I recommend reading The Wall Street Journal article OUTSIDE INFLUENCE: How Borrowed Shares Swing Company Votes (subscription required). The article describes how some funds borrow a company's shares temporarily to vote, often to detriment of the shareholders and the company, and then short the shares.
Henderson Land Development Co., Hong Kong's third-largest property developer, owned 73% of a subsidiary called Henderson Investment. It offered a rich premium in November 2005 to buy the rest. It had failed in a similar effort three years earlier, but this time it came back with a better offer. Under Hong Kong law, the deal would go through unless 10% of all the shares opposed it. Since the parent owned such a large stake and large institutions backed the deal, passage was considered a foregone conclusion.
Yet the acquisition was voted down early last year by a slim margin. Several market participants were quoted in news reports saying there was a surge in borrowed shares by at least one hedge fund ahead of the vote, compared with little if any lending in Henderson shares over the previous seven months.
By borrowing the shares and simultaneously shorting the underlying stock, the hedge funds gained the voting rights to squash the deal and stood to profit when the stock dropped 18% the next day. After the Henderson vote, the Hong Kong regulator said it was examining voting practices.
"It appears that one or more hedge funds borrowed Henderson Investment shares before the record date, voted against the buyout, and then sold those shares short, thus profiting from its private knowledge that the buyout would be defeated," the Texas professors wrote in the May 2006 Southern California Law Review. A Henderson spokeswoman declined to comment.
If your shares are held in a margin account, your shares and your voting rights can be transferred to others. They might vote against your interests. One way to prevent this situation is to hold your shares in a cash account.
I found this article interesting because the problem, although not widespread, is not uncommon. Yet, I do not know how regulators could or should stop it from happening. I generally prefer less regulation—so long as the markets continue to act in a fair and transparent manner. I am not sure, however, if this situation is either fair or transparent. Again, I recommend reading this well written article.
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