Ford Value Enhancement Plan (VEP)
In April 2000, Ford Motor Co. announced a shareholder Value Enhancement Plan (VEP) to significantly recapitalize the firm's ownership structure. Ford had accumulated $23 billion in cash reserves and under the VEP would return as much as $10 billion of this cash to shareholders. In exchange for each share currently held, the plan would give stockholders one new share plus the choice of receiving $20 in either cash or additional new Ford common shares. Shareholders electing to receive cash would be taxed on these distributions at capital gain rates. Among other things, the plan provided a means for the Ford family to obtain liquidity without having to dilute their 40% voting interest (even though they own only 5% of the shares outstanding). Background of Case:
Ford Company was founded by Henry Ford and 11 Investor in 1903. By 1906 Henry Ford had acquired a majority position in the company’s stock. In 1956, Ford sold shares to the public. Until then Ford family and Ford Foundation (formed in 1936) had been the company’s sole stockholders. The Ford Foundation pressured the company to create a public market for Ford common shares so that it could sell its Ford Shares and reduce its reliance on income received in the form of Ford dividends. Class A shares sold by the Ford Foundation became voting common shares. Ford modified its ownership structure of multiple share classes in order to preserve family control. Class B shares had special voting rights and could be owned only by Ford family members. As long as they owned a minimum number of class B shares, the ford family would retain 40% of the voting power. When class B shares were sold outside the Ford Family, they reverted to common stock. The Ford Family strongly preferred receiving dividends despite the fact that dividends were tax inefficient for many shareholders. Cash Dividends provided family members with liquidity without having to sell class B shares and run the risk of...
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