Who Gets the Vote When Your Shares Back a Loan?
When a shareholder raises cash against a stake, the vote attached to those shares can stay with the borrower, pass to the lender, or sit unused until the loan is repaid. Which of the three happens depends on how the loan is built.
Two structures
The first common structure leaves the borrower as the legal owner and gives the lender a security interest over the shares. This is the model behind most bank credit lines and brokerage margin accounts. The borrower normally keeps the vote and the dividends unless the loan goes into default.
Margin accounts are the main exception. Shares bought on margin are usually held in the broker’s name, and the margin agreement typically allows the broker to lend them to other clients. Shares out on loan are voted by whoever holds them on the record date, so the account holder does not vote any shares that are on loan at that time. Henry Hu and Bernard Black, in a 2007 paper in the Journal of Corporate Finance, showed how share lending, equity swaps and options let votes end up with investors who carry no matching economic stake, often without public disclosure. They called it “empty voting.”
The second structure is a sale-and-repurchase agreement: the shares are sold to the lender with a commitment to buy the same number back at the end of the term. It is the standard form in the professional repo market, and it moves legal title for the life of the deal. The International Capital Market Association’s guidance on repo is direct about the consequence: “During the life of a repo, the buyer holds legal title to the collateral. In other words, the collateral is his property and he is entitled to any benefits of ownership.” That includes the right to vote. ICMA adds that the buyer is “under no obligation whatsoever” to vote, and that it is “unacceptable under corporate governance recommendations to use repo to buy securities solely in order to exercise the voting rights given that the repo buyer is only a short-term holder of those securities.”
The abstention route
Under non-recourse equity-backed financing built as a sale-and-repurchase, the lender holds title for the term, so the practical question is what it does with the votes. A repo buyer is entitled to use them. An equities-backed financing firm such as EquitiesFirst commits not to. Title and the attached votes transfer to the firm for the term, but the firm abstains from voting the shares and from company management decisions, and on repayment an equivalent number of shares of the same class goes back to the client. The firm sets out how that works for voting rights and shareholder control on its own site. No votes are cast by a holder without an economic stake, and the borrower’s position comes back at repayment.
The forced sale
The larger threat to a shareholder’s control is a forced sale, and it is sharpest where call windows are short and the lender can sell without notice. Boards have been guarding against it for a decade. More than 90% of S&P 500 companies restrict their directors and executives from putting company shares up as collateral, according to a 2022 review by ISS-Corporate, which stressed that an insider who cannot meet a margin call may see the lender sell the shares in a sudden block that pushes down the price for every other shareholder.
The review’s other concern was an insider keeping full voting power over shares already used to raise cash. Where title passes to a lender that abstains, no one votes those shares during the term, so that concern does not arise in the same form. A vote set aside for the term of a loan is restored at repayment. Shares sold in a forced sale are not returned.
For a borrower, the loan documents should settle four things before signing: who holds legal title during the term, what that holder may do with the votes, any right the lender has to pass the shares on before a record date, and what can trigger a sale. Once the loan is signed, those answers determine how much influence the shareholder still has when the loan ends.
