Tender Offers and the Sale of Control: An Analogue to Determine the Validity of Target Management Defensive Measures

Stuart R. Cohn*

The corporate world has been satirized on the stage and pilloried in the theatre, but for sheer drama little compares to the true-life scenes played almost daily by an ever-changing cast of directors, officers, shareholders, attorneys, investment bankers, and others engaged in pur­ suing or defeating hostile tender offers. 1 The conflicts created by such offers provide a direct and highly visible confrontation between an acquiror seeking support from target shareholders and an embattled target management fearing the consequences of the takeover effort. 2

*Professor of Law, Spessard L. Holland Law Center, University of Florida. B.A. 1962, University of Illinois; Honours Degree in Jurisprudence 1964, Oxford University; LL.B. 1966, Yale University. The author expresses his appreciation for the contributions of Frank M. Wolff, his research assistant. 1. References to the term "tender offer" denote a publicly announced and broadly ,- disseminated offer addressed to all shareholders of a particular corporation, referred to as the "target corporation," to purchase shares of the target corporation at a stated price, generally a premium over market, subject to stated time limitations and, often, minimum 'percentage tendering of shares. Payments are in the form of cash, securities, or a com· bination thereof. The tender offer, made directly to shareholders, does not require approval or any other formal action by the board of directors of the target corporation, although approval may be sought as a means of inducing the tendering shares. Tender offers may be for any percentage of a target corporation's shares, generally the offers being for at least a sufficient number of shares to acquire working control of the target. term "hostile tender offers" refers to those offers opposed by management of the target corporation. Reference to "tender offer" in this Article is consistent with but not necessarily limited to statutory interpretation of that term under the Williams Act, §§ l!l(d), (e), (f), 14(d), (e), (f), 15 U.S.C. §§ 78m(d), (e), (f), 78n(d), (e), (f) (1976); see note 8 infra. See, e.g., Wellman v. Dickinson, 475 F. Supp. 78!1, 817, 826-27, 829-37 (S.D.N.Y. 1979) ("class of shareholders protected," "tender offer," and "effort to gain control'' defined). 2. Although negotiated mergers and tender offers are the normative means of effect· a reorganization, contested tender offers comprised approximately 30% of all tender in 1978 and approximately 20% of tender offers in 1979, there being, respectively, annualized total of 166 and 112 interfirm tender offers during such years. Austin, Offer Update: 1978-1979, 15 MERGERS & ACQ.UISITIONS, Summer 1980, at 13-14. figures also indicate that 76% of contested tender offers in 1978 were at least par­ successful, and 75% were in 1979. /d. at 18. The success rates appear misleading, :llOWever, for they do not take into account inchoate efforts frustrated by pre-tender offer tde£ensive tactics and thus never brought to public attention. See text accompanying notes

475 476 66 IOWA LAW REVIEW 475 TENDER OFFERS

Notorious contests in recent years include Occidental Petroleum-Mead techniques have been created at Corporation, Anderson Clayton-Gerber Products, Carter Hawley Hale­ tion, causing a discernible la1 Marshall Field, and American Express-McGraw-Hill. 3 Each of these con­ management and counsel to de1 frontations resulted in target management causing the eventual with­ courts to develop legal standard drawal of the tender offer by employing a variety of defensive measures and novel area. The result is tha: known colloquially as "scorched earth" tactics.• Although potential is often mired in amorphous con acquirors may be wary of entering upon so tumultuous a stage, the "urge different from the competing to merge"5 among major corporations will continue to produce unsoli­ others affected by tender offer d cited, nonnegotiated tender offers at varying scales of size. 6 quently voiced under the rubri1 whose unbridled breadth gives st The hostile tender offer phenomenon has spawned wholesale defen­ ambiguous are arguments ftam sive measures adopted by target company management. 7 Strategies and such concepts as the "business jt 16-17 infra. Moreover, the figures may not sufficiently include preliminary efforts that and the effect of standards set were publicly announced but, prior to any actual offer, overwhelmed by a torrent of thereunder. 8 An alternative bal defensive reactions. Austin's statistical table, for example, omits the highly contested, analysis of corporate and share] unsuccessful effort of American Express to proceed with a tender offer for the shares of aura of reason fades in the tangle McGraw-Hill. See note 97 infra. 3. See text accompanying notes 80-81 and notes 59, 97 infra. dent economic theories and goal 4. While target management may select among the defensive measures described in The predictable result of ·n Part I of this Article, it is not uncommon that management employs with immediate and perhaps indefinable concepts is full force as many of such measures on a concurrent basis as may be plausibly justified. defensive measures undertaken.ll Thus, litigation may be commenced at both federal and state levels, federal regulatory perspectives such as fiduciary _< agencies may be besieged with pleas for intercession, white knights sought, publicity cam­ I~ paigns undertaken, charter amendments proposed, and other measures initiated for the inadequate as a means to devf purpose of keeping the potential acquiror off balance, on the defensive, and perhaps, evaluate specific measures. Such eventually enticed or required to withdraw. See notes 59, 97 infra. Employment of espousal of the broad concep numerous defensive measures on a concurrent basis is referred to within the investment , defending antitakeover tactics a industry as "scorched earth" tactics. 5. See ABA Section of Corporation, Banking and Business Law, The Urge to the lost opportunity of a premill Merge-Where Has it Come From and Where is it Going?, 35 Bus. LAW. 1417, 1417 The pattern of case law to d; (1980). Mergers among companies having or creating a value in excess of $100 million standards. In the profusion of ne grew from 14 in 1975, 41 in 1977, 80 in 1978 to over 90 in 1979. I d. at 1429. have been reluctant to find targ4 6. Often an unsolicited tender offer proceeds with the concurrence of target man­ tain measures except in egregio~ agement, a concurrence whose enthusiasm may range from genuine to grudging depend­ ing upon management's view of its ability to influence the outcome of the tender offer blatantly defy any justification ot and its future role in the acquired company. Occasionally an initial position of bent management. The relative ~ antagonism by target management is altered by sweetened packages, including a higher offering price and perhaps commitments for continuing employment of the target's prin·, be borne either by the insurance carri« cipal officers. Magnavox's opposition to the tender offer by T.M.C. Development Cor· outcome. Questions may arise about wl poration, a subsidiary of North American Phillips Corporation, was expressed to stock· if tender offers are frustrated but subs« holders in terms of "the inadequacy of the offer of $8 per share in relationship to a book against target management. value in excess of $11.00." Singer v. Magnavox Co., 380 A.2d 969, 971 (Del. 1977). Such' 8. Williams Act, §§ 13(d), (e), (t), opposition was dropped after agreement by North American to employment contracts for (e), (f) (1976). The Williams Act amen( 16 Magnavox officers, despite the fact that the tender offer price was raised only to $9, , §§ 13(d), (e) and 14(d), (e), (f). The still well below book value. Id. require the filing with the Securities aJ 7. The phenomenon has also spawned a new form of insurance, underwritten an entity, person, or group acquiringr Lloyds of London, providing up to $1,000,000 for costs spent resisting hostile or intending to make a tender offer tl offers. SEC. REG. & L. REP. (BNA) No. 564, at Y-1 Quly 30, 1980). Estimated costs class of equity securities, the filing sizeable contests are $300,000-$400,000 for attorneys' fees, $100,000-$200,000 background of the acquiror, source of accountants, $200,000 for public relations, and $300,000-$400,000 for imfes1:m«mt, and any plans for future merger, reoJ bankers. Id. Reportedly, insurance benefits are not payable unless the tender offer is assets or change in the target's board of cessfully resisted. Id. The existence of such insurance may create added impetus to considerations covering activities of bo management's determination to employ defensive measures, for the substantial costs will contained in § 14(e). WA LAW REVIEW 475 TENDER OFFERS 477

11de Occidental Petroleum-Mead techniques have been created at a pace faster than the process of litiga · · Products, Carter Hawley Hale­ tion, causing a discernible lag between the ingenuity of corporate iflcGraw-Hill. 5 Each of these con- · management and counsel to devise defensive measures and the ability of nent causing the eventual with­ courts to develop legal standards effectively addressed to this expanding ~ a variety of defensive measures and novel area. The result is that analysis of the validity of such measures n" tactics. 4 Although potential is often mired in amorphous concepts derived from contexts substantially so tumultuous a stage, the "urge different from the competing claims of management, investors, and will continue to produce unsoli­ others affected by tender offer disputes. Arguments as to validity are fre­ uying scales of size. 6 quently voiced under the rubric of "fiduciary duty," the old warhorse on has spawned wholesale defen­ whose unbridled breadth gives sustenance to innumerable claims. No less ny management. 7 Strategies and ambiguous are arguments framed upon statutory provisions, including such concepts as the "business judgment rule," " corporate democracy," iciently include preliminary efforts that and the effect of standards set by the Williams Act and regulations 11al offer, overwhelmed by a torrent of thereunder. 8 An alternative basis for evaluation relies upon economic '~'example, omits the highly contested, analysis of corporate and shareholder interests. Here too, however, an ~ with a tender offer for the shares of aura of reason fades in the tangle of conflicting positions utilizing indepen­ notes 59, 97 infra. dent economic theories and goals. 11.' tong the defensive measures described in The predictable result of reliance upon expansive, ill-defined, and 1·1 magement employs with immediate and perhaps indefinable concepts is a lack of cohesive standards by which d rrent basis as may be plausibly justified. defensive measures undertaken by target management are judged. Broad leral and state levels, federal regulatory on, white knights sought, publicity earn­ perspectives such as fiduciary or statutory concepts have been wholly ed, and other measures initiated for the inadequate as a means to develop meaningful standards by which to Nllance, on the defensive, and perhaps, evaluate specific measures. Such inadequacy is strikingly revealed by the ee notes 59, 97 infra. Employment of espousal of the broad concepts noted by both target management •asis is referred to within the investment defending antitakeover tactics and disgruntled shareholders reacting to king and Business Law, The Urge to the lost opportunity of a premium sale. iS it Going?, 35 Bus. LAW. 1417, 1417 The pattern of case law to date is consistent with the lack of definitive eat1ng a value in excess of $100 million standards. In the profusion of nebulous and conflicting standards, courts :over 90 in 1979. ld. at 1429. have been reluctant to find target management liability or to enjoin cer­ ds with the concurrence of target man­ :ange from genuine to grudging depend­ tain measures except in egregious circumstances where defensive actions Ruence the outcome of the tender offer , blatantly defy any justification other than the self-perpetuation of incum­ y. Occasionally an initial position of bent management. The relative ease by which management may create a sweetened packages, including a higher .tinuing employment of the target's prin· be borne either by the insurance carrier or the acquiring company depending upon the c;ler offer by T.M.C. Development Cor­ outcome. Questions may arise about what constitutes "successful resistance," particularly ips Corporation, was expressed to stock· if tender offers are frustrated but subsequent derivative actions result in damage awards of $8 per share in relationship to a book against target management. :0., 380 A.2d 969, 971 (Del. 1977). Such 8. Williams Act, §§ 13(d), (e), (f), 14(d), (e), (f), 15 U.S.C. §§ 78m(d), (e), 78n(d), h American to employment contracts for (e), (f) (1976). The Williams Act amended the Securities Exchange Act of 1934 by adding tender offer price was raised only to $9, §§ 13(d), (e) and 14(d), (e), (f). The statutory provisions and regulations thereunder require the filing with the Securities and Exchange Commission (SEC) of documents by n form of insurance. underwritten by an entity, person, or group acquiring more than 5% beneficial interest in a corporation I for costs spent resisting hostile tender or intending to make a tender offer that may result in obtaining more than 5% of a Y-1 Quly 30, 1980). Estimated costs for class of equity securities, the filing to include information as to the identity and attorneys' fees, $100,000-$200,000 for background of the acquiror, source of funds, relationships with the target corporation, md $300,000-$400,000 for investment, and any plans for future merger, reorganization, or other material use of the target's 10t payable unless the tender offer is suc­ assets or change in the target's board of directors. /d. § 78m(d)(1), (e). General antifraud liUI'ance may create added impetus to considerations covering activities of both the tender offeror and target corporation are >e measures, for the substantial costs will contained in § 14(e). 478 66 IOWA LAW REVIEW 475 (1981) TENDER OFFERS patina of legitimacy for defensive measures results in even further con­ must be cognizant of corporat striction of judicial relief. The recent district court decision in Panter v. generally has no control. Stanc and minority shareholders fro Marshall Field (I Co. 9 is representative of judicial myopia in this area. As more fully discussed below, 10 the court's dismissal of the shareholder sale of control by a dominant complaint against management's successful blocking of the Carter and sufficient to judge the will Hawley Hale tender offer was laced with imposing references to fiduciary collective judgment of individu obligations and business judgment concepts. Yet the opinion of the court dards supports certain defeJ is one of homage without substance, for there is a marked lack of evalua­ modifications of others, and tion of the fundamental question whether a business-as opposed to a much more directly and aCCll survival-judgment was in fact made, or whether the judgment made tender offers than do the anal was based upon adequate consideration of relevant facts. 11 After briefly outlining pii Panter, unfortunately, is not aberrational. The Second Circuit's Article will examine each of recent decision in Treadway Cos. v. Care Corp., 12 reflects a similar perspectives generally advance eagerness to-embrace a business judgment standard despite a lower the difficulties of em~loying Sl ·court's explicit findings that target management's actions created defensive measures. Part II wil unusual and deleterious effects upon the corporation and minority ing the collective action of t~c stockholders. 15 Until standards for control battles are more sharply a single, dominant shareholdc delineated, one cannot expect courts, with occasional exception, to be management to impede the teJ other than inadequate arbiters of competing interests, routinely endorsing of the sale of control analogu~ and thus perpetuating the confusing maze of contradictory rationales. Identifying appropriate and feasible standards for evaluating defensive measures goes beyond creating a framework for judicial response. Inherent in such an exercise is determining a formula for according priorities and A. Defensive MeG limitations among the competing rights, obligations, and interests of 1. Pr. management, shareholders, and the corporate entity}• The ambiguities inherent in current perspectives might be substan­ The notoriety of hostile tel tially reduced if attention is focused on the nature and effect of the management of potential targl tender offer, analogizing a successful tender offer to the sale of control by defensive measures. Indeed, ~r a single or otherwise controlling shareholder. The owner of a fractional directors and officers conchi1 11 percentage of shares who joins with others in the collective sale of control unwanted tender offer exists, , in the tender offer context should be subject to no greater limitations is at the door. 17 This advice b upon transferability decisions than is the fifty-one percent owner who Defensive measures that are fin

9. 486 F. Supp. 1168 (N.D. Ill. 1980), appeal docketed, No. 80-1389 (7th Cir. Mar. 15. See text accompanying notes 24, 1980). Notwithstanding eventual disposition, the factual context is illustrative and the 16. Factors relevant to such eval'tl district court's treatment of such issues as fiduciary duty and business judgment is indica· shares, percentage of shares owned 01 tive of the lack of clarity and direction within these standards. with management, corporate liquidil 10. See text accompanying notes 87, 121-24 z"nfra. economic and strategic factors. For a 11. See note 124 z"nfra. Tactic5 of Cash Takeover Bids, 4~ H 12. FED. SEc. L. REP. (CCH) 197,603 (2d Cir. 1980). Characteristz"cs of Target Compames, 13. See notes 107, 112 'infra. 17. Forming a "team" to assist II 14. The standards and perspectives proposed in this Article may appropriately be Small, Defending Target Companies­ adopted at the judicial level without imposition of statutory or administrative controls. (1977). Advance planning is illustrate The proposals have accordingly been directed towards a judicial response, although no (N.D. Ill. 1980), appeal docketed, No inference is intended that legislative or regulatory intervention consistent with such stan· shall Field hired special counsel in 196! dards should necessarily be avoided. As a matter of preference, it appears that the tender in the event of any takeover effort, rtl offer context contains complexities and variables more appropriately suited for judicial tors meeting. /d. at 1176-77. evaluation than the mandatory application of potentially inflexible rules. 'A LAW REVIEW 475 TENDER OFFERS 479

IreS results in even further con· must be cognizant of corporate concerns15 but over whom management trict court decision in Panter v. generally has no control. Standards developed to protect the corporation 'judicial myopia in this area. As and minority shareholders from the potential dangers of an ill-advised 's dismissal of the shareholder sale of control by a dominant shareholder may be equally appropriate ~ful blocking of the Carter and sufficient to judge the wisdom of the potential sale of control by the imposing references to fiduciary collective judgment of individual shareholders. Application of those stan­ ~· Yet the opinion of the court dards supports certain defensive measures and denies or suggests here is a marked lack of evalua­ modifications of others, and in each instance the evaluation focuses er a business-as opposed to a much more directly and accurately on the essential characteristics of •r whether the judgment made tender offers than do the analyses of currently employed concepts. of relevant facts. 11 After briefly outlining principal defensive measures, Part I of this rational. The Second Circuit's Article will examine each of the fiduciary, statutory, and economic are ?:orp. ,u reflects a similar perspectives generally advanced in tender offer struggles, focusing upon !lent standard despite a lower the difficulties of employing such perspectives as a basis for evaluating nanagement's actions created defensive measures. Part II will posit an alternative approach, analogiz­ the corporation and minority ing the collective action of tendering shareholders to a sale of control by ttrol battles are more sharply a single, dominant shareholder. Specific defensive measures by target ith occasional exception, to be management to impede the tender offer will be analyzed in the context ng interests, routinely endorsing of the sale of control analogue. tze of contradictory rationales. 1dards for evaluating defensive PART I ~k for judicial response. Inherent ala for according priorities and A. Defensive Measures by Target Management 1,. obligations, and interests of orate entity .14 1. Preparatory Actions ·perspectives might be substan­ The notoriety of hostile tender offers and the resulting unease of the llhe nature and effect of the management of potential targets have created a welter of anticipatory ter' offer to the sale of control by defensive measures. Indeed, corporate counsel uniformly advise that when Icier. The owner of a fractional directors and officers conclude that a reasonable possibility of an 5 in the collective sale of control unwanted tender offer exists, 16 defensive measures not wait until the wolf lbject to no greater limitations is at the doorY This advice has sound tactical and legal justification. e fifty-one percent owner who Defensive measure,s that are first raised during a control· battle will often rdocketed, No. 80-1389 (7th Cir. Mar. 15. See text accompanying notes 171-80 infra. 1e factual context is illustrative and the 16. Factors relevant to such evaluation include size and extent of block holdings of r duty and business judgment is indica­ . shares, percentage of shares owned or controlled by management or those likely to side se standards. with management, corporate liquidity, antitrust and regulatory matters, and similar l.fra. economic and strategic factors. For a description of such factors, see Hayes & Taussig, Tactics of Cash Takeover Bids, 45 HARV. Bus. REv., Mar.-Apr. 1967, at 138; Troubh, . 1980). Characteristics of Target Companies, 32 Bus. LAW. 1301, 1301-04 (1977). 17. Forming a "team" to assist management in advance planning is discussed in in this Article may appropriately be Small, Defending Target Companies-General Perspectives, 32 Bus. LAW. 1349, 1351-52 If statutory or administrative controls. (1977). Advance planning is illustrated in Panter v. Marshall Field, 486 F. Supp. 1168 rards a judicial response, although no (N.D. Ill. 1980), appeal docketed, No. 80-1389 (7th Cir. Mar. 24, 1980), in which Mar­ intervention consistent with such stan­ shall Field hired special counsel in 1969, 10 years prior to any tender offer effort, to advise [ preference, it appears that the tender in the event of any takeover effort, with counsel thereafter attending each board of direc­ more appropriately suited for judicial tors meeting. Id. at 1176-77. entially inflexible rules. 480 66 IOWA LAW REVIEW 475 (1981] TENDER OFFERS

meet with substantially increased shareholder resistance and judicial target management specify broa~ scrutiny. 18 increase the minimum vote req Questions of validity are most sharply raised with regard to aggressive wholesale changes in board com antitakeover measures that attempt to create a porcupine-type defense not Charter provisions authorizi dependent upon the hope that shareholders will reject the tender offer broad range of factors in detein either because of loyalty to, or the persuasive logic of, target manage· offer are designed to legitimate ment. 19 Nonaggressive measures such as frequent communications to ' ing the breadth of management shareholders, particular attention to holders of large blocks of targeted tions. Shareholders of MacDoll shares, and respectable dividend policies generate a goodwill between amend the corporation's articles shareholders and management that may be of considerable help in com· tors as "the social, legal and eci batting takeover efforts. Such measures, however, create far less impedi· suppliers, customers and busines1 ment to both target shareholders and acquiring companies than do the offers. u Management of Forem01 aggressive measures described below, and are often only an incidental tions of a substantial minority part of an expanded package of defensive tools. shareholders of an amendment Aggressive defensive measures are designed to impose substantial stock purchases by "a person or.. tactical and administrative barriers to the pursuance of a hostile tender government authorities," and en offer. The following discussion briefly notes the more commonly adopted regulatory agencies on that .sul measures, adopted individually or in various combinations. technically be unnecessary in lig~ Amendments to the articles of incorporation. A pervasive and poten­ sibilities, 23 they remove questiou tially highly effective antitakeover device is the adoption of charter and offer support to board mem amendments enlarging the defensive powers of target management and blocking shareholder acceptance making the corporation an unattractive takeover candidate. 20 Although A second and potentially 1 wide variations exist, the principal types of charter provisions sought by superrnajority vote of shareholdex has previously obtained a specifie 18. Proxy statements for charter amendments to be adopted during the pendency of a rnajority provisions typically ran1 control fight will not only alert shareholders to their potential loss of premium in a percent, a higher figure often r specific context (should the amendment pass), but will also involve much greater risks of nondisclosure or misleading statements regarding the control issues. Compare, for exam­ shares controlled by managemen ple, the extensive disclosures in the April 18, 1979, proxy statement of Outdoor Sports quently the first of a two-step p Industries, Inc., issued during an ongoing tender offer for the shares of OSI, with the acquiring and target corporatioi brief discussion contained in the December 15, 1978, proxy statement of Alberto-Culver may considerably reduce the ris1 Company issued at a time of no pending or anticipated tender offer. Extracts of each of superrnajority impediment from the proxy statements are set forth in A. FLEISCHER, TENDER OFFER: DEFENSES, RESPONSES, workable percentage, such prow AND PLANNING 400-75 to 400-111 (1979). 19. Description of defensive measures in this Article is intended principally as a further requirement that they ca background for discussion of the legal models used to determine justification. Com­ prehensive descriptions of the variety of available defensive measures are set forth in E. 21. Wall St. J., Apr. 30, 1979, at 1 ARANOW & H. EINHORN, TENDER OFFERS FOR CORPORATE CONTROL 219-76 (1973); E. 22. /d., July 24, 1980, at 25, col. 2 ARANOW, H. EINHORN & G. BERLSTEIN, DEVELOPMENTS IN TENDER OFFERS FOR COR· 23. See note 71 infra. PORATECONTROL 193·206 (1977); A. FLEISCHER, supra note 18, at 113-56; and 1M. LIP· 24. A two-thirds provision was prop TON & E. STEINBERGER, TAKEOVERS & FREEZEOUTS 263-325 (1978). The defensive at 10, col. 2. A typical provision was 11 measures discussed are applicable to cash tender offers. Where the offer is premised upon mative vote of at least 75% of Bell's Sh111 an exchange of securities, additional measures based upon the quality of the security assets with a "related entity," defined 1 offered, disclosure, and other securities law concerns may be taken. This Article will focus 20% of Bell's voting securities. /d., Oct principally, however, upon measures common to both cash and exchange offers. also common, requiring 80% sharehoL 20. Discussion of a wide variety of defensive charter provisions is found in Buford, more of the target's shares. See Three Amending the Corporate Charter, 32 Bus. LAW. 1353, 1353-56 (1977); Hochman & Tender Offers, Wall St. J., Apr. 9, 197! Folger, Deflecting Takeovers: Charter and By-Law Techniques, 34 Bus. LAW. 537, described in Buford, Amending the Ctn 537-56 (1979); and Mullaney, Guarding Against Takeovers-Defensive Charter Provi­ Fleischer notes a variation that increu sions, 25 Bus. LAw. 1441, 1441-62 (1970). increase in stock owned by the acquiriJI WA LAW REVIEW 475 [1981] TENDER OFFERS 481 lfeholder resistance and judicial target management specify broad areas for board of directors' concerns, increase the minimum vote required for mergers, and protect against 1ly raised with regard to aggressive wholesale changes in board composition. :-eate a porcupine-type defense not Charter provisions authorizing the board of directors to consider a >lders will reject the tender offer broad range of factors in determining whether to resist a hostile tender rsuasive logic of, target manage­ offer are designed to legitimate and thus remove any questions regard- as frequent communications to ' ing the breadth of management concerns that may justify defense reac- >lders of large blocks of targeted tions. Shareholders of MacDonald's Corporation were thus asked to ies generate a goodwill between amend the corporation's articles to permit directors to consider such fac­ y be of considerable help in com­ tors as "the social, legal and economic effect on franchises, employees, , however, create far less impedi­ suppliers, customers and business" in considering whether to resist tender lcquiring companies than do the offers. 21 Management of Foremost-McKesson, concerned about the inten­ md are often only an incidental tions of a substantial minority shareholder, obtained approval from ive tools. shareholders of an amendment authorizing the board to interfere with ~·designed to impose substantial stock purchases by "a person or persons determined to be unsuitable by the pursuance of a hostile tender government authorities," and empowering the board to express views to totes the more commonly adopted regulatory agencies on that subject. 22 Although such provisions may ilrious combinations. technically be unnecessary in light of expanding notions of board respon­ rporation. A pervasive and paten­ sibilities, 25 they remove questions of validity regarding indirect concerns vice is the adoption of charter and offer support to board members who might be otherwise cautious of owers of target management and blocking shareholder acceptance of favorable premium offers. e takeover candidate. 20 Although A second and potentially more impeding amendment requires a es of charter provisions sought by supermajority vote of shareholders to approve a merger with any party that has previously obtained a specified minimum percentage of shares. Super­ .ts to be adopted during the pendency of a majority provisions typically range from two-thirds to as much as ninety to their potential loss of premium in a percent, a higher figure often reflecting a relatively low percentage of ~~t will also involve much greater risks of 24 agt;he control issues. Compare, for exam­ shares controlled by management and insiders. As tender offers are fre­ l979, proxy statement of Outdoor Sports quently the first of a two-step process involving eventual merger of the der offer for the shares of OSI, with the acquiring and target corporations, a substantial impediment to merger 1978, proxy statement of Alberto-Culver may considerably reduce the risk of a hostile tender offer. To avoid the icipated tender offer., Extracts of each of supermajority impediment from later being amended down to a more ER, TENDER OFFER: DEFENSES, RESPONSES. workable percentage, such provisions are frequently accompanied by the this Article is intended principally as a further requirement that they cannot be amended or repealed except by s used to determine justification. Com­ >le defensive measures are set forth in E. 21. Wall St. J., Apr. 30, 1979, at 10, col. 2. CORPORATE CONTROL 219-76 (1973); E. 22. /d., July 24, 1980, at 25, col. 2. ~LOPMENTS IN TENDER OFF.ERS FOR COR· 23. See note 71 infra. l, supra note 18, at 113-56; and 1 M. LIP· 24. A two-thirds provision was proposed for MacDonalds. Wall St. J., Apr. 30, 1979, ~EOUTS 263-325 (1978). The defensive at 10, col. 2. A typical provision was adopted by Bell Industries, providing for an affir­ r offers. Where the offer is premised upon mative vote of at least 75% of Bell's shares to authorize a merger, consolidation, or sale of 1 .based upon the quality of the security assets with a "related entity," defined as a person or entity owning directly or indirectly :ems may be taken. This Article will focus 20% of Bell's voting securities. Id., Oct. 19, 1979, at 6, col. 2. An 80-10 combination is to both cash and exchange offers. also common, requiring 80% shareholder approval for merger with owners of 10% or re charter provisions is found in Buford, more of the target's shares. See Three More Companies Lay Plans to Impede Hostile AW. 1353, 1353-56 (1977); Hochman & Tender Offers, Wall St. J., Apr. 9, 1979, at 14, col. 2. An example of a 90% provision is y-Law Techniques, 34 Bus. LAW. 537, described in Buford, Amending the Corporate Charter, 32 Bus. LAW. 1353, 1354 (1977). '1St Takeovers-Defensive Charter Provi- F1eischer notes a variation that increases the vote requirement on a scale relative to an increase in stock owned by the acquiring company. A. FLEISCHER, supra note 18, at 19. 482 66 IOWA LAW REVIEW 475 [1981] TENDER OFFERS

