Council Research Service
A L E R T S
Vol. I, No. 7
February 28, 1996
Editor: Ann Yerger
©1996, Council of Institutional Investors
FORMER COUNCIL CO-CHAIR HARRISON J. GOLDIN helped lead several pension plans in a court battle to protect plan assets. A federal judge said District 65 of the Bureau of Wholesale Sales Representatives, three affiliated pension funds and a charitable organization could proceed with their case against Prudential Securities. Judge Willis B. Hunt ruled that the six-year statute of limitations started when the plaintiff discovered the violation-- not when the alleged wrongdoing--took place. A federal court appointed Goldin as successor trustee for District 65 in 1993. The trustee for the other three plans attended his first trustees meeting in 1991.
ALUMAX'S CLASSIFIED BOARD may be a topic of discussion not only with the Laborers International Union of North America--which has filed another resolution on the subject for a vote at the 1996 annual meeting--but also with hostile suitor Kaiser Aluminum. On Feb. 22, the rival aluminum company offered to buy Alumax for more than $2 billion in stock and cash. Alumax rejected the offer and adopted a poison pill.
At Alumax's 1995 annual meeting, 67.7 percent of the votes cast--representing 47.2 percent of the outstanding shares--supported the Laborers proposal to repeal the staggered board. Chairman and CEO Allen Born, responding to the Council's second letter about the board's response to the 1995 vote, wrote that if two-thirds of the outstanding shares support the 1996 resolution, then the board would recommend amending the charter in 1997. The charter amendment would require another two-thirds vote.
The classified board may figure in Kaiser's strategy at Alumax. The Wall Street Journal noted that one of Kaiser's options is to keep pressure on by launching a proxy fight. In August 1995, Alumax VP Helen M. Feeney wrote to the Laborers that the classified board was not adopted as an antitakeover measure, and our board believes it has worked well and has not compromised the accountability of the board. However, the staggered board will serve as a powerful takeover deterrent now, because it will block Kaiser from gaining control of the board in 1996 through a proxy fight. (Born is one of three directors up for re-election in 1996.)
Charles Hurwitz, who controls Maxxam, the 62 percent owner of Kaiser, joins the list of 1996 noisemakers with colorful and controversial pasts. Several pending lawsuits allege that Hurwitz was responsible for the 1988 failure of a Texas thrift that cost taxpayers $1.6 billion. Other lawsuits and disputes resulted, and some are still pending, from his leveraged buyouts of several companies in the 1980s.
OTHER CONTROVERSIAL TAKEOVER ACTIVISTS apparently haven't been hurt by their pasts, according to panelists at the Feb. 23 Institutional Shareholders Services Proxy Issues 96 conference. David Eisner, executive VP of Jefferies, said investors were willing to look past the reputations of Carl C. Icahn and Bennett S. LeBow in casting their votes on Brooke Group's consent solicitation at RJR Nabisco. Ralph Whitworth, president of Whitworth Associates and adviser to Kirk Kerkorian in his efforts at Chrysler, agreed, noting that most institutions were receptive to Kerkorian and his message.
Both lauded the results of the campaigns launched by these controversial activists. Eisner, whose firm acted as financial adviser to Brooke Group, called the RJR vote perhaps the single largest shareholder rejection of management strategy in U.S. corporate history. Whitworth described the process leading to Chrysler's settlement with Kerkorian as a milestone in shareholder rights and the corporate governance movement. (For more information on results of the consent solicitation at RJR Nabisco, see Feb. 23 Council Alert and for details on Chrysler's announcement, see Feb. 9 Alert.)
Eisner and Whitworth were joined by Kayla Gillan, deputy general counsel of CalPERS, and moderator Nell Minow, principal of LENS, on the Preview of the 96 Proxy Season panel discussion.
BROOKE GROUP'S CONSENT SOLICITATION calling for the immediate spin- off of RJR's remaining stake in Nabisco was supported by 20 of RJR's 25 largest institutions (and 35 of the 50 biggest), according to Eisner. He said public pension funds were less supportive of dissident LeBow than money managers. LENS did not support Brooke Group's spin-off resolution, Minow said, although it voted for Brooke Group's proposal to amend RJR's bylaws to restore shareholders right to call a special meeting. Both proposals passed, but the company says it won t do an immediate spin-off.
The interests of RJR's directors may conflict with those of the shareholders, Eisner said, because the board may be worried about potential personal liability. Under Delaware law, where RJR is incorporated, directors may be held personally liable for monetary damages resulting from certain actions, including the payment of illegal dividends--which the spin-off could be deemed. Eisner argued that RJR should be run not by lawyers but by business people willing to take risks. Brooke Group's potential dissident slate is willing to take on the liability risk, he said.
