NEW YORK  - It’s hard to get between a determined chief executive and a “transformative” acquisition. AbbVie and Occidental Petroleum are two companies whose bosses recently structured huge deals such that their shareholders don’t get to vote on them. That’s a rich tradition, but it’s a shame. Executives are losing a valuable sanity check.

Giving a vote to shareholders is good governance, but it’s also potentially good for the share price. A study updated in 2018 and published by the European Corporate Governance Institute found that companies that announce deals that don’t give investors a say experience on average 3% lower early market returns. That makes sense intuitively, since shareholders are likely to kill off the most seriously misconceived or overpriced transactions.

Yet under U.S. listing rules, companies only need to ask shareholders for permission when they issue enough new stock to increases their share count by more than one-fifth. Many deals sail close to that threshold, including AbbVie’s $63 billion purchase of Botox-maker Allergan, announced this week, and Occidental’s acquisition of fellow oil driller Anadarko Petroleum. Shareholders who don’t like it can only dump their holdings: AbbVie’s market value fell by $19 billion on Tuesday after it revealed its plans. Occidental has lost roughly a quarter of its market capitalization since April 11, though peers have slipped a bit too.

History is littered with bad deals that might not have happened if investor had a more direct say. Think of Hewlett-Packard’s disastrous purchase of Autonomy for more than $10 billion in 2011. Nor is it just a U.S. issue. Bayer’s merger with weed-killer firm Monsanto sailed through without a vote, despite being plainly value destructive. Bayer shares have lost more than 40% since the deal was first reported in 2016.

Were those companies listed in Britain, things might have been different. Rules for major companies there require a vote when a deal expands the buyer’s assets or profit by more than 25%. That might reflect a philosophical difference: the United States puts more focus on control, which is only in jeopardy when companies issue lots of stock. But logically shareholders should want a say when their company dramatically changes shape.

Moreover, bypassing owners deprives chief executives of the wisdom of crowds. A shareholder vote sounds like red tape, but it’s also a safety net.

CONTEXT NEWS

- AbbVie said on June 25 it had agreed to buy Allergan, the U.S. maker of the drug Botox, for about $63 billion. AbbVie’s cash and stock deal would give the target’s owners 17% of the merged company.

- Occidental Petroleum agreed on May 9 to buy rival oil producer Anadarko Petroleum for $38 billion in cash and shares. Anadarko investors would emerge with 16% of the combined group.

- Companies that announce deals that do not give shareholders a vote experience on average 3% lower early market returns and involve higher offer prices than those that do give investors a say, according to an updated study published in 2018 by the European Corporate Governance Institute.

(Editing by Richard Beales and Amanda Gomez)

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