Dual-Class Shares Spell Aggravation for Directors
from
March/April 2007
by Julie Connelly
As if directors didn’t have enough governance problems to worry about, another is likely to rear its head this proxy season—the challenge of trying to represent all stockholders at a company where a handful of investors control the board through a special class of shares. Among the companies under shareholder attack: New York Times Co., where the holders of the A shares (representing 99.4% of the stock) get to elect only four of the 13 directors, while the owners of the B shares (primarily the Sulzberger family) get to select the rest. (See the box on page 17 for who picked whom.) Morgan Stanley Investment Management, which owns 7.6% of the A shares, wants Times Co. to declassify its shares and provide equal voting rights for all common shareholders—something the Sulzbergers are unlikely to agree to.
The Corporate Library, a governance watchdog, estimates that about 300 companies have this kind of share structure. They include a number of other media outfits, such as Dow Jones and Washington Post Co., whose dominant families, like that of Times Co., maintain that hoarding voting control protects editorial integrity. With newspaper share prices depressed industrywide, the dual structure serves another purpose: It’s a potent anti-takeover device. Unlike poison pills, it’s almost impossible to get rid of, since B holders rarely vote to eliminate their privileges. Says attorney Roland Hlawaty, a partner at Milbank Tweed Hadley & McCloy: “Without either the support or at least the grudging consent of the controlling stockholders, you can’t declassify.”
Dual-class structures can lead to management entrenchment, which Morgan Stanley Investment Management believes is the problem at Times Co. It notes that under chairman and publisher Arthur “Pinch” Sulzberger, the company’s stock has declined more than 50% from its 2002 high and that profits have shrunk.
Of course, when things are going well investors tend to be quiet. Says William E. Mayer, founder of Park Avenue Equity Partners and lead director of Lee Enterprises, a Davenport, Iowa, newspaper chain that also has dual-class shares: “If you perform okay, then people more or less leave you alone. But when the performance isn’t there, that’s when you leave yourself open with A and B shares. That’s when people ask if having a different kind of accountability is the cause of the company’s problems.”
Not all attempts to eliminate dual stock classes assuage shareholders. Indeed, at Emmis Communications, an Indianapolis company that owns radio and television stations, such a move has triggered multiple battles with large investors. Last May Jeffrey Smulyan, the founder, chairman, and CEO, who also holds 100% of Emmis’s class-B voting shares, offered to buy the 83% of the company he didn’t own, at $15.25 a share. Other shareholders regarded this as a lowball bid because various Wall Street analysts had pegged Emmis’s liquidation value at $20 or more a share. Smulyan said that if shareholders didn’t accept the deal, he would vote his B shares to block any other offer for the company.
A special committee of the board boldly chose to stand up to Smulyan and refused to recommend his offer to the shareholders. He withdrew it and came back to the board, informally raising his bid to $16.80. That went nowhere, and he never made a new formal offer.
Just as the board might have been congratulating itself on acting for the general good, three irritated fund managers from Arnhold & S. Bleichroeder Advisers, which owns 1.7% of Emmis’s A shares, demanded to know why directors had not grabbed the higher offer. “We believe the answer lies in an extreme overreaction to perceived conflicts of interest arising out of Mr. Smulyan’s personal and professional ties to board members, including the fact that only two of the nine board members…were elected by Class A shareholders,” the investment outfit wrote to Emmis. The letter declared that since Smulyan would block any other attempt to sell the company, it behooved the board to get back to the negotiating table and work out a deal at around $16.80 a share.
Meanwhile, Martin Capital Management, which owns 8.7% of the A shares, has submitted a shareholder resolution for Emmis’s 2007 annual meeting that seeks to eliminate the dual-class structure. “Our solution is to box in the board,” says Todd Martin, whose father, Frank, is leading the charge against the dual-class shares. “If the board recommends a vote for our resolution, then Jeff looks like a complete fool if he goes against the board’s recommendation.”
Even on those rare occasions when the controlling shareholders agree to surrender the special voting shares, a board can still get it in the neck as it tries to keep everybody happy. Case in point: Reader’s Digest Association Inc., which four years ago recapitalized to eliminate its B shares. No one gives up control without being paid for it, so the company agreed to buy out the B holders at a 25% premium to the price of the A shares. The A holders yelped—and four of them sued. They objected to the premium and also the directors’ institution of anti-takeover provisions, including a staggered board, to replace the lost protection of the B shares. The publicity surrounding the shareholder suits was nasty, and ultimately the Delaware Supreme Court barred the recapitalization. Two months later Reader’s Digest came back with another offer, clipping the premium to 22% while retaining the anti-takeover provisions. That was good enough for the shareholders, who voted for it.
So should you be on the board of a dual-class company?
You’d better be able to handle conflict, because if the company isn’t doing well or if the controlling shareholder pressures you for a special deal, you’ll be in a no-win situation. Then the answer to the question won’t be “Why not?” but rather “Why did you set yourself up for the aggravation in the first place?”
New York Times Co. Board
with other directorships
Elected by the holders of B shares
Arthur O. Sulzberger Jr., 54
Chairman and Publisher, New York Times Co.
Michael Golden, 56*
Vice Chairman, New York Times Co.
Janet L. Robinson, 55
President and CEO, New York Times Co.
Brenda C. Barnes, 52
Chairman and CEO, Sara Lee Corp., Chicago
Staples Inc.
Lynn G. Dolnick, 54*
Former Associate Director for Exhibits and Outreach,
Smithsonian National Zoological Park, Washington, D.C.
David E. Liddle, 61
Partner, U.S. Venture Partners, Menlo Park, California
Ellen R. Marram, 59
President, Barnegat Group LLC, New York City
Eli Lilly & Co., Ford Motor Co.
Thomas Middelhoff, 52
CEO, KarstadtQuelle AG, Essen, Germany
Cathy J. Sulzberger, 56†
Partner, LHIW Real Estate Development Partnership, Laurel, Maryland
Elected by the holders of a shares
Raul E. Cesan, 58
Founder and Managing Partner,
Commercial Worldwide LLC, New Vernon, New Jersey
William E. Kennard, 49
Managing Director, Carlyle Group, Washington, D.C.
Sprint Nextel Corp.
James M. Kilts, 58
Founding Partner, Centerview Partners, New York City
MetLife
Doreen A. Toben, 56
Executive Vice President and CFO,
Verizon Communications Inc., New York City
*Arthur Sulzberger’s cousins
†Arthur Sulzberger’s sister
