From the Hustings: The Roll of States With Takeover Control Laws

Forty-two states had adopted some type of statutory takeover controls as of mid-1999. Many of them have written more than one type of takeover regulation technique into their company laws. Here is the roll of states with the most popular forms of antitakeover mechanisms. COMPENSATION RESTRICTIONS These statutes prohibit companies from entering into agreements that provide for non-routine increases in compensation during a tender offer. The laws are intended to prevent officers and directors from awarding themselves lucrative severance packages when their jobs are threatened by a takeover attempt. Because they limit golden parachute awards only during a tender offer, compensation restriction statutes are largely symbolic, since there are no restrictions on agreements entered into before an actual offer. Compensation restriction laws have been enacted in Arizona and Minnesota. CONTROL SHARE ACQUISITION Most control share acquisition laws provide that an acquirer of 20%, 33 1/3%, or 50% of a company’s shares must win the approval of a majority of the outstanding shares and a majority of the disinterested outstanding shares before it can exercise the voting rights of the “control” stake. Thus, the mere acquisition of control shares does not ensure voting control. States with control share acquisition statutes are: Arizona Michigan Oregon Florida Minnesota Pennsylvania Hawaii Mississippi South Carolina Idaho Missouri South Dakota Indiana Nebraska Tennessee Kansas Nevada Utah Louisiana North Carolina Virginia Maryland Ohio Wisconsin Massachusetts Oklahoma Wyoming CONTROL SHARE CASH-OUT Generally, control share cash-out laws give shareholders the right to cash out of a company at the expense of a shareholder that has acquired a certain percentage of the outstanding stock (usually 20%). After acquiring the specific percentage, the interested shareholder must notify all other shareholders of the acquisition and of their right to demand purchase of their shares at the highest acquiring price. From that date on, shareholders may demand payment for their shares from the acquirer. Although most states with voting control share acquisition laws provide dissenters’ rights to shareholders that oppose the restoration of voting rights, Pennsylvania and South Dakota allow shareholders to cash out at the acquirer’s expense rather than the company’s. In other words, once an acquirer gains voting rights under the acquisition laws, then the cash-out laws kick in and the purchaser could be forced to buy additional shares. Control share cash-out laws are in effect in Maine, Pennsylvania, and South Dakota. DIRECTORS’ DUTIES Since many corporate actions, and takeovers in particular, affect more than just shareholders, a majority of the states have now enacted laws recognizing the interests of other corporate constituencies. Some apply only to decisions affecting control, but most apply to decisions on all corporate activity. A typical law might allow directors to consider any or all of the following: (1) the long-term and short-term interests of the company, its subsidiaries, and its shareholders; (2) the interests of employees, creditors, customers, and suppliers; (3) community and societal considerations; (4) the economies of the nation and the state; (5) any other factor deemed relevant by a director; and (6) the possibility that these interests may be best served by the continued independence of the company. States with directors’ duties laws include: Arizona Louisiana New York Connecticut Maine North Dakota Florida Maryland Ohio Georgia Massachusetts Oregon Hawaii Minnesota Pennsylvania Idaho Mississippi Rhode Island Illinois Missouri South Dakota Indiana Nevada Tennessee Iowa New Jersey Vermont Kentucky New Mexico Wisconsin Wyoming FAIR PRICE Many states have fair price laws that stipulate price and procedural criteria for takeover bids that do not receive supermajority votes. The effect of the statutes is the same as that of fair price supermajority charter provisions. They do not directly regulate tender offers, but by aiming to eliminate two-tier bids, they hinder tender offers, open-market purchases, and even privately negotiated transactions. The definition of a fair price varies from state to state. Under Connecticut’s law, the price an interested stockholder would have to pay is the highest of three amounts: (1) the highest price paid for the company’s shares in the two years before the proposed business combination was announced or in the transaction establishing the acquirer as an interested stockholder; (2) the market value per share on the date the proposal was announced or the date the 10% share was acquired; or (3) the value determined in (2) multiplied by the highest price paid in the previous two years divided by the market value of the common stock on the first date that shares were acquired in the two-year period. States with fair-price laws include: Arizona Maryland Ohio ConnecticutMichiganPennsylvania Florida Minnesota Rhode Island Georgia Mississippi South Carolina Idaho Missouri South Dakota Illinois Nevada Tennessee Indiana New Jersey Virginia Kentucky New York Washington Louisiana North Carolina Wisconsin FREEZE-OUT The freeze-out law is designed to discourage acquirers that hesitate to have funds tied up for as long as five years without consummating a merger or otherwise gaining access to a target’s assets. It makes a control share acquisition impossible for a bidder that needs the target’s assets to service the debt incurred in the acquisition. Potential acquirers could circumvent the law’s stringent requirements by launching a proxy contest. By purchasing up to 14.9% of a company’s shares and successfully electing a friendly board of directors, a dissident could get board approval of a business combination or the 15% purchase. A typical freeze-out law delays business comminations for a certain amount of time, usually three or five years, and imposes fair price criteria after the waiting period expires. Most freeze-out laws prevent a business combination