an equally high supermajority vote. 25 An additional related provision, to the iegislation generally provide assure that friendly or negotiated mergers do not face the difficult hurdle to state administrative authoritit provisions for administrative he; of supermajority approval, permits approval of mergers by a simple major­ 1 ity vote if the board of directors has approved the merger prior to the by target management. 5 Then acquiring company's attainment of control of the board of directors.26 sions offer important breathing The consequent ability of the board to affect voting requirements has them to consider, prepare, andll survived challenge in at least two statesY However, the more fundamen­ prise offer. Moreover, there is a tal question of adoption of a supermajority amendment through a simple tor will find the tender offer to possibly time-consuming disclOS1 majority vote has not yet been directly addressed. zs quently, such statutes become­ A third and frequent form of charter amendment provides for a defensive measures, and it is n01 classified board of directors, thus delaying the ability of the acquiring shareholder approval of reinCOI'] company to obtain majority control of the board.29 The limitation could statutes. 53 A major cloud on the be an extremely effective impediment where acquisition of control on a however, remain until the Sup1 near-term basis is important to the potential offeror, including situations interstate commerce issues avoic where the offeror intends to utilize assets of the target company to fund v. Great Western United corp:i ,, the costs of acquisition. Reincorporation. A majority of states have adopted statutes imposing STAT. ANN.§§ 80B.01 to .13 (West Su. II'•' advance notice, filing, and other requirements upon potential acquirors of (Supp. 1980); Mo. ANN. STAT. §§ 409 ,, . target corporations incorporated, located in, or otherwise having substan­ 21-2401 to -2417 (1977); NEV. REv. S1 50 ANN. § 421-A:1 to :15 (Supp. 1979);. II' j tial connections with the state. Often referred to as antitakeover statutes, 1980); N.Y. Bus. CORP. LAW§§ 160CH 25. Such restrictions may be superfluous, however, in some states that establish such to -11 (Michie Supp. 1979); OHIO REV. limitation by statute. Delaware's statute, for example, requires "such greater vote" to STAT. tit. 70, §§ 71 to 85 (Purdon SupJ alter, amend, or repeal a supermajority provision. DEL. CODE ANN. tit. 8, § 242(c)(4) to -47 (Supp. 1980); TENN. CODE ANN. (Supp. 1978). 61-4-1 to -13 (1978); VA. CODE§§ 13.1-! 26. Again, variations abound. Some corporations may vest the waiver power in "con­ .25 (West Supp. 1980). tinuing directors," that is, directors elected prior to the potential acquiror's acquisition of 31. See note 109 infra. shares. See A. FLEISCHER, supra note 18, at 21-22 n.65. 32. Price may be only one aspect 27. Siebert v. Gulton, No. 79-5631 (Del. Ch., filed June 21, 1979), affd wz~hout additional factors that may influence ; publ. opinion, 414 A.2d 822 (1980); Siebert v. Milton Bradley Co., 80 Mass. Adv. Sh. example, requires a finding that the pG 1235, 1241, 405 N.E.2d 131, 135 (Mass. 1980). to this state, its citizens and its resou'rcel 28. See text accompanying notes 181-201 infra. 1980). Presumably such a standard coul 29. See Wendy$ Asks Holders to Approve Changes to Thwart Any "Raids," Wall St. hav~ adverse impact upon employmen J., Apr. 14, 1980, at 35, col. 1. To assure that a successful tender offeror cannot remove may be closed or relocated. In 6bited all directors and, through a special meeting, fill all vacancies at one stroke, it would be Corporation, the New York Attorney necessary to provide by additional charter amendment that no directors may be removed required a detailed description of what ; except for cause, or alternatively only by supermajority vote. Other protective measures existing employee benefit plans, and tht include a restriction against an increase in the size of the board, designated "alternate" changes would be made in Carriers' pl directors to fill vacancies, and limitations on shareholder meetings. See A. FLEISCHER, Takeover Bid by United Technologies J supra note 18, at 14-18. United Technologies from Louis l...efkml 30. As of November 1980, tender offer statutes had been adopted in 35 states: in A. FLEISCHER, supra note 18, at 56~2 ALASKA STAT.§ 45.57.010-.120 (Michie 1980); ARK. STAT. ANN.§§ 67-1264 to -1264.14 33. Bell Industries, for example, re (1980); COLO. REv. STAT. §§ 11-51.5-101 to -108 (1978); CONN. GEN. STAT. ANN. §§ 1979, at 6, col. 2. 36-456 to -468m (West Supp. 1980); DEL. CooE ANN. tit. 8, § 203 (Supp. 1980); GA. CODE 34. 443 U.S. 173 (1979), rev'gonjt# ANN.§§ 22-1901 to -1915 (1977); HAWAII REV. STAT.§§ 417E-1 to -15 (1976); IDAHO CODE v. Kidwell, 577 F.2d 1256 (5th Cir. 19' §§ 30-1501 to -1513 (1980 & Supp. 1980); ILL. REv. STAT. ch. 121~. § 137.5-1 (1977); history, state statutes having failed on IND. CODE ANN.§§ 23-2-3.1-1 to -11 (Burns Supp. 1980); IOWA CODE§§ 502.211 to .215 Indus., Inc. v. Neiditz, FED. SEC. L. R (1979); KAN. STAT. ANN.§§ 17-1276 to -1285 (1974); KY. REV. STAT.§§ 292.560 to .630 Illinois, Mite Corp. v. Dixon, 633 F.2d ~ (Supp. 1978); LA. REV. STAT. ANN.§§ 51:1500 to:1512 (West Supp. 1980); ME. REV. X Corp., No. 46077 (Mich. Ct. App. Ul STAT. ANN. tit. 13, §§ 801 to 817 (Supp. 1980-1981); MD. CORP. & ASS'NS CODE ANN.§ 80-3770 (D.N.J. Jan. 30, 1981); and Sot 11-901 (Michie Supp. 1980); MASS. GEN. LAWS ANN. ch. 110C, §§ 1 to 13 (West Supp. FED. SEC. L. REP. (CCH), 97,804, at 9C 1980-1981); MICH. COMP. LAWS ANN.§§ 451.901 to .917 (West Supp. 1980-1981); MINN. in Ohio, AMCA Int'l Corp. v. KroUie, IWA LAW REVIEW 475 TENDER OFFERS 483 n additional related provision, to the legislation generally provides minimum time frames for advance notice n do not face the difficult hurdle to state administrative authorities and to the target corporation, as well as DVal of mergers by a simple major· provisions for administrative hearings on the merits of the offer if opposed pproved the merger prior to the by target management. 51 The notice and delay occasioned by such provi­ :ttrol of the board of directors. a• sions offer important breathing space for target management, permitting [) affect voting requirements has them to consider, prepare, and launch countermeasures to subvert the sur­ 11 However, the more fundamen· prise offer. Moreover, there is always the chance that a state administra­ rity amendment through a simple tor will find the tender offer to be unfair, or will require additional and addressed. 28 possibly time-consuming disclosure. 32 Delay alone can be decisive. Conse­ uter amendment provides for a quently, such statutes become an important weapon in the arsenal of ying the ability of the acquiring defensive measures, and it is not uncommon to find corporations seeking he board. 29 The limitation could shareholder approval of reincorporation in states that have adopted such 33 vherl acquisition of control on a statutes. A major cloud on the validity of the various state statutes will, ntial offeror, including situations however, remain until the Supreme Court resolves the preemption and tS of the target company to fund interstate commerce issues avoided by its jurisdictional decision in Leroy v. Great Western United Corp.s. es have adopted statutes imposing ments upon potential acquirors of STAT. ANN.§§ 80B.01 to .13 (West Supp. 1980); MISS. CODE ANN.§§ 75-72-101 to -121 (Supp. 1980); Mo. ANN. STAT. §§ 409.500 to .565 (Vernon 1979); NEB. REV. STAT. §§ din, or otherwise having substan­ 21-2401 to -2417 (1977); NEV. REV. STAT. §§ 78.376 to .3778 (1979); N.H. REV. STAT. ~erred to as antitakeover statutes, ANN.§ 421-A:1 to :15 (Supp. 1979); N.J. REV. STAT.§§ 49:5-1 to :5-19 (West Supp. 1980); N.Y. Bus. CORP. LAW§§ 1600-1614 (McKinney 1980); N.C. GEN. STAT.§ 78 B-1 wever, in some states that establish such to -11 (Michie Supp. 1979); OHIO REV. CODEANN. § 1707.041 (Supp. 1979); PA. CONS. ~ple, requires "such greater vote" to STAT. tit. 70, §§ 71 to 85 (Purdon Supp. 1980-81); S.D. CODIFIED LAWS ANN.§§ 47-32-1 on. DEL. CODE ANN. tit. 8, § 242(c)(4) to -47 (Supp. 1980); TENN. CODE ANN.§§ 48-2101 to -2114 (1979); UTAH CODE ANN.§§ 61-4-1 to -13 (1978); VA. CODE§§ 13.1-528 to -540 (Supp. 1980); WIS. STAT.§§ 552.01 to tions may vest the waiver power in "con­ .25 (West Supp. 1980). to the potential acquiror's acquisition of 31. See note 109 infra. !!-n.65. 32. Price may be only one aspect of fairness, as statutory provisions often include :h~i filed June 21, 1979), affd without additional factors that may influence an administrator's determination. Louisiana, for Milton Bradley Co., 80 Mass. Adv. Sh. example, requires a finding that the potential acquisition "will provide a positive benefit to this state, its citizens and its resources." LA. REV. STAT. ANN.§ 51:1501G (West Supp. n.. 1980). Presumably such a standard could lead to an injunction when the acquisition may umges to Thwart Any "Raids," Wall St. have--adverse impact upon employment, competition, or communities in which plants successful tender offeror cannot remove may be closed or relocated. In United Technologies' tender offer for shares of Carrier all vacancies at one stroke, it would be Corporation, the New York Attorney General, acting under the New York statute, lment that no directors may be removed required a detailed description of what arrangements would be made to protect Carriers' aajority vote. Other protective measures existing employee benefit plans, and the criteria United would use to determine whether lie of the board, designated "alternate" changes would be made in Carriers' present management and plant locations. In Re: areholder meetings. See A. FLEISCHER, Takeover Bid by United Technologies for Carrier Corp. (letter dated Oct. 2, 1978, to United Technologies from Louis Lefkowitz, Attorney General, State of New York), cited atutes had been adopted in 35 states: in A. FLEISCHER, supra note 18, at 56-2, n.139. JUt. STAT. ANN.§§ 67-1264 to -1264.14 33. Bell Industries, for example, reincorporated in Delaware. Wall St. J., Oct. 19, 18 (1978); CONN. GEN. STAT. ANN. §§ 1979, at 6, col. 2. to!N. tit. 8, § 203 (Supp. 1980); GA. CODE 34. 443 U.S. 173 (1979), rev'g on jurisdictional grounds, Great Western United Corp. n. §§417E-1 to -15 (1976); IDAHO CODE v. Kidwell, 577 F.2d 1256 (5th Cir. 1978). The preemption issue has had a checkered :EV. STAT. ch. 121 ~, § 137.5-1 (1977); history, state statutes having failed on preemption grounds in Connecticut, Hi-Shear 1, 1980); IOWA CoDE§§ 502.211 to .215 Indus., Inc. v. Neiditz, FED. SEC. L. REP. (CCH), 97,805, at 90,038 (D. Conn. 1980); '14); KY. REV. STAT. §§ 292.560 to .630 Illinois, Mite Corp. v. Dixon, 633 F.2d 486, 498 (7th Cir. 1980); Michigan, Kelley v. Beta to:1512 (West Supp. 1980); ME. REV. X Corp .. No. 46077 (Mich. Ct. App. 1980); New Jersey, Kennecott Corp. v. Smith, C.A. 181); MD. CORP. & ASS'NS CODE ANN.§ 80-3770 (D.N.J. Jan. 30, 1981); and South Carolina, Hi-Shear Indus., Inc. v. Campbell, 001. ch. 110C, §§ 1 to 13 (West Supp. FED. SEC. L. REP. (CCH), 97,804, at 90,031 (D.S.C. 1980). Statutes have been sustained to .917,(West Supp. 1980-1981); MINN. in Ohio, AMCA lnt'l Corp. v. Krouse, 482 F. Supp. 929 (S.D. Ohio 1979); Delaware, 484 66 IOWA LAW REVIEW 475 [1981) TENDER OFFERS

Issuance of shares. Where insiders own or control an insufficient tive block against a hostile tt number of shares to discourage tender offers, effort might be made to of Marriott Corporation to • place a sizeable block of shares in the hands of one or more parties who Marriott shares will result • may be expected to side with management in the event of a hostile from 24.7 to 36 percent of til takeover effort. One avenue is the establishment of an Employee Stock hostile takeover efforts beca1 Ownership Trust (ESOT). Although formation of an ESOT concurrent approval of mergers. •o AbseJ with opposition to a pending tender offer raises substantial questions of not require shareholder apF whether the formation is serving a valid corporate purpose, 35 an ESOT proxy disclosures regarding t established well in advance of any potential offer may be free from significant shifts in the peret serious challenge and could result in a sizeable block of shares held by Acquisitz"on of regulatetl trustees with inclinations favorable to management. Similarly, stock once an unexpected offer is • dividends, 36 and stock bonus, purchase, and dividend reinvestment agencies as possible in a c01 plans, 37 aggrandize the percentage stock ownership of employees and cems. Thus, potential target current stockholders who, it is anticipated, will constitute a group loyal thus be less attractive, to tl1 to management in the event of a takeover effort. Substantial numbers of regulatory controls. Enlisting shares may also be issued by the target company through acquisitions or by McGraw-Hill's efforts ~o mergers, thereby increasing the acquiror's cost of acquisition or creating Among other defensive reaGti blocks of shares likely to support target management.38 Communications Commission Repurchase of shares. If management owns or controls a substantial FCC consideration regarding 1 percentage of shares, a repurchase program by the target corporation the continued validity of Me( may increase that percentage perhaps to the point that it acts as an effec- 39. Repurchases may be und. cause-through a reduction in outst< Wylain v. TRE Corp .. [1979-1980 Transfer Binder] FED. SEC. L. REP. (CCH) 1 97,270 or to buy out the holdings of a diSIIi (Del. Ch. 1980); Kentucky, Strode v. Esmark, Inc., FED. SEc. L. REP. (CCH) 1 97,538 (Ky. 1980); and Virginia, Telvest, Inc. v. Bradshaw, 618 F.2d 1029 (4th Cir. 1980). The These purposes carry substantial let gram reduces the total number of &1 SEC's recent adoption of rule 14d-2(b), 17 C.F.R. § 240.14d-2(b) (1979), regarding the the overall tender offer cost unless commencement date of tender offers for Williams Act purposes appears to create direct market price per share. In most caa conflicts with advance notice provisions of state statutes. Based on this and other per­ ticularly in light of· ceived conflicts, the SEC has concluded that state statutes "frustrate the operation and antimanipulati~ purposes of the Williams Act." SEC Rei. No. 34-16384, Jan. 7, 1980, FED. SEC. L. REP. (proposed) Rule 13e-2, SEC Exch~ (CCH) 1 82,873. Decisions to date have regarded rule 14d-2 as preempting state provi­ 34-17222 (Oct. 17, 1980). Purchase t sions. Kennecott Corp. v. Smith (1979-1980 Transfer Binder] FED. SEc. L. REP. (CCH) 1 substantial issues of corporate purpos 97,731, at 98,835 (3d Cir. 1980); GM Sub Corp. v. Liggett Group, Inc., [1979-1980 the possibility of precipitating • bidd Transfer Binder] FED. SEc. L. REP. (CCH) 1 97,389 (Del. 1980; Eure v. Grand purposes are therefore most ef~eeti-v increases in the percentage holdmgs ' Metropolitan Ltd., FED. SEc. L. REP. (CCH) 197,383 (N.C. 1980. See Langevoort, State Sobel, Corporate Stock Repurchases;, Tender Offer Legislation: Interests, Effects and Political Competency, 62 CORNELL L. REV. 213, 246-54 (1977). LAW. 1545, 1556 (1980). 35. In Klaus v. Hi-Shear Corp., 528 F.2d 225 (9th Cir. 1975), the court suggested 40. Wall St. J., Mar. 14, 1980, a I tender offer for 10,600,000 of its own that an ESOT mi~ht be e~j~in_ed perm~nently fro~ voting or otherwise dealing with any The combined effect of the tender 1 of the shares acqmred by It If Its establishment dunng a control fight would cause irrep­ arable harm or would be a breach of management's fiduciary duties to minority share­ would increase insider holdings from holders. Id. at 234. Accord, Podesta v. Calumet Indus., Inc., [1978 Transfer Binder] I d. 41. Informal pressure for shareli FED. SEC. L. R~P. (CCH) 1 96,433, at 93,557 (N.D. Ill. 1978) ("defendants adopted the ESOP for the Improper purpose of retaining control by diluting the plaintiff's voting exchanges or other institutional forces strength"). 1977), the New York Stock Exchange 1 36. See Corenco Corp. v. Schiavone & Sons, Inc., 488 F.2d 207, 212 (2d Cir. 1973). though noncontrolling, block of shares 37. The dividend reinvestment plan as a preparatory defensive measure is discussed for shareholder approval. /d. at 561. 1 in Robinson, Strategy to Prevent a Takeover, 32 Bus. LAW. 1361, 1362 (1977). legally this was necessary." /d. 38. Here, too, timing and appearance are critical. Acquisitions not concurrent or 42. See notes 59, 97 infra. reasonably close to a struggle for control may have a substantial chance of success 43. Wall St. J., Jan. 17, 1979, at 8 given the absence of facts inferring questionable motivation and the disinclination of formed a basis of General Host's effor courts to interfere with business decisions. American, despite the relatively insigni IOWA LAW REVIEW 475 [1981] 485 iers own or control an insufficient block against a hostile tender offer. 39 A recent decision by the Board ler offers, effort might be made to Marriott Corporation to authorize the repurchase of up to 3,100,000 e hands of one or more parties who 'tott shares will result in increasing the Marriott family's control agement in the event of a hostile 24.7 to 36 percent of the common stock, thus effectively precluding $tablishment of an Employee Stock takeover efforts because of Marriott's requirement for two-thirds formation of an ESOT concurrent lsannroval of mergers. •o Absent special charter provisions, repurchases do offer raises substantial questions of require shareholder approval and therefore may not be subject to alid corporate purpose,35 an ESOT disclosures regarding the effect of such programs upon slight but potential offer may be free from shifts in the percentage ownership of insiders. n 1 a sizeable block of shares held by Acquisition of regulated b'U.Stnesses. A common defensive measure to management. Similarly, stock an unexpected offer is announced is to engage as many regulatory :hase, and dividend reinvestment agencies as possible in a consideration of antitrust and licensing con­ ~ock ownership of employees and Thus, potential targets may create administrative burdens, and ~ated, will constitute a group loyal be less attractive, to the extent that their operations fall within over effort. Substantial numbers of controls. Enlisting the aid of regulatory agencies is illustrated :t company through acquisitions or McGraw-Hill's efforts to avoid an American Express tender offer. lror's cost of acquisition or creating !'.tUIIOng other defensive reactions, •z McGraw strenuously sought Federal 38 ret management. Commission (FCC) support to delay the offer pending ment owns or controls a substantial consideration regarding the effect of a transference of control upon m>gram by the target corporation continued validity of McGraw's four television licenses. •a to the point that it acts as an effec- 39. Repurchases may be undertaken for other defensive reasons, such as to Iinder) FED. SEC. L. REP. (CCH) , 97,270 cause-through a reduction in outstanding shares-an increase in market price per share ,'Inc., FED. SEc. L. REP. (CCH), 97,538 or to buy out the holdings of a dissident group likely to side with a potential acquiror. :lshaw, 618 F.2d 1029 (4th Cir. 1980). The These purposes carry substantial legal and practical risks, however. A repurchase pro· F.R. § 240.14d-2(b) (1979), regarding the _ reduces the total number of shares necessary to acquire control, thereby reducing ams Act purposes appears to create direct the overall tender offer cost unless the target repurchases have materially increased ate statutes. Based on this and other per­ market price per share. In most cases a material rise in market price is unlikely, par· ltllte statutes "frustrate the operation and ticularly in light of·antimanipulative provisions of the federal securities laws. See, e.g., 54-16384,Jan. 7, 1980, FED. SEC. L. REP. (proposed) Rule 13e-2, SEC Exchange Act Release Nos. 34-10539 (Dec. 6, 1973) and iled rule 14d-2 as preempting state provi­ !14-17222 (Oct. 17, 1980). Purchase of shares from a select group of shareholders raises ansfer Binder] FED. SEC. L. REP. (CCH), tubstantial issues of corporate purpose and unequal treatment of shareholders, as well as :Orp. v. Liggett Group, Inc., [1979-1980 the possibility of precipitating a bidding war for such shares. Repurchases for defensive ) , 97,389 (Del. 1980; Eure v. Grand purposes are therefore most effectively undertaken when they may effect significant 97,383 (N.C. 1980. See Langevoort, State increases in the percentage holdings of management and other insiders. See Nathan & ad Political Competency, 62 CORNELL L. Sobel, Corporate Stock Repurchases in the Context of Unsolicited Takeover Bids, 35 Bus. LAw. 1545, 1556 (1980). -225 (9th Cir. 1975), the court suggested 40. Wall St. J., Mar. 14, 1980, at 16, col. 3. Marriott had previously engaged in a from voting or otherwise dealing with any tender offer for 10,600,000 of its own shares, for which 7,500,000 shares were tendered. : during a control fight would cause irrep­ The combined effect of the tender offer and repurchase program, when completed, ment's fiduciary duties to minority share­ would increase insider holdings from 24.7% to 36% of the outstanding common stock. net Indus., Inc., [1978 Transfer Binder] I d. N.D. Ill. 1978) ("defendants adopted the 41. Informal pressure for shareholder referendum may be brought to bear by ~ontrol by diluting the plaintiff's voting exchanges or other institutional forces. In Kaplan v. Goldsamt, 380 A.2d 556 (Del. Ch. 1977), the New York Stock Exchange advised that the proposed repurchase of a sizeable, 1, Inc., 488 F.2d 207, 212 (2d Cir. 1973). though noncontrolling, block of shares from a dissident shareholder should be submitted reparatory defensive measure is discussed for shareholder approval. !d. at 561. The Board acquiesced although it "did not feel that 12 Bus. LAW. 1361, 1362 (1977). legally this was necessary." !d. ~ critical. Acquisitions not concurrent or 42. See notes 59·, 97 infra. ay have a substantial chance of success 43. Wall St. J., Jan. 17, 1979, at 8, col. 2. Shipping and communication regulations Lble motivation and the disinclination of formed a basis of General Host's efforts in 1973 to enjoin the tender offer of Triumph American, despite the relatively insignificant aspects of those portions of General Host's 486 66 IOWA LAW REVIEW 475 TENDER OFFERS

