CORPORATE GOVERNANCE CASE STUDY
Carter Hawley Hale

In 1984, Carter Hawley Hale stores (CHH) was the largest retailing chain on the West coast, and sixth largest in the country. Based in Los Angeles, its nationwide empire stretched from trendy LA bargain basements to tiny Fifth Avenue boutiques, with a bookstore chain in between. Operating under the CHH flag were Bergdorf-Goodman, The Broadway, Contempo Casuals, Emporium-Capwell, Hole Renfrew, Neiman-Marcus, Thalimers, Walden Books, John Wanamaker, and Weinstock’s.

The chief executive of this diverse conglomerate since 1973 was Philip M. Hawley. He had led the company on an ambitious acquisition drive, increasing revenue threefold.

Despite the strength of the company’s franchise, however, there was a widespread belief that weak management was dragging down the company’s earnings, reflected in Wall Street’s favorite saying about the company: “God gave them Southern California and they blew it.” Hawley’s acquisition program had resulted in enormous growth in sales, but not in profits. The company’s net earnings had barely grown in the ten years of Hawley’s stewardship.

Not all was wrong in the Hawley empire. The specialty stores division, especially its Contempo Casuals, was performing superbly. The big department stores, however, including The Broadway and Emporium-Capwell, continued to show marginal returns.

The company’s sluggish growth was reflected in its stock price. CHH did not keep pace with the explosive growth of the rest of the market during the early 1980s and hovered around $20–$25 a share. However, the stock carried a healthy dividend of $1.22, prompting Barron’s writer, Benjamin J. Stein to comment: “Some investors viewed CHH common as a sort of bond with no redemption date and carrying no say in the affairs of the company.”[i]

Hostile takeover

On April 3, 1984, CHH’s management received an unsolicited bid to take over the company. The would-be buyer was The Limited, Inc., an aggressive Ohio-based retailer based, led by billionaire Leslie Wexner. The Limited offered $30 a share (a premium of nearly 50 percent over the pre-bid price) for 56 percent of CHH’s shares, and then a package of Limited shares worth about $30 per CHH share for the remainder.

CHH responded with vigorous defiance. Management wasn’t giving up without a fight.

The first step taken by CHH was a rapid repurchase of its own stock. The admitted aim was to buy up sufficient shares to prevent The Limited from acquiring a dominant position. CHH’s stock climbed higher and higher as the company repurchased nearly 18 million shares within a week.

The second part of the strategy was to bring in a so-called “white knight.” By persuading a friendly third party to buy a large position, CHH could keep stock out of The Limited’s hands. General Cinema, one of CHH’s largest shareholders and headed by Richard A. Smith, agreed to buy a special issue of preferred stock for $300 million. The shares carried preferential voting rights, giving Smith 37 percent of the voting power for a much smaller fraction of the stock. The stock paid a guaranteed dividend of 13 percent, at a post-tax cost to CHH of about $39 million a year. Lastly, Smith was offered an option to buy Waldenbooks (probably CHH’s most profitable asset) at a discount. In exchange for this deal, Smith agreed to vote his stock in line with the recommendations of a majority of the CHH board of directors.

The Limited responded to CHH’s defensive measures by raising its offer to $35 a share, roughly a 75 percent increase on CHH’s pre-bid trading price.

The General Cinema deal did not guarantee CHH its independence, however. The crucial chunk of stock – which could decide the takeover battle one way or the other – was in the hands of the employees.

For some years, CHH had run an employees’ profit-sharing plan, structured as a 401(k). While most 401(k) plans allow employees to choose between a variety of investment options, the CHH plan purchased only the company’s stock. On retirement, employees could claim the stock they had collected over the years or the cash equivalent. Thus, employees who saved under the plan relied entirely on the good performance of the company’s stock for the growth of their savings. The plan involved over 20 percent of the company’s 56,000 employees, and some 6.5 million CHH shares. Prior to The Limited’s bid, these shares accounted for 18 percent of CHH’s outstanding shares. Following the repurchase effort, this figure rose to 39 percent of the total, though the plan’s shares represented only 23 percent of the voting power owing to the issue of the preferred stock to General Cinema. The size of the plan gave it a virtually decisive say in the takeover battle. If The Limited could persuade CHH employees to vote against incumbent management, its bid would almost certainly succeed.

