Senate Commission on Corporate Governance, Shareholder Rights and Securities Transactions

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Golden Gate University School of LawGGU Law Digital CommonsCalifornia Senate California Documents3-1988Corporate Takeovers: A Recommendation For aCalifornia PolicySenate Commission on Corporate Governance, Shareholder Rights and Securities TransactionsFollow this and additional works at: http://digitalcommons.law.ggu.edu/caldocs_senatePart of the Business Organizations Law Commons, and the Legislation CommonsThis Committee Report is brought to you for free and open access by the California Documents at GGU Law Digital Commons. It has been acceptedfor inclusion in California Senate by an authorized administrator of GGU Law Digital Commons. For more information, please contactjfischer@ggu.edu.Recommended CitationSenate Commission on Corporate Governance, Shareholder Rights and Securities Transactions, "Corporate Takeovers: ARecommendation For a California Policy" (1988). California Senate. Paper 219.http://digitalcommons.law.ggu.edu/caldocs_senate/219t\FC 345.A2 C34 CORPORATE TAKEOVERS A Recommendation for a California Policy By Senator Dan McCorquodale California Legislature Senate· Commission on Corporate Governance Shareholder Rights and Securities Transactions March, 1988 323-S EXECUTIVE SUMMARY The Senate Commission on Corporate Governance, Shareholder Rights and Securities Transactions having studied the issue of cor-porate takeovers, submits the following conclusions and recommenda-tions to the Legislature: Conclusions: • A California corporate takeover law would be an ineffective protection of corporations, workers and shareholders since it would apply to a minimal number of corporations having busi-ness contacts in the State. • A national law requiring minimal standards of conduct for cor-porations, bidders and investors would reduce jurisdictional competition and claims among states. • Without jurisdiction the Legislature cannot adequately address and resolve conflicts between management and owners of corpo-rations. Recommendations: • The California Legislature should support federal preemption of state takeover laws. • The California Legislature should support state legislative proposals which will add to the protection of shareholders and pension investments. • The California Legislature should support state legislative proposals relating to takeover activities when there is a potential for economic hardship to small corporations and their share-holders. • Problems associated with corporate takeovers such as depletion of assets and resources, debt burdens to corporations and other dislocations to the State's economy should be resolved as issues separate from tender offer legislation. Dan McCorquodale is Chairman of the Senate Commission on Cor-porate Governance, Shareholder Rights and Securities Transactions and represents the San Jose and Modesto areas in the California legis-lature. some form of legislation to restrict '-""'""'" have restricted tender takeover law will effect relatively few corporations, chosen to incorporate in the State or have suffi-cient business contacts to come under the jurisdiction of the State's Section 2115. A law will neither abet nor deter The passage of takeover legislation at this ineffective protection of shareholders, workers and , as well as a deception of public policy . . . . should be limited to takeover infringe upon the appropriate corporate governance and inter-legislative proposals, the Senate Commis-Shareholder Rights and Securities federal preemption of all states' laws relat-activities. The preemption as described by the limited to takeover activities and not infringe state interests of corporate governance and inter-be drawn to separate internal management affairs takeover issues of corporate control. In addi-associated with takeovers, such as plant closings and resources, should be resolved as separate diminish the seriousness of these issues or their economy, resources and workers. This recommendation is limited to federal preemption through amend-ment to the Williams Act, applicable to all corporations with a class of equity securities registered under Section 12 or subject to Section l5(d) of the Securities Exchange Act of 1934 for the following standards: (a) Voting rights based on percent of ownership; (b) Voting rights based on duration of ownership; (c) Poison pills; (d) Second step "cash out" transactions; (e) Greenmail; (f) Prohibitions of equitable remedies; (g) "Fair price" for cash out mergers; (h) "Drop and sweep" purchases, and (i) Disclosure rules for stating an intent to control a corporation. The recommendation is not intended to be prescriptive. California should have a voice in determining federal standards, but it is presumptuous to assume the actions of Congress and contradictory to circumscribe the rules for other states. Corporate takeovers are a na-tional or perhaps, an international problem that cannot and should not be resolved by fifty separate state laws. 3 2 LACK OF JURISDICTION In most of preempt-ed by other states, such as virtue of a corporation hav-the to select a choice of law through incorporation. Even if a corporation had a of its property, payroll, sales, share-holder and its located in California, it would not exclu-sively come under California laws should it choose to incorporate in another state. The is that the sixth largest economy California can claim authority over only three Fortune and less than four percent of New York Stock Ex-companies. Corporate laws affecting Times-Mirror, or Atlantic Richfield for example are made not in Sacramento or D.C., but in Dover, Delaware. The merits of takeover legislation matter little, if California does not have jurisdiction over corporations. Despite having the sixth largest economy in the world, California can claim authority over only three Forture 500 companies. It is also quite clear that California cannot enact corporation laws even if to do so. which as attractive to It should dividends or valuation ble to shareholders. 