Ask any group of corporate directors if they have “union issues,” and they may say no. But the truth is, they do. Although less than 6 percent of the private-company workforce is unionized, unions have a broad impact on employment issues. Many of the 180 federal laws administered by the Department of Labor on behalf of all employees (not just unionized employees) have come into being as a result of union backing. Similarly, although unions hold only a fraction of the total outstanding shares in U.S. corporations (no union pension fund ranks among the top 10 investors in any of the top 10 Fortune companies, for example), their influence is wide-ranging. This is because unions invest not only to make a return, but also to make a point—or many—about the special-interest social issues they champion.
They do this in two main ways: via shareholder litigation and through proxy resolutions, often aligning themselves with powerful and prevalent public pension funds to do so. Of the 124 members of the highly influential Council of Institutional Investors, half are public pension funds. The remainder comprises corporate pension funds (32), union pension funds (22) and special-purpose funds (8) such as Ceres. When public pension funds and unions align on matters of Council policy, they hold sway.
A Framework for Shareholder Litigation
When unions sue companies, they are generally suing as shareholders and with other shareholders, notably public pension funds. However, there are times when employee and shareholder interests conflict, as in the case of hostile takeovers that may lead to layoffs. In such cases, the courts have shown themselves to take the high road, looking to the long-term interests of all shareholders and giving boards discretion to determine those interests.
Edgar v. Mite (1982) said boards could not defend companies from takeovers that would enrich shareholders at the expense of other stakeholders such as employees, but CTS Corp. v. Dynamics Corp. of America (1987) found otherwise, opening up a floodgate of state anti-takeover statutes that are now on the books in a majority of states, with the notable exclusion of Delaware, known to be pro-shareholder.
The State of the Unions:
In Unocal v. Mesa Petroleum (1985), the question before the Delaware Chancery Court was whether directors of a corporation could reject a hostile takeover offer on the grounds that rejection was better for employees or other stakeholders even though shareholders might be worse off. The Chancery Court held that it was the board’s fiduciary duty to manage the corporation for the benefit of shareholders. That decision was reversed on appeal to the Delaware Supreme Court, which found that directors had the right to analyze the impact not only on shareholders, but also on creditors, customers, employees and the community.
Then, in Revlon v. McAndrews (1987), that same court held that when the sale of a company is inevitable, directors must put shareholders’ interests first. Subsequent cases have underscored shareholder supremacy in similar scenarios. Shareholder- first decisions are one reason why more than 50 percent of all U.S. publicly traded companies and 63 percent of the Fortune 500 choose Delaware as their legal home.
Shareholder Litigation by Labor Unions and Pension Funds
Shareholder litigation by unions and pension funds is not surprising. A typical union pension fund or public pension fund may hold up to 70 percent in equity securities (the rest being held in debt securities). These plans often litigate against corporations when the value of the equity goes down.
The way for strong union and pension fund power was paved, ironically, through tort reform. The Private Securities Litigation Reform Act of 1995 was intended to ease the burden on companies. It required that every securities case have a qualified lead plaintiff. Since then, activist institutions have spearheaded a majority of cases—and most of those have been unions and/or public pension funds. According to the 2011 PwC Securities Litigation Study, which analyzed U.S. federal securities class-action lawsuits, there were 72 filings in 2011 headed by institutional investors, including 47 led by unions or pension funds. Most of these cases name directors and officers, including the chairman. Pension funds accounted for $2.7 billion of the $3.4 billion in total settlements (or 79 percent) last year.
Lessons from WorldCom: The Director Pays
Two of the most famous lawsuits against directors had union connections. In one, WorldCom directors paid nearly $25 million out of pocket in a settlement with a group of investors for failing to detect an accounting fraud.
After WorldCom declared bankruptcy, New York State Comptroller Alan Hevesi, representing the New York State Common Retirement Fund, served as the lead plaintiff in a class-action lawsuit against officers and directors of the company, among others. The class he represented consisted of “all individuals or entities that purchased or acquired stocks and/ or publicly traded bonds or notes of WorldCom during the period beginning on April 29, 1999, through and including June 25, 2002.” One of the other plaintiffs was HGK Asset Management Inc., a registered investment advisor that “acts as a fiduciary to its union-sponsored pension and benefit plan clients under the Employee Retirement Income Security Act of 1974.”
Hevesi, representing the class, refused to accept D&O insurance money alone and insisted on being paid directly by directors and officers. In a settlement approved Sept. 21, 2005, the total amount of $60.7 million consisted of $24.7 million from the director defendants personally and $36 million from the entities that provided liability insurance for WorldCom’s directors and officers.
Corruption was neither found nor charged against any director. The case revolved around accounting misrepresentations that the directors failed to detect. In the litigious environment post-Enron, the directors clearly felt pressure to settle, even though it meant paying out of their own personal funds. Ironically, Hevesi later pleaded guilty to misconduct at the pension fund.
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