This left a possible divergence of interests between the members of the plan and the senior managers of the company. Employees stood to make an instant 75 percent gain on their 401(k) savings if they tendered their shares to The Limited and the bid succeeded. From the executives’ point of view, however, a successful Limited bid meant losing their jobs – Wexner would certainly replace top management if he won control of the company. Thus, while it might be in the employees’ interests to tender their shares, it was in the interests of CHH executives to see that they didn’t.

The role of Bank of America

The duty of resolving this dichotomy was left to the trustee of the profit-sharing plan, Bank of America. Under the Employees’ Retirement Income Security Act (ERISA), the trustee of such a plan must see that the plan’s assets are managed “solely in the interest of the participants and beneficiaries” and with “complete and undivided loyalty” to them. To this end, a trustee must not have any conflict of interest in administering the plan, or act in any transaction involving a conflict of interest.

Did Bank of America have a conflict of interest in dealing with the stock of the profit sharing plan?

•               The Bank agreed to be the lead lender to the CHH takeover defense. It arranged a $900 million line of credit to CHH, pledging the largest single share of $90 million. Much of this money was used to repurchase CHH shares. For this service, Bank of America received an initial fee of $500,000.

•               Before The Limited announced that CHH was the target of its tender offer, Bank of America had agreed to commit $75 million to The Limited for use in an unspecified acquisition. When it became known that CHH was the target, it withdrew from this arrangement.

•               Hawley sat on the Bank of America’s board of directors, was a member of the executive committee, and chairman of the compensation committee. He had held those positions for nearly a decade.

•               For years, the bank had been CHH’s most important lender. At the time of The Limited’s bid, it had loans outstanding of over $57 million and lines of credit of $15 million.

•                Following the announcement of The Limited’s bid, the Bank of America revised these loan agreements so that if a majority of CHH’s board of directors was replaced, the loans would automatically be in default. Were the Limited’s bid to succeed, the Bank could, at least theoretically, step in and instantly repossess CHH assets.

Stein wrote in Barron’s: “Bank of America was supposed to administer the plan according to the sole interests of the stockholder-employees. But it was simul-taneously in the active, highly paid service of CHH management with a life or death interest in seeing that the shares of the plan were voted against the tender offer.”[ii]

Do you agree with this comment?

The possibility of a conflict of interest between the company’s management and the plan’s trustees at the bank had been addressed when the CHH profit-sharing plan was first created. The trust agreement, signed in 1971, included a “pass-through” provision that would come into effect if CHH were ever subject to an unsolicited takeover bid. In that situation, Bank of America would inform the plan participants of the terms of the offer, and allow them to vote their shares in confidence.

Despite the terms of the pass through, the bank still had two responsibilities under ERISA. First, it had to explain fully to employees the terms of the offer, to ensure that they made an informed choice. Second, it had a duty to ensure that employees made an independent choice, free from any coercion from management to vote their way.

The pass-through was designed to achieve both these ends in a hostile bid situation. Under the terms of the provision, the bank would inform employees of the terms of the bid and individuals would then instruct the bank how to vote the shares in their accounts. If employees representing more than 50 percent of the plan’s stock instructed the bank to sell the stock in their accounts, then it was to tender all the stock held by the plan. Otherwise, none of the stock was to be tendered.

The pass through received its first test when The Limited made its bid. No sooner had the offer been made, however, than the terms of the provision were radically changed.

Under the new terms, CHH’s employee-shareholders were given four choices:

1.             to tender all the shares in their account but only if plan participants representing a majority of the plan’s shares chose to tender;

2.             not to tender their shares unless the majority voted to tender;

3.             not to tender their shares, the votes of the majority notwithstanding; and

4.             to tender their shares, the votes of the majority notwithstanding.

Letters were sent to employees explaining these choices. The letter stated that if plan participants chose either of the last two options, the bank would be unable to preserve the confidentiality of that vote. In other words, if a CHH employee voted to tender to The Limited (essentially a vote against management), CHH management would know that he or she had done so. This was because the plan participants’ account records were maintained by CHH, not by the bank.

The bank’s instructions added that, under the new provisions, any shares for which no voting instructions were received would automatically be voted according to the second option – not to tender unless a majority did so.

All of the plan’s assets were ultimately distributed to individual accounts maintained for participants. At any given time, however, the plan owned a big chunk of unallocated stock because shares acquired during the course of a year were not distributed to individual accounts until the year’s end. At the time of The Limited’s bid there were 800,000 such shares, or 11.4 percent of the total plan. The bank announced that these shares would be voted in line with the voting instructions received from a majority of the plan’s shares.

