February 13, 2007

2007 Preview: Takeover Defenses

From ISS’ Friday Report: This year, individual shareholders are taking the lead in filing proposals that target takeover defenses, such as classified boards, “poison pill” plans, supermajority voting rules, and requirements for holding special meetings.

Proposals to declassify corporate boards will be well represented this proxy season. As of Feb. 5, ISS was tracking more than 40 such proposals. Labor pension funds submitted seven resolutions, including a third-time proposal filed at Peabody Energy by the AFL-CIO. Peabody says the proposal was intended to “pressure the company into adopting policies being promoted by union officials that would be detrimental” to the firm, shareholders, and employees.

The Amalgamated Bank’s LongView fund has withdrawn a declassification proposal at Martek Biosciences after the company adopted the proposal. New York City’s pension funds have also filed proposals to declassify boards, as have a number of individual shareholders. In recent years, U.S. companies have become increasingly receptive to this governance reform. A majority of S&P 500 firms now allow for the annual election of all directors, according to an ISS study on boards at S&P “Super 1,500” companies.

Several issuers that have begun the process of declassifying their boards or plan to put the matter to a shareholder vote have asked for “no-action” letters from the Securities and Exchange Commission on the grounds that the proposals have been “substantially implemented.” These companies include Avista, Lear, Piper Jaffrey, and Visteon. Three other proposals to declassify boards have been withdrawn in the face of no-action challenges.

Individual shareholders thus far appear to be the only proponents who have submitted resolutions to limit poison pills, according to ISS records, with a total of 18 filed. Hewlett-Packard sought to exclude a poison pill bylaw proposal filed by investor Nick Rossi, but the SEC staff rejected that request on Dec. 21. Boeing, Home Depot, and Honeywell have asked the SEC for permission to exclude similar proposals. Honeywell argued that it has “substantially implemented” the proposal by adopting a new pill policy in December.

At Walt Disney’s annual meeting on March 8, investors will vote on a bylaw proposal by Harvard Law Professor Lucian Bebchuk that calls for a 75 percent vote by directors to adopt or amend a poison pill plan and would impose a one-year limit on pills that are not ratified by shareholders. Management opposes the proposal, arguing that it would limit the board’s ability to respond to hostile takeover offers and may not be enforceable under Delaware law. The media-and-entertainment company also warns that the 75 percent threshold would allow “a small group of directors” (such as representatives of an acquirer) “to block action that other directors believe is in the best interests of shareholders.”

A similar Bebchuk bylaw proposal received 48.5 percent support at CA last year and prompted the business software company to modify its pill and agree to put the defense to a shareholder vote.

Members of the Chevedden, Rossi, and Steiner families have filed 20 proposals this year seeking to strengthen shareholder rights to call special meetings. The proposal calls for boards to amend bylaws to give “holders of 10 percent of outstanding common stock the power to call a special shareholder meeting.”

Shareholder activist Evelyn Y. Davis has submitted at least 14 proposals calling for cumulative voting. Her targets this year include Aetna, General Electric, IBM, Safeway, and Bank of New York. Other individual investors have filed another 10 proposals. Last season, ISS tracked 23 proposals calling on companies to allow for cumulative voting that went to a vote between Jan. 1, and June 30, 2006. Average support for those proposals amounted to 39.8 percent.

Proposals to eliminate supermajority vote requirements also will be well represented this season, according to ISS records. Thirty such proposals were filed prior to Jan. 1, with slightly more than half by members of the California-based Rossi family. The California Public Employees’ Retirement System also intends to file proposals on the issue, fund officials tell ISS. Proponents intend to capitalize on strong support for such proposals in recent years. Last year, resolutions to eliminate supermajority requirements averaged 67.8 percent support for 19 proposals that came to a vote between Jan. 1 and June 30, according to ISS records.

While labor funds are less focused this year on takeover defense-related measures, they continue to file at companies that have failed to act on past majority votes on shareholder proposals. This year, union funds will be filing proposals asking companies to create committees to respond to cases where a majority of shareholders supported a resolution and the company failed to act.

The International Brotherhood of Electrical Workers (IBEW) filed such a proposal at Genzyme (where an IBEW-filed golden parachute proposal won 57.9 percent of votes cast last year) and at OfficeMax, where a similar IBEW proposal received 53 percent support in 2006.

Companies Take Action

Meanwhile, a number of companies have acted to dismantle takeover defenses. Last year, at least seven firms, including Amgen, Hilton Hotels, Motorola, and Newell Rubbermaid, terminated their poison pills following majority votes for shareholder proposals requesting the redemption or submission for investor approval of any pill.

Last month, the board of McKesson, a San Francisco-based healthcare services firm, amended the company’s poison pill to let it expire on Jan. 31. The board also agreed to ask shareholders to vote to institute annual elections for all directors.

“These actions demonstrate our board’s continuing commitment to strong, stockholder-focused, contemporary corporate governance practices, which we believe are consistent with our goal of creating long-term, sustainable value for McKesson stockholders,” John H. Hammergren, the company’s chairman and chief executive officer, said in a statement.

In December, Schering-Plough said it will rescind its poison pill and accelerate the declassification of its board from 2008 to this year’s annual meeting. The New Jersey-based pharmaceutical company also plans to recommend that shareholders vote to reduce the 80 percent supermajority requirement to simple majority approval for the removal of directors, and for mergers and acquisitions.

Marathon Oil and IBM recently said in regulatory filings that they will ask for shareholder approval at their 2007 annual meetings to eliminate supermajority voting rules. 3M, FedEx, and Lockheed Martin are among other companies that recently lowered their vote requirements, according to The Wall Street Journal.