From the Hustings The Roll of States With Takeover Control Laws

Forty-one states had adopted some type of statutory takeover controls as of mid-1998. Thirty-eight of them had written more than one type of takeover regulation technique into their corporation laws. Here is the roll of states with the most popular forms of antitakeover mechanisms. CONTROL-SHARE ACQUISITION These statutes require approval of voting rights for stockholders whose ownership interests exceed certain percentage thresholds. Approval of these voting rights must come from so-called disinterested stockholders – those holders affiliated with neither the investor nor the incumbent officers and directors. A control-share acquisition law has been upheld by the U.S. Supreme Court. The high court’s ruling was delivered in CTS Corp. v. Dynamics Corp. of America in April 1987. (See Mergers & Acquisitions, July/August 1987.) States with control-share statutes include:Arizona Michigan OregonFlorida Minnesota PennsylvaniaHawaii Mississippi South CarolinaIdaho Missouri South DakotaIndiana Nebraska TennesseeKansas Nevada UtahLouisiana North Carolina VirginiaMaine Ohio WisconsinMaryland Oklahoma WyomingMassachusettsNON-STOCKHOLDER/ NONMONETARY CONSIDERATIONSThese statutes allow boards of companies to consider factors other than benefits to shareholders in making decisions on corporate transactions, including acquisitions. These so-called stakeholder laws allow directors to consider the long-term and short-term effects of a proposed takeover on a variety of constituencies, including employees, creditors, customers, suppliers, and communities. States with directors’ duties laws include:Arizona Louisiana New YorkConnecticut Maine North DakotaFlorida Massachusetts OhioGeorgia Minnesota OregonHawaii Mississippi PennsylvaniaIdaho Missouri Rhode IslandIllinois Nebraska South DakotaIndiana Nevada TennesseeIowa New Jersey WisconsinKentucky New Mexico WyomingBUSINESS COMBINATION/ FREEZE-OUT These statutes prescribe lengthy waiting periods before uninvited acquirers – those not approved by target companies’ boards – can complete mergers with unwilling target firms even if the acquirers have purchased majorities of the target’s shares in tender offers. The spans during which the buyer is in limbo range from two years to five years. Although it may own all or most of the shares, the buyer cannot control the assets or operations of the acquired company. Even after the cooling-off period expires, the merger still cannot be consummated until certain other conditions are met, such as stockholder approval or purchase of shares at a fair price. Delaware’s freeze-out law, for example, suspends a merger for three years unless the board approves the combination or the acquirer obtains at least 85% of the shares in its initial tender offer. The states whose legislatures have adopted various versions of freeze-out laws include:Arizona Maryland OregonConnecticut Massachusetts PennsylvaniaDelaware Minnesota Rhode IslandGeorgia Missouri South CarolinaIdaho Nebraska South DakotaIllinois Nevada TennesseeIndiana New Jersey VirginiaKansas New York WashingtonKentucky Ohio WisconsinMaine Oklahoma WyomingFAIR PRICE These statutes require a bidder to pay a legally defined fair price to all shareholders to acquire their shares, unless the transaction is approved by the board or by holders of a specified supermajority of the shares. Fair-price provisions often are included in freeze-out laws. States with fair-price laws include:Arizona Maryland OhioConnecticut Michigan PennsylvaniaFlorida Minnesota Rhode IslandGeorgia Mississippi South CarolinaIdaho Missouri South DakotaIllinois Nevada TennesseeIndiana New Jersey VirginiaKentucky New York WashingtonLouisianaNorth Carolina WisconsinPOISON PILLS These statutes authorize company directors to enact so-called shareholder rights plans, known as poison pills, that have the potential to deter hostile takeovers. States with laws endorsing poison pills include:Colorado Kentucky PennsylvaniaFlorida Massachusetts Rhode IslandGeorgia Nevada South DakotaHawaii New Jersey TennesseeIdaho New York UtahIllinois North Carolina VirginiaIndiana Ohio WisconsinIowa OregonANTI-GREENMAIL These statutes bar the discriminatory repurchase of a specified percentage of a company’s shares at a premium-to-market price from an investor who has held the shares for less than a statutory minimum amount of time. These laws do not restrict repurchases where the transaction is approved by shareholders or the same offer is made to all shareholders. States with laws restricting the payment of greenmail include:Arizona Nevada TennesseeMichigan New York WisconsinMinnesotaCASH-OUT These statutes require the acquirer of a certain percentage of a company’s shares to purchase the shares of the remaining shareholders at a statutory fair price. Cash-out laws are in effect in Maine, Pennsylvania, and South Dakota. LABOR CONTRACTS/SEVERANCE PAY These statutes protect employees from the negative effects of plant closings and other disruptions caused by an acquisition. The statutes provide for the assumption of existing collective bargaining agreements by the acquirer. These continuity-of-contracts laws are in effect in Delaware, Illinois, Massachusetts, Pennsylvania, and Rhode Island. The laws in Massachusetts, Pennsylvania, and Rhode Island also provide for severance pay for employees who lose their jobs as a result of a takeover. RECAPTURE OF PROFITS These statutes allow companies to recapture the profits of bidders who put them into play. Under the laws, a company may recover profits of an investor who discloses an intention of acquiring control and then sells its holdings within 18 months of the disclosure. Recapture may be waived if the investor held its shares for a sufficient period of time before the disclosure was made. Recapture-of-profits laws are in effect in Ohio and Pennsylvania MANDATORY CLASSIFIED BOARD This law is in effect only in Massachusetts. It requires all companies incorporated in that state to have staggered terms for their boards of directors. All other states allow companies to classify their boards, provided they have a certain minimum number of directors. COMPENSATION RESTRICTIONS These statutes prohibit companies from granting non-routine increases in compensation, including lucrative severance agreements known as golden parachutes, while a tender offer is open. The laws, enacted in Arizona and Minnesota, do not affect severance packages enacted in the absence of a tender offer.