In a decision that will directly affect Virginia and Maryland, the U.S. Supreme Court, in striking down a tough Illinois law, raised questions yesterday about the right of states to regulate corporate takeovers.
The court voted 6 to 3 to invalidate the statute. Justice Byron White, writing the majority opinion, declared the Illinois Business Takeover Act violates constitutional provisions for interstate commerce.
White agreed with lower court decisions, writing that the protections provided by the Illinois act are "speculative," and that the act "imposes a substantial burden on interstate commerce which outweighs its putative local benefits."
Three dissenting justices--William Rehnquist, William Brennan and Thurgood Marshall--did not take up the issue of interstate commerce, writing instead that no decision should have been rendered since the case, involving the attempt by Mite Corp., a Delaware company, to acquire Chicago Rivet and Machine Co. in 1979, was moot--legally dead.
After Mite's tender offer, Mite sued to stop enforcement of the law by Illinois' secretary of state. Federal district court and the 7th U.S. Circuit Court of Appeals ruled in favor of Mite, saying the Illinois statute frustrated federal law. Illinois appealed to the Supreme Court.
Thirty-six states have laws that go beyond federal regulations in protecting local corporations and shareholders from takeover attempts, and the Illinois law was considered one of the toughest. It requires the material terms of a tender offer be made public and that a substantial waiting period be observed. The Illinois secretary of state could stop a tender if he found it to be "inequitable," and a fairness hearing had to be conducted on the request of 10 percent of the target company's owners.
According to government officials and experts on corporate law contacted yesterday, the Supreme Court's ruling may render all or part of a long-standing Virginia takeover law unconstitutional as well as a less stringent Maryland version. The District has no such law.
The Virginia law, which has come into play in at least three recent takeover attempts, requires the State Corporation Commission be notified at least 20 days beforehand of any intent to buy a Virginia-based business.
Virginia also can order hearings on the offer, delaying the attempt and affording incumbent management more time to fight the takeover. Maryland's statute requires only the 20-day notice.
At issue is whether tender-offer regulations are part of a state's right to govern corporations--a right that the Supreme Court has strongly upheld--or are part of the body of law that controls securities transactions--a field traditionally relegated to the federal government.
In its decision, the court appeared to be placing tender offers under federal domain, the legal experts said, because White wrote that states have "no legitimate interest in protecting nonresident shareholders."
It is unclear whether this means states will have no ability to regulate takeovers whatsoever or merely that attempts, like Illinois', to govern actions beyond state lines will be struck down.
Maryland Securities Commissioner Houston Matley said yesterday, "If states can design their laws not to interfere with interstate commerce, then at least they have left open the door to continued state regulation."
University of Virginia law professor Michael Dooley was not as optimistic about his state's takeover law. Calling the Virginia statute "quite broad," Dooley said, "I would suppose it would be subject to the same objection as the Illinois law."
Commenting on the language used by Justice White barring states from protecting nonresident shareholders, he said that state regulation "sounds pretty dead to me."