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about the impact of LBOS on the PBGC's liability:

"If highly-leveraged companies are more likely to fail, then the PBGC will be asked to step in more frequently as LBOS increase. Even if LBOS do not increase the chance of failure, the distribution of assets to the shareholders in an LBO reduces the assets available to the PBGC as an unsecured creditor in the event of a bankruptcy".10




Leveraged buyouts also have serious implications for pension funds with pre-LBO bondholdings. The devaluing of the bondholdings is related to the capital restructuring of the leveraged company which usually results in a ratio of 90 percent debt and 10 percent equity. Bondholders in the RJR Nabisco LBO experienced a 15-20 percent drop in value which sent shockwaves throughout the bond market.

The negative implications for pension funds is illustrated by the North Carolina Pension Fund which held $500 million of RJR bonds and suffered a $75 million loss in those holdings. Bondholders are not taking the RJR Nabisco buyout sitting down. Metropolitan Life Insurance Company, one of the RJR bondholders, has filed a lawsuit against RJR for the $40 million loss it sustained. 11



One of the most serious abuses involving worker pension funds in takeover financing comes from employer terminations and raiding of so-called excess assets from single employer pension plans.

Pension fund obligations of leveraged companies are reduced or discontinued altogether when those leveraged companies terminate the workers' pension plans and recapture so-called excess assets. A study by the Securities and Exchange Commission, to be released in the near future, finds that onethird of all major reversions took place within one year of a takeover or takeover contest. Dr. Utgoff of the PBGC testified that an undisclosed PBGC report found that 7% of reversions over $1 million occurred within one year after an LBO.12 Our own examination of PBGC quarterly data on reversions over $1 million found that from 1980 to September 1988, 276 reversions or 15% of all reversions affecting 2 million participants and worth $1.4 billion dollars, were associated with reversions that listed merger and acquisition activity as the reason for termination.

We believe that both the PBGC and the S.E.C. studies severely underestimate the number and asset amount of reversions related to leveraged or other takeover activity. Both studies fail to examine reversion activity before the LBO, termination

10Testimony of Dr. Kathleen P. Utgoff, Executive Director, Pension Benefit Guaranty Corporation, before the Senate Finance Committee, U.S. Senate. January 26, 1989.

11Margaret Elliot, "No Turning Back for LBOs", Institutional Investor March 1989, pp. 135-151.

12Dr. Utgoff, op.cit.


activity that occurred shortly after the one-year period, and termination activity that occurred in subsequent divestitures.

We believe that employers who terminate pension plans to skim off excess assets violate workers' ownership rights and breach a promise of pension protection. The Department of Labor estimates that workers in such situations lose an average of 45 cents for every dollar they would have received if the plan had not been terminated.

The adverse impact of takeovers on pension benefits was made clear in the Texaco buyout of Getty Oil Company in 1984, which involved serious pension abuses affecting members of Local 8-898 of the Oil, Chemical and Atomic Workers Union. Texaco terminated the Getty plan and raided $250 million from the 18,700 former Getty employees, substituting the inferior Texaco plan. As a result, employees who retired found that their pension benefits had not increased in value in the four years following the takeover. To add insult to injury the $250 million that Texaco took from the terminated plan was used to fight off several subsequent takeover attempts and not to improve workers' wages or working conditions.

Another example of pension abuse is the termination of the Pacific Lumber pension fund, which has been investigated by the Labor Department and the Securities and Exchange Commission.

Using junk bonds to finance the takeover of Pacific Lumber, a company named Maxxam directed a brokerage firm to buy Pacific Lumber stock from six pension funds. This action served to "park" the stock until Maxxam could buy it at a later date, thereby depriving the pension funds of the takeover profit. Maxxam then terminated Pacific Lumber's $80 million pension fund and took control of $50 million in so-called "excess assets," which it used to help finance debt rather than to improve workers' wages or working conditions. The chart in the Appendix outlines this complex case.



