There may be revolution in the air come the 1999 proxy season if boards of directors continue to ignore their nonbinding resolutions requesting changes in companies' shareholder rights plans.
Institutional investors are making a major change in strategy, and will propose binding resolutions mandating that boards carry out shareholders' proposals on poison pills.
Also sparking the activity is the expiration in 1999 of 28 poison pills at companies in the Standard & Poor's 500 index, which were adopted by companies in the late 1980s to protect themselves from hostile takeovers.
Guy Wyser-Pratte, president of the New-York based money management firm bearing his name, is on the front line in the overall fight. "Institutions have decided it's time for another Boston Tea Party," he said. "Only this time instead of cases of tea, they're throwing directors overboard."
Investors are furious, he said, because "(they) realize the poison pill has become perverted and used to eviscerate the property rights of shareholders."
Mr. Wyser-Pratte has helped develop a new poison pill reform proposal that will be submitted via binding resolutions to shareholders at the 1999 annual meetings of selected companies whose poison pills expire during the year.
The proposal would prohibit the board from renewing the company's poison pill without shareholder approval. The new pill also would include a provision that would require companies to put takeover offers to a shareholder vote and not simply reject them.
However, Martin Lipton, the attorney given credit for inventing the poison pill in the mid-1980s, thinks pension funds are only hurting themselves. "I think shareholders who do this (require that shareholders get to vote on poison pills) are making a big mistake," he said in an interview.
"This (hostile takeovers) is a matter for the board of director, ." he said. "This is inimical to the rights of shareholders." If shareholders are unhappy with a board of directors' response to a takeover proposal, "all they have to do is change the board of directors," he said. "They shouldn't mess around with the poison pill."
Institutional investors are already in the fray, fighting the so-called "dead-hand" poison pill, which allows only directors in place at a company at the time a tender offer is made to redeem the pill.
On Dec. 1 the Delaware Chancery Court, which had ruled against the dead-hand pill in July, threw out a variation of it put in place by Quickturn Design Systems Inc., Mountain View, Calif. Hoping to fight off a hostile takeover bid from Mentor Graphics Corp., Wilsonville, Ore., Quickturn enacted a poison pill that would have prevented a new board of directors from redeeming it pill for six months.
But the decision, which Quickturn is appealing, didn't rule that dead-hand poison pills are illegal in all circumstances.
The case now will go to the Delaware Supreme Court, "which is free to look at all four arguments we made against the pill" before the Chancery Court, said Christopher Kaufman, a partner in Latham & Watkins, the Menlo Park, Calif.-based law firm that represented Mentor.
"Dead-hand pills such as this one (enacted by Quickturn) interfere with the stockholder franchise" to have a say in the running of a company, said Mr. Kaufman. Because so many companies are incorporated in Delaware, the decision made by the Supreme Court will be extremely important, he added.
There also is hard evidence of how boards of directors have ignored "precatory," or nonbinding, resolutions on poison pills. The Investor Responsibility Research Center, Washington, issued a report on poison pills last June.
In the report, the IRRC tracked 13 resolutions on poison pills that won majority votes in 1997 and 11 that were deemed to have passed and found that companies had taken action on only four of the proposals.
"Most companies that are not faced with the threat of a binding resolution don't take action," said Kenneth A. Bertsch, director of communications at IRRC and author of the report.
Bart Naylor, director of corporate affairs for the International Brotherhood of Teamsters pension fund, Washington, which won a precedent-setting court fight with Fleming Cos. in 1997 that required the company to put the Teamsters fund's binding resolution to give shareholders the right to vote on the renewal of its poison pill in its proxy statement, said his fund is "talking to about a dozen companies about their poison pills."
"I see more shareholders moving toward proposing binding resolutions," he added.
BEST OF 2 WORLDS
A spokesman for the State of Wisconsin Investment Board, Madison, which runs the state's $12 billion pension fund and is working with Mr. Wyser-Pratte on its strategy, said, "stockholders should have a vote on those kinds of protections (poison pills) because they can be abused."
He added the new type of pill, which would mandate that shareholders have the right to vote on a hostile takeover after a specified time period, usually 60 or 90 days, "is the best of both worlds. It lets corporations block a lowball offer (by having the poison pill in place) and it lets shareholders vote to approve the deal if they want it."
The Wisconsin board is in discussions with 10 companies whose poison pills expire next year. It is hoping to get their agreement to put renewal of the poison pill to a shareholder vote and also to have a "chewable" pill that will allow shareholders to vote on a takeover proposal. If no agreement is reached, the board will attempt to file binding resolutions on the poison pills that will appear in the companies' proxy statements and be put to shareholder votes.
The pension fund of the Communications Workers of America, Washington, is filing resolutions against two companies with expiring poison pills.
Compaq Computers, Houston, allowed its poison pill to expire, but Suman Ray, a CWA spokesman, said the pension fund is filing a binding resolution to ensure the poison pill is not renewed without shareholder approval. A Compaq spokesman said the company had terminated its pill, but would not comment further.
The CWA also has filed a binding resolution with U.S. West Communications Group, Englewood, Colo., to require the company to put the renewal of its poison pill to a shareholder vote. Mr. Ray said the CWA discussions with U.S. West were "unsuccessful."
Michael Zucker, director of the office of corporate and financial affairs for the Union of Needletrades, Industrial and Textile Employees, Washington, said the union is in negotiations with two companies whose poison pills expire next year, asking them to put the renewal of the pill to a shareholder vote.
Mr. Zucker said the union's pension fund will file binding proposals to if they don't.