Brown, David T.

English

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Takeovers: A Review of Bidders & Targets: Mergers and Acquisitions in the U.S.

University of Florida Levin College of Law

University of Florida Journal of Law & Public Policy Volume 4 Issue 1 Article 10 1991 Takeovers: A Review of Bidders & Targets: Mergers and Acquisitions in the U.S. David T. Brown Follow this and additional works at: https://scholarship.law.ufl.edu/jlpp Recommended Citation Brown, David T. (1991) "Takeovers: A Review of Bidders & Targets: Mergers and Acquisitions in the U.S.," University of Florida Journal of Law & Public Policy: Vol. 4: Iss. 1, Article 10. Available at: https://scholarship.law.ufl.edu/jlpp/vol4/iss1/10 This Article is brought to you for free and open access by UF Law Scholarship Repository. It has been accepted for inclusion in University of Florida Journal of Law & Public Policy by an authorized editor of UF Law Scholarship Repository. For more information, please contact kaleita@law.ufl.edu. Bidders & Targets: Mergers and Acquisitions in the U.S. By LeoHerzel and Richard W. Shepro. Basil Blackwell, 1990. Pp. x, 523.David T. Brown*Bidders & Targets: Mergers and Acquisitions in the U.S. is anexhaustive treatment of both the law and economics of takeovers. Itsself-contained text and technical appendixes make it accessible to bothbeginners and experts. Additionally, the book is extremely current.For example, it contains a lengthy discussion of the Time-Warneragreement which was not completed until late 1989.The authors, who have worked extensively as legal counsel intakeover contests, divide the book into three parts. Part one describesthe current takeover market and how it evolved into its present state,beginning by explaining the legal rights and the economic incentivesof directors, shareholders and CEO's. The authors argue that the keyrole of the directors of the target company is to increase the bargainingpower of shareholders. Disorganized shareholders cannot effectivelybargain with the bidder especially when faced with a coercive two-tierbid. The author's also discuss the role of anti-takeover charter amend-ments in overcoming the problems which diffuse shareholders face.Unfortunately, managers may claim to fight an offer because it isinadequate when they actually are attempting to save their own jobs.Traditionally, there has been little legal recourse against target direc-tors. However, in Smith v. Van Gorkom,1 referred to as the "TransUnion" case, the Delaware courts took large steps toward weakeningthe business judgment rule. The authors provide a lengthy discussionof the implications of this landmark case.The authors argue in favor of increased scrutiny by institutionalinvestors, and rules which are designed to give shareholders morepower over directors. For example, they argue that shareholders ofacquiring firms should be required to approve cash and stock offers.Currently, exchange rules only require shareholder approval for stockoffers.Part one continues with a discussion of state and federal takeoverlaws providing a thoughtful discussion of the (1) legislative intent of*Assistant Professor of Finance, University of Florida. Ph.D., 1986, Washington University(St. Louis).1. 488 A.2d 858 (Del. 1985).UNIVERSITY OF FLORIDA JOURNAL OF LAW & PUBLIC POLICYthe laws, (2) political forces that shape the evolving legal climate and(3) potential impact the Reagan appointees to the Supreme Court mayhave on future litigation over state anti-takeover laws. The authorsargue that state takeover statutes tip the legal playing field in favorof targets. Since the takeover boom in the 1960s, many states haveacted to protect firms incorporated in their state from hostile takeov-ers. The authors state that the "first generation" anti-takeover statutestypically required state approval of hostile acquisitions. These lawswere held unconstitutional in Edgar v. Mite Corp. ,2 on the groundsthat they unreasonably interfered with federal tender offer regulationand interstate commerce.The resulting "second generation" statutes have mandated strictmodifications of the required majorities for approval of acquisitions ofcompanies in particular states. These laws were recently upheld inCTS v. Dynamics Corp. of America.3 While these laws clearly violatethe spirit of Federal laws, in particular the Williams Act 4 which gov-erns tender offers, the authors argue that the second generation stat-utes are quite safe given the unwillingness of the current SupremeCourt to interfere with state takeover legislation.The authors see very little recent change in federal corporatetakeover law. The only recent change in the role of the federal govern-ment has been a realization of the antitrust standards for approval ofhorizontal mergers. Part one ends with a complete discussion of variousstrategies available in corporate control battles including lock-ups,poison pills, squeeze-outs and leveraged buyouts.The first part of the book is outstanding. The authors distill manycomplex economic arguments about the incentives of shareholders andmanagers into an understandable form. Further, they provide a com-plete discussion of the scientific evidence on these issues gathered byeconomists. The authors highlight their arguments by a discussion ofthe applicable law, theoretical economics, scientific evidence and exam-ples from specific transactions.Part two of the book is titled "Advice for Bidders and Targets."In the introduction, the authors describe this section as "strategic andadvisory." The strategies discussed are well developed extensions ofthe concepts discussed in part one. As a result, this section is bothadvisory to executives and valuable to other readers. The questions2. 457 U.S. 624 (1982).3. 481 U.S. 69 (1987).4. The Securities Exchange Act of 1934, §§ 13(d)(1) & 14(d)(1, 5-7), (e) as amended 15U.S.C. §§ 78m(d)(1), 78n(d)(1, 5-7), (e).[Vol. 4TAKEOVERSthat are discussed in this section include "friendly deals, what goodis a contract?, should I make a hostile bid?," and "how should wedefend against a hostile bid?"The authors identify the key issue for takeover bidders as avoidingcompetition from other bidders. Competitive auctions typically resultin the bidder paying an inflated price for the target, and thus, thekey to avoiding competition is to move quickly when making a bid.Further, the authors point out that the winning bidder in a competitivecontest should be aware of the "winner's curse," that is the tendencyfor the highest bidder in any auction to pay more than the object isreally worth. In the authors words, "[a] successful bidder may be aloser. '5Part three includes a detailed discussion of the Time-Warner deal.This transaction is rich enough to demonstrate many of the conceptsdeveloped earlier in the book. The authors incorporate nearly all ofthe documents filed during this acquisition, thus giving the reader agood feel for many of the legal technicalities that are critical to asuccessful outcome.Finally, the book contains a one hundred page appendix that detailsthe federal securities laws and Delaware and New York state lawsthat pertain to acquisitions.5. LEO HERZEL & RICHARD W. SHEPRO, BIDDERS AND TARGETS: MERGERS AND Ac-QUISITIONS IN THE U.S. 119 (1990).

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Takeovers: A Review of Bidders & Targets: Mergers and Acquisitions in the U.S.

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