Loan Shares to be Shorted?

[seanismorris]

TO APPROVE AN AMENDMENT TO MANNKIND CORPORATION'S AMENDED AND RESTATED CERTIFICATE OF INCORPORATION TO INCREASE THE AUTHORIZED NUMBER OF SHARES OF COMMON STOCK FROM 550 MILLION SHARES TO 700 MILLION SHARES.

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It's happened before....

[Deleted]

I am not following. Are you suggesting the company will be loaning their shares for shorting?

[lakon]

Apr 29, 2016 15:06:24 GMT -5 @reverselo said:

I am not following. Are you suggesting the company will be loaning their shares for shorting?

I was wondering a similar possibility. Of course, it would be interesting if the Mann Trust was for years, but I think Al had a moral problem with that so not likely. On the other hand, how much interest paid by short sellers could be used to refinance the company? That's a scary thought IF you are SHORT. I know of people buying with their interest payments...

Note that the authorized shares would need to be issued (sold) before loaned for shorting. Adding authorized shares does not give MNKD corporate the ability to just loan shares out of thin air, or does it? All I will say for corporate is that they had better have the votes already since the announcement to increase authorized shares came out after it was possible to recall shares. I do question the poor timing on this. Thus, leading me to believe Matt's story. If I was gaming it, I'd want shares recalled no matter how they voted...

[matt]

Stock has to be issued to vote; a company cannot vote shares in its treasury in Delaware or any other state that has adopted the language in the Model Business Corporations Act. Since the beneficial owner does not change when a share is loaned by the broker, there is no need to recall shares to vote since the broker is responsible for routing the proxy materials to the ultimate beneficial owner and not the most recent borrower.

Borrowing shares does not transfer ownership but rather grants a limited right as in an usufruct (strange word I know; blame the Romans for that). When a share is borrowed the usufructuary (the borrower) enjoys the gain or loss on the trading value of the stock, but they are not entitled to keep any dividends and have no other rights that normally accrue to a typical shareholder.

[cm5]

USUFRUCT

The right of enjoying a thing, the property of which is vested in another, and to draw from the same all the profit, utility and advantage which it may produce, provided it be without altering the substance of the thing.



The obligation of not altering the substance of the thing, however, takes place only in the case of a complete usufruct.



Usufructs are of two kinds; perfect and imperfect. Perfect usufruct, which is of things which the usufructuary can enjoy without altering their substance, though their substance may be diminished or deteriorated naturally by time or by the use to which they are applied; as a house, a piece of land, animals, furniture and other movable effects. Imperfect or quasi usufruct, which is of things which would be useless to the usufructuary if be did not consume and expend them, or change the substance of them, as money, grain, liquors.

www.lectlaw.com/def2/u071.htm

[morfu]

Ah, well this something I found about voting right and posted in a diffferent thread about 2 months ago.. I hope I dont annoy anyone by repeating it.. it seems relevant to the discussion here..

fidelityinstitutional.fidelity.com/app/literature/view?itemCode=948750&renditionType=pdf

"Under the securities lending agreement, you
relinquish your ability to exercise voting rights. If you
wish to act on an upcoming proxy vote, you must
contact your Fidelity customer representative or the
Fidelity Securities Lending desk and instruct him
or her to return the securities on loan prior to the
record date of the proxy."

[liane]

I remain confused. I always understood things as morfu has stated - you loan your shares and you lose your voting rights. The eventual buyer of the loaned shares would have the vote. But matt (who has posted a lot of good stuff and seems incredibly knowledgeable) has stated that the loaner retains the rights.

[tayl5]

May 1, 2016 9:51:40 GMT -5 cm5 said:

USUFRUCT

The right of enjoying a thing, the property of which is vested in another, and to draw from the same all the profit, utility and advantage which it may produce, provided it be without altering the substance of the thing.



The obligation of not altering the substance of the thing, however, takes place only in the case of a complete usufruct.



