In the first move of its kind, the rights of corporations to adopt anti-takeover measures without shareholder approval are being challenged by a group of major institutional shareholders. These investors - mostly pension funds - are disturbed by the increasing use of ``poison pills'' to prevent hostile takeovers. Claiming such rules can hurt both long-term shareholders and the company itself, their campaign appears on a record number of annual meeting agendas this year.
``In the past, you'd abide by the `Wall Street law','' says Nell Minow, general counsel for the Institute of Shareholder Services Inc., a Washington-based shareholders' rights organization. ``If you didn't agree with the management, they'd tell you to sell the funds ... but you can't do that with a huge fund.''
Since poison pills can be adopted without shareholder approval, large shareholders are usually left with little recourse but to bring their dissatisfactions to managers' attention at meetings.
During the next two weeks, some 40 of these resolutions will be up for a vote. While they will only determine whether or not shareholders will be given the right to vote for or against poison pills, some observers see this as the beginning of a stronger and more coordinated effort to protect shareholders' rights in the future.
Poison pills, formally known as shareholder rights plans, are measures that make potential takeovers unpalatable to corporate raiders. A typical poison pill gives shareholders preferred stock which can be converted into voting shares of the remaining company in the event of a takeover. Or a poison pill could give shareholders the right to acquire two shares for the price of one when a hostile bid is made.
Either way, an acquisition becomes much less desirable, says Richard Schlefler of the College Retirement Equities Fund, which sponsored a recent resolution against International Paper.
According to the Washington-based Investor Responsibility Research Center, some 380 companies now employ poison pill plans. More than half these plans were adopted after a 1984 Delaware court decision upheld their legality.
Several institutional shareholders charge that this suddenly popular and very powerful anti-takeover measure is not, as managers claim, used in the best interest of shareholders. Companies, however, argue that poison pills are beneficial, preventing corporate raiders from taking over undervalued companies with tactics that often harm employees as well as the interests of long-term shareholders.
Management favors them because they are a negotiating tool, a controlling factor when dealing with aggressive bidders, says Jos'e Arau, principal investment officer at California Public Employees Retirement System in Sacramento. His group is also sponsoring an anti-poison pill resolution.
But while a poison pill may drive up the company's purchase price, it also lowers the value of its shares, says Mr. Schlefler.
A recent study by the Securities and Exchange Commission (``The Effects of Poison Pills on Wealth of Target Shareholders'') concluded that when a company defeats a bid using its poison pill the price of its stock goes down dramatically, averaging a sharp 17 percent drop relative to the market.
But William Greener, director of corporate communications and state affairs at International Paper, says ``there just isn't enough persuasive evidence backing that view.'' Such studies should be viewed with suspicion, says John Gavin, executive vice-president at D.F. King & Co., a New York firm that works with management in proxy solicitation.
While the first of this season's anti-pill resolutions, sponsored by the College Retirement Equities Fund (to force International Paper to allow its shareholders to vote on the rule), was defeated, its sponsors were surprised and encouraged by the amount of support they did receive.
Says Schlefler, ``the typical shareholder resolution is lucky to get 3 percent of the vote.... International Paper now knows 28 percent of the people that voted disagreed with management, and if I were them, I'd be very uncomfortable.'' Other resolutions have averaged 20 percent share support, which is significant considering proxy votes are tilted in favor of management.
While some proponents say the likelihood of these resolutions passing is very small in the face of management opposition, others feel they have already achieved much of their goal.
``We've already gotten their attention, and hopefully they'll realize they can't ignore the large shareholder,'' says Mr. Arau.
Mr. Gavin of D.F. King says that ``as dialogue between management and shareholders develops, their [stockholders] initial concerns are being assuaged.... They're seeing it isn't as bad as they thought.''
Institutional shareholders, however, have served notice that they are not simply passive investors.
``The fact that a significant number of them [shareholders] feels that way is going to have to cause management to take notice,'' says Ms. Minow of the Institute for Shareholder Services. ``It's much more productive for a shareholder to stay in there [by not selling out] and work towards change.''