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Shareholder Rights and Legislative Wrongs: Toward Balanced Takeover Legislation

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Shareholder Rights and Legislative Wrongs: Toward Balanced Takeover Legislation Scholarship Repository University of Minnesota Law School Articles Faculty Scholarship 1991 Shareholder Rights and Legislative Wrongs: Toward Balanced Takeover Legislation John H. Matheson University of Minnesota Law School, [email protected] Brent A. Olson Follow this and additional works at: https://scholarship.law.umn.edu/faculty_articles Part of the Law Commons Recommended Citation John H. Matheson and Brent A. Olson, Shareholder Rights and Legislative Wrongs: Toward Balanced Takeover Legislation, 59 GEO. WASH. L. REV. 1425 (1991), available at https://scholarship.law.umn.edu/ faculty_articles/401. This Article is brought to you for free and open access by the University of Minnesota Law School. It has been accepted for inclusion in the Faculty Scholarship collection by an authorized administrator of the Scholarship Repository. For more information, please contact [email protected]. Shareholder Rights and Legislative Wrongs: Toward Balanced Takeover Legislation John H. Matheson* and Brent A. Olson** Table of Contents Introduction ................................................ 1427 I. The Evolution of the Market for Corporate Control .... 1434 A. The Shifting Role of the Board of Directors ....... 1434 B. Current Protectionist Efforts ....................... 1438 1. Legislation ..................................... 1438 a. Business Combination Statutes ............. 1440 b. Control Share Acquisition Statutes .......... 1442 c. Fair-Price Statutes .......................... 1445 d. Disclosure Statutes ......................... 1447 e. Directors' Duties Statutes ................... 1448 f. Shareholder Rights Plan Endorsement Statutes .................................... 1450 g. Other Statutes With Antitakeover Effects .... 1450 h. Recent Developments ...................... 1453 i. Summary ................................... 1454 2. Case Law ...................................... 1455 Copyright © 1990 John H. Matheson. * Associate Professor of Law, University of Minnesota. Of Counsel, Kaplan, Strangis and Kaplan, P.A. ** J.D., 1991, University of Minnesota; M.B.A. expected December, 1992, Univer- sity of Minnesota. The authors wish to thank Alan Gilbert, Phil Garon, James T. Hale, and Bill Harder for their helpful comments on previous drafts. August 1991 Vol. 59 No. 6 1425 C. Current Reform Proposals ......................... 1466 II. The Nature and Role of Shareholders in the Modem Corporation ........................................... 1470 A. O verview .......................................... 1472 B. The Role of the Small Shareholder ................ 1475 C. The Role of the Large Shareholder and Household Investor ........................................... 1476 D. The Role of the Institutional Investor ............. 1477 III. Justifications for Balanced Shareholder Input ........... 1482 A. Conflict of Interest ................................ 1483 B. Directors' Uncertainty ............................. 1488 C. Economic Efficiency ............................... 1491 D. Shareholder Fairness: Corporate and Political Theory ............................................ 1496 1. Shareholder Democracy and the Corporate Contract ....................................... 1496 2. Shareholders' Political Impotence .............. 1498 IV. A Paradigm for Shareholder Involvement and Director Decisionmaking ........................................ 1502 A. Toward Balanced Policy ........................... 1503 B. The Dynamic Environment of Takeover Reform: Uncertainties, Constraints and Opportunities ...... 1506 1. State or Federal Legislation? ................... 1507 2. Scope of Coverage: Dynamics of Antitakeover Mechanisms and Antitakeover Legislation ...... 1510 3. Dynamics of Shareholders Involvement ......... 1511 V. The Model Act ........................................ 1514 -Subdv. 1 Adoption of Shareholder Rights Plans ............ 1514 -Subdv.2 Opting into State Antitakeover Legislation ........ 1514 -Subdv.3 Directors' Duties in Control Transactions ......... 1514 -Subdv.4 Definitions ....................................... 1515 Notes and Comments ....................................... 1516 Conclusion ................................................. 1518 Appendix ................................................... 1519 S SUMMARY OF STATE ANTITAKEOVER LEGISLATION .................................... 1519 BCS BUSINESS COMBINATION STATUTES .......... 1521 CSAS CONTROL SHARE ACQUISITION STATUTES ... 1530 DDS DIRECTORS' DUTIES STATUTES ................ 1538 FPS FAIR PRICE STATUTES .......................... 1546 SRPES SHAREHOLDER RIGHTS PLAN ENDORSEMENT STATUTES ........................................ 