Lansing Bill Bad For Everyone

April 18, 2003
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GRAND RAPIDS — A Senate bill that aims to provide more protection for directors of public companies in Michigan could have an adverse effect for those firms if it becomes law.

SB 218 could compel investors to sell common stock of Michigan companies, and keep others from buying shares, because the bill would remove power from a firm’s shareholders.

Introduced by Traverse City Republican Sen. Jason Allen in late February, the bill amends the Business Corporation Act.

The Senate Office of Policy and Legislative Affairs reported SB 218 would make it tougher for shareholders to remove directors. The report said the measure also would reduce shareholders’ ability to adopt provisions in their own companies’ articles or bylaws, or to defend against takeovers.

Under the bill, unless the articles of incorporation already state otherwise, shareholders would be prohibited from reducing the term of office of a director, from amending or repealing a provision that divides the board into classes; and from increasing or decreasing the number of directors without the prior approval of a majority of the directors in office.

In many instances, stockholders could only remove directors for cause unless the company’s articles of incorporation allow otherwise.

Some analysts have characterized the bill as a tool that would help Taubman Centers fend off a takeover attempt from rival mall owner, the Simon Property Group. They said the bill would make it more difficult for shareholders to accept a sale offer, but Allen remarked that it would simply make Michigan competitive with laws in other states.

The bill had emerged from the Commerce and Labor Committee, which Allen chairs, but was sent back to the committee last month.

A call made by the Business Journal to Allen’s Lansing office was not returned. Nor was a phone call to Senate Majority Leader Ken Sikkema’s office.

“It’s terrible. That’s exactly what we don’t want,” said Gregory Dodgson, financial consultant with Kent King Securities in Grand Rapids, of the bill.

“We want the stockholders to own the company. Management should do day-to-day operations, but when it comes to a takeover bid or firing somebody without cause, that is the stockholders’ right,” he added.

Eric Ericksen, an investment advisor and finance professor at GVSU, felt most legislation offered today goes against investors, especially smaller ones, and he wasn’t surprised that a bill would offer directors further protection.

“These arguments go on between the rich and powerful, between the trial lawyers and the takeover groups, and much of the time it’s done under the guise of protecting shareholder rights — and that’s really not the case,” said Ericksen.

“My interpretation is that it’s like two large companies deciding what is the fair price for energy, and neither one of them is on our side,” he remarked.

“And none of the people in on these kind of bills are on our side, because we’re not powerful enough to go down there and lobby for something that will work for us.”

Ericksen said he was referring to individual investors when he used “our side” and “us.”

He also said a state should never pass legislation that affects securities because the markets are international by nature.

“What worries me is any time they try to change the basic rules they end up choking the balance, making it more difficult for people to buy or sell, or be on the board, or whatever,” he said.

“The system we have now isn’t perfect, but it is understandable.

“My point is, I’m against any laws along this line because I understand the ones we have now. They’re not perfect, but I understand them.”

The Rasmuessen Investor Index — which purports to measure the confidence of investors — is down 40 points from this time last year presumably due to a lackluster equity market and the corporate scandals that have unfolded over the past two years.

A lack of confidence in corporate America has been blamed for pushing some investors to other securities, like real estate, and has kept them away from stocks.

Dodgson thought that if SB 218 is passed and becomes law, it would continue to erode that confidence, at least as far as Michigan firms were concerned.

“Absolutely. It goes against the grain of everything that is trying to be done here. The bill should be defeated,” he said.

Ericksen didn’t see the bill as very inspiring, either.

“It certainly won’t raise it,” he said of investor confidence.

But Ericksen added that he doesn’t have much confidence in measures of investor confidence.

“Those are just a diversion, a non-issue,” he said.

So who would be behind a movement to protect directors at a time when investors seem leery to invest? Dodgson felt corporate law firms were the key culprits.

“It is corporate lawyers that are advising management to do these things to entrench management, because those are the guys that are paying the lawyers’ bills,” he said.

“Guess what most of our congressmen in the state of Michigan are? Lawyers. I’m very much opposed to the bill.”

But Dodgson said he was pleased that shareholders have finally begun to take action against the stock options and golden parachutes that some top-level executives and directors have been given.

He also blamed attorneys for so much being handed to so few so freely, an act he felt left shareholders footing the bills.

“It leads right to their lawyers.

“Their corporate lawyers have advised them on these different issues,” said Dodgson, who once took part in a proxy fight against the management of a Chicago company.

“Part of this whole conspiracy against shareholders starts at the law offices.”

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