Rogue Missives
Rogue Missives
| ROGUE ARCHIVES | |
Georgia Bill Attacks Shareholder Rights Late last week, the Georgia state Senate unexpectedly became the latest battleground in the ongoing war over shareholder rights when it passed new state anti-takeover rules that would have stripped shareholders of their most basic right of control. The amendment to a routine House bill was designed to discourage Ohio-based INVACARE CORPORATION <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IVCR)") else Response.Write("(Nasdaq: IVCR)") end if %> from acquiring a controlling stake in HEALTHDYNE TECHNOLOGIES INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HDTC)") else Response.Write("(Nasdaq: HDTC)") end if %>, a company based in Marietta, the center of Newt Gingrich's U.S. congressional district. But the measure would have affected all companies incorporated in Georgia. Shareholders were losing the battle up until Tuesday, when the Georgia House voted 115 to 52 to reject the Senate amendment, sending the entire bill to a joint House and Senate conference committee. That committee is expected to decide the matter before the General Assembly's annual session ends today, March 28. Though weighted toward amendment supporters, the six-person committee decided on Thursday that each member must agree on any compromise plan for the measure to be sent to both houses for a new vote. The whole skirmish began when the Senate voted to rewrite Georgia's corporate code to require public companies incorporated in the state to elect their board members on a staggered, three-year cycle unless those boards voted to opt out of the provision. The proposal also would have made it more difficult for shareholders to remove board members. Authorities on the issue say the majority of U.S. public companies continue to elect directors on a staggered basis. Michael Useem, management professor at the Wharton School of Business at the University of Pennsylvania and author of the recent book Investor Capitalism, estimated that about 60% of companies employ such staggered elections. Still, CalPERS and the other giant public pension funds that have turned into corporate governance activists over the last decade have worked hard to do away with this practice in favor of annual elections for all directors. CalPERS spokesperson Brad Pacheco said that the fund has submitted corporate governance amendments designed to do away with staggered boards at REEBOK <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RBK)") else Response.Write("(NYSE: RBK)") end if %> and FLEMING <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FLM)") else Response.Write("(NYSE: FLM)") end if %>, two of the 10 companies on the pension fund's target list for 1997. Activist investors prefer electing the entire board each year because they believe staggered boards tend to entrench management by entrenching friendly board members. Directors who don't come up for re-election annually often are less responsive to shareholders than they should be. After all, boards exist mainly to make sure that management is acting in the best interests of shareholders. One way to minimize conflicts of interest is to make directors accountable each year. Corporate executives, however, usually prefer staggered elections both because they breed shareholder passivity and because they make it difficult for outsiders to mount a successful hostile takeover. Even if outside investors amass a controlling stake in a company, it might take two years before these investors could actually gain control of the board. That's because only a third of the directors are elected each year. In short, staggered boards are part of the defensive arsenal used to discourage what management considers an unwanted suitor. The suitor might seduce some shareholders into getting naked, but the whole takeover dance won't go beyond heavy petting until the courtship has honored the more complex rules of engagement. Only a buyer convinced there's a perfect match will stay the course to consummate the takeover. Based in Elyria, Ohio, Invacare makes and distributes medical equipment such as wheelchairs and walkers for the home health and extended care markets. The company currently employs about 4,400 people and had 1996 revenues of $620 million. The company initiated its all-cash bid for Healthdyne on January 2, when it sent a private letter to Healthdyne officials offering to buy the company's outstanding shares for $12.50 per share. After the Healthdyne board rejected the offer on January 24, Invacare raised its bid to $13 a share, or about $169 million. With 525 Georgia employees, Healthdyne specializes in medical devices that diagnose and treat sleep disorders. The company also produces monitors for infants at risk of Sudden Infant Death Syndrome (SIDS) plus products that monitor women with high-risk pregnancies. The firm was founded a quarter century ago by Chairman Parker H. Petit after his son died of SIDS. The company took in $118 million in revenues last year but hopes to boost sales to the $300 to $500 million range on the strength of new products it will introduce in the next two years. Invacare's bid represents a 45% premium over Healthdyne's market value at the time of the offer, but it's below Healthdyne's 52-week high set early in 1996. On January 31, Healthdyne's board rejected the revised offer, calling it "grossly inadequate." At least some money managers agree, saying Healthdyne should fetch up to $18 a share. Though Healthdyne shares dropped on news of the Georgia Senate's proposal, they have recently rebounded, once again trading above $13 on the expectation that Invacare will need to increase its bid or that a rival bidder might come forward. On the other hand, Invacare's Chairman and CEO A. Malachi Mixon III has repeatedly expressed an interest in meeting with Healthdyne officials to negotiate "a