"The Delaware Court Yields Another Setback for Shareholders Rights'" "The UN, LIbya and Human Rights"
Sydney M. Williams
The rhetorical question – Do corporate boards of directors represent management or shareholders? – is worth re-asking. We know what the answer should be; however, too often boards cater to the demands of management, at the expense of shareholders.
Last week, William Chandler of Delaware’s Court of Chancery upheld Airgas’ “poison pill” provision, a mechanism for diluting the shares held by what the board deems a hostile acquirer. The fact that Airgas has a staggered, or classified, board (in which one third of the directors are elected every year for a three-year term) aggravated the situation for the management of Air Products, but more importantly for the shareholders of Airgas. (Staggered, as opposed to unitary, or annually elected, boards are increasingly uncommon, but still too prevalent.)
Staggered boards came into prominence in 1982, via lawyer Martin Lipton of Wachtel Lipton as a form of poison pill, at a time when managements were being threatened by “green mailers” and other corporate raiders whose purpose was to buy companies, strip out the cash, fire a bunch of people (generally, including the management) and sell the carcass piecemeal. In using leverage, these raiders were able to make a lot of money on very little invested equity. While shareholders did benefit, as an asset worth X became valued at X plus, managements were threatened; so staggered boards became a means to protect their job, without regard to the interests of shareholders. One could argue that, in preserving management, they saved employee jobs. But, to the extent the company was poorly run, that would simply buy time. For competitive forces – keeping Schumpeter’s theory of Creative Destruction in mind – would ultimately have rationalized the business. Jobs would be lost; management gone and shareholders would be losers.
The Court’s decision is important, as Delaware is home to 60% of Fortune 500 companies and 50% of all publically traded U.S. companies. As the Financial Times put it last week, Delaware courts have “generally favored a director-centric model of corporate governance over so-called shareholder democracy.”
The impetus for the decision was the rebuffed bid for Airgas by Air Products, a company followed and recommended by MCH analyst, Chris Shaw. The question is, were Airgas shareholders well served by management’s costly battle to remain independent. At the beginning of February, when the $60 initial offer was made (later raised to $65, Airgas stock was trading at $42 – a premium of 40%. In December, Air Products raised the bid to $70, but Airgas said the business was worth $78. The stock, as I write, is trading at $62.15, 11.2% below the offered price.
There have been other examples of directors putting the interest of shareholders behind that of management. Steve Kroll, who works in our office, was a director of E.F. Hutton, with a pocketful of options struck at 30, when, in the spring of 1987, Shearson offered $62.50 for the company. Management rejected the offer as inadequate. In December of that year, in the aftermath of the crash, management reconsidered, deciding the company was worth $29.50.
More recently Yahoo management, in the spring of 2008, rejected a cash offer by Microsoft to buy the company for $31.00 per share, a 66% premium. Three years later, the stock is trading at 16.37. That same spring, Electronic Arts made a $25.74 cash bid for Take Two Interactive Software. The board deemed the offer inadequate. Today, three years later, Take Two is trading at $15.69.
The argument generally issued in defense of staggered boards is that they permit the company to focus on the longer term – to not worry about the re-election of all directors every year, as opposed to just a third. Secondly, they argue, somewhat patronizingly, since directors are “insiders,” they are in a better position to know and understand which strategy would produce the better result for shareholders. However, Professor Lucian Bebchuk of the Harvard Law School has written extensively on the subject of staggered boards. A study prepared in 2005, “The Costs of Entrenched Boards” co-authored by Professor Alma Cohen, compared stocks that were public in 1990 and then looked at valuations between 1995 and 2002. They found a correlation that was “consistent with staggered boards having a negative effect on firm value.”
Yesterday, Professor Lucian Bebchuk wrote in a Wall Street Journal op-ed that the Delaware Court’s decision “represents a setback for investors and capital markets.” In the article, he does point out that the industry is trending in the right direction, as the number of S&P 500 companies with staggered boards have declined from 300 in 2000 to 164 in 2009. Still, almost half public companies continue to have them. Professor Bebchuk asks: “Why should shareholders, who have powerful incentives to get it right, not be permitted to make their own choice between selling and staying independent?” A good question.
One of the more depressing developments, in my opinion, of the past half century has been the growing irrelevancy of the United Nations. It has become the most vivid example of what is wrong with political correctness and multiculturalism. It is sad, because the organization could be a leading light toward democracy, fairness and equality. As a manifestation of this downward trend was the decision to convene their Human Rights Council today to pass judgment on the Libyan situation. The UN Human Rights Council is comprised of 47 nations, including Libya and includes other paragons of virtuous human rights, such as Nigeria, Bahrain, Saudi Arabia, China and Russia – countries that wouldn’t recognize a human right if it demonstrated in front of their capital.
