Senate Cuts a Hole in ‘Golden Parachutes’

The Senate voted today to prohibit multimillion-dollar “golden parachutes” for corporate executives who lose their posts in hostile takeovers unless approved by public shareholders.

The Senate voted 98 to 1 for an amendment, proposed by Sen. William L. Armstrong (R-Colo.), to legislation tightening regulations on major stock acquisitions, tender offer abuses and insider trading. Sen. William V. Roth Jr. (R-Del.) cast the only no vote. Many large firms are incorporated in Delaware.

As part of a series of amendments to the bill, Armstrong also planned to ask the Senate to prohibit “poison pill” programs, such as issuing new shares to dilute value, without receiving the approval of shareholders in advance.

The bill, which is expected to pass this week, would cut from 10 days to 5 the period in which people who buy more than 5% of the stock in a company must make disclosure statements with the Securities and Exchange Commission. Additional purchases must be reported within a day.

The legislation would also require that information be provided about the financing of the acquisition, the parties who participated in pertinent discussions in the previous 30 days and a declaration of whether the purchase of the stock was to take control of the company.

In addition, the bill lengthens the tender offer period from 20 to 35 days and for 60 more days if 10% of the company stock is owned by an employee stock ownership plan which intends to make a competing offer. Any purchase of 25% or more of the stock would have to be made through a tender offer.

The measure would also prohibit bidder and target companies from using pension funds to finance or fight takeovers, except by employee stock ownership plans, extend broker-dealer registration requirements to tender offer arbitragers, and increase insider-trading penalties to $1 million and 10 years in prison.

The “golden parachutes,” which Armstrong said are as high as $25 million, are payments guaranteed to top executives who lose out in hostile takeovers.

The Internal Revenue Service considers amounts three times annual salary to be “golden parachutes,” and they are taxed at a higher rate.

“I cannot imagine why any senator would come to the floor and vote in favor of the ‘golden parachute,’ ” Armstrong said. He said it would be rare for shareholders to approve the “golden parachutes” but added, “If they do it, that’s their business.”