Reduction i'n liquidity. Corporations may be attractive takeover can· standards for determining the 1 didates because of substantial liquid assets that may be used by acquirors to below, 47 encourages the adop fund the acquisitions or expansion of their own operations. It is not uncom· midst of a control struqle. mon for such candidates to deliberately reduce their charm through the · employed during a tender offe payment of cash dividends, cash acquisitions of companies or major assets, Li'tigati'on. Immediate ini1 and the premature retirement or redemption of debt and preferred injunction against the tender ofl securities. •• reaction in hostile takeover situa Restri'cti've provisions in loan agreements. Banks and other lending tions including failure to make f institutions may be utilized as allies through provisions in loan of such filings, antitrust violatic agreements requiring acceleration of loans in the event of any change in borrowing restrictions, •• rule I 0 control of the borrowing corporation.45 Acceleration may cause a ingenious counsel for target mar substantial drain upon working capital of the target corporation, thus the attractive possibilities of til giving pause to potential acquirors. Although new loans may be obtained may open new avenues of at following accel~ration, interest rates and other lending provisions may preliminary injunctidn. Delay a not be as favorable as at the date of the original loan. The limited or the entering of a preliminar usefulness and questionable validity of such loan provisions, however, acquiror is dependent upon·~ p have probably caused banks as well as borrowers generally to avoid their of funding sources. 50 adoption.46 The two most fruitful gr01 and antitrust concerns. The Wi 2. Defensive Measures Concurrent wzth Announced or violations, ranging from technic Pending Tender Offers standards. 51 However, even if W The preparatory measures described above may also be initiated may be short-lived if the injuncti 52 during the pendency or imminence of a tender offer. Adoption of such disclosure correction. Much m measures at a later date, however, may raise considerable legal questions term preliminary injunction bu under "perpetuation of control" theories. Nevertheless, the ambiguity in scope and complexity of antiti'Ul time-consuming discovery that operations. General Host Corp. v. Triumph American, Inc., 359 F. Supp. 749, 752 too wasteful from the standpoin (S.D.N.Y. 1973); see note 235 infra. Some regulated industries may offer greater defen· sive protection than others. One commentator has noted that "acquiring a small 47. See notes 65-160 infra and acec insurance company can be very helpful because of the regulatory roadblock which can be 48. 15 u.s.c. § 78g (1976). thrown up, no matter how insignificant a part of the business it may represent." R. JEN· 49. The commonality of litigation I NINGS & H. MARSH, SECURITIES REGULATION 742-43 n.28 (4th ed. 1977). without exception, any announcement 44. Within five days of an announced tender offer by Schiavone & Sons, Inc. for the injunction action filed by the corporab shares of Corenco Corp., Corenco directors declared an extra cash dividend payable to the crimes in the Decalogue, but usuallJ holders of record the day after the offer's stated expiration date. See Corenco Corp. v. H. MARSH, SECURITIES REGULATION 7~ Schiavone & Sons, Inc., 488 F.2d 207, 212 (2d Cir. 1973). See also City Investing to 50. Additfonal advantages noted b) Dispose of 1200 Million of Assets in Wake of Takeover Bid-Offer, Wall St. J., July 25, enthusiasm of arbitrageurs before subsl 1980, at 4, col. 2. space for target management's efforts tel 45. See Schmults & Kelly, Cash Takeover Bids-Defensive Tactics, 23 Bus. LAW. the morale of an embattled target man: 115, 132 (1967). Certain loans of the Anaconda Company contained acceleration provi­ tion Tactics, 32 Bus. LAW. 1433, 1437' sions "whenever more than 10 percent of the Anaconda voting stock was concentrated in ·· 51. See, e.g., GAF Corp. v. Milsteit one person or entity." Anaconda Co. v. Crane Co., 411 F. Supp. 1210, 1214 (S.D.N.Y. schedule !3D); Wellman v. Dickinson,' 1975). mation of group and commencement ol 46. Such loan provisions have been criticized as "a particularly shocking technique" 52. E.g., Rondeau v. Mosinee Pape that "would also raise the possibility that the management be held liable for tying up the of schedule 13D is sufficient relief in : company on a long-term basis." Cary, Corporate Devices Used to Insulate Management harm caused by initial failure); Corencc from Attack, 25 Bus. LAW. 839, 841 (1970). Contra, Kamen, Special Problems of Institu­ 215 (2d Cir. 1973) (permanent injw tional Lenders, 32 Bus. LAW. 1423 (1977), in which it is suggested that cases upholding disclosures were corrected). the acceleration of mortgage loans upon sale of the property may have analogous applica­ 53. In issuing a preliminary injuncu tion to creditor interests in changes of management. /d. at 1425. common shares of Harnischfeger Corp '

~WA LAW REVIEW 475 TENDER OFFERS 487

>OS may be attractive takeover can­ standards for determining the validity of defensive measures, as discussed ets that may be used by acquirors to below ,'7 encourages the adoption of aggressive measures even in the eir own operations. It is not uncom­ midst of a control struggle. Additional defensive techniques often ly reduce their charm through the employed during a tender offer battle include the following: itions of companies or major assets, demption of debt and preferred Litigation. Immediate initiation of litigation seeking a preliminary injunction against the tender offer proceeding has been almost a knee-jerk reaction in hostile takeover situations. The suit often alleges a host of viola­ rements. Banks and other lending tions including failure to make filings under the Williams Act, inadequacy ies through provisions in loan of such filings, antitrust violations, obtaining funds in excess of statutory >ans in the event of any change in borrowing restrictions,'8 rule IOb-5 violations, and whatever other claims tn. 45 Acceleration may cause a ingenious counsel for target management might devise. ' 9 Litigation offers al of the target corporation, thus the attractive possibilities of time-consuming and broad discovery that hough new loans may be obtained may open new avenues of attack, as well as the potentiality of a llld other lending provisions may preliminary injuncticm. Delay alone, whether created by litigation itself f the original loan. The limited or the entering of a preliminary injunction, may be decisive where the i such loan provisions, however, acquiror is dependent upon a pending line of credit or other availability borrowers generally to avoid their of funding sources. 50 The two most fruitful grounds for litigation involve Williams Act "ent with Announced or and antitrust concerns. The Williams Act provides a variety of potential er Offers violations, ranging from technical filing requirements to broad disclosure standards. 51 However, even if Williams Act violations are proven, victory i>ed above may also be initiated may be short-lived if the injunction is conditional on a particular filing or a tender offer. Adoption of such disclosure correction. 52 Much more promising is the possibility of a long­ raise considerable legal questions term preliminary injunction based on a potential antitrust violation. The :s. Nevertheless, the ambiguity in scope and complexity of antitrust litigation also invites a broad range of time-consuming discovery that may become enervating and eventually unerican, Inc., 359 F. Supp. 749, 752 too wasteful from the standpoint of the potential acquiror. 55 Moreover, lat~ industries may offer greater defen­ ~r has noted that "acquiring a small >f the regulatory roadblock which can be 47. See notes 65-160 infra and accompanying text. f the business it may represent." R. JEN­ 48. 15 u.s.c. § 78g (1976). ,2-4!1 n.28 (4th ed. 1977). 49. The commonality of litigation has caused one commentator to note that "almost r offer by Schiavone & Sons, Inc. for the without exception, any announcement of a take-over bid is now instantly followed by an lared an extra cash dividend payable to injunction action filed by the corporate management charging the 'raider' with most of l expiration date. See Corenco Corp. v. the crimes in the Decalogue, but usually stopping short of statutory rape." R. JENNINGS & H. MARSH, SECURITIES REGULATION 742 (4th ed. 1977). I_ Cir. 1973). See also City Investt'ng to lkeover Bid-Offer, Wall St. J., July 25, 50. Additi"onal advantages noted by a leading practitioner include the chilling of the enthusiasm of arbitrageurs before substantial positions are acquired, creating breathing rJids-Defensive Tactics, 23 Bus. LAW. space for target management's efforts to find a more suitable merger partner, and raising Company contained acceleration provi­ the morale of an embattled target management. Wachtell, Special Tender Offer Litiga­ tconda voting stock was concentrated in tion Tactics, 32 Bus. LAW. 1433, 1437 (1977). :01: 411 F. Supp. 1210, 1214 (S.D.N.Y. 51. See, e.g., GAF Corp. v. Milstein, 453 F.2d 709, 714 (2d Cir. 1971) (failure to file schedule 13D); Wellman v. Dickinson, 475 F. Supp. 783, 826, 831 (S.D.N.Y. 1979) (for­ l as "a particularly shocking technique" mation of group and commencement of tender offer without required filings). tagement be held liable for tying up the 52. E.g., Rondeau v. Mosinee Paper Corp., 422 U.S. 49, 59 (1975) (corrective filing of schedule 13D is sufficient relief in the absence of plaintiff establishing irreparable 1 Devices Used to Insulate Management ra, Kamen, Special Problems of Institu­ harm caused by initial failure); Corenco Corp. v. Schiavone & Sons, Inc., 488 F.2d 207, kh it is suggested that cases upholding 215 (2d Cir. 1973) (permanent injunction denied when defects in schedule 14D disclosures were corrected). e property may have analogous applica­ :nt. /d. at 1425. 5!1. In issuing a preliminary injunction halting the tender offer of Paccar, Inc. for the common shares of Hamischfeger Corporation, the trial judge acknowledged that the TENDER OFFERS 488 66 IOWA LAW REVIEW 475 [1981] newspapers, press releases, matters learned through discovery might become a basis for heightened 5 analysts, and others within tb governmental concern or intervention. • pose: one, to create a pause, State tender offer statutes. Target management may receive shareholders' eagerness to • welcome assistance from local officials charged with enforcement of state shares, and second, to serve tli antitakeover statutes. For example, in the aborted effort by Occidental for an arduous struggl~. Althc Petroleum to go forward with a tender offer for Mead Corporation, cash offers, a hard hitting pul Mead gained valuable time and impetus when the Ohio Division of contrived weakness of the ace Securities made an initial finding that Occidental had made inadequate determined acquiror to co~ and misleading disclosures. As a result of the finding, Occidental could rebutting such campaigns arc 55 not proceed with its offer until those disclosures had been corrected. Defensive mergers. If all Defensive acquisitions. Timely acquisitions by target corporations to be inadequate against a d may bootstrap the target into an offensive litigating posture based upon may seek a more suitable acqu antitrust concerns. 56 The haste by which such acquisitions are made, cerns as to management tenw however, as well as the substantial suspicion necessarily raised as to bona shifting control. Rescuing acq fides, create considerable risk of adverse judicial reaction. 57 The Panter the fray either by competin_g: t court, however, appeared untroubled by Marshall Field's eleventh hour ject to shareholder approval. 1 acquisition of stores in the Carter Hawley Hale marketing areas. 58 outbid or frustrate the unwat Publicity campaigns. Full page ads in national and regional knights" have their limits and bidding war. 61 injunction "might be fatal to the offer." Harnischfeger Corp. v. Paccar, Inc., 474 F. Supp. 1151, 1153 (E.D. Wis. 1979). The foregoing discussion ] 54. See Axinn, Tactics and Strategies, 32 Bus. LAW. 1527, 1531 (1977). the most aggressive and effect 55. The delays obtained by Mead permitted it to undertake a wide range of defensive activities that eventually resulted in Occidental's withdrawal. The Occidential-Mead 59. When Occidental Petroleum struggle is described in Hostl1e Merger Moves Meet Fierce Opposition from Target Con· Mead gathered enormous volumes ol cerns, Wall St. J., Apr. 3, 1979, at I, col. 6. See note 59 infra. from the files of federal regulatory 81 56. Subsequent to the announced exchange offer by Crane to acquire 22.·6% .of the J., Apr. 3, 1979, at 39, col. 2. M common stock of Anaconda, Anaconda acquired a major competitor of Crane and sought. $1100,000. Id. The information ob a preliminary injunction against the offer, inter alia, upon antitrust grounds. Crane Co. numerous regulatory commissions i v. Anaconda Co., 411 F. Supp. 1210, 1220 (S.D.N.Y. 1975). The court denied the Occidental's activities in the decade.] request for injunction, relying upon the investment exception provision of § 7 of the the American Express battle for Me Clayton Act, 15 U.S.C. § 18 (1970), as well as a perceived ability to "unravel the challenged by McGraw-Hill's vocifen :' situation" should that be necessary after a full trial on the merits. 411 F. Supp. at president of American Express who 1M 1219-20. ing the same period that American I 57. Royal Indus., Inc. v. Monogram Indus., Inc. [1976-77 Transfer Binder] FED. SEC. 16, 1979, at 5, col. 1. A disclosure: L. REP. (CCH), 95,863 (C.D. Cal. 1976). Five days following the announced intention of Clayton was whether Anderson-Ciaytc Monogram to make a tender offer for the shares of Royal, Royal negotiated and executed to its employees in connection with f an agreement for the acquisition of Sar Industries, a small but competing business of Supp. 1310, 1314-16 (W.D. Mich. 1! Monogram's that was plaintiff in a pending antitrust action against Monogram. Id. at identification and location of the eiDJ 91,134. The acquisition was totally a defensive maneuver designed solely to create an During the pendency of the action antitrust block. At Monogram's instance the court enjoined the acquisition. Id. at 91,133. Clayton withdrew its tender offer. Id. The court regarded the transaction as a violation of§ 14(e) of the Williams Act, contrary 60. Kern County Land Co. v. Oa to the Act's presumed requirement that the tender offeror "has a right to a fair oppor­ known for the Court's "pragmatic" aF tunity to compete for control of a target company." !d. at 91,136. The court also regarded Old Kern's accomplishing a defensive the acquisition as violating fiduciary standards of Delaware law. !d. The Williams Act acquired a substantial block of share basis for the opinion has been undermined by post-Sante Fe v. Green, 430 U.S. 462 61. Defensive efforts by Liggett ( (1977), decisions limiting§ 14(e) to disclosure concerns. See In re Sunshine Mining Co. Grand Metropolitan Ltd. included e Securities Litigation, 496 F. Supp. 9, 11 (S.D.N.Y. 1979); Berman v. Gerber Prods., 454 Inc. Wall St. J., May 7, 1980, at S, • F. Supp. 1310, 1318 (W.D. Mich. 1978); Altman v. Knight, 431 F. Supp. 309, 314 increased its bid, and Standard Brm (S.D.N.Y. 1977). May 15, 1980, at 6, col. 1. 58. See note 230 infra. IOWA LAW REVIEW 475 TENDER OFFERS 489 tight become a basis for heightened newspapers, press releases, and mailings to shareholders, brokers, o.u analysts, and others within the investment industry serve a two-fold pur­ rarget management may receive pose: one, to create a pause, hopefully of permanent duration, in the s charged with enforcement of state shareholders' eagerness to embrace the premium being offered for their n the aborted effort by Occidental shares, and second, to serve the potential acquiror with notice that it is in 1der offer for Mead Corporation, for an arduous struggle. Although more relevant to exchange rather than petus when the Ohio Division of cash offers, a hard hitting publicity campaign seizes upon every actual or : Occidental had made inadequate contrived weakness of the acquiror, occasionally causing even the most t of the finding, Occidental could determined acquiror to consider whether the allegations and costs of 59 disclosures had been corrected. 55 rebutting such campaigns are worth enduring. cquisitions by target corporations Defensive mergers. If all other defensive measures appear or prove ISive litigating posture based upon to be inadequate against a determined adversary, target management llich such acquisitions are made, may seek a more suitable acquiror, presumably one that raises fewer con­ kion necessarily raised as to bona cerns as to management tenure, use of target assets, and other effects of se judicial reaction. 57 The Panter shifting control. Rescuing acquirors, dubbed "white knights," may enter ~y Marshall Field's eleventh hour the fray either by competing tender offers or by negotiated mergers sub­ •ley Hale marketing areas. 58 ject to shareholder approval. 60 In either case, the effort is designed to ads in national and regional outbid or frustrate the unwanted tender offeror, although even "white knights" have their limits and may not tolerate too many dark days of a 61 ischfeger Corp. v. Paccar, Inc., 474 F. bidding war. The foregoing discussion presents those defensive measures generally JS. LAW. 1527, 1531 (1977). the most aggressive and effective in forestalling, impeding, and perhaps 't to undertake a wide range of defensive l's withdrawal. The Occidential-Mead tit Fierce Opposition from Target Con­ 59. When Occidental Petroleum initiated its takeover efforts of Mead Corporation, note 59 infra. Mead gathered enormous volumes of documents regarding Occidental's global activities d'fer by Crane to acquire 22:6% ,of the from the files of federal regulatory agencies as well as directly from Occidental. Wall St. J., Apr. 3, 1979, at 39, col. 2. Mead's photocopying bill alone was approximately l major competitor of Crane and sought. lio., upon antitrust grounds. Crane Co. $300,000. Id. The information obtained was then organized and disseminated to D.N.Y. 1975). The court denied the numerous regulatory commissions in order to prompt or facilitate investigations of ent exception provision of § 7 of the Occidental's activities in the decade preceding the takeover bid. /d. at I, col. 6. During the American Express battle for McGraw-Hill, the integrity of American Express was I a perceived ability to "unravel the trial on the merits. 411 F. Supp. at challenged by McGraw-Hill's vociferous denunciation of the "conspiratorial" role of the president of American Express who served on the board of directors of McGraw-Hill dur­ c. [1976-77 Transfer Binder] FED. SEC. ing the same period that American Express was planning its takeover attempt. /d., Jan. 16, 1979, at 5, col. I. A disclosure issue raised by Gerber Products against Anderson­ 1 following the announced intention of i Royal, Royal negotiated and executed Clayton was whether Anderson-Clayton had failed to sufficiently disclose illegal payments to its employees in connection with foreign sales. Berman v. Gerber Prods. Co., 454 F. 1, a small but competing business of list action against Monogram. /d. Supp. 1310, 1314-16 (W.D. Mich. 1978). In particular, Gerber sought disclosure of the Uieuver designed solely to create identification and location of the employees involved in the illegal payments. /d. at 1315. During the pendency of the action seeking an order for fuller disclosure, Anderson­ ljoined the acquisition. /d. at 91, § 14(e) oHhe Williams Act, contranfl! Clayton withdrew its tender offer. /d. at 1316. offeror "has a right to a fair 60. Kern County Land Co. v. Occidental Petroleum Corp., 411 U.S. 582 (1973), best known for the Court's "pragmatic" approach to the interpretation of§ 16{b), arose out of ~. at 91,136. The court also rega:r..f...l. 1 Old Kern's accomplishing a defensive merger with Tenneco after Occidental had already ~ware law. /d. The Williams acquired a substantial block of shares through a tender offer. /d. at 587. t-Sante Fe v. Green, 430 U.S. 61. Defensive efforts by Liggett Group to ward off a proposed cash tender offer by ms. See In re Sunshine Mining 979); Berman v. Gerber Prods., Grand Metropolitan Ltd. included enticing a competing offer from Standard Brands, Inc. Wall St. May 7, 1980, at 3, col. 2. The effort failed when Grand Metropolitan v. Knight, 431 F. Supp. 309, J., increased its bid, and Standard Brand's "rescue" attempt was promptly withdrawn. /d., May 15, 1980, at 6, col. I. 490 66 IOWA LAW REVIEW 475 TENDER OFFERS

precluding hostile tender offers. Each of the measures, whether taken so-called fiduciaries o~ prior to or concurrent with pending hostile offers, is couched in terms shareholder interests diverj of safeguarding corporate and shareholder interests. Management's role the target corporation.'! ( in the initiation and pursuance of defensive measures is defined at times although noting the in~ by fiduciary concepts, 62 at other times by reference to the statutory with respect to investmeJ 69 management powers of directors, 63 and on occasion by resort to influencing factorl;. 1 economic theory. 64 These diverse standards reflect not a harmony of The issue of allegiaD goals, hut a confusing panoply of inherently ambiguous, self­ within a specific tender o~ contradictory perspectives. Each of the standards is sufficiently broad to company. Where (1 cash teD generate and embrace arguments by both advocates and adversaries of tion of all target shareholcl defensive maneuverings. Fiduciary concepts, for example, both fuel the fiduciary requirement of "~ ardor of shareholder complaints and offer refuge to beleaguered that management's efforts· management. Similarly, statutory and economic arguments are raised price per share possible? s'1 with equal vigor by both sides on the issue of validity of defensive effects of the acquisition UJ measures. What is surprising is not the phenomenon of contrasting use, by the acquiring compan~ wh!ch is predictable whenever broad principles are sought to be applied desires be weighed by 't_aJ to xssues of substantial complexity and competing claims, but rather the employees, customers, and, tenacity of such perspectives in light of their inability to provide mean­ what are the priorities of thtl ingful guidance. Examination of each ofthe three perspectives may place 6 7. Examples of the belief the their limitations in sharper relief. tion include the following: "[M]J all lawful means persons whose a B. Current Perspec#ves for Evaluation of Target would harm the corporate enterptl Management Response "Management should be rec~ the corporation's business, its de¥4 social requirements." Steinbrink,~ 1. Fidudary Concepts CASE W. RES. L. REV. 882, 884 (: The most alluring theoretical underpinning for examining manage­ 68. Weiss, Tender Offers and 445, 446-47 (1978). Weiss stated: I ment's defensive techniques is the "fiduciary" concept. As if the statement [I)t must be questioned wh~ has inherent and authoritative meaning, we are told that directors of tent with management's fidu' ta.rget companies "have a high fiduciary duty of honesty and fair dealing stockholders. In seeking to eJ wxth shareholders . . . and their dealings with the corporation and its with the tender, managemenl shareholders are rigorously scrutinized. "65 This standard creates the adverse impact an injunction I tender. appearance of an acceptable evaluative norm for management actions, Id. See also Note, Corporate IJiret:j hut upon application it fades into illusion. Justice Frankfurter's oft­ Substantive and Procedural Mo~ quoted statement in SEC v. Chenery Corp. testifies to the inherent lack VAND. L. REV. 575, 598 (1979). of substance in the fiduciary concept. 66 In the tender offer context, the 69. In Bromberg, Tender OJftll lack of substance becomes glaring. To whom, for example, do the 21 CASE W. RES. L. REv. 61!1 (197~ the question whether equal standan short-term holders of target compan 62. See note 72 infra and accompanying text. and Management Responsibility, 251 6!1. See notes 11!1-14 infra and accompanying text. 70. Petty v. Penntech Papers, Ir 64. See text accompanying notes 148-60 infra. 71. See, e.g., Herald v. Seawell, 65. Berman v. Gerber Prods. Co., 454 F. Supp. 1!110, 1!119 (W.D. Mich. 1978). noted that the economic interests of l 66. Justice Frankfurter stated: concerns of management, citing sucll But to say that a man is a fiduciary only begins analysis; it gives direction to fur­ quality of accurate news coverage ~ ther inquiry. To whom is he a fiduciary? What obligations does he owe as a conditions. Id. at 1095. The court,. fiduciary? In what respect has he failed to discharge these obligations? And prise involved, noting at one point th: what are the consequences of his deviation from duty? as the Denver Post is, in effect, a qUill 318 u.s. 80, 85-86 (1943). Co. v. Seawell: A New Corporate Socl 'I rowA LAW REVIEW 475 [1981] TENDER OFFERS 491 h of the measures, whether taken so-called fiduciaries owe primary allegiance when corporate and hostile offers, is couched in terms shareholder interests diverge? Some courts and commentators have stressed older interests. Management's role the target corporation.67 Others have pointed to shareholder interests, 68 ensive measures is defined at times although noting the inevitable lack of uniformity among shareholders D.es by reference to the statutory with respect to investment goals, loyalty to management, and other and 'on occasion by resort to influencing factors. 69 ndards reflect not a harmony of The issue of allegiance may be further complicated by variables of inherently ambiguous, self­ within a specific tender offer and by ultimate intentions of the acquiring ~ standards is sufficiently broad to company. Where a cash tender offer is the first step in an eventual elimina­ i>oth advocates and adversaries of tion of all target shareholders through a cash-for-stock merger, does the tcepts, for example, both fuel the fiduciary requirement of "utmost good faith and fair dealing"70 demand ad· offer refuge to beleaguered that management's efforts be limited exclusively to obtaining the highest l economic arguments are raised price per share possible? Such an argument is plausible since any adverse be issue of validity of defensive effects of the acquisition upon the target corporation will be borne solely ~ phenomenon of contrasting use, by the acquiring company and its shareholders. Or may shareholder rmciples are sought to be applied desires be weighed by target management against the concerns of Competing claims, but rather the employees, customers, and creditors of the target corporation, and if so r their inability to provide mean- what are the priorities of these competing concerns?71 The complexities of r the three perspectives may place 6 7. Examples of the belief that fiduciary duty is owed primarily to the target corpora­ tion include the following: "[M]anagement has not only the right but the duty to resist by ~~~~: · Evaluation of Target all lawful means persons whose attempt to win control of the corporation, if successful, 1 would harm the corporate enterprise." Heit v. Baird, 567 F.2d 1157, 1161 (1st Cir. 1977). ~eiponse I ~;I "Management should be recognized as possessing the responsibility and power to shape ";'I the corporation's business, its development, its return to investors, and its satisfaction of ;oncepts social requirements." Steinbrink, Management's Response to the Takeover Attempt, 28 ·,~1 CASE W. RES. L. REV. 882, 884 (1978). .•. I rpinning for examining manage­ 68. Weiss, Tender Offers and Management Responsibility, 23 N.Y. L. ScH. L. REv. ·r. uy" concept. As if the statement 445, 446-47 (1978). Weiss stated: ~. we are told that directors of [I]t must be questioned whether ... a request [to enjoin a tender offer] is consis­ ~uty of honesty and fair dealing tent with management's fiduciary obligation owed to all of the corporation's stockholders. In seeking to enjoin an offeror from commencing or continuing gs with the corporation and its 15 with the tender, management may be giving insufficient consideration to the • " This standard creates the adverse impact an injunction will have on the rights of those stockholders to norm for management actions, tender. sion. Justice Frankfurter's oft- ld. See also Note, Corporate Directors' Liability for Resisting a Tender Offer: Proposed 1J. testifies to the inherent lack Substantive and Procedural Modifications of Existing State Fiduciary Standards, 32 VAND. L. REV. 575, 598 (1979). In the tender offer context, the 69. In Bromberg, Tender Offers: Safeguards and Restraints-An Interest Analysis, > whom, for example, do the 21 CASE W. RES. L. REv. 613 (1970), the author noted that there is no ready answer to the question whether equal standards are to apply to the interests of both long-term and short-term holders of target company securities. I d. at 624. See also Weiss, Tender Offers :text. and Management Responsibility, 23 N.Y. L. SCH. L. REV. 445,452 (1978). 'l . - 70. Petty v. Penntech Papers, Inc., 347 A.2d 140, 143 (Del. Ch. 1975). !p:-1310, 1319 (W.D. Mtch. 1978). 71. See, e.g., Herald v. Seawell, 472 F.2d 1081 (lOth Cir. 1972). The Seawell court noted that the economic interests of the shareholders of the Denver Post were not the sole 1 analysis~ it gives direction to fur­ concerns of management, citing such noninvestor interests as the preservation of the high hat obligations does he owe as a quality of accurate news coverage and the maintenance of favorable employee working discharge these obligations? And conditions. Id. at 1095. The court was undoubtedly influenced by the particular enter­ om duty? prise involved, noting at one point that "a corporation publishing a great newspaper such as the Denver Post is, in effect, a quasi-public institution." Id. See generally Note, Herald Co. v. Seawell: A New Corporate Social Responsibility?. 121 U. PA. L. REV. 1157 (1973). 492 66 IOWA LAW REVIEW 475 [1981] TENDER OFFERS