mutually agreeable transaction." He has said that Invacare is willing to "discuss all aspects of our offer fully, including, if Healthdyne's management is able to substantiate additional value to our satisfaction, our offer price." But as Malachi noted in the company's latest press release, "We are frankly tired of Parker H. Petit, Healthdyne's chairman, criticizing us as 'bargain-hunters' when he refuses to provide us any information which would justify a higher price." Invacare had already purchased 600,000 shares of Healthdyne on the open market by the time it initiated its tender offer. By February 24, more than two million additional shares had been tendered to Invacare by shareholders. As of March 24, Invacare had purchased an additional 300,000 shares from shareholders, giving the firm 23% of Healthdyne's outstanding shares. The fight for control of the company heated up last week when Invacare announced plans to offer its own slate of seven directors at the annual shareholders meeting, which is usually held in April or May but remains as yet unscheduled. Invacare has also proposed certain amendments to prevent manipulation of Healthdyne's bylaws by current board members, to eliminate the company's poison pill provisions which make a hostile takeover prohibitively expensive, and to allow shareholders who own 10% of Healthdyne stock to call a special shareholders meeting. Healthdyne officials could not be reached to comment on the ongoing dispute, but it's clear they are looking to the Georgia General Assembly to keep Invacare at bay. The Georgia Senate amendment was introduced by Senator Steve Thompson (D-Powder Springs). He told Rogue he was first approached by Healthdyne shareholders who "were worried they weren't being offered enough for their stock." Later, Petit went to Thompson for help in shoring up the company's defenses. Though Malachi has said that Invacare would like to expand Healthdyne's operations in Georgia, the senators supporting the staggered board proposal believe that Georgia jobs are at risk and that the failure to support a local constituent would be tantamount to announcing Georgia ripe for bargain-hunting takeover artists. Thompson put it this way to The Atlanta Constitution. "An Ohio company is trying to take over a Georgia company. We are trying to offer the Georgia company some protection." The amendment's co-sponsor Senator Chuck Clay (R-Marietta) told Rogue that "if nothing else, what I wanted to do was to fire a shot across the bow.... The last thing I want is for folks to say [Georgia] is a playground for hostile takeovers." The legislative battle began March 20, when the Georgia Senate met to consider House Bill 294, a routine piece of legislation drafted by a bar committee and full of technical amendments designed to keep the state's corporate code up to date. The surprise came on the Senate floor when Thompson introduced the staggered board amendment. Due to the length of the amendment, the final vote on the bill was postponed until the next day, when the bill passed the Senate on a 29 to 15 vote. The uproar, however, had already begun. Mary Margaret Oliver (D-Decatur), chair of the Senate Judiciary Committee, told Rogue that the Thompson amendment was proposed "without any committee input and with no notice of any kind whatsoever." "Both Invacare and the broader business community opposed the bill," she said. "On their behalf, I was asked to carry an amendment to the amendment to delay its effective date, which in effect would thwart the purpose of the legislative amendment." Oliver's proposal, though, was killed on a 26 to 26 tie vote. She then asked that the entire bill be reconsidered on Monday, March 24. A successful vote to reconsider would have pushed the bill to the bottom of the legislative calendar. With the Georgia General Assembly ending its annual session this week, that effectively would have killed the bill. But the reconsideration vote itself stalled out Monday on a tie vote. Oliver said she opposes the process used to introduce the amendment as well as the substance of the amendment. "It's an egregious interruption of the traditional political process to create an advantage of one business over another based on the facts of one hostile takeover. I think it's a bad way to conduct policy and that the General Assembly is being used by these major business interests in a way that obviously weakens the traditional way that shareholders control corporations." She said that if the bill passes, it will be a real step backwards for Georgia businesses and for the rights of shareholders. William J. Carney, an Emory University law professor and chair of the bar committee that drafted the original House Bill 294, agreed with Oliver. In fact, he's serving as a consultant to Invacare's attorneys, the high-powered Atlanta law firm of King & Spalding. Carney said he was disappointed with the Senate's decision to pass the amendment. "I doubt very much if they fully appreciated the consequences of that bill." Carney said that while some states have even more onerous anti-takeover provisions built into their corporate codes, only Massachusetts has a law similar to the one being debated in Georgia. In his view, it's a measure designed to entrench current management. He also said "there isn't any evidence that such hostile takeovers, in general, cost jobs." It depends a great deal on the specific situation. He did allow, though, that Healthdyne can't have two CEO's. "So there would be one less job in Georgia." Well-known shareholder activist Nell Minow, a principal at Lens Inc., an investment firm in Washington, D.C., agreed. She expressed utter dismay at the Georgia proposal. "It's appalling. I don't understand it at all," she said. "The state of Massachusetts adopted such a law in the middle of a huge takeover attempt of a Massachusetts company several years ago. And