Toward a Constitutional Review of the Poison Pill

We argue that the state-law rules governing poison pills are vulnerable to challenges based on preemption by the Williams Act. Such challenges, we show, could well have a major impact on the corporate-law landscape. The Williams Act established a federal regime regulating unsolicited tender offers, but states subsequently developed a body of state antitakeover laws that impose additional impediments to such offers. In a series of well-known cases during the 1970s and 1980s, the federal courts, including the Supreme Court, held some of these state antitakeover laws preempted by the Williams Act. To date, however, federal courts and commentators have paid little attention to the possibility that the state-law rules authorizing the use of poison pills — the most powerful impediment to outside buyers of shares — are also preempted. Our study examines this subject and concludes that there is a substantial basis for questioning the continued validity of current state-law rules authorizing the use of poison pills. The Essay shows that these rules now impose tighter restrictions on unsolicited offers than those once imposed by state antitakeover regulations that the federal courts invalidated on preemption grounds. Preemption challenges to these poison-pill rules could well result in their invalidation by the federal courts. Finally, we discuss how state lawmakers could revise poison-pill rules to make them more likely to survive a federal preemption challenge. This could be done, we show, by imposing substantial limits on the length of time during which a poison pill can be used to block tender offers. Whether preemption challenges lead to invalidation of existing poison-pill state rules or to their substantial modification, such challenges could well reshape the market for corporate control

Corporate Political Speech: Who Decides

The Supreme Court spoke clearly this Term on the issue of corporate political speech, concluding in Citizens United v. FEC\u27 that the First Amendment protects corporations\u27 freedom to spend corporate funds on indirect support of political candidates. 2 Constitutional law scholars will long debate the wisdom of that holding, as do the authors of the two other Comments in this issue.3 In contrast, this Comment accepts as given that corporations may not be limited from spending money on politics should they decide to speak. We focus instead on an important question left unanswered by Citizens United: who should have the power to decide whether a corporation will engage in political speech? Under existing law, a corporation\u27s decision to engage in political speech is governed by the same rules as ordinary business decisions, which give directors and executives virtually plenary authority. In this Comment, we argue that such rules are inappropriate for corporate political speech decisions. Instead, lawmakers should develop special rules to govern who may make political speech decisions on behalf of corporations. We analyze the types of rules that lawmakers should consider. We also offer a set of proposals, and policymaking considerations, for designing such rules

Toward a Constitutional Review of the Poison Pill Essay

We argue that the state-law rules governing poison pills are vulnerable to challenges based on preemption by the Williams Act. Such challenges, we show, could well have a major impact on the corporate law landscape. The Williams Act established a federal regime regulating unsolicited tender offers, but states subsequently developed a body of state antitakeover laws that impose additional impediments to such offers. In a series of well-known cases during the 1970s and 1980s, the federal courts, including the Supreme Court, held some of these state antitakeover laws preempted by the Williams Act. To date, however, federal courts and commentators have paid little attention to the possibility that the state-law rules authorizing the use of poison pills-the most powerful impediment to outside buyers of shares-are also preempted. Our study examines this subject and concludes that there is a substantial basis for questioning the continued validity of current state-law rules authorizing the use of poison pills. The Essay shows that these rules now impose tighter restrictions on unsolicited offers than those once imposed by state antitakeover regulations that the federal courts invalidated on preemption grounds. Preemption challenges to these poison-pill rules could well result in their invalidation by the federal courts. Finally, we discuss how state lawmakers could revise poison-pill rules to make them more likely to survive a federal preemption challenge. This could be done, we show, by imposing substantial limits on the length of time during which a poison pill can be used to block tender offers. Whether preemption challenges lead to invalidation of existing poison-pill state rules or to their substantial modification, such challenges could well reshape the market for corporate control

The Law and Economics of Blockholder Disclosure

The Securities and Exchange Commission is currently considering a rulemaking petition that advocates tightening the rules under the Williams Act, which regulates the disclosure of large blocks of stock in public companies. In this Article, we explain why the Commission should not view the proposed tightening as a merely technical change needed to meet the objectives of the Williams Act, provide market transparency, or modernize its regulations. The drafters of the Williams Act made a conscious choice not to impose an inflexible 5% cap on pre-disclosure accumulations of shares to avoid deterring investors from accumulating large blocks of shares. We argue that the proposed changes to the SEC\u27s rules should similarly be examined in the larger context of the optimal balance of power between incumbent directors and these blockholders. We discuss the beneficial and documented role that outside blockholders play in corporate governance and the adverse effect that any tightening of the Williams Act\u27s disclosure thresholds can be expected to have on such blockholders. We explain that there is currently no evidence that trading patterns and technologies have changed in ways that would make it desirable to tighten these disclosure thresholds. Furthermore, since the passage of the Williams Act, the rules governing the balance of power between incumbents and outside blockholders have already moved significantly in favor of the formerboth in absolute terms and in comparison to other jurisdictions-ratherth an the latter. Our analysis provides a framework for the comprehensive examination of the rules governing outside blockholders that the Commission should pursue. In the meantime, we argue, the Commission should not adopt new rules that would tighten the disclosure thresholds that apply to blockholders. Existing research and available empirical evidence provide no basis for concluding that such tightening would protect investors and promote efficiency. Indeed, there is a good basis for concern that such tightening would harm investors and undermine efficiency

