The Games Business Plays
There is a better way to control corporate takeovers and protect shareholder interests in the United States. It is to adopt the British rules.
That is the argument of The Economist, the distinguished London weekly, in an article entitled “Blackballing Greenmailers.” It is a persuasive argument. It merits the attention of the House subcommittee on telecommunications, consumer protection and finance as it conducts hearings on the takeover situation.
This is no small problem in America these days. Vast resources are being diverted from the expansion of productive enterprise to acquisitions--many uneconomic, some solely to permit the plunder of accumulated assets. Management of a targeted corporation often finds itself spending its time structuring defenses against a takeover rather than making more effective the enterprise itself. Stockholders find their interests sometimes treated by executives as secondary to those of protecting the jobs of incumbent managers, or abused through flagrantly inequitable deals in which those seeking takeovers are bought out with premium payments for their shares in what has come to be called greenmail.
Most remedies that have been proposed in Washington, including those weighed by the Securities and Exchange Commission, reflect a bias to limit the defensive tactics of managers rather than to discourage uneconomic takeovers.
Any remedy needs to respect the desirability of allowing managers to protect legitimate interests and to allow takeover moves that are economic, that redress the failings of inept managements.
The British rules are not perfect, but are much better than existing American regulations. Here is how The Economist describes those regulations:
“A buyer must disclose a stake of 5%. At 15% he must slow his purchases, or tender for the next chunk. He must stop short of 30%--or be prepared to buy all the rest of the shares at the best price he has paid anybody in the previous 12 months. The power to buy back shares is constrained, and shareholders’ approval is needed. Companies may not issue new shares or design golden parachutes while a bid is pending.”
As The Economist points out, the concern of the British system for equitable treatment of stockholders makes takeovers “protracted and expensive.” To us, that seems a virtue rather than a defect.
In the United States, persons engineering the takeovers must give notice within 10 days of acquiring a 5% stake--too long a time lag. After that the procedure is what The Economist correctly calls “brutal and discriminatory.” In most cases the stockholder is left unprotected while executives maneuver with extravagant golden parachutes, assuring themselves of substantial fortunes even if they lose or get fired in the process. And in many cases those making the bid can be vastly enriched by losing--a prosperity for the bidder that often results in a direct loss for all other shareholders through stock-price declines.
Making a change in the rules will not be easy these days, because of the power of those with a special interest in the takeover and greenmail games. Extraordinary accumulations of wealth are being generated by these moves, not only by the principals but also by those who serve as intermediaries in the banks and other financial institutions and in the legal firms that mount the attacks and organize the defenses. Furthermore, as John F. Lawrence, our assistant managing editor, pointed out in a recent column, the reform should also include changes in regulations for the stock markets to protect individual investors from abuses--and that is never easy to accomplish.
But impatience is growing with the distortions of power and market influences inherent in some takeover practices. No nation, not even the richest in the nation, can afford to squander money that could be productively invested to generate jobs not just for lawyers, bankers and money managers.
