Harvard Prof Sues CA Over ‘Poison’ Power

Long Island Business News
Jeremy Harrell
May 19, 2006

A prominent shareholder activist and Harvard law professor has targeted software company CA Inc. in a bid to upset the balance of power in corporate America.

In a lawsuit filed last week, the professor, Lucian Bebchuk, is asking the Delaware Chancery Court to decide whether shareholders can rightfully claim more authority in deciding governance issues by taking charge of company bylaws. CA, like most public companies, is incorporated in Delaware.

Specifically, Bebchuk wants to allow CA shareholders to vote on a proposal that would require a unanimous vote of the board of directors to authorize a so-called poison-pill provision. Such maneuvers are designed to thwart hostile takeovers by doubling the number of shares that must be bought.

CA’s bylaws now require a majority board vote for a poison pill provision.

The suit comes a month after Islandia-based CA said it would not include in its annual proxy filing a proposed bylaw amendment Bebchuk submitted that sought the poison-pill authorization change.

Michael Barry, Bebchuk’s lawyer and a partner with Grant & Eisenhofer, based in Wilmington, Del. said a poison pill “discourages people from making unsolicited bids by making it ridiculously expensive. It prevents shareholders from considering legitimate third-party offers.”

“The point of this litigation … is to demonstrate that shareholders can exercise direct control over the operations of a company,” Barry added. “Directors are agents and serve at the behest of shareholders.”

Kurt Heyman, a partner with Proctor & Heyman in Wilmington, said Bebchuk’s suit cuts to the core of Delaware corporate law and would likely set a precedent in the increasingly heated battle between activist shareholders and boards of directors.

“A bedrock principle of Delaware corporate law is that a company is run by directors and not by shareholders,” Heyman said. “This [suit] is part and parcel of shareholder activism.”

Bebchuk sued CA after the company rejected his proposal in an April letter to the Securities and Exchange Commission. The software company contended that Bebchuk’s proposal is illegal in Delaware because it seeks to shift essential decision-making power from directors to shareholders.

In a statement, CA said: “We only recently received Mr. Bebchuk’s lawsuit and have no comment on it. As stated in our letter to the SEC dated April 21, 2006, we believe that the proposed By-Law amendment would violate Delaware law.”

Bebchuk, who owns a small number of shares in many publicly traded companies, submitted similar by-law amendments to 11 companies. American International Group, Bristol-Meyers Squibb and Time Warner have accepted Bebchuk’s proposals. The challenge to CA’s proxy, which is due a month before the company’s August annual meeting, is one of two Bebchuk made challenging the poison-pill provision.

Martin Lipton, a renowned corporate lawyer, wrote a white paper condemning Bebchuk’s shareholder activism, saying that the law professor is part of a “cabal” of academics, corporate raiders and hedge-fund agitators who “equate immediate stockholder wealth maximization with the national good.” Lipton also chided Bebchuk for turning these “very real companies” into his “case studies.”

Imposing a “shareholder-centric governance model” is “at odds with the fundamental construct of our corporate law,” Lipton wrote.
Bebchuk’s suit opens a second shareholder-activist front on CA’s proxy. Last month, labor union-owned Amalgamated Bank petitioned the SEC to allow a shareholder vote to dismiss two of the company’s directors. In that case, CA has argued that a dismissal motion is matter for the board, not the shareholders.

Barry said Bebchuk asked the Delaware court for an expedited review, given the two-month window before the proxy is issued.

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