relationship matters. It is on the typically more quantifiable, and perhaps more important, misalignments that flow from interests in the company, broadly conceived; in particular, what we refer to as “financial stakes” and “organization voting dynamics.”

Our 2023 article noted that “the doctrinal insistence in Delaware case law that ‘disinterestedness’ requires having an ‘actual economic stake in the outcome of the vote,’ will, among other things, often disqualify institutional investor voting in public companies from being considered sufficiently ‘disinterested’ for validation purposes.” That article also noted that, in contrast, individual investors were unlikely to have the coupled assets and related non-host assets that would result in them having a negative or zero overall economic interest that would disqualify them from being considered “disinterested.” This contrast suggested that rigid application of the “disinterestedness” doctrine would lead to an inadvertent and likely undesirable shift in power to individual investors.

Here, we suggest that there would be another inadvertent shift in power, one to activist investors. Activist investors are a category of institutional investors whose holdings of host shares are unlikely to be offset by the effects of coupled assets and related non-host assets. Because of their largely undiversified portfolios, it is reasonable to presume that activist investors have positive overall economic interests in the host shares. The straightforward application of the disinterestedness doctrine would have the effect of shifting power to activist investors without any consideration of the benefits and costs of doing so, despite enormous controversy over whether hedge fund activism is privately or socially optimal.

Nevertheless, in cases in which courts rely on stockholder voting to determine the appropriate standard of judicial review of fiduciary conduct, the justification for some degree of judicial attention to decoupling is self-evident. Because those cases rest explicitly on the premise that voting is by stockholders with an “actual economic stake in the outcome,” it would be irrational for courts to set out that premise but fail to exercise some oversight to determine that voting is done by disinterested stockholders.

2. SB 21’s Construct of Stockholder Disinterestedness and Its Role

The 2024–25 reincorporation “Dexits” referred to in the Introduction, especially that of Elon Musk’s Tesla and the possibility of Meta doing so, sparked alarm and caused Delaware lawmakers to deal with the perceived causes. SB 21, the primary response, mirrors at its core the concerns that former Chief Justice Strine, former Justice Jacobs, and one of us (Hamermesh) had raised in 2022 about how Delaware law had drifted away from an efficient, predictable, and stable model. The 2022 article referred to:

certain standards of review and other doctrinal approaches that create excessive litigation intensity and suboptimal respect for intra-corporate decision-making processes in which independent directors and disinterested stockholders have potent say.

This Article was substantially complete prior to the February 17, 2025 introduction of the initial version of SB 21. From the standpoint of this Article’s subject matter—the problems with the “disinterested” stockholder doctrine and our proposed solution—certain provisions of amended Section 144 are most pertinent. We show that our analysis of the problems and our solution are robust to such statutory changes. As a whole, the SB 21 changes are sweeping—including other voting-related matters such as the definition of “controlling stockholder” and the composition of director special committees as well as stockholder inspection rights. This Article does not seek to address these other matters.

First, amended Section 144 reconfigures when disinterested stockholder votes are relevant. Specifically, amended Section 144 divides conflicted transactions into three categories and provides safe harbors for when an irrebuttable business judgement rule would apply. Roughly speaking, the safe harbor is available:

(1) When an act or transaction does not involve a conflicted controlling stockholder but the directors or officers have a conflict, if either: (a) the act or transaction is approved by “disinterested directors” (as defined); or (b) the act or transaction is approved or ratified by the “informed, uncoerced, affirmative vote of a majority of the vote cast” by “disinterested stockholders” (as defined) [Section 144(a)(1)/(2)];

(2) When a transaction (other than a “going private” transaction (as defined)) involves a conflicted “controlling stockholder” (as defined), in contrast to Match Group, if either: (a) the transaction is approved by “disinterested directors” (as defined); or (b) the transaction is approved or ratified by the “informed, uncoerced, affirmative vote of a majority of the votes cast” by “disinterested stockholders” (as defined) [Section 144(b)(1)/(2)]; and

(3) When a “going private” transaction (as defined) involves a conflicted “controlling stockholder” (as defined), if both: (a) the transaction is approved by “disinterested directors” and (b) the transaction is approved by an “informed, uncoerced, affirmative vote of a majority of the votes cast” by “disinterested stockholders.” [Section 144(c)].

The legislation thus makes a major substantive change. The Match Group decision applied to all conflicted controller transactions the “dual” independent committee/disinterested stockholder vote requirements of MFW. SB 21 provides that such dual requirements would only apply to the conflicted controlling stockholder going private situation, i.e., the situation that was at issue in MFW.

This Article, however, is not directed at determining whether Match Group was correctly decided. Instead, of focusing on when a disinterested stockholder vote should be required, the Article is focused on what a “disinterested” stockholder should be re-conceptualized to mean as a substantive matter in the face of modern institutional investor realities and how this could be determined as a procedural matter notwithstanding extraordinary informational challenges.

Second, amended Section 144(e)(5) establishes, for the first time, a statutory definition of “disinterested” stockholder: “any stockholder that does not have a material interest in the act or transaction at issue or, if applicable, a material relationship with the controlling stockholder or other member of the control group, or any other person that has material interest in the act or transaction.” For this purpose, Section 144(e)(7) defines “material interest” as “an actual or potential benefit, including the avoidance of a detriment, other than one which would devolve on the corporation or the stockholders generally, that . . . would be material to such stockholder.” For this purpose, “material relationship” means “a familial, financial, professional, employment, or other relationship that . . . would be material” to the stockholder.

The wording of this definition is skeletal but is consistent with the judicial construct that it replaces. The “interest” leg of the judicial construct pivots on whether a stockholder had an economic interest “arguably common to all shareholders” or whether the interest is idiosyncratic to that shareholder. Similarly, the “interest” leg of the statutory definition pivots on whether the stockholder has an actual or potential benefit “other than one which would devolve on the corporation or the stockholders generally”: i.e., whether, like stockholders generally, it would benefit from an increase in the share price, or whether the interest is idiosyncratic to the stockholder. The materiality element of the statutory definition should also be understood to be present in the judicial construct. At no point in the hearings on SB 21 or elsewhere in its legislative history is there any statement or other indication of an intent to in any way modernize or otherwise modify the judicial construct in either respect.

The “relationship” leg of the new statutory definition makes explicit the less quantifiable, often non-economic, considerations that judges customarily consider. As we have noted, our disinterestedness analysis does not seek to comprehend these considerations and instead focuses on the impact flowing from financial stakes in the host shares and investor-specific organizational voting dynamics.

Thus, on the substantive side, there is a new statutory definition of disinterested stockholder, but it dovetails with the judicial construct. The conceptual structure for disinterestedness remains in place. As for the procedural side, there is literally nothing to talk about. The legislation does not touch at all the critical and challenging task of implementing the definition.

In short, this Article’s analysis of the problems with substance of the disinterested stockholder construct and the associated procedural architecture apply to both the longstanding judicial approach and the new statutory approach.

