Company Pressure : States Act to Stem Tide of Takeovers

Arizonans do not always look fondly on The Greyhound Corp. It has battled unions, sold off its bus lines and 18 other businesses and has been criticized for skimping on charitable contributions.

Yet, when John W. Teets, Greyhound’s tough-talking chief executive, in July asked the state’s lawmakers to enact emergency measures to protect the Phoenix company from takeovers, the Arizona Legislature fairly snapped to attention. Within days, and by lopsided margins, the legislators adopted a Greyhound-inspired bill that state officials say is among the most comprehensive in the nation.

“Greyhound said, ‘Jump,’ and we said, ‘How high?’ ” said state Rep. Jim Skelly, chairman of the House Judiciary Committee.

26 States Have Laws

Arizona is one of 26 states that have adopted anti-takeover laws, and some say that the trend already is slowing the pace of the decade-old wave of corporate takeovers. Anti-takeover measures have swept through state after state in recent months, propelled by the influence of local companies and the appeal such bills hold for legislators eager to vote for local jobs and businesses.

These actions have not resolved debate over the laws’ merits, however. Critics say that they hurt not only shareholders who could profit from takeover offers but also companies that want to acquire, to be acquired or simply to maintain maximum investor interest in their stock.

Such restrictions may protect managers who deserve to be ousted, critics say, and they do not guarantee that local companies will not lay off employees or sell assets, anyway. Some also wonder whether the states are moving with unseemly haste to enact laws that benefit few and may have far-reaching effect on the economy.

Not ‘Finest Hour’

These statutes “aren’t exactly the legislatures’ finest hour,” said Michael Hatch, secretary of commerce and labor in Minnesota, which adopted a tough law in June to protect retailer Dayton Hudson Corp. “This isn’t lawmaking that would impress (former Supreme Court Justice Benjamin N.) Cardozo,” he said, referring to one of the nation’s foremost legal scholars.

Congress, after years of debating the issue, has only tinkered with federal takeover rules because of concern that a full overhauling might upset the balance of power between corporate managers and those who wish to overthrow them. The states are rushing in where Congress has feared to tread.

They have moved most quickly since last April, when the Supreme Court upheld state regulation of takeovers after a review of Indiana’s statute. Since then, nine states have enacted or amended such laws--six at the urging of threatened managements. Several others have enacted aggressive new rules that may not survive court tests, takeover specialists say.

As Arizona shielded Greyhound and Minnesota protected Dayton-Hudson, so Washington state assisted aircraft builder The Boeing Co. Massachusetts came to the aid of consumer-products maker Gillette Co. Florida helped publisher Harcourt Brace Jovanovich Inc., and North Carolina sought to shield textile manufacturer Burlington Industries. Experts predict that many other states will follow suit within months. California plans hearings on the subject in the fall.

In Arizona, the call for protection came in the blunt language of Teets, the Greyhound chief.

Teets, the iron-pumping son of a Chicago crane operator, began his lobbying by making the rounds of some spots he does not often visit. His limousine swung past Arizona’s copper-domed Capitol for meetings with legislative leaders, by the state executive tower, where Gov. Evan Mecham works, and by the offices of newspaper editors.

The consumer-products and service company had noticed heavy trading in its stock, he told them, and suspected that Minneapolis investor Irwin Jacobs or another corporate raider might make a takeover bid or try to “greenmail” the company--force it to pay an above-market price for the investor’s stock.

Got Special Session

Teets wanted the Legislature to meet in special session to write Greyhound a law. If it did not, he warned, this very Republican state could no longer claim to be pro-business.

“The question is: Are (state legislators) for business, or are they against it?” Teets demanded to know.

The Greyhound bill was introduced on July 21, passed the next day (43 to 12 in the House of Representatives; 25 to 2 in the Senate) and immediately signed by the governor. Among other features, the law seeks to prevent unfriendly takeovers financed by heavy borrowing. It prohibits such a suitor from liquidating a target company’s assets within three years of the purchase.

Michael Preston Green, the Phoenix lawyer and lobbyist who masterminded Greyhound’s campaign, called the statute “the most well-balanced in the country . . . a model to which other states will be looking.”

Questions lingered, however. Had there been an emergency, or had Greyhound simply figured it could fare better in the frantic atmosphere of an emergency session than in regular session, when unhurried deliberation might have crystallized opposition?

Greyhound’s belief that Jacobs posed a threat was based on the evidence of heavy trading in its stock and an article in the newspaper USA Today reporting that Jacobs was amassing a stake, Robert Wilmoth, one of Greyhound’s lawyers, said. But Jacobs apparently never amassed even a 5% holding, a proportion that would have required public disclosure under Securities and Exchange Commission rules, Wilmoth acknowledged.

