High Court Lets States Curb Hostile Takeovers : Buyouts: Wisconsin law permits firms' officers to block acquisitions. A deterrent to raiders is seen.


Striking a serious blow to the nation's unprecedented wave of corporate mergers, the Supreme Court on Monday gave states broad powers to block hostile takeovers.

In recent weeks, troubles in the junk bond market have made it more costly for corporate raiders to borrow money to buy out a corporation. Now, the high court has added a major legal obstacle as well.

Without a dissenting vote, the justices let stand a Wisconsin law that gives corporate managers there the authority to prevent outsiders from buying up and merging with a Wisconsin-based firm.

Since 1985, similar laws have been enacted in 23 other states, which together are home to 784 of the nation's 1,000 largest corporations.

Two years ago, the Supreme Court upheld a weaker Indiana anti-takeover law that gave shareholders the final word on whether a home-state corporation would be taken over by outside buyers.

The Wisconsin law, known variously as a "merger moratorium" or a "business combination act," goes one step further by giving corporate management a veto on unwanted takeover offers.

"This will have a tremendous deterrent effect on hostile takeovers," said Gregg Jarrell, former chief economist at the Securities and Exchange Commission. "When you combine this with the difficulties in the junk bond market, we may be witnessing the death knell of financial acquisitions."

Others characterized the laws as only "an obstacle." Often, they noted, corporate directors feel obliged to accept unfriendly offers because they are a boon to the shareholders.

California is one of the few states in which anti-takeover legislation has been offered but defeated, said Peg O'Hara, director of corporate governance for the Investors Re sponsibility Research Center in Washington. "We characterize California as a pro-shareholder state," she said.

However, in many other states, particularly in the aging industrial areas of the East and Midwest, legislators have sought to save home-state corporations from outside takeovers, even at the expense of local stockholders.

"Some of these laws have been rushed through the legislature in 24 hours to save a well-known, threatened corporation," said O'Hara, whose nonprofit group tracks corporation legislation.

The Wisconsin law grew out of the proposed buyout in 1987 of a venerable Wisconsin firm, G. Heileman Brewing Co., by Australian investors. The Legislature, in a special session, enacted the law banning mergers that are opposed by corporate boards. The law stipulates that the merger cannot take effect for three years from the time the corporate raiders first make a takeover attempt, unless the corporate board agrees to the merger.

The law covers "resident domestic corporations," which are broadly defined as companies with a "principal executive offices" or "significant business operations" in the state.

Ironically, Heileman's corporate directors chose to accept the Australian offer.

The law got its first real test a year later, when Amanda Acquisitions Corp., owned by British investors, tried to buy out Wisconsin-based Universal Foods Corp.

When Universal's stock was selling for $25 a share on Dec. 1, 1988, Amanda offered $30.50 a share for all of it. The offer was contingent on Amanda's being able to take full control of the Wisconsin firm and merge with it. But Universal's directors balked, triggering the three-year merger moratorium.

Lawyers for Amanda challenged the law in court, contending that it violated the Constitution's guarantee of free-flowing interstate commerce. Both a district judge and the U.S. 7th Circuit Court of Appeals in Chicago agreed in part: They labeled the Wisconsin law a "protectionist measure" that could harm investors and the nation's economy. Nevertheless, they concluded, the measure was not unconstitutional.

Quoting Justice Antonin Scalia in the Indiana case, the appeals court declared: "A law can be both economic folly and constitutional."

In their appeal to the Supreme Court, lawyers for Amanda called the Wisconsin law "virulent" and discriminatory against out-of-state interests. Without comment, the justices simply denied the appeal. (Amanda Acquisition vs. Universal Foods, 89-372.)

Monday's decision is in line with recent actions by the court under Chief Justice William H. Rehnquist. Although the conservative court has been much criticized for rejecting constitutional claims by criminal defendants and civil rights plaintiffs, it has been just as willing to dismiss constitutional claims filed by business attorneys.

Last week, for example, the court rejected an appeal by drug companies arguing that they should not be forced to pay damages for DES injuries that arose from another firm's DES pills. DES was a drug used to prevent miscarriages that is linked to cancer in the daughters of women who took it.

On Monday, the court rejected constitutional appeals of three huge punitive damage verdicts against businesses. They ranged from a $500,000 verdict against a mobile-home manufacturer in Alabama to a $6-million verdict against an insurance firm in Nevada.

Lawyers and economists agreed Monday that the high court's latest decision will encourage even more states to pass anti-takeover laws. They disagreed somewhat, however, on the impact of those laws.

Joel Seligman, a University of Michigan securities law professor, said that the laws create "serious difficulties" for hostile mergers. But, in many instances, he said, corporate directors can be persuaded to approve an outside takeover.

Some state anti-takeover laws allow mergers to proceed if the outside investor manages to purchase more than 85% of the shares, Seligman noted.

Jarrell, now at the University of Rochester, said that the Wisconsin-type law does not necessarily end hostile takeovers, but it will scare away many potential investors. "This will have a chilling effect on hostile mergers. Frankly, until today, I didn't think it had a chance of surviving the Supreme Court," he said.

State anti-takeover laws aren't blocking many unfriendly acquisition bids, experts say. D1

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