B. The (Un)importance of Decoupling in the Exercise of Statutory Voting Rights and Exceptions

1. General Tolerance for Empty Voting

Corporate statutes typically confer upon stockholders the right to vote in the election of directors and on fundamental transactions such as mergers, sales of all or substantially all assets, dissolution, and amendments to the corporation’s certificate or articles of incorporation. With rare exceptions discussed below, and unlike the situation described above involving reliance on voting to determine a standard of judicial review, the voting rights conferred by these statutes are unencumbered by any explicit requirement that the rights be exercised only by persons having a positive overall economic interest in the host shares, let alone a requirement that holders’ organizational voting dynamics be demonstrably supportive of share value maximization. Consistent with that statutory framework and putting aside cases involving transfers of voting rights not accompanied by transfers of the voting shares, we have not been able to identify a single case in which a court has declined to give effect to a stockholder’s vote for purposes of compliance with statutory requirements for electing directors or approving a merger, dissolution, or charter amendment.

That vacuum is certainly not due to a failure by the courts to recognize that shares are frequently voted by persons having no economic interest in the shares at all. Stockholders of record who are nominees of beneficial owners are entitled to vote shares held in their names, and the corporation may give effect to their vote regardless of whether the person beneficially owning the shares concurs with or even has been consulted with respect to the vote. In Blasius, the opinion in which Chancellor Allen announced that “the shareholder franchise is the ideological underpinning” of director authority, the court also ruled that despite evidence that stockholders of record do not invariably give effect to the voting intentions of beneficial owners of stock, “the law does not inquire into the subjective intent of either the record owner or the beneficial owner” in evaluating stockholder votes.

Similarly, the statutory framework that establishes record dates for voting guarantees that shares can be voted by persons who hold shares as of the record date but who sell them before the meeting date on which the shares are voted and thus have no economic interest in the shares at the time they are voted. Thus, the record-date/voting-date disparity and the practice of holding shares in nominee name both make empty voting inevitable, at least to some degree.

In addition to the foregoing instances of empty voting, corporate law expressly validates allocations of voting rights that result in wide disparities between economic interest and voting power. Most notably, corporate charters may provide that shares of one class hold substantially greater voting power than shares of another class with equivalent economic rights. Such dual class voting arrangements are controversial but neither new nor uncommon: many of the largest publicly traded companies employ dual class voting structures.

Less common but similarly reflecting departures from the ostensible one share/one vote principle are charter provisions that allocate voting power based on the duration of shareholding (so-called tenure voting), levels of share ownership (graduated voting), stockholder identity, and even per capita voting. Governance control that is disproportionately large in relation to share ownership can also be achieved by means of agreements that confer upon one or more shareholders the power to direct the corporation to take, or refrain from taking, specified actions.

West Palm Beach Firefighters’ Pension Fund v. Moelis & Co., a February 2024 Court of Chancery decision, acknowledged that such agreements could be implemented through provisions in the certificate of incorporation. Although that decision invalidated such agreements because they were not included in the charter, an amendment to Section 122 of the Delaware General Corporation Law broadly validating themSee flagged part at end of footnote 109 — is this a reference to a citation? it seems there should there be a cite here? was adopted just a few months later, resulting in even greater tolerance for agreements with stockholders that decouple voting rights from economic rights.

To be sure, as one of us has argued in the decoupling context, provisions that are adopted midstream following the initial public offering pose special concerns: the usual arguments for IPO charters do not apply to midstream charter amendments. Such midstream adoption can be evaluated under standard principles of fiduciary duty and can be invalidated if inequitably adopted. But where they are included in charters when shares are first offered for sale to the public, they are supported by settled law and have been routinely sustained.

Substantive corporate law thus extensively tolerates voting by persons having a negative or zero overall economic interest in host shares and situations where voting power is not strictly proportionate to economic interest. Although certain state antitakeover statutes establish explicit exceptions to that general tolerance, these statutory voting disqualifications stand as rare exceptions. Although it has been said that Delaware has a “public policy of guarding against the decoupling of economic ownership from voting power,” courts simply do not enforce any such policy in determining whether statutory voting requirements have been satisfied; to the contrary, courts as a general matter make no effort to reject the votes of shareholders with a zero or negative overall economic interest in their shares.

There are multiple explanations for the judicial reluctance to insist on motivational alignment as a condition to giving effect to the exercise of statutory voting rights. First, refusal to give formal effect to stockholder votes would be a radical act, given the clarity and prominence of those rights. The statutory right to vote has been recognized as the first in the list of “the most familiar default rights of shares.” That voting right shares a fundamental characteristic with other private property rights: namely, “the exclusive authority to determine how [the] resource is used.” That view of voting rights may explain judicial pronouncements that “[s]hareholders are free to do whatever they want with their votes, including selling them to the highest bidder,” and that a shareholder’s motivations for voting “may be for personal profit, or determined by whims or caprice, so long as he violates no duty owed his fellow shareholders.”

Indeed, “[t]he ownership of voting stock imposes no legal duty to vote at all.” Thus, there is no realistic expectation on the part of investors that their fellow investors’ votes in director elections or on fundamental transactions are motivated by a materially positive overall economic interest. To the contrary, governing law allows and contemplates that stockholders may vote for entirely idiosyncratic reasons. Accordingly, and given the importance attached to the control flowing from share voting rights, a regime in which courts make ad hoc decisions declining to give statutory effect to a shareholder’s vote due to concerns that the vote might be decoupled from a positive economic interest in the corporation would impair the value of voting shares by rendering associated voting rights less predictable.

Compelling practical reasons for tolerating the exercise of voting rights by persons lacking a positive overall economic interest in shares also exist. In a publicly held company or any corporation with a large number of shareholders, it is clearly impractical, and ordinarily impossible, to gather, present, and evaluate evidence regarding the economic interests of each and every one of hundreds or thousands of voting shareholders. Ascertaining and evaluating the competing economic interests of even one shareholder can be a complex, time-consuming exercise, and non-economic/qualitative considerations only further complicate the inquiry. In short, insisting on proof that all voting occurs at the instance of persons with a positive overall economic interest in the shares as a condition to entitlement to vote such shares would make the exercise of statutory voting rights essentially impossible.

Judicial opinions support this justification for tolerating voting by persons with no (or perhaps even negative) economic interest in shares. As explained by Chancellor Allen in Blasius, “[a] legal test that made inquiry into the subjective wishes of ultimate owners relevant would, of course, threaten to convert every close proxy fight into protracted and costly litigation.” Paraphrasing that assessment to apply to shareholder voting motivation more generally, a legal test that required or even allowed inquiry into the overall economic interest, let alone the overall motivation, of holders of voting shares would “threaten to convert every close [vote] into protracted and costly litigation.” Allowing such an inquiry would thus defeat the value of the shareholder franchise by depriving corporations and their shareholders of the “certainty and expedience in the decision-making process [they need] in order to operate effectively.”

