WHEN SHAREHOLDERS CHOOSE NOT TO MAXIMIZE VALUE: THE UNION BANK OF SWITZERLAND'S 1994 PROXY FIGHT

Authors


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    We talked with various people, including current and former officers of Union Bank of Switzerland and BZ Bank. For obvious reasons, some of them wish to remain anonymous. Various pieces of information were collected from the daily newspaper Neue Zürcher Zeitung. Listing all the articles used would clutter the text unnecessarily, but we would be glad to provide the appropriate references to the interested reader. We are grateful to an anonymous referee, Thomas Lys, Kurt Schiltknecht, Roger Trunz, and, particularly, Roger Kunz for detailed comments. Stock return data were kindly provided by BZ Bank and Union Bank of Switzerland.

Abstract

This paper examines the fight over a share reunification plan that pitted Swiss financier Martin Ebner against Union Bank of Switzerland (UBS), once the largest Swiss bank and a global leader in asset management. In the U.S. corporate governance debate, large shareholders are often held up as a possible solution to corporate governance problems. But this examination of the UBS proxy fight shows why some large shareholders can themselves be a source of governance problems.

The share reunification plan was designed to combine the firm's two classes of stock: registered (voting) shares and bearer (non-voting) shares. As its motive for the plan, the UBS board cited a desire both to increase liquidity and to prevent a control change. The majority of the holders of the company's registered stock—many of whom had other financial ties to the bank—ended up voting for a proposal that caused them to lose 11% of the value of their shares during the three trading days following its announcement, and eventually almost twice as much. Moreover, even the holders of the bearer stock hurt themselves by approving the reunification plan. Although the plan clearly transferred value from the registered to the bearer shares, the redistribution benefits from the plan for the bearer shareholders were not sufficient to offset their losses from the reduced probability of a control change.

Although it did not succeed in accomplishing its immediate goal, the UBS proxy fight is today recognized as a watershed event in Swiss corporate governance. Until recently, Switzerland's economy has been dominated by cartels, with closely overlapping boards of directors. Hostile takeovers were essentially unheard of, and criticism of management by shareholders was highly unusual. Ebner's activities have had the effect of stimulating public debate about shareholders' rights and shareholder activism. In so doing, they have made it more acceptable for shareholders to criticize management and established shareholder value as a “politically correct” goal for Swiss corporations.

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