Thought of the Day
“The Delaware Court Yields Another Setback for Shareholders’ Rights”
“The UN, Libya and Human Rights”
February 25, 2011The rhetorical question – Do corporate boards of directors represent management or shareholders? – is worth re-asking. We know what the answer should be; however, too often boards cater to the demands of management, at the expense of shareholders.
Last week, William Chandler of Delaware’s Court of Chancery upheld Airgas’ “poison pill” provision, a mechanism for diluting the shares held by what the board deems a hostile acquirer. The fact that Airgas has a staggered, or classified, board (in which one third of the directors are elected every year for a three-year term) aggravated the situation for the management of Air Products, but more importantly for the shareholders of Airgas. (Staggered, as opposed to unitary, or annually elected, boards are increasingly uncommon, but still too prevalent.)
Staggered boards came into prominence in 1982, via lawyer Martin Lipton of Wachtel Lipton as a form of poison pill, at a time when managements were being threatened by “green mailers” and other corporate raiders whose purpose was to buy companies, strip out the cash, fire a bunch of people (generally, including the management) and sell the carcass piecemeal. In using leverage, these raiders were able to make a lot of money on very little invested equity. While shareholders did benefit, as an asset worth X became valued at X plus, managements were threatened; so staggered boards became a means to protect their job, without regard to the interests of shareholders. One could argue that, in preserving management, they saved employee jobs. But, to the extent the company was poorly run, that would simply buy time. For competitive forces – keeping Schumpeter’s theory of Creative Destruction in mind – would ultimately have rationalized the business. Jobs would be lost; management gone and shareholders would be losers.
The Court’s decision is important, as Delaware is home to 60% of Fortune 500 companies and 50% of all publically traded U.S. companies. As the Financial Times put it last week, Delaware courts have “generally favored a director-centric model of corporate governance over so-called shareholder democracy.”
The impetus for the decision was the rebuffed bid for Airgas by Air Products, a company followed and recommended by MCH analyst, Chris Shaw. The question is, were Airgas shareholders well served by management’s costly battle to remain independent. At the beginning of February, when the $60 initial offer was made (later raised to $65, Airgas stock was trading at $42 – a premium of 40%. In December, Air Products raised the bid to $70, but Airgas said the business was worth $78. The stock, as I write, is trading at $62.15, 11.2% below the offered price.
There have been other examples of directors putting the interest of shareholders behind that of management. Steve Kroll, who works in our office, was a director of E.F. Hutton, with a pocketful of options struck at 30, when, in the spring of 1987, Shearson offered $62.50 for the company. Management rejected the offer as inadequate. In December of that year, in the aftermath of the crash, management reconsidered, deciding the company was worth $29.50.
More recently Yahoo management, in the spring of 2008, rejected a cash offer by Microsoft to buy the company for $31.00 per share, a 66% premium. Three years later, the stock is trading at 16.37. That same spring, Electronic Arts made a $25.74 cash bid for Take Two Interactive Software. The board deemed the offer inadequate. Today, three years later, Take Two is trading at $15.69.
The argument generally issued in defense of staggered boards is that they permit the company to focus on the longer term – to not worry about the re-election of all directors every year, as opposed to just a third. Secondly, they argue, somewhat patronizingly, since directors are “insiders,” they are in a better position to know and understand which strategy would produce the better result for shareholders. However, Professor Lucian Bebchuk of the Harvard Law School has written extensively on the subject of staggered boards. A study prepared in 2005, “The Costs of Entrenched Boards” co-authored by Professor Alma Cohen, compared stocks that were public in 1990 and then looked at valuations between 1995 and 2002. They found a correlation that was “consistent with staggered boards having a negative effect on firm value.”
Yesterday, Professor Lucian Bebchuk wrote in a Wall Street Journal op-ed that the Delaware Court’s decision “represents a setback for investors and capital markets.” In the article, he does point out that the industry is trending in the right direction, as the number of S&P 500 companies with staggered boards have declined from 300 in 2000 to 164 in 2009. Still, almost half public companies continue to have them. Professor Bebchuk asks: “Why should shareholders, who have powerful incentives to get it right, not be permitted to make their own choice between selling and staying independent?” A good question.
…………………………………………………………..
One of the more depressing developments, in my opinion, of the past half century has been the growing irrelevancy of the United Nations. It has become the most vivid example of what is wrong with political correctness and multiculturalism. It is sad, because the organization could be a leading light toward democracy, fairness and equality. As a manifestation of this downward trend was the decision to convene their Human Rights Council today to pass judgment on the Libyan situation. The UN Human Rights Council is comprised of 47 nations, including Libya and includes other paragons of virtuous human rights, such as Nigeria, Bahrain, Saudi Arabia, China and Russia – countries that wouldn’t recognize a human right if it demonstrated in front of their capital.
Labels: TOTD
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