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University of Pennsylvania

Law ReviewFOUNDED 1852

Formerly

American LawRegister

VOL. 155 MAY 2007 NO. 5

ARTICLES

HEDGE FUNDS IN CORPORATE GOVERNANCEAND CORPORATE CONTROL

MARCEL KAHAN& EDWARD B. ROCK

G!"# T. L!$% P"!''!" ! L($) N$ Y!"* U+,-"',% S/!! ! L($. M("/K((+' "'("/ $(' '344!"6% M,!+ (+ M,",( H(+" F!3+(,!+.

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:1021=


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25 UNIVERSITY OFPENNSYLVANIA LAW REVIEW V!. 155 1021

Hedgefunds have become c!"!ca# $#a%es !n bo"h co$oa"egovenanceand

co$oa"e con"o#& In "h!s A"!c#e'Pofessos (ahan and Roc) documen" and

e*am!ne "he na"ue of hedge fund ac"!v!sm' ho+ and +h% !" d!ffes fom

ac"!v, !sm b% "ad!"!ona# !ns"!"u"!ona# !nves"os' and !"s !m$#!ca"!ons fo

co$oa"e govenance and egu#a"o% efom& The au"hos ague "ha" hedge

fund ac"!v, !sm d!ffes fom ac"!v!sm b% "ad!"!ona# !ns"!"u"!ons !n sevea#

+a%s- !" !s d!, ec"ed a" s!gn!f!can" changes !n !nd!v!dua# com$an!es .a"he

"han sma##' s%s, "em!c changes/' !" en"a!#s h!ghe cos"s' and !" !s s"a"eg!c

and e* an"e .a"he "han !nc!den"a# and e* $os"/& The easons fo "hese

d!ffeences ma% #!e !n "he !ncen"!ves"uc"ues of hedge fund manages as +e##

as !n "he fac" "ha" "ad!, "!ona# !ns"!"u"!onsface egu#a"o% ba!es' $o#!"!ca#

cons"a!n"s' o conf#!c"s of !n"ees" "ha" ma)e ac"!v!sm #ess $of!"ab#e "han !"

!s fo hedge funds& 0u" "he d!ffeences ma% a#so be due "o "he fac" "ha"

"ad!"!ona# !ns"!"u"!ons $usue a d!, ves!f!ca"!on s"a"eg% "ha" !s d!ff!cu#" "o

comb!ne +!"hs"a"eg!c ac"!v!sm&A#"hough hedge funds ho#dgea" $om!se as ac"!veshaeho#des' "he! !n,

"ense !nvo#vemen" !n co$oa"e govenance and con"o# a!ses "+o

$o"en"!a# $ob#ems- "he !n"ees"s of hedge funds some"!mes d!vege fom "hose

of "he! fe#, #o+ shaeho#des' and "he !n"ens!"% of hedge fund ac"!v!sm

!m$oses subs"an"!a# s"ess "ha" "he egu#a"o% s%s"em ma% no" be ab#e "o

+!"hs"and& The esu#"!ng concens' ho+eve' ae e#a"!ve#% !so#a"ed and

nao+' do no" undem!ne "he va#ueof hedgefund ac"!v!sm as a +ho#e' and

do no" +aan" ma1o add!"!ona# egu#a"o% !n"even"!ons&

The sha$es" accusa"!on #eve#ed aga!ns" ac"!v!s" funds !s "ha" ac"!v!sm !s

des!gned "o ach!eve a sho","em $a%off a" "he e*$ense of #ong,"em

$of!"ab!#!"%& A#"hough "he au"hos cons!de "h!s a $o"en"!a##%se!ous $ob#em

"ha" aguab#%$evades hedge fund ac"!v!sm' "he% conc#ude "ha" a suff!c!en"casefo #ega# !n, "even"!on has no" been made& Th!s conc#us!on esu#"s fom

"he unce"a!n"!es abou" +he"he sho","em!sm !s' !n fac"' a ea#$ob#em and

ho+ much hedge fund ac"!v!sm !s d!ven b% e*cess!ve sho","em!sm& 0u"

mos" !m$o"an"#%' !" s"ems fom "he au"hos2 v!e+ "ha" ma)e" foces and

ada$"!ve dev!ces ado$"ed b% com$an!es !nd!v!dua##% ae be""e des!gned "han

egu#a"!on "o dea# +!"h "he $o, "en"!a# nega"!ve effec"s of hedge fund sho",

"em!sm' +h!#e$esev!ng "he$os!"!ve effec"s of hedge,fund ac"!v!sm&

L($ (+ F,+(+/. F,+(%) (3!"' $!3 ,* ! (+* K(3' S/!* (+ A+,(Y3+ !" ," 43 "'("/ ('','(+/.


3/73

2007 HE34E FUN3SIN 5ORPORATE 4OVERNAN5E 255

INTRODUCTION....................................................................................102I. WHATS GOING ON OUT THERE

SOME ILLUSTRATIVE) HAPPY STORIES ........................................... 102

A. HedgeFunds asAc"!v!s"s &&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&1021. C!"4!"( G!-"+(+/ A/,-,'........................................... 1022. C!"4!"( C!+"! A/,-,'.................................................. 10

(. 0#oc)!ng Ac6u!es&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&& 106. 0#oc)!ng Tage"s&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&& 107/. 7a)!ng 0!ds &&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&100

B. Ac"!v!sm b% Tad!"!ona# Ins"!"u"!ons 5om$aed&&&&&&&&&&&&&&&&&&&&&&&&&&&&102C. HedgeFund Ac"!v!sm !n Pes$ec"!ve &&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&& 10. H,+?)

M(''% E+"#%)

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M(". 17) 200.) M(". 15)

200(+( P("+"' +!,+(,!+ ! " ,"/!"/(+,(' !" SITEL'6!("=.
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