Trading Cooled Off

And the trading volume and lofty prices had largely eased between May, when they were first noticed, and July, when Greyhound sought the legal protection. Investors traded 1.5 million shares of Greyhound on May 27, but volume had slowed to 137,000 shares by July 21.

Greyhound already had a raft of anti-takeover devices in place, including a “poison pill”--a charter clause designed to make unfriendly acquisition prohibitively expensive by giving shareholders extra stock in the event of a takeover. Also in place were “golden parachutes” to compensate Greyhound executives in case of a takeover. Those included a $2.8-million package for Teets, the company’s proxy statement shows.

Arizona’s legislative leadership exerted strong pressure for the Greyhound bill, and many who voted for it believed they had to do so to win approval of two other popular bills--on worker compensation and sales tax distribution--that were considered at the one-day special session.

In their draft forms, each of the three bills was conditioned on the enactment of the other two, and many legislators incorrectly believed that those conditions remained in the final bills as well. Actually, those provisions were removed before the bills were formally introduced. Rep. Bill English (R-Sierra Vista), sponsor of the Greyhound bill, acknowledged that many lawmakers “probably thought the bill was still tied to the other two.”

Lured to Arizona

Some legislators wondered how far Arizona should go for Greyhound. They remembered that Greyhound was lured to Arizona by special enactment of a law to exempt local companies’ dividends from taxation and that the company had several times threatened to pull out of the state because it did not like pending legislation.

Greyhound is the only Arizona-based firm in the Fortune 500, but its Arizona work force has dwindled to about 1,400 employees, from 2,200 two years ago, as Teets has sold off units that did not fit into his long-term strategy.

“Why do they need protection? What could they do to the company that they haven’t already?” asked Rep. John Kromko, a Tucson Democrat.

The ease with which the Greyhound measure cleared the Arizona Legislature illustrates why such laws are gaining popularity in corporate board rooms. They “can be the quickest, cheapest way for managements to strengthen defenses,” said Roberta Romano, a Yale law professor.

Some experts argue that corporations should ask their shareholders to adopt anti-takeover amendments in their bylaws, rather than turn to the state legislature, but organizing such voting can take months--and may fail, because shareholders are increasingly unwilling to block takeovers that might bring them quick profits.

Law Professor’s Question

In briefing Washington legislators before last month’s vote on that state’s proposed anti-takeover law, Douglas M. Branson, a law professor at the University of Puget Sound, observed that most Boeing shareholders might feel far differently from the managers lobbying for the measure.

“Are we about to do something that Boeing shareholders wouldn’t do?” he asked.

Such reflections have not usually slowed legislatures’ deliberations.

Teets began lobbying for Greyhound on July 1 and had won state protection by July 22. Boeing, threatened by T. Boone Pickens, needed 11 days for its lobbying campaign; Dayton-Hudson and Burlington needed only a week.

Minnesota’s effort to rescue Dayton-Hudson from Dart Group Corp. took on the tone of a popular crusade last June, as labor unions, charities and local officials came to the aid of the retailer. Usually, however, support for anti-takeover bills comes only from the threatened company and firms that believe they may find themselves similarly menaced.

Labor unions usually stay on the sidelines. In Arizona, the state AFL-CIO “was officially neutral, which is the position our national organization takes on these things,” said Chuck Huggins, secretary of the Arizona AFL-CIO. Such a law “might keep management’s jobs, but it doesn’t do anything direct for working men and women.”

Anti-takeover bills often get strong opposition from segments of the business community.

Massachusetts’ new law was strongly advocated by the Assn. of Industries in Massachusetts, which primarily represents the old-line shoe, textile and basic manufacturing companies--the kinds of concerns most likely to be takeover targets.

The Massachusetts High-Technology Council, an influential state business group, stayed scrupulously out of the fray. Many of its member firms strongly opposed the bill, fearing it would dampen investor interest in Massachusetts companies and make it harder for them to acquire or be acquired.

Indeed, some of the companies approaching the legislatures themselves opposed earlier state efforts to restrict takeovers. William C. Norris, former chairman of Control Data Corp., said that, when he called on Dayton-Hudson in 1984 to drum up support for state anti-takeover legislation, “I couldn’t interest them.”

Many legislatures have shown themselves willing to dispense with the usual formalities of law-making. Arizona’s bill was made public on a Monday morning, 30 minutes before hearings were opened, “which pretty much excludes any chance of public input,” said Dana Larsen of Arizona Common Cause.

The North Carolina Legislature heard comments from Burlington representatives, but no opposing testimony on the bill it passed in July. “You don’t understand--there was no time for such things,” said state Sen. R. C. Soles Jr. of Tabor City, the sponsor. “It went through here like lightning.”

Lack of Deliberation

In the aftermath, some citizens wish they had had more information and more time to reflect.

