A blue ribbon committee charged by the Securities and Exchange Commission with reviewing the system of tender offers, mergers and proxy contests is recommending changes that could fundamentally alter the rules of corporate governance.
The group, which is chaired by Dean LeBaron, president of Batterymarch Financial Management of Boston and comprised of Wall Street veterans of the takeover process, Friday expressed preliminary approval by a margin of 11 to four for annual advisory votes by shareholders on such issues as anti-takeover provisions in corporate charters and the awarding of so-called "golden parachutes," or lucrative severance contracts, to executives forced out in a change of control caused by a merger.
The vote would be non-binding on management and directors but it would serve to remind them of stockholders' desires. As shareholders become more important, proxy contests could increase, LeBaron conceded. Opponents objected that important issues would be decided by directors on the basis of a popular referendum rather than by business judgment.
Separately, the panel endorsed by 16 to one a sunset provision, or automatic phase-out, of special rules that require more than a 50 percent vote of the shareholders to accomplish a merger. These charter amendments, colloquially called "shark repellents," are sought by corporations that fear being taken over. They are opposed primarily by large institutional investors who fear the restrictions will decrease their chances of selling their shares to bidders at a premium.
The task force also backed, 11 to four, a procedure to discourage takeovers without adequate disclosure of information to shareholders. No person would be able to buy more than 15 percent of the outstanding securities of a corporation on the open market. This process of gradual accumulation of stock, often leading to a de facto seizure of control, is sometimes called a creeping tender offer. Under the new recommendations, if the buyer wished to acquire more stock, a tender offer would have to be made, thus affording the existing stockholders time to weigh the offer and decide whether to tender their shares.
The proposal is a compromise between the current system and the British system, which discourages partial takeovers by requiring anyone who owns or seeks more than 30 percent of a company's stock to make an offer for all shares. After hearing a presentation by John M. Hignett, director general of London's panel on takeovers and mergers, the panel decided 8 to four against a radical switch to the British system because of cultural and legal differences between each country's markets.
Throughout Friday's third meeting of the commission, its newest member, former U.S. Supreme Court justice Arthur Goldberg cautioned several times that perception is more important than substance in these matters. He said the average shareholder perceives something is wrong, that corporations are treating the tender offer like a game. Phrases like "golden parachute," and "shark repellent" are "not seemly when dealing with corporate interests and great sums of money," he said. Goldberg, who was seated next to Edward L. Hennessy, chairman of Allied Corp., called last year's battle involving Allied, Martin Marietta and Bendix "a scandal and a fiasco."
That particularly messy takeover fight was one of the abuses of the tender offer process that prompted the SEC to create the select committee. Its recommendations to Congress are due by this July.
Goldberg also proposed that the views of the general public should be heard. An open meeting will be held here June 2.