Fairness to shareholders invoked; Tighter rules asked for the takeover game
The language surrounding corporate takeovers often sounds as if it belongs in a video game or James Bond movie. When chief executives bid billions of dollars for control of rival companies, the air is filled with references to poison pills, golden parachutes, greenmail, shark repellent, and the Pac-Man defense.
The complex maneuvers described by these colorful terms are sometimes confusing even to those who speak the specialized language of takeovers. The deals can be baffling to individual shareholders asked to sell a small stake in a publicly traded company.
In the wake of criticism surrounding last autumn's especially messy four-way takeover battle involving the Bendix Corporation, Allied Corporation, Martin Marietta Corporation, and United Technologies Corporation, the Securities and Exchange Commission (SEC) named an 18-member advisory panel. The group's assignment was to study takeovers and suggest changes in the laws and regulations that govern them.
Last week the panel issued its final report, which included 50 recommendations for the commission. ''We concentrated our work and recommendations on shareholders' interests,'' notes Dean LeBaron, chairman of the SEC'S Advisory Committee on Tender Offers. Mr. LeBaron is president of Batterymarch Financial Management, a Boston-based portfolio management firm.
Key recommendations include:
* Tightening the rules for disclosing when a company has purchased more than 5 percent of another company's stock. This is to control an acquirer's ability to amass a large block of stock secretly.
* Limiting the methods a company can use to acquire more than 20 percent of a target. This is to ensure that all stockholders get a share of any premium paid for control of a company.
* Requiring annual disclosure, and advisory stockholder voting, on golden parachutes. These are the generous severance packages given to executives if control of a company changes. The panel also recommends that the awarding of such contracts be prohibited once a takeover battle is under way.
The next step is for the agency to study the proposals, some of which would require changes in legislation. The report was also sent to the Senate Banking Committee, which had asked the advisory committee to examine several tender-related issues.
While the panel suggested tightening some takeover rules, the group's No. 1 recommendation was that regulation should neither promote nor deter takeovers. Such deals are permissible as long as they are conducted in accordance with laws designed to protect both shareholders' interests and the capital markets, the panel concluded. ''Academic evidence is widespread that the takeover process is at least not demonstrably harmful to shareholders, and some evidence points to its systematic benefits,'' Mr. LeBaron wrote in a letter to SEC chairman John Shad.
This endorsement of the general premise upon which federal regulation of takeovers has been based failed to please people who want to change the level of takeover regulation.
Panel member Arthur J. Goldberg, a former US Supreme Court justice, argues that no authoritative study has been conducted to determine whether, in the long run, tender offers have contributed to corporate health and profits or shareholder welfare.
And because of a lack of professional advice, the small shareholder ''is literally at sea in a tender offer,'' Mr. Goldberg complains. SEC disclosure documents are ''as esoteric to a small shareholder as (IRS) Form 1040 is to the average taxpayer.''
To help the small shareholder, Mr. Goldberg advocates new procedures to ensure that all shareholders ''receive independent and expert advice as to the fairness of every tender offer.''
And the North American Securities Administrators Association complains the panel's proposals ''still dramatically favor the hostile bidder.'' The association's members administer securities laws in the 50 states.
On the other hand, some panel members contend that too many rules already restrict takeovers. The advisory report ''is essentially a plea for more regulation. Even moderately more regulation is a change in the wrong direction, '' argue two panel members, Frank Easterbrook and Gregg Jarrell. Mr. Easterbrook is a professor at the University of Chicago Law School and Mr. Jarrell is a senior economist at Chicago-based Lexecon Inc., an economics consulting firm.
The proposed rules would make tender offers more scarce, they argue. ''Shareholders in bidders, targets, and bystanders alike would be the losers.'' Instead, these panel members argue, tenders should be regulated ''only the absolute minimum necessary to ensure confidence in securities markets and equitable treatment of the smallest investors.''
Even before the panel's recommendations can be acted upon, the pace of takeover bids, which has remained relatively stable since the mid-1970s, may slow because of the run-up in the stock market. The stronger market makes it harder to find appealing targets, those companies whose market prices are significantly below the value of the company's assets.