'Some shareholders are more equal than others'

October 09, 1994|By David Conn | David Conn,Sun Staff Writer

In the corporate world, there are owners and then there are owners.

Giant Food Inc., for instance, has more than 38,000 shareholders, usually considered the true owners of a company. But after the four grandchildren of Giant's co-founder Samuel Lehrman sell their stock to the British retailer J. Sainsbury PLC, as they announced last week, only two shareholders will have the ultimate say in how Giant is run: Sainsbury Chairman David Sainsbury and Giant Chairman Israel Cohen.

"Some shareholders are more equal than others," observed Jack T. Ciesielski, president of R.G. Associates Inc., a Baltimore investment research firm.

This Orwellian reality is the result of a corporate law that allows companies to establish separate classes of stock, with different voting rights. The phenomenon is found most often at family-run companies, and there are several local examples. While the issue of dual-stock classes has cooled off since it came under attack during the era of hostile leveraged buyouts, regulators are considering a rule to preserve the democratic rights of some shareholders.

"It's kind of the golden rule -- he who has the gold makes the rules," said Patrick McGurn, legal counsel to the Investor Responsibility Research Center Inc., in Washington. The IRRC is a nonprofit research organization that advises institutional investors and corporations.

At most public companies, the common stockholders are entitled to their share in the benefits of ownership: cash and stock dividends; escalation in the price of the stock; and a vote in the major issues that face the company, such as board membership, compensation plans and most importantly, takeover offers.

But where companies have classes of common stock with different voting rights, ownership doesn't necessarily mean control, said Rick Sachs, a securities lawyer at Gordon, Feinblatt, Rothman, Hoffberger & Hollander in Baltimore. "You can provide for nearly every type of control that you could imagine to want to create different rights for," he said.

That includes stock that carries no votes, fractional votes, and even 10 or 20 votes per share.

The issue first attracted the spotlight during the leveraged buyout days of the mid-1980s. Shareholder rights advocates blamed the so-called "super-voting shares" for allowing entrenched management to block potentially lucrative takeovers at the expense of individual shareholders.

The Securities and Exchange Commission tried to institute a one share-one vote rule in 1989 that would have prohibited unequal voting rights. But a federal court struck down the rule a year later.

The IRRC found that of the 1,500 largest public companies, 122 had dual-stock classes at the end of last year.

At Giant, an extreme example, holders of 59.3 million common shares have no say in how the food chain operates. Instead all voting power rests with Mr. Cohen, whose 125,000 Class AC shares entitle him to name four of Giant's seven board members, and, soon enough, J. Sainsbury, whose 125,000 Class AL shares will allow it to name the other three board members.

Dual classes of stock are most common among companies built by and strongly identified with one or two families, such as Giant, McCormick & Co. Inc., and several media companies, including the Washington Post Co. and the Times Mirror Co., which owns The Sun and The Evening Sun, among others.

When these families reached a point where they needed new capital, but didn't want to give up operating control of the company, they sold stock that carried limited or even no voting rights.

At Hechinger Co. the 3,778 owners of Class A stock are entitled to one vote per share. There are 1,261 owners of Class B stock, but Hechinger family members own most of it, and cast 10 votes per share. While the B shares are less than a third of the total, they carry more than 80 percent of the voting rights.

"It becomes a forefront issue when there's a hostile takeover, because you get into fairness issues, blocking strategies," said Mr. Ciesielski, of R.G. Associates.

Even when the takeover is friendly, fairness concerns can arise. When casino operator Resorts International was sold to Merv Griffin's company several years ago, Donald Trump drew fire because he negotiated a large premium for his "super-voting" shares in Resorts, at the expense of other shareholders.

Likewise, Times Mirror is being sued by shareholders who claim the company's agreement in June to sell its cable operations unfairly favors the controlling Chandler family.

When the controlling family does a good job, there's rarely a dispute. Unequal voting rights "can be a problem if the controlling group is reknowned for its ignorance, or inability to run a company," acknowledged Peter Harkin, a senior vice president at D.F. King & Co. Inc., an investor communications firm in New York.

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