10. Recognition of the Legitimate Interests of the States in Regulating Takeovers The Supreme Court in the Mite case tacitly recognized that there is a role for states to play in the regulation of takeover bids. Unfortunately, the court was badly split in the case, and the decision did not set any clear parameters for state involvement. Subsequent federal court decisions have merely added to the confusion as the judges have failed to read the Mite decision closely. A number of states have reacted to the decisions by enacting more divergent and more radical solutions to the local economic problems created by takeovers. It is now incumbent on Congress to clarify the role of the states in the field. In this regard, it is important to remember that all corporations are creations of the states. By failing to recognize this important federalist principle, we may be inadvertently heading towards de facto federal incorporation. It is also essential to be cognizant of the significant impact of takeovers on local economies. A change in control of a local corporation may result in elimination of local management positions and plant closings which increase local unemployment. These changes have ripple effects throughout the affected community's economy. There must be some sensitivity to these problems in our federal regulatory scheme. There must also be a recognition of the limited resources of the agency responsible for administering and enforcing the federal law. To accomplish these goals, the Williams Act should be amended to provide for (1) state standing in federal court to seek relief on behalf of its citizens for violations of federal law and (2) express recognition of the limited right of every state to regulate bids for companies with significant ties to the state. With respect to the first part of this proposal, standing should be limited to the state of incorporation, or any state or group of states representing a significant percentage of the shareholders and assets of the entities involved. The second part of this proposal would permit states to prohibit an offer to its citizens if the offer did not meet state prescribed anti-fraud or substantive standards. These changes would bolster the SEC's enforcement ability while recognizing improtant local interests. In closing, I want to commend your Committee's willingness to perform an in-depth and objective evaluation of the current federal scheme for regulating tender offers. When the SEC appointed its Advisory Committee on Tender Offers last year, I was skeptical that it would recommend any significant changes in the present loophole ridden system because the Committee was composed almost entirely of specialists who make their living from tender offers or those who were pre-disposed philosophically not to question the current structure. That skepticism appears to have been well founded based upon the meager recommendations of the Advisory Committee. I look forward to your Committee developing the significant changes that are essential to curb abuses in this vital area of our economy. I also invite your Committee to hold one of its public hearings on takeovers in Boston. As you are aware, Massachusetts is the base for many large and new high technology companies, with a vital interest in your work. In addition, Boston is one of the top financial centers in the country. These factors, together with ongoing public interest, would produce a lively and well attended hearing. Very truly yours Michal Joseph Condly Michael Joseph Connolly 38-709 0-84-4 STATE OF MICHIGAN JAMES J BLANCHARD, Governor DEPARTMENT OF COMMERCE PO BOX 30004, LAW BUILDING, LANSING, MICHIGAN 48909 February 2, 1984 The Honorable Timothy E. Wirth U. S. House of Representatives Rayburn House Office Building, Room B-331 Dear Tim: Thank you for soliciting the Blanchard Administration's official position on corporate takeover regulations. You and your committee are to be commended for looking into this very important and timely issue. Governor Blanchard has requested that I respond to your letter of December 5, 1983 in reference to the Securities Exchange Commission's Advisory Committee on Tender Offers Report of Recommendations. Rather than address each of the SEC Advisory Committee's recommendations individually, I have set forth a general statement of the Michigan Department of Commerce's position relative to current tender offer situations. The SEC's Advisory Committee indicated as a starting point for its review, that no objective data exists which would indicate that tender offers are either per se beneficial or detrimental to the economy and that therefore, the principal concern with any regulation in this area should be protection. of shareholders and the integrity of the marketplace. The Michigan Department of Commerce agrees with the SEC Advisory Committee's initial conclusion. However, this agency does not concur with the Committee's underlying conclusion that protection of shareholders and of the marketplace is purely a function of federal regulation. The Committee's report includes statements that the state's corporate laws should not be overriden nor preempted, but proceeds to conclude that neither should state corporate laws be allowed to conflict with federal requirements and procedures for tender offers. It is our position that requirements in this area should be viewed as a unified system in which federal regulations establish the minimum disclosure and procedural