In the case of the annual election of directors—undoubtedly the most prevalent occasion for shareholder voting—there are additional reasons why judicial evaluation of shareholder economic interests in host shares and related assets in order to assess shareholder voting motivation is unwarrnted:

• Elections of directors are typically uncontested, so there is little prospect that evaluation of shareholder motivation would affect the outcome;
• Director elections may appropriately involve multidimensional considerations of a non-economic nature, to which economic factors affecting shareholder voting motivation may be irrelevant;
• The tendency of large asset managers to refrain from recalling share loans to vote the shares corroborates the view that voting in uncontested director elections and in other routine matters is not economically significant; and
• Judicial intervention is available to address situations in which directors take improper action, making active review of director elections less useful. Fiduciary duties and norms of fiduciary conduct provide ongoing influence over the conduct of directors once they are elected, thereby rendering stockholder voting incentives less important as a mechanism to promote desirable director behavior.

The two contrasting approaches to the effectiveness of stockholder votes described above—the use of stockholder votes to measure the merits of a transaction and the general tolerance of motivational misalignment in the context of statutory voting rights—were both followed by the British Columbia Supreme Court in TELUS Corp. v. Mason Capital Management, one of the highest-profile and most-contested proxy fights in Canadian history. That controversy involved a hedge fund that Justice Fitzgerald, relying in part on the affidavit one of us provided, found “in all likelihood” was “the extreme type of ‘empty voter’ identified by Hu & Black as an ‘empty voter’ with ‘negative economic ownership.’” The fund had voted against a proposed plan of reorganization, but in considering the fund’s objections, the court recognized and took into account that the fund’s negative economic ownership would incentivize it to “act in a manner detrimental to the interests of . . . other Common Stockholders.” The court approved the plan.

On the other hand, the court expressly affirmed that the hedge fund was entitled to have its shares counted for purposes of determining whether a formal voting requirement had been satisfied. Neither TELUS nor the affidavit suggested a contrary position.

2. Exceptions to Tolerance for Empty Voting: Transfers of Voting Rights Decoupled from Economic Rights

Where the “public policy of guarding against the decoupling of economic ownership from voting power” has had at least some force is in the situation of stockholders attempting to transfer the voting rights of their shares without at the same time transferring economic ownership associated with the shares. Although decisions invalidating such transfers have become increasingly uncommon, courts and corporate statutes have continued to review closely and occasionally invalidate several forms of such transfers, as discussed below.

a. Vote Buying

Vote buying, in the context of corporate law, has been defined as “any transaction by which a party [the vote buyer] directs a shareholder’s vote for consideration personal to that shareholder.” Put another way, vote buying occurs when a stockholder, in exchange for consideration, cedes voting discretion and authority to another person without at the same time transferring any economic interest in the voted shares. Rather than routinely giving effect to such transfers of voting rights, courts recite that the arrangement warrants close scrutiny to avoid impairment of the stockholder franchise generally. Absent proof of fairness, a vote procured through vote buying will be disregarded if the arrangement’s “object or purpose is to defraud or in some way disenfranchise the other stockholders.” The explicit rationale for this approach is the concern that the stockholder vote will fail to be based on the motivations of persons with a positive overall economic interest in the corporation’s shares. Judicial scrutiny of vote buying may also be animated by concern that shareholders may not be adequately informed when they agree to sell their vote.

Nevertheless, judicial scrutiny of vote buying is not as stringent as it apparently once was. Delaware courts have abandoned any presumption that “bought” votes are inherently void and hold that such votes “should not be considered to be illegal per se.” And vote buying will be deemed to be “disenfranchising” only “when it delivers the swing votes”—i.e., when it is outcome-determinative. When holders of the shares not subject to vote buying retain the power to determine the outcome of the vote (e.g., where they hold the majority of voting shares), vote buying has been disregarded. Such relaxation of judicial constraints against vote buying may have encouraged the creation in 2024 of a “Shareholder Vote Exchange” (SVE) website for buying and selling voting rights of corporate shares.

As will be discussed in Part III.E, however, arrangements to buy votes should be sensitive to the prospect that in a vote in which the bought votes affect the outcome, a court might invalidate and disregard the bought votes. There is little doubt, for example, that management use of corporate funds to buy votes in a contested election could result in invalidation of such votes. Invalidation of votes can also be an appropriate remedy even where votes are purchased by a stockholder using its own funds, rather than corporate assets. As stated by the Court of Chancery, when “third party vote buying [i.e., purchase of votes by a shareholder not using corporate assets] prove[s] deleterious to stockholder voting, this Court can and should provide a remedy.” And finally, in light of the stated rationale for judicial policing of vote buying (adverse effects of decoupling), vote buying by persons who own no shares at all should be subject to particularly close scrutiny. In any event, and even though the precise scope of the prohibition against buying votes is decidedly unclear, vote buying doctrine contemplates that bought votes are not necessarily effectual.

b. Irrevocable Proxies

Perhaps nowhere is the “public policy of guarding against the decoupling of economic ownership from voting power” more forcefully expressed and applied than in challenges to the effectiveness of irrevocable proxies. A stockholder who grants an irrevocable proxy entirely cedes discretion and authority over voting the shares to a person who may have no economic interest in the shares. The resulting “concerns raised by decoupling voting power from ownership” underlie the courts’ insistence that the terms of a proxy make irrevocability “clear and unambiguous.”

Even apart from that strict construction approach, courts and statutes have addressed more directly the decoupling concerns inherent in irrevocable proxies. Specifically, they have insisted that a proxy can be irrevocable only if it is “coupled with an interest.” Although that critical phrase lacks nothing in ambiguity, examples of it provided in case law and in the statutes themselves suggest that it refers to an interest in the economic well-being of the corporation. Thus understood, the “coupled with an interest” requirement mitigates the decoupling problem by assuring that the proxy holder has a positive economic interest either in the shares in question or in the issuer of the shares.

In any event, when courts conclude that an allegedly irrevocable proxy is not “coupled with an interest” or is ambiguous, they do not hesitate to refuse to give effect to the proxy in assessing the vote of the shares purportedly subject to the proxy.

c. Other Forms of Voting Rights Transfer, and Reasons for Judicial Attention to Vote Buying and Irrevocable Proxies

In other areas, the law has become even less rigorous in insisting that voting rights be coupled with economic interest in shares. Although a source of concern about decoupling in the past, voting trusts and voting agreements—both of which contemplate that stockholders cede their voting authority to a third person—are now sanctioned by statute. To be sure, a voting agreement that is used as a vehicle to accomplish otherwise invalid “vote buying” would probably not be spared invalidation simply because it complied with the formal requirements of the voting agreement statute. Likewise, a formally valid voting agreement will not be enforced where it is a product of fraud or illegal purpose. But given the statutory validation for voting trusts and voting agreements, use of those mechanisms to separate voting rights and economic interest no longer is an independent basis for invalidating stockholder votes.

There are several potential explanations for vote buying and irrevocable proxies, in contrast to voting trusts and voting agreements, having been the object of somewhat more intensive judicial attention to decoupling. Part of the explanation involves substantive distinctions:

• In the case of an irrevocable proxy, courts cannot decline to overlook the statutory requirements that the proxy be expressed in writing and coupled with an interest;
• In the case of vote buying, in which invalidation of votes is purely a judge-made result, it is inconceivable that a court would decline to invalidate a vote once it determines that a vote buying arrangement was either fraudulent or unfair and resulted in disenfranchisement of other shareholders; and
• These two situations, unlike voting trusts and voting agreements, can involve transfers of voting rights to persons who own no shares at all and who therefore have no apparent incentive to vote in the interests of the corporation and its shareholders generally.

