Statute Aimed at ‘Bust-Up’ Deals : Delaware’s Takeover Law Upheld by Courts

The federal courts have upheld Delaware’s takeover law for the second time in recent weeks, further bolstering the ability of target companies to keep unwanted bidders at bay.

But because the judges’ opinions were issued in preliminary hearings and are subject to further consideration, experts expect the law to be tested further.

“An appeal is almost guaranteed,” said Robert Heim, a partner in the Philadelphia office of Dechert Price & Rhoads. “This is far from being conclusive.”

A number of states have enacted anti-takeover laws in recent years, but Delaware’s is regarded as especially significant because many of the nation’s biggest companies are incorporated there.

Some 45% of the companies listed on the New York Stock Exchange are incorporated in the state, and 56% of the Fortune 500 industrial companies have opted to incorporate in Delaware to take advantage of its liberal corporate and tax laws.

On Monday, U.S. District Judge Jane Roth upheld Delaware’s 3-month-old law as it applies to Tate & Lyle PLC’s hostile $1.42-billion bid for Staley Continental Inc.

And last month Judge Murray M. Schwartz said the law was “most likely constitutional.” His ruling came in response to a challenge by BNS Inc., a takeover company headed by British industrialist Brian Beazer, which is pursuing a hostile $1.69-billion bid for Koppers Co.

Both Tate & Lyle and BNS argued that the Delaware law is unconstitutional because, they say, it conflicts somewhat with federal laws that govern tender offers and takeovers.

Two previous challenges to the statute--involving Campeau Corp., which was attempting to acquire Federated Department Stores Inc., and American Standard Inc. in its bid for Black & Decker Corp.--never got to the review stage.

A key provision of the Delaware law bars a potential buyer from acquiring a company for three years after the buyer accumulates more than 15% of the target company’s stock. The provision does not apply if the buyer acquires a total of 85% of the company’s shares in the same transaction that it passes the 15% threshold, or if the board of directors supports the offer.

The provision is aimed at “bust-up” deals in which a hostile buyer sells off chunks of a target company in order to help finance the buyout, and partial offers under which the buyer acquires just enough shares to win control of the target and offers the remaining shareholders a lesser price.

Tate & Lyle’s challenge was backed by the Securities and Exchange Commission, which filed a brief supporting the British firm.

Some experts say the SEC’s willingness to formally register its opposition to the law makes Roth’s ruling particularly important.

“It is quite significant because it shows that a federal court in charge principally of interpreting the Constitution approved a state statute under attack by . . . the SEC,” said Charles Crompton, an attorney with Potter Anderson & Corroon in Wilmington.

Crompton, who represented both Koppers and Staley, noted that the SEC’s involvement was highly unusual and that the court likely would “pay special attention to the position of a federal agency.”

But others say that the SEC’s support, filed in a friend-of-the-court brief, bolsters Tate & Lyle’s position so much that an appeal is inevitable.

“Here’s a federal agency that comes in and says the law runs counter to the principles of the Williams Act (which governs tender offers) because it gives management too much power and therefore denies shareholders the ability to make an informed decision,” Heim said. “It is certain to be reviewed.”