The Bitter Legal Battle for Household: Directors' Anti-Takeover Give Rise to Exchange of Lawsuits
Sudo, Philip T., American Banker
NEW YORK -- Household International Inc. is embroiled in a family feud.
The Prospect Heights, Ill.-based firm said last week it is filing suit against John Moran, a director and member of Household's executive committee and chief executive officer of the Dyson-Kissner-Moran Corp. (DKM), a private New York investment company and Household's largest shareholder.
The suit is a response to litigation filed earlier this month by Mr. Moran and DKM against Household International, the parent company for Household Finance Corp., National Car Rental, and other merchandising and manufacturing subsidiaries.
The dispute -- which may shape up as a battle for control -- stems from an anti-takeover plan authorized by Household International's board of directors on Aug. 14. Mr. Moran claims the plan will adversely affect the value of the stock. DKM holds the equivalent of 6.9% of Household common stock, acquired for about $13 million.
The Household board may have been worried about a takeover after watching a hostile takeover battle between two other consumer finance companies. Last month, Avco Financial Services Inc. of Newport Beach, Calif., fended off a hostile takeover bid by New York-based Leucadia National Corp. The fight was settled last week when Leucadia sold its 2.6 million
Avco shares back to the company for $100 million.
Household itself, with assets of $9.1 billion, is an attractive takeover candidate. Its primary holding is Household Finance, which has more than 1,000 consumer finance offices in 45 states and offices in Canada, Australia, and the United Kingdom. Last week, Household Finance acquired two troubled thrifts, Fidelity Federal Savings & Loan Association in Baltimore and American Heritage Savings in Bloomingdale, Ill. The firm also holds two other thrifts, as well as a tax service and an insurance company.
The holding company's other subsidiaries include: Household Merchandising Inc., with annual sales of more than $5.3 billion; Household Manufacturing Inc., with annual sales of more than $750 million; and National Car Rental System Inc. and Wien Air Alaska Inc. airlines. Poison Pill
The controversial plan represents the latest in what is known as the "poison pill" type of anti-takeover measure -- a rule that permits friendly offers, but protects the company from a hostile one while trying to maximize stockholder gain.
Issued last Tuesday, the "Preferred Share Purchase Rights Plan" gives all shareholders a special right that cannot be separated from the stock. The right can be invoked only after a corporate predator appears, either by acquiring 20% of the common stock or by making an offer for 30%. It allows shareholders to buy, for $100, a security with the same dividend as Household common stock. If a hostile takeover ensues, the $100 security could be exchanged for $200 worth of the new owner's common stock.
The aim is to avoid the so-called "two-tier bust-up" tender offers that have become prevalent in today's merger-crazed environment. In such an offer, the first tier involves a cash purchase of stock at a price significantly higher than its book value; after control is gained, the second tier involves converting shares of those who did not sell for cash into the purchaser's stock. "Bust-up" refers to the practice of a buyer stripping the acquired company of its assets to pay back loans used for the purchase.
The Household poison pill plan would make the second tier stock conversion so costly that only a first tier all-cash offer for all the stock could succeed. Household has nearly 60 million shares outstanding, assuming conversion of all outstanding preferred stock, currently trading at about $32 per share. No Effect on Voting Rights
The catch is that if a friendly offer should be made, the board may cancel the special rights by paying 50 cents for each right per share. The plan has no effect on voting rights, as the purchase rights do not carry any right to vote. …