States Given Broad Powers to Head Off Corporate Raiders

The Supreme Court on Tuesday gave states broad powers to head off hostile corporate takeovers, ruling that state restrictions “promoting stable relationships” among corporations are not prohibited by federal law or the Constitution.

On a 6-3 vote, the high court upheld an Indiana law designed to prevent corporate raiders from pulling off quick takeovers of in-state companies.

Legal experts predicted that the ruling will cut down on corporate takeovers in such states as Minnesota and New York, which have similar laws, and will encourage other states to pass anti-takeover legislation.

“This gives the corporate people a chance to fight for the hearts and minds of their stockholders,” said John F. Pritchard, a New York attorney who represented Indiana in the case. The Indiana law provides for a grace period that prevents corporate raiders from buying up stockholders’ shares before management can respond with counteroffers.

Marc Cherno, a New York lawyer who submitted a brief on the losing side for the Securities Industry Assn., said the decision “will definitely make takeovers harder to accomplish. It will add to the expense and the burden. But it won’t make them impossible.”

The case grew out of an attempt last year by the Connecticut-based Dynamics Corp. to take over the CTS Corp. of Elkhart, Ind.

The Indiana law gave corporate managers at least 50 days to counter the tender offer made by the outside group and required a majority of the stockholders to vote approval of the takeover.

Frustrated by the requirements, Dynamics filed suit in federal court to have the state law invalidated.

Two lower federal courts ruled against the state, saying the law gave the corporate managers of a takeover target an unfair advantage and had the effect of blocking interstate commerce in stocks.

Attorneys for the Securities and Exchange Commission, as well as those representing securities traders, had urged the Supreme Court to accept this logic. A brief on behalf of corporate raider T. Boone Pickens of Texas said the Indiana law was an example of “protectionistic zeal” and “economic isolationism and parochialism prohibited by the Commerce Clause of the U.S. Constitution.”

But the high court disagreed. “The Constitution does not require the states to subscribe to any particular economic theory,” wrote Justice Lewis F. Powell Jr. for the court.

Powell said states long have had the authority to charter and regulate corporations. The main purpose of the law in question “is to protect shareholders of Indiana corporations” by giving them “an opportunity to decide collectively whether the resulting change in voting control of the corporation, as they perceive it, would be desirable,” he wrote. This period of delay and the requirement for a considered vote “may be especially beneficial where a hostile tender offer may coerce shareholders into tendering their shares.”

The Indiana law applies to any company incorporated in that state which has its principal office or substantial assets there. At least 10% of its shareholders must also be Indiana residents.

The law was passed last year. In recent years, a number of states have attempted to combat the wave of corporate mergers, citing the mass layoffs and plant closings that often result.

Thirty-two states have some laws on the books that regulate takeovers of “corporations deeply rooted in those states,” according to a brief filed by the New York attorney general’s office.

California does not have a takeover law, but a state legislative commission has been examining problems arising from mergers.

Michael Strumwasser, a special assistant to state Atty. Gen. John Van de Kamp, said Tuesday’s ruling may help bolster the state’s case in its pending antitrust lawsuit challenging Texaco’s merger with Getty Oil Co.

“Texaco has relied on the argument that state antitrust laws can’t be applied to a national merger like this one,” Strumwasser said. “This strengthens our claim that the state can assert jurisdiction in this situation.”

Van de Kamp has contended that states should play a more active role in attacking mergers that limit competition and has argued that Texaco’s acquisition of Getty could allow it to monopolize oil refining in California.

The high court dissenters in the Indiana case (CTS Corp. vs. Dynamics Corp. of America, 86-71) contended that such aggressive state regulation of business is forbidden by the Constitution and ultimately will harm both individual stockholders and the economy. The dissenters were Justices Byron R. White, Harry A. Blackmun and John Paul Stevens.