Minnesota’s bill was passed amid heavily favorable coverage in the state’s newspapers, which pointed to Dayton-Hudson’s charitable giving, civic spiritedness and payroll of 34,000 jobs in the state. After the vote, the Minneapolis Star & Tribune reported an unsettling story about how Dayton-Hudson had closed Detroit’s only downtown department store, laid off 1,000 people and cut charitable contributions in Michigan after it acquired the Hudson retail chain.

To some, that story showed that anti-takeover laws cannot guarantee that local companies will maintain jobs and hold onto their assets. “I think some people would’ve liked to have known about that episode in advance,” said Hatch, the state commerce secretary.

T. Boone Pickens, the corporate raider and chairman of Mesa Petroleum Co., says that anti-takeover laws “are legislation by the most powerful man in the state--the head of the big local company.” If the companies are influential, the bills succeed because constituencies that usually oppose them--investor groups and acquisitive companies--have little political leverage in state capitols.

Neither Pickens’ shareholders’ rights group, United Shareholders of America, nor the Securities Industry Assn., the investment world’s leading trade group, often bothers to oppose passage of anti-takeover legislation. “It isn’t worth our time,” an investment industry officer said. “These bills are always a slaughter.”

More Than a Bailout?

Some state lawmakers confessed to feeling squeamish about appearing too willing to back legislation designed for one corporation. Many in Massachusetts’ liberal-dominated Legislature tried to persuade constituents that their bill was more than a bailout for Gillette.

So, it was to their horror that Gov. Michael S. Dukakis delayed signing the bill for three days so that he could do it in a public ceremony in front of the red brick Gillette plant in South Boston. “Some people around here cringed,” one statehouse aide said.

Several features are common to the recently enacted state laws, according to the Investor Responsibility Research Center, a nonprofit group in Washington.

Many of them extend the bidder’s waiting period after a tender offer is made, to give managements longer to arrange their defenses, plan a restructuring or find a sympathetic acquisitor--a “white knight.” This may be the most important feature of such laws, for, although takeover experts may dream up ways to get around other legal obstacles, time is the key to a successful defense.

Many of the laws prohibit an unfriendly buyer from liquidating a company’s assets within several years of a takeover.

Limits on Voting

Many also limit the voting rights of unfriendly bidders. Under so-called control share acquisition provisions, investors who accumulate a certain percentage of outstanding shares may vote those shares only if they win the support of “disinterested” shareholders in a special vote.

Indiana’s law, with its “control share” provisions, is the only state statute specifically upheld by the Supreme Court, yet other states have aggressively drawn up new provisions and extended their coverage to out-of-state corporations.

North Carolina’s law, for example, provides that an acquisitor may not vote his shares unless he obtains approval from shareholders representing 95% of the remaining shares.

That means that an investor could hold 50% of a company’s stock and still be kept from voting by a shareholder with 2.5% of the company’s shares.

Massachusetts’ law has an exotic twist. It sets back the date of stock ownership required to vote on any takeover to a point before the takeover fight got under way, specialists note.

In that way, it seeks to ensure that voting shareholders are not the arbitragers--takeover-stock speculators--who buy up huge blocks of shares during a takeover fight and usually vote for the acquisition so they can make a quick killing in the market.

Shareholder Rights Cited

Such provisions may infringe on the rights of shareholders, some specialists say. “The courts will be sensitive to statutes that go overboard,” warned Arthur Fleischer Jr., a leading takeover lawyer, who called some of the recent variations “silly.”

Constitutional questions remain, too, about the rights of states to extend their laws to cover corporations that have substantial payrolls and assets within their borders but are chartered in other states. Washington, Massachusetts and North Carolina wrote out-of-state coverage into their laws because the concerns they sought to protect were chartered in Delaware.

Two of the most important states, California and Delaware, have moved slowly on takeover regulations, partly because their large corporate populations include many companies that oppose such restrictions. Both states are due to consider the proposals in the months ahead, but some predict that neither will enact a tough law.

California, after all, has already rejected overtures from several companies that sought such protection. These include Unocal Corp., which approached legislators during Pickens’ 1985 assault, and Carter Hawley Hale Stores Inc., which expressed interest when it came under attack from The Limited Inc. in 1984.

Some investment industry executives fear, however, that, if most other states adopt strong takeover laws, California and Delaware would feel pressure to do likewise.

Some Firms Move Out

Otherwise, companies incorporated in California and Delaware might move to states that offer more protection. Only last month, The Singer Co., military contractor and consumer-products maker, announced it had moved its executive offices to New Jersey from Connecticut because New Jersey’s tough law offered better protection from Pickens’ pending takeover bid.

Officials of other states say candidly that they hope to use anti-takeover rules as an economic development tool--to attract new business. Days after the Supreme Court approved the Indiana statute, that state bought big newspaper ads to proclaim a law that gave corporations one more reason to move to Indiana.

“When you think about it, this kind of law not only saves jobs and businesses for a state, it can bring in new ones,” Greyhound lawyer Wilmoth said.