4 as the laws of Delaware or states com-of Delaware's laws In some instances such the declaration of Delaware law is favora-However, California should not enter into a competition for incorpo-rations which it cannot win without substantially redirecting state law. The State should have the freedom to determine laws based upon eco-nomic, social, cultural and historical justification rather than a response to coercive competition between states. Delaware as an ex-ample, has a free hand to enact corporate laws which have relatively little effect on their own citizens except to provide additional revenue in franchise taxes and a disproportional effect on otherstates ability to regulate corporations. As a small state with a modest economy, Delaware is the overwhelm-ing choice of incorporation for corporations having their principal business contacts in other states. In addition, Delaware courts have established a body of case law unrivaled by other states. The incen-tives for Delaware incorporation are not likely to be reversed by the passage of a California takeover law. A law which would likely reverse past state pol icy. Califorina Jaws do not protect Delaware corporations. Other states such as New York that have passed takeover laws with less balance and equity than the Delaware takeover law at the behest of their business lobbyists with such features as a five year prohibi-tion on the divestiture of assets, lengthy disclosures and long tender periods have not experienced a return of corporations from Delaware. In most instances, state legislatures have reacted to the intimidation of a single corporation's threat to leave for Delaware, by immediately enacting protective legislation. This has been the case in Arizona (Greyhound), Minnesota (Dayton-Hudson). New Jersey (Singer), Washington (Boeing), and Ohio (Goodyear) to name just a few examples. 5 The California Legislature, much to its credit, has resisted overreaction despite takeover attempts on some of the major corporations in the state. Perhaps that is due to a recognition of the inefficacy of a state takeover law. Other states ... that have passed takeover laws ... have not experienced a return of corporations from Delaware. Although California would like to provide a better business climate, that goal is unlikely to be realized by legislation that has a narrow application of relatively few corporations incorporated in California. California laws do not protect Delaware corporations. 6 3 CALIFORNIA ALTERNATIVES California has three alternatives: (l) do nothing and continue to abrogate authority over corporations with substantial business pass a takeover law which applies only to a relatively or assert jurisdiction through federal preemption of state laws virtue of its representation. In light of these facts, the best alternative is to attempt to assert jurisdiction through federal preemption of state laws. Preemption would set a floor for shareholder protections and a ceiling for management prerogatives in the governance of corporations. States would be free to set additional standards above the floor or below the ceiling. With such a minimum federal even set at a base approximating existing Delaware law is not being advocated), states would be free to decide an appropriate standard for governance of corpora-tions with the that Delaware or some other state would not continue the downward spiral of shareholder rights. There is nothing wrong with states having different standards for corporate behavior. What is divisive is the competition to lower standards in the "race to the bottom·'. Minimal federal preemptive standards would establish a finish line for the race to the bottom. Minimal federal standards would establish a finish line in the race to the bottom. of multi-state claims and disputes over ""·'"''w'-''-" as the in state laws are is not to the states' rights claim which was a contention in the Indiana takeover case. To the contrary, such would promote states· rights. Differ-ences in governance standards should reflect regional anomalies, not 7 state entrepreneurialism. To restate the earlier question: Would California be better served being preempted by Congress or preempt-ed by the Delaware Legislature? The current system in which a post office drop determines political and corporate behavior is totally irra-tional. It is an unimaginable metaphor for democracy. Differences in governance standards should reflect regional anomalies, not state entrepreneurialism. What is a more reasonable alternative? A federal takeover law recognizing two precepts: (l) Regulation limited to the changes in corporate control. Responsibilities for corporate law traditionally vested with states should remain with states. (2) Neutrality among shareholders and contending parties vying for ownership as presumed by the Williams Act. The purpose of any law should be to allow the