1554 AGMS ANTIGREENMAIL STATUTES .................... 1559 DS DISCLOSURE STATUTES ........................ 1560 PS PARACHUTE STATUTES ......................... 1568 Shareholder Rights THE GEORGE WASHINGTON LAW REVIEW Introduction Nowhere are the tensions and infirmities in the current framework of corporate governance 1 more apparent than in control transac- tions. As the legal landscape defining the contours of control trans- actions increasingly favors management discretion, sophisticated institutional shareholders feel increasingly estranged from corpo- rate governance machinery. Before this corporate governance structure collapses to society's detriment, this Article proposes leg- islative reform aimed at corporate governance's structural soft spot: control-change transactions. It explores ways to harness the valua- ble input of sophisticated, expert, and increasingly active institu- tional shareholders when the conflict between management and shareholders is most acute: during control-change transactions. This Article's proposal seeks to assure that management and share- holders work as a team to determine whether a takeover should oc- cur in the first instance and, in the event of a takeover, to assure that shareholders' voices are heard regarding both the takeover's form and substance and the corporation's future governance structure. Contests for control of publicly held corporations can take many forms, including proxy contests, tender offers, stock for stock ex- changes, open-market purchases, and privately negotiated transac- tions. Takeovers of public companies constitute a major facet of American business activity, and have become a primary method of corporate expansion and diversification. In recent years, scarcely a week has passed during which at least one major takeover bid has not been announced. 2 The eight-year period from 1982 to 1989 saw more than 200 merger or acquisition transactions valued at one-billion dollars or 1. According to defensive takeover specialist Martin Lipton, "the present system of corporate governance is an anachronism [and] is not suitable for the present era.... We need a new system of corporate governance. We need to strike a balance." Lipton, A ProposalFor a New System of Corporate Governance: QuinquennialElection of Directors, in INSTI- TUTIONAL INVESTORS, PASSIVE FIDUCIARIES To ACTIVIsT OWNERS 61, 64-65 (Practising Law Institute 1990) (proposing board terms of five-year duration). Corporate governance is today's hot topic. The stakes are large. Indeed, I believe that the health and vitality of our entire economy is at risk. We have lost our place as the World's leading financial power. In many basic industries we are no longer competitive in World markets. If we do not solve the problems and reverse the trends, we will bequeath a declining stan- dard of living to our future generations. Id at 63; see also Gilson & Kraakman, Reinventing the Outside Director: An Agendafor Institu- tional Investors, 43 STAN. L. REV. 863 (1991); Lipton & Rosenblum, A New System of Corpo- rate Governance: The QuinquennialElection of Directors, 58 U. CHI. L. REV. 187 (1991). 2. MERGERS & AcouiSrriONS, 1990 Almanac, at 12 (May/June 1991) [hereinafter 1990 Almanac]. more.3 In 1989 alone, there were nearly 3800 mergers or acquisi- tions representing a value of approximately 254 billion dollars.4 Although these figures represent a downturn in activity from 1988, when 500 more transactions occurred, the dollar volume in 1989 was the second highest in history.5 The volume of transactions fell three percent in 1990 to around 3600 completions, but significantly, the value of those completed transactions fell 35% to 160 billion dollars. 6 Fueling the entire takeover market has been a virtually unlimited flow of capital to finance corporate acquisitions. The development of the controversial "junk bond" market allowed corporate ac- quirors to raise hundreds of millions and even tens of billions of dollars to purchase publicly held corporations. 7 Although some of the takeover fever may have subsided with the problems in the junk bond market,8 substantial financing remains available. The most significant change in the market for corporate control may be that in the 1990s strategic deals are replacing the unbridled merger mania of the 1980s. 9 Indeed, although the value of takeover activity 3. MERGERS & AcQuIsrrIoNs, 1989 Almanac, at 57 (May/June 1990) [hereinafter 1989 Alamanac]. In 1990, 37 deals were closed valued at over $1 billion each. 1990 Almanac, supra note 2, at 6. 4. 1990 Almanac, supra note 2, at 5. These statistics include only those transac- tions that exceeded one million dollars and involved American companies. Id 5. 1989 Almanac, supra note 3, at 8. The trend appears to have continued into 1990. See Stock Market Loses Vital CorporateCrutch, Wall St. J., July 23, 1990, at C1, col. 1. 6. 1990 Almanac,
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