Judicial review of cases of vote buying and irrevocable proxies may also be relatively more intensive for purely practical reasons. Compared to the situation involving votes of thousands of dispersed stockholders each of whose motivational misalignments might require deep, expensive factual exploration, cases involving vote buying or irrevocable proxies focus on one or at most a few discrete voting blocs, and the question of whether voting and economic rights have been decoupled is relatively uncomplicated. Vote buying cases tend to involve fairly obvious economic inducements, and the only potentially complex questions are the factual ones of whether the bought votes are outcome-determinative and whether the inducement was fair or manipulative. Similarly, the existence of an irrevocable proxy is a simple matter of fact: the only remotely difficult question is one of law, namely whether the proxy is coupled with a sufficient interest within the meaning of the applicable statute. Thus, these are discrete, relatively uncomplicated matters of fact and law, and the courts are able to police decoupling in these contexts, at least where the votes in question are outcome-determinative.

III. Substance—The Existing “Disinterested Stockholder” Construct: Limitations, Consequences, and Our Proposed Reconceptualization

A. Overview: Our Reconceptualization’s Four Core Moves

As discussed in Part I.A, we warned in our 2023 article that application of the “disinterested stockholder” judicial construct would disqualify the votes of mainstream institutional investors—including the Big Three asset managers—with alarming frequency. Ironically, and through complete inadvertence, this would shift voting power to individual investors, the very group at the core of Berle-Means concerns, as well as to activist investors.

A closer examination of the construct reveals that it is based in part on two premises that are conceptually dubious and at odds with market realities. The first premise is that an investor’s voting incentives flow solely from its financial stakes in the host shares or, more specifically, from whether it has a positive overall economic interest in the host shares. Absent a positive financial stake, the construct deems that the investor will not vote in value-enhancing ways—i.e., it will vote contrary to the foundational premise of the stockholder franchise—so the investor’s votes will be disqualified. The second flawed premise is that each investor votes its position monolithically, so either all or none of the investor’s shares are properly motivated and will be counted.

Our reconceptualization of disinterestedness doctrine addresses these and other faulty premises with four core moves.

The first premise is conceptually flawed because of its rigid insistence that voting behavior flows exclusively from financial stakes. In fact, investor-specific policies and practices related to voting—an investor’s “organizational voting dynamics”—can exacerbate, run counter to, or even overcome the effects of such financial stake incentives. As we will show in Part III.B.1, in the case of SSGA, one of its organizational voting dynamics—the primary pole star that SSGA relies on to guide its voting behavior—results in most of SSGA’s host company shares always being voted in a manner consistent with the foundational premise, irrespective of SSGA’s financial stakes in the host company, a merger counterparty, or anyone else. Yet under the existing disinterested stockholder doctrine, none of SSGA’s votes will be counted whenever SSGA does not happen to have a positive financial stake in the host shares. De facto miscounting of votes and distorted voting outcomes inevitably result.

This first premise hinges on a hypothesized voting pole star that is at odds with market realities. As we will show in Part III.B.1, the hypothesis is that all asset managers use as their pole star for voting behavior what we can term “asset manager portfolio value maximization.” In fact, as shown in Part III.B, neither of the Big Three asset managers we examined use this pole star. SSGA primarily relies on what we term “host share value maximization,” while Vanguard primarily relies on what we term “fund-by-fund portfolio value maximization.” Highly fact-specific types of vote miscounting and voting outcome distortions flow from the stark differences among the current doctrine’s hypothesized pole star, SSGA’s primary pole star, and Vanguard’s primary pole star.

Our reconceptualization of the doctrine’s first core move is thus to extend the disinterestedness motivational alignment analysis to also comprehend organizational voting dynamics. We also show how, for instance, this can be done with the especially important dynamic of the pole star for voting behavior. We will discuss other dynamics as well, including matters relating to voting power divestitures (via, e.g., pass-through voting, proxy advisors, and mirror voting), value-destructive voting policies (e.g., certain extreme types of ESG-based voting), and share lending/borrowing.

The second premise, with its binary, all-or-nothing approach to the counting of an investor’s votes, makes little sense. An investor who does not qualify as a disinterested stockholder may nevertheless be voting some or all its shares in a manner consistent with the foundational premise. Votes of the investor’s shares that are guided by a bona fide, publicly disclosed host share value maximization pole star fall into this category. Certain types of pass-through voting arrangements, mirror voting, and other arrangements effectively divest the investor of any voting discretion as to the pertinent shares and are thus free of the kind of motivational misalignment flowing from that investor’s financial stakes. Yet, under the existing judicial doctrine, that investor’s failure to qualify as a disinterested shareholder means that all the votes associated with all shares held by the investor would be rejected, including the votes unaffected by financial stake–based motivational misalignment.

Our reconceptualization’s second core move is thus that the existing “disinterested stockholder” construct needs to incorporate the concept of “disinterested shares.” Even if an investor does not qualify as a disinterested stockholder, some or perhaps even all of its shares may be voted in ways consistent with the foundational premise. These particular shares can be termed “disinterested shares” and, irrespective of the status of the investor, would be counted under our approach. Correspondingly, even if an investor does qualify as a disinterested stockholder, some of its shares may be voted in ways inconsistent with the foundational premise, in which case the shares should be considered “interested shares.”

Our reconceptualization’s third core move flows from the first two: an investor would, through appropriate private ordering, be able to effectively opt out of full application of the disinterestedness doctrine. The doctrine’s inference from overall financial stakes would become more of a default rule rather than a conclusive presumption. A variety of organizational voting dynamics that an investor may choose to adopt could result in some or all of its shares being voted consistent with the foundational premise. Our reconceptualization, by counting the votes associated with such disinterested shares, would facilitate private ordering that can substantially reduce the effect of motivational misalignments.

Our fourth core move consists of a coda to our substantive reconceptualization: we offer a comprehensive and systematic way of assessing “disinterestedness” and associated terminology. “Disinterestedness” must, subject to the procedural aspects set out in Part V, consider the effects of both (1) the stockholder’s “financial stakes” (i.e., its “overall economic interest in the host shares” flowing from the net effect of its holdings of (a) “host shares,” (b) “coupled assets,” and (c) “related non-host assets”); and (2) the shareholder’s “organizational voting dynamics” (e.g., its voting pole star and pass-through, mirror voting, proxy advisor, and share lending/borrowing arrangements). Moreover, irrespective of the stockholder’s financial stakes, its organizational voting dynamics may result in some or all its shares being counted (“disinterested shares”) and some or all its shares not being counted (“interested shares”).

We proceed as follows:

Part III.B focuses on the disinterestedness construct’s hypothesized asset manager portfolio value maximization pole star and the actual pole stars and voting patterns of SSGA and Vanguard. Using these asset managers’ real-world voting, we illustrate the consequences of the existing construct’s behavioral premises and how our reconceptualization can resolve many of the resulting problems.