Toward a Constitutional Review of the Poison Pill

We argue that the state-law rules governing poison pills are vulnerable to challenges based on preemption by the Williams Act. Such challenges, we show, could well have a major impact on the corporate law landscape. The Williams Act established a federal regime regulating unsolicited tender offers, but states subsequently developed a body of state antitakeover laws that impose additional impediments to such offers. In a series of well-known cases during the 1970s and 1980s, the federal courts, including the Supreme Court, held some of these state antitakeover laws preempted by the Williams Act. To date, however, federal courts and commentators have paid little attention to the possibility that the state-law rules authorizing the use of poison pills – the most powerful impediment to outside buyers of shares – are also preempted. Our study examines this subject and concludes that there is a substantial basis for questioning the continued validity of current state-law rules authorizing the use of poison pills. The Essay shows that these rules now impose tighter restrictions on unsolicited offers than those once imposed by state antitakeover regulations that the federal courts invalidated on preemption grounds. Preemption challenges to these poison-pill rules could well result in their invalidation by the federal courts. Finally, we discuss how state lawmakers could revise poison-pill rules to make them more likely to survive a federal preemption challenge. This could be done, we show, by imposing substantial limits on the length of time during which a poison pill can be used to block tender offers. Whether preemption challenges lead to invalidation of existing poison-pill state rules or to their substantial modification, such challenges could well reshape the market for corporate control

Corporate Governance, Measurement of

The increased focus on good governance and the development of best practice guidelines, often supported by legislation, has been in response to corporate scandals, such as Enron and Worldcom in the early 2000s, and the 2008 banking crisis. Good governance is increasingly recognised as a process where the ‘best practices\u27 of yesterday become the standard practices of today. This increased focus has also coincided with a worldwide movement for corporate reporting on sustainability and corporate social responsibility (CSR) issues and a growing demand within the investment industry for investment products that are socially responsible (Benn and Dunphy 2013). Sustainable development is now part of the best practice model of corporate governance. There is a more equal recognition of stakeholders’ interests and the role of not only economic, but also social and environmental issues in laying the foundations for a new long-term model of economic growth. This is in contrast to the historic governing model that focused on the creation of shareholder value. However, despite increased attention and interest by policymakers and academics alike, a challenge that has not been unanimously resolved is the definition and measurement of ‘good corporate governance’. This chapter evaluates the main approaches to the measurement of corporate governance

Pre-Disclosure Accumulations by Activist Investors: Evidence and Policy

The Securities and Exchange Commission (SEC) is currently considering a rulemaking petition requesting that the Commission shorten the ten-day window, established by Section 13(d) of the Williams Act, within which investors must publicly disclose purchases of a five percent or greater stake in public companies. In this Article, we provide the first systematic empirical evidence on these disclosures and find that several of the petition\u27s factual premises are not consistent with the evidence. Our analysis is based on about 2,000 filings by activist hedge funds during the period of 1994-2007. We find that the data are inconsistent with the petition\u27s key claim that changes in market practices and technologies have operated over time to increase the magnitude of pre-disclosure accumulations, making existing rules obsolete and therefore requiring the petition\u27s proposed modernization. The median stake that these investors disclose in their 13(d) filings has remained stable throughout the 17-year period that we study, and regression analysis does not identify changes over time in the stake disclosed by investors. We also find that: A substantial majority of 13(d) filings are actually made by investors other than activist hedge funds, and these investors often use a substantial part of the ten-day window before disclosing their stake. A significant proportion ofpoison pills have low thresholds of 15% or less, so that management can use 13(d) disclosures to adopt low-trigger pills to prevent any further stock accumulations by activists-a fact that any tightening of the SEC\u27s rules in this area should take into account. Even when activists wait the full ten days to disclose their stakes, their purchases seem to be disproportionately concentrated on the day they cross the threshold and the next day; thus, the practical difference in pre-disclosure accumulations between the existing regime and the rules in jurisdictions with shorter disclosure windows is likely much smaller than the petition assumes. About ten percent of 13(d) filings seem to be made after the ten-day window has expired; the SEC may therefore want to consider tightening the enforcement of existing rules before examining the proposed acceleration of the deadline. Our analysis provides new empirical evidence that should inform the SEC\u27s consideration of this subject-and a foundation on which subsequent empirical and policy analysis can build