Did the bank act in the interests of CHH senior management, or the plan participants? Did the bank fulfill its ERISA requirement to act with “complete and undivided loyalty” to the beneficiaries? Did the fact that management knew how an employee voted constitute coercion?

The Department of Labor takes note

These were some of the questions raised by the federal agency charged with overseeing ERISA funds, the Pension and Welfare Benefits Administration (PWBA), a branch of the Department of Labor (DOL). The PWBA was then headed by one of the authors of this book, Robert A.G. Monks. On April 30, 1984, Monks wrote to the law firm representing Bank of America to inform them of PWBA’s interest in the case. The letter strongly suggested that if Bank of America did not alter some of the terms of the pass-through (such as the provision to vote all unallocated shares against the tender if a majority so voted), then the Bank would be in violation of its fiduciary duties under ERISA.

The DOL’s warning was just one of several regulatory and legal challenges filed against CHH and Bank of America.

•               A single employee of CHH launched a suit against Bank of America charging misadministration of the profit plan.

•               The SEC sued CHH, on the basis that the giant buyback of stock constituted an illegal tender offer.

•               The New York Stock Exchange (NYSE) threatened CHH with delisting because the issue of preferred stock to General Cinema, and the massive dilution that resulted, had been consummated without shareholder approval.

•               The DOL concluded that the amended pass-through was insufficient in protecting employees’ independence, and prepared a suit charging violations of ERISA.

The New York Times commented: “Analysts yesterday said they found it remarkable that Carter Hawley had managed to run afoul of the SEC, the stock exchange and possibly the Labor Department, considering the caliber of its legal and investment advisers.”[iii] CHH had hired the New York firm Skadden, Arps, Meagher and Flom, as counsel, and Morgan Stanley as investment adviser.

One by one, CHH dodged the bullets. The NYSE reached an agreement with the company under which CHH shareholders would get their chance to vote on the General Cinema issue in the summer. Soon after that settlement, a Los Angeles court ruled that the SEC’s case was without merit. Less than a week later, a second LA court dismissed the employee’s suit. The judge agreed with Bank of America’s argument that there was no connection between the bank’s trust department that administered the plan and the commercial department that arranged loans to CHH for its takeover defense.

The DOL, however, broke ranks. In an draft complaint prepared by PWBA, the DOL charged that, under ERISA, “participants must be given a free choice, monitored by an entirely neutral trustee.”[iv] The complaint argued that Bank of America had broken this guideline in two respects:

•               The pass-through provision, as amended, did not leave employees with an uncoerced, free choice.

•               Bank of America had a conflict of interest in connection with the outcome of the tender offer that precluded it from acting as an impartial plan trustee.

In connection with the second argument, the DOL demanded that the court appoint an independent fiduciary to oversee the tendering process of the plan’s stock.

Several aspects of the new pass through worried the DOL. First, DOL officials decried the fact that non-responses, and the 18,000 unallocated shares, would be treated as votes not to tender, unless a majority voted in favor of tendering. Second, they objected to the option that allowed employees’ votes to be reversed depending on the choice of the majority. Third, they noted with concern that Bank of America had not guaranteed the confidentiality of employees’ votes.

ERISA imposes onerous fiduciary duties on plan trustees, who must manage the plan’s assets with “care, skill, prudence and diligence.” This includes voting the plan’s shares. Where Bank of America had received no direction from individuals as to how to vote the shares – whether because the shares were unallocated, or because the individual concerned had not responded – the bank, argued the DOL, had a fiduciary duty to make a reasoned, independent decision about how to vote. The bank could not simply abrogate this fiduciary duty by lumping all the shares together under a decision not to tender. The complaint argued, “The trustee must reach an independent fiduciary decision as to whether to tender shares for which proper directions are not received.”[v] The complaint also contended that there was an ERISA violation in the option that allowed employees to vote a certain way, depending on the decision of the majority. Under ERISA, there were only two groups that could lawfully make investment decisions about the shares in the CHH profit sharing plan – Bank of America, as the plan trustee with a fiduciary responsibility to the participants, and the participants themselves, as the “named fiduciary.” However, two of the options on the voting card allowed for the possibility of an employee’s vote being reversed if his/her choice was in the minority. Thus, the responsibility for the outcome of the vote lay with “the majority” of the employee shareholders, a group with no fiduciary responsibility to either the plan or its participants.

