Mall Rats

How Alfred Taubman’s real estate company is shortchanging its shareholders.

In December 2001, A. Alfred Taubman, the former chairman of Sotheby’s, was convicted of fixing commissions behind the scenes with rival auctioneer Christie’s. While the headlines were damning, it was difficult to get too exercised about minor European nobles and American industrialists being gouged as they sold off jewel-encrusted baubles and Impressionist paintings.

Now, as Taubman serves out his one-year sentence, the real estate company that he built—Taubman Centers Inc.—is being accused by a rival of a different type of malfeasance. Unlike the Sotheby’s price fixing, this alleged rip-off happened in plain sight. And while Sotheby’s shareholders arguably benefited from Taubman’s price fixing efforts, Taubman Centers’ shareholders are plainly being hurt.

When he was convicted, company founder Taubman resigned as chairman of Taubman Centers, the Michigan-based company that owns and operates upscale malls. The company is now run by his son Robert Taubman. William Taubman, Robert’s brother, is also a company executive and serves on the board. (Excuse the Taubman pileup: Real estate is one of the few giant industries that is still predominantly a family business.)

Last November, Simon Property Group, based in Indianapolis, made an unsolicited bid to buy Taubman Centers. Rebuffed by Taubman’s board, Simon enlisted a partner, Westfield America Trust, and in January increased the offer to a healthy $20 per share. (Taubman’s stock has been trading around $17.) While some 85 percent of the holders of Taubman’s common stock have indicated a willingness to accept the offer, Taubman’s board has dug in its heels.

In this case, the will of common shareholders is irrelevant because the Taubmans hold a special class of stock that essentially allows them to block any major transaction. Now, at many public companies, founding families maintain ironclad control because they own a special class of voting stock that was clearly disclosed to investors at the time the company went public. (See this “Moneybox” on how such an arrangement helped the Rigas family destroy Adelphia.) The wrinkle in this case is that the Taubmans and their affiliates didn’t take voting control for themselves until nearly six years after the company’s initial public offering, and it’s not clear shareholders were adequately informed about what the family did.

Taubman Centers went public in November 1992, and until 1998 it was a straight-up one-share, one-vote democracy. Its 50-odd million common shares were held by investors large and small, but the founders didn’t own all that much. Alfred Taubman in 1998 owned just 186,000 common shares while Robert Taubman controlled about 6 percent of the company.

Taubman Centers conducted business through a subsidiary called the Taubman Realty Group Limited Partnership, in which A. Alfred and Robert Taubman held significant stakes, along with other investors, including two General Motors pension funds.

In 1998, GM’s pension funds swapped their stake in the partnership and in the parent company for 10 of Taubman’s malls. At roughly the same time, the company amended its bylaws and sold nearly 32 million special Class B voting shares to people who held interests in the partnership—namely the Taubmans and their affiliates.

The price the insiders paid for the 32 million shares was minimal—$38,400 bought all of them. The shares are essentially worthless on the open market: You need 14,000 of Class B shares to convert into a single share of common stock. But each Class B share has a vote equal to a share of common stock. In other words, Taubman Centers instantly increased the number of voting shares from about 50 million to 82 million and practically gave 32 million of them to insiders. With a two-thirds majority required to approve certain transactions—such as a takeover—the holders of the Class B shares received veto power over the company virtually for free. Alfred Taubman himself effectively controls nearly 25 million of the Series B shares.

And that’s why Taubman’s board can thumb its nose at any hostile offer, no matter how high it is.

Taubman’s altered voting structure has been evident for more than four years. But nobody thought twice about it until an acquisitive rival wanted the company’s assets for its own. In a lawsuit against Taubman, Simon Property alleges that the corporate restructuring that created the Class B stock was approved by the board at the behest of management but that shareholders never approved the change. And because the new stock wasn’t offered to the public at large, it was exempt from certain Securities and Exchange registration requirements.

It’s hard to justify Taubman Centers’ stance today, or its actions in 1998.

Anybody who acquires control of a company should have to pay a significant premium: That’s why takeover bids always start significantly above a company’s market price. But in this instance, the Taubmans paid no premium for control. And, if Simon Property’s allegations are true, Taubman’s management and board sneaked the change by shareholders, who deserved to know more about it. (Simon, it should be noted, is also a family-run, publicly held company. Brothers Herbert and Melvin Simon are co-chairmen of the board while Melvin’s son, David, is chief executive officer. Together, they control a special class of stock that controls less than 2 percent of the company’s total voting stock.)

The board of Taubman certainly doesn’t want to put the company on the block. But when you’re publicly held, your stock is for sale every day, and, in theory, so is your whole company. Too many management teams are willing to accept the upside of being public—liquidity, the use of stock as a currency for acquisitions, the ability to get paid in options—while rejecting the downsides, which include unsolicited takeover bids. By standing in the way of a sale, Taubman’s board is denying the shareholders to whom they owe a fiduciary duty what they have been unable to deliver thus far—a value of $20 per share.

What’s the price of Taubman Center’s sly change in governance? The $125 million that shareholders are losing because the board has blocked Simon’s bid.