Public Interest Also at Stake in Takeover Fights

Of the 3,336 sales or mergers of companies or parts of companies that took place in the United States last year, 150 were done by tender offer to shareholders. And of the tender offers, according to W. T. Grimm & Co. of Chicago, 40 were “hostile”--that is, not greeted with open arms by company managements--and 110 were “friendly” deals.

Those statistics give you some perspective on the U.S. Supreme Court’s ruling on Tuesday that upheld the right of the state of Indiana to regulate hostile tender offers in corporate takeovers. Other states are now moving to pass similar laws.

But clearly the active market in buying and selling companies will not come to a screeching halt because of a court ruling or state laws aimed at 1% of the acquisition deals done in a given year. Nor is that the intent of the Supreme Court or the states.

Shareholders Given Say

What they do want, however, is to slow the headlong spectacle of takeover fights that disrupt companies and communities. The Indiana law puts on the brakes by requiring that no deal be final until shareholders can vote on it at a special meeting within 50 days of an offer. A would-be acquirer holding 20% or more of the stock must get approval for a takeover plan from a majority of the other shareholders.

A delay like that can affect takeover financing, but it need not affect the outcome. And the truth is, such slowing could have a beneficial effect on shareholder rights and values, and on American business in general.

It’s an intelligent compromise of a many-sided, thorny issue. It’s no secret, after all, that though 70% of the American people--as measured by the Harris Poll--believe that takeovers weaken the country, individual Americans find corporate raiders appealing when it suits their interests. Almost everybody who owns a share of stock, if asked to take a lower price in order to defend some principle like business stability, would flatly refuse.

And it’s also true, as everybody knows, that U.S. industry must change its ways in order to compete in the global marketplace. In that respect, there is undeniably some validity to the claims of acquirers and financiers that by disturbing the status quo they force companies to become more efficient.

So how do the Indiana and similar state laws resolve those conflicts? By the democratic tradition of assuring all shareholders a chance to vote on change of control of their company.

Let’s face it, small share owners and large institutional investors alike are discomfited these days, not only by the hurry-up, take-it-or-leave-it tactics of raiders but by the often counterproductive responses of corporate managers, who--holding their golden parachutes--maneuver to sell parts of the business or burden it with so much debt that they practically destroy the company in order to save it.

Old-Time Proxy Fights

By requiring shareholders to meet and vote in a timely manner in hostile takeover situations, the state laws will stop the raiders’ abuse and possibly prevent that of the managers.

What we’re likely to see is a return to the old-fashioned proxy fights, where buyers wishing to acquire control of a company seek the votes of shareholders by proposing a slate of directors and a firm plan for improving the business. It’s a more orderly system, one better suited to the fact that a major company is not merely a price on the exchange, but a public enterprise.

And from the beginnings in the 1870s of stock corporations that financed themselves by selling shares to the general public, such enterprises have been chartered and regulated by the states. The Indiana takeover law is hardly a legal innovation.

But it is part of a trend among the states to take a greater interest in regulating business. In that respect, the attorneys general of the 50 states took a significant step last month when they adopted their own guidelines on mergers because the federal government has let antitrust enforcement lapse. The guidelines were adopted, said California Atty. Gen. John Van de Kamp, in response to the many mergers where too often “the result is less competition, higher prices and higher unemployment.”

Van de Kamp’s rhetoric is arguable, but the political reality of the chief legal officers of 50 states planning tougher antitrust enforcement is not. Sure, the state lawmakers are often more interested in protecting local companies and local jobs than in strict economics. But so what? Japanese corporations work under similar merger guidelines--and they haven’t done too badly.

In a democratic society, as much could be said for that priority as for the alternative argument that all should be at the mercy of fast-draw finance in a simple fight between raiders and management.

Because the final point about the Supreme Court ruling is one often overlooked in business arguments: It is that there is a third party to these takeover disputes. As Walter Lippmann phrased it 50 years ago, there is a “public interest” in businesses that are too big and important to be considered private affairs. The court’s ruling, on balance, upholds the public interest.