Wary of Takeovers, Companies Adopt ‘Tin Parachutes’ for Workers

WASHINGTON – Hoping to fend off hostile takeovers, some companies seem to have returned to an old defense: the tin parachute.In an apparent effort to deter unwanted acquirers and to protect employees if their takeover defenses fail, at least three companies recently have adopted so-called tin parachutes – broad-based severance plans that cover many of their employees in the event of a change in control of the companies.Unlike the better-known “golden parachutes,” which provide top executives with lucrative payouts if they leave a company, tin parachutes are targeted at a larger swath of a company’s workers, ranging from lower-level executives to rank-and-file workers. The severance payments under tin parachutes are smaller than under their golden counterparts, but they still can have a deterrent effect: Would-be acquirers may face the prospect of an employee exodus and doling out millions of dollars in severance.The three companies that recently have enacted the plans – Mylan Laboratories Inc., Merck & Co., and People-Soft Inc. – either are or are rumored to be potential acquisition targets. Experts say these companies’ programs represent a resurgence in the use of severance plans as a weapon to fight unsolicited bids.“We’ve had a little boomlet of popularity” in tin parachutes, said Patrick McGurn, executive vice president of Institutional Shareholder Services. Other observers agreed.Starting in the late 1970s, some companies began turning to golden parachutes in part as a strategy to thwart takeover attempts. The defensive use of tin parachute plans came later, and has waned since their heyday in the early 1990s, as the number of hostile takeovers declined and companies realized that the plans didn’t tack on enough costs to discourage unsolicited bids. “It just didn’t prove to be a very potent takeover defense,” Mr. McGurn said.Although the potential costs of broad-based severance plans may not scare away potential acquirers, the plans can still serve a purpose for companies trying to avoid takeovers, said Paul Hodgson, senior research associate at the Corporate Library, a governance research firm based in Portland, Me. “It does send a message that ‘we know there are hawks out there and we’re ready for you,’ ” he said.Seen As Retention ToolThe companies themselves describe the severance plans as a tool for retaining employees, not deterring buyers.Mylan disclosed a new severance plan for about 2,200 employees in a recent regulatory filing. The plan would entitle employees to severance payments if they leave for good reason within two years of a change in control of the company. Carl Icahn, an investor who holds about 9.8% of Mylan’s shares, has made a hostile bid for the Canonsburg, Pa., maker of generic prescription drugs. A Mylan spokeswoman wasn’t available to comment.Mylan’s board adopted the plan three days after Merck disclosed that it had enacted a change-in-control severance plan for about 230 of its top employees. The pharmaceutical giant said in a Securities and Exchange Commission filing last week that it adopted the plan “as part of its ongoing, periodic review of its compensation and benefits programs and in recognition of the importance to the company and its shareholders of avoiding the distraction and loss of key management personnel that may occur in connection with rumored or actual fundamental corporate changes.”Merck, of Whitehouse Station, N.J., said it had been planning the severance plan before it announced the recent recall of the painkiller drug Vioxx.PeopleSoft disclosed in September that it had sweetened its severance plan for executives and employees if PeopleSoft is acquired. The Pleasanton, Calif., software company said in an SEC filing that it updated its plan in part “to enhance employee retention by addressing employees’ concerns regarding their long-term employment prospects.”About two dozen companies have parachute policies such as PeopleSoft’s that entitle all employees to severance payments in the event of a change in control, according to the Washington based Investor Responsibility Research Center, which tracks more than 1,900 companies.Depleted Anti-Takeover ArsenalsThe recent reappearance of the broad severance plans may reflect companies’ depleted arsenals of anti-takeover tactics, experts said.Investors today are paying more attention to corporate governance practices and are increasingly critical of traditional takeover defenses such as so-called shareholder rights plans and staggered-term boards of directors. Those tactics are seen as entrenching management and, in the case of shareholder rights plans, possibly diluting a stock’s value.“Those that are considered the most powerful (takeover defenses) have been under attack by shareholders,” said Carol Bowie, director of governance research at the Investor Responsibility Research Center. “We’re starting to see a downward trend in some of these other takeover provisions, which means other defenses such as tin parachutes may come back into fashion.”In this climate, Mr. McGurn said, companies “have kind of gone to the back of the rack to see what kinds of defenses they can put in place, because their first lines of defense aren’t as strong.”Investors don’t necessarily frown upon broad-based severance plans. Pharmaceutical and technology companies rely on their scientists and software programmers, and retaining them during a period of uncertainty is crucial to the companies’ success. “There’s a need to keep these workers on board,” Ms. Bowie said.Mr. McGurn agrees that employee retention is a worthy goal, but said he doesn’t think that the plans enacted by Mylan, Merck, and PeopleSoft are narrowly defined to cover essential employees.Indeed, the three companies’ SEC filings indicate that their severance plans aren’t designed to reassure the scientists and programmers that Mr. McGurn has in mind.Mylan’s plan covers all of the company’s full-time, non-unionized employees who don’t have individual employment agreements.Merck’s plan is aimed at members of the company’s management committee and “other vice president-level managers.”And portions of PeopleSoft’s policy apply to all of its employees.In cases where the change-in-control severance plans involve a large number of managers and don’t focus primarily on specialized employees, Mr. McGurn said, “I don’t think shareholders see it as saving a lot of value.”

Wary of Takeovers, Companies Adopt ‘Tin Parachutes’ for Workers

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