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The Case Against State Takeover Statutes
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17188 |
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MODERN THOUGHT
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12 / 1990 |
3,775 Words |
| Author
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Jeffrey Gordon
Jeffrey Gordon is a professor of law at Columbia University.
Among his specialization are corporate legal theory and
mergers and acquisitions. |
Pennsylvania's adoption in April 1990 of the nation's most expansive antitakeover law was an important moment in a several-year period of more and more inventive state legislative efforts to suppress hostile takeover bids. The Pennsylvania statute is especially interesting because it exposes the uncertain rationale and the contradictory impulses that lead to legislative action in the takeover area.
The story behind the Pennsylvania statute fits into a well-defined pattern. One particular Pennsylvania corporation, Armstrong World Industries, was under siege from the Belzberg family of Canada, well-known takeover entrepreneurs who had in the past accepted greenmail - a premium price offered by the target company to buy back a block of stock in exchange for the bidder withdrawing from a takeover quest. In years past, Pennsylvania had seen the loss of other important firms. Gulf Oil, once a leading corporate citizen of Pittsburgh, had fallen to Chevron Oil after escaping the clutches of T. Boone Pickens, and, in the resulting consolidation of executive functions, Pittsburgh was the loser. Other leading firms, Koppers (Pittsburgh) and Pennwalt (Philadelphia), had fallen after bitter battles. So when the Belzbergs made their run for Armstrong, Armstrong management made a run for the state legislature and, with the help of labor support, obtained passage of an antitakeover statute to protect their conception of Pennsylvania's interest from outside incursion. In most of the forty-two states that now have antitakeover laws, the legislative story has been very similar.
NOXIOUS BREW
The Pennsylvania legislature concocted a particularly noxious brew of antitakeover provisions that distort traditional corporate law norms in far-reaching directions. Two provisions are especially noteworthy. First is a provision that would require an unsuccessful hostile bidder to disgorge to the target company any profit made on a subsequent sale of target stock that it acquired in the course of the bid. The ostensible purpose of this provision is to block greenmail payments and thus discourage unsavory types from putting corporations "in play," but this limited goad (controversial on its own) is belied by the actual provision. If the Belzbergs had made a tender offer for all of Armstrong's stock but were defeated by a higher bidder, under this statute they would have lost any profit for previously owned shares sold to the higher bidder. Since a competitive auction for a firm is a common scenario, the obvious point of the statute is to discourage the initial bid. More typical state provisions try to discourage hostile takeovers by adding hurdles to
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