tender offer battles give rise to a plethora of similar questions, none of Both the Berman and Pan which is readily answered by reference to a fiduciary concept whose reference to fiduciary duty. Lofty breadth makes it inherently incapable of creating priorities among the scrutiny, 78 however, soon glve wa~ recipients of its beneficent standards. business judgment, an independe1 Yet the concept survives, even flourishes. Reference to the "fiduciary favor .of management action. mi1 duties" of management is prominent in recent tender offer litigation. 72 Its lying questions that are raised b~ ~opularity is the direct outgrowth of its inherent ambiguity, serving as the including such questions as to whCJ simultaneous rallying cry of both plaintiff shareholders and defendant parameters of fair dealing wheiJ management. 73 Frequency of recitation creates an illusion of substance. diverge, and whether the conseq1 The utility of a legal standard must be seriously questioned when the stan­ propriately favor one interest ovel dard is avidly and equally embraced by adversaries. Examination of recent' narrowed its discussion to the leg cases illustrates the inadequacy of the fiduciary standard. closure deficiencies. 80 Inasmuch as Fiduciary arguments are raised under state law, although frequently any and all Gerber shares tendel'! joined with federal causes of action based on alleged Williams Act viola­ consider who the intended benefic tions. 74 In both Berman v. Gerber Products Co. 75 and Panter v. Marshall litigation were. They were certai Field & Co., 76 the most direct cases to date involving shareholder well in excess of a rnajority, who challenges under state law to the validity of management's defensive litigation protected the interests 9j measures taken against hostile tender offers, plaintiff shareholders' assumption that the integrity of} allegations regarding breach of fiduciary duties focused upon litigation material fact to the remaining Q undertaken against the acquiring companies. The Berman plaintiffs, for the acquiror's management was st example, alleged that such litigation "was not motivated by legitimate had stated in the tender offer matt business interests but rather by the self-serving interests of the individual cers were aware of illegal foreign board members. " 77 whether the speculative value of a shareholders outweighed the inter See also Steinbrink, Management's Response to the Takeover Attempt, 28 CASE W. RES. Target management chose the mt~ L. REV. 882, 909 (1978). in initiating litigation. Was n: 72. See Panter v. Marshall Field & Co., 486 F. Supp. 1168, 1194 (N.D. III. 1980); Treadway Cos. v. Care Corp., [Transfer Binder] FED. SEC. L. REP. (CCH), 97,188, at fiduciary standards? The Berman 96,529 (S.D.N.Y. 1979), rev'd, FED. SEC. L. REP. , 97,603 (2d Cir. 1980); Berman v. fairness and conflicting interests, a Gerber Prods. Co., 454 F. Supp. 1310, 1310 (W.D. Mich. 1978). ing to " [t ]he so-called 'business j~d 73. In Panter, defendant management countered the plaintiff shareholders' claim of discretion in management to act in breach of fiduciary obligation by arguing that their actions were required by their of the corporation. "82 Only lip st fiduciary obligation to the corporation to avoid an antitrust violation. 486 F. Supp. at 1193-94. reference to "high fiduciary duty. 74. Although it has been argued that the Williams Act incorporates a fiduciary con­ The Panter court followed as cept, see Lynch & Steinberg, The Legitimacy of Defensive Tactics in Tender Offers, 64 duties of "honesty, loyalty, goOd CORNELL L. REv. 901, 913 (1979), the argument does not appear consistent with current shifting to the presumption fav judicial perceptions. The reference in the Williams Act forbidding "fraudulent" acts or absence of fraud, bad faith, gross practices in relation to tender offers, Securities Exchange Act of 1934, § 14(e), 15 U.S.C. § 78m(e) (1976), has been limited in recent decisions to the context of disclosure violations rather than "fair dealing" concepts, analogizing to the Sante Fe limitation on 10b-5. Ber­ 78. 454 F. Supp. at 1319; 486 F. SUJ man v. Gerber Prods. Co., 454 F. Supp. 1310, 1318 (W.D. Mich. 1978); Altman v. 79. See note 66 supra and accompau Knight, 431 F. Supp. 309, 314 (S.D.N.Y. 1977). 80. The Berman court stated that "[t: 75. 454 F. Supp. 1310 (W.D. Mich. 1978). the principal dispute between Gerber aD~ 76. 486 F. Supp. 1168 (N.D. Ill. 1980). of the disclosure required in connectic 77. 454 F. Supp. at 1317. See also Abella v. Universal Leaf Tobacco Co., 495 F. operation." 454 F. Supp. at 1319. Supp. 713, 714-15 (E.D. Va. 1980), in which a shareholder of Universal Leaf brought a 81. Id. at 1315. deriv~tive actio~ alleging that directors of Universal breached their fiduciary duties by 82. Id. at 1319 .. opposmg a hostile takeover attempt by Congoleum. The derivative action was upheld 83. See id. against the claim that disinterested directors could void the suit, but no decision has as yet 84. Panter v. Marshall Field & Co., • been reached on the merits. I d. at 717. 85. Id. at 1194. i IOWA LAW REVIEW 475 [1981] TENDER OFFERS 493 f>lethora of similar questions, none of Both the Berman and Panter courts began their analysis with erence to a fiduciary concept whose reference to fiduciary duty. Lofty statements of fair dealing and rigorous able of creating priorities among the Is. scrutiny, 78 however, soon gave way in each case to the statutory model of business judgment, an independent standard carrying a presumption in flourishes. Reference to the "fiduciary favor of management action. Neither court addressed any of the under­ tin rec,ent tender offer litigation. 72 Its lying questions that are raised by reference to the fiduciary standard, fits inherent ambiguity, serving as the including such questions as to whom the fiduciary obligation is owed, the plaintiff shareholders and defendant parameters of fair dealing when shareholder and corporate interests .tion creates an illusion of substance. diverge, and whether the consequences of management's actions inap­ >e seriously questioned when the stan- . propriately favor one interest over another. 79 Instead, the Berman court by adversaries. Examination of recent' narrowed its discussion to the legitimacy of Gerber's allegations of dis­ 1e fiduciary standard. closure deficiencies. 80 Inasmuch as Anderson Clayton was offering cash for under state law, although frequently any and all Gerber shares tendered, it would have been appropriate to based on alleged Williams Act viola­ consider who the intended beneficiaries of target management's defensive roducts Co. 75 and Panter v. Marshall litigation were. They were certainly not the shareholders, presumably ue5 to date involving shareholder well in excess of a majority, who would have tendered. Arguably, the validity of management's defensive litigation protected the interests of the nontendering shareholders, on the 1der offers, plaintiff shareholders' assumption that the integrity of Anderson Clayton's management was a £:iary duties focused upon litigation material fact to the remaining Gerber shareholders. Yet the integrity of iipanies. The Berman plaintiffs, for the acquiror's management was substantially known-Anderson Clayton 1 "was not motivated by legitimate had stated in the tender offer materials that some of its directors and offi­ ~If-serving interests of the individual cers were aware of illegal foreign payments. 81 The issue, therefore, was whether the speculative value of additional information to nontendering shareholders outweighed the interests of shareholders desiring to tender. to the Takeover Attempt, 28 CASE W. RES. Target management chose the interests of the nontendering shareholders 486 F. Supp. ll68, ll94 (N.D. Ill. 1980); in initiating litigation. Was management's choice consistent with L!rJ FED. SEc. L. REP. (CCH) '97, 188, at fiduciary standards? The Berman court failed to address the questions of REP. '97,603 (2d Cir. 1980); Berman v. fairness and conflicting interests, avoiding such questions entirely by turn­ :w.o. Mich. 1978). ing to "[t ]he so-called 'business judgment rule' [that] leaves relatively wide mtered the plaintiff shareholders' claim of discretion in management to act in what it considers to be the best interests nat their actions were required by their 82 ,jd an antitrust violation. 486 F. Supp. at of the corporation. " Only lip service was paid to the court's opening reference to "high fiduciary duty. "83 Williams Act incorporates a fiduciary con­ The Panter court followed a similar pattern, citing first the fiduciary of Defensive Tactics in Tender Offers, 64 duties of "honesty, loyalty, good faith, diligence and fairness, "84 then nt does not appear consistent with current shifting to the presumption favoring management's actions "in the Iiams Act forbidding "fraudulent" acts or 85 Exchange Act of 1934, § 14(e), 15 U.S.C. absence of fraud, bad faith, gross overreaching or abuse of discretion. " lions to the context of disclosure violations r t0 the Sante Fe limitation on 10b-5. Ber- 78. 454 F. Supp. at 1319; 486 F. Supp. at 1192. 0, 1318 (W.D. Mich. 1978); Altman v. 79. See note 66 supra and accompanying text. ). 80. The Berman court stated that "[t]he factual history of this case ... indicates that the principal dispute between Gerber and Anderson-Clayton centered around the extent of the disclosure required in connection with Anderson-Clayton's foreign payments v. Universal Leaf Tobacco Co., 495 F. operation." 454 F. Supp. at 1319. shareholder of Universal Leaf brought a 81. Id. at 1315. lei'Sal breached their fiduciary duties by 82. /d. at 1319 .. eum. The derivative action was upheld 83. See id. ld V()id the suit, but no decision has as yet 84. Panter v. Marshall Field & Co., 486 F. Supp. at 1192. 85. /d. at 1194. 494 66 IOWA LAW REVIEW 475 [1981] TENDER OFFERS

As in Berman, there was a complete lack of perception of the differing management -oriented argumen and competing shareholder and corporate interests, or of the fact that enigma-to whom is the fidud; management unilaterally made choices among such interests. Instead, Perhaps the most frequent the Panter court looked at the narrow question of the antitrust fears of concept is the "primary purp Marshall Field management, an examination that was inadequate even taken primarily for a legitimate on its own terms. 86 One may wonder what reflex reaction caused the Ber­ narrow purpose of perpetuation man and Panter courts to assert fiduciary standards. One would also find imagination, however, for target it difficult to give a meaningful content to the fiduciary concept from corporations to elevate arguab these or other court opinions. 87 "primary" motivation for opposi Even in cases where target management's action has been successfully circumstances may offer relative challenged, the fiduciary concept has served as no more than a gloss on the purpose of Marshall Field maru court's reasoning. In Condec Corp. v. Lunkenheimer Co., 88 target based principally on an antitm management sought to dilute the effect of a tender offer by issuance of what was the purpose of Me 75,000 share~ to a proposed merger partner. 89 The court premised its substantial concern over the et . conclusion against the target board upon a fiduciary standard, citing a tions?97 Even if perpetuation ~ II "breach of this [fiduciary] duty ... for directors to make use of issuance management, defensive measun of shares to accomplish an improper purpose. "90 The reference to "impro­ corporate purposes are also f II per purpose" concerned an issuance of shares in circumstances suggesting a II 91 94. See Note, Herald Co. v. Seawel II motive of self-perpetuation rather than a valid business objective. In II these circumstances, reference by the court to the fiduciary standard was PA. L. REV. 1157, 1161 (1973). Thus, occasion, have enjoined defensive m unnecessary because the directors failed to adhere to elementary statutory controlling purpose was to thwart, the. II obligations of management, the issuance of shares having been made Indus., Inc. [1976-1977 Transfer Bind' II "with precipitous haste with insufficient consideration or opportunity for (C.D. Cal. 1976). II consideration of the interest of the corporation or its stockholders. "9% 95. See note 57 supra; text accomF I~ ,, Reference to fiduciary duty in Condec was not only superfluous but Papers, Inc., 347 A.2d 140, 14!1 (Del percentage to remove an existing ~ created unnecessary ambiguity. It has been argued by one commentator, 96. Panter v. Marshall Field & Co. for example, that even a precipitous sale of shares to thwart an impending 97. McGraw-Hill management str takeover, as was done in Condec, is in the best interests of the corporation, Week, would suffer a loss of editorial and thus consistent with a fiduciary duty owed to the corporation. 93 This takeover. Wall St. J., Jan. 16, 1979,' "fiduciary" duty owed, and with whi 86. See note 124 infra. primary duty to the integrity of one of i 87. An example of the confusion generated by the use of uncertain terminology is would be cashed out by acceptance oft Northwest Indus., Inc. v. B.F. Goodrich Co., 301 F. Supp. 706 (N.D. Ill. 1969). The interest in the editorial objectivity- of court combined references to "that strict impartiality which is required by their . appropriate focus. See id., Feb. 20, ~97 [director's] fiduciary duties," id. at 712-13, with business judgment concepts upholding by certain McGraw-Hill shareholders b management's defensive issuance of shares because "plaintiff has not shown any trageurs who had acquired substantial likelihood that it can prove that the transaction amounts to fraud." /d. Whatever the con· ment. The efforts did not reach fruiti~ tent of the fiduciary model, it scarcely could be regarded as resting narrowly upon the suits were eventually filed against McC absence of fraud. American Express offer. /d. Mar. 2, 1! 88. 43 Del. Ch. 353, 230 A.2d 769 (1967). group there may have existed a sizeaM 89. /d. at 358, 230 A.2d at 772-73. those still undecided. How is the fiduci 90. Id. at 363, 230 A.2d at 775, citing Yasik v. Wachtel, 25 Del. Ch. 247, 256, 17 interests? With regard to the BusinesJ A.2d 309, 313 (1941). management include reasonable effort 91. Id. at 363, 230 A.2d at 776. shareholders may go forward? These an 92. /d. at 359, 230 A.2d at 773. gle, and it is readily apparent that noti 93. Lipton states: "Once the directors have properly determined that a takeover and equally amorphous concepts are 1 should be rejected they may take any reasonable action to accomplish this purpose, through competing interests. including ... the issuance of shares to a big brother .... " Lipton, Takeover Bids in the 98. Northwest Indus., Inc. v. B.F. Target's Boardroom, 35 Bus. LAW. 101, 123-24 (1979). 1969). OWA LAW REVIEW 475 TENDER OFFERS 495 lack of perception of the differing management-oriented argument asserts its own answer to the original l)rate interests, or of the fact that enigma-to whom is the fiduciary duty, however defined, owed? es among such interests. Instead, Perhaps the most frequent attempt to give content to the fiduciary r question of the antitrust fears of concept is the "primary purpose" test-were the defensive measures lination that was inadequate even taken primarily for a legitimate corporate purpose or for the improper, b.at reflex reaction caused the Ber- narrow purpose of perpetuation of management control?94 It takes little 11}' standards. One would also find imagination, however, for target management oflarge, multidimensional :nt to the fiduciary concept from corporations to elevate arguably plausible corporate concerns as the "primary" motivation for opposing an unsolicited tender offer. Egregious ment's action has been successfully circumstances may offer relatively easy cases. 95 But what was the primary rved as no more than a gloss on the purpose of Marshall Field management in pursuing defensive litigation v: Lunkenheimer Co. , 88 target based principally on an antitrust opinion from their own counsel?96 Or t of a tender offer by issuance of what was the purpose of McGraw-Hill management who professed artner. 89 The coun premised its substantial concern over the editorial independence of their publica­ ~n a fiduciary standard, citing a tions?97 Even if perpetuation of control is found to be one purpose of directors to make use of issuance management, defensive measures may be justified, we are told, if other rpose. "90_The reference to "impro­ corporate purposes are also served. 98 When does a purpose become :ares in circumstances suggesting a a, a valid business objective. 91 In 94. See Note, Herald Co. v. Seawell: A New Corporate Social Responsibility?, 121 U. ian to the fiduciary standard was PA. L. REV. 1157, 1161 (1973). Thus, courts seek to determine true purpose, and, on occasion, have enjoined defensive measures "whose sole, primary, compelling and to adhere to elementary statutory controlling purpose was to thwart the ... tender offer." Royal Indus., Inc. v. Monogram tee of shares having been made Indus., Inc. [1976-1977 Transfer Binder) FED. SEC. L. REP. (CCH), 95,863, at 91,136 consideration or opportunity for (C.D. Cal. 1976). rporlltion or its stockholders. "92 95. See note 57 supra; text accompanying note 77 supra. See also Petty v. Penntech Papers, Inc., 347 A.2d 140, 143 (Del. Ch. 1975) (redemption of shares in sufficient ~·was not only superfluous but percentage to remove an existing threat to management's control). ~n argued by one commentator, 96. Panter v. Marshall Field & Co., 486 F. Supp. 1168, 1181 (N.D. Ill. 1980). of shares to thwart an impending 97. McGraw-Hill management strenuously argued that its publication, Business : llest interests of the corporation, Week, would suffer a loss of editorial objectivity in the event of an American Express •owec:J. to the corporation. 93 This takeover. Wall St. J., Jan. 16, 1979, at 5, col. 1. In this context, to whom is the "fiduciary" duty owed, and with what consequences? Management clearly sensed a primary duty to the integrity of one of its principal corporate divisions. Shareholders who by the use of uncertain terminology is would be cashed out by acceptance of the offer, and therefore would have no continuing n F. Supp. 706 (N.D. Ill. 1969). The interest in the editorial objectivity of Business Week, regarded their interests as the )artiality which is required by their appropriate focus. See id., Feb. 20, 1979, at 14, col. 2, describing an eleventh hour effort business judgment concepts upholding by certain McGraw-Hill shareholders to seek shareholder input, led principally by arbi­ cause "plaintiff has not shown any trageurs who had acquired substantial blocks after American Express' initial announce­ tOunts to fraud." Id. Whatever the con­ ment. The efforts did not reach fruition, although at least five shareholder class action regarded as resting narrowly upon the suits were eventually filed against McGraw-Hill based on management's impeding the American Express offer. Id. Mar. 2, 1979, at 4, col. 3. Yet even within the shareholder group there may have existed a sizeable block that agreed with management, as well as those still undecided. How is the fiduciary concept to be applied to these widely varying v. Wachtel, 25 Del. Ch. 247, 256, 17 interests? With regard to the Business Week question, does the fiduciary concern of management include reasonable efforts to overcome the problem so that the offer to shareholders may go forward? These and numerous other issues surfaced from this strug­ gle, and it is readily apparent that notions of primary motivation, fidelity, fair dealing, and equally amorphous concepts are totally inadequate as dispositive bases for sifting pJOperly determined that a takeover e ·action to accomplish this purpose, through competing interests. 98. Northwest Indus., Inc. v. B.F. Goodrich, Inc., 301 F. Supp. 706, 712 (N.D. Ill. ~ ...." Lipton, Takeover Bids in the 979}. 1969).

~ 496 66 IOWA LAW REVIEW 475 [1981] TENDER OFFERS

primary? In this metaphysical realm, concepts are not easily defined. presumption favoring the busip Thus one commentator has suggested that "the primary purpose test is such decisions are made "in the perhaps somewhere between the 'business judgment' and 'fairness' tests reaching or abuse of discretion of state law, "99 hardly a clarifying delineation. 100 create differing burdens of proof An alternative standard for giving content to the fiduciary concept selected, the burden created m; is reflected in Klaus v. Hi-Shear Corp., 101 the court requiring a "compel­ Yet, precisely because the fidu~ ling business purpose" to justify the issuance of shares-in Klaus, the courts are prone to a confusion establishment of an ESOT-as a defense measure during a control bat­ unknowing, rejection of fiducial tle.102 Even the "compelling business purpose" standard, while perhaps Definitional content to fidu4 appearing more definitive than other tests, 105 creates broad areas of sub­ a tender offer is directed to -1 jectivity and lack of guidance. As described by the Klaus court, the test capacities. There is no clearlJ "suggests a balancing of the good to the corporation against the dispro­ analogous to merger or sale of portionate advantage to the majority shareholders and incumbent commentators are left groping management."104 Notions of "balancing," "good to the corporation," honesty, loyalty, and other vim and "advantage ... to incumbent management" offer scant evidence of not readily translatable into dec clarity. hostile tender offer struggles. T The lack of substance in the fiduciary perspective is further illus­ tion of opinion, ranging from'ttl II trated by the efforts of both the Berman and Panter courts to infuse the fiduciary duty whenever they agJ II concept with content through the so-called "business judgment rule."105 shareholders110 to the position t1J r I The fiduciary ideology is grounded on notions of loyalty, fair dealing, of management ... [justifies] tal and avoidance of conflict. This is far removed from the judicially-created appropriate to frustrate Ot:_ de}; :r 99. A. FLEISCHER, supra note 18, at 86-87. 106. Panter v. Marshall Field & Co. 100. The "primary purpose" test has been further criticized with regard to the ambi­ 107. The distinction and effect Upol guity of the term "primary" (is the primary motive that which is stronger than all other cuit decision in Treadway Cos. v. Car motives combined, or simply the strongest of any individual motive?) and the uncertainty Cir. 1980), reversing the district coUJ!!I of determining motives when board members act collectively, each member perhaps Treadway during the midst of a control responding to a different influencing factor. See Gelfond & Sebastion, Reevaluating the focused upon Treadway management'! Duties of Target Management in a Hostile Tender Offer, 60 B.U. L. REV. 403, 437-43 issued shares from voting in light of itS (1980). ment was primarily motivated by its dei 101. 528 F.2d 225 (9th Cir. 1975). 668, 687 (S.D.N.Y. 1980). The Second 102. Id. at 233-34. It is not coincidental that Klaus is a Ninth Circuit decision, for the the standard business judgment analysi court's standard was taken from the language of the California Supreme Court in Jones v. to overcome the presumption that dine H.F. Ahmanson & Co., 1 Cal. 3d 93, 108, 460 P.2d 464, 471, 81 Cal. Rptr. 592, 599 SEC. L. REP. (CCH) , 97,603, at 98;il0 (1969), dealing with the obligations of controlling shareholders. Co. v. Internorth, Inc., No. 80-7865 (l! 103. In Fischel, Efficient Capital Market Theory, the Market for Corporate Control, sive measures was reversed based up(m and the Regulation of Cash Tender Offers, 57 TEX. L. REv. 1 (1978), the author argued proof to plaintiffs rather than target cc for universal adoption of the "compelling business purpose" test as "more consistent with 108. In Brundney, Fiduciary Ideolos the inevitable conflict of interest faced by management in a contested control situation. MICH. L. REv. 259 (1966), the author F Adoption of this test would subject many defensive tactics to claims of breach of fiduciary repurchase of shares by corporations d1 duty, a radical departure from much of existing law." Id. at 44. It is difficult to accept erroneously slipped into business judj the author's implication that clarity is obtained by the confluence of "compelling business within the fiduciary context of a duty 4 purpose," burden of proof, and the fiduciary duty context, for defensive measures are fre­ 109. The Williams Act permits but quently defended on plausible business and fiduciary grounds. The content of these statement recommending or opposing ambiguous standards is what creates the problems of application, and perceptions may (1976). Limited authority is given to vary among courts just as they vary among management and shareholders. It would statutes permitting management to in1 therefore be preferable to consider standards that _avoid such inherently ambiguous ter­ R.EV. CODE ANN. § 1707 .04l(B)(l)(b) ( minology. 110. A Bn'ef Against Managements j 104. 528 F.2d at 234. 1979, at 159. 105. See text accompanying notes 78-87 supra. Ill. Steinbrink, Management's Resj L. REv. 882, 894 (1978). rOWA LAW REVIEW 475 [1981] TENDER OFFERS 497 t, concepts are not easily defined. presumption favoring the business decisions of management so long as I that "the primary purpose test is such decisions are made "in the absence of fraud, bad faith, gross over­ iness judgment' and 'fairness' tests reaching or abuse of discretion."106 The distinctions between the two ·lineation. 100 create differing burdens of proof and, depending upon which standard is 1g c~mtent to the fiduciary concept selected, the burden created may be dispositive of particular actions. 107 101 , the court requiring a "compel­ Yet, precisely because the fiduciary concept lacks inherent guidelines, issuance of shares-in Klaus, the courts are prone to a confusion of terms and an implicit, perhaps even nse measure during a control bat­ unknowing, rejection of fiduciary ideology. 108 purpose" standard, while perhaps 101 Definitional content to fiduciary concepts is impeded in part because :ests, creates broad areas of sub­ a tender offer is directed to target shareholders in their individual :ribed by the Klaus court, the test capacities. There is no clearly defined role for target management ne· corporation against the dispro­ analogous to merger or sale of asset transactions. 109 Thus courts and .ty Shareholders and incumbent commentators are left groping for substance. Notions of good faith, ing," "good to the corporation," honesty, loyalty, and other virtues inherent in the fiduciary model are ~agement" offer scant evidence of not readily translatable into decisional standards in the complexities of hostile tender offer struggles. The result predictably has been polariza­ tciary perspective is further illus­ tion of opinion, ranging from the argument that directors breach their fn and Panter courts to infuse the fiduciary duty whenever they aggressively impede an offer from reaching t!Jed "business judgment rule. " 1• 5 shareholdersno to the position that "the ever-present fiduciary obligation P.notions of loyalty, fair dealing, of management ... [justifies] taking such reasonable action as they deem 111oved from the judicially-created appropriate to frustrate or delay an unsolicited takeover attempt. "m

106. Panter v. Marshall Field & Co., 486 F. Supp. at 1194. ther criticized with regard to the ambi­ 107. The distinction and effect upon results are illustrated by the recent Second Cir­ ive that which is stronger than all other cuit decision in Treadway Cos. v. Care Corp., FED. SEC. L. REP. (CCH) , 97,603 (2d mdividual motive?) and the uncertainty Cir. 1980), reversing the district court's injunction against the voting of shares issued by let collectively, each member perhaps Treadway during the midst of a control battle with Care. /d. at 98,213. The district court Gelfond & Sebastion, Reevaluating the focused upon Treadway management's fiduciary duty to shareholders and enjoined the ~_Offer, 60 B.U. L. REV. 403, 437-43 issued shares from voting in light of its conclusion that "Treadway's incumbent manage­ ment was primarily motivated by its desire to stave off a Care takeover bid." 490 F. Supp. 668, 687 (S.D.N.Y. 1980). The Second Circuit found that the lower court "did not apply is a Ninth Circuit decision, for the :taus the standard business judgment analysis" and reversed, based upon a failure of plaintiff 1e California Supreme Court in Jones v. to overcome the presumption that directors "have acted properly and in good faith." FED. i».2d 464, 471, 81 Cal. Rptr. 592, 599 SEC. L. REP. (CCH), 97,603, at 98,210-11; see note 112 infra. Similarly, in Crouse-Hinds : shareholders. Co. v. Internorth, Inc., No. 80-7865 (2d Cir. 1980), an injunction against certain defen­ ry, the Market for Corporate Control, sive measures was reversed based upon the appellate court's reallocation of the burden of K. L. REV. 1 (1978), the author argued proof to plaintiffs rather than target company directors. purpose" test as "more consistent with 108. In Brundney, Fiduciary Ideology i'n Transactions Affecting Corporate Control, 65 ment in a contested control situation. MICH. L. REv. 259 (1966), the author points out that Delaware courts, in considering the tactics to claims of breach of fiduciary repurchase of shares by corporations during control fights have, in the author's opinion, aw." /d. at 44. It is difficult to accept erroneously slipped into business judgment standards rather than viewing the issues the confluence of "compelling business within the fiduciary context of a duty of loyalty. /d. at 273-77. :ontext, for defensive measures are fre­ 109. The Williams Act permits but does not require target management to issue a ciary grounds. The content of these statement recommending or opposing the tender offer. § 14(d)(4), 15 U.S.C. § 78n(d) . of application, and perceptions may (1976). Limited authority is given to target management by some state antitakeover agement and shareholders. It would statutes permitting management to invoke state administrative review. See, e.g., OHIO ~void such inherently ambiguous ter- REv. CODE ANN.§ 1707.041(B)(1)(b) (1979). 110. A Bn"ef Against Managements that Fight Off Tender Offers, FORTUNE, Mar. 12, 1979, at 159. 111. Steinbrink, Management's Response to the Takeover Attempt, 28 CASE W. RES. L. REv. 882, 894 (1978). 498 66 IOWA LAW REVIEW 475 [1981] TENDER OFFERS