Usufructs are of two kinds; perfect and imperfect. Perfect usufruct, which is of things which the usufructuary can enjoy without altering their substance, though their substance may be diminished or deteriorated naturally by time or by the use to which they are applied; as a house, a piece of land, animals, furniture and other movable effects. Imperfect or quasi usufruct, which is of things which would be useless to the usufructuary if be did not consume and expend them, or change the substance of them, as money, grain, liquors.

www.lectlaw.com/def2/u071.htm

Thanks for the explanation, cm5. In the event of a major positive announcement by MannKind, the situation for shorts that have borrowed shares will be a perfect usufuct. If there are no announcements, the term will apply equally to the longs that lent them. BK for longs would constitute a complete usufuct.

Apologies for any typos.

[cm5]

More for fellow nerds and nerdettes:

As Matt pointed out, this is a term in Roman law----ie, Latin.

u·su·fruct  sounds like ˈyo͞ozəˌfrəkt

The right to enjoy the use and advantages of another's property short of the destruction or waste of its substance.

[lakon]

May 1, 2016 17:16:31 GMT -5 liane said:

I remain confused. I always understood things as morfu has stated - you loan your shares and you lose your voting rights. The eventual buyer of the loaned shares would have the vote. But matt (who has posted a lot of good stuff and seems incredibly knowledgeable) has stated that the loaner retains the rights.

There is no reason to be confused. matt is simply wrong, no matter how much Roman Law he wishes to discuss. Read your contracts folks. It's in there.

Now, perhaps, matt has a special contract written for him. As far as I know, there is nothing special about the loan agreements as far as securities law goes. Therefore, he could have taken possession of his shares and loaned them under his preferred terms. Just like MNKD might have tried to sell to TASE funds that could not loan shares per their contractual obligations under the terms of the fund contract. That said, for most, by contract shares are loaned to your broker who acts as an intermediary fiduciary. The broker provides collateral, usually cash and/or your full faith in them, your counter-party risk. Then, the broker loans the shares to another party, usually intent on selling the shares short, or playing nasty voting games. The real test to this argument is what happens to the poor sucker who buys from the short sale? He does not know or care if the shares are sold short or just sold. He has common shares, and he expects that he can vote them. That's where the votes go. End of story. Of course, if you only explain half of the story, it might sound good.

Interestingly, knowledge, intelligence, and correctness are orthogonal. You can be really intelligent, knowledgeable, and very wrong. We crashed a spacecraft into Mars by being just that combination.

Usufruct that! It just rolls off the tongue.

[therealisaching]

I have a margin account, so presumably my shares are loaned. I was able to vote my shares though.

[LosingMyBullishness]

May 3, 2016 15:51:44 GMT -5 therealisaching said:

I have a margin account, so presumably my shares are loaned. I was able to vote my shares though.

What I learnt recently is that my broker lend my MNKD shares out while I was deep in my margin. They arranged the collateral in such a way that they were practically the owner enjoying 100% of the borrow rate and the interest for the margin. I should have read the small print..

[LosingMyBullishness]

May 3, 2016 16:48:29 GMT -5 LosingMyBullishness said:

May 3, 2016 15:51:44 GMT -5 therealisaching said:

I have a margin account, so presumably my shares are loaned. I was able to vote my shares though.

What I learnt recently is that my broker lend my MNKD shares out while I was deep in my margin. They arranged the collateral in such a way that they were practically the owner enjoying 100% of the borrow rate and the interest for the margin. I should have read the small print..

I figured this out when I did not receive the proxy material although I didn't lend them out myself.

[kc]

May 3, 2016 15:51:44 GMT -5 therealisaching said:

I have a margin account, so presumably my shares are loaned. I was able to vote my shares though.

On a margin account it would depend on if your on any margin terms currently. If your not than ask your broker to put your MNKD shares into the cash side of that account. Most brokerage houses will do that with no questions asked. In the event that you are using margin than you can still do that if the ratio of margin borrowing is not exceeding the rest of the portfolio. Don't let them loan them out without getting paid.

[lakon]

May 3, 2016 18:07:18 GMT -5 kc said:

May 3, 2016 15:51:44 GMT -5 therealisaching said:

I have a margin account, so presumably my shares are loaned. I was able to vote my shares though.

On a margin account it would depend on if your on any margin terms currently. If your not than ask your broker to put your MNKD shares into the cash side of that account. Most brokerage houses will do that with no questions asked. In the event that you are using margin than you can still do that if the ratio of margin borrowing is not exceeding the rest of the portfolio. Don't let them loan them out without getting paid.

It also depends on how crooked your broker is...