shareholders to make an informed decision regarding the ownership of a corporation free from coercive offers from both bidders and management. With the changes in ownership of corporations due to a shift of corporate equi-ty to large pension funds perceptions of bias may have changed. This is but another reason to reexamine federal Jaw. 8 A FINAL PERSPECTIVE 4 California has been affected by the loss of jobs, resources and disrup-tions to the economy as much if not more than other states due to corporate takeovers of the last few years. Some of this disruption can be considered the price for the free movement of capital. Number and Value of Mergers and Acquisitions, 1968-1986 a/ ($ millions) :\umber of Total Current Year Transactions Value Base bl Dollars 1968 4,462 $43,609.0 1,514 $28.8 1969 6,107 23,710.9 2,300 10.3 1970 5,152 16,414.9 1,671 9.8 1971 4,608 12,619.3 1,707 7.4 1972 4,801 16,680.5 1,930 8.6 1973 4,040 16.664.5 1,574 10.6 1974 2,861 12,465.6 995 12.5 1975 2,297 11,796.4 848 13.9 1976 2,276 20,029.5 998 20.1 1977 2,224 21,937.1 1,032 21.3 1978 2,106 34,180.4 1,071 31.9 1979 2,128 43,535.1 1,047 41.6 1980 1,889 44,345.7 890 49.8 1981 2,395 82.617.6 1,126 73.4 1982 2,346 53,754.5 930 57.8 1983 2.533 73,080.5 1,077 67.9 1984 2.543 122,223.7 1,084 112.8 1985 3,001 179,767.5 1,320 136.2 1986 3,337 173.300.0 1,274 117.9 1987 d/ 927 93,100.0 440 211.6 a; Reported transactions valued al $500,000 or more bi The number of transactions for which the price \tas disdosed c/ 1\leasured by the gross national product implicit price deflator dl Figures as of June 1987 Source: W.T. Grimm & Co. 9 Average Value 1982 Hollars cl $76.4 25.9 23.3 16.7 18.5 21.4 23.1 23.4 31.9 31.6 44.2 52.9 58.1 73.4 57.8 65.4 104.5 122.2 103.0 180.5 Transa<.:tions Valued at Over $100 Million 46 24 10 7 15 28 15 14 39 41 80 83 94 113 116 138 200 270 339 166 the state has long been a net importer of capital, Califor-nia has from a total increase in jobs and other benefits to the laws. 10 economy. Some measures providing for the protection of sudden economic adjustment are warranted, but be ineffective if their application is limited to California Protection of California's resources must apply to all business in our state regardless of their charter. uv'"""'" associated with takeovers are a result of ""'""'"'r and tactics in gaining or maintaining control The State cannot correct problems of business and often lacks the authority to restrain harmful tactics. has been affected by the loss of jobs, resources and disruptions to the economy as much more than other states ... should be to unveil the myth of legal control over and restore to California. That can only take federal Just as in the story of the Emperor's Calitixnia bills itself as the sixth largest economy in control over the governance of the largest cor-business in the State. This recommendation should nakedness of its authority and debunk the myth and endorse federal preemption of state takeover 5 THE GOVERNANCE COMMISSION The California Senate created the Commission on Corporate Gover-nance, Shareholder Rights and Securities Transactions in 1986 to evaluate laws relating to and practices of corporate management, in-vestment managers and investors, with particular concern to recon-ciling the need to establish stability for corporations operating in or desiring to locate in California with the fiduciary obligations of in-vestment managers and pension fund trustees to prudently invest shareholder funds. The Commission's membership represents promi-nent members of the business, academic, investment and political communities. The Commission sponsors legislation and its members are often called upon for consultation or testimony on corporation and securities law issues before the Legislature. ll Senator Robert Beverly Senator William Campbell Senator Barry Keene Senator Nicholas Petris Senator Alan Robbins Senator Rose Ann Yuich Peter Barker Goldman, Sachs Willie Barnes Manatt, Phelps. Rothenberg & Tunney Christine Bender Commissioner of Corporations Ted Brewer New York Stock Exchange Richard Buxbaum U. C. School of Law Lee Eckel Columbia Savings and Loan Alan Emkin Wilshire Associates Hugh Friedman University of San Diego Law School Marz Garcia Fundamental Economics Ronald Gilson Stanford Law School Michael Halloran Pillsbury Madison & Sutro Susan Henrichsen Deputy Attorney General Dennis Hensley Senate Commission On Corporate Governance, Shareholder Rights and Securities Transactions Senator Dan McCorquodale, Chairman Janice Hester State Teachers' Retirement System Bill Holden, Counsel Secretary of State Mary Jo Jacobi Drexel, Burnham, Lambert Benjamin Krause American Stock Exchange William Lerach Milberg, Weiss, Bershad. Spechtrie & Lerach Jack Loveall United Food and Confectionary Workers John Mackey Henry Swift & Co. Robert Monks Institutional Shareholder Services John Pound Harvard University L.S. Prussia, Retired Chairman Bank of America Gilbert Serota Orrick, Herrington & Sutcliffe James Shaffer Norris Industries Peter Slusser Paine, Webber Harry Snyder Consumers Union Franklin Tom Parker, Milliken, Clark & O'Hara Thomas Unterman National Association of Securities Dealers Morrison & Forrester Richard Damm Peter Szego Consultants Virginia Daley Secretary 

Corporate Takeovers: A Recommendation For a California Policy

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Corporate Takeovers: A Recommendation For a California Policy

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