A new Virginia law written to protect the state's businesses from "creeping takeovers" by corporate raiders is in danger of being thrown out by the courts in its very first test.
Unless the Fourth U.S. Circuit Court of Appeals overturns a Labor Day weekend ruling by a federal judge in Richmond, the Virginia takeover statute will join similiar laws from other states on the judicial junkpile.
It will then be clear that federal lawmakers rather than state legislators are writing the rules of corporate gamesmanship, and the states have little power to protect local businesses from unwelcome advances.
Passed earlier this year and put into effect only July 1, the Virginia law attempted to write the state's own definition of a "takeover" attempt. By Virginia's definition, anyone who buys 10 percent of a company is trying to take over a Virginia company must comply with strict state rules.
The challenge to the law is coming from a controversial Chicago conglomerate that already owns 9.9 percent of American Furniture Co. of Martinsville, and wants to buy more.
The Chicago firm, Telvest Inc., apparently knew nothing of the Virginia law, which had not yet gone into effect when Telvest began buying American of Martinsville stock in a series of open market transactions.
In June, after spending about $600,000 to buy 7 percent of American's stock, Telvest filed notice with the federal Securities and Exchange Commission of its purchases and its intent to keep buying stock until it acquired at least 20 percent. Telvest said it not only wanted to have a voice in American's management, but also wanted to be able to report a proportionate share of American's profits as its own. That's permitted when one corporation owns 20 percent of another.
Telvest kept to its game plan, buying American shares on the American Stock Exchange until it had spent about $1.5 million. Then last month Telvest received a copy of the new state law from the Virginia State Corporation Commission along with a letter that Telvest attorneys interpreted as a warning that law applied to them.
Telvest promptly sued, demanding a temporary restraining order to block enforcement of the law. After two weekend hearings, U.S. District Court Judge Robert Merhige, Jr. issued a preliminary injunction barring the SCC from enforcing the law. Judge Merhige delayed enforcement of his order until next Saturday to give the state a chance to appeal.
Earlier rulings by Judge Merhige were a prime motivation for Virginia legislature in amending its state takeover law this year to try to block unfriendly assaults on the commonwealth's corporations. Two years ago, Merhige refused to grant a federal injunction asked by Universal Leaf Tobacco Co. of Richmond which was fighting an unfriendly takeover by Congoleum Inc. of Milwaukee.
Attempting to give Virginia corporations a law that would protect them when the federal courts would not, the legislature last spring wrote in the 10-percent rule.
Once a company buys 10 percent of a Virginia corporation, it can only buy more by complying with the state's complex takeover law. Unlike federal laws, the Virginia takeover rules do not exempt purchases of stock on the open market.
In Virginia, open market purchases above the 10 percent threshold are limited to an additional one percent every six months. At that rate, it would take another five years for Telvest to meet its target of 20 percent of American.
Most other state takeover laws have been declared unconstitutional by federal judges on the grounds that federal authority over interstate commerce is supreme. Telvest however, is challenging only the limitation on open-market purchases.
That provision, however, is the teeth of the Virginia law.
Telvest is no stranger to the corporate infighting that the Virginia law was meant to prevent. An obscure Chicago conglomerate whose holdings have included a used-car auction, a medical supply company and a small bank, Telvest and its affiliates have been involved in half a dozen messy takeover fights.
In June, the company and its president and chief majority shareholder, Clyde W. Engle, were charged by the Securities and Exchange Commission in three separate cases with violating federal laws in previous acquisitions. Those cases are still pending.