Part III.C outlines other organizational voting dynamics beyond those relating to pole stars. They include voting power divestiture arrangements, value-destructive voting policies, and the complex effects of share lending/borrowing.

Part III.D offers a succinct formulation for our reconceptualization of “disinterestedness,” including provisions for “disinterested shares” and “interested shares” and the incorporation of the procedural mechanism set out in Part V.

Part III.E deals with an ancillary, but related, substantive issue: the special circumstances in which we believe that votes arising from transfers of decoupled voting rights should not be recognized, whether in the disinterested shareholder context or in the exercise of statutory voting rights.

B. The Construct’s Behavioral Presumption, Actual Institution-Specific Voting Policies and Patterns, and Our Reconceptualization

For the purposes of this Part III.B, consider the following hypothetical scenario. Airline company A (A) seeks to acquire airline company T (T) through a merger requiring favorable votes at stockholder meetings of both airlines. Assume that:

• (1) Some asset managers—including all pertinent decision-makers at SSGA and Vanguard—consider that the price A offers is too high and that the acquisition would undermine the value of A shares and enhance the value of T shares;
• (2) The financial stakes of both SSGA (as a whole) and Vanguard (as a whole) related to A and T consist solely of shares in A and T; and
• (3) Both SSGA (as a whole) and Vanguard (as a whole) hold a materially lower percentage of A shares outstanding than they do of T shares outstanding.

1. The Disinterestedness Construct’s Behavioral Presumption and Its Implicit “Asset Manager Portfolio Value Maximization” Pole Star

The disinterestedness construct presumes that an investor’s vote will be disinterested if it has a positive overall economic interest in the host shares. Thus, if an asset manager has shares in both parties to a transaction, the investor would weigh its respective financial stakes in the respective parties and vote in ways that would maximize the overall value of the asset manager’s funds considered in the aggregate—i.e., ignoring which particular fund or funds the shares of the parties are in. This pole star for voting implicit in the judicial construct will be referred to as “asset manager portfolio value maximization.”

With many institutional investors, the construct’s presumption of asset manager portfolio maximization may well accord with reality. For instance, a 2022 Journal of Financial Economics study of fund voting behavior in 1,800 horizontal mergers found strong evidence that diversified shareholders often take a portfolio value maximization view in voting—i.e., they vote in favor of the acquisitions that destroy the value of host shares because they profit from an increase in value of holdings in their portfolio.

Under our hypothetical, SSGA and Vanguard both have a negative overall economic interest in A shares but a positive overall economic interest in T shares. The disinterestedness construct thus presumes that SSGA and Vanguard would be incentivized to vote as follows and would accord the following deference to their votes:

At A’s shareholder meeting:

• SSGA would vote FOR the merger—SSGA’s votes will not be counted as disinterested (because of its negative overall economic interest in A shares); and
• Vanguard would vote FOR the merger—Vanguard’s votes will not be counted as disinterested (because of its negative overall economic interest in A shares).

At T’s shareholder meeting:

• SSGA would vote FOR the merger—SSGA’s shares will be counted as disinterested (because of positive overall economic interest in T shares); and
• Vanguard would vote FOR the merger—Vanguard’s votes will be counted as disinterested (because of its positive overall economic interest in T shares).

In short, with the disinterested stockholder’s behavioral presumption and its implicit pole star of asset manager portfolio value maximization, (a) all SSGA votes would be cast the same way (for the merger) at both A and T; (b) similarly, all Vanguard votes would be cast the same way (for the merger) at both A and T; and (c) as to A’s stockholder meeting, because neither SSGA nor Vanguard qualifies as a disinterested stockholder in A, none of SSGA’s or Vanguard’s votes would be counted as disinterested.

In fact, as we shall see, the actual pole stars and voting patterns of SSGA and Vanguard are much different from those conclusively presumed under the existing disinterestedness doctrine and also much different from each other’s.

2. SSGA’s “Host Share Value Maximization” Pole Star and Its “House View” Implementation: Raising a Concept of “Disinterested Shares”

SSGA vote decision-making falls into four patterns, none of which are consistent with the pattern presumed by the disinterestedness construct. First, with respect to the SPDR S&P 500 ETF Trust (SPY) (the country’s largest ETF) and the SPDR Dow Jones Industrial Average ETF (DIA), SSGA will use a “mirror vote” approach. That is, SSGA votes shares of each company in its portfolio in the same proportionate relationship that all other shares of that company are voted to the extent permissible and, if not permissible, abstains from voting. Second, for bank regulatory reasons, SSGA votes its shares in certain banks and bank holding companies according to the benchmark voting policy of Institutional Shareholder Services (ISS), a major proxy advisor. Third, SSGA uses third parties to make voting decisions to vote on stocks of SSGA-affiliated entities and in other situations raising conflict-of-interest-like concerns.

Fourth, and by far the most important, is its generally applied pole star: what we term “host share value maximization.” Under this pole star, SSGA will vote in ways it believes will maximize the value of the shares of the host company, independent of considerations relating to the shares of other companies that SSGA holds in its various fund portfolios. This is directly contrary to the disinterestedness construct’s presumption of asset manager portfolio value maximization.

Both SSGA policy pronouncements and SSGA voting patterns are consistent with this host share–value maximization pole star. SSGA’s Global Proxy Voting and Engagement Policy specifies as follows:

We expect proposals to be in the best interests of shareholders, demonstrated by enhancing share value or improving the effectiveness of the company’s operations. We evaluate mergers and structural reorganizations on a case-by-case basis and expect transactions to maximize shareholder value.

SSGA enumerated eight examples of factors that help determine its voting decisions in the merger context. If SSGA followed an asset manager portfolio value maximization approach as presumed by the disinterested shareholder doctrine, SSGA would likely have noted as factors matters relating to the merger counterparty, such as the effects the merger would have in the counterparty, the stakes SSGA has in the counterparty, and the impact of the merger on the overall value of SSGA’s portfolio. None of these matters were mentioned.

In implementing the host share value maximization pole star, the question of who determines whether a transaction would contribute to the value of the host shares arises. At least two possibilities come readily to mind: the determination could be made centrally by SSGA as a whole or it could be made by individual portfolio managers at SSGA who hold host shares with respect to the voting associated with their respective holdings. At SSGA, the pole star is implemented centrally. SSGA does not allow the managers of individual SSGA funds to make their own voting decisions. It speaks with a single voice, voting “securities in a unified manner”—one version of a “house view” voting approach.

Perhaps the best evidence for SSGA following a host share value maximization pole star (implemented through this type of “house view” approach) rather than the construct’s asset portfolio value maximization presumed pole star can be seen using our hypothetical. With respect to our hypothetical, if SSGA followed the construct’s asset manager portfolio value maximization approach, SSGA would vote for the merger at both A’s stockholder meeting and B’s stockholder meeting. That is, because SSGA has a negative overall economic interest in A shares, it would vote for the merger despite the merger being destructive of the value of A shares—so it would be sensible not to count SSGA’s votes at the A stockholder meeting as disinterested. Because the merger contributes to the value of B shares and SSGA has a positive interest in T shares, it would also vote for the merger at B’s meeting. In short, the disinterested construct presumes that SSGA would cast two “for” votes, one at A’s meeting and one at T’s meeting.