Competing arguments often are based on wholly discrete perceptions of Within that grant of authority, i1 the proper object of management's "fiduciary" concerns. Perceptions tant judgment for directors than vary as well among courts, resulting in decisions that lend neither term interests of the corporation. guidance nor substance to already ambiguous standards. 112 permit directors to make decisio tions but preclude them from tak 2. Statutory Provisions they perceive that corporate takeover. 114 The natural exten A distinct perspective for evaluation of defensive measures centers "business judgment rule" to tak upon statutory provisions that hopefully avoid the ambiguities of rule applies to other operation common-law and equity doctrines by defining the specific roles of man­ earlier, m the result of applying agement and shareholders. This perspective, however, embraces several to the presumed business expel independent statutory bases. Thus, in common with the problems raised come only by gross overreaching by fiduciary concepts, varying statutory provisions support arguments of v. B. F. Goodrich Co. ,ll6 a deriv both challengers and defenders of defensive measures. Moreover, resort ment's hastily arranged issuanc~ to a statutory perspective is futher clouded by the imprecision of broad dismissed because "managemeJll statutory language, as well as by a lack of clear delineation to determine which, in its best judgm¢nt, .2 II which of several potentially conflicting statutory provisions have priority stockholders. "ll7 Similarly the...di in application. presumption of sound busin~ IIi I It' A starting point for some courts and commentators is the provision disturb if any rational business ji r found universally in statutory codes granting to directors broad discre­ tors'] decisions."HB I tionary authority to manage the conduct and affairs of the corporation. m The business judgment rUl fiduciary model, but it suffers frtil 112. The problems in application of ambiguous standards are reflected in Treadway purposes. Rarely will a target~ Cos. v. Care Corp., FED. SEC. L. REP. (CCH) , 97,603 (2d Cir. 1980), in which the perceptions of management motivation differed sharply between the district court and knowledgeable counsel,m be UI1 court of appeals. The district court, noting the haste bY'which a substantial block of shares was issued to a third party, the unusual terms of the transaction mandating the starting point in our analysis is the bu"a eventual redemption of such shares, and management's obvious efforts to avoid a delegation of managerial authority to t! shareholder vote on the issuance, concluded that "Treadway's incumbent management 97,603, at 98,210. was primarily motivated by its desire to stave off a Care takeover bid." 490 F. Supp. at 114. Lipton comments: 687. The Second Circuit, however, reversing the lower court's issuance of an injunction, A takeover bid is no different than found "the critical fact, in our view, is that the Treadway board ... in approving the As long as matters such as capital stock sale ... were moving Treadway toward a business combination with Fair Lanes." and bankruptcy are for the reli.IOB FED. SEC. L. REP. (CCH), 97,603, at 98,212. The Second Circuit's opinion suffers from is no reason to put acceptance or several weaknesses compared to the extensive discussion of issues in the lower court. The basis. ' appellate court failed to address the unusual terms of the issuance, such as mandatory Lipton, Takeover Bids in the Target's redemption, and dismissed in a cursory and inadequate footnote the problem of dilution 115. See text accompanying notes 7: of minority shares that abrogated a statutorily created veto right. /d. at 98,211-12 n.48. 116. 301 F. Supp. 706 (N.D. Ill. 19 Moreover, if the court of appeals was prepared to accept the issuance as a first step 117. /d. at 712. Cary, commenting' toward a business combination, a matter of substantial shareholder concern and statutory concluded that "if that philosophy pret rights, the court was unaccountably silent regarding the district court's finding that field for an incumbent management." 4 "Treadway has consistently structured its proposed transactions so as to avoid shareholder ment from Attack, 25 Bus. LAW. 859, scrutiny." 490 F. Supp. at 686. If business combination was a major purpose, then why is 118. 486 F. Supp. at 1194. not shareholder scrutiny appropriate? The court would have been better served had it 119. The role of corporate counsel i: kept in mind its earlier admonishment in Butler Aviation lnt'l v. Comprehensive questions of potential conflict that an Designers, Inc., 425 F.2d 842 (2d Cir. 1970), that "[w]hile courts should rigorously PROFESSIONAL RESPONSIBILITY EC 5-18 enforce the policy of honesty and fair dealing prescribed by federal securities legislation, SIONAL CONDUCT § 1.13 stress that a Ia they must guard against the risk that, at the instance of incumbent management, they its directors, officers, and shareholder~ may be frustrating informed shareholders from doing what the latter want." /d. at 845. t!hat target management is motivated 1 113. DEL. CODE ANN. tit. 8, § 141 (1978); MODEL BUSINESS CORPORATION ACT§ 35 cerns, to what extent may counsel acti (1975). In Treadway, challenging Treadway's defensive issuance of shares in an effort to measures? The Code and Model Rule dilute Care's holdings and prevent an eventual Care takeover, the court noted that "the cumstances .. But there may be a marm lOWA LAW REVIEW 475 [1981] TENDER OFFERS 499

:d on wholly discrete perceptions of Within that grant of authority, it is argued, there can be no more impor­ "fiduciary" concerns. Perceptions tant judgment for directors than to consider the future viability and long­ 11g in decisions that lend neither term interests of the corporation. Thus, it is argued, it makes little sense to nbiguous standards. 11 2 permit directors to make decisions regarding day-to-day business opera­ tions but preclude them from taking appropriate action in instances where ' Provisions they perceive that corporate welfare is threatened by a potential takeover The natural extension of such reasoning is to apply the ttion of defensive measures centers .u• "business judgment rule" to takeover defenses in the same manner the lefully avoid the ambiguities of rule applies to other operational decisions of management. As noted defining the specific roles of man­ earlier, 115 the result of applying the rule may be a substantial deference leetive, however, embraces several to the presumed business expertise of management, a deference over­ common with the problems raised come only by gross overreaching or fraud. In Northwest Industries, Inc. ry provisions support arguments of v. B.F. Goodrich Co., 116 a derivative action based upon target manage­ ensive measures. Moreover, resort ment's hastily arranged issuance of shares to a friendly third party was uded by the imprecision of broad dismissed because "management has the responsibility to oppose offers t' of clear delineation to determine which, in its best judgment, are detrimental to the company or its r statutory provisions have priority stockholders. " 117 Similarly the directed verdict in Panter was based on "a presumption of sound business judgment . . . , which courts will not l!ld commentators is the provision disturb if any rational business purpose can be attributed to their [direc­ ranting to directors broad discre­ tors'] decisions. " 118 :t and affairs of the corporation. 1 u The business judgment rule may offer greater certainty than the 10us standards are reflected in Treadway fiduciary model, but it suffers from equally severe limitations for evaluative ) , 97,603 (2d Cir. 1980), in which the purposes. Rarely will a target corporation, particularly one advised by d sharply between the district court and knowledgeable counsel, 119 be unable to devise a plausible business pur- u~ haste by,which a substantial block of I tenns of the transaction mandating the starting point in our analysis is the business judgment rule," citing New Jersey's statutory magement's obvious efforts to avoid a delegation of managerial authority to the board of directors. FED. SEC. L. REP. (CCH), Ill}. "Treadway's incumbent management 97,603, at 98,210. ffa Care takeover bid." 490 F. Supp. at 114. Lipton comments: e lower court's issuance of an injunction, A takeover bid is no different than any other fundamental business decision .... ~ Treadway board . . . in approving the As long as matters such as capital expenditures, discontinuances of businesses . business combination with Fair Lanes." and bankruptcy are for the reasonable business judgment of the directors, there 'he Second Circuit's opinion suffers from is no reason to put acceptance or rejection of a takeover bid on any different ICussion of issues in the lower court. The basis. rms of the issuance, such as mandatory Lipton, Takeover Bids in the Target's Boardroom, 35 Bus. LAW. 101, 120 (1979). lequate footnote the problem of dilution 115. See text accompanying notes 78-79 supra. Jl!ated veto right. /d. at 98,211·12 n.48. 116. 301 F. Supp. 706 (N.D. Ill. 1969). d to accept the issuance as a first step 117. /d. at 712. Cary, commenting upon the court's attitude in Northwest Industries, antial shareholder concern and statutory concluded that "if that philosophy prevails on the part of a court, it is very much an open arding the district court's finding that field for an incumbent management." Cary, Corporate Devices Used to Insulate Manage­ rl transactions so as to avoid shareholder ment from Attack, 25 Bus. LAW. 839, 841 (1970). nation was a major purpose, then why is 118. 486 F. Supp. at 1194. t would have been better served had it 119. The role of corporate counsel in advising and assisting target management raises 1tler Aviation Int'l v. Comprehensive questions of potential conflict that are not readily resolvable. Both the ABA CODE OF that "[ w]hile courts should rigorously PROFESSIONAL RESPONSIBILITY EC 5·18 (1978) and the proposed MODEL RULES OF PROFES· !SCribed by federal securities legislation, SIONAL CONDUCT § 1.13 stress that a lawyer represents the corporate entity distinct from tance of incumbent management, they its directors, officers, and shareholders. When counsel perceives or reasonably suspects loing what the latter want." /d. at 845. that target management is motivated principally by personal rather than corporate con· I>DEL BUSINESS CORPORATION ACT§ 35 cerns, to what extent may counsel actively advise and coordinate efforts as to defensive fensive issuance of shares in an effort to measures? The Code and Model Rules imply that counsel should not act in such cir· :are takeover, the court noted that "the cumstances .. But there may be a marked gap between standards and practice, for it would ,

500 66 IOWA LAW REVIEW 475 (1981] TENDER OFFERS

pose for its conduct. 1Z° For example, the Panter court accepted the the antitrust concerns, it is ( legitimacy of defensive acquisitions even though none of the acquisitions by directors to any probler was pursued prior to the initiation of takeover efforts. m The court also "business judgment." The readily accepted management's decision to undertake defensive Panter court creates for dd litigation. m Judicial deference to a presumed business judgment is starkly the much-criticized Cheffs v. exhibited by the court's acceptance of the argument that a "business judg­ repurchase of shares. ment'' was made by Marshall Field directors when they concluded that the Apart from validating u proposed Carter Hawley Hale offer justified antitrust litigation.m The judgment rule" creates a p1 directors' conduct in this regard exhibited a determined unwillingness to pora.te governance situation consider financial and other corporate benefits of the proposed merger shareholder control. Thus, i and a marked eagerness to embrace antitrust concerns to support their impede, and are therefore c opposition.l%4 If the facts in Panter support a "business judgment" as to right to determine the man The division of ownership an be unreasonable to expect counsel to undertake an independent investigation of manage­ constricted the sphere of sh; ment motivations. Nor would it be reasonable to demand that counsel independently and alter management118 bei evaluate whether the tender offer is advantageous for its corporate client. Reliance will ( necessarily bt: placed upon management expertise. Is reliance reasonable in a hostile vestiges of shareholder ·au1 tender offer context? The issue is deserving of careful study and evaluation. See Cary, statutory authority in manjtSl Professional Responsibility in the Practice of Corporation Law: The Murky Divide create an ongoing authori~ Between Right and Wrong, PROFESSIONAL RESPONSIBILITY OF THE LAWYER 27, 29-30 (N. management. A tender off«: Galston ed. 1977). It is appropriate to note that adoption of standards proposed by the shareholder to acquire suffici4 sale of control analogue would ameliorate a substantial aspect of the problem by reducing the area of unilateral management activity. available for a midstre;un.. 120. See Lynch & Steinberg, supra note 74, at 926 ("Besieged with business reasons perspective, constraints upon justifying the use of a maneuver, a court applying the business purpose test frequently tioned, for there is no compell finds itself compelled to legitimize the corporate conduct."). See also U.S. Smelting v. authority to directors over ~ Clevite Corp., FED. SEC. L. REP. (CCH) 1 92,691 (N.D. Ohio 1968), in which the court shareholders. 130 :;l noted the serious time pressures on target management and approved the hasty decision as consistent with valid business judgment in light of the "exigencies of the situation." /d. And I don't doubt that those points 1 at 99,047. said as being reasonable ...."). 121. 486 F. Supp. at 1194; see note 230 infra. In additional efforts to determine the · 122. 486 F. Supp. at 1194. existing problems could be readily ~ 123. /d. in any direction was made. Depositio1 124. Although both Carter Hawley and Marshall Field operated stores throughout the that he gave no consideration to Cart4 country, antitrust concerns involved only the Chicago area, focusing upon one store be sold, being satisfied to rest tOijally 4 operated by Caner Hawley in Northbrook Court, potential competition with regard to it is difficult to perceive or accept at two future sites, and existing competition in the retail sales of books. /d. at 1180. lack of any effort to apply business ' Management's judgment was based upon an opinion of counsel from the company's law justified by, the long-standing comi firm in response to a request from Angelo Arena, Marshall Field's president. Id. commitment "expressed so many timl Although over three months passed between the date of the opinion and Carter Hawley's as policy." 486 F. Supp. at 1177. eventual withdrawal, no further consideration was made of the antitrust issues despite the 125. 41 Del. 494, 199 A.2d 548 ~ facts that: (a) the issues were fairly narrow in scope and therefore potentially resolvable; Shares-Are There New Overtones?, (b) Carter Hawley advised Marshall Field of its willingness to sell the Northbrook store, 126. Yoran, Advance Defensive 1 the primary source of concern, id. at 1180; (c) Marshall Field management should haVe been aware, and at least one director was so advised by Carter Hawley, that the FTC had 531, 532 (1973). ' 127. See DEL. CODE ANN. tit. 8, § approved prior department store mergers, including one involving the leading company in the industry, Deposition of Edward McCormick Blair, Sept. 29, 1978; and (d) Marshall 128. See id. § 141(k) (Supp. 1978). 129. See FLA. STAT. § 607.084(S) Field management was aware that Caner Hawley's attorneys had opined "that there is no (1975). Limiting or denying the abilil antitrust deterrent" to the potential merger. 486 F. Supp. at 1188. The potential merger, tiona! defensive measure that may be apart from antitrust concerns, held substantial promise for Marshall Field and its were recently adopted by the Americ shareholders. It appears that at least Arena believed that advantages were present. shareholders. Wall St.]., July 28, 19: Deposition of Angelo Arena, Oct. 2, 1978 ("There is some benefit to be accrued by pooling 130. In Maldonado v. Flynn, 415 of managements and pooling of special professional people in a bigger organization . . .. applicability of the business judgment )WA LAW REVIEW 475 [1981] TENDER OFFERS 501

, the Panter court accepted the the antitrust concerns, it is difficult to imagine what minimum attention n though none of the acquisitions by directors to any problem will not constitute a judicially protected takeover efforts. m The court also "business judgment." The deference accorded management by the dsion to undertake defensive Panter court creates for defensive litigation an aura of legitimacy that wned business judgment is starkly the much-criticized Cheffs v. Mathes 125 decision creates for the defensive te argument that a "business judg­ repurchase of shares. :tors when they concluded that the Apart from validating unwarranted judicial deference, the "business stifled antitrust litigation.m The judgment rule" creates a presumption for management action in cor­ ted a determined unwillingness to porate governance situations traditionally and statutorily entrusted to benefits of the proposed merger shareholder control. Thus, it has been argued that defensive measures 11t~trust concerns to support their impede, and are therefore contrary to, the shareholders' fundamental »pot;t a "business judgment" as to right to determine the management structure of their corporation. 126 The division of ownership and management in modern corporations has an independent investigation of manage- constricted the sphere of shareholder action, with the rights to elect1Z7 to demand that counsel independently IUs -for its corporate client. Reliance will and alter managementl%8 being perhaps the last and most fundamental rtise. Is reliance reasonable in a hostile vestiges of shareholder authority. These rights, coupled with the careful study and evaluation. See Cary, statutory authority in many states to call special shareholder meetings, 1z9 Corporation Law: The Murky Divide create an ongoing authority in shareholders to determine corporate O.NSIBILITY OF THE LAWYER 27, 29-30 (N. r-adoption of standards proposed by the management. A tender offer represents an opportunity for a single tantial aspect of the problem by reducing shareholder to acquire sufficient shares to invoke the statutory provisions available for a midstream change in management. Viewed in this at 926 ("Besieged with business reasons perspective, constraints upon shareholder action must be seriously ques­ ~g t~e business purpose test frequently tioned, for there is no compelling basis for preferring a grant of statutory :e conduct."). See also U.S. Smelting v. 11 (N.D. Ohio 1968), in which the court authority to directors over a distinct grant of statutory authority to 150 gement and approved the hasty decision shareholders. 1.t ofthe "exigencies of the situation." I d. And I don't doubt that those points were valid, so I accepted the bulk of what Phil Hawley z. l said as being reasonable ...."). In such circumstances it would be reasonable to expect additional efforts to determine the depth and scope of antitrust concerns and whether existing problems could be readily resolved through divestiture or other means. No effort Ull Field operated stores throughout the in any direction was made. Deposition of Edward McCormick Blair, Sept. 28, 1978 (stating Chicago area, focusing upon one store that he gave no consideration to Carter Hawley's suggestion that its Northbrook store could rt, potential competition with regard to be sold, being satisfied to rest totally on counsel's original opinion). In these circumstances the retail sales of books. Id. at 1180. it is difficult to perceive or accept as valid the "business judgment" that was made. The nion of counsel from the company's law lack of any effort to apply business consideration is understandable in light of, but not t\rena, Marshall Field's president. ld. justified by, the long·standing commitment of management to remain independent, a date of the opinion and Carter Hawley's commitment "expressed so many times that at least two directors ... recall it being stated IS made of the antitrust issues despite the as policy." 486 F. Supp. at 11 77. »pe and therefore potentially resolvable; 125. 41 Del. 494, 199 A.2d 548 (1964); see Israels, Corporate Purchase of its Own willingness to sell the Northbrook store, Shares-Are There New Overtones?, 50 CORNELL L.Q. 620, 624 (1965). rfarshall Field management should have 126. Yoran, Advance Defensive Tactics Against Takeover Bids, 21 AM.]. COMP. L. sed by Carter Hawley, that the FTC had 531, 532 (1973). ling one involving the leading company 127. See DEL. CODE ANN. tit. 8, § 211 (1974). I. Blair, Sept. 29, 1978; and (d) Marshall 128. See id. § 141(k) (Supp. 1978). r's attorneys had opined "that there is no 129. See FLA. STAT. § 607 .084(3) (1977); MODEL BUSINESS CORPORATION ACT § 28 F. Supp. at 1188. The potential merger, (1975). Limiting or denying the ability of shareholders to call special meetings is an addi­ d promise for Marshall Field and tional defensive measure that may be taken by target management. By-law amendments »elieved that advantages were :r-~--··~ were recently adopted by the American Investment Company eliminating such right of ~is some benefit to be accrued by shareholders. Wall St.]., July 28, 1980, at 4, col. 4. 11al people in a bigger organization . . • 130. In Maldonado v. Flynn, 413 A.2d 1251 (Del. Ch. 1980), the court denied the applicability of the business judgment rule as a basis for directors compelling the dismissal 502 66 IOWA LAW REVIEW 475 [1981]

The foregoing conflict of statutory authority is clouded by yet another Yet each of the arguments is deriv~ statutory provision cited for target management intervention, namely ....'''"'Jl5J to explicit statutory proVISll those provisions requiring director consent to statutory merger. 131 Applica­ The merger analogy has su~ tion of the provision is premised on the fact that a successful tender offer for by which to evaluate ~efellSl a controlling interest is essentially equivalent to a merger, particularly or criteria to determme wll when the offer is the first step in an eventual two-step merger process. 132 ... ------A board dissatisfied with the The merger analogy is not for the purpose of requiring a formal director absolute veto power over that vote, but rather to justify director consideration of the merits of the pro­ auAl\IJI'iJ, however, there would be : posed tender offer and to thereafter take actions consistent with their tender offer' a transaction not reql conclusions. This argument has shades of the de facto merger concept, 155 :UJ••n•''",.· . Short of a veto power, the! seeking application of statutory provisions when the effect, but not the pro­ appropriate under a merger. cedure, of the transaction is arguably governed by statutory policy. The shareholder action followt merger analogy for tender offers seeks to justify director response, while the limited to a proxy-type disci? de facto merger doctrine is designed to permit shareholder involvement. with the Williams Act, and u limited management to co~ of a derivative action. The business judgment rule was regarded as a "limitation of competing, independent ~tatutl liability" and "not an independent grant of authority to the directors to dismiss derivative OJ:Ip<>SIItion to, management mv9lv suits." /d. at 1262. Accord, Maher v. Zapata Corp., 490 F. Supp. 348, 351-54 (S.D. Tex. little guidance where the tti11 1980); Abella v. Universal Leaf Tobacco Co., 495 F. Supp. 713, 717 (E.D. Va. 1980). Contra, Genzer v. Cunningham, 498 F. Supp. 682, 688 (E.D. Mich. 1980). The shares, or when the acquiring co1 Maldonado court was influenced by the ability of "an impartial tribunal, and not a com­ ultimate merger. mittee appointed by the alleged wrongdoers," to decide the merits of the particular claims. Business judgment, corporate 413 A.2d at 1263. Relevance of these decisions to the tender offer context is not immedi­ arguments based upon state'coljl ately apparent, but the opinions represent a possible crack in the business judgment rule in instances where conflicting claims of shareholders and management may be readily resolved rounding out the dtverse st.at~tofJ through the judicial process. Unilateral defensive measures by target management may lack of reference in the Willtams thwart a tender offer without shareholder input, despite the fact that a tender offer, like a fueled arguments on both side;; J derivative action, is a matter directed to the decisionmaking by individual shareholders. ,,I effect of the Act upon evaluaua1 Regarding the tender offer as analogous to a collective sale of control, the judgment of argued that the principal purpose tendering shareholders should not be subordinated to a presumption that management's "business judgment" should prevail. To do so without the leavening process of adjudica­ to create a balancing between the': tion would create a burdensome restraint on the alienability of minority shares not pre­ shareholders of the target com.J:>ail sent in transfers by dominant shareholders. It will be interesting to observe whether the situation of having to make unn reasoning in the Maldonado and Maher opinions is expanded to contexts other than derivative actions. 134. A board veto may not be overric 131. See, e.g., DEL. CODE ANN. tit. 8, § 251(b) (1974). exists, of course, that a shareholder rev. 132. Frequently the tender offer seeks only to acquire working control to achieve an 135. Lynch & Steinberg, supra note eventual merger between the acquiring company and target. Thus, it is argued that infra. tender offers should not subvert a major role of management in merger transactions, i.e., 136. See notes 1, 8 supra. bargaining for consideration, a role that results in a more favorable retum to shareholders 137. Support for the argument that t1 than would ensue if acquirors were able to deal with the shareholders on an individual tion is drawn from the remarks of Senal basis. See Harzel, Schmidt & Davis, Why Corporate Directors Have a Right to Resist This measure is not aimed at ol Tender Offers, 61 CHI. B. REC. 152, 153 (1979). This argument gives economic justifica· instances, a change in managem tion to the involvement of directors under a merger equivalency theory. Lipton, supra holder[s] . . . and ... it may be nee: note 93, at 116. I have taken extreme care with tl 133. Transactions not formulated pursuant to statutory merger provisions, yet creating protect ... corporation, managen substantially or identically equivalent results as such mergers, have in some instances been been made to avoid tipping the treated by courts as "de facto mergers" in order to apply statutory merger provisions as to management or in favor of the off« shareholder votes and appraisal procedures. Rath v. Rath Packing Co., 257 Iowa 1277, and fair disclosure for the benefit 1285-86, 136 N.W.2d 410, 415 (1965); Farris v. Glen Alden Corp., 393 Pa. 427, 433-35, viding the offeror· and mangem~ 143 A.2d 25, 29-30 (1958). Contra, Hariton v. Arco Electronics, Inc., 40 Del. Ch. 326, case. 330-32, 182 A.2d 22, 25-26 (1963), affd, 41 Del. Ch. 74, 188 A.2d 123 (1963). 113 CONG. REC. 854-55 (1967). IOWA LAW REVIEW 475 [1981] TENDER OFFERS 503 ry authority is clouded by yet another Yet each of the arguments is derived from functional equivalence and from management intervention, namely analogy to explicit statutory provisions. asent to statutory merger . 151 Applica­ The merger analogy has superficial appeal, but flounders as a stan­ ~fact that a successful tender offer for dard by which to evaluate defensive measures. The analogy offers no quivalent to a merger, particularly guides or criteria to determine what defensive tactics might be appro­ ~entual two-step merger process. uz priate. A board dissatisfied with the proposed terms of a statutory merger irpose of requiring a formal director has absolute veto power over that transaction. 1u Even under a merger nsideration of the merits of the pro­ analogy, however, there would be no role for a formal board veto of the r take actions consistent with their tender offer, a transaction not requiring corporate action for its consum­ es of the de facto merger concept, us mation. Short of a veto power, therefore, what defensive measures would ions when the effect, but not the pro­ be appropriate under a merger analogy? Since mergers are effected y gqverned by statutory policy. The through shareholder action following proxy solicitation, is management's to j~tify director response, while the role limited to a proxy-type disclosure? The latter role would be consis­ to permit shareholder involvement. tent with the Williams Act, and indeed it has been argued that the Act has limited management to communications alone. 135 Thus, again there 1eni: rule was regarded as a "limitation of uthority to the directors to dismiss derivative are competing, independent statutory arguments raised in support of, or in 'Corp., 490 F. Supp. 348, 351·54 (S.D. Tex. opposition to, management involvement. Moreover, the merger analogy 1., 495 F. Supp. 713, 717 (E.D. Va. 1980). offers little guidance where the tender offer is for less than a majority of the ~pp. 682, 688 (E.D. Mich. 1980). The shares, or when the acquiring company has no announced intention of ty of "an impartial tribunal, and not a com­ ultimate merger. , to decide the merits of the particular claims. as to the tender offer context is not immedi­ Business judgment, corporate governance, and merger analogies are ossible crack in the business judgment rule in arguments based upon state corporate codes. At the federal level, and len and management may be readily resolved , rounding out the diverse statutory elements, is the Williams Act. 156 The msive measures by target management may lack of reference in the Williams Act to specific defensive measures has ut, despite the fact that a tender offer, like a decisionmaking by individual shareholders. fueled arguments on both sides of tender offer struggles regarding the li. collective sale of control, the judgment of effect of the Act upon evaluation of such measures. For example, it is ut@ted to a presumption that management's argued that the principal purpose of the Act, citing legislative history, 157 is D without the leavening process of adjudica- to create a balancing between the target company and the acquiror so that L the alienability of minority shares not pre­ shareholders of the target company are not met with the pre-Williams Act It will be interesting to observe whether the >inions is expanded to contexts other than situation of having to make immediate decisions based upon relatively

