How Ford family saved dynasty,Bold stock maneuver preserved control
Monday, June 2, 2003
By Bill Vlasic and Mark Truby / The Detroit News
DEARBORN -- The press release dubbed it an "innovative and unprecedented" move to reward Ford Motor Co. shareholders with stock or cash from the automaker's bulging financial reserves.
But the long-term effect of Ford's "Value Enhancement Plan" of 2000 extended far beyond doling out new shares or cash windfalls to loyal investors.
In one bold stroke, the plan cemented the founding Ford family's control over the world's No. 2 automaker, and guaranteed that the dynasty started by Henry Ford would continue into the 21st century.
Besides receiving $1.4 billion worth of new common stock, the Ford family retained the crucial 40 percent voting rights conferred on their Class B shares when the company went public in 1956.
The plan, commonly referred to as the VEP, gave shareholders the option of receiving $20 in cash for each share owned, or new stock of equal value.
But the 62-page document also reaffirmed the extraordinary powers of the Ford family's 70.9 million shares of Class B stock -- including the exclusive right to approve a merger, sale or liquidation of the company.
With the issuance of millions of new Ford shares, the family's Class B stock now accounts for only 3.7 percent of the company's total equity, down from 4.9 percent before the VEP.
Yet even as their ownership stake declined, the heirs of Henry Ford kept their ironclad hold on the Class B stock's 40 percent voting power.
"That (VEP) transaction, while beneficial to all shareholders, was most beneficial to the Fords," said Scott Hill, an auto industry analyst with Sanford C. Bernstein & Co.
Ford Chairman Bill Ford Jr., the great-grandson of Henry Ford, defended the VEP as a boon to all stockholders and not just the Ford family.
"The family was treated just like any other shareholder," he said. "I believe it was an unfair criticism. Others clearly saw it differently."
At least two major shareholders saw it very differently.
In a proxy statement, the Teachers Insurance and Annuity Association-College Retirement Equities Fund (TIAA-Cref) and the California Public Employees' Retirement System (Calpers) blasted the "ominous precedent" of preserving the Ford family's voting power.
"This is fundamentally at odds with the one share, one vote principle that constitutes the single most important tenet of good corporate governance," TIAA-Cref and Calpers, owners of nearly 15 million Ford shares, said in 2000.
A traditional stock buyback, they claimed, also would have boosted shareholder value.
"Management made a conscious decision to pursue the VEP in lieu of (a buyback), however, in an apparent attempt to preserve the Ford family's voting power," they said.
That should come as no surprise to students of Ford history.
"The Class B shares are why Ford is still run by Fords and DuPont is not run by du Ponts and Dodge is not run by Dodges," said Bob Casey, historian at The Henry Ford museum.
Beginning in 1936
The origin of the Class B shares dates back to 1936 when Henry Ford and his son, Edsel, created the Ford Foundation as a means to avoid potentially devastating inheritance taxes.
Henry Ford entrusted his corporate counsel at the time, Clifford Longley, to come up with an ownership structure that would keep Fords in charge of Ford -- even after Henry and Edsel died.
"It is your desire to perpetuate ownership control of Ford Motor Co. in the Ford family as far as it was legally possible," Longley wrote Henry Ford in a letter on file at the Benson Ford Research Center.
Longley's solution? Give 95 percent of the stock owned by the Fords to the new foundation as Class A, nonvoting shares. Henry and Edsel kept 5 percent of the shares -- and 100 percent of the votes.
In 1956, managers of the Ford Foundation lobbied then-Chairman Henry Ford II for the chance to diversify the foundation's holdings. The decision would impact Ford's corporate governance for decades to come.
The foundation put up 10.8 million shares of Ford stock for sale to the public. Those shares became common stock with a single vote each, or 60 percent voting power.
The Ford family's shares -- 6.5 million at the time -- were reclassified as Class B stock, with a voting stake of 40 percent. The Class B stock could only be owned by Fords. If sold to outsiders, the shares convert to common stock.
But critical conditions were attached to the Class B shares owned by the family. They kept 40 percent voting rights unless the number of their shares fell below a specified level, when it would shrink to 30 percent. At an even lower threshold, a Class B share would have the same one vote as a common share does.
More importantly, the corporation could not take certain actions without a vote of the majority of the Class B shares. According to the 1956 prospectus, Ford could not be merged, sold or liquidated without the approval of the Class B holders.
In essence, the Ford family alone would determine the future of the Ford Motor Co.
Over time, as Ford issued common stock to raise capital, the Class B shares became a smaller slice of its shareholder equity.
At the time of the VEP, there were 1.13 billion shares of common stock, and 70.9 million shares of Class B. Even with only 5 percent of the total stock, the Class B shares commanded 40 percent voting power.
Edsel B. Ford II, a Ford director since 1988, said the family's voting muscle has been a shield against an unwanted takeover.
"It would be very difficult to be raided because the Ford family controls a 40 percent vote," he said. "It would be almost impossible."
But family members would hardly sell Class B shares. If their holdings drop below 60.7 million shares, their voting power shrinks to 30 percent. If they own fewer than 33.7 million shares, all special rights are lost forever.
With the potential for huge inheritance taxes on the horizon, the family needed liquid assets at its disposal.
The VEP handled that. Just like other shareholders, family members received new common stock for every share owned. The Ford family received common stock then-valued at $1.4 billion, shares that could be sold without any threat to the 40-percent voting rights.
In fact, the additional common stock, on top of the Class B shares, gives the family 42 percent of the shareholder votes.
Critics wonder why
Three years later, critics still wonder why the family merits such treatment.
"Their influence should be proportionate to their risk," said John Chevedden, a Ford shareholder who is using the 2003 annual meeting on June 16 to propose an independent board committee to address "conflicts of interest" between the family and other shareholders.
One conflict that theoretically could arise is a takeover offer. With Ford's stock price hovering at $10 a share, the company could be bought at a bargain price.
But deep in the VEP, on page 57, it's clear that the power to sell Ford rests solely with the family.
In a section titled "Voting by Class," the company said that a majority vote of Class B shareholders was required to "merge or consolidate with or into another corporation ... dispose of all or substantially of our property and assets ... transfer any assets to another corporation ... voluntarily liquidate or dissolve."
Only the Fords can decide the fate of Ford? That hardly surprises industry experts.
"Control is control," said Hill. "Let's not kid ourselves. It's nothing new."
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My next Ford.....