How are Chairmen of the Board/Owners ousted from their own companies?

In light of Martha Stuart “resigning” as Chairman of the Board (I use quotes because I’m pretty sure it wasn’t her choice) at Martha Stuart Omnimedia, Inc., I was wondering why company founders build a company structure that puts them in a position to be kicked out.

If I started Widget Manufacturing, Inc. with my own money, sure, I’d sell shares, but only up to 49% stake. But why is it in my interest to set up a board which could vote me off? And if I own 51%, why can’t I just say, “Screw you guys. I own 51% of the company, so I declare your stock worthless and am printing new bonds. Don’t let the door hit you in the ass on the way out.”

It’s my company. What regulation allows me to be ousted, and what’s the way around it?

  • Adam

[nitpick] Pardon, her name is spelled “Stewart”, not “Stuart”. Check looked it up. [/nitpick]

Martha wasn’t chair(wo)man of the board, she was a board member. Board members of public companies cannot be convicted felons (I’m sure it must be a bit more complicated than that…), so she’s off the board. No choice in the matter. Apparently (I haven’t looked it up) she still owns more than half the company.

Some people do try to hold on to control. One example was Michael Saylor of MicroStrategy (symbol: MSTR). When they first went public, he still held a large portion of the shares (80%? 90%?), but he had “class B” shares. Sounds like a downer, eh, since the general public owned class A? Not at all! class A or class B is just a name, it is the details that counts. In particular, MSTR class B shares had 10 votes per share, class A had 1 vote. If a class B is sold by Saylor, it must be converted to class A. A cute way to keep control of the company, even if you own only 10%.

There’s a down side to this, of course. Large institutional investors and mutual funds don’t want to hold the stock, because they see no point in investing in a stock where, even if they buy a significant portion of stock (say, 5%), they have absolutely zero say. Even if a few major investors ganged up, they still would have no say.

In short, the founders often give up complete control in exchange for the investors’ money. Investors often want something for their money, especially if they are large institutional investors – specifically, if they see things going wrong, they want to have the power to institute change in order to protect their investment.

If the founder’s principal concern is keeping control, she has the option of keeping the company privately held and not going public.

For the typical company, it is almost impossible for a founder to end up with a majority stake. After having gone through two or three rounds of private funding and a public offering, so many people will have demanded a piece of the pie that a founder will be lucky to still be the largest shareholder. Often, though, that’s enough since even if you hold only a 33% share, it still should get you enough seats on the board for practical control. Your shares vote as a block, the other 67% typically won’t.

Anyway, getting booted from the board is the least of Martha Stewart’s humilations. In addition to booting her, the board just announced that the company will be changing its name from “Martha Stewart Living Omnimedia” to “Dead Men Walking Omnimedia.”

Excerpts from Martha’s new Living on the Inside magazine?

Technically, I believe you can be convicted of a felony and serve on the board as long as its disclosed in the public filings. However, the SEC has the power to get a court to order you out of service of any public company for a period of years or for your life. They are seeking that against MS because her crime involved a violation of the securities laws and the SEC views such as violation as inconsistent with service as a director or officer. I guess if you kill someone they don’t care.

As for MS, it can be very rewarding financially to take your company public. Its shares become liquid, and you have greater publicity and access to capital. But when you take investors’ money, you have to live by a different set of rules.

In her case, she will probably take the company private when the stock craters enough.

Kicking and screaming?