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FOR IMMEDIATE RELEASE:
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AUSTIN TX — T. Boone Pickens, chairman and founder of the United Shareholders Association, and general partner, Mesa Limited Partnership, today testified before the Texas House of Representatives committee on Business and Commerce concerning House Bill 2554. His prepared statement follows.
USA is a grassroots, shareholder rights advocacy organization formed in August 1986. USA now has more than 58,000 individual members nationwide, including 8,000 in Texas.
USA has testified before Congress and the Securities and Exchange Commission on numerous occasions to promote shareholder rights. We appreciate this opportunity to present our views on the proposed anti-shareholder legislation.
Since shortly after its founding, USA has actively sought to preserve shareholder rights against the encroachment of state legislation designed to shield incumbent corporate managers from accountability to shareholders. We filed an amicus brief in the U.S. Supreme Court opposing Indiana’s discriminator statute in the landmark CTS Corp. v. Dynamics Corp. of America case in 1987. USA has testified against anti-shareholder legislation in a number of states. We presented testimony in Texas last year when this committee was considering similar legislation. Personally, I testified in Delaware last year urging the state legislature to reject the call for protectionism from the managers of Delawareincorporated companies.
We characterize this proposal as anti-shareholder because it severely undermines the rights of shareholders to decide who will run public corporations in Texas and transfers that power to incumbent corporate managers. The evidence compiled in other states that have enacted similar legislation demonstrates that effected corporations suffer a significant loss of shareholder value.
Of even more significance, however, by eliminating the incentives of management to perform for shareholders, these laws will have damaging long-term effects on competitiveness that go beyond the immediate harm to share value. The citizens of Texas cannot afford to allow the managers of its corporations to endanger the state’s economic future in the name of protecting their jobs.
In Texas, as elsewhere, the proponents of restrictive state tender offer legislation claim that it is intended to protect shareholders. Yet, I know of no state where shareholders have requested this protection. In every state that has adopted the legislation, it was advocated by corporate managers seeking protection from the competitive pressures of the marketplace.
There are two key sections of the proposed legislation that would shift from shareholders to managers decisions about who will run Texas corporations: a control share acquisition provision and a five-year business-combination moratorium, or “freeze-out.” Both of these have proven to protect the positions of management at heavy cost to shareholders and economic efficiency.
A study last year on the effects of Indiana’s control share statute by former White House staff economists Greg Sidak and Susan Woodward found a loss to shareholders in only 19 Indiana firms of $2.65 billion. “Indiana’s anti-takeover statute insulates Indiana corporations from the possibility that rival teams of managers will deploy the assets of those corporations more profitably and divide the earnings generated by those assets more favorably between management and shareholders,” said Sidak and Woodward.
Sidak and Woodward’s findings are consistent with other studies of control share statutes. A 1987 Securities and Exchange commission analysis found Ohio’s anti-takeover law, which includes a control share provision, cost shareholders of 37 Ohio-based firms more than $1.45 billion within 10 days of the law’s enactment. A recent update of the SEC study said losses ran as high as 3.4 percent for some Ohio companies.
Freeze-outs give incumbent managers enormous power to veto unwanted bids for control, even in cases where a majority of shareholders approve a transaction. A 1987 Federal Trade Commission study found that New York’s freeze-out protects managers at the expense of shareholders. The announcement of New York’s statute that eventually became law cost shareholders in 94 firms more than $1.2 billion, equal to nearly one percent of the value of the affected firms, according to the FTC.
The FTC study said that anti-takeover laws such as New York’s freeze-out “may promote the inefficient management of society’s assets by lessening the ability of capital markets to efficiently reallocate assets.” The FTC asserts that as a result, increases in the “real cost of goods and services produced by the firms affected by these regulations” is “injuring consumers as well as shareholders.”
New Jersey’s legislature was pressured into reenacting a fiveyear freeze-out despite warnings from the state’s own office of Economic Policy that the statute could harm the competitiveness of New Jersey corporations. The study found an 11 percent decline in the value of New Jersey firms affected by the law. The freeze-out “puts the veto power in the hands of incumbent management, which may prevent the company from reaching its full potential for development and growth,” the study concluded.
Since a freeze-out short-circuits the auction market, it may lead to coercive, under-valued management buyouts. By discouraging competing bids, the law allows incumbent managers to approve their own insufficient offers, while deterring competing premium offers. Given their insulated position, management has no incentive to offer full value.
Attempts to restrain restructuring and takeover activity would put at serious risk the economic benefits that have resulted from an active market for corporate control over the past several years. A September 1987 study by SEC Commissioner Joseph Grundfest found that takeovers increased shareholder returns by as much as $210 billion between 1981 and 1986. This money is recirculated through the economy, providing capital for new investments and creating jobs.
The President’s Council of Economic Advisers, in opposing the freeze-out legislation in Delaware that was enacted in 1988, said that these gains are “evidence that a competitive market for corporate control serves to move the country’s corporate assets into the hands of those managers who can utilize them most productively.”
Even more significant than direct gains to shareholders, however, are the incentives that an active market for corporate control provides for managers to cut costs, increase efficiency and improve productivity to maximize shareholder value and avoid the threat of a takeover. This has been the driving force behind a broad restructuring of American industry that is substantially improving the competitiveness of our firms.
Proof of the beneficial effects of this activity are available in data showing that productivity gains have been particularly strong in industrial sectors that have experienced a high level of restructuring. McKinsey & Co., the management consulting firm, found that the value created by restructuring is due to better management of corporate assets. “Contrary to popular belief ...our analyses show that more than 80 percent of the benefits of restructuring is generally attributable to improved performance,” said Ennius Bergsma, the head of McKinsey’s corporate finance practice.
Morgan Stanley’s John D. Paulus and Robert Gay reported that restructuring is “enhancing the competitiveness of our nation’s producers.” They found that “substantial value has been created through altered ownership, redeployment of assets, and the overhauling of management.”
By insulating management from accountability to shareholders, the legislation before this committee will eliminate the incentives of management to continue restructuring to improve efficiency and competitiveness. As a result, Texas firms will be slower to adapt to change in international and world markets. In the short run, the legislation will protect the organized interests of incumbent corporate managers, but will result in longer-term injury to consumers, the labor force and the economy as a whole.
While strongly urging you to resist the management entrenchment approach, I ask that you seriously consider an alternative. We support legislation aimed at promoting shareholder rights and management accountability. USA would be happy to help the Texas legislature crafting a true shareholder rights law, which would become a model for shareholder rights across the nation.
A true shareholder rights law would not resemble the proposal which this committee is currently considering. It would include
measures that preserve shareholder rights and end real abusive tactics. Provisions would include:
— a ban on discriminatory greenmail payment by managers;
— requiring a shareholder vote on the adoption of poison pill entrenchment devices, which have been adopted by nearly 900
corporations without shareholder approval;
— requiring shareholder approval for lucrative golden parachute management severance contracts;
— a confidential vote in corporate elections;
— a one share/one vote guarantee.
With such legislation, the owner of Texas’ corporations would be guaranteed management that is accountable and responsive to the interest of shareholders. The result will be corporations that are prepared to meet the competitive challenges that lie ahead.