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Anti-Takeover Moves : Investors Relinquish Key Rights

THE CHALLENGE TO SHAREHOLDER RIGHTS: First of a series.

May 18, 1986|MICHAEL A. HILTZIK | Times Staff Writer

NEW YORK — On April 15, the stockholders of Chase Manhattan Corp. elected a board of 24 directors. Then they gave them the company.

After approving rules that make it almost impossible to replace a director for any reason, the bank company's stockholders gave the board virtually unassailable authority to accept or reject any takeover bid.

The stockholders nearly eliminated their own power to overrule the board. From now on, overriding a board decision or repealing any of the April 15 rules will require a vote of 75% of all shares.

That is a greater margin than Congress needs to override a presidential veto. The changes themselves passed only by majorities as slim as 52.4%.

Like Chase's stockholders, investors in about 40 other companies have voted this year to relinquish some of their most important rights. Stockholders in another 387 major corporations did the same thing in 1985.

Such extensive restrictions on shareholder rights--aggressively sought by corporate executives fearful of hostile takeovers--have set in motion perhaps the biggest shift in control of American business since the Great Depression, evoking the atmosphere of the 1920s when huge corporations were dominated by the owners of minuscule portions of their stock. The change could have major ramifications for the U.S. economy and for the political environment in which American business operates.

Critics say the latest crop of restrictions, often known as "shark repellents" for their anti-takeover design, allow even ineffective executives to fend off responsible challenges from those who advocate changes in corporate direction or management. Over time, that could make American industry less efficient.

Could Lose Legitimacy

Concentrating power in the hands of executives with limited stock holdings also could destroy the corporation's best insulator from government interference--the perception that it is the public, through ownership of shares, that is really at the heart of the economic system.

"This might be one way business would lose its legitimacy as the private controller of the means of production," said former Securities and Exchange Commissioner Bevis Longstreth, now a corporate lawyer in Manhattan. "And that could lead to more government intervention."

The shift in power from stockholders to management arises out of a historic fissure between executives and the corporations' nominal owners. Executives fear the power of institutional investors, who now own more than half the stock of companies listed on the New York Stock Exchange, to determine the fate of their firms and the future of their careers.

Institutions--insurance companies, mutual funds, banks and pension funds--do not demonstrate the same corporate loyalty that managements are accustomed to receiving from individual shareholders. Institutions trade stock more vigorously--they account for 75% of all transactions on the New York Stock Exchange--and are much more likely to react to short-term fluctuations in company earnings.

Executives hold institutional investors largely responsible for the wave of hostile takeovers, contending that they sell firms to the highest bidder solely for the sake of a quick profit and without regard to long-term company prospects and the impact on employees and communities.

"We better start looking at ways of protecting the American economic system from its shareholders," said Andrew Sigler, chairman of Champion International Corp. and head of a task force on merger issues for the Conference Board, a management lobbying group. Three-fourths of Champion's stock is owned by institutions.

Professional investors, who believe that share ownership should carry the right to a voice in corporate governance, regard such views with scorn.

'Bohemian Grove'

"I call it management by Bohemian Grove," said Robert Kirby, chairman of the Los Angeles investment management firm Capital Group, referring to the exclusive corporate retreat outside San Francisco. "Their argument is that shareholders aren't investors in these companies, just guys who trade securities."

Whatever the arguments, the trend is unmistakable: Ownership of a share of common stock no longer gives investors a predictable say in the affairs of a corporation.

At hundreds of companies--one being Federated Department Stores, owner of Bloomingdale's, Bullock's and Ralphs Grocery--shareholders no longer have the right to replace a majority of the board at a single election.

At such companies as Gannett, publisher of hundreds of newspapers, and Procter & Gamble, the consumer-goods concern, shareholders have lost the traditional privilege of calling their own shareholders' meeting.

Many companies no longer allow each share an equal vote in corporate affairs.

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