Justices Give States Takeover Veto : Uphold Wisconsin Law Allowing Board to Block Mergers

The Supreme Court today gave states the authority to block hostile takeovers of their corporations.

The justices unanimously rejected a constitutional challenge to a Wisconsin law that forbids outsiders to buy up and merge with a Wisconsin-based firm without the permission of its corporate board.

Two years ago, the high court upheld a state law that gave shareholders the final word on whether to approve the outside takeovers. The subsequent Wisconsin law, as well as similar measures in Delaware and 22 other states, go one step further by giving the corporate management a veto on hostile mergers.

Lawyers for the corporate raiders contended the Wisconsin law was a “protectionist” measure that violated the Constitution’s guarantee of free flowing interstate commerce. Nevertheless, a key federal appeals court in Chicago, and today the Supreme Court, upheld the anti-takeover measures.

“This will have a tremendous deterrent effect on hostile takeovers,” said Gregg Jarrell, former general counsel for the Securities and Exchange Commission. “When you combine this with the difficulties in the junk bond markets, we may be witnessing the death knell of financial acquisitions.”

The Wisconsin anti-takeover law was challenged by Amanda Acquisition Corp., described in court documents as a shell business backed by Berisford Capital, a British venture capital firm. Amanda is a subsidiary of High Voltage Engineering Corp. in Massachusetts.

Amanda’s $687-million tender offer for Universal Foods Corp. in Wisconsin was sidetracked by the state law.

The U.S. 7th Circuit Court of Appeals ruled in May that the law does not violate the Constitution or federal securities law.

“If our views of the wisdom of state law mattered, Wisconsin’s takeover statute would not survive,” the appeals court said. “Wisconsin’s law may well be folly. We are confident that it is constitutional.”

The appeals court said states are free to favor corporate managers over shareholders without necessarily running afoul of federal law or the Constitution.

If the law in the long run drives businesses that need to raise new capital away from Wisconsin, it is not the role of the federal courts to correct such flaws, the 7th Circuit court said.

The appeals court also relied in part on a 1987 Supreme Court ruling that broadened state power to regulate hostile takeovers.