HD13 - Hostile Corporate Takeovers
Executive Summary: This study was undertaken in accordance with HJR No. 139, which identified the primary study objectives: - Determine the extent of the problems with hostile corporate takeovers in Virginia and their impact on the Commonwealth's economy. - Consider how other states and the federal government, including court decisions, addressed issues of hostile corporate takeovers. - Consider possible legislation to protect Virginia's corporations and employees from the adverse effects of such takeovers. Two bills, HB 983 and HB 984, addressed the subject in the 1988 Session. HB 983 was adopted to amend Article !4 of the Virginia Stock Corporation Act. The second bill, HB 984, was held over for consideration in 1989 Session and is treated at some length in this study. The major topics in this report include: (1) economic perspectives, takeover experiences, and policy considerations; (2) regulatory programs of other states; (3) takeover regulation in Virginia; and (4) conclusions. A review of economic literature reveals a sharp diversion of views, ranging from the view that there is a strong need to regulate the takeover process to the view of free-market economists who hold that such regulation undermines operation of free-market forces and should be avoided. A review of corporate takeovers presents a collage of diverse and often conflicting information. However, it is clear that takeovers are changing the face of corporate America. Today, the number and size of corporate takeovers is enormous. Hundreds of billions of dollars and thousands of people at investment banks, commercial banks, and law firms are now involved in takeovers. The lines between so-called corporate raiders and other takeover bidders have become blurred, as major corporations and investment bankers have become major participants. Foreign participation is substantial; in 1987, foreign transactions accounted for 11 percent of all the mergers and acquisitions in the United States. Over the years, a number of corporate takeovers have occurred in Virginia; for purposes of illustration, the study reviews thirteen relevant cases and suggests that there is no reason to believe that the Virginia experience differs significantly from the nation as a whole. Certainly these cases serve to document the legitimate concerns expressed by the General Assembly in HJR No. 139. The study proceeded on the basis that there is a close relationship between economic perspectives, takeover experience, and policy issues. After a review of economic perspectives and takeover experience, a series of conclusions related to policy considerations were formulated. The primary policy related conclusions: - There is no certainty concerning whether hostile takeovers are good or bad. Existing empirical analyses provide little insight and few guidelines on the proper role of regulation of corporate takeovers. - The fundamental goal of corporate takeover regulation is not to protect the corporation from hostile takeovers but to protect the shareholder and the corporation from abusive practices and inequity's that often occur in connection with takeover activities. - Government should provide a level playing field, meaning that the rules of the game be fair to all participants. Recognizing that the state has a legitimate interest in the corporation, its employees, the community, and economic stability, a balanced set of rules is desirable. A review of current state regulatory programs reveals that there is no uniformity of state regulation of corporate takeovers nor any clear evidence of the impact of such statutes on takeover activities. In general, states that do regulate takeovers use one or more of four basic statutory approaches: - Control Share Acquisition Statutes allow shareholders to collectively decide on a change of control. Once an acquirer exceeds certain thresholds, he is denied all voting power of control shares unless approved by a majority of disinterested shareholders. - Business Combination/Moratorium Statutes prohibit a person who has acquired a certain percentage of shares from engaging in a business combination with the corporation for a period of years, unless the acquirer receives approval by a majority of disinterested directors and a supermajority of disinterested shareholders. These statutes protect against potential abuses by those who would use corporate assets to finance their transactions. - Fair Price Statutes require certain business transactions to be approved by a supermajority of shareholders or by a payment of a fair price to all shareholders. These statutes are designed to ensure that all shareholders are treated equally and receive the same price for their shares. Nineteen states have adopted a control share type statute and sixteen have business combination/moratorium statutes (seven have adopted both). Fair-price/ value provisions are generally incorporated in such statutes. Four states have only fair-price/value statutes. Two states have redemption rights statutes. Two states have takeover statutes that do not fall within the above classifications. Fifteen states have no statutory provisions related to takeover regulation. Virginia has adopted various forms of legislation dealing with corporate takeovers (a fair-price provision in 1985 and a business combination/moratorium provision in 1988). In addition, the General Assembly is considering HB 984, which is a type of control share acquisition statute. This study reviews Virginia's existing law as well as the pending HB 984. Major findings include: - A control share acquisition statute may be effective because it allows shareholders to evaluate proposed changes in control of the corporation. Shareholders are protected from coercion in tendering their shares and are given time to consider proposals that may be in their best interest and make informed decisions. These statutes may encourage corporate raiders by giving them the ability to announce that a target corporation is for sale and, at the same time, hamper management's ability to take effective action. Indiana's control share share acquisition statute has been upheld as constitutional by the United States Supreme Court in CTS Corp. v. Dynamics Corp. - Virginia's Take-Over-Bid Disclosure Act, through adverse court decisions, has been limited in its effectiveness and may be unconstitutional. After reviewing the identified policy considerations, examining regulatory programs of other states, and analyzing Virginia's current statutes and pending legislation, the following study conclusions were formulated for consideration by the General Assembly. - Virginia's Take-Over-Bid Disclosure Act has served purpose in the past. However, in light of its limited effectiveness and possible unconstitutionality, it should be repealed. If it is repealed, the General assembly should consider addressing creeping tender offers, perhaps as a new provision in the Stock Corporation Act. - The General Assembly should monitor the experience with HB 983 and similar legislation in other states. - The General Assembly should consider whether the benefits of a control share acquisition statute justify its adoption. The consensus of the Study Advisory Committee and Staff is that a control share acquisition statute is desirable and could benefit shareholders and Virginia corporations. - If the General Assembly determines that it is desirable to adopt a control share acquisition statute, several suggested amendments to HB 984 should be considered by the General Assembly: * The acquisition of additional shares within the range of voting power fro which approval has already been granted should be added as an "excepted acquisition" to clarify what is now implicit in HB 984. * The applicability of the statute should be changed to an "opt-out" provision rather than an "opt-in" provision, thus making the statute automatically effective for public corporations in Virginia. This "opt-out" provision should be implemented through the corporation's articles of incorporation or bylaws. * The fair market value determination for redemption rights should be changed to the average price paid for the shares. |
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