The Securities and Exchange Commission recently studied the economic consequences of the defensive measures corporations increasingly are taking to protect themselves from hostile corporate raiders.
The study was performed by the office of the SEC's chief economist, Gregg A. Jarrell, and described last week by Chairman John S.R. Shad in testimony before the House Energy and Commerce subcommittee on telecommunications, consumer protection and finance.
The study looked at the impact that "supermajority requirements," "fair price" provisions and "poison pills" can have on stock prices.
Supermajority requirements written into corporate bylaws typically permit shareholders who control at least 20 percent of the shares in a corporation to block a merger. The fair price provision requires those seeking to take over a company to pay all stockholders the highest price the raiders paid for any shares. Poison pills are a stock, warrant or right issued by a company that allows shareholders to buy more shares at a discount in the event of a takeover attempt.
The SEC found that fair price provisions hurt shareholders' pocketbooks less than supermajority provisions. On average, stock prices decline by 4 percent over a period from 20 trading days before a company announces it is adopting such a provision through 10 trading days afterward. Fair price amendments, however, have no significant impact on share price, according to the study. Companies that issued poison pills found that their stock price decreased an average of 13 percent over a 50-day period, from 10 trading days before the announcement to 40 trading days after.
Large investors contend that these tactics harm shareholders' interests because they inhibit tender offers and thus prevent the price of the stock from rising. The SEC has filed a friend-of-the-court brief in a pending Delaware case, contending that the poison pill is not in the best interest of shareholders.
REFORMING RICO . . . Outgoing commissioner Charles L. Marinaccio recently urged Congress to amend the Racketeer Influenced and Corrupt Organizations Act (RICO) to prevent it from being misused in cases involving charges of securities fraud.
Marinaccio told the Senate Judiciary Committee that it has become standard practice for investors involved in ordinary disputes with securities brokers to charge them with racketeering. There is no suggestion that the brokers have anything to do with organized crime, which the law was designed to thwart. Instead, the law is invoked because it provides a rich reward for successful plaintiffs, including potential treble damages and the payment of attorneys' fees.
"In many cases, the allegations involve nothing more than a misunderstanding with a broker or a challenge to an interest rate level charged by a bank," Marinaccio testified. "Indeed, the threat of negative publicity attendant to 'racketeering' charges, as well as the exposure to treble damages, provides plaintiffs with powerful settlement tools, regardless of the merits of the underlying legal claims . . . . RICO claims coupled with securities fraud claims seem to have become the rule rather than the exception."
He supported legislation that would require plaintiffs who want to file suit under RICO to show that a defendant had been convicted of two criminal counts of racketeering, involving such activities as murder, drug trafficking or bribery.
Marinaccio, whose term expires June 5, has agreed to stay on until his successor is chosen. The agency has been operating with four commissioners since James C. Treadway Jr. stepped down.
PAPERLESS WORLD . . . On July 1, the financial filings of 17 public utilities will be added to EDGAR, the SEC's electronic disclosure system. The filings will be sent in the form of direct digital transmission, diskettes or magnetic tapes.
In a separate development, Bechtel North American Power Corp. has been awarded a contract to record SEC filings onto microfilm and disseminate them. Starting Oct. 1, Bechtel is to provide an estimated 250,000 microfiches a year to the SEC's public reference rooms. Bechtel is expected to earn between $4 million and $6 million a year from sales of the information, depending on the number of filings.