The DOL’s brief also challenged the lack of confidentiality in the voting procedure, particularly the fact that an employee who wished to tender his shares could not do so without management knowing: “A trustee could not be considered to have fully discharged its responsibility to make sure that participants’ directions are proper unless it takes all available steps to preserve the confidentiality of their choices and makes reasonable efforts to assure that the directions are not the result of pressure or coercion”[vi]

The DOL’s case included a broader criticism. Given that the pass-through, in the DOL’s opinion, was insufficiently protective of employees’ independence, the fiduciary responsibility for the CHH plan remained with Bank of America. As the plan trustee, the bank was ultimately responsible for seeing that the administration of the plan conformed with ERISA. The DOL alleged that the bank, due to multiple conflicts of interest, was incapable of fulfilling this role. The bank could not possibly act with complete objectivity to the tender offer, given its intimate connections with one of the parties concerned: “Rather than serving as a fiduciary protector of the participants, the Bank here has already aligned itself with CHH as the lead lender to the CHH takeover defense, thus presenting not only a conflict of interest in fact and law, but a necessary perception in the minds of the participants that the trustee is acting in league with their employer.”[vii]

The DOL argued that there were numerous legal precedents for a plan trustee to step aside. The complaint referred to one Supreme Court opinion that said the chief purpose of ERISA’s fiduciary provisions is “to prevent a trustee from being put in a position where he has dual loyalties, and, therefore . . . cannot act exclusively for the benefit of a plan’s participants and beneficiaries.”[viii] The DOL’s complaint cited a case argued before the US Court of Appeals

in which the court stated: “As a practical matter we view favorably the

suggestion . . . that the preferred course of action for a fiduciary of a plan holding or acquiring stock of a target, who is also an officer, director or employee of a party-in-interest seeking to acquire or retain control, is to resign and clear the way for the appointment of a genuinely neutral trustee to manage the assets involved in the control contest.”[ix]

The DOL complaint never got beyond its draft stage. The DOL was instructed by the Department of Justice (DOJ) to drop its suit. It was government policy that any suit brought by any part of the federal government had to be approved by the DOJ. And the DOJ put an end to this one.

Why was the DOJ so concerned? In a statement to Stein, Michael Horowitz, general counsel at the department, said the matter was purely one of government intervention: “We were concerned that a part of the government seemed to be expanding its role through litigation and we did not want any part of the govern-ment making policy through litigation. Our feeling was in no way related to the personalities involved or even the dollars involved.”[x] Stein questioned whether the decision was a little more political than that. The US attorney-general at this time was William French Smith, a California lawyer and a long-time friend of Phil Hawley. Smith had served on various corporate and non-profit boards alongside Hawley.[xi] Stein also noted that Smith’s office, along with the White House and Federal Trade Commission, had been lobbied hard by the Californian congressional delegation. Over three-fifths of California’s representatives had gathered at a press conference, pledging their support for an independent CHH. They were joined by Tom Bradley, mayor of Los Angeles, and many other Californian public officials.[xii] Stein verified that Bradley, among other CHH supporters, had received contributions from the CHH political action committee.[xiii] The DOL dropped its suit, as ordered. Each of the three legal suits, as well as NYSE’s threatened delisting, had now collapsed. Within days of the May, 1984, dismissal of the employee’s suit, The Limited dropped its tender offer. Wexner stated that he would seek other ways to gain control of CHH.

The CHH stock, which had been run up into the $30 range by arbitrageurs and speculators, quickly dropped back to the low twenties.

1984 was not a great year for CHH. Depressed by the cost of defending itself against The Limited, earnings fell to half their 1983 figure. CHH struggled to pay the guaranteed 13 percent dividend to General Cinema for its preferred stock, while finding enough left over to pay dividends on the common. Despite slightly better performance in 1985, Standard & Poors placed CHH on credit watch in March 1986.

The Limited attacks again

In November 1986, The Limited formed a special acquiring group called Retail Partners with real-estate developer Edward J. DeBartolo. Together, they made a second bid for CHH, offering $55 a share. The pre-bid trading price of CHH was $35–$40. Stein notes that The Limited had doubled in size since its 1984 bid and reported earnings that were about four times those of CHH on 40 percent less sales.[xiv]

It faced up to the second battle in much the same shape as it had fought the first. General Cinema held more stock than it had before, but its voting rights were limited to 39 percent. The employee profit-sharing plan owned about 20 percent of CHH. Again, these would be the two crucial elements of CHH’s defense.

Richard Smith, head of General Cinema, announced that he was not adamantly against the idea of tendering his shares to The Limited, but that he considered $55 too low. Believing that Smith could be persuaded to tender at a higher price, Retail Partners raised their offer to $60 a share.

Meanwhile, Bank of America had put new procedures in place in the event of a tender offer.