In contrast, if SSGA in fact follows a host share value maximization approach, SSGA would vote against the merger at A’s stockholder meeting because the merger would reduce the value of A shares and take the contrary position of voting for the merger at T’s meeting because the merger would increase the value of T shares. That is, SSGA would simultaneously vote for and against the same transaction, depending on what is in the best interests of the company whose shares it is voting—even though voting against the transaction at A’s stockholder meeting could diminish the value of SSGA’s portfolio.

This pattern of simultaneously voting for and against a merger is not merely theoretical. On November 17, 2016, stockholders in both Tesla and SolarCity voted on the approval of a merger. SSGA’s SPDR Russell 3000 ETF held shares in both Tesla and SolarCity. At the Tesla stockholder meeting, the fund voted against the merger, while at the SolarCity meeting, it voted for the merger.

A more systematic examination of SSGA voting patterns yields convincing evidence of adherence to a host share value maximization pole star with house view implementation. We compared the actual voting patterns of SSGA funds subject to its primary pole star with the voting patterns one would expect under such a pole star. From a sample of 1,156 voting occasions in the period 2013–2023 in which any such SSGA fund voted on a merger, we were able to identify five transactions wherein (a) one or more SSGA funds held shares in both counterparties to a merger; and (b) such a fund simultaneously voted for and against the same transaction. We will refer to each such SSGA fund that held shares in both counterparties as being a “dual-holding” SSGA fund and an SSGA fund that held shares in only one of the counterparties as a “single-holding” SSGA fund. (We should note that some SSGA funds that held the pertinent shares may not have voted because the shares had been lent, so the borrowers, not the SSGA funds, had the voting rights.)

If SSGA funds in fact adhered strictly to the host share value maximization pole star with house view implementation, it can be expected that:

• (a) At all meetings of one counterparty (AAA), all SSGA funds—whether dual-holding or single-holding—would vote identically (i.e., “for,” “against,” or “abstain”), depending on whether SSGA believes the transaction would maximize the value of the shares of company AAA;
• (b) At all meetings of the other counterparty (BBB), all SSGA funds—whether dual-holding or single-holding—would vote identically (i.e., “for,” “against,” or “abstain”), depending on whether SSGA believes the transaction would maximize the value of the shares of company BBB; and
• (c) Perhaps most informative to us, a dual-holding SSGA fund will vote in a “mixed” way if the transaction would, as with our A/T hypothetical, enhance the value of the shares of one counterparty but diminish the value of the shares of the other: i.e., it would simultaneously vote for the transaction at the meeting of the counterparty whose shares would increase in value if the transaction occurred but vote against the transaction at the meeting of the counterparty whose shares would decrease in value if the transaction occurred.

On the other hand, if SSGA funds followed the disinterested stockholder construct’s asset manager portfolio maximization approach, one would never observe “mixed,” simultaneous for-and-against voting of the sort set out in item (c) above. This is because under the asset manager portfolio value maximization approach, the key is whether the transaction would either hurt or help the value of the asset manager’s portfolio. If it hurts, a dual-holding SSGA fund would vote against the transaction at both AAA and BBB, and if it helps, a dual-holding SSGA fund would for the transaction at both companies.

With all five transactions, the results are consistent with SSGA following the host share value maximization pole star (with house view implementation)—i.e., consistent with (a), (b), and, most notably, (c):

• 2022: Zendesk, Inc.—Momentive Global, Inc.
  • ○ Dual-holding SSGA fund: SPDR S&P Software & Services ETF;
  • ○ Every SSGA fund, whether dual- or single-holding, voted for the merger agreement at Momentive’s meeting; and
  • ○ Every SSGA fund, whether dual- or single-holding, voted against the issuance of shares Zendesk needed in connection with the proposed merger at Zendesk’s meeting.
• 2018: Biocryst Pharmaceuticals, Inc.—Idera Pharmaceuticals, Inc.
  • ○ Dual-holding SSGA funds: SPDR Portfolio Small Cap and Portfolio Total Stock Market ETFs;
  • ○ Every SSGA fund, whether dual- or single-holding, voted for the merger agreement at Idera’s meeting; and
  • ○ Every SSGA fund, whether dual- or single-holding, voted against the merger agreement at Biocryst’s meeting.
• 2016: Tesla Motors, Inc.—SolarCity Corporation
  • ○ Dual-holding SSGA funds: SPDR Russell 1000(R) and 3000(R) ETFs;
  • ○ Every SSGA fund, whether dual- or single-holding, voted for the merger agreement at SolarCity’s meeting; and
  • ○ Every SSGA fund, whether dual- or single-holding, voted against the merger-related issuance of shares at Tesla’s meeting.
• 2015: Gramercy Property Trust—Chambers Street Properties
  • ○ Dual-holding SSGA funds: SPDR Russell 2000, 3000(R), and S&P 1000 ETFs;
  • ○ Every SSGA fund, whether dual- or single-holding, voted for the merger-related issuance of shares at Chambers Street’s meeting; and
  • ○ Every SSGA fund, whether dual- or single-holding, voted against the merger agreement at Gramercy’s meeting.
• 2013: Crimson Exploration, Inc.—Contango Oil & Gas Company
  • ○ Dual-holding SSGA funds: SPDR Russell 1000(R) and 3000(R) ETFs;
  • ○ Every SSGA fund, whether dual- or single-holding, voted for the merger-related issuance of shares at Contango’s meeting; and
  • ○ Every SSGA fund, whether dual- or single-holding, voted against the merger agreement at Crimson Exploration’s meeting.

We thus see voting patterns consistent with SSGA adhering to a host share value maximization pole star rather than with the disinterested construct’s implicit asset manager portfolio value maximization pole star. In situations like the A/T hypothetical, SSGA would be voting at A’s shareholder meeting with the best interests of A’s stockholders in mind and voting at T’s shareholder meeting with the best interests of T’s stockholders in mind. SSGA’s votes would always, in other words, be consistent with the foundational premise.

So SSGA’s votes, whether at A or at T, should thus be counted as disinterested. Yet, under the existing disinterestedness doctrine, SSGA’s votes at A would not be counted because of SSGA’s not qualifying as a disinterested stockholder in the A shares. Ironically, the early Blasius-era hopes for the role of the institutional investor rested on the very type of sophisticated, properly motivated institutional voice that would be silenced by the existing disinterestedness doctrine. Omitting SSGA’s A votes, there is de facto vote miscounting at A and a possibility of the wrong voting outcome. Moreover, by rejecting such well-motivated SSGA votes, it is clear that the consequent shifting of power to retail investors and activist investors is unjustified. Thus, for purposes of the “disinterested stockholder” definition in SB 21, a stockholder should not be deemed to have an “actual or potential benefit” that is “material to such stockholder,” and therefore be disqualified as a “disinterested stockholder,” based exclusively on the stockholder’s financial stakes and disregarding the organizational voting dynamics that align its voting decisions with those of disinterested stockholders generally.

