State Takeover Laws1st Generation Laws - Edgar v. Mite, Illinois, 1983

2nd Generation (Control Shares) – CTS v. Dynamics, Indiana, 1987

3rd Generation Merger Moratorium/Business Combinations

Expanded Fiduciary Duty Statutes (Pennsylvania)Revised12/4/08

First Generation Laws Edgar v. Mite, Illinois, 1983 Illinois Secretary of State had to ok

terms of the deal

Constitutionality Issues (1) How does the Supreme Court

decide if a takeover law is constitutional?

Constitutionality Issues (2) Two Clauses of the U.S. Constitution

are relevant (1st) Commerce Clause

States may not interfere with interstate commerce, and only the Federal government may regulate commerce with other nations, and with the native American Indian tribes.

Constitutionality Issues (3) Two Clauses of the U.S.

Constitution are relevant (2nd) Supremacy Clause

States may not pass any law that negates or makes ineffective a federal law (Federal law is supreme).

Constitutionality Issues (4)Pike v. Bruce ChurchCalifornia - Arizona Border

Pike v. Bruce Church, 1970 “Although the criteria for determining the validity

of state statutes affecting interstate commerce have been variously stated, the general rule that emerges can be phrased as follows: Where the statute regulates evenhandedly to effectuate a legitimate public interest effects on interstate commerce are incidental

It will be upheld unless the burden imposed on such commerce is clearly excessive in relation to the putative local benefits.

2nd Generation LawsAlso called “Control Shares Law”

CTS v. Dynamics, Indiana, 1987 Acquiring shareholder loses his

vote if he acquires >20% without board approval

Vote may be restored by a majority vote of non-acquiring shareholders

Purpose: Allows shareholders to vote without having to tender their shares (eliminates “prisoners’ dilemma)

2nd Generation: Ohio(1990) Prohibits arbs (defined as anyone buying

more that $250,000 of stock after an offer has been announced) from voting in the control shares vote required

Most states control voting - Only Ohio restricts arbitrageur voting.

Purpose: Eliminate the arb vote because of perceived conflict of interest, i.e. arbs interested in “transaction” not in the company. Similarly target board, and acquiror may not vote.

3rd Generation (Merger Moratorium)

Merger Moratorium / Business Combinations

Universal Foods (1989) No merger (or other business

combination) for 3 - 5 years Delaware exception (85%),

Georgia exception (90%), Wisconsin (no exception)

Expanded Fiduciary Statutes: General

Directors MUST make decisions they believe are in the best interests of the corporation

Directors MAY / MUST take into account interests of other constituencies

Expanded Fiduciary Statutes: Pennsylvania (1)

Director as fiduciary. A director … shall stand in a fiduciary relation to the corporation and shall perform his duties … in good faith, in a manner he reasonably believes to be in the best interests of the corporation and with such care, including reasonable inquiry, skill and diligence, as a person of ordinary prudence would use under similar circumstances.

Expanded Fiduciary Statutes: Pennsylvania (2)

Consideration of factors. In discharging their duties

directors, may, in considering the best interests of the corporation, consider the effects of any action upon employees, suppliers, customers and communities, and all other pertinent factors.

Expanded Fiduciary Statutes: Pennsylvania (3)

Presumption. Absent breach of fiduciary duty,

lack of good faith or self-dealing, actions taken as a director or any failure to take any action shall be presumed to be in the best interests of the corporation.

Expanded Fiduciary Statutes: Pennsylvania (4)

Consideration of interests and factors: In discharging their duties the board may, in considering the best interests of the corporation, consider to the extent they deem appropriate:

(a) The effects of any action upon any groups affected by such action, including shareholders, employees, suppliers, customers, and creditors, and upon communities in which offices of the corporation are located.

Expanded Fiduciary Statutes: Pennsylvania (5)

Consideration of interests (cont’d) (b) The short-term and long-term

interests of the corp., including benefits that may accrue from its long-term plans & the possibility that these interests may be best served by the cont’d independence of the corp.

(c) The resources, intent and conduct (past, stated, potential) of any person seeking to acquire control of the corp.

Expanded Fiduciary Statutes: Pennsylvania (6)

Consideration of interests (cont’d) All other pertinent factors. The board,

shall not be required, in considering the best interests of the corporation, to regard any corporate interest or the interests of any particular group affected by such action as a dominant or controlling interest or factor.

Pennsylvania Comments “..undermines a key concept of

capitalism: a board’s fiduciary duty to shareholders. It allows directors to place the interests of a company’s other stakeholders, such as employees, communities, and suppliers, above those of shareholders. Business Week Editorial, Jan. 29, 1990

Pennsylvania Comments In brief, the law would free company

directors from having to act on behalf of their shareholders. They could decide that the good of the community, the employees, the suppliers - or themselves - outweighs the rights of the people who hold the company’s stock. Sunbury Daily News, Jan. 3, 1990

Pennsylvania Comments Moreover, instead of the ancient duty to

maximize share price, directors … could consider the interests of “stakeholders” (employees, suppliers) above interests of stockholders. Fiduciary duty, RIP

WSJ, April 3, 1990

Fatcat Protection and Shareholder Rip-off Act of 1990.” State Senator Vincent Fumo

Pennsylvania Comments The Pennsylvania bill would permit

managers to reject takeovers that benefit shareholders but harm customers, suppliers or other constituencies. That sounds compassionate; but the effect would be to absolve officers of accountability for the property they manage.

(New York Times, February 12, 1990)

Mass. Staggered Board Law From EMC 2002 Annual Proxy Statement

Pursuant to Section 50A of Chapter 156B of the Mass. General Laws, the Board of Directors is currently divided into 3 classes, having staggered terms of 3 years each. … Under Section 50A … the Board may determine the total number of directors and the number of directors to be elected at any annual meeting of stockholders or special meeting in lieu thereof. The Board has fixed at nine the total number of directors and has fixed at three the number of Class III Directors to be elected at the 2002 Annual Meeting.

Time, Inc. (1989) In the longer term, Time’s advisors have

predicted trading ranges of$159 - $247 for 1991, $230 - $332 for 1992 and $208 - $402 for 1993. Nagy Aff., Exh. 3.

The latter being a range that a Texan might feel at home on.

Time, Inc. (1989) Time’s investment banker takes issue with Mr. Phillips’ cash flow

multiples, stating that they are inappropriately low for a company such as the proposed Time-Warner. Several other outside analysts have produced the following trading estimates:

David J. Londoner of Wertheim Schroder -$155 Kendrick Nobel of Paine Webber Group -$173 Jeffrey Russell of Drexel Burnham Lambert -$145 - $160 Richard MacDonald of First Boston $120 - $150

Rossoff Aff . , 16.