ANALYSIS : Anti-Takeover Laws Can Help Even Up the Odds : Buyouts: Experts say restrictions on highly leveraged corporate raids are often effective tactical weapons.


The state anti-takeover laws that the U.S. Supreme Court chose not to review Monday can be formidable obstacles to highly leveraged hostile takeovers, although as a practical matter the laws probably aren't blocking many such deals at present, takeover experts say.

The court declined to reconsider Wisconsin's anti-takeover law, which says a bidder for a company's shares must wait three years to take full control of the firm if the target's board won't approve the deal. Such laws--which require a five-year wait in some cases--are designed to fight off bids that are financed with heavy borrowing and require sales of the target company's assets to quickly pay off debts.

These laws became popular in the mid-1980s as companies and their allies in state legislatures became alarmed at the seeming ease with which corporate raiders could sell high-yield junk bonds, take control of a target company and sell off divisions.

Today, about 24 states have such laws, including Delaware, where more than half of the nation's largest industrial concerns, the Fortune 500, are chartered. California does not have an anti-takeover statute.

Such laws are less of an issue in the takeover world today than they were even a year ago, however, because the number of such highly leveraged deals is rapidly dwindling. As the failure of last month's bid for UAL Inc. dramatically illustrated, it is now harder to raise money for takeovers through the sale of junk bonds.

The junk bond market has become less active, and commercial banks are more leery of extending loans to would-be acquirers who rely on junk financing. In addition, some tax law changes have reduced the incentives for highly leveraged offers, takeover specialists note.

There is evidence that anti-takeover laws have had some effect. In New York, only one hostile takeover has taken place since the adoption of such a law in 1987, according to John Coffee, a specialist in securities law at Columbia University. The successful bid was the acquisition of Irving Trust Co. by Bank of New York, which could complete the transaction without needing to quickly sell off assets.

The laws clearly hinder takeovers in many other cases by making them more expensive and more time consuming.

The laws can force a bidder, for example, to try to mount a proxy fight or shareholder vote to win a company. Very often, they force the bidder to raise his price high enough so that the board of directors cannot justify refusing it.

"It's the deals at the margins, the ones where the bidder can't afford the delay, or they can't raise the price, that these things affect," said Donald Bingle, a takeover lawyer in Chicago. "In combination with other defenses like the 'poison pills,' these laws have an important effect."

At the same time, the laws are far from airtight. For one thing, directors have a fiduciary responsibility to their shareholders; if board members reject an attractive offer, they may be dragged into court by those shareholders. "They're bound to accept a fair price, and they keep that in mind," said Stuart Shapiro, a New York takeover lawyer.

There are other "outs" in Delaware's version of the law. In that state--the major leagues of the takeover game--a bidder can defuse the law by accumulating 85% of a company's shares. The three-year freeze also won't apply if management has approved another offer for the company.

There's also a way for a buyer who's acquired a controlling share in a target firm to get his hands on some proceeds from asset sales within the three-year limit, Coffee says. While the owner can't sell assets of the target firm to his own company, he can order some assets sold to an outside company and then issue a dividend to all shareholders, including his own firm, Coffee says.

Shareholder-rights advocates have also claimed that the laws can be circumvented if the bidder is willing to offer rich incentives to the target company's board of directors. "All they have to do is offer rich severance contracts to the management, and they can get the board's blessing," said Ralph Whitworth, director of United Shareholders Assn., a group formed by oilman and takeover artist T. Boone Pickens Jr.

But despite the law's limited effectiveness, takeover specialists consider the federal appeals court decision that upheld the Wisconsin statute to be of great importance, because it seems to open the door for other restrictions on takeovers.

Judge Frank H. Easterbrook of the U.S. 7th Circuit Court of Appeals found that "because states have the power to authorize takeovers, they also can determine the circumstances under which they can occur," said Shapiro.


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