The goal of the AFL-CIO is enactment of legislation which contains certain worker pension benefit protections and is aimed at slowing the spate of leveraged buyout activity. This legislative agenda includes the passage of The Employee Pension Protection Act (H.R. 1661 and S. 685) and the enactment of other tax and shareholder rights legislation aimed at stemming the tide of LBO activity.

of great legislative priority to our affiliates is the passage of The Employee Pension Protection Act (S. 685, H.R. 1661), which contains basic pension protections for workers and retirees in the event of a reversion. Furthermore, this bill recognizes that workers and retirees have a right to share in socalled "excess assets" a right that financially cushions the blow of devalued pensions associated with reversions. It is our understanding that roughly 600 reversions are on hold as a result of the six-month moratorium imposed by the Treasury. This staggering number of pending reversions is a testament to the urgent need for this legislation. We are very interested in working with you, Mr. Chairman and members of the Subcommittee on this issue.

The AFL-CIO believes that the Employee Retirement Income Security Act (ERISA), combined with recent clarification by the Labor and Treasury Departments, provides adequate guidance for fiduciaries regarding their decisions on tender offers and proxy contests. Essentially the Departments stated that fiduciaries

are not automatically obligated to accept tender offers just because they exceed the market price. Fiduciaries are, obligated to review the economic merits of each investment, and weigh the return on investments with risks in consideration of the plan's portfolio and participant needs.

In previous testimony on this issue, we have asked the tax writing committees to end the tax deduction on interest on debt used for merger activity or to retire equity. This action would deter the mortgaging of our economy for business transactions that merely redistributes wealth from workers and bondholders to fee hungry investment firms while providing no identifiable social good. In addition, we have also asked the tax writing committees to strengthen the excise taxes on "greenmail" and "golden parachutes". Both suggestions essentially stem from the fine work done by you and this Subcommittee when investigating these issues in 1985.

In other committees' jurisdiction we are concerned about the role of shareholder rights in corporate governance issues. Incompetent management and misdirected corporate policies resulting in undervalued companies and investor withdrawal have been exploited by corporate raiders in takeover activity. Efficient and accountable management, without the use of debt driven financing, could be achieved if Congress enacted shareholder reforms including: confidential shareholder voting, one share-one vote for all classes of stock and greater access for non-management shareholders to management proxy materials and records.

The AFL-CIO has also testified in support of certain changes in our securities laws before the committees of jurisdiction. We have advocated that the tender-offer or process should be improved by requiring that raiders provide workers and their communities with detailed disclosure about their plans for the new company, lengthening the time given to stockholders to respond to tender offers, and by prohibiting two-tiered offers. Of particular significance, in our view, would be an amendment to Section 16(b) of the Securities Act of 1934 to require that a raider, as well as corporate insider, disgorge any "short-swing" profits realized from the sale of stock acquired in connection with a tender offer and sold within a defined period of time after the offer expires or is withdrawn.

The AFL-CIO looks forward to working with you on these very important issues. Thank you.


September 1988

The Pacific Lumber Takeover

The House Energy and Commerce Oversight and Investigations Subcommittee has uncovered evidence that major securities laws were violated during several corporate takeovers. Further, pension funds may have been cheated in these schemes, and Representative John Dingell (D-M), who heads the subcommittee, has asked the Department of Labor to explore whether there has been violations of the Employee Retirement Income Securities Act. Concurrently, the Securities and Exchange Commission has charged securities violations in some of these same takeovers. Below is a diagram and chronology of the Pacific Lumber (PL) takeover, mentioned in both investigations, outlining allegations, including the pension connections.

[graphic][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][merged small]

1. 6/24/85 - Maxxam begins buying PL stock. Drexel provides $480 million in junk bond financing, and a bank loan provides another $300 million. Executive Life buye some of those junk bonds.

