Fight Centers on Bid to Preempt State Takeover Laws See TAKEOVER, H4, Col. 1 TAKEOVER, From H1 By David A. Vise and Steve Coll Washington Post Staff Writers

When Minneapolis-based Dayton Hudson Corp. found itself the target of an unfriendly takeover attempt by Washington's Haft family last June, one of the first places the company turned for help was the Minnesota Legislature.

The Minnesota lawmakers, who feared a loss of local jobs if the Hafts' bid succeeded, quickly enacted a stiff antitakeover law, erecting a defense for Dayton Hudson that the Hafts have not yet breached.

Dayton Hudson's aggressive defensive maneuver was crafted in part by the company's principal merger adviser, the Wall Street investment banking firm of Goldman, Sachs & Co. Yet while Goldman's advisers were helping to enact the Minnesota legislation, lobbyists and lawyers retained by the firm in Washington were pressing Congress to overturn the Minnesota law -- an effort Goldman continues to pursue even as Dayton Hudson is fighting off new overtures from the Hafts.

That contradiction -- some might say conflict of interest -- is symptomatic of the growing rift between Wall Street investment banking firms and their corporate clients, a division that has emerged at the center of the fight this fall in Congress over corporate takeover legislation.

A senior Goldman official who declined to be identified said the firm's handling of the Dayton Hudson situation does not represent a conflict.

"I think what we are trying to do in Washington is come up with balanced {takeover} legislation," he said. "In any event we are going to use the rules that exist to defend our client's best interests."

Historically united on federal legislative issues and bound together by delicate relationships, Wall Street and its major corporate clients are standing toe-to-toe over takeover reform. And longtime political observers say they have never seen the two factions so antagonistic.

"I can't remember an issue on which they've been as divided as this," said A.A. Sommer Jr., former commissioner of the Securities and Exchange Commission and a private attorney representing the corporate lobby. "It's a strange sort of thing."

At issue is the degree to which hostile corporate takeovers -- those opposed by the managements of the target companies -- should be allowed to continue unfettered.

The conflict, spurred by a surprise Supreme Court ruling earlier this year that gave the states new power to restrict hostile takeovers, has produced unusual lobbying alliances. Wall Street and organized labor have teamed up, as have the corporate lobby, which normally favors a federal approach to legislation, and states rights activists.

Lobbyists involved explain these alliances as practical politics.

At stake in the struggle are millions of dollars in investment banking fees, protection for workers of companies acquired in takeovers, and the quality of life in the executive suite. A preliminary showdown is expected Wednesday, when the Senate Banking Committee is set to determine which of the legislative proposals will move to the Senate floor.

Wall Street securities firms, which earn multimillion-dollar fees representing the bidders and targets in takeover contests, are eager to protect their revenues by encouraging federal legislation that would stimulate brisk merger activity.

On the other side, executives at the nation's largest corporations are pushing for laws that would sharply limit hostile takeovers, leaving the executives more securely entrenched in their jobs. Changes in top management virtually always follow successful hostile takeovers.

Several bills are pending in the House and Senate that would rewrite the federal laws governing takeovers. The proposed laws generally would make takeovers tougher to accomplish.

But the key question is whether a new federal law should preempt state laws such as the one protecting Dayton Hudson in Minnesota.

Wall Street favors federal preemption, saying it would create a "level playing field" and one national standard for takeovers. Big business opposes any federal override, figuring it can have its way on takeover reform in state legislatures across the nation.

There is plenty of rhetoric on both sides about the costs and benefits of takeovers, but the positions of the players appear to be defined largely by economic self-interest.

The corporate lobby appears to hold sway in the Senate, where Banking Committee Chairman William Proxmire (D-Wis.) has repeatedly expressed his view that it is time to slow takeovers because they have added billions of dollars of debt to corporate balance sheets.

In the House, Wall Street appears to have the upper hand, largely through the leadership of its most influential supporter, Energy and Commerce Committee Chairman John Dingell (D-Mich.). Dingell does not support all of Wall Street's views on takeovers, but he is far more sympathetic to the investment firms than Proxmire.

Many of the arguments in the takeover debate are complex, but these days rhetoric from the two sides -- and their political muscle -- is being directed at the threshold issue of whether the states or the federal government should take the lead in regulating corporate takeovers.

Until recently, the role of the states in regulating takeover contests was severely limited. But with the sharp rise in hostile takeovers during the 1980s, state legislatures, under pressure from targeted corporations that employ thousands of voters, began to enact antitakeover statutes.

Those state laws, however, were almost routinely declared invalid by federal courts on the grounds that they improperly interfered with interstate commerce or federal takeover laws.

An unexpected ruling by the U.S. Supreme Court last April reversed that trend. In the case of CTS Corp. v. Dynamics Corp. of America, the high court upheld a restrictive Indiana law aimed at thwarting takeovers. The Indiana statute gives shareholders who owned stock prior to a takeover attempt greater voting powers than new stockholders -- including the bidder. It also increases the time required to complete a takeover, a provision that favors the target and discourages hostile bids.

Legal experts say it is not clear how wide a precedent the CTS ruling will set. But its immediate effect was to suddenly and dramatically enhance the power of states to regulate hostile takeovers. Since the ruling, about a dozen state legislatures either have adopted or proposed antitakeover statutes modeled on the Indiana law.

Wall Street and Washington sources say the CTS decision put the big Wall Street investment banking firms that specialize in takeover defense, such as Goldman Sachs, in a bind.

Helping to enact effective state antitakeover laws has become an important part of defensive strategy for Wall Street firms with corporate clients who are the targets of hostile bids. At the same time, the Wall Street firms are worried that the state laws they are helping to enact will reduce the overall number of takeovers, cutting into their fees, and potentially hurting other clients, such as the institutional shareholders who profit when takeover activity drives up stock prices.