between any 15% shareholder (this is Delaware’s threshold but other states have different thresholds) and the target company for a specific period of time after the 15% acquisition. The law does not apply if the target company’s board approved either the 15% acquisition or the proposed business combination before the shareholder acquired the 15% stake. In addition, the freeze-out statutes usually provide that after the time period has expired, an interested shareholder can engage in a business combination with the target company only if one of two conditions is met: Either a majority of the disinterested outstanding shares must approve the deal, or the interested shareholder must pay a fair price for all outstanding shares in the same form of consideration that was used when purchasing the largest block of shares. The states whose legislatures have adopted various versions of freeze-out laws include:Arizona (3 yrs.) Nevada (3 yrs.)Connecticut (5 yrs.) New Jersey (5 yrs.)Delaware (3 yrs.) New York (5 yrs.)Georgia (5 yrs.) Ohio (3 yrs.)Idaho (3 yrs.) Oklahoma (3 yrs.)Illinois (3 yrs.) Oregon (3 yrs.)Indiana (5 yrs.) Pennsylvania (5 yrs.)Iowa (3 yrs.) Rhode Island (5 yrs.)Kansas (3 yrs.) South Carolina (2 yrs.)Kentucky (5 yrs.) South Dakota (4 yrs.)Maine (5 yrs.) Tennessee (5 yrs.)Maryland (5 yrs.) Texas (3 yrs.)Massachusetts (3 yrs.) Virginia (3 yrs.)Michigan (5 yrs.) Washington (5 yrs.)Minnesota (4 yrs.) Wisconsin (3 yrs.)Missouri (5 yrs.) Wyoming (3 yrs.)Nebraska (5 yrs.) GREENMAIL RESTRICTIONS Greenmail restriction statutes generally prohibit a company from purchasing 10% or more of its stock from a shareholder that has held the shares for less than two years at a price above fair market value, unless both the board and a majority of the outstanding shares have approved the transaction. If the shares have been held for more than two years or if the same offer is made for all outstanding shares, there is no restriction on share repurchases. The provisions allow the board to repurchase shares at market price even if that price has been inflated by a bidder’s activities. Also, a company may buy up to 10% of its shares at a premium price without obtaining either board or shareholder approval. States with laws restricting the payment of greenmail are: Arizona Tennessee Minnesota Wisconsin New York LABOR CONTRACTS/SEVERANCE PAY These statutes protect employees from the negative effects of plant closings and other disruptions stemming from a takeover. The statutes provide for the assumption of existing collective bargaining agreements by an acquirer. These continuity-of-contract laws are in effect in Delaware, Illinois, Massachusetts**, Pennsylvania, and Rhode Island. Massachusetts also provides for severance pay for all employees that lose their jobs as a result of a takeover. **Law declared invalid MANDATORY CLASSIFIED BOARD A classified board is one in which directors are divided into separate classes so that only one class of directors is elected each year. Most states authorize boards to be classified into three classes. As a result, only one-third of the company’s directors must be elected each year. The principal justification for staggering the board is that it protects against a sudden change in the board membership of the company despite any change in shareholdings. In addition, a classified board reduces the impact of cumulative voting, since a greater number of votes is required to elect a director if the board is staggered than is required if the entire board was elected at each annual meeting. Every state, and the District of Columbia, permits its companies to have classified boards. Massachusetts is the only state that requires all of its companies to have a classified board, unless the company opts out. POISON PILL ENDORSEMENTS A number of states have endorsed the use of poison pill shareholder rights plans by in-state companies. Poison pills have been one of the most controversial of all takeover defenses because they are potent and boards of directors can adopt them without shareholder approval. The pills allow shareholders other than the potential acquirer to buy shares in either the target or the surviving company at a below-market price, thereby diluting the voting power and value of the acquirer’s shares. Although companies have been adopting poison pills since 1984, the devices never have been officially authorized by state or federal statute. By endorsing poison pills in their state codes, the states listed below have added considerable strength to the positions of in-state companies should their pills be challenged in court. The language of the provisions varies greatly. Essentially, they all boil down to granting boards of directors the authority to issue rights or options with conditions that prevent the holder or holders of a specified percentage of the outstanding shares from exercising those rights or options. States with laws endorsing poison pills include: Colorado Kentucky Oregon Florida Maryland Pennsylvania Georgia Massachusetts Rhode Island Hawaii Nevada South Dakota Idaho New Jersey Tennessee Illinois New York Utah Indiana North Carolina Virginia Iowa Ohio Washington Wisconsin RECAPTURE OF PROFITS This takeover law allows companies to recapture the profits of bidders that put them into play. Pennsylvania and Ohio adopted such statutes in the spring of 1990. Both Pennsylvania and Ohio laws permit a company to recover profits from a shareholder that disclosed the intention or the possibility of acquiring control if that shareholder sells its holdings within 18 months after the disclosure. Ohio and Pennsylvania, respectively, exempt from recapture shares purchased more than 18 and 24 months before the control threat. Ohio also exempts profits of less than $250,000 and all profit earned by a shareholder that can convince a court that the purchase offer was sincere and no market manipulation occurred to increase profit or decrease loss. States with no takeover provisions are Alabama, Alaska, Arkansas, California, Montana, New Hampshire, Vermont, West Virginia, and the District of Columbia.