Under our reconceptualization of disinterestedness, shares voted pursuant to a bona fide, publicly disclosed host value maximization pole star would be counted as disinterested. Under this reconceptualization, the shares SSGA votes in accordance with its host share value maximization policy—i.e., most of the shares held by SSGA—would be counted. This would have real-world significance. First, on many voting occasions, SSGA would likely fail to qualify as a disinterested stockholder. In the CNX/CONSOL situation discussed in Part I.B.2, based on 13F information, SSGA held 0.147 percent of the outstanding CNX shares but 4.524 percent of CONSOL’s outstanding shares—a ratio of 1:29. SSGA would not qualify as a disinterested shareholder with respect to its CNX shares, so its CNX votes would be disqualified. Second, given SSGA’s assets under management—$4.13 trillion at 2023 year-end—the absolute magnitude of de facto voting miscounting is large, and such miscounting may well affect voting outcomes.

From a broader perspective, our reconceptualization would facilitate and encourage private ordering that mitigates the effects of motivational misalignments. An asset manager seeking to insulate some or all of its votes from full application of the disinterestedness doctrine could adopt a bona fide, publicly disclosed host share value maximization policy as to those shares. In turning the existing doctrine into more of a default rule and allowing for “disinterested shares” to be counted, a promising opportunity arises to broadly dissipate the effects of motivational misalignments flowing from transformative institutional investor changes of the modern era. Improving the integrity of voting outcomes in a significant way at low cost becomes possible with our reconceptualization.

3. Vanguard’s “Fund-by-Fund Portfolio Value Maximization” Pole Star and Its “House View” Implementation

In the context of the A/T hypothetical, Vanguard’s primary pole star for its internally managed funds operates precisely contrary to SSGA’s primary pole star and differently in material ways from the disinterestedness construct’s hypothesized pole star.

The disinterestedness construct looks at the asset manager as a single entity. It assumes that the asset manager will vote with a single voice pursuant to a maximization of the value of the entity’s portfolio. Under the A/T hypothetical, the construct’s implicit pole star presumes that Vanguard would vote all its A shares in favor of the acquisition. Thus, the construct would not count Vanguard’s votes at A’s stockholder meeting as disinterested. The construct’s behavioral presumption is that of asset manager portfolio value maximization.

Vanguard does use a portfolio value maximization pole star, but its version is markedly different. It does not vote with a single voice. Vanguard’s “proxy voting policy for U.S. portfolio companies” applies to the quantitative and index equity portfolios advised by Vanguard, not externally managed Vanguard funds. The policy states that “[i]n all cases, proposals are voted as determined in the best interests of each fund consistent with its investment objective” and that “[p]roposals are voted case by case . . . at the direction of the relevant Fund’s board.” Similarly, the Statement of Additional Information for Vanguard’s index funds says that funds may vote differently than one another if “doing so is in the best interest of the individual fund.”

That is, portfolio value maximization is not applied to Vanguard as an entity but is instead considered on a fund-by-fund basis. Vanguard funds have different portfolios as well as different objectives. A vote that would enhance the value of the portfolio of one Vanguard fund may undermine the value of the portfolio of another Vanguard fund. Vanguard can be characterized as having a “fund-by-fund portfolio value maximization” pole star.

Implementation of Vanguard’s pole star could, in theory, be through determinations made centrally (as with SSGA’s “house view” approach) or by decision-makers at individual Vanguard funds (what can be characterized as a “portfolio manager-view” approach). Vanguard has chosen the house view route, with the determination made by the Investment Stewardship Oversight Committee.

Under the fund-by-fund portfolio value maximization pole star used by Vanguard, in our A/T hypothetical, the Vanguard funds that own high stakes in A and low or no stakes in T have a positive overall economic interest in A and will vote their A shares against the merger. The votes at the A meeting of these particular Vanguard funds would be guided by a desire to enhance the value of A shares—i.e., they are being voted consistent with the foundational premise.

Yet, under the existing doctrine, none of the votes at the A meeting cast by these individual Vanguard funds will be counted because Vanguard, viewed in the aggregate, is not a disinterested shareholder. The disqualification of these funds’ votes at A results in de facto vote miscounting and distortions in voting outcomes.

There is evidence of the kind of mixed voting driven by Vanguard having a fund-by-fund portfolio value maximization approach. In February 2022, Vanguard funds submitted opposite votes on the proposed transaction between Zendesk and Momentive Global. Examination of the respective holdings of the merger counterparties held by the individual Vanguard funds involved suggests that the mixed pattern is consistent fund-by-fund portfolio value maximization.

The Vanguard Small-Cap Value Index Fund (which held no Zendesk shares but did have Momentive shares) voted for the merger. In contrast, with one exception, all the Vanguard funds that voted against the merger either only held shares of Zendesk or, in the case of two dual-holding Vanguard funds, held a larger percentage stake at Zendesk. (At Zendesk, the precise issue voted on was whether Zendesk would be authorized to issue shares for the purpose of accomplishing the merger. Voting against the issuance was effectively a vote against the merger.)

• The Vanguard Small-Cap Growth Index Fund was a dual-holding fund owning shares in Momentive (0.68%) and Zendesk (0.78%). This fund voted against at Momentive’s meeting and voted against the issuance of shares relating to the merger at Zendesk’s meeting;
• The Vanguard Extended Market Index Fund was a dual-holding fund owning shares in Momentive (1.16%) and Zendesk (1.33%). This fund voted against at Momentive’s meeting and voted against the issuance of shares relating to the merger at Zendesk’s meeting; and
• The Vanguard Mid-Cap, Mid-Cap Growth, Large-Cap, and Growth Index Funds, all single-holding funds owning Zendesk shares only, each voted against the issuance of shares related to the merger at Zendesk’s meeting.

Under our reconceptualization of disinterestedness, the A shares held by the specific Vanguard funds with a positive overall economic interest in those shares would be considered disinterested shares. Thus, the kind of vote miscounting and distortions in voting outcomes flowing from the existing doctrine would be avoided.

However, the impact of problems with the existing doctrine on the integrity of voting in this Vanguard situation is materially less than the problems that flow from the SSGA situation. In the SSGA situation, a substantial portion of SSGA votes is not counted as disinterested when it should be. In the Vanguard situation, only the votes of those Vanguard funds whose particular financial stakes are different from the overall financial stakes of Vanguard as a whole are being improperly considered:

• (1) The votes of specific Vanguard funds are improperly not counted as disinterested when they have a positive overall economic interest in a company but Vanguard as a whole has a negative overall economic interest; and
• (2) The votes of specific Vanguard funds are improperly counted as disinterested when they have a negative overall economic interest in a company but Vanguard as a whole has a positive overall economic interest.