2 8/5/86 Maxxam approaches $15 million holding threshold of PL stock that would require public filing and a temporary halt in further PL purchases. The next day, Jefferies begins buying 2.3% of PL's stock from sellers that include six pension funds, at below the market price, possibly on Inside information, possibly in "parking agreement with Maxxam. On 9/27/86, Maxam buys PL steak from Jetferies, at a below-market price. Three days later, Maxxam announces intention to take over PL

3. 10/1/86-Drexel allegedly instructs Bossky to buy PL stock,


boosting both PL's stock price and fees owed to Drexel
by Maczam.

4. 10/2/86-Maxxam begins tender offer for PL. About three
weeks later, Maxczam takes over PL Drexel earns $41 mal-
lion in fees. At this point, Bossly owned over 5% of PL's
stook. After the takeover, FL accelerates tree falling, al-
legedly to reduce debt, angering employees and environ-
mentales. Employees also express fear about their jobs.
5.3/31/88-PL pension fund is terminated, with $50 million
reversion going back to PL, to help finance debt. Execu-
tive Life is awarded $37.3 million annuity contract, over
the objections of some PL executives, who argue that the
firm missed the bidding deadline and holde rieky invest-
ments, including junk bonds that financed PL takeover.

Labor & Investments diagram based on information provided by the Subcommittee on Oversight and Investigations of the Committee on Energy and Commaros, October 5, 1987 Commitse hearings, SEC laws, and June 15, 1988 letter from Representative John Dingell to Assistant Secretary of Labor David Walker.

Chairman PICKLE. I noticed in the beginning you said that at least 90,000 members of the AFL-CIO union have lost their jobs because of these LBO takeovers, because of mergers, takeovers or leveraged buyouts.

That is a lot of people. If 90,000 of them have lost their jobs, have others been replaced? Has the company gotten stronger and other people been hired, or is it a net loss of 90,000?

Mr. DONAHUE. A net loss of 90,000 in those corporations have been affected by that takeover activity. I would note, Mr. Chairman, that those are AFL-CIO union members involved in such takeover activity. The number, obviously, for non-union employees affected under similar activity would obviously be much higher. If we represent 37 percent of the work force-

Chairman PICKLE. Do you have any estimate of how much higher the figure might be?

Mr. DONAHUE. I am thinking close to half a million jobs affected. Chairman PICKLE. A contention has been made

Mr. DONAHUE. Jobs eliminated by that sort of activity. Now the question is as to whether or not there is replacement activity, similar type jobs are created in other corporations. I don't believe there is any data on that, Mr. Chairman.

Chairman PICKLE. The assertion has been made to this committee over and over that these mergers end up with a company being stronger and it creates more jobs in the long run.

Do you strongly disagree with that position?

Mr. DONAHUE. I would strongly disagree with it, Mr. Chairman, I would wait somewhat impatiently for conclusive evidence of that. I haven't seen any authoritative studies which show that all of this takeover/merger activity has resulted in a more efficient corporation or in higher employment for employees affected in those corporations.

Chairman PICKLE. The question of asset reversion is a sticky question, and a thorny question for us. We are trying to decide which way to go. There is a constant argument whether the benefits belong to the workers and retirees or to management since they basically take the risk.

The current law provides for these terminations. Now, I notice that there is legislation that has been proposed on the other side that would kind of reorder the current provision for distributing these excess assets.

I think the legislation pending would only affect overfunded plans and the question, of course, is where does the most harm come? To the participants or in other categories?

I don't know that harm comes to the participants per se. My question to you then is, When a company terminates a defined pension benefit plan in order to recover excess assets, does the greatest harm to the plan participants come from the termination of the plan or from the reduction of the assets in the pension plan?

Mr. DONAHUE. Well, Mr. Chairman, one of the problems of the overall subject as we have all discussed it is that we talk about asset recapture, reversion of excess assets. I start from the premise that the tax legislation which provided for pension plans and for the tax deductibility of contributions to pension plans, envisioned

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