Despite the conflicts, the Wall Street firms, individually and collectively, are attempting this fall to shepherd through Congress a takeover reform bill that would specifically preempt the state antitakeover laws already on the books.

Wall Street and legislative sources said there is a strong chance that a bill guided by Dingell could overturn the Supreme Court decision in the CTS case and preempt the state laws.

As part of its aggressive lobbying effort, a coalition of three securities firms called the Capital Markets Group -- First Boston Corp., Morgan Stanley & Co. and Goldman -- has cut a deal with the AFL-CIO under which labor has agreed to support federal preemption in exchange for Wall Street's backing of federal law on successor contracts, those collective bargaining agreements that protect employes of companies that are acquired in takeovers.

The unions want federal guarantees that new owners of businesses will uphold provisions in existing contracts that provide for severance benefits and continuing employment. The alliance with Wall Street lobbyists was facilitated by labor's traditional preference for federal preemption of state laws -- federal legislation has set one standard nationwide on many work place issues.

"We have agreed in principle," said Bob McGlotten, legislative director of the AFL-CIO, referring to the deal with Wall Street. "What we have said essentially is that on this issue, where {contract} successorship is extremely important to us, it gives us a way to protect those individuals we represent."

Big business lobbyists, meanwhile, have seized the opportunity presented by the Supreme Court's decision in the CTS case to push for an even greater expansion of the power of states to adopt antitakeover statutes. A provision in the bill introduced by Proxmire in the Senate not only would reaffirm the Supreme Court's ruling but also would permit states to go beyond the Indiana law in adopting antitakeover legislation.

Debate over how to deal with the Indiana-style statutes was fueled on Sept. 17 when newly appointed Securities and Exchange Commission Chairman David S. Ruder asked Congress to give the SEC special rule-making authority to overturn the Indiana law and any other state statutes that interfere with the trading and voting of shares of companies listed on the national stock exchanges.

Lobbying over the preemption question, according to participants in Washington and on Wall Street, is expected to heat up as the two sides prepare for a scheduled Wednesday markup of Proxmire's legislation in the Senate. (At the markup, members of the banking committee will shape the final version of legislation that could, if approved, move to the Senate floor for a vote.)

Proxmire said he hopes to resolve the preemption fight and move the bill to the Senate floor this year.

The conflict between the Wall Street firms and their big business clients over federal preemption is part of a growing schism between the former allies, according to Harvard Business School professor Sam Hayes.

"It is not some isolated phenomenon; you're feeling the toe of the elephant," Hayes said. "I think it is symptomatic of a fundamental shift in the perspective and the loyalty of these investment bankers." Hayes said the increasing reliance by the firms on fees related to mergers and acquisitions is primarily responsible for the change.

Hayes said he has been impressed by Wall Street's ability to mobilize for political fights, noting the success the firms have had keeping commercial banks out of the securities underwriting business.

At times, Wall Street's political clout is enhanced by exceptionally close personal relationships between its lobbyists and members of Congress. There was evidence of Wall Street's pull at a birthday party thrown last July 8 for Dingell, the key legislator on securities issues in the House.

The party was hosted by Dingell's wife and two lobbyists, Timmons & Co.'s Howard Pasteur and Washington attorney Michael Berman. Pasteur and Berman are lobbyists for First Boston, Goldman Sachs and Morgan Stanley on takeover legislation.

Berman said the party was paid for by another of his clients, Columbia Pictures, and that spokesmen on both sides of the takeover issue were invited, although the party was not directly connected to takeover lobbying.

"I don't want you to think that the holding of a birthday party is an event of great significance to me," Dingell said. "I am not looking for a free lunch... . Howard {Pasteur} is a close friend. He visits our house. We visit his home. He has more integrity than anyone I know... . The same goes for Mike Berman."

While Wall Street has concentrated its lobbying efforts on congressional insiders such as Dingell, corporate groups, led by the Business Roundtable and the National Association of Manufacturers, have encouraged activism on the state level. NAM recently sent a letter to its members around the country urging them to contact state and federal officials on the preemption question and warning them that Congress might soon try to usurp the states' authority to regulate takeovers.

Proxmire also has worked for his cause at the state level. After Wisconsin-based G. Heileman Brewing became the target of a hostile takeover bid this month, he eagerly teamed up with a political foe, Wisconsin Republican Gov. Tommy Thompson, in an effort to thwart the bid through state antitakeover legislation.

"I've talked to the governor of Wisconsin several times," Proxmire said, noting that their most recent discussion was at the Wisconsin-Hawaii college football game on Sept. 12.

The corporate grass roots push, including letter writing and personal visits by chief executives to leading politicians of the states where their companies are headquartered, has been very successful, according to both supporters and opponents of the big business lobby. That lobbying is expected to be augmented on the federal level Tuesday, when chief executive officers of corporations that belong to the Business Roundtable converge on Washington.

"To some degree, Wall Street's so-called immense power is overestimated," said Edward I. O'Brien, president of the Securities Industry Association. "People are not really in love with Wall Street. They think we do not really represent America at its grass roots, mom-and-pop level. And to be honest, we don't."

While Wall Street executives are waiting nervously for the SEC to announce the next charges in the insider stock trading scandal, Washington lobbyists and legislators on the side of corporate America are waiting hopefully for the SEC or the U.S. Attorney to act.

"If they came down with some indictments against some investment bankers who have played important roles in some of the largest hostile takeovers, that would have a great impact on the legislation," said National Association of Manufacturers lobbyist Jim Carty.

"If a story breaks in the next few months, that will really help," Proxmire said.