!5l(b) (1974). 134. A board veto may not be overridden by shareholder vote. The remote possibility ly to acquire working control to achieve an exists, of course, that a shareholder revolt will remove and replace the board. npany and target. Thus, it is argued that 135. Lynch & Steinberg, supra note 74, at 933·38; see text accompanying note 139 of management in merger transactions, i.e., Its in a more favorable return to shareholders See notes 1, 8 supra. deal with the shareholders on an individual Support for the argument that the Williams Act limits target management discre· ':Of'ptrrate Directors Have a Right to Resist tion is drawn from the remarks of Senator Harrison Williams, sponsor of the legislation: 79). This argument gives economic justifica­ This measure is not aimed at obstructing legitimate takeover bids. In some l merger equivalency theory. Lipton, supra instances, a change in management will prove a welcome boon for share· holder[s] ... and ... it may be necessary ifthe company is to survive. Lt to statutory merger provisions, yet creating I have taken extreme care with this legislation to balance the scales equally to as such mergers, have in some instances been protect ... corporation, management, and shareholders .... Every effort has ler to apply statutory merger provisions as to been made to avoid tipping the balance of regulatory burden in favor of Rath v. Rath Packing Co., 257 Iowa 1277, management or in favor of the offeror. The purpose of this bill is to require full and fair disclosure for the benefit of stockholders while at the same time pro· 1 v. Glen Alden Corp., 393 Pa. 427, 433-35, ,v. Arco Electronics, Inc., 40 Del. Ch. 326, viding the offeror, and mangement equal opportunity to fairly present their Del. Ch. 74, 188 A.2d 123 (1963). case. 113 CONG, REC, 854·55 (1967). ·TENDER OFFERS 504 66 IOWA LAW REVIEW 475 The jurisdictional problem .._· little information. 138 The balancing is achieved through disclosure possibility that a private cause mechanisms and minimum time frames, one purpose of the minimum ~i Williams Act. Shareholders concel' time frames being to permit target management, should they so desire, basis to challenge defensive measu to provide shareholders with additional information, recoi?mendati~ns, on broader aspects of fraud or and arguments respecting the merits of the offer. From this perspective, Supreme Court in Piper v. Chris-! the permissible activity of target management is fairly limited, and is opinion to denying standing to te designed primarily to provide information to shareholders so that they target corporations, 144 but recen~ ~ may make an intelligent decision about whether to tender their shares. causes of action in other sec~t Any other management action that interferes with the shareholder deci­ whether an implied right for pnv sionmaking process creates a disturbance in the balance of the Williams aggrieved shareholders will in fac Act and, it is argued, is impermissible conduct under that Act. 139 . As the foregoing discussion b Equally plausible, however, is the argument that the disclosure · tains elements that both justify ant mechanisms and various time frames provided for in the Act are not incon­ by target management. While not sistent with, but rather support, aggressive defensive measures by target of fiduciary concepts, the statu~o~ management designed to impede the takeover effort. From this perspec­ emphases placed upon altemauvc tive, the Williams Act provides restraints upon the acquiring company to a much greater degree than might be imposed upon target management. and arbitrageurs in light of the pendidg It Seen primarily as a protective measure against acquiring companies, the strain logic under these circumstances tCJ II I! Williams Act is thus viewed as neutral to the taking of defensive sions of the Williams Act should not be i II measures. The neutrality of the Act is silent support for defensive tactics, Act in this regard are in marked co~trilll as Congress arguably chose to regulate only disclosure aspects and not other cases seeking to define the nouon ~ 7 F. Supp. 783, 823-24 (S.D.N.Y. 191 other defensive activities of target management. 4 5 142. See Royal Indus., Inc. v. MonOJ These alternative arguments mask a more serious weakness within the FED. SEC. L. REP. (CCH) , 95,863, at Williams Act context: the Act's provisions are not triggered unless and until supra. there is a tender offer or a public announcement of an intended offer. 140 143. 430 u.s. 1 (1977). ~ 144. ld. at 47. Where scorched earth tactics prevent a proposed offer from reaching frui­ 145. Transamerica Mort. Advisors, tion-as is generally their intent-there may be substantial doubt whether private right of action for ~amages un& the threshold jurisdictional elements of the Williams Act have been Touche Ross & Co. v. Redmgton, 442 t satisfied. Shareholders of McGraw-Hill, Gerber Products, and Marshall under§ 17(a) of the Securities Exc~ Field were all met with narrow judicial approaches that denied Williams Chicago, 441 U.S. 677, 688 (1979). 141 146. See generally Phillips & Nichob Act claims. Gateway Indus., Inc. v. Agen~y Rent-1 private right of action was specdicilly d 138. Note, Target Management and Tender Offers: Proposals for Structuring the FiduciaryRelationshzp, 15 HARV.J. LEGIS. 761,768 (1978). other securities contexts. I d. at 101. Ac REP. (CCH), 97,613 (E.D. Wis. 1980). 139. Lynch & Steinberg, supra note 74, at 973. 1216, 1224 (4th Cir. 1980); Kirsch _CCJ 140. S-G Securities, Inc. v. Fuqua Inv. Co., 466 F. Supp. lll4, ll25-26 (D. Mass. (CCH), 97,580, at 98,071 Mtch 1978). (W.~. 141. Lewis v. McGraw, 619 F.2d 192, 195 (2d Cir. 1980), cert. denied, 49 U.S.L.W. 147. A suggestion that combmes sta1 3332 (Nov. 3, 1980) (No. 79-2054); Panter v. Marshall Field & Co., 486 F. Supp. 1168, business judgment presumption to c 1190 (N.D. Ill. 1980); Berman v. Gerber Prods. Co., 454 F. Supp. 1310, 1318 (W.O. Mich. presumably higher, "fairness" standal 1978). It may be questioned whether these decisions, which effectively deny Williams Act . board. Gelfond & Sebastion, Reevalvat application where defensive measures have successfully impeded a tender offer, do not take Tender Offer, 60 B.U. L. REv. 403, premise that "outside" directors are 1 too narrow a view of the remedial purposes of the Act. In Panter, for example, where the court held that the Act did not apply because Carter Hawley's proposed tender offer had insiders, a premise that may well be qUI not commenced or been announced in a sufficiently unconditional manner, 485 F. Supp. Restructuring the Corporate Board of. at 1190-91, the effect upon the market of Carter Hawley's announced intentions was L. REV. 581, 590 (1978). Moreover, use substantially similar to what the market reaction would have been if the offer had been · battles is problematic. The authors notl tion of their article that "this standar unconditionally commenced. A flurry of trading activity increased the price of Marshall Field stock over 30%, and investor decisions were being made by numerous shareholders· both the realities of corporate control c "OWA LAW REVIEW 475 TENDER OFFERS 505 r is achieved through disclosure The jurisdictional problem, however, pales in comparison to the 11es, one purpose of the minimum ·· possibility that a private cause of action has not been created by the .anagement, should they so desire, Williams Act. Shareholders conceivably will be without any Williams Act al information, recommendations, basis to challenge defensive measures, either on grounds of disclosure or ,f the offer. From this perspective, on broader aspects of fraud or denial of "fair opportunity."142 The llagement is fairly limited, and is Supreme Court in Piper v. Chris-Craft Industn:es 143 carefully limited its ation to shareholders so that they opinion to denying standing to tender offerors suing for damages from ut whether to tender their shares. target corporations, 144 but recent denials by the Court of implied private terferes with the shareholder deci- .. causes of action in other securities law contexts145 raise doubt about 11ce in the balance of the Williams whether an implied right for private actions under the Williams Act by e conduct under that Act. 159 aggrieved shareholders will in fact be upheld. 146 he prgument that the disclosure As the foregoing discussion indicates, the statutory perspective con­ -ovided for in the Act are not incon- tains elements that both justify and challenge unilateral defensive actions ssive defensive measures by _ by target management. While not suffering from the inherent ambiguities akeover effort. From this perspec-' of fiduciary concepts, the statutory approach fails because of conflicting ts upon the acquiring company to a emphases placed upon alternative statutory provisions. w Here too, the nposed upon target management. ·against acquiring companies, the and arbitrageurs in light of the pending tender offer struggle. Id. at 1182-84. It seems to strain logic under these circumstances to suggest that the disclosure and antifraud provi­ .Ual to the taking of defensive sions of the Williams Act should not be applicable. The narrow readings of the Williams ;ilent support for defensive tactics, Act in this regard are in marked contrast to the more expansive interpretations found in e only disclosure aspects and not other cases seeking to define the notion of tender offer. See, e.g., Wellman v. Dickinson, 11agement. 475 F. Supp. 783, 823-24 (S.D.N.Y. 1979). 142. See Royal Indus., Inc. v. Monogram Indus., Inc., [1976-1977 Transfer Binder] am6re serious weakness within the FEn. SEC. L. REP. (CCH) , 95,863, at 91,136 (C.D. Cal. 1976), discussed at note 57 llS are not triggered unless and until supra. uncement of an intended offer. 14' 143. 430 u.s. 1 (1977). proposed offer from reaching frui­ 144. Id. at47. ~ay be substantial doubt whether 145. Transamerica Mort. Advisors, Inc. v. Lewis, 444 U.S. 11, 19-24 (1979) (no private right of action for damages under§ 206 of the Investment Advisors Act of 1940); of the Williams Act have been Touche Ross & Co. v. Redington, 442 U.S. 560, 569-71 (1979) (no private right of action L Ge~ber Products, and Marshall under§ 17(a) of the Securities Exchange Act of 1934). See also Cannon v. University of approaches that denied Williams Chicago, 441 U.S. 677, 688 (1979). 146. See generally Phillips & Nicholson, Chris-Craft, 10 REv. SEC. REG. 891 (1977). In Gateway Indus., Inc. v. Agency Rent-A-Car, Inc., 495 F. Supp. 92 (N.D. Ill. 1980), a " Offers: Proposals for Structunng the private right of action was specifically denied on the basis of Supreme Court precedent in • 768 (1978). other securities contexts. Id. at 101. Accord, Sta-Rite, Inc. v. Nortek, Inc., FED. SEC. L. 73. REP. (CCH), 97,613 (E.D. Wis. 1980). Contra, Dan River, Inc. v. Unitex Ltd., 624 F.2d .- 466 F. Supp. 1114, 1125-26 (D. Mass. 1216, 1224 (4th Cir. 1980); Kirsch Co. v. Bliss & Laughlin Indus., FED. SEC. L. REP. (CCH), 97,580, at 98,071 (W.O. Mich. 1980). !d Cir. 1980), cert. denied, 49 U.S.L.W. 147. A suggestion that combines statutory and fiduciary perspectives would apply the brshall Field & Co., 486 F. Supp. 1168, business judgment presumption to decisions made by "outside" directors, and a ::0., 454 F. Supp. 1310, 1318 (W.O. Mich. presumably higher, "fairness" standard to decisions made by an insider-dominated ions, which effectively deny Williams Act board. Gelfond & Sebastian, Reevaluating the Duties of Target Management 1n a Hostile IISfully impeded a tender offer, do not take Tender Offer, 60 B.U. L. REv. 403, 447 (1980). The dual approach is based on the 1e Act. In Panter, for example, where the premise that "outside" directors are more likely to reach an objective decision than arter Hawley's proposed tender offer had insiders, a premise that may well be questionable even in a control context. See Solomon, ntly unconditional manner, 485 F. Supp. Restructuring the Corporate Board of Directors: Fond Hope-Faint Promise.P, 76 MICH. rtevHawley's announced intentions was L. REv. 581, 590 (1978). Moreover, use of the business judgment standard in tender offer n ~ould have been if the offer had been battles is problematic. The authors noted as much when they concluded in an earlier por­ ~ ac_tivity increased the price of Marshall tion of their article that "this standard of culpability [business judgment rule] ignores re being made by numerous shareholders both the realities of corporate control contests and the balances adopted in related areas 506 66 IOWA LAW REVIEW 475 TENDER OFFERS I difficulty of developing a standard for evaluating defensive measures lies , vene in the tender offer ptocc not in the illegitimacy of any particular argument, but rather in the social and economic conseqll diversity that exists within the framework of the evaluative effort. movement are matters of 51 management should be entru 3. Economic Interests Congress should establish a 1 offer efforts. 151 Such persped If fiduciary concepts and statutory constructs are unable to provide any notion of a substantial s firm guidance to evaluate defensive measures, perhaps economic theory cess.1s2 can fill the void. The economic approach views the several actors in a A related economic a~ tender offer battle from the perspective of economic interests that each ment is most capable of detc of those actors is seeking or is charged with protecting. offering sufficient value for t1 Arguments favoring active target management intervention stress that be at substantial premiums corporate directors are much more qualified than shareholders to make "inherent values" of the s judgments affecting the corporation's long-term economic viability. Direc­ market-may be higher yet.• tors are regarded as possessing greater ability and objectivity to consider means of improving ~he 01 the long-range concerns raised by a tender offer, including the interests of ~ompromise on share value II employees, suppliers, and other groups that may be materially affected. 150. One commentator stated: Ill Shareholders, on the other hand, are seen as having a narrower interest, namely, their particular investment in the target's stock. This limited Rather than forcing directors t~ ill shareholders, national policy re ~ll perspective inevitably compels shareholders, it is argued, to favor :11 interests of the shareholders anci immediate, favorable, short-term returns, and to disregard long-term its constituencies in addition to consequences to the corporation, nontendering shareholders, and other Lipton, supra note 93, at ll5. interests. 148 This argument is buttressed by the frequent presence of arbi­ 151. Liman, Has the Tender Men trageurs and other speculators, who often compose a significant percent· 706-07 (1978). age of shareholders during a tender offer fight and whose interests are 152. A more fundamental posi~ the broad disparity between "own«! undeniably short-term. m Some commentators, so taken by the perceived analyzed as early as 1932 by A. BEl dichotomy between management's high road and shareholders' low road, PRIVATE PROPERTY 220-32 (1932). lJ regard it as a matter of "national policy" that directors be allowed to inter- cate, centralized, economic-adminia hire capital from the investor," ~Ill of corporate law." Gelfond & Sebastian, supra, at 434. Finally, the suggested approach 67 YALE L.J. 1477, 1489 (1958), an; assumes ready application to specific defensive measures. Inherent ambiguities within tenn economic decisions would be 1 business judgment and fairness standards, however, provipe little guidance to judge the than that of lenders or long-term creel validity of actual measures. to cause a change in corporate tontJ 148. Steinbrink, Management's Response to the Takeover Attempt, 28 CASE W. R.Fs. the disparity of ownership and contr L. REv. 882, 891 (1978). Regarding the shareholder's interest in a corporation as a movement to restrict shareholder sui monetary one limited solely to the value of his stock leads to the argument that the social recent trend has been opposite, witnc and broad economic repercussions of a shift in control is too important a decision to leave porate democracy" and ~tate ~tatul to shareholders motivated solely by personal concerns. Lipton, supra note 93, at 113-16. directors without cause. The attitude Although shareholders interested primarily in long-term, low-risk growth may constitute is that shareholder ability to remove a block favoring defensive measures, it may reasonably be presumed that in most hostile cised, remains a positive check upon 1 tender offer situations the pro-management block represents an insubstantial minority. for example, having recognized the ii Indeed a major factor in considering the prospects of a tender offer is the dispersal of· fu1 arguments can be advanced tCl shares of the target company and management's lack of control of sizeable blocks. E. reallocating frozen assets." /d. at 141 ARANOW & H. EINHORN, TENDER OFFERS FOR CORPORATE CONTROL 6 (1973). without shareholder cooperation. 149. The role of arbitrageurs in tender offers is discussed in O'Boyle, Changing Tactics 153. Long, Director Fiduciaria: in Tender Offers, 25 Bus. LAW. 863, 865 (1970), and Rubin, Arbitrage, 32 Bus. LAW .. AcQ.UISITIONS, Winter 1980, at 5. 1315, 1315 (1977). Because arbitrageurs may constitute a pressure group upon manage· 154. Harzel, Schmidt & Davis, I ment to accept or at least not impede the tender offer from going forward, it is important Tender Offers, 61 CHI. B. REc. 15l from a tactical standpoint that target management act with sufficient speed and force to infra (regarding defensive measu discourage substantial arbitrage activity. inadequacy). WA LAW REVIEW 475 TENDER OFFERS 507

~aluating defensive measures lies vene in the tender offer process. 150 Indeed, it has been suggested that the lar argument, but rather in the social and economic consequences of a relatively unbridled tender offer trk of the evaluative effort. movement are matters of such moment that neither shareholders nor management should be entrusted with major economic decisions, but that lnt~rests Congress should establish a more pointed public policy limiting tender offer efforts. 151 Such perspectives are of course completely antithetical to constructs are unable to provide any notion of a substantial shareholder role in the decisionmaking pro­ asures, perhaps economic theory cess.t52 lch views the several actors in a : of economic interests that each A related economic argument favoring management is that manage­ with protecting. ment is most capable of determining whether the acquiring company is offering sufficient value for the target shares. Although tender offers may magement intervention stress that · be at substantial premiums over market price, it is argued that the lifield than shareholders to make "inherent values" of the shares-presumably not reflected on the .g-term economic viability. Direc­ market-may be higher yet. 153 Defensive measures are thus justified as a );»ility and objectivity to consider means of improving the offering price, assuming a willingness to ~r 6ffer, including the interests of ~ompromise on share value by acquiring and target managements. 15• that may be materially affected. ~ as having a narrower interest, 150. One commentator stated: the target's stock. This limited Rather than forcing directors to consider only the short-term interests of certain &lders, it is argued, to favor shareholders, national policy requires that directors also consider the long-term ns, and to disregard long-term interests of the shareholders and the company as a business enterprise with all of 1dering shareholders, and other its constituencies in addition to the short-term institutional shareholders. Lipton, supra note 93, at 115. 'I ~y the frequent presence of arbi- 151. Liman, Has the Tender Movement Gone Too Far?, 23 N.Y. L ScH. L REV. 687, 'H D. compose a significant percent­ 706-07 (1978). .m er fight. and whose interests are 152. A more fundamental position endorsing management priority may be based on ·~ the broad disparity between "ownership" and "control" of a corporation, thoroughly tators, so taken by the perceived .·~ 'Oad and shareholders' low road, analyzed as early as 1932 by A. BERLE & G. MEANS, THE MODERN CORPORATION AND PRIVATE PROPERTY 220-32 (1932). If in fact corporations may be best viewed "as an intri­ h~ directors be allowed to inter- cate, centralized, economic-administrative structure run by professional managers who hire capital from the investor," Manning, Book Review, THE AMERICAN STOCKHOLDER, 1~ 434. Finally, the suggested approach 67 YALE LJ 1477, 1489 (1958), any shareholder-investor role in control or other long­ measures. Inherent ambiguities within term economic decisions would be anomalous. The investor role would be no different er, provip.e little guidance to judge the than that oflenders or long-term creditors, neither of which groups are regarded as entitled to cause a change in corporate control. The argument would be stronger, however, had 41 Takeover Attempt, 28 CASE W. REs. the disparity of ownership and control resulted during the past 50 years in any statutory tolder's interest in a corporation as a movement to restrict shareholder suffrage or the ability to remove directors. In fact the dt leads to the argument that the social recent trend has been opposite, witness the increased SEC emphasis upon notions of "cor­ ttrol is too important a decision to leave porate democracy" and ~tate statutory provisions permitting shareholder removal of ems. Lipton, supra note 93, at 113-16. directors without cause. The attitude inherent within the continuing role for shareholders g-term, low-risk growth may constitute is that shareholder ability to remove management, however limited or infrequently exer­ 11ably be presumed that in most hostile cised, remains a positive check upon management excesses and abuse of power. Manning, (represents an insubstantial minority. for example, having recognized the investor role of shareholders, also noted that "power­ :ts of a tender offer is the dispersal of ful arguments can be advanced to justify the corporate 'raid' as a mechanism for lack of control of sizeable blocks. E. reallocating frozen assets." Id. at 1488-89. No "raid" could be effectively accomplished IRPORATE CONTROL 6 (1973). without shareholder cooperation. iliscussed in O'Boyle, Changing Tactics 153. Long, Director Fiducian'es: Protecting Shareholder Interest, 14 MERGERS & and Rubin, Arbitrage, 32 Bus. LAW. ACQUISITIONS, Winter 1980, at 5. ltit~e a pressure group upon manage­ 154. Harzel, Schmidt & Davis, Why Corporate ·Directors Have a Right to Resist 'fet from going forward, it is important Tender Offers, 61 CHI. B. REc. 152, 154 (1979); see text accompanying notes 242-45 t act with sufficient speed and force to infra (regarding defensive measures assertedly undertaken by reason of price inadequacy). 508 66 IOWA LAW REVIEW 475 [1981] TENDER OFFERS

Accordingly it has been argued that the proper test for judging defensive they hinder the ability of sha~hc actions is "whether the defensive action is reasonably calculated to benefit and preclude obtaining the grei shareholders in a market sense, that is, higher values for their securities." 155 Although each of the ~ This argument suffers from an inability to distinguish good faith efforts elements of legitimacy, there 1l to determine "inherent value" from the employment of a price inade­ economic perspective over anot quacy concern as a smokescreen for management's feared loss of control. Despite the economists' delight i Determining the bona fides of management's position is made con­ of evidence in the tender ofl siderably more difficult by the subjective nature of "inherent value." economic theory. 160 Dispositive Opinions of investment counsel often vary widely, particularly in the soft economic perspective could sea areas of long-term forecasting, effects of synergism, and long-range speculative nature of judgmentS economic conditions. 156 takeover, and the vicissitudes of A contrasting argument would suggest that it is ironic for manage­ ing a successful defense to a tei ment to be posing as the protector of shareholder returns, for the pre­ sumably undervalued market price may be a reflection of the market's collective judgment of the inefficiency of current management. 157 Acquiring companies are prepared to pay substantial premiums for A. Sale~ target shares presumably because they foresee an ability to create a more The inability of courts an\i · It productive use of assets than exists under target management. Hostile evaluate defensive measures is d tender offers thus serve a useful economic purpose in upgrading, or at fiduciary concepts, the diversit) ••15 158 I[ least serving as a prod to improve, management performance. For this able and the conflicting perspeo reason it has been suggested that management's veto role-even in due 'to the use of defensive,mea statutory mergers-is inimical to assuring that "corporations are control­ ment alien to traditional modes 159 led by those who can use that control most productively." Defensive concepts as fiduciary duty and measures are thus regarded as contrary to economic efficiency because tender offers involving mult 155. Bromberg, Tender Offers: Safeguards and Restraints-An Interest Analysis, 21 disparate shareholders, and ~ CASE W. REs. L. REV. 613, 655 (1970). See also Note, Corporate Directors' Liability for costly array of counsel, investn: ··' Resisting a Tender Offer: Proposed Substantive and Procedural Modifications ofExisting are a relatively recent phenon State Fiduciary Standards, 32 VAND. L. REv. 575, 603 (1979). distinct lexicon, including deli@ 156. During the course of the American Express tender offer effort, McGraw·Hiii hugs," "sleeping beauties,'' .: chairman Harold McGraw was reported to state: "Who says we have an obligation to sell knights," but from ~n evaluau this company: I never saw times better for (McGraw-Hill)." Wall St. J., Apr. 25, 1979, at 31, col. 3. If such better times were so evident, it may be questioned why the market price complexity of defensive measui, of McGraw-Hill was not higher and why the market price following the withdrawal by process. American Express dropped back to close to its preoffer position. Unless we are to give lit· Rather than attempt to tie if any credence to the efficient capital market hypothesis, it may be questioned whether Chairman McGraw was basing his comment on information not adequately 160. Lipton suggests that managem disclosed to the public investors. even when the tender offer is defeated, 157. See R. POSNER, ECONOMIC ANALYSIS OF LAW § 12.5 (1972); Fischel, Efficient post-tender offer market price was ne: Capital Market Theory, the Market for Corporate Control, and the Regulation of Cash ton, supra note 93, at 107. Lipton c 57 TEX. L. REV. 1, 5 (1978). Tender Offers, rejected and defeated by target m 158. The economic value of the tender offer phenomenon was noted by the court in shareholders of more than 50 ~reel Dart Indus. Inc. v. Conrad, 462 F. Supp. I, 8 (S.D. Ind. 1978) ("A tender offer plays an defeated tender offer had succeeded." important role in the health of the national economy in that it serves as a device which from the substantial lapse of time-se helps to maintain accountability of corporate management to its shareholders."). Similarly and current illustrative prices, as well the Senate Report on the Williams Act noted that "takeover bids should not be discouraged refute, that shareholders who reinv~ because they serve a useful purpose of providing a check on entrenched but inefficient (had the offers been successful) woulc management." S. REP. No. 550, 90th Cong., 1st Sess. 3 (1967). current market price of target compa 159. R. POSNER, ECONOMIC ANAYLSIS OF LAW§ 12.5, at 183 (1972).