•                Employees could request information about the tender and, if they wished to vote, could apply for their share certificates and vote the shares themselves, rather than issuing instructions for the trustee to vote for them.

•               If an employee didn’t request his or her certificates, however, the shares would automatically be voted against the tender.

The new procedures were hardly a step in the direction of confidentiality, since the only reason an employee would apply for his share certificates would be in order to vote against the tender. The records of employee shareholding were still at CHH headquarters, so management would know exactly which employees had requested their shares and might be considering a vote for Wexner.

Not only were the new Bank of America voting procedures transparent, they were moot. Even if an employee decided to tender his shares, it was impossible to do so. Employees were informed that it would take six to eight weeks for their certificates to arrive, if requested. Retail Partners’ offer expired in five weeks.

On December 8, 1986, CHH announced that it was rejecting the $60 bid in the light of a widespread restructuring of the company. Morgan Stanley issued a fairness opinion saying that the restructuring was a much better choice for shareholders than the inadequate Limited offer. It was later asserted that such a restructuring had been under consideration since October 1986, just before The Limited’s second bid.

The restructuring, if approved, would split CHH into two new companies. Each would carry a separate stock. One company, still called Carter Hawley Hale, would consist of department-store operations including Broadway, Thalimers, and Weinstock’s. The second company, called The Neiman-Marcus Group Inc., would consist of the specialty stores: Contempo Casuals, Neiman-Marcus, and Bergdorf Goodman.

Stockholders, including employee-shareholders, would receive the following for every share of CHH they owned:

•               One share of the department-store company.

•               One share of The Neiman-Marcus Group.

•               A one-time payout of $17, which could be converted into further shares of CHH and Neiman-Marcus.

Under the restructuring, General Cinema would end up with a huge interest in The Neiman-Marcus Group, while CHH would be owned by its employees. Top management would convert its $17 a share payout, and its outstanding stock options into a 22 percent holding of the department-store company – a massive holding compared to the less than 1 percent that management owned of the unrestructured CHH. The employee plan would own a further 23 percent.

The net effect was to insulate CHH from any hostile takeover attempt and to give the employees a huge stake in the company. In Phil Hawley’s words to Women’s Wear Daily: “The big story, and you can forget all this other stuff – the big story is that we are the first major retailer owned by the people who work for it. . . . All of a sudden we have 12,000 entrepreneurs.”[xv] The restructuring was announced to shareholders in the form of a 400-page proxy statement and prospectus. The proxy stated that the board had unanimously approved the restructuring, and asked shareholders to ratify it. The restructuring contained some amendments to CHH’s certificate of incorporation. These included:

•               the division of the CHH board into three classes;

•                elimination of directors’ liability in future damages if claimed as a result of any breach of their fiduciary duty of care;

•                elimination of the ability of stockholders to call a special meeting of stockholders, or to take any action by less than unanimous written consent;

•               a shareholder rights plan, or “poison pill”, that would kick into effect if any person acquired 20 percent of the company’s shares.

The proxy admitted, “Certain of the amendments to the Company’s certificate of incorporation . . . may make more difficult or discourage the removal of company management . . . and may make more difficult, if not impossible, certain mergers, tender offers or other future takeover attempts.”

The proxy warned that the restructuring would “include an immediate change in the Department Store Company’s capitalization to one that is highly leveraged,” since the department store half of CHH would assume the debt burden of the entire company. The proxy disclosed the fact that shareholders faced “the prospect that no dividends will be paid to holders of the Department Shares for the foreseeable future.” Finally, the proxy said that paying for the $17-per-share distribution, and financing the restructuring, would cost over $1 billion.

The proxy predicted a bright financial future for the department store company. Sales were expected to rise from $2.7 billion in 1988 to $3.2 billion in 1991. Earnings per share were expected to rise from $1.41 in 1988, to $3.2 in 1990, and to $4.51 in 1991. As Stein comments, “These projections were provided, with the straight face that only a financial document can offer, as ‘in line with recent results’ . . . results had never shown such dramatic improvement, except over periods of less than three quarters.”[xvi] Stein also pointed out the fantastic fees that would be paid to Morgan Stanley, for their part in the restructuring. The investment banking firm received a basic fee of $24.375 million, though its involvement in the placement of the securities associated with the restructuring, would take the overall fee to over $43 million.[xvii] This figure is substantially greater than CHH’s own estimate of its 1988 earnings of $32 million.

