In a decision with far-reaching implications for corporate takeovers, an Idaho law regulating such takeovers was declared unconstitutional by the U.S. Fifth Circuit Court of Appeals in New Orleans yesterday.
Wall Street investment bankers said the ruling could set off a spate of blitzkrieg tender offers in the next few weeks in what is already a torrid environment for big corporate acquistions.
The three-judge panel upheld a lower court ruling and decided that the Idaho State statute was preempted by the Securities and Exchange Act and other federal legislation and therefore violated the supremacy clause of the U.S. Constitution.
The Idaho law is similar to those in rities lawyers said the broad ruling effect in 31 other states. Leading secu-probably means that most if not all of these state laws also are unconstitional.
Because these laws often have a prenotification requirement and can produce lengthy hearings, they frequently have been used by companies who are the targets of hostile tender offers either to fend off the offer or create a delay during which they can find a more preferable merger partner.
Some investment bankers predicted the court ruling would set off a flurry of so-called "Saturday Night Special" tender offers in the next few weeks as companies seek to take advantage of the situation in advance of a new Federal Trade Commission prenotification rule on corporate acquistions that goes into effect on Sept. 5.
"I would not be surprised to see a rash of offers said J. Ira Harris, the Salomon Brothers partner who is in charge of the firm's merger and acquistion department. "Between now and Sept. 5, you've got a real vacuum. And there well might be some Europeans around who might want to take advantage of this vaccuum as well."
Under current rules described in the federal Williams Act and administered by the Securities and Exchange Commission, a corporation can make an offer to shareholders of another company to purchase their stock - usually at a good premium over the market price - with the offer expering in 10 days.
If the offer is for 100 percent of the shares and the company is not listed on the New York Stock Exchange, the running time for the offer can be as short as seven days.
This puts tremendous pressure on management to accept the offer, because there is little time to rally shareholder support or to find an alternative merger partner. Because it is like putting a gun to the company's head, the technique has been dubbed the "Saturday Night Special."
But state takeover statutes offered a respite, making SEC-sanctioned 10-day offers extremely rate.
"The state laws changed the entire dynamics of tender offers," said Martin Lipton, a leading attorney in this field. "The state statutes have created both delay and expense, and by doing that they have been a deterrant to people making tender offers, in some cases, and in others have generally resulted in the original offer or raider losing out to someone else, or having to make the deal at higher then the original price. But they have not stopped takeovers."
While a number of challenges to the constitutionally of the state takeover statutes are in the courts, no case had yet received a ruling at the circuit court level until yesterday.
The court in New Orleans upheld a ruling handed down last September by U.S. District Court Judge Robert Hill in Dallas on a case brought by the Great Western United Corp. after the Sunshine Mining Co. tried to use state laws in Idaho, New York and Maryland to fight the tender.
Rather than make the disclosures required by the Idaho takeover law, Great Western, which is 65 percent controlled by Texas multimillionaires Herbert and Bunker Hunt, took the case to federal court in Dallas, where Judge Hill ruled that it was "clear that the purpose of the Idaho takeover statute is to inhibit tender offers for the benefit of management."
He also found the law unconstitutional because it was superceded by the federal laws in this area.
The takeover attempt was completed late last year after the circuit court agreed to hear an appeal from Idaho officials but refused to further enjoin the tender offers.
"In our particular case, the State of Idaho sought to enjoin a Texas-based corporation from making a tender offer anywhere in the country until the Idaho statute was compiled with," said Ivan Irwin, an attorney for Great Western United who is with the Dallas firm of Shank Irwin Conant Williamson and Grevelle.
"Idaho law required an advance hearing procedure which Congress had rejected," said Irwin. "It required the state administrator to have a hearing if the target company - namely Sunshine Mining - requested it. It required information far beyond what was required under the Williams Act. And it required compliance with the state's statue before the offer could be made in any other state. So we refused to comply with the Idaho statute and brought suit to declare it void."
Clearly delighted with yesterday's ruling, Irwin said it "may very well sound the death knell for all state takeover statutes containing similar provisions."
The lawyer said he had been "informally advised" that the State of Idaho is not going to take this case up to the Supreme Court. "I would be surprised it Idaho takes it any further, but we would be more than pleased to defend our position in the U.S. Supreme Court," he said.
But Wayne Tidwell, the Idaho state attorney general, said he hadn't had a chance to study the ruling and "a lot depends on the language" in the ruling in deciding whether to appeal.