STATE ROLE IN CORPORATE TAKEOVERS

Corporate takeover and merger activity has increased substantially in the last several years sparking public debate on the benefits of such activity. While takeovers often serve useful purposes, they may also have negative effects. Discussion of corporate takeover activity raises a host of questions concerning the economic impact and public policy implications of large business combinations.

In the recent Edgar v. Mite (1982) case, the U.S. Supreme Court declared the Illinois tender offer statute invalid and in doing so struck a severe blow to state takeover regulation. Although the language of the decision did not entirely eliminate state involvement in the regulation of tender offers, subsequent federal and state court decisions, based on interpretations of Mite, have drastically limited other state's tender offer laws.

The result of these judicial decisions has been the sharp curtailment of the state role in tender offer regulation and with it a significant decline in investor protection and in public confidence in the integrity of our economic system. Concentrating the authority to regulate tender offers with the Securities and Exchange Commission (SEC) ignores the state and local impact of corporate takeovers and mergers. Takeovers not only involve large, multinational corporations but also affect small and medium sized companies locally or regionally based. Because, the SEC focus is understandably a national one, the Commission is not able to adequately address local considerations in takeover activity.

The NGA strongly supports the adoption of federal legislation which expressly authorizes state regulation of tender offers and control share acquisitions. We urge Congress to amend the Williams Act to remove barriers to state regulation imposed by the Commerce Clause in this area. The absence of a significant state role will inevitably lead to further tender offer abuses and erosion of public confidence in the integrity of our economic system.

The Committee on Criminal Justice and Public Protection recommends the adoption of a policy position. Background information is as follows:

STATE ROLE IN CORPORATE TAKEOVERS

The Committee on Criminal Justice and Public Protection offers for adoption a policy position indicating NGA's support for state authority to regulate corporate takeovers. Corporate takeover and merger activity has proliferated in the last several years. Takeovers involving tender offers for billions of dollars in corporate stock have become an increasingly important technique in the financial markets. Tender offers have a significant impact on investors and the financial markets and such activity should be closely monitored at the state and federal level.

To ensure that the tender offer process operates with a minimum of abuse, the federal and state governments enacted legislation to protect their citizens from the raiding of corporate treasuries, securities of questionable value being exchanged for securities of sound companies, the closing of local plants and offices and further concentration of economic power. However, as a result of judicial decisions, there has been a sharp curtailment of the state role in tender offer regulation.

In the recent Edgar v. Mite (1982) case, the U.S. Supreme Court declared the Illinois tender offer statute invalid. Although the decision did not entirely eliminate state involvement in the regulation of tender offers, subsequent federal and state court decisions, based on interpretations of Mite, have drastically limited other state's tender offer laws.

Concentrating authority to regulate tender offers with the Securities and Exchange Commission (SEC) and the erosion of state sovereignty ignores the state and local impact of corporate takeovers. Often it is a small or medium size company, locally based, which is the target of a takeover bid. State governments have a legitimate interest in protecting and promoting the interests of their citizens, including the owners and shareholders of local businesses, local economic interests and jobs. Centralized regulation of tender offers fails to recognize the regional character of such activity.

Many states have substantial experience in enforcing takeover statutes. Undoubtedly some states have more exposure to the problems associated with and resulting from tender offers, takeover bids and acquisitions than has the SEC. State securities agencies, with their wealth of experience, represent a powerful force to work with the SEC in eliminating fraud, abuse and other problems in connection with tender offers.

State agencies are in many instances much closer to the investors, the companies and the professionals involved in these battles. As a result, state agencies often have access to information not readily available to the SEC. Furthermore, the states, through formal or informal proceedings, are able to resolve problems more expeditiously and less expensively than at the federal level.

In order to curb tender offer abuses, protect investors and retain public confidence in the integrity of our economic system, it is necessary that there be dual, cooperative regulation of tender offers involving the states and the federal government. State authority to regulate tender offers has been diluted to the point where they can no longer adequately protect their citizens.

This letter is in response to your inquiry dated December 5, 1983,
regarding the effects of corporate takeovers.

The state of Washington does not have a statute that regulates corporate
takeovers. Regulation in our state has been adequate to provide integrity
of the market, yet offer a positive climate for business capitalization
and growth. In addition, it protects shareholders and market participants
against fraud and non-disclosure of necessary material information and
provides protection where shareholders would be at a disadvantage with
professionals operating in the markets.

I am not aware of any major studies which have been completed in our
state in this area of study.

In response to your specific request for comment, I offer the following:
Economics of Takeovers and Their Regulation

I.

II.

Number 1 is clearly stated and appears reasonable.

I do not have adequate data to confirm or rebut number 2. It does
seem reasonable that poor management should not be perpetuated.
However, it does not appear reasonable to siphon off large sums of
money to fund a corporate takeover fight when those dollars could
be better utilized to fund and capitalize other promising industrial
endeavors.

Additionally, I would be opposed to any corporate takeover which
would have a long-term effect of reducing business and jobs in the
state of Washington and which could conceivably create a monopolistic
or near-monopoly to the serious disadvantage of the citizens and
competing businesses already established within this state.

Objectives of Federal Regulation of Takeovers

I agree with numbers 3, 4, 7, and 9(c) philosophically. As
indicated above, there is not available data to go beyond that
point.

III. Regulation of Acquirers of Corporate Control

I do not have available data to make a substantive judgment of
items 13, 14, 17, and 34.

In conclusion, I am hopeful that this response will be of assistance to
you and your committee in your deliberations.

With best wishes,

Sincerely

Jefe

John Sellman
Governor

State of Wisconsin
Office of the Governor

Anthony S. Earl

February 6, 1984

Honorable Timothy E. Wirth, Chair
Subcommittee on Telecommunications, Consumer
Protection and Finance

Committee on Energy and Commerce
US. House of Representatives

331 Rayburn House Office Building
Washington, D.C. 20515

Dear Representative Wirth:

This is in response to your letter of December 5 soliciting comments on the central issues relating to tender offers.

In general, I agree with the problems outlined in your letter, assuming that the federal takeover statute is strong enough. However, if it isn't, I think the states should be able to take whatever steps are necessary to protect shareholders within their borders. We are opposing a strengthening of the Wisconsin takeover law during the current session of the Legislature. I am enclosing a copy of the bill for your information and for the analysis of your staff. I hope you find it useful.