Fluorocarbon’s Reincorporation Proposal Defeated

The management of Fluorocarbon Co. failed Tuesday to win shareholder approval of a reincorporation proposal containing anti-takeover provisions and limiting the financial liability of Fluorocarbon’s officers and directors.

The rare defeat of a management-backed package appears to have been dealt by institutional investors concerned that the proposal would give the company’s management the ability to routinely reject acquisition bids that might be favorable to investors.

A simple majority was needed to approve the package, but just 44% of the 4.3 million shares outstanding were voted in favor of the management proposal. Owners of 25% of the company’s shares did not vote.

“We’re disappointed and very puzzled,” Fluorocarbon Chairman Peter Churm said at the company’s annual meeting in Irvine.

Fluorocarbon, a Laguna Niguel-based manufacturer of a variety of rubber, plastic and fluid sealing products, with more than 20 locations across the country, is one of many corporations that have sought shareholder approval in recent years to reincorporate in Delaware.

Such a move does not involve relocating the company. It is popular because corporate laws and court decisions in Delaware generally are considered more friendly to corporate managements than those in other states.

Fluorocarbon’s reincorporation proposal contained such anti-takeover provisions as measures: to eliminate cumulative voting by shareholders; to create staggered terms for directors; to limit the ability of shareholders to call a special meeting, and to increase management’s ability to take actions to thwart a hostile takeover.

Also the reincorporation would have allowed Fluorocarbon to limit the financial liability of its officers and directors, which it is unable to do under state law. The company said it is becoming increasingly expensive to obtain liability insurance for management.

Churm said the reincorporation proposal was opposed primarily by pension funds, trust departments and other institutional holders of Fluorocarbon stock. He said New York-based Citibank, which owns 6% of Fluorocarbon’s shares, opposed the proposal. A Citibank spokeswoman declined comment.

Although institutional investors are beginning to challenge anti-takeover proposals in increasing numbers, a national authority on corporate governance said the failure of Fluorocarbon’s reincorporation proposal is surprising.

“It’s very unusual for a management proposal to be defeated,” said Jamie Heard, deputy director of the Investor Responsibility Research Center in Washington. “On average, 97% to 98% of the management proposals that we track are approved.”

Heard speculated that Fluorocarbon’s institutional holders may have objected to a provision requiring a “super-majority” of 80% of shareholders to approve a change in control of the corporation. With Fluorocarbon’s officers and directors owning 18% of the company’s stock, the provision “effectively gives management an absolute veto,” Heard said.

Churm said Citibank told the company that its primary objection was the 80% provision. He said Fluorocarbon intends to repackage its reincorporation proposal to eliminate shareholder objections and will seek approval at next year’s annual meeting.

Churm said the company is not aware of any potential suitors with an interest in Fluorocarbon.