Despite RJR's "just say no" response to the shareholder vote, LeBow remains committed to a rapid spin-off of the food business. If Brooke Group wins a proxy fight but fails to complete a spin-off within six months, the dissident says it will call a special meeting to elect new directors, according to Eisner. Brooke Group's other goals for RJR are:
The company says its corporate governance profile is already shareholder-friendly. For example, directors are elected for one-year terms, and the board has not adopted a poison pill.
CALPERS ANALYSIS OF ITS 1996 TARGETS revealed that four of eight (excluding Melville and Edison Brothers) had at least one director who served on the boards of four or more poorly performing companies, according to Gillan. She said this individual director review was part of CalPERS new focus on the performance of the board. The fund isn t ready to publicize the names of these directors. (For details on CalPERS 1996 activism campaign, see Feb. 6 Alert.)
RELATIONAL INVESTORS LP, a fund created by Ralph Whitworth and David H. Batchelder, will use a strategy similar to CalPERS 1996 focus on mid-sized companies. Whitworth said the fund, which should soon receive $200 million from CalPERS, plans to buy 3 to 10 percent stakes in four to six mid-sized firms. The fund is focusing on underperformers relative to peers and the market and where there is a clear path toward reversing the performance. Whitworth said the fund expects improved financial results in 12 to 24 months.
LINDA QUINN, speaking on her last day at the SEC, told attendees at the ISS conference Feb. 23 that reform of the shareholder proposal process is unlikely without some consensus by all interested parties--including companies, institutional investors, socially-conscious investors, investment managers, individuals and unions. Current positions of interested parties are basically unchanged from 1983, the last year the SEC attempted to revise the process, she said, and this isn t a prescription for a constructive approach.
Quinn, outgoing director of SEC's division of corporation finance, reported that two recent SEC initiatives have been tabled. A proposal to abbreviate the disclosure in corporate annual reports met with widespread opposition. As proposed, full disclosure would have been included in 10-Ks, which companies would have been required to mail within five days of a shareholder's request. Due to the increased availability of financial information on-line through the SEC's EDGAR system and other sources, the commission proposed changing a company's responsibilities from the delivery of information to the access of information. However, access is not an idea whose time has come, Quinn reported.
Reaction was predictably mixed to the SEC's proposal to move certain information from the executive compensation section of the proxy materials to the footnotes of the annual report and to amend the proxy statement disclosure of director pay to a tabular format. Users generally opposed moving the executive pay information but supported changing the director pay format. Companies were more enthusiastic about the executive pay changes but voiced opposition to the proposed director pay table. The split is not a prescription for fast action, Quinn said. She doesn t expect any changes for the upcoming proxy season.
Two rulemaking issues are pending. First, the commission hasn t responded to a request from a number of institutional shareholders for the reversal of the Cracker Barrel decision, which allows companies to omit employment-related proposals on the grounds of ordinary business. Second, in response to a petition from the American Trucking Association to allow the exclusion of certain shareholder resolutions filed by unions, Quinn said the SEC staff is putting the burden on companies to provide quite concrete evidence of an attempt to misuse the process.
THE AMERICAN BAR ASSOCIATION's committee on corporate laws has proposed amending the Model Business Corporation Act to increase the percentage of outstanding shares required to call a special meeting from 10 percent to up to 25 percent. The committee says the more stringent requirement will give corporations greater flexibility to prevent the occasional abusive use of the special meeting demand procedure by a relatively small minority of shareholders. Many states incorporate the provisions of the ABA's Model Act in their state laws.
The rights of shareholders to call special meetings have been limited by a growing number of companies and states. For example, when Rhode Island-based Hasbro received a hostile offer from Mattel earlier this year, the state legislature passed a bill deleting a law allowing owners of at least 10 percent of the stock to call a special meeting. A growing number of companies have amended their bylaws to increase the percentage of shares required to call a special meeting or to eliminate the right entirely.
The proposal also includes a statutory provision requiring an announcement to be made at the meeting specifying when the polls will close--after which, no ballots, proxies or votes may be revoked or changed. The committee said this addresses relatively sparse case law...some of which suggests votes could be changed up until the time that the inspectors of the election announced the results.
Comments on the proposed change are due by May 1, 1996 and should be sent to Donald A. Scott, Chair, Committee on Corporate Laws, 2000 One Logan Square, Philadelphia, PA 19103.