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August 15, 2002

CORPORATE NEWSPEAK
SHAREHOLDERS' "RIGHTS" CLAUSES

Although his prophesies did not come true within the time frame he gave, many enduring images remain from George Orwell's famous book 1984. For example, we still refer to government as "Big Brother" when it gets too powerful or too intrusive.

To my mind, however, the most enduring, and most frighteningly true concept that carries through to today from 1984 is "Newspeak", the language Big Brother required the populace to use. The structure and vocabulary of the language were designed to actually limit the thoughts of those using it. Thus, Big Brother hoped to control the very thoughts of the people he ruled.

To my dismay, I see examples of Newspeak all around us nowadays. The smallest package of a cleaning product is called the "large" size. (Bigger ones are "jumbo", etc.) A parking meter sign says I get a half hour for a dime, but for my "convenience" it will give me a half hour for a quarter, as well. If they were really worried about my convenience, an hour and fifteen minutes for a quarter, would do just fine, thanks.

Newspeak In Your Mail

The most glaring example I see of Newspeak in the corporate world is the "Shareholders' Rights" clause so often seen in corporate charters these days. If you've been investing in stocks for several years or more, you've probably at one time or another gotten a proxy in the mail asking you to vote for a Shareholders' Rights amendment to some company's charter.

The line you'll get from management is that the measure is to prevent a corporate raider from coming in and taking over the company at a price that's unfair to you. In fact, nothing could be further from the truth. Shareholders' Rights measures are really designed to prevent shareholders from firing management that is not performing up to shareholders' expectations.

No one needs to protect you from outside corporate raiders. In order to buy enough stock to control a company, a raider must go into the open market and buy a large percentage of the shares outstanding. The very act of buying in such large amounts drives the price of the stock up, increasing the value of your investment. As the stock rises, each stock owner gets to make his or her own decision about when the price is right. If not enough people think the price is right, the raider can't buy enough stock, and can't take control of the company. It's that simple.

Your Right to Keep Lousy Management

What Shareholders' Rights measures do is use artificial means to make it impossible for a raider to acquire enough stock to gain control of a company's board of directors. The company usually accompanies this change of charter with another measure that rotates the election of board members so that current shareholders can't vote to throw out the whole group of directors at once. The combination of these measures makes a company's board and management virtually immune from replacement no matter how badly they perform. That's because small groups of individual shareholders can seldom muster the organization and resources it takes to carry on a proxy fight over the typical six year period it would take to gain a majority on the board of directors. You can't fire management until you replace the board members who have a too cozy relationship with management.

To add insult to injury, management actually spends shareholders' own money to fight the proxy battle to keep themselves in power.

It is natural for management to conveniently forget that they are not the company's owners, but shareholders should never forget who the real owners are. So, as a part owner of a publicly held corporation, you should always vote against so-called Shareholders' Rights measures. By defeating such measures you'll keep your right to fire incompetent management, and keep your right to decide what price is fair for your stock.

Jack




   
Copyright 2001 by Jack Adamo. All rights reserved.