Ousting Management;

 

WHEN THE DELAWARE SUPREME Court talks, business executives listen.

Because so many companies are incorporated in Delaware, court decisions in that state carry a lot of weight. And now a Delaware Supreme Court Justice, Andrew G. T. Moore II, predicts that an obscure statute could have a major effect in coming years on the ability of management to retain control in the face of dissident shareholders.

Consider this: last October, Newell Co. increased its holdings in the William E. Wright Co., a Delaware corporation, from a minority interest to 57%. The next day, Newell sacked all seven directors of Wright, a ribbon and fashion trimmings maker with around $52 million in sales.

In most states, Newell would have had to wait months for the annual meeting or a special meeting to carry out its coup -- or it would have had to gain unanimous written consent of all shareholders, a difficult proposition. But the lightning strike against Wright relied on a statute -- on the books in Delaware and a number of other states -- that enables companies to take action by written majority consent of the shareholders.

Ironically, Delaware passed the law in 1967 as a convenience for small-company execs. The law spares corporations the time and expense of a shareholders' meeting and enables them to move quickly. But now, says Donald E. Schwartz, a Georgetown University Law Center professor, "it's seen not so much as a convenience as a threat."

The threat is the potential use of the consent statute as a weapon in corporate takeovers, such as Newell's move against Wright, and in actions by dissident shareholders. "It's obviously a potent tool in the hands of an acquirer," says Moore. Wherever management does not control a majority of shares, majority consent is a cudgel that shareholders can use to force action. Even in family-owned companies, says Moore, it is a "factor" because "families do fall out."

Some lawyers are urging firms to amend their charters to prevent action by less than unanimous written consent. Without it, says Chicago lawyer Leo Herzel, "management can be taken by surprise and doesn't have a chance to state its case."