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Senior management at Sun Microsystems has failed to persuade shareholders to reject a change to the company's corporate governance that cedes greater control to investors during a hostile take over.

Shareholders have reportedly thrown-out Sun's so-called poison pill defense against take-overs. The ballot against Sun's poison pill received backing from 84 per cent of shareholders.

Poision pills, or shareholder rights, are a standard corporate defense tactic that dump shares into the market to drive-up the company's acquisition price to help discourage an unwanted buyer.

Sun shareholder William Steiner from New York state, said he wanted the current poison pill to be removed and for all future pills to be approved by shareholders. Sun had urged shareholders to reject the proposal.

"Without the rights plan, the board would lose an important bargaining tool in negotiating a transaction with a potential acquirer or pursuing a potentially superior alternative to a hostile takeover offer," Sun told shareholders.

However, shareholders attending Sun's annual general meeting (AGM) in Santa Clara, California, on Thursday, rejected a proposed change to the way Sun's stock is awarded to directors such as chief executive Scott McNealy.

The motion was filed by investors at the Service Employees International Union who wanted stock to be granted on the basis of company performance, saying the current program may "reward mediocre company performance."

According to the union, McNealy was awarded options to buy 7,500,000 Sun shares between 2001 and 2004. If Sun’s stock price increased by just one per cent McNealy would reap more than $7.5m even if Sun underperformed its competitors. McNealy received a $1.1m discretionary bonus for fiscal 2005.

"We believe that Sun Microsystems’ use of standard stock options to compensate its senior executives has the potential to reward mediocre company performance," the union said in Sun’s last proxy filing.

Performance is defined in this case as options whose exercise price is linked to an industry index, premium-priced options whose exercise price is above the market price on the grant date, or options that vest when a certain performance target is met.

"Compensation of senior executives using stock options is intended to align their interests with those of shareholders and motivate executives to improve company performance," the union said. Sun's board managed to persuade shareholders to reject the measure, which received just 42.8 per cent of the vote, saying current compensation is already performance based.

Sun's share price has been flat for a long time now, and management has struggled to turn profits. But then, you probably knew that already. ®

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