As noted with respect to adoption of a host share value maximization pole star like SSGA’s, adoption of Vanguard’s fund-by-fund portfolio value maximization approach could, among other things, validate the disinterestedness of shares of one or more funds whose votes might otherwise be disqualified. To be sure, taking Vanguard’s organizational voting dynamics into account in determining disinterestedness would likely restore fewer decibels to its institutional voice than SSGA’s policy, but it is still a restoration deserving of consideration.

As discussed in Part II.A, the disinterestedness doctrine is generally applicable only to shareholder voting in the context of transaction-specific conflicts of interest, such as a shareholder having shares in both Airline A and Airline T as parties to a merger. The doctrine does not attempt to consider how the shareholder’s incentives would be affected by that shareholder’s holdings in other companies that may be affected by the merger.

It is in this disinterestedness transaction-specific context that we characterize Vanguard as having a fund-by-fund portfolio value maximization voting approach—i.e., in its maximization calculus, Vanguard would consider the merger’s impact on a fund’s respective holdings of Airlines A and T. In contrast, we do not suggest that Vanguard’s maximization calculus would also consider the merger’s impact on the shares of other portfolio companies—be they holdings in other airlines, oil companies, or something else. Apart from the context of transactions involving two portfolio companies, Vanguard follows a host share value maximization approach. That is, Vanguard-advised funds are “guided by a focus on maximizing long-term investment returns at each portfolio company in which the funds invest.” Moreover, most of Vanguard’s funds are indexed. In this context, for Vanguard to start considering the impact of the myriad other portfolio companies that may be affected by the merger would put it on the slippery slope of evaluating the impact of merger on society as a whole. Vanguard explicitly rejects such a broad social goal in its voting. Vanguard has declared that it “does not use investment stewardship activities to pursue public policy objectives” and believes that “setting public policy, including policy on environmental and social matters, is appropriately the responsibility of elected officials.”

C. Other Organizational Voting Dynamics

1. Voting Power Divestiture: External Portfolio Manager-View Voting, Pass-Through Voting, Proxy Advisors, and Mirror Voting

There is a family of private ordering arrangements centering on asset manager divestiture of voting power that can, under certain circumstances, also mitigate financial stake–based motivational misalignments.

Externally managed funds. Some asset managers forego their voting power with respect to holdings in funds that are managed externally. Vanguard’s Investment Stewardship team is responsible for proxy voting and engagement on behalf of the quantitative and index equity portfolios advised by Vanguard. In 2019, Vanguard’s board “delegated full proxy voting responsibility for Vanguard’s externally managed funds to the external managers of those funds.” This means that externally managed funds are free to set their own voting policies.

The existing disinterestedness doctrine applies to all of Vanguard’s holdings, not just those that are internally managed. Thus, if Vanguard has a negative overall economic interest in the shares of a company, existing disinterestedness doctrine would disqualify even the shares that are in the portfolios of externally managed funds that have a positive overall economic interest in the shares. This makes no sense.

Pass-through voting. In recent years, asset managers have increasingly allowed the indirect beneficial owners of the shares they manage to make the voting decisions associated with their respective shares—a practice known as “pass-through voting.” Asset managers vary with regard to the extent and nature of the voting power that is passed through.

Under BlackRock’s Voting Choice program established in 2022, certain institutional pooled vehicles can apply their preferred voting policy to shares in the pooled fund reflecting the client’s relative ownership of that fund. To develop their preferred policy, they could rely on in-house teams or contract directly with third-party proxy advisors. Clients in separately managed accounts (SMAs) have an option that clients in institutional pooled vehicles do not have: they can make specific voting decisions at the companies that matter most to them. Both types of institutional clients can select a set of voting policies from third-party proxy advisers—and also simply rely on BlackRock’s Investment Stewardship voting policy. In February 2024, BlackRock extended its Voting Choice program on a pilot basis to the 3 million individual investors in its primary S&P 500 index fund. As of October 2024, less than a quarter of the $2.6 trillion of assets available for BlackRock’s Voting Choice program have taken advantage of the program.

The precise nature of the choices that asset managers give to their clients and the choices that their clients make would make a difference in whether the votes that are passed through should be considered disinterested. BlackRock’s SMA clients, who have the sole discretion to make specific voting decisions, present the strongest case to be untainted by any negative financial stakes that BlackRock may have in host shares. It is unclear, however, how many SMA clients would themselves be disinterested (based on their own financial stakes and organizational voting dynamics) or at least should be presumed to be disinterested.

Similar issues arise with respect to the individual investors in the BlackRock pilot program. The menu of voting policies offered to individual investors includes the ISS Catholic Faith-based Proxy Voting Guidelines. Such guidelines contemplate certain votes being determined by whether a company designated by Climate 100+ as a significant greenhouse gas (GHG) emitter is not taking the minimum steps consistent with a net-zero-by-2050 trajectory. Whether a shareholder deciding on this voting choice should be considered disinterested is unclear. As will be discussed in Part III.C.2, in February 2024, BlackRock determined that Climate 100+’s anticipated June 2024 adoption of net-zero reductions would not be in the economic interests of shareholders.

At the other extreme, both BlackRock’s pass-through menu for its individual investors and Vanguard’s offer a choice that focuses unabashedly on shareholder wealth. BlackRock characterizes it as one that “focuses strictly on maximizing financial returns and protecting shareholder rights” and that “generally opposes stakeholder capitalism tenets, and disregards DEI/ESG initiatives unless they demonstrably contribute to immediate financial gains.” This choice is one that its provider, Egan-Jones Proxy Services, denominated as its Wealth-Focused Principles and Guidelines—to be distinguished from its Standard Proxy Voting Principles and Guidelines.

Proxy advisors. Proxy advisory firms such as ISS provide proxy research and vote recommendations to institutional investor clients. In 2022, ISS helped more than 1,600 clients make and execute proxy voting decisions for approximately 50,000 shareholder meetings in over 100 markets worldwide. There is strong empirical evidence that proxy advisors’ recommendations have a big impact on voting outcomes. Indeed, one 2024 study found that an increasing proportion of customers vote in lockstep with proxy advisor recommendations, a practice known as “robo-voting.” The study characterized 23 percent of ISS clients in the study as robo-voters in 2021, more than triple the percentage in 2007.

The impact of proxy advisors on firm value is currently a topic of debate, but in general, proxy advisors claim to formulate their recommendations on an issuer-specific basis. Thus, Glass Lewis states that for mergers and acquisitions proposals, it seeks to determine the “transaction’s likelihood of maximizing shareholder returns,” while ISS seeks to assess, among other things, whether the value received by the target shareholders (or paid by the acquirer) is ”reasonable.” If their clients follow benchmark recommendations that focus on promoting host company shareholder returns, their clients’ votes should be treated as disinterested.

However, the specifics of the relationship between a proxy advisor and a client are important in determining relevance for the purposes of the disinterestedness determination. For example, most institutional investors play an active role in shaping the voting recommendations they receive, as discussed in Part IV.C.4.b.

Mirror voting. As discussed in Part III.B.2, SSGA will use a mirror voting approach with respect to its voting of certain bank and bank holding company securities. This is not new. The employee stock ownership plan of the old Polaroid Corporation also used mirror voting.