Corporate Defensive Moves Eroding Shareholder Rights

T. Boone Pickens and Carl Icahn are receiving news headlines for their so-called takeover attempts of large corporations: but very little attention is being paid to the severe reductions in shareholder rights arising out of corporate management’s defensive moves against these or other potential corporate raiders.
Many articles and newscasts have reported the collapse of government securities’ trading firms due to speculation and fraud and the consequences for shaky savings and loans associations, as in Ohio, who dealt with these firms. But again, there is little focus on how giant banks like Citicorp and Chase Manhattan are using these bank failures as a way of vaulting the barriers against interstate banking through rescue-purchase of these small banks.

It seems that no matter how many ways corporations mess up -­whether through fraud, crime, speculation or mismanagement — the bosses of the large corporations become stronger and stronger and corporate power becomes more and more concentrated.

Instead of the Reagan government exercising some law and order to prevent the looting and negligence which leads to the collapse of banks and government securities’ traders, the Reaganites look to the big banks to buy up the failed banks on their way to becoming national banking octopuses.

The relentless stripping of shareholder authority is a result of all those intricate defenses that management’s lawyers are installing to block the assault of professional shareholders like Pickens who, under the pretext of trying to takeover the company to install superior management and increase shareholder values, usually sell their shares for a premium -­called greenmail — in return for withdrawing their assault.

These defenses have a common objective — to thwart the principle that a simple majority of shareholders can change management and the company’s direction. Bylaws are passed with colorful names like the “poisoned pill defense” to double the difficulty of the takeover group to win. Corporate charters are moved to Delaware where shareholder rights are comparatively weak compared to other states. Other company bylaws change the percentage of shareholders required to defeat management from a simple majority to two-thirds or more.

At the same time, the New York Stock Exchange is rethinking its 59 year old “shareholder democracy” rule that refuses to list any company which authorizes two classes of common stock with different voting rights. John S. R. Shad, the chairman of the Securities Exchange Commission, believes this could start “race to the bottom of the barrel” among stock exchanges.

A former SEC member, Bevis Longstreth, called unequal voting rights “the ultimate takeover defense. If you have voting common stock in the hands of management and nonvoting common stock in the hands of the public, it would give management total control.” Longstreth said that this would lead to self-perpetuating management and more inefficiency due to the absence of the disciplining effects of takeover attempts.

Corporate chiefs have long used their presumed accountability to shareholders as a way of legitimizing their actions. When those shareholders are rendered voiceless, except for the shares in management’s control, to whom are these managers responsible? And so, the thrust for more and more concentrated management power and megacorporate control proceeds while Ronald Reagan makes speeches about a long-gone capitalism that Adam Smith wished existed in his England of 1776.