DealBook: The Big Board Tunes Out Its Own Rules

Jin Lee/Bloomberg NewsThe New York Stock Exchange.

The New York Stock Exchange, that bastion and soundstage of capitalism, has always held itself up as a model of good corporate governance. It has strict governance rules for companies whose shares trade on its exchange.

Even through years of weathering Enron and other corporate scandals, not to mention the outcry over the pay package for its own former chief executive, Richard A. Grasso, the exchange has marketed a Big Board listing as a Good Housekeeping Seal of Approval.

So it has been somewhat surprising to watch the board of the exchange’s parent company as it defends its planned merger with Deutsche Börse and fights off a rival bid from the Nasdaq OMX Group and IntercontinentalExchange, or ICE.

Without so much as having a brief meeting or discussion with Nasdaq and ICE on their bid — which offered over 13 percent more than Deutsche Börse’s bid — the board of NYSE Euronext declared the offer “clearly not in the best interests of our shareholders.”

How could the board determine that without even having a conversation?

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Rob Rutschow, an analyst at the Hong Kong-based CLSA brokerage firm, put it best: “It is hard to ignore a much higher value per share offered by Nasdaq and ICE, but NYSE’s management found a way to do it.”

Then, in the face of a proposal for shareholders to hold an extraordinary meeting to compel the NYSE Euronext board to consider the rival bid — a right that the shareholders don’t have without the consent of the board — the directors turned them down.

Corporate governance experts are dismayed. John Biggs, a director of Boeing and the former chief of TIAA-CREF who now teaches corporate governance at New York University, says that given the Big Board’s role as a model for others, it is indefensible for the company not to engage in merger talks.

“Why is the NYSE taking this position and being unwilling to talk? On the face of it, ‘best practice’ would be to have a meeting,” he said. “There may be reasons not to talk — but I haven’t heard them.”

In truth, the NYSE has articulated a series of reasons it prefers its deal with Deutsche Börse, all of which seem somewhat reasonable. Its biggest reason is that a deal with Nasdaq and ICE, it says, faces enormous regulatory challenges and is complicated by the fact that NYSE would be split up by the buyers, which is, of course, accurate.

But that doesn’t mean that the board of NYSE shouldn’t be meeting with potential buyers in hopes of squeezing an even better offer from them. And it seems even stranger to see the board prevent its own shareholders from considering the offer, given its propensity toward pushing companies on the exchange to be more open.

Here’s the NYSE, in its own words, when it comes to listed companies: “Good business practice is frequently the controlling factor in the determination of management to submit a matter to shareholders for approval even though neither the law nor the company’s charter makes such approvals necessary. The exchange encourages this growth in corporate democracy.”

And yet, when it comes to its own shareholder democracy, well, the NYSE is not as quick to take its own advice.

The NYSE’s reason for not having a special meeting? “A 10 percent standard for calling special meetings as favored by the proponent would present a real risk of significant cost, management distraction and diversion of management and financial resources to address a possibly unlimited number of special meetings.”

Really? That’s the rationale? It’s not as if the company is being bid on every day.

Institutional Shareholder Services, the proxy advisory service, wrote: “The inability to call a special meeting and the resulting insulation of management could adversely affect corporate performance and shareholder returns.”

In fairness, people close to the NYSE say the bid by Nasdaq is so inadequate — the price is too low and the antitrust challenges so high with little in the way of protection for its shareholders should a deal fail to get done — that it would be a disservice to NYSE shareholder’s to engage in any form of talks. If the bid were higher or included some greater sense of certainty, it would at least be worth the conversation.

And some have cynically suggested that Nasdaq and ICE are not really interested in a deal with the NYSE. The bid, they say, is just an effort to force Deutsche Börse to pay more or an opportunity for Nasdaq to get a peek at its biggest rival’s confidential numbers. Invoking an old Wall Street saw, one executive working for NYSE described Nasdaq’s bid as “a chance to see the centerfold without having to pay for the magazine.”

All that may be true — and the offer from Deutche Börse may ultimately be the better deal — but for a company that is supposed to be the example to every other, the right “process” may be as important as the outcome.

Article source: http://feeds.nytimes.com/click.phdo?i=ea17a4d971c630b3ff467166ee4628d7