··'I IOWA LAW REVIEW 475 [1981] TENDER OFFERS 509 t the proper test for judging defensive they hinder the ability of shareholders to remove inefficient management ion is reasonably calculated to benefit and preclude obtaining the greatest return on shareholder investment. higher values for their securities." 155 is, Although each of the economically oriented arguments contain )ility to distinguish good faith efforts elements of legitimacy, there is no apparent basis for embracing one n the employment of a price inade­ economic perspective over another for evaluating defensive measures. management's feared loss of control. Despite the economists' delight in empirical evidence, there is a paucity 1anagement's position is made con- of evidence in the tender offer context to support any particular bjective nature of "inherent value." economic theory. 160 Dispositive data as to the desirability of any one n vary widely, particularly in the soft economic perspective could scarely be expected given the unavoidably .Iects of synergism, and long-range speculative nature of judgments regarding the desirability of a particular takeover, and the vicissitudes of economic and market conditions follow­ l suggest that it is ironic for manage­ ing a successful defense to a tender offer . . of shareholder returns, for the pre- may be a reflection of the market's PART II lciency of current management. 157 ~ to pay substantial premiums for A. Sale of Control Analogue r.ey foresee an ability to create a more 1 under target management. Hostile The inability of courts and commentators to concur on a standard to gnomic purpose in upgrading, or at evaluate defensive measures is due in part to the inherent ambiguities of nanagement performance. 158 For this fiduciary concepts, the diversity of statutory provisions arguably applic­ t management's veto role-even in able, and the conflicting perspectives within economic arguments. It is also ;uring that "corporations are control­ due to the use of defensive measures in an aggressive, explosive environ­ trol most productively. " 159 Defensive ment alien to traditional modes of corporate conduct out of which such trary to economic efficiency because concepts as fiduciary duty and business judgment have evolved. Hostile tender offers involving multinational corporations, thousands of rds and Restraints-An Interest Analysis, 21 disparate shareholders, and scorched earth defensive tactics employing a ·-also Note, Corporate Directors' Liability for costly array of counsel, investment bankers, accountants, and publicists t4e and Procedural Modifications of Existing V. 575, 603 (1979). are a relatively recent phenomenon. The phenomenon has created a n Express tender offer effort, McGraw-Hill. 'distinct lexicon, including delightfully descriptive phrases such as "bear !late: "Who says we have an obligation to sell " "sleeping beauties," "Saturday night specials," and "white McGraw-Hill)." Wall St. J., Apr. 25, 1979, af auu~m:;," but from an evaluative standpoint the ingenuity, speed, and 1t, it may be questioned why the market price­ iCOmplexity of defensive measures have outrun the slower-paced judicial le market price following the withdrawal by its preoffer position. Unless we are to give lit­ Ll market hypothesis, it may be questioned_t than attempt to squeeze tender offers and defensive is comment on information not 160. Lipton suggests that management actions often do not impair shareholder return liS OF LAW § 12.5 (1972); Fischel, Effir•.__,. ·even when the tender offer is defeated, and offers a table of several illustrations where the rporate Control, and the Regulation of oost·tender offer market price was near or higher than the defeated offering price. Lip· ~- supra note 93, at 107. Lipton concluded that of the 36 unsolicited tender offers ){fer phenomenon was noted by the court and defeated by target management between 1976 and June 1979, "the , 8 (S.D. Ind. 1978) ("A tender offer plays fthareholders of more than 50 percent of the targets are better off today than if the I economy in that it serves as a device l:clefeated tender offer had succeeded." I d. The difficulty with such evaluation arises both :management to its shareholders."). Similarlj the substantial lapse of time-several years in most cases-between the tender offer that-"takeover bids should not be discoura~ current illustrative prices, as well as an implied assumption, impossible to confirm or liding a check on entrenched but inefficien that shareholders who reinvested their proceeds received from the tender offers ' 1st Sess. 3 (1967). the offers been successful) would not have an accumulated return greater than the 'LAW§ 12.5, at 183 (1972). market price of target company shares. 510 66 IOWA LAW REVIEW 475 TENDER OFFERS

measures into traditional modes created in differing contexts, it may be by tendering shareholders to the san more appropriate to examine the validity of defensive measures within of such transfers may be identical. I the framework of the underlying transaction. Such analysis takes as its the motivation of minority sharell starting point the nature and purpose of the tender offer. Fundamen­ monetary considerations alone, w! tally, a tender offer is equivalent to a private transaction in which a shareholder may be equally susceF potential purchaser offers terms and conditions governing the purchase reproach except in limited eire~ for acceptance or rejection by the potential seller. What transforms the tender offers permit removal o~ ~ private, relatively unregulated one-on-one transaction161 into a tender action of tendering shareholders 1S 1l offer subject to Williams Act provisions and to a host of adverse target vides a far more efficient means of 64 management reactions is the extension of the offer to all shareholders with system.I • the consequent potentiality of a shift in control in the target company .162 Regarding the tender offer a Shifts in control occur, of course, in private transactions. Such suggests that defensive measures t private transactions between a single or small group of control shareholders of control transactions. The dual and a third party usually meet with no management opposition, manage- individual and collective transfer . ment generaliy being synonymous with control shareholders. It is appro­ applicable to the dominant shar«:! priate, indeed it may even be logically mandated, to question why a single, the tender offer context. Altemat controlling shareholder may sell his shares in a relatively unburdened trans­ sive tactics by management pl~e action, while fractionalized, minority shareholders cannot do so collec­ able disadvantage compared td .t tively without overcoming substantial and costly impediments created by shareholders? It is submitted that an unhappy target management. restricted only to the extent of val Corporate control may be transferred in several manners. A statutory ual counterpart, a conclusion st merger involves director approval because the merger may substantially of the tender offer. The app1icati alter the capital structure and identity of the merged corporation. A sale of vidual and collective transfers of a controlling block of shares, however, creates no change in corporate the sale of control analogue. Th structure, identity, or legal relationships. Thus, no state corporate code defensive measures by target rna provides for director approval as a condition precedent to a shareholder's that they are consistent with 1imi1 sale of controlling interest. If the transfer of shares by a single, dominant control and to the degree they do shareholder is an individual judgment to pass corporate control to the pur­ minority shareholders to make a c chaser, the transfer of shares through a tender offer is a collective judgment individual sale may be transacte

161. Certain judicial and statutory standards apply to all sales of securities by insiders 163. See text accompanying notes 1~ or others possessing material information and under a duty to disclose or abstain from [I]n very few instances is an obliga! trading, e.g., rule 10b-5. Common-law restraints have developed on the sale of shares by poration at the expe~ of the IDa] controlling shareholders, e.g., Perlman v. Feldman, 219 F.2d 173, 178 (2d Cir.), cert. example, it is seldom If ever held denied, 349 U.S. 952 (1955), and Brown v. Halbert, 271 Cal. App. 2d 252, 272, 76 Cal. control shares (other than to a loot Rptr. 781, 793-94 (1969), and other judicially created standards have developed with sion of corporate advantage). respect to potentially fraudulent conduct, e.g., Diamond v. Oreamuno, 24 N.Y.2d 494, Kaplan, Fiduciary Responsibility in th 498-501, 248 N.E.2d 910, 912-14 (1969). Despite the imposing list of potential pitfalls, 88!1, 888 (1976) (footnotes omitted). the overwhelming bulk of daily transactions occur between traders for whom such restric­ 164. Brudney and Chirelstein cOJDI tions have no applicability. Realistically, the tender-plus-mel'J 162. It was the spector of unregulated shifts in control, rather than broad-based offers target company's proxy machin to shareholders at large, that appears to have been the primary purpose of the Williams board, and submitting the acq'll Act. See Smallwood v. Pearl Brewing Co., 489 F.2d 579, 599 (5th Cir.), cert. denied, 419 stockholders. Those who accept t U.S. 873 (1974). The court stated that aye-voters, those who do not, as a corporation does not become a tender offeror simply by proposing a paper Brudney & Chirelstein, A Restatemen exchange of securities. There must be contemplated some change in control. If (1978). See also R. POSNER, ECONOM actual control does not shift, it is difficult to see why the shareholder needs the 165. A significant difference bet protection of Section 14(e). shareholder and sale by individual stc /d. latter situation, management acts as 2

,,J fOWA LAW REVIEW 475 TENDER OFFERS 511 ~in differing contexts, it may be by tendering shareholders to the same effect. The motivation behind each ~dity of defensive measures within of such transfers may be identical. It therefore makes little sense to attack uaction. Such analysis takes as its the motivation of minority shareholders as being based upon selfish, 1e of the tender offer. Fundamen- monetary considerations alone, when the motivation of a controlling a private transaction in which a shareholder may be equally susceptible to such challenge but is beyond conditions governing the purchase reproach except in limited circumstances. 165 Moreover, to the extent that tential seller. What transforms the tender offers permit removal of inefficient management, the collective l-one transaction 161 into a tender action of tendering shareholders is in effect a vote of no confidence and pro­ os and to a host of adverse target vides a far more efficient means of changing management than the proxy of the offer to all shareholders with system.l&4 1 control in the target company. 1&Z Regarding the tender offer as effecting a collective sale of control 1e, in private transactions. Such suggests that defensive measures be judged by standards relevant to sale mall group of control shareholders of control transactions. The dual identity of purpose and effect between management opposition, manage­ individual and collective transfers causes inquiry into what limitations ~ontrol shareholders. It is appro­ applicable to the dominant shareholder are appropriately applicable in .andated, to question why a single, the tender offer context. Alternatively, to what extent do specific defen­ ~in a relatively unburdened trans­ sive tactics by management place minority shareholders at an unreason­ lhareholders cannot do so collec­ able disadvantage compared to the transferability rights of controlling ~d costly impediments created by shareholders? It is submitted that the collective sale of control should be restricted only to the extent of validly imposed restraints upon its individ­ ed in several manners. A statutory ual counterpart, a conclusion stemming from the transactional nature use the merger may substantially of the tender offer. The application of consistent standards to both indi­ I ·the Iperged corporation. A sale of vidual and collective transfers of control is referred to in this Article as · creat~ no change in corporate l the sale of control analogue. The premise of analogous treatment is that j 111. Thus, no state corporate code defensive measures by target management are appropriate to the extent ltion precedent to a shareholder's that they are consistent with limitations imposed upon private transfers of l ir.. pf shares by a single, dominant control and to the degree they do not reasonably impair the opportunity of pbs corporate control to the pur­ minority shareholders to make a collective sale of control as effectively as an nder offer is a collective judgment individual sale may be transacted. 165 apply to all sales of securities by insiders nder a duty to disclose or abstain from 163. See text accompanying notes 171-80 infra. Kaplan states: have developed on the sale of shares by [I)n very few instances is an obligation to act primarily for the benefit of the cor­ 1an, 219 F.2d 173, 178 (2d Cir.), cert. poration at the expense of the majority shareholder's own interest imposed. For ert, 271 Cal. App. 2d 252, 272, 76 Cal. example, it is seldom if ever held that ... he shall be restricted in selling his :reated standards have developed with control shares (other than to a looter or at a premium which constitutes a diver­ l:iamond v. Oreamuno, 24 N. Y.2d 494, sion of corporate advantage). ~ the imposing list of potential pitfalls, Kaplan, Fiduciary Responsibility in the Management of the Corporation, 31 Bus. LAW. between traders for whom such restric· 883, 888 (1976) (footnotes omitted). 164. Brudney and Chirelstein comment: oontrol, rather than broad-based offers Realistically, the tender-plus-merger procedure is merely a way of bypassing the n the primary purpose of the Williams target company's proxy machinery, which is controlled by the incumbent d 579, 599 (5th Cir.), cert. denied, 419 board, and submitting the acquisition proposal to direct referendum of the stockholders. Those who accept the tender offer are properly to be regarded as ~Nimply by proposing a paper aye-voters, those who do not, as nay- or non-voters. 1plated some change in control. If Brudney & Chirelstein, A Restatement of Corporate Freezeouts, 87 YALE L.J. 1354, 1360 lee1 why the shareholder needs the (1978). See also R. POSNER, ECONOMIC ANALYSIS OF LAW§ 12.5 (1972). 165. A significant difference between the sale of control by a single dominant shareholder and sale by individual stockholders in the tender offer context is that, in the latter situation, management acts as a surrogate for negotiating or affecting some matters 512 66 IOWA LAW REVIEW 475

The sale of control analogue is, it is submitted, the most appropriate desire to assure are protect:~ standard for judging defensive measures. It does not seek to impose stan­ dominant shareholder also l dards developed from such historically differing contexts as the fiduciary determine whether the tra'DSfe and statutory perspectives. More importantly, it treats the tender offer in constituents. In the tende its essential characteristic-an offer to purchase directed to each greater leverage over minor shareholder in his individual capacity. 166 The analogue focuses on alien­ , number of shares to be P~ ability, a fundamental characteristic of the ownership of shares, and . other aspects of the offer. The < eliminates the incongruity of restraints that management's defensive ' perspective between control and measures have created between the alienability of majority and minority the conclusion that the latter s1 shares. 167 A unified approach applies, individual shareholders possessing . roles. Differences in knowledge m no greater right to transmit control by acting in a collective manner the Williams Act has encoura adverse to corporate interests than does the single, dominant share­ shareholders. Concerns expressecl holder. Nor is there less right, or conversely, greater justification for interestsi&s are protected by tw• management interference with decisionmaking for the minority rather ment's injunctive efforts and tl than the majority shareholder. cems. The former' however self looting, and illegality analogo Distinctions unquestionably exist between factors influencing the shareholder's transference of.~ transference-of-control-judgment of the dominant shareholder and factors interests, and frequently over . affecting fractionalized shareholders acting in a de facto collective manner. II consequences of takeovers, are II In the former instance, a controlling shareholder may have fostered rela­ company that may and _probal ,, tionships with corporate employees, suppliers, customers, minority share­ 18 disruptions in employee moralt holders, and other community interests-relationships the shareholder the nonproductive use of -acqu that scattered shareholders are incapable of handling collectively. While this difference is shareholder welfare based on I significant, it only goes to who raises the questions and not the judgments to be made. between control and non~ont Target management, for example, might negotiate with the acquiror regarding changes resolved by the impact of diScl< in the price or other terms of the offer. Management might also institute litigation based and the commonality of targt!' upon concerns of corporate waste. Management's role in these circumstances may be appropriately regarded as facilitating resolution of the more fundamental issue, deter­ .·~ · 168. See note 71 supra . mined by shareholders alone, of accepting or rejecting the offer. 169. See text accompanying notes. 166. For Williams Act purposes the definition of tender offer goes well beyond the 170. The sale of control ~a_lo~e.l essential characteristic noted in the text. See Wellman v. Dickinson, 475 F. Supp. 783, to the appropriate scope of limttattoD 817 (S.D.N .Y. 1979). This is to be expected, for distinct issues are being considered. The . ing principally on a pr~mise t~at wh~t text seeks to consider the essential characteristic of a tender offer for the purpose of applied to the collecuve actton of m evaluating management's defensive response. Statutory definition has sought to deter­ judgmental response may be tHat c mine what combination of characteristics will trigger Williams Act procedures and insufficient to protect the broad rani requirements. Characteristics such as premiums, contingencies, and limited time frames, an argument based solely on analogy t examined for Williams Act purposes, do not necessarily distinguish an individual sale of of values and goals. To some ex~~t tl control from the collective sale, as such factors may well be present in both circumstances. purport to examine current. hmttat Characteristics determining whether stockholders should come under the Williams Act economic perspectives. Tha~ 1S not t~ umbrella, designed to protect them from undue pressure, nondisclosure, and unequal is without unarticulated maJOr prem treatment by the tender offeror, do not necessarily apply in determining whether the limitations. One premise is the aco transaction may permissibly trigger a host of defensive reactions by target management. shares where the result may ~e ecOil4 It is, for example, a matter of relative indifference for defensive purposes whether the and corporate credit~r~. An md~ potential acquiror is offering a premium for the purchase of shares. Indeed a common encouraging competitive enterpnse reply by target management is that the premium is not adequate. The existence of a cumstances where antitrust concen premium, however, is a primary element in determining whether a tender offer exists for more fundamental, premise r~ Williams Act purposes. right of alienability of shares,. lffiP 167. See Bromberg, Tender Offers: Safeguard and Restraints-An Interest Analysis, arguments based upon competing 1 21 CASE W. RES. L. REV. 613, 678-79 (1970) (discussing the tender offer as a device for judgmental aspects, although such I providing equal opportunity for the sale of shares by both minority and majority Article. · shareholders).

··' WA LAW REVIEW 475 [1981] TENDER OFFERS 513 s submitted, the most appropriate may desire to assure are protected as part of the transference of control. s. It does not seek to impose stan­ The dominant shareholder also presumably has the economic expertise differing contexts as the fiduciary to determine whether the transfer will have deleterious effects upon cor­ tantly, it treats the tender offer in porate constituents. In the tender offer context, offerors may be able to to' purchase directed to each 11 exert greater leverage over minority shareholders in determining issues of The analogue focuses on alien­ price, number of shares to be purchased, conditional acceptances, and of the ownership of shares, and other aspects of the offer. The differences, however, in knowledge and 1ts that management's defensive perspective between control and noncontrol shareholders do not lead to nability of majority and minority the conclusion that the latter should not enjoy similar decisionmaking ndividual shareholders possessing roles. Differences in knowledge may well be ameliorated by disclosure, and •Y acting in a collective manner the Williams Act has encouraged a greater flow of information to oes 1 the single, dominant share­ shareholders. Concerns expressed for employee, customer, and community lversely, greater justification for interests168 are protected by two independent sources: target manage­ lllllaking for the minority rather. ment's injunctive efforts and the acquiring company's economic con­ cerns. The former, however selfishly pursued, may raise issues of waste, ·between factors influencing the looting, and illegality analogous to concerns relevant to a majority dominant shareholder and factors: · shareholder's transference of control. 169 Even more protective of such ingin a de facto collective manner. interests, and frequently overlooked in discussions regarding the feared lii'eholder may have fostered rela­ consequences of takeovers, are the economic interests of the acquiring pliers, customers, minority share-. company that may and probably will be quite inimical to substantial :&-relationships the shareholder~ disruptions in employee morale, supplier and trade relationships, and the nonproductive use of acquired assets. Concerns for corporate and Ding collectively. While this difference shareholder welfare based on the disparity in knowledge and position ons and, not the judgments to be between control and noncontrol shareholders are thus substantially ate with the acquiror regarding cnanJtes nent might also institute litigation resolved by the impact of disclosure, the availability of judicial scrutiny, It's role in these circumstances may and the commonality of target-acquiror economic interests.l1° 1 tf the more fundamental issue, deter-" jecting the offer. 168. See note 71 supra. 11!. of t~nder offer goes well beyond the 169. See text accompanying notes 176-80 infra. ellman v. Dickinson, 475 F. Supp. 785, 170. The sale of control analogue may be viewed as a neutral perspective with regard distinct issues are being considered. The to the appropriate scope of limitations upon the actions of controlling shareholders, rely­ ic of a tender offer for the purpose ing principally on a premise that whatever such limitations are they should be analogously tatutory definition has sought to deter- applied to the collective action of individual shareholders in a tender offer context. A trigger Williams Act procedures judgmental response may be that current limitations on controlling shareholders are contingencies, and limited time tinsufficient to protect the broad range of corporate and community interests, therefore ~arily distinguish an individual sale argument based solely on analogy to current standards fails to address underlying issues ay well be present in both of values and goals. To some extent the argument would be valid, for this Article does not "S should come under the Williams purport to examine current limitations on controlling shareholders from social and e pressure, nondisclosure, and unequal ~economic perspectives. That is not to say, however, that reliance upon current standards lrily apply in determining whether the is without unarticulated major premises that adopt policies supporting the scope of such ensive reactions by target management. limitations. One premise is the acceptance of standards that deny free alienability of nee for defensive purposes whether the shares where the result may be economically damaging to nonparticipatory shareholders :purchase of shares. Indeed a common and corporate creditors. An independent premise adopts in a broad sense the values of m is not adequate. The existence of a competitive enterprise, thus limiting the alienability of shares in cir- mirung whether a tender offer exists for cumstances where antitrust concerns have appropriate dominance. A third, perhaps fundamental, premise regards current limitations as consistent with a presumptive i qnd Restraints-An Interest Analysis, of alienability of shares, imposing upon third parties the burden of advancing tcussing the tender offer as a device for :;arguments based upon competing values and claims. The analogue is thus not without hares by both minority and l."iudi!Dlental aspects, although such premises are generally tangential to the theses of this 514 66 IOWA LAW REVIEW 475 More relevant to tender B. Limitations upon the Sale of Controlling Interests ;au.•... n•• ..,.. or imposing liability Limitations upon the sale of control shares are narrowly drawn, consis­ '£\Jm!ltaJnct~swhere a "lootihg" 4 tent with judicial concerns regarding restraints upon alienability. Twenty­ is reasonably foresee five years have passed since Perlman v. Feldmann, 171 yet that apparently dealt with companies owning ground-breaking decision has failed to produce substantial litigation whether the sellers could rec challenging sales of control. Contrary to the efforts of some commentators porate assets would be w~te to give expansive interpretations to Perlman, 172 the Second Circuit has .. party. 17& Perception of thts regarded Perlman in the narrow context of its somewhat unusual factual seller, 111 for there does not aJ situation. That court's characterization of Perlman seven years after the to investigate the character (l decision "was basically that the controlling shareholders in selling control case law has generally devc to a potential customer had appropriated to their personal benefit a cor­ former controlling shareholdc porate asset: the premium which the company's product could command "if the circumstances surro\1 in a time of market shortage."173 Perlman has thus not created a substan­ suspicion in a prudent man tial restraint upon the sale of control shares, and may be viable only in group who will mismanage all the relatively infrequent instances of clearly identifiable corporate oppor­ waste ordinarily have narrow tunities inuring to the principal benefit of selling shareholders.m Such a sistent to apply su~h standaJ:d limitation would have rare application in the tender offer context where thus including anutrust and I the offered premium extends to all shareholders, each shareholder thus in its ability to perceive pot given the right to share proportionately in the premium representing disclosure obligations of the transference of control. 175 source of funds, plans' regax:c assets, and board changes, as 171. 219 F.2d 173 (2d Cir.), cert. denied, 349 U.S. 952 (1955). target company's corporate s1 172. See generally Andrews, The Stockholder's Right to Equal Opportunity in the Sale of Shares, 78 HARV. L. REV. 505 (1965); Berle, "Control" in Corporate Law, 58 COLUM. The foregoing restraints L. REV. 1212 (1958). minimal. Corporate and min2, 173. Essex Universal Corp. v. Yates, 305 F.2d 572, 576 (2d Cir. 1962). ficiently protected as long asl 174. In a fairly narrow reading of Perlman, it has been suggested that the case is simply through the sales price the val~ an illustration of the "looting" standard arising from such cases as Gerdes v. Reynolds, 28 N.Y.S.2d 622, 652-53 (Sup. Ct. 1941). See Hill, The Sale of Controlling Shares, 70 HARV. offer context where offers are open 1 L. REV. 986, 988-90 (1957). l4(d)(7), 15 U.S.C. § 78n(d)(7)(19~ 175. The Perlman decision has been used to suggest that the controlling shareholder basis. Williams Act § 14(d)(6), Hi\: should seek to obtain for the minority shareholders the opportunity to sell their shares 176 Insuranshares Corp. v. Nm upon the same tenns offered to the controlling shareholder. This obligation has been 1940);. Gerdes v. Reynolds, 28f?l.Y.l implied by some commentators based upon a broad reading of Perlman. Andrews, The R.Ev. 118 (1941). See generaUy Haze~ Stockholder's Right to Equal Opportunity in the Sale of Shares, 78 HARV. L. REv. 505, trolling Shareholders-Common LA 515 (1965); Berle, "Control" in Corporate Law, 58 COLUM. L. REV. 1212, 1222 (1958); Proposal for Reform, 125 U. PA. L. Jennings, Trading in Corporate Control, 44 CALIF. L. REv. 1, 31 (1956). But Perlman has 177. In DeBaun v. First W. B~ not evolved in this direction and the position has generally been rejected. Clagett v. !54 (1975), the court upheld a den Hutchinson, 583 F.2d 1259, 1264 (4th Cir. 1978); Honigman v. Green Giant Co., 309 court found that the seller became c! F.2d 667, 670 (8th Cir. 1962), cert. denied, 372 U.S. 941 (1963); Yerke v. Batman, 376 dent person that the purchaser Will N.E.2d 1211, 1215 (Ind. Ct. App. 1978). California courts, however, appear more prone ·to accept an "equal opportunity" doctrine, particularly where arguably undue advantage Rptr. at 360. 178. In Levy v. American Bcvera has inured to the controlling shareholder. In Brown v. Halbert, 271 Cal. App. 2d 252, 76 The law does not require one to Cal. Rptr. 781 (1969), the court referred to the articles cited in note 172 supra and sug­ a business transaction, even of a gested that the growth in shareholder population and need for continual investment "may or criminal act if given the opj in the future require legislative action or the adoption by the courts of one or the other assumed, in the absence of •en: law writer's recommendations for the investor's protection." Id. at 271, 76 Cal. Rptr. at 265 A.D. 208, 219, 38 N.Y.S.2d 51 793. Similar concerns in a somewhat different context are evident in the obligations F.2d 57~. 578 (4th Cir. 197~). , imposed upon controlling shareholders in Jones v. H.F. Ahmanson & Co., 1 Cal. 3d 93, 179. McDaniel v. Painter, 418 F .. 111-12, 460 P.2d 464, 473-74, 81 Cal. Rptr. 592, 601-02 (1969). However valid or 180. Schedule 14 D-1, 17 C.F.R. desirable "equal opportunity" arguments appear, they have little relevance in the tender

• • J OWA LAW REVIEW 475 [1981] TENDER OFFERS 515

'le of Controlling Interests More relevant to tender offers is the common-law limitation pro­ hibiting or imposing liability upon the sale of controlling interests in cir­ ,lshares are narrowly drawn, consis­ cumstances where a "looting" or other usurpation of corporate assets by the ~traints upon alienability. Twenty­ acquiror is reasonably foreseeable. Decisions in this area have generally ~ Feldmann, 171 yet that apparently dealt with companies owning highly liquid assets and have turned upon to 'produce substantial litigation whether the sellers could reasonably have perceived the risk that cor­ >the efforts of some commentators porate assets would be wasted or otherwise exploited by the acquiring rrrlman, 172 the Second Circuit has party. 176 Perception of this risk must arise from facts known to the xt of its somewhat unusual factual seller, 177 for there does not appear to be an affirmative duty upon sellers 11 of Perlman seven years after the to investigate the character or intentions of the purchaser. 178 Although ling shareholders in selling control case law has generally developed through derivative actions against to their personal benefit a cor­ :ed former controlling shareholders, management may seek injunctive relief IMP~llny's product could command "if the circumstances surrounding the proposed transfer would alert an has thus not created a substan­ suspicion in a prudent man that the purchasers are an irresponsible hares, and may be viable only in group who will mismanage and loot the corporate assets." 179 Looting and ~arly identifiable corporate oppor- waste ordinarily have narrow connotations, but it would be entirely con­ . of selling shareholders. 174 Such a sistent to apply such standards to instances of alleged statutory illegality, in the tender offer context where thus including antitrust and regulatory violations. Management is aided reholders, each shareholder thus in its ability to perceive potential misuse of target assets through the in the premium representing if disclosure obligations of the Williams Act, including disclosure of the source of funds, plans regarding potential merger, liquidation, sale of 9 u.s. 952 (1955). assets, and board changes, as well as any other material effects upon the sRight to Equal Opportunity in the Sale target company's corporate structure and business.180 "Control" in Corporate Law, 58 COLUM. The foregoing restraints on alienation of controlling interests are . 572, 576 (2d Cir. 1962). minimal. Corporate and minority shareholder interests are regarded as suf­ ~as been suggested that the case is simply ficiently protected as long as the selling shareholder does not appropriate mp such cases as Gerdes v. Reynolds, 28 through the sales price the value of a corporate asset, and has no reasonable "~Sale of Controlling Shares, 70 HARV.