Shortly after the announcement of the restructuring, The Limited and Edward DeBartolo withdrew their offer. The ownership structures of the two companies under the restructuring made a takeover impossible without the cooperation of either management or the board of CHH. It was clear to Retail Partners that neither would be forthcoming.

After the restructuring

How did Hawley’s “12,000 entrepreneurs” fare as a result of this shake-up? At first, the employee-shareholders appeared to have made out like bandits. CHH stock reached a peak of nearly $80 during the period following The Limited’s bid, and continued to trade at roughly the $60 price Wexner had offered. Stein, in his May 1987 article, concluded: “Considering the current share prices, the CHH story could have come out a lot worse than it did.”[xviii]

Barron’s later admitted it was wrong[xix] – as far as the shareholders were concerned the CHH story came out just about as badly as it possibly could have. In the months following their approval of the restructuring, CHH’s shareholders witnessed the freefall of their shares.

By the end of 1987, CHH’s stock had plunged to around $10.

Moreover, over the next four years the company manifestly failed to live up to the projections provided in the 1987 restructuring prospectus. That prospectus had predicted that net earnings would reach $85 million for the year ended July 31, 1990. Instead, the company reported a $26 million loss in that year. In other words, the company lost $1.03 a share, compared to its 1987 prediction that it would earn $3.25 per share in 1990. Meanwhile, the stock continued on its downward spiral, reaching a low of less than $5 a share in late 1990. The com-pany filed for Chapter 11 bankruptcy protection on February 11, 1991.

Employee-shareholders went down with the ship. Because the CHH plan was a profit-sharing plan, not an employees’ retirement fund, the plan trustee was not obliged by ERISA to diversify employee holdings. That is, Bank of America was merely charged with acquiring CHH stock on behalf of the plan, not ensuring that they had a diversified, less risky portfolio. The result was that Bank of America had continued to buy CHH stock on behalf of the plan, even up to a week before the Chapter 11 filing.

Employee-shareholders experienced a devastating reduction in the value of their plan accounts. Barron’s described one employer, Bill Fiore, who had contributed $8,000 to the plan over 13 years. His contribution was now worth less than $2,000.[xx] The Wall Street Journal interviewed Shirley J. Miner, an employee of 26 years standing, who had expected her contributions to have grown to $80,000. On retirement, she found that her account was worth just $15,000.[xxi] What did the 12,000 employee-shareholders now own?

•               One CHH share, trading at about $2 in the months following the Chapter 11 filing.

•               One Neiman-Marcus share, received at the time of the restructuring. Following the spin-off, Neiman-Marcus stock traded at highs of up to $45. By the time of CHH’s bankruptcy filing, it had dropped to around $17.

•               The $17-a-share special payout.

So the shares in the plan, for which Wexner had offered $60 in 1986, were worth about $36 four years later.

This loss in value did not go unnoticed in the press. Rising to his company’s defense, Hawley told the Journal that the plan accounts were not “retirement savings.”[xxii] Strictly speaking, this was true – CHH’s 401(k) scheme merely allowed employees to share in the company’s profits. As such, employees could decide whether to contribute up to 12 percent of salary for the purchase of CHH stock, or keep the extra cash and make their own investment decisions. CHH employees, however, charged that the choice was not that simple. Employees told the press that they were pressured into contributing a full 12 percent to the plan, for fear of seeming uncommitted to the welfare of the company. Bill Fiore told Barron’s, “It was common knowledge that if you were thinking of going into management, you’d better have your 12 percent in or you weren’t going anywhere.”[xxiii] Ms. Miner told the Journal that she felt she had “no choice” but to convert her $17-per-share payout at the time of the restructuring (worth $23,000) into further CHH and Neiman-Marcus shares: “I feared being labeled as disloyal.”[xxiv]

Employees must have wondered why they hadn’t realized an instant 75 percent gain on their shares by tendering to Wexner in 1984 or accepted $60 dollars a share in 1986. Of course, if either of those bids had been successful, Hawley and his management team would have lost their jobs.

Whom did the profit-sharing plan serve?

To what lengths should incumbent managers be allowed to go to protect their company from takeover? Did Phil Hawley go too far?

Does this case study present a “free market” for corporate control? Should take-overs be encouraged or discouraged? Would your answer change if you knew that The Limited also suffered from years of poor performance following its attempted takeover of CHH?

Were the employee-shareholders of CHH genuine shareholders? Were they genuine stakeholders? How might their interests be protected?

Is employee ownership in the best interests of good corporate performance?

What role did Bank of America play in fending off The Limited? What role should it have played?

Notes