standards. However, the interest of the state of incorporation is substantial enough that provisions of the state's corporate laws must be allowed to be applicable and to supplement the federal minimum standards. Therefore, where the laws of the state of incorporation mandate that corporate bylaws indicate whether shareholder approval is required for control acquisition bids, such laws should remain effective even in the presence of federal disclosure and procedural requirements. Historically the laws of the state of incorporation have been controlling in terms of establishing requirements of corporate organization and the general procedures and parameters for shareholders excercising control over the corporation. This tradition of states being the primary source of corporate law should not be aborted. Pending before the Michigan Legislature at the present time is a bill (S.B. 540) which requires that the bylaws of all Michigan corporations indicate whether shareholder approval of control acquisitions is required. While the final form of the bill is undetermined, this department clearly supports the bill's concept; that the state of incorporation can afford to shareholders of entities incorporated under its laws, the option of approving control acquisition bids. The bill pending before the Michigan Legislature presumes that shareholders of some corporations are desirous of having available, a mechanism whereby the details of a control acquisition bid and all of the collateral issues involved, may be reviewed in an organized manner without the inherent pressure in the current system. The primary arguments against permitting shareholder approval under state laws to supplement minimum federal requirements are: 1. 2. 3. That such shareholder approval requirements inherently give Such shareholder approval creates additional complexities which A requirement that control acquisition bids be approved at a In reference to the first argument, our response is that existing corporate management will receive an advantage by permitting shareholder approval. That advantage will flow from the fact that where shareholder approval is required under corporate bylaws, existing management will have a greater opportunity to convince shareholders that the control acquisition bid is not in their best interest, and/or to seek bids from other parties. Therefore, shareholders may receive more information or an increase in the bid. It should also be noted that under the current system, credible arguments can be maintained that the threat of takeovers encourages corporate management to focus on short term returns rather than the long term well-being of the corporation. Arguably, where shareholder approval is required for control acquisition bids, management would be more apt to pursue long term strategies, given the knowledge that should a control acquisition bid be made, management will have the opportunity to reemphasize those long term strategies to shareholders. As to the second and third arguments, the market itself should be permitted to be the determining factor. As noted in the Easterbrook and Jerrell separate statement in the SEC Advisory Committee's report, "If anti-takeover provisions are not beneficial to investors, they will depress the price of the stocks affected by them. At lower prices, these stocks will be more attractive as takeover targets. The market thus has at least one automatic compensation device for undesired opposition to takeovers...in the long run useful provisions will dominate in corporate articles and bylaws. Investors who do not want to take the risk of missing out on the gains of tender offers can buy stock in corporations with fair-price, anti-two-tier-offers or other rules that insure equal treatment of investors in the event of an offer. Other investors can make different choices." We agree with the Easterbrook and Jerrell conclusion that ultimately the market will limit the use of pre-established anti-takeover provisions. It is our contention that shareholders should not be precluded from establishing shareholder approval provisions in their corporate bylaws if permitted under applicable state law. However, we differ with the Easterbrook and Jerrell position in that we do believe procedural modifications are in order under the federal law. Therefore, the Michigan Department of Commerce does not object to the procedural recommendations of the SEC's Advisory Committee. However, we do oppose all recommendations of the SEC's Advisory Committee which limit or impinge on state corporate law applicability. I hope these comments help clarify our position. If you or your staff need further imput from us, please contact David Koss at the State of Michigan's Washington, D.C. office. He will be more than happy to follow up. Best regards. Sincerely, Raeph Ralph U. Gerson RE: Federal Regulation of Tender Offers and Corporate Takeovers I am encouraged that the Subcommittee on At the present time, the Securities Act of New Mexico exempts from regulation stock transactions incident to corporate mergers, and thus there is currently no state level regulation concerning the issues your Subcommittee will be addressing. I am, however, directing my economic development staff to contact your Subcommittee staff to provide Our views on these issues from an economic policy perspective. I appreciate the opportunity to participate in the review your Subcommittee is undertaking. Sincerely, TONEY ANAYA TA: TD: rm |