PROXY Governance, Inc., an independent proxy advisory and voting services firm, has called for increased transparency and more board involvement in mergers like the Providian/Washington Mutual union. At the same time, the firm reiterated its recommendation in favor of the Providian/Washington Mutual merger on economic grounds and warned that voting against the merger in the hopes that appraisal rights might result in a better price was a risky strategy.
“We recommended in favor of this merger on economic grounds, but with significant reservations,” said PROXY Governance President and corporate law expert James P. Melican. “We were concerned about the lack of transparency with regard to management’s and the board’s decision-making process and their effort to seek bids from other suitors.
“We were also particularly concerned by the lump sum cash payments and the equity awards that Mr. Saunders and other executive officers will receive from Washington Mutual,” he said. “They raise the specter of a conflict of interest, given that the executive officers will now be employed by that company.”
Melican said that PROXY Governance was calling on boards to reject “these kinds of payments in friendly transactions when an executive’s employment is going to be continued by the acquiring company. Boards should be unwilling to allow executives to negotiate lucrative arrangements for themselves before striking the best bargain they can for their shareholders. This is a problem that boards need to correct in transactions going forward, and as they review executive employment contracts,” he said.
Melican said Providian is not the only recent example of apparent conflict of interest problems in merger situations. He pointed out PROXY Governance has spotlighted the same kinds of transparency and process problems in its reports on other major mergers over the past several weeks, most notably the AT&T/SBC and Gillette/P&G mergers.
“Managements and boards must come to recognize that these are the factors that erode shareholder confidence and can interfere with acquisitions that, at the end of the day, actually can deliver economic value to shareholders, as we believe the Providian/Washington Mutual merger can,” Melican said. “Mergers are tarnished when it appears that managements have negotiated lucrative employment contracts for themselves with the acquiring company and the board’s involvement in the critical question of whether shareholders are getting the best deal appears to be minimal and only at the end of the process.”
Melican said that, while the appraisal rights alternative is without question a useful one in some cases, the uncertainty of the valuation process by the Delaware courts makes it the wrong course for most Providian shareholders.
“The appraisal rights approach has been presented by some observers as a ‘no-lose’ proposition,” Melican said. “However, the reality is very different. We considered it quite carefully, and actually there is a not insignificant possibility that Providian shareholders who take this approach will receive a lower price for their shares. Additionally, they likely are in for a long and costly process.”