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Corporate Interests Widely Decry SEC's Plan on Proxy Reform

One opponent calls the proposal, focus of much public comment, 'an extreme overreaction.'

March 11, 2004|Jonathan Peterson | Times Staff Writer

WASHINGTON — The lawyer hired by Walt Disney Co. to help fend off a takeover bid by Comcast Corp. told the Securities and Exchange Commission on Wednesday that its plan to give investors a greater voice in board struggles was a major blunder.

The criticism from Martin Lipton, who wasn't speaking on behalf of Disney, reflected widespread opposition by corporate interests to the SEC's plan.

"I think it's a very serious mistake to take this step at this time," said Lipton, a famed anti-takeover strategist known for designing the "poison pill" defense for corporations trying to deflect unwanted purchasers.

Lipton made his remark at an SEC roundtable in which regulators heard sharply divergent views of their plan to give investors, under certain circumstances, use of a company's election materials to compete for spots on a corporate board.

The proposal -- backed in broad terms by major institutional investors and shareholder activists -- has sparked the most public comment of any proposal in the agency's history.

On Wednesday, three of the SEC's five commissioners expressed support for the general approach, indicating that a version of the plan would be approved this year.

SEC Chairman William H. Donaldson, a Republican, described the proposal as an alternative for unhappy investors who currently have no choice but to sell their stock or dig into their pockets to mount expensive, independent board campaigns.

In corporate board elections, investors may withhold their votes in symbolic protest -- like many did at Disney's meeting last week -- but such actions aren't binding.

Alternatively, dissidents must pay for a corporate election campaign, a costly undertaking that requires printing and mailing ballots to all of the company shareholders.

"The proposal ... is an attempt to find a middle ground between the extreme choices of forcing shareholders to give up their long-term interest in the company and sell their stock ... and forcing them to wage a wasteful proxy fight on the other," Donaldson said.

Under the SEC plan, a board challenge could begin if at least 35% of the shareholders withhold support from a board candidate in the election at the annual meeting.

Alternatively, a shareholder group owning 1% of the stock could propose a challenge, and it would then need to win a majority of shareholder votes.

At the next annual meeting, investors representing 5% of the company's stock could place one or two candidates on the corporate ballots, with the number of candidates tied to the size of the board.

"As I'm listening here, I'm trying to understand why it's so terrible for the corporate community to deal with this," said Commissioner Roel C. Campos, one of the Democrats, terming it a "modest, modest" proposal.

Investor activist Ralph V. Whitworth, a supporter, described the proposal as "the most critical and potentially, the most powerful" of post-Enron reforms because it would directly target the boardroom, where directors in the past failed to act as watchdogs.

Some critics say the plan doesn't go far enough.

One area of concern is time. Once shareholders qualify candidates for the corporate ballot, the actual vote would be a year away -- at the next annual meeting.

The SEC's proposed process is "slow, complicated, arbitrary and confrontational," said Joseph A. Grundfest, a professor at Stanford Law School.

On the other hand, U.S. Chamber of Commerce President Thomas J. Donohue suggested that the proposal strays into a domain of law reserved for states, "and we may well be in a position to go to court to test that."

As for Lipton, he called the proposal "an extreme overreaction" to corporate scandals at Enron Corp., WorldCom Inc. and elsewhere.

"It's too easy to say well, we need to fix this, we need to fix that, we need to fix everything. I think we fixed it," he said.

The struggle over Disney's leadership provided a real-world backdrop to the SEC debate. Before the Disney battle, an important part of the proposal -- that 35% of votes being withheld from a director could trigger an election challenge -- was seen by many as unrealistically difficult to reach.

SEC officials said they were unaware of any position Disney has taken on the proxy reform proposal, and Disney officials did not return calls for comment Wednesday.

Had the SEC proposal been in effect last week, the 43% of votes withheld for Michael Eisner, then chairman and CEO, would have been more than symbolic. It would have started a process that could lead to a formal challenge at Disney's next annual meeting.

One critic of the SEC proposal maintained that the Disney board's decision to remove Eisner as chairman proved the system works.

"Everybody has their own interpretation of what happened" at Disney, said Franklin D. Raines, chairman and chief executive of Fannie Mae. "One thing we know is that you had an effort to challenge the leadership of the board ... and somehow the voters were able to do it without a massive proxy fight."

Times staff writer Richard Verrier in Los Angeles contributed to this report.

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