there was certainly no justification for it then. But there's really no justification for it now because there are enough impediments to hostile takeovers. You certainly don't need this one. And why should that decision be taken away from the shareholders?" "There's a huge amount of irony of an elected body moving to take away the rights of the shareholders," Minow said. She added that staggered boards have "nothing to do with jobs. The only people whose jobs it has anything to do with are the directors." Professional money managers are among those most adamantly opposed to the provision. Eric Rosenfield, managing director at New York-based Oppenheimer & Co. told the Constitution that he thinks Invacare needs to boost its offer price but that he's troubled by the Senate proposal. "If the legislature takes away the ability that shareholders have to decide, does it make sense to hold investment in Georgia companies in the future?" Wharton's Useem said that from the standpoint of investors, hiding behind state law is "just a complete non-starter." He said that while such anti-takeover provisions are often sold as a package to protect state businesses and jobs, several academic studies show that the stock of companies based in these states will drop a point or two after such laws pass. And falling stock prices are bad for business because they raise a company's cost of raising new capital. "The supposition was, with management a little bit less accountable to shareholders, the company's worth a little bit less," he said. Invacare's Mixon has also shown increasing signs of exasperation, considerably strengthening his rhetoric in the company's press release following the Senate's passage of the amendment last Monday. "Based on Healthdyne's delay in calling their annual meeting," he said, "and their desperate and extraordinary attempt to do an end-run around their own shareholders -- by trying to manipulate the Georgia legislature to strip Healthdyne's shareholders of critical shareholder rights by mandating staggered boards and other director-entrenching measures -- we can only assume that Healthdyne and its board are scared of what their own shareholders may say and do at the upcoming annual meeting. "If the Healthdyne shareholders want a staggered board, they can always approve one at the annual meeting on their own. We challenge Healthdyne to stop trying to hide behind the skirts of the Georgia legislature, schedule their annual meeting promptly, and let their own shareholders exercise their right to elect the entire board of directors and thereby decide who should run the company and whether it should be sold. "In light of the attempts of Healthdyne's board and management to disenfranchise them, the Healthdyne shareholders should seriously consider whether they have any reason to place their trust and loyalty in the current directors and management team." In going to King & Spalding, Invacare enlisted the help of some of Atlanta's most prominent attorneys, including former Governor George Busbee and former U.S. Attorney General Griffin Bell. Such high-powered lobbying appeared to pay off on Tuesday when the House voted to reject the bill with the controversial amendment. Given the strong opposition in the House, the proposal may well die in the conference committee or be considerably watered down. If the bill passes both chambers, though, it would then need to be signed by Georgia Governor Zell Miller. Miller's spokesperson has declined to comment on whether the governor supports the amendment. However the matter is decided, the whole episode highlights the way well-meaning legislators can sometimes push far-reaching yet ill-conceived measures in a confused attempt to protect local jobs. The case also points to unresolved tensions in our ideas about the very nature of public corporations. In short, whom do they serve and who should control them? Senator Clay, who, like Senator Oliver, is planning to run for Lieutenant Governor of Georgia, said he's generally opposed to hostile takeovers. "My experience with so many of these hostile takeovers is that you've got folks out there looking for successful but undervalued corporations who put together a group of investors, buy enough [stock] to get a majority share, put in a slate of folks who take it over, and then suddenly, a year later, there ain't no business left. While we can say, 'That's the price of doing business in America,' I don't have a very comfortable feeling over hostile takeovers. I find by and large they've done a disservice to America. By and large." He said he feels no contradiction about being a Republican opposed to the free market for corporate control, which is seen by most academics as the ultimate way to spur companies to improve performance. "I don't care whether it's a contradiction in terms or not," Clay said. "I'm proud to represent my constituency and the businesses here. We grow Georgia businesses, everybody succeeds." Clay admitted that the Thompson amendment may turn back the clock on shareholder rights. "I don't have a dog in that fight," he said. "You may be 100% correct on that. It's hard for me to sit here and say philosophically that shareholders don't own the corporation. They do." "The other side of that coin," he said, "is that what the shareholders want isn't always exactly what's best for my community in the state of Georgia. And that becomes my job. I don't know where that balance is.... When I've got to balance my community needs and best interests against the best interests of shareholders around the nation, they don't always dovetail." Senator Thompson offered an equally conflicted vision. On the one hand, he suggested that shareholders ultimately should and do control companies by their power to elect the board. "Every year they elect their board of directors at the annual meeting. They entrust them with the