Talk about understatements. When $8.3 billion Ashland Inc. last week announced it had settled a class action lawsuit with the Central Laborers’ Pension Fund, it stated in a press release that it agreed to certain “modifications” of its corporate governance policies.
Those slight modifications amount to the most radical governance changes a Fortune 500 company has ever agreed to; they’re also among the most aggressive series of compromises agreed to by any company in the U.S.
Ashland matter-of-factly said in its press release it agreed to require that two-thirds of the company's board be comprised of only independent directors. While that requirement is in keeping with most trends, the company also stated that it agreed to solicit director candidates from major shareholders, and to nominate a qualified candidate for election to the board.
The move comes as industry groups like the Business Roundtable and the U.S. Chamber of Commerce continue lobbying the Securities and Exchange Commission not to issue final rules that would allow major shareholders to nominate directors.
Hausrath
Ashland is only the fourth company to agree to allow shareholders to nominate directors. The others are Hanover Compressor, Broadcom and Microtune, which agreed to a similar arrangement earlier in January (see sidebar below, right). “The agreement improves Ashland's excellent corporate governance principles and reinforces the Board's and management's commitment to continue to enhance shareholder value," Ashland Senior Vice President, General Counsel and Secretary David L. Hausrath said in a statement accompanying the press release.
Trouble On The Horizon
Interestingly, the company seems eager to downplay the significance of the developments. For example, Ashland did not even issue a separate press release announcing the settlement; rather, the company subtly tucked the announcement about the class action settlement into a release whose headline highlighted the fact that the company held its 81st annual meeting.
Changes At Microtune, TXU
On Jan. 10, Lerach Coughlin Stoia Geller Rudman & Robbins settled a shareholder lawsuit with Microtune, which makes tuners and amplifiers for cable boxes and radios, that also called for sweeping governance changes.
Under the agreement, shareholders of the $46.2 million cable chip maker can nominate one director beginning in 2005 at the annual meeting and a second director at the annual meeting in 2006. The deal also calls for the plaintiffs’ attorney to select a corporate governance consultant, who along with a member of the board will identify potential directors.
Within this process, the consultant will contact every shareholder who owns at least 1 percent of the company’s stock for at least nine months and who has never been an officer or director of Microtune, to provide names of candidates. The consultant and board member will then submit names of viable candidates to the nominating and corporate governance committee for review.
The company also agreed to put forward a binding shareholder resolution that would declassify the board of directors, effective immediately. It also agreed to set a term limit of 15 years for directors, require that two-thirds of the directors are independent, and require all directors to attend the Vanderbilt Directors College.
Microtune also agreed to rotate its independent auditor by the end of 2007and to create a “trading compliance officer,” who will be responsible for the company’s stock trading and market communications policy.
TXU Settlement
Also in January, Lerach partner Darren Robbins hammered out a deal with TXU, which agreed to sweeping governance changes. But, the nearly $11 billion utility stopped short of allowing shareholders to nominate directors. TXU also agreed to pay $150 million to the class members, who saw their stock drop from $55 to $11 in 2002.
Under the settlement, TXU said it would replace two board members, ensure that at least 70 percent of the board members are independent, create a lead independent director, and rescind its poison pill.
The company also agreed to create two new positions—chief governance officer and director of corporate governance. It also mandated minimum stock holding periods for directors.
Why did Ashland and Microtune—but not TXU—agree to allow shareholders to nominate directors? Says Robbins: “Each situation is different.”
In the press release, the company also stressed that it vigorously disputes the settlement, which stemmed from a 2002 lawsuit for alleged breach of fiduciary duty, abuse of control, gross mismanagement, and waste of corporate assets.
The settlement agreement is still subject to approval by the Kenton County Circuit Court in Kentucky.
Meanwhile, a spokesman for the company stressed in an interview that while the company agreed to solicit nominees from shareholders, “It’s not a guarantee that those names will stand for election. We still preserve the process for Committee review.”
The trouble is, that’s not exactly what the company agreed to. According to the Term Sheet, “If, after 12 qualified director candidates have been proffered to Ashland’s G&N (governance and nominating) committee, the G&N committee and the board do not appoint at least one qualified director candidate to the board, Plaintiff may notify defendants in writing of Plaintiff’s intention to seek the intervention of an arbitrator agreed upon by the parties.”
Robbins
In fact, both parties agreed that well-respected Columbia professor John Coffee will serve as the arbitrator for the shareholder nomination process, and will issue a binding decision concerning any dispute arising out of the shareholder nomination process. “This was never done before,” asserts Darren Robbins, partner at Lerach Coughlin Stoia Geller Rudman & Robbins and the lead plaintiffs’ attorney.
Also under the terms of the settlement, the shareholder nominated director must be nominated by the board’s G&N Committee to serve subsequent terms.
Robbins says it took about seven months to hammer out the arrangement with Ashland. As a contrast, he says the Broadcom settlement took more than a year. “Every word is fought over,” he explains.
The Ashland pact calls for other significant governance provisions, none of which appeared in Ashland’s press release. For example:
No director can serve more than 15 years or after turning 70.
All directors must accept at least 50 percent of their director fees in Ashland common stock and defer at least 50 percent of their director fees into hypothetical common stock units of Ashland common stock in the Deferred Compensation Plan for Non-Employee Directors.
Senior executives’ bonuses will be linked to achieving certain financial goals.
The company must appoint a lead independent director.
Directors and officers who acquire shares from the exercise of options must retain 50 percent of the net shares acquired for at least 12 months.
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