Usually content to leave the stock market to its own devices, securities experts have begun an avid search for ways to shore up regulation and end the trading abuses that figure in the unhealthy rash of corporate takeover campaigns.
Last year, most of the effort by the Securities and Exchange Commission and Congress was aimed at correcting corporate defensive practices that are symptoms of the takeover problem rather than causes. Even that effort failed in the face of reluctance to inhibit free market choices. But as the takeover binge heats up, some of this reluctance is disappearing and proposed remedies are getting more to the heart of the problem.
The alternative is for companies to build more and more elaborate barriers to takeovers, often at the expense of sound business judgment.
Among the more far-reaching reform proposals to date is one offered late last year by New York securities lawyer Martin Lipton, a leading expert in takeover law. Under his plan:
- Anyone seeking to acquire more than 5% of a company's stock normally would be required to make an offer for all of it. This would eliminate so-called two-tier offers in which shareholders who get on the raider's bandwagon early get a higher price. In addition, because initial block purchases would be so limited, companies would be discouraged from paying "greenmail"--getting a raider to end his takeover effort by buying back his big block of shares.
- An investor would have to disclose his holdings when he amasses 3% of a company's stock instead of the present 5%. Any tender offer would have to remain open for 60 calendar days instead of just 20 business days.
- Institutional investors which held more than 5% of an issue could not participate in any effort affecting control of a company.
At the same time, Lipton would enforce corporate accountability to shareholders by halting the emerging practice of companies creating more than one class of common stock, some without voting power, to insulate management and directors from outside attack. He would bar any such stock from trading on national securities markets.
Let Outsiders Decide
Former SEC commissioner A. A. Sommer Jr. points to efforts to get public companies to have more independent outside directors and suggests giving this group on the board the power to block a tender offer or decide it should be presented to shareholders.
Taken together, these proposals would take steam out of the trend. But they are too timid in dealing with the underlying misuse of the public stock market.
What is needed is to strictly circumscribe the influence pension funds and other money managers have on stock prices and on the control of public corporations.
Moreover, new rules should be established that prohibit, not just limit, concerted buying of shares by individuals and their investment bankers when the purpose is to set up a takeover threat. At the very least, such would-be raiders should be required to make their bid for the company in the open from the beginning, not after acquiring a major position. Such secret purchases are made at the expense of other investors who sell not knowing what the raiding group knows--that the price shortly will be bid up. This also would make it more difficult for raiders to profit in an aborted attack.
Suspend Hostile Bids
While these regulations are under discussion, it would be wise to declare a moratorium on hostile tender offers.
Such steps need not entrench bad management in American companies. There are other effective ways to insure efficient transfers of power. More independent directors is one. The old-fashioned proxy contest is another. Takeover proposals still could be made directly to a corporation's board and the terms made public, forcing the board to weigh the offer under the public spotlight.
Those who argue that any new regulation would be too inhibiting should recall how severely an inadequately regulated stock market has affected the nation's business in the past. When professionals are permitted to dominate the playing field, they often create artificially inflated prices and that inevitably leads to trouble.