governance of their organization throughout the year." And that board, he agreed, has a fiduciary responsibility to act in the shareholders' best interest. On the other hand, Thompson said he thought Healthdyne's shareholders were potentially being duped into selling their shares on the cheap by Invacare's "slick advertising." He said his proposal is designed mainly to give Healthdyne "enough time, at least, to get to the next annual meeting" where the management and the board can properly inform shareholders about why they believe Invacare's offer is inadequate. Of course, it's not clear there's anything preventing Healthdyne from doing just that. And the Thompson amendment would effectively weaken the shareholder control he supports by imposing a new constraint on their ability to elect directors annually. These contradictions ultimately make sense only in the context of the undercurrent of parochialism shaping Thompson's views. "Some of these shareholders don't have any interest in" Healthdyne's employees and business in Georgia, he said. In a world that celebrates the free flow of capital across international markets as a sign of resources being used more efficiently, it seems peculiarly arcane for states to engage in protectionist lawmaking that effectively diminishes the private ownership rights of shareholders. Moreover, how do the supporters of the Thompson amendment know that Invacare's deeper pockets and wider distribution channels won't actually be better for Georgia workers than an independent Healthdyne? Boards are entrusted with power by shareholders, and shareholders need to maintain close control over directors through annual elections and other corporate governance measures. Indeed, companies need to move in the direction of a proposal made last fall to shareholders of WALLACE COMPUTER SERVICES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WCS)") else Response.Write("(NYSE: WCS)") end if %> by an investment group led by Guy Wyser-Pratte, president of Wyser-Pratte & Company and former chief arbitrageur at Prudential Securities. The Wyser-Pratte amendment would have required Wallace to hold a shareholder vote within 90 days of receiving an all-cash offer for all of its stock as long as the offer came at a 25% or greater premium on the average price of the company's shares over the preceding 30 days. The proposal would have done away with Wallace's anti-takeover defenses unless a majority of shareholders voted to keep them. The amendment would have returned corporate control directly to shareholders by allowing them to do an end run around unresponsive directors. The board would have been forced to try to persuade shareholders that a takeover proposal was not in their best interests, and the ultimate decision would have remained directly in the hands of shareholders. In the Healthdyne case, such a shareholder rights amendment would force Chairman Petit and the other board members from running to the Georgia Assembly for help. They would need to focus on scheduling a shareholders meeting and making their case about why the company should remain independent. Indeed, the sooner they scheduled such a meeting, the better off all parties would be. Shareholders anxious to sell might find they could get a better price than that initially offered. Plus the uncertainty hanging over both companies would be quickly resolved one way or another. There's simply nothing honorable about Petit's attempt to avoid addressing shareholders directly. However much he may feel that Healthdyne is his baby, the price of going public is submitting to shareholder control. At least, that's the way it ought to work. On the other hand, the seemingly convoluted position of lawmakers Thompson and Clay rests on our conflicted ideas about what corporations are designed to do. Most historians agree that the public corporation was created as a means of organizing private interests to promote public benefits. And because corporations are chartered by state governments, they remain, at least in theory, agencies of the state. Supporters of the Georgia Senate amendment, then, are right to assert that the state's corporate code can, and perhaps should, be altered to protect the obvious public benefit of keeping jobs within the state. Indeed, one could argue that the chief reason corporations exist is to provide such employment opportunities. The problem is with the way the Georgia proposal -- and countless others -- goes about achieving its goal. The amendment effectively restricts shareholders' rights and entrenches current management in the interest of saving jobs. But saving state jobs is a completely different issue from protecting current management. Indeed, there's no reason at all to combine the two issues. If jobs are the key issue, then perhaps what's needed is a corporate code that offers some reasonable formula for protecting state jobs in the event of a hostile takeover. Indeed, it should not much matter to legislators who runs a company or where they are based as long as the public benefits of the corporation are being achieved. Stripping shareholders of their most basic rights of ownership to accomplish these ends is a misguided endeavor. It shows how much Americans, particularly American lawmakers, continue to confuse managers and directors with owners. Ultimately, shareholders should be understood as being engaged in a partnership with the state to achieve both public and private goals. This partnership has obvious tensions that may from time to time create problems. But corporate boards and the management teams they support are really no more than servants commissioned with the task of achieving these goals. The Georgia amendment simply confuses these issues while denying shareholders the rights that should by now be set in stone.
--Louis Corrigan (RgeSeymour) |
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