A minority opinion in the world of corporate governance holds that poison pills and staggered terms for boards of directors are not the obstacle to shareholder rights that many claim them to be.
Now BEA Systems has 2.71 billion reasons why that minority might be not be out in left field.
That’s the premium BEA shareholders received earlier this month when the company agreed to be acquired by Oracle Corp. for $19.37 billion—14 percent higher than a hostile bid Oracle made, and BEA rejected, three months earlier.
BEA’s success at holding out and extracting a higher price is significant because the software company has both a poison pill and a staggered board. Good governance enthusiasts have long argued that such takeover defenses hold down stock prices and hurt shareholders.
Indeed, BEA has been the target of shareholder resolutions to end its staggered board. In 2006, members of the New York City police and fire department pension funds called for BEA to declassify its board. The measure received 75 percent support, but the company (which had opposed the idea) did not act on it.
The same proposal has been resubmitted for the 2007 proxy season, but so far BEA has not held an annual meeting since 2006.
Lipton
In the last few years, in fact, more and more U.S. companies have bought into the notion that poison pills and staggered boards harm shareholders, and have been willing to dismantle them. Still, stalwarts like Martin Lipton—partner at the law firm Wachtell Lipton Rosen & Katz and widely credited as the inventor of the poison pill—have argued that such “shareholder rights plans” give companies more time to field additional offers, preventing quick takeovers on the cheap or under pressure from shareholder activists.
How much all that theory played on in practice at BEA isn’t clear. The company did not return a phone call asking for comment. Millicent Budhai, director of corporate governance for the comptroller’s office of New York City, which filed the resolutions on behalf of the city pension funds, says the deal and the poison pills have nothing to do with each other.
”The higher offer they received was not correlated to having a classified board and pill in place,” she says. “They were just seeing if they could get a higher offer from someone else.”
Another twist to the plot: famed corporate raider Carl Icahn has accumulated a 13 percent stake in BEA, enough to make any board feel uncomfortable. The board could have decided to sell to Oracle to placate Icahn, but the reality is that he would have needed at least two years to secure a majority on the board. “When you have protections in place, the options for a hostile or proxy fight are limited,” says Shirley Westcott a managing director at proxy-advisory firm Proxy Governance.
Going Off the Pill
According to the research firm SharkWatch, 1,400 U.S. companies had a poison pill in place at the end of last year, down 13.6 percent from 2006. About 80 percent of the remaining 1,400 companies are either small or microcap companies; less than 30 percent of the S&P 500 have poison pills, compared to 60 percent in 2002.
Meanwhile, a recent analysis from the law firm Shearman and Sterling found that only 33 of the Fortune 100 companies had classified boards last year, down from 54 in 2004.
“When you have protections in place, the options for a hostile or proxy fight are limited.”
— Shirley Westcott,
Managing Director,
Proxy Governance
“Shareholder activists have consistently argued that such defenses entrench management and directors and prevent shareholders from receiving full value for their shares,” Shearman and Sterling said in the report.
But the study added that “the merits of these arguments can be debated,” and governance scholars have been doing so for years. In 2003, Harvard University professors Lucian Bebchuk and Alma Cohen concluded in a study that in a majority of U.S. public companies, a staggered board protects board members from removal in a hostile takeover or a proxy contest and is associated with a lower market value.
The two did find that staggered boards established in company by-laws rather than charters (and so can be amended by shareholders determined to oust incumbent directors) do not have a statistically significant association with reduced market value. Charter-based staggered boards, however, bring about a mean reduction in market value of 4 to 6 percent, which Bebchuk and Cohen called “economically significant.”
The counter-argument came last year. Three professors—Thomas Bates of the University of Arizona, David Becher of Drexel University, and Michael Lemmon of the University of Utah—studied the relationship between board classification, takeover activity, and transaction outcomes for a number of firms from 1990 and 2002. They concluded that how a board is classified does not change the likelihood that a company, once targeted for acquisition, is ultimately acquired. In addition, they found that shareholders of targets with a classified board see the same returns as those of targets without a staggered board.
While board classification can reduce the chance of receiving a takeover bid, “the economic magnitude of deterrence on the value of the firm is relatively small,” according to the study. When examining the target company’s stock price from the announcement of a bid through the eventual transaction, “Classification has an insignificant impact on the cumulative abnormal returns realized by target shareholders.”
In addition, several studies over the years by Georgeson Shareholder Communications and JP Morgan & Co. found that companies with poison pills have historically received higher takeover premiums when acquired than companies without them. Yet another new study, led by Professor Sanjai Bhagat of the University of Colorado, finds no connection at all between corporate governance and corporate performance. Rather, Bhagat and his colleagues found, no single “best” measure of corporate governance exists. The most effective governance appears to depend “on context, and on firms’ specific circumstances.”
Like those surrounding Oracle’s takeover of BEA Systems.
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