When the U.S. Supreme Court eight months ago approved state efforts to make it harder for corporate raiders to take over local companies, it seemed likely that legislatures would hurry to pass such statutes.
And the betting was that, to avoid litigation, most would be modeled on the one the high court had approved, the new Control Share Acquisitions Chapter of the Indiana Business Corporation Law. And state lawmakers have been quick to use the opportunity: A count by Chemical Week magazine found 12 legislatures passed such laws this year.
The lawmakers, however, have been more adventurous than merely following the Indiana example. Now the state that matters most to big business -- Delaware -- is stepping into the debate, and indications are that it will enact curbs far more stringent that those of Indiana. Delaware's pro-management statutes have made it a favorite state of incorporation. More than two out of every five companies listed on the New York Stock Exchange are incorporated in Delaware, and that includes more than half of Fortune magazine's list of the country's 500 biggest firms.
The Supreme Court endorsement of the Indiana antitakeover statute came as something of a surprise, because in 1982 the high court threw out an Illinois law with the same purpose. The message seemed to be that since regulation of the securities market was in the hands of the federal government, the individual states couldn't put restraints on the market in the interest of protecting their own companies from outsiders.
The two lower courts that considered the Indiana law cited the 1982 decision in deeming the Indiana law an unconstitutional bid by a state to intrude into what is a federal concern. But in April, by a solid 6-3 vote, the justices said that there is a role for the states. The trick is not to interfere too much with interstate commerce and to appear neutral.
The upcoming Delaware statute -- which is much like a law passed by New York -- seems certain to be tested in litigation challenging whether, in fact, it has stuck close enough to that principle of neutrality. Under the Indiana law, once a potential new owner gets 20 percent of the stock of a company, its power to vote those shares is frozen. The shares regain the vote only if a majority of the other shareholders agree -- and the would-be raider can insist that the stockholders vote on the matter within 50 days. That procedure may lead to fewer takeovers, Justice Lewis F. Powell Jr. noted, but it is consistent with Indiana's interest in seeing that the affairs of its corporations are handled in a stable way.
It's an approach that doesn't provide enough takeover protection, officials of the Delaware Bar Association decided. The proposal gives clear sailing to a bidder who gets the blessing of the target firm's board before beginning a stock buy-up. But, essentially, the measure would force an unfriendly bidder to wait three years between gaining its initial stake and making further moves against the target firm. The corporate lawyers backing the measure call it a moderate approach, since New York requires a five-year wait. But given the interest rate raiders pay on the money they use to buy their initial stake, either can be an expensive wait.
In Delaware, the only way an unwanted suitor would be able to put through a merger or sell off any assets of the target company would be to round up virtually all the shares -- and then get an approval from holders of a majority of the rest.
The Delaware proposal is emerging from the corporation law section of the state bar, which is the usual origin point for new corporate governance legislation.
Many issues are still being debated. What is settled, however, is that there will be solid backing for a proposal once the legislature convenes next month. And that means the odds are that there will be new protection for the management of a lot of the biggest companies by mid-1988.
Moskowitz covers legal affairs for McGraw-Hill World News.