Takeover Is Dogged by Controversy
The 1985 takeover of Pacific Lumber by Maxxam has generated an unusual amount of litigation and controversy.
A series of lawsuits has alleged that Maxxam chief Charles E. Hurwitz and the logging company’s chief executive, Gene G. Elam, cut an unholy deal that failed to give shareholders the best price for their stock.
Lawsuits tend to come with the territory in corporate takeovers, and Hurwitz has had his share. But so far, these suits have failed.
In one 1986 decision, for instance, U.S. District Court Judge William W. Schwarzer held: “It is abundantly clear that (the board members) did not rush into Maxxam’s embrace. . . . They concluded, in the words of Winston Churchill, that facts were better than dreams.”
In 1987, a congressional subcommittee looking at the Pacific Lumber deal issued a report contending that Los Angeles investment dealer Boyd L. Jefferies may have parked--that is, secretly held--Pacific Lumber stock for the benefit of Hurwitz. The Federal Trade Commission and the U.S. Department of Labor were asked to investigate, but neither has alleged any improprieties.
In 1988, the Securities and Exchange Commission saw Hurwitz in another light: as a victim. The SEC brought civil suit against Drexel Burnham Lambert and its junk-bond chief Michael Milken on charges that they defrauded Drexel clients, illegally hid the ownership of securities and participated in insider trading, citing the Pacific Lumber deal among many others. The SEC charged that Drexel, as Hurwitz’s biggest financier in the takeover, secretly bought Pacific Lumber stock, improperly driving up the final cost to Hurwitz--and therefore Drexel’s fees.
Drexel and Milken settled with the SEC without admitting or denying the allegations.
A current round of shareholder suits, in state and federal court, sees the Drexel arrangement differently.
In a bid to break up the takeover itself, they say that Hurwitz, far from being a victim, worked in concert with Drexel and others to gain secret control of more than 5% of the company’s stock. Had shareholders known this, the suits contend, they could have invoked an anti-takeover measure of the company’s articles of incorporation. The measure makes a merger bid by anyone effectively controlling 5% or more of the stock subject to a tough 80% vote of approval by shareholders.
Hurwitz, who launched his takeover with less than 5% of the shares, was able to win the much-easier approval of 50% of the voting shares.
Trials in these suits are years away at best.
