Major corporations won a preliminary victory over Wall Street investment firms last night when the Senate Banking Committee approved a bill that would change the rules governing corporate takeovers and stiffen the penalties for illegal, insider stock trading.
The key victory for corporations was the banking committee's defeat of amendments that would have overturned state antitakeover statutes. The amendments would have provided for federal preemption of state laws, making hostile takeovers easier.
A decision by the Supreme Court earlier this year increased the power of states to regulate takeovers, helping corporations that want to avoid becoming targets. Wall Street has opposed the state laws, in part because they make hostile takeovers more difficult, potentially reducing investment bankers' fees.
After the banking committee voted 14 to 6 to send the bill to the Senate floor, Sen. William Proxmire (D-Wis.) said, "I'm pleased, you bet your life.
"It's a good bill. It is more than I expected. I didn't think we'd get a bill this strong through." Proxmire said he hopes a Senate vote on the bill will take place later this year.
Banking committee sources said Proxmire's victory yesterday was the result of a series of compromises. At the start of the hearing, Proxmire removed a provision that would have increased the role of states to govern takeovers. In return, sources said, he was able to win support to defeat efforts to reduce the role of the states, which the Supreme Court dramatically expanded earlier this year.
To pacify corporate lobbyists who wanted to expand the power of states to block hostile takeovers, Proxmire removed provisions from the bill that would have restricted golden parachutes and poison pills. Golden parachutes are lucrative severance arrangements for the deposed top management of takeover targets. The poison pill is an antitakeover device designed to make hostile takeovers prohibitively expensive.
Despite the corporations' victory in the Senate, Wall Street appears to have the upper hand in the House of Representatives, which has not yet moved a takeover bill out of the Energy and Commerce Committe.
The banking committee considered scores of amendments to the Senate bill in a session that began at 10 a.m. and did not conclude until 7 p.m. The final version of the bill included an increase in the criminal penalty for insider trading from five years in jail and a $100,000 fine, to 10 years in jail and a $1 million fine. The bill also includes a one-year jail term for anyone under investigation for insider trading who lies to government investigators or destroys documents.
Another key provision in the bill would change the disclosure requirements, known as 13(d) filings, for investors who acquire 5 percent or more of a public company's stock. Under current law, investors must publicly disclose their holdings within 10 days of acquiring 5 percent. However, investors are free to continue buying stock during that 10-day window, a period that has been used by some corporate raiders to secretly amass large blocks of stock.
The banking committee's bill would require investors to freeze their holdings at 5 percent until they publicly disclose their stake and would cut the disclosure period from 10 days to 5 days.
The bill generally would restrict open market purchases of stock by anyone who owns 25 percent or more of a company. An investor who owns 25 percent or more and wishes to purchase additional shares would be required to make those purchases through a formal offer to all shareholders.
Sen. William Armstrong (R-Colo.) criticized the bill repeatedly yesterday, saying it favors entrenched corporate management and hurts shareholders. He was rebuffed in an effort he said would help shareholders, when his ammendment to mandate equal voting rights for all owners of common stock was defeated.
Armstrong prevailed, however, in his quest to add a provision that would help shareholders who own 10 percent or more of a public company to nominate directors. The provision would require companies to include nominations from large shareholders in official mailings to stockholders.