) offer context where offers are open to all shareholders on identical terms, Williams Act § lllggest that the controlling shareholder 14(d)(7), 15 U.S.C. § 78n(d)(7)(1976), and shares may be rejected only on a pro rata lers the opportunity to sell their shares basis. Williams Act§ 14(d)(6), 15 U.S.C. § 78n(d)(6) (1976). shareholder. This obligation has been 176. lnsuranshares Corp. v. Northern Fiscal Corp., 35 F. Supp. 22, 27 (E.D. Pa. lad reading of Perlman. Andrews, The 1940); Gerdes v. Reynolds, 28 N.Y.S.2d 622, 629 (Sup. Ct. 1941), noted in 26 MINN. L. Sale of Shares, 78 HARV. L. REv. 505, REv. 118 (1941). See generally Hazen, Transfers of Corporate Control and Duties of Con­ !i8 COLUM. L. REV. 1212, 1222 (1958); trolling Shareholders-Common Law, Tender Offers, Investment Companies-and a . L. REv. 1, 31 (1956). But Perlman has Proposal for Reform, 125 U. PA. L. REv. 1023 (1977). as generally been rejected. Clagett v. 177. In DeBaun v. First W. Bank & Trust Co., 46 Cal. App. 3d 686, 120 Cal. Rptr. ); Honigrnan v. Green Giant Co., 309 554 (1975), the court upheld a derivative action against the seller of control where the J.S. 941 (1963); Yerke v. Batman, 376 court found that the seller became directly aware of facts that would have alerted a pru­ ia courts, however, appear more prone dent person that the purchaser was "likely to loot the corporation." /d. at 697, 120 Cal. tlarly where arguably undue advantage . Rptr. at 360. o v. Halbert, 271 Cal. App. 2d 252, 76 178. In Levy v. American Beverage Corp., the court stated: tides cited in note 172 supra and sug­ The law does not require one to act on the assumption that a person with whom od need for continual investment "may a business transaction, even of a large amount, is had, will commit a fraudulent 1tion by the courts of one or the other or criminal act if given the opportunity to do so. Quite the contrary may be l)tection." /d. at 271, 76 Cal. Rptr. at assumed, in the absence of actual notice. ontett are evident in the obligations• 265 A.D. 208, 219, 38 N.Y.S.2d 517, 527 (1942). See also Swinney v. Keebler Co., 480 H~F. Ahmanson & Co., 1 Cal. 3d 95, F.2d 573, 578 (4th Cir. 1973). f2, 601·02 (1969). However valid ore 179. McDaniel v. Painter, 418 F.2d 545, 547 (lOth Cir. 1969). hey-have little relevance in the tender. 180. Schedule 14 D-1, 17 C.F.R. § 240.14d-1 (1979). 516 66 IOWA LAW REVIEW 475 TENDER OFFERS grounds to suspect that the acquiror will engage in corporate looting or Although such provisions are gm1 other waste. In the absence of legitimate concerns by target management of shareholders pursuant to statut( about either of these potentialities, considering as well questions of ment or repeal requires a superm3; magnitude and subsequent availability of judicial relief, fractionalized merger requirement. m The effeo shareholders acting as a collective majority should have no additional locked into the supermajority pre impediments placed upon their judgments regarding transference of be the "dead hand" of prior share] shares. Corporate interests and remaining minority shareholders require but sold their shares long before tl no greater protection in the context of collective, rather than unitary, didate. 185 The result of superm decisionmaking. Employing such a conclusion as the premise of the sale perhaps no longer identifiable, m.' of control analogue, it is appropriate to examine specific defensive ferent circumstances has effectt measures in light of the analogue standard. without management approval. I utilize corporate machinery to iru C. Applicatz"on of the Sale of Control Analogue to Defensive Measures Although corporate codes u sions, it may be questioned wheth1 Evaluating specific defensive measures in the perspective of relatively provisions to be adopted by any~ circumscribed common-law restraints on the sale of control indicates that percentage.187 The eighty perceJl some defensive tactics are consistent with alienability rights accorded con­ trol shares, while other measures unreasonably impinge upon transfer­ 183. E.g., DEL. CODE ANN. tit. 8, ~~ ability and exceed protections developed at common law. In particular, followed by approval by "a majority of tl the sale of control analogue may be examined with regard to the follow­ The articles of incorporation may requ ing defensive techniques. Imposing a supermajority voti~~ n;quil would impose a substantial sohotauon I those with diverse, highly fragmented Sh 1. Amendments to Articles of Incorporation 184. See note 25 supra and accompal A controlling shareholder is not likely to be faced with charter or 185. The "dead hand" argument is restrictive charter provisions occurs dw by-law restraints that may impede the sale of control. It would be quite Labaton v. Universal Leaf Tabacco Co~ extraordinary to expect the controlling shareholder to tie his own hands or , 96,943 (S.D.N.Y. 1979). Although s1i limit his own transferability by charter provisions requiring supermajority cumstances is equivalent to a rejection c votes in excess of his own voting strength. What the controlling require supermajority approval as the pl shareholder is unlikely to impose upon himself is nevertheless imposed 186. See, e.g., E. ARANOW, H. EINHC upon a fractionalized minority through supermajority provisions that OFFERS FOR CORPORATE CONTROL (19~~ sions. effectively preclude the possibility of merger and therefore create in are contrary to the basic principle management or recalcitrant shareholders a virtual veto over unwanted incumbent management to control tender offers. 181 port of its shareholders. In addition The justification for supermajority voting restraints imposed by of the majority into what may be c charter amendment is their adoption by the shareholders, who permitting that minority to block sij supported by a majority of the shal presumably have knowledge of the effect that such provisions will have in Jd. at 195. In what is surely an aberra1 discouraging potential tender offerors. 182 This justification, however, Home Corporation recommended to its. does not address a more fundamental issue: what protections are appro­ majority provision adopted a~ ~ de£~ priate to assure that supermajority provisions do not unreasonably ment noted that the supermaJonty proVI restrict future conduct desired by a majority of the shareholders? consistent with the Company's current corporate governance .... In addition, 1 of management . . . ." The proxy state. 181. See notes 24-25 supra and accompanying text. at 390-41,-42. 182. The SEC requires through proxy regulation a justification by management of 187. Whether supermajority provisic charter amendments that would impede or discourage tender offer efforts. Exchange Act majority vote has not been directly liti.j Release 34-15230, Oct. 13, 1978 [1978 Transfer Binder] FED. SEC. L. REP. (CCH) 1 propriety of these charter an? by:la~ ; 81, 748. The disclosure requirement has not proven a deterrent to management in the cern or with respect to compliance With pursuit of such antitender offer measures. 18, at 13 (footnote omitted). Indeed, )WA LAW REVIEW 475 TENDER OFFERS 517 ill engage in corporate looting or Although such provisions are generally adopted by only a majority vote e concerns by target management of shareholders pursuant to statutory provision, 183 any attempted amend­ considering as well questions of ment or repeal requires a supermajority vote equivalent to the underlying f of judicial relief, fractionalized merger requirement. 184 The effective result is that future majorities are \i<>rity should have no additional locked into the supermajority provision, unable to overcome what may ments regarding transference of be the "dead hand" of prior shareholders who approved the amendments ing minority shareholders require but sold their shares long before the emergence of a viable acquiring can­ f collective, rather than unitary, didate.185 The result of supermajority provisions is that a shifting, tclusion as the premise of the sale perhaps no longer identifiable, majority of shareholders acting in far dif­ :e to examine specific defensive ferent circumstances has effectively precluded current tender offers dard. without management approval. Inefficient management is thus able to utilize corporate machinery to insulate itself from challenge. 186 r A~logue to Defensive Measures Although corporate codes universally permit supermajority provi­ llres in the perspective of relatively sions, it may be questioned whether statutory interpretation permits such the sale of control indicates that provisions to be adopted by any vote less than the proposed supermajority n 187 h alienability rights accorded con­ percentage. The eighty percent provision of Gulton Industries, Inc. ~asonably impinge upon transfer­ 18~. E.g., DEL. CODE ANN. tit. 8, § 242(c)(1) (Supp. 1978) (requires board approval ~ at common law. In particular, followed by approval by "a majority of the outstanding stock entitled to vote thereon."). !Dnined with regard to the follow- The articles of incorporation may require a greater vote than the statutory standard. Imposing a supermajority voting requirement upon a supermajority charter proposal would impose a substantial solicitation burden for numerous corporations, particularly those with diverse, highly fragmented shareholder groups. ~les of Incorporation 184. See note 25 supra and accompanying text. likely to be faced with charter or 185. The "dead hand" argument is not applicable where shareholder approval of sale of control. It would be quite restrictive charter provisions occurs during the pendency of a tender offer. See, e.g., shareholder to tie his own hands or Labaton v. Universal LeafTabacco Co., [1979 Transfer Binder] FED. SEC. L. REP. (CCH) , 96,94~ (S.D.N.Y. 1979). Although shareholder approval of amendments in such cir­ p!ovisions requiring supermajority cumstances is equivalent to a rejection of the tender offer, adoption should nevertheless strength. What the controlling require supermajority approval as the provisions create future prophylactic effects. n himself is nevertheless imposed 186. See, e.g., E. ARANOW, H. EINHORN & G. BERLSTEIN, DEVELOPMENTS IN TENDER gh supermajority provisions that OFFERS FOR CORPORATE CONTROL (1977), in which it is argued that supermajority provi­ merger and therefore create in sions. are contrary to the basic principles of corporate democracy, for they permit Lers a virtual veto over unwanted incumbent management to control a corporation long after it has lost the sup­ port of its shareholders. In addition . . . [such] provisions . . . transform the will ity voting restraints imposed by of the majority into what may be described as the tyranny of the minority, by :ion by the shareholders, who permitting that minority to block significant changes in the corporation that are ct that such provisions will have in supported by a majority of the shareholders. 111 Id. at 195. In what is surely an aberrational reversal of roles, the management of U.S. s. This justification, however,. Home Corporation recommended to its shareholders in 1979 the repeal of a 75% super­ issue: what protections are appro- . majority provision adopted as a defensive measure in 1975. Management's proxy state­ provisions do not unreasonably· ment noted that the supermajority provisions "reflect a defensive posture which is neither il majority of the shareholders? consistent with the Company's current philosophy nor in tune with current concepts of corporate governance .... In addition, such provisions place excessive power in the hands ing text. of management .... " The proxy statement is extracted in A. FLEISCHER. supra note 18, ulation a justification by management at ~90-41,-42. courage tender offer efforts. Exchange 187. Whether supermajority provisions may be validly adopted by less than a super­ ISfcr Binder] FED. SEC. L. REP. majority vote has not been directly litigated. Fleischer refers to "sparse case law on the >roven a deterrent to management in propriety of these charter and by-law amendments, either as a matter of fiduciary con­ cern or with respect to compliance with 'technical' provisions." A. FLEISCHER, supra note 18, at 1~ (footnote omitted). Indeed, "sparse" is an overstatement as to any direct 518 66 IOWA LAW REVIEW 475 was adopted by a fifty-four percent shareholder vote .188 to repeal the provision should shareholders in Seibert v. Culton Industn'es did not challenge the is a far heavier burden than m ciency of the vote. 189 Rather, they focused on the Board of of the antitakeover provision tb discretionary authority to reduce the required percentage vote Additional statutory support £1 eighty percent to a simple majority by Board approval of a pn:>p<>&e(f. •c:lCJrptJIOn may be garnered ~ro.m tb takeover prior to the offeror's acquisition of a five percent ...,,... ,Mna the same supermaJOnty VCl interest. 190 Although the court's decision upholding the alternative provision.I9& The legislative percentage provision may impliedly be read to support the validity of by an earlier group of sh; underlying shareholder vote, the validity of that vote was not at issue. require supermajority approval I Delaware precedent may not be lacking should such validity be challenged. tides of any lesser numl Cases involving the reduction of prior rights of shareholders indicate the this legislative policy ~.con~a inability of one group of shareholders or management to unilaterally adoption of the proVIsiOn lik acquire an improved position relative to nonconsenting shareholders. In simple majority,. but ~as Telvest, Inc. v-. Olson, 191 a defensive effort by target management to issue knowingly tmposmg . rs 197 to all common stockholders preferred shares containing supermajority !K&oauo.... ~ VOtlflg powe • terms for the approval of certain merger, sales of assets, or similar transac­ Insistence upon a vote in~xces tions was held to violate plaintiff's voting rights despite plaintiffs equal without precedent. In Sear treatment with all other shareholders. 192 The acts of the Board of Directors .. n,nT~\v:~ of a charter amendment-~ were purportedly consistent with its statutory and charter authority to issue of··in1terest ramifications was rejecte preferred shares and set the terms thereof. 195 Nevertheless, this action interested shareholders. The votes resulted in "an alteration of the voting powers of the common stock"194 such trolled notwithstanding the fact th that plaintiffs twenty percent interest no longer carried the same strength total v~te was in opposition to the. to influence merger votes as existed prior to the issuance of the preferred based entirely on equitable groun~ shares. 195 . the nonrecognition of the votes of I The Telvest decision suggests that a similar "alteration of voting powers" argument may apply to the adoption of supermajority provisions 196. See note 25 supra. :-; 197. If a supermajority vote _for adoJ by less than a supermajority vote. The adoption in Seibert effectively . through reincorporation, ~equinng only_ aggrandized a fifty-four percent decision into an eighty percent decision already written into the articles of the ~ that could not be altered without an eighty percent approval. Thus, the • to challenge, however, as lacking a leg~~ forty-six percent of the Gulton Industries shareholders who opposed or of the higher shareholder approval that ,_ 8. 212 F.2d 389 (6th Cir. 1954). abstained from voting 19 in favor of the supermajority provision must now interested shareholders, the amendment r convince not five percent, but an additional thirty-four percent of the the 61,351 votes required to achi~ve a stat been unduly harsh in not reducmg the challenge of validity. The issue of what vote is necessary to adopt a supermajority provi­ shares of noninterested sharehold~. A¥ sion is discussed in Hochman & Folger, Deflecting Takeovers: Charter and By-Law grounds was made even clearer m the Techniques, 34 Bus. LAW. 537, 545 (1979), but the authors inconclusively suggest only approval by the majority of the ~t~khold that "an element of judgment is involved; a 70% supermajority requirement can prob­ the principles of equity' is not bmding UJ ably be adopted by a smaller stockholder vote than a 90% supermajority requirement." v. Seagrave Corp., 112 F. Supp. 330, 35 /d. at 546. 199. See 212 F.2d at 397. . 188. See Seibert v. Gulton Indus., Inc., No. 79-5631, at 2 (Del. Ch., filed June 21, 200. See Cary, Corporate Devtces Us• 1979). (1970). Cary states: . ' 189. /d. at 3. I raise the quesuon · · · whether ~ 190. /d. at 3-4. super-majority requirement. Certlll 191. No. 79-5798 (Del. Ch., filed March 8, 1979). lead me to say that it is invalid. I do 192. /d. at 7-8, 14. ticularly relating to the ~e:W York .a 193. DEL. CODE ANN. tit. 8, § 151(a) (1974). more than so-called maJonty requm 194. No. 79-5798 (Del. Ch., filed March 8, 1979). that such a provision can only be c 195. /d. /d. at 840. Professor Cary presumably h OWA LAW REVIEW 475 TENDER OFFERS 519 nt shareholder vote. 188 Plaintiff shares to repeal the provision should an attractive merger partner appear. ustn'es did not challenge the suffi­ This is a far heavier burden than management's task of achieving adop­ ICUSed on the Board of Directors' tion of the antitakeover provision through only a fifty-four percent vote. e required percentage vote from Additional statutory support for requiring a supermajority vote of ~y Board approval of a proposed adoption may be garnered from the provision in some corporate codes llisition of a five percent stock requiring the same supermajority vote to alter, amend, or repeal the par­ cision upholding the alternative ticular provision. 196 The legislative policy thus reflected is that a matter · read to support the validity of the considered by an earlier group of shareholders to be sufficiently important lity of that vote was not at issue. to require supermajority approval should not be subject to the shifting, should such validity be challenged. subsequent tides of any lesser number. It would not be unreasonable to rights of shareholders indicate the regard this legislative policy as containing an implicit presumption that the :s or management to unilaterally original adoption of the provision likewise was not the result of a temporary, to rtonconsenting shareholders. In shifting, simple majority, but was instead the overwhelming choice of fort by target management to issue shareholders knowingly imposing restrictions upon their statutorily l. shares containing supermajority granted voting powers. 197 r:sales of assets, or similar transac­ Insistence upon a vote in excess of the minimum statutory standard is lng rights despite plaintiffs equal not without precedent. In Seagrave Corp. v. Mount ,1 98 shareholder I The acts of the Board of Directors approval of a charter amendment having substantial control and conflict­ !!ory and charter authority to issue of-interest ramifications was rejected by the court disregarding the votes of ~f.m Nevertheless, this action interested shareholders. The votes of the noninterested shareholders con­ )Wers of the common stock" 194 such trolled, notwithstanding the fact that only approximately six percent of the o longer carried the same strength total vote was in opposition to the amendment. 199 The court's action was [)r to~ the issuance of the preferred based entirely on equitable grounds, as no statutory authority existed for the nonrecognition of the votes of interested shareholders. 200 tt a similar "alteration of voting. ).ption of supermajority provisions 196. See note 25 supra. t~adoption in Seibert effectively 197. If a supermajority vote for adoption were the norm, evasion may be sought m-into an eighty percent decision through reincorporation, requiring only a majority vote with supermajority provisions already written into the articles of the survivor corporation. Such efforts might be subject ghty percent approval. Thus, the to challenge, however, as lacking a legitimate business purpose other than the avoidance oies shareholders who opposed or of the higher shareholder approval that would otherwise be required. upermajority provision must now 198. 212 F.2d 389 (6th Cir. 1954). Disregarding the 43,000 shares voted by the itional thirty-four percent of the 'interested shareholders, the amendment received 53,979 affirmative votes, falling short of the 61,351 votes required to achieve a statutory majority. I d. at 397. The court may have aecessary to adopt a supermajority provi­ been unduly harsh in not reducing the required majority to a figure based upon the rcting Takeovers: Charter and By-Law. shares of noninterested shareholders. Avoidance of the statutory standard on equitable t the authors inconclusively suggest only grounds was made even clearer in the district court opinion, which stated that "the % supennajority requirement can prob­ approval by the majority of the stockholders of the proposed plan which is in violation of ban a 90% supermajority requirement. the principles of equity, is not binding upon the stockholders of the corporation." Mount v. Seagrave Corp., 112 F. Supp. 330, 334 (S.D. Ohio 1953). 79-5631, at 2 (DeL Ch., filed June 21, 199. See 212 F.2d at 397. 200. See Cary, Corporate Devices Used to Insulate Management, 25 Bus. LAW. 839 (1970). Cary states: I raise the question . . . whether a majority of shareholders . . . may create a 979). super-majority requirement. Certainly I have no actual case in mind that would lead me to say that it is invalid. I do have in mind some statutes in this field par­ ticularly relating to the New York Business Corporation Act, which permits [sic] 979). more than so-called majority requirements in other areas. They in effect require that such a provision can only be created by a super·majority as well. at 840. Professor Cary presumably had in mind§ 616 of the New York Business Cor- 66 IOWA LAW REVIEW 475 TENDER OFFERS not effected a material Corporate democracy as a means of reflecting changing consensus, ,hift accorded appropriate presum as well as the need to facilitate corporate response to altered conditions, management is subject to tl are objectives frustrated by supermajority charter provisions that prevent priate, as well as to th~ st~tut< a majority shareholder interest from acting. Turnover rates among ment if dissatisfied wtth Its u: shareholders within particular corporations may not be readily available, but it is reasonable to surmise that for many corporations an active A different set of concen market will have the cumulative, relatively frequent effect of a change in control or is concurrent wit identity and a significant shift in percentage of ownership of shares. 201 effort. 2oa The sale of cont The transient nature of stock ownership, coupled with the evanescent guidance. A controlling shar~ quality of a majority block of shares, suggest the need for substantial purchase of his shares would 1 safeguards before past judgments are permitted to preclude current deci­ shares that might create a vet sions favored by a majority of shareholders. Supermajority provisions reorganization. Even if the pa may render shareholders-and even management-powerless to react to independent, negative block c changed economic conditions, however material their impact. The tially more favorable offers. amending process is intended to facilitate timely corporate reaction to In order to permit indivi fluctuating conditions; it is not a process designed for strangulating rights of transferabilit_y analog obstinacy or enshrining irrevocable veto rights. If supermajority provi­ issuance of shares dunng a t~ sions are to be permitted, minimum safeguards and policy concerns sup­ wise materially affecting cont port the requirement of adoption by no less than an equally supermajority shareholders. Such approval, 202 vote. 203. The shift in evaluative con illustrated by Northwest IndUS:, Iric. 2. Issuance of Shares 1969). In 1965, Goodrich and Gulf sidered having one party buy out tb In the absence of an announced or threatened takeover effort, deci­ agreement on price. Id. at 708. Su sions by target management to issue shares to ESOTs, employees, suppliers, January 1969 when Northwest I~d~ or other third parties are appropriately evaluated by such standards as con· for Goodrich shares. Id. Negotlatlor flict of interest, adequacy of consideration, reasonableness in light of menced, and after only one day of n~ by the exchange of $35,000,000 of· capital structure, and similar traditional concerns. Where the issuance has court noted that "although the offic mutual agreement to defeat plain~ poration law which, unlike the simple majority provision for other charter amendments, between the companies." Id. at 712. l N.Y. Bus. CORP. LAW§ 803 (McKinney Supp. 1980), requires a two-thirds approval for applied traditional business judgtl_lell charter amendments that increase statutorily prescribed voting majorities. /d. § 616 shares, totally ignoring the dyruu_mcs (McKinney 1963). An indirect effort to dissuade the adoption of supermajority provisions ance upon the entrenchment of Gooc: is the position of the Wisconsin Department of Securities that it may not permit the judgment presumptions may b~ve be registration of shares by any corporation whose charter contains a supermajority provi­ concluded and challenged, but m the sion. Bartell, WiSconsin Takeover Statute, 32 Bus. LAW. 1465, 1468 (1977). This tions were unduly charitable to targt administrative judgment does not go to the validity or invalidity of such provisions but present in Crouse-Hinds Co. v. lnten appears premised upon a notion of fairness to the holders of equity securities. which Crouse-Hinds found itself the t 201. A 1971 SEC study of institutional investor trading indicated a steady annual rise announced proposed me~ger ~th Bel in block trades of 10,000 shares or more, with over 15,000 of such trades occurring in determined that the busmess JUdgm 1970. INSTITUTIONAL INVESTOR STUDY REPORT OF THE SECURITIES AND EXCHANGE COM· their efforts to go forward with t~~- me MISSION, REPORT 1546, H.R. Doc. No. 92-64, at 1546, 92nd Cong., 1st Sess. (1971). proposed tender offer. The deClSIOn 202. Policy concerns militating against supermajority provisions suggest an argument occurrence of a tender offer s~ould ~ of per se invalidity rather than, as proposed in this Article, requiring that such provisions measures generally consistent With pn~ ·gamer supermajority approval. Per se invalidity, however, faces the insuperable burden management's decision to merge Will of universal statutory recognition of the right of shareholders to adopt voting require­ Hinds shareholders. As long as mal ments in excess of statutory minimums. Indeed such may be the preferred course in some knowledge of an imminent tender offi circumstances, for example close corporations. This Article has therefore adopted a more be avoided simply because the shan limited, pragmatic approach, one that is believed to be consistent with both statutory and policy concerns. opportunity. 'OWA LAW REVIEW 475 TENDER OFFERS 521 s of reflecting changing consensus, not effected a material shift in control, management's action may be rate response to altered conditions, accorded appropriate presumptions. However, any presumption favoring dty charter provisions that prevent management is subject to the availability of judicial relief, if appro­ n acting. Turnover rates among priate, as well as to the statutory right of shareholders to change manage­ ttions may not be readily available, ment if dissatisfied with its use of corporate power. for many corporations an active A different set of concerns arises when the issuance of shares affects ively frequent effect of a change in . control or is concurrent with an announced or threatened takeover centage of ownership of shares. tol effort. 208 The sale of control analogue may provide appropriate hip, coupled with the evanescent guidance. A controlling shareholder faced with a premium offer for the , suggest the need for substantia}. purchase of his shares would be unlikely to cause the corporation to issue lellilitted to preclude current shares that might create a veto block over any eventual merger or other hol«jlers. Supermajority reorganization. Even if the particular offer is not favored, creation of an tanagement-powerless to react independent, negative block diminishes the prospects for future, poten­ ver material their impact. tially more favorable offers. it_ate timely corporate reaction In order to permit individual, noncontrolling shareholders to enjoy rocess designed for rights of transferability analogous to a dominant shareholder, a corporate ~to rights. If supermajority issuance of shares during a tender offer time frame, or any issuance other­ feguards and policy concerns wise materially affecting control, should be subject to prior approval of ~than an equally shareholders. Such approval would necessarily involve full disclosure of

203. The shift in evaluative context between control and noncontrol situations is if Shares illustrated by Northwest Indus., Inc. v. B.F. Goodrich Co., 301 F. Supp. 706 (N.D. Ill. 1969). In 1965, Goodrich and Gulf Chemicals, Inc., engaged in a joint venture, con­ nhreatened takeover effort, sidered having one party buy out the other's interest but negotiations failed for lack of estoESOTs, employees, suppuen.. agreement on price. Id. at 708. Such prospect apparently was not raised again until January 1969 when Northwest Industries announced its intention to make a tender offer valuated by such standards as for Goodrich shares. Id. Negotiations between Goodrich and Gulf immediately recom­ ation, reasonableness in light menced, and after only one day of negotiations Goodrich agreed to buy out Gulfs interest C4mcerns. Where the issuance by the exchange of $35,000,000 of Goodrich common stock for Gulfs share. Id. The court noted that "although the officers of both Goodrich and Gulf claim there was no provision for other charter amendmentt mutual agreement to defeat plaintiffs takeover bid, there was a remarkable empathy 1980), requires a two-thirds approval between the companies." Id. at 712. Despite these "remarkable" circumstances, the court prescribed voting majorities. Id. § applied traditional business judgment standards in evaluating the defensive issuance of the adoption of supermajority provis;,.... shares, totally ignoring the dynamics of the battle for control and the effects of such issu­ •f Securities that it may not permit ance upon the entrenchment of Goodrich management. Id.; see note 87 supra. Business , charter contains a supermajority judgment presumptions may have been validly invoked had the 1965 negotiations been ~ Bus. LAW. 1465, 1468 (1977). concluded and challenged, but in the context of a 1969 tender offer battle such presump­ idity or invalidity of such provisions tions were unduly charitable to target management. Fairly unusual circumstances were ~e holders of equity securities. present in Crouse-Hinds Co. v. Internorth Inc., No. 80-7865 (2d Cir. Nov. 14, 1980), in >r trading indicated a steady annual which Crouse-Hinds found itself the target of an unwanted tender offer subsequent to its over 15,000 of such trades occurring announced proposed merger with Belden Corp. See note 133 supra. The Second Circuit OF THE SECURITIES AND EXCHANGE .determined that the business judgment presumption protected target management in t 1546, 92nd Cong., 1st Sess. (1971). their efforts to go forward with the merger, despite the merger's negative effects upon the najority provisions suggest an argumedi proposed tender offer. The decision is reasonable in its narrow context, for the mere is Article, requiring that such nrn.n.;,..., occurrence of a tender offer should not affect the burden of proof as to the validity of , however, faces the insupera measures generally consistent with prior approved plans. Using a sale of control analogue, f shareholders to adopt voting management's decision to merge was pursuant to authority acknowledged by Crouse­ tch may be the preferred course in Hinds shareholders. As long as management was acting in good faith and without ltisoArticle has therefore adopted a knowledge of an imminent tender offer, a presumption of business regularity should not to be consistent with both statutory be avoided simply because the shareholders are now confronted with a tender offer opportunity. 522 66 IOWA LAW REVIEW 475 TENDER OFFERS

the reasons and consequences of the issuance of shares, including the extinguishment of a debt < potential inhibiting of pending or imminent tender offers. 2°4 While undermined by serious ques shareholder votes may be strongly influenced by management's control of debt, 2°9 These deficiencies the proxy machinery, shareholder consciousness will be considerably rather than the bona fides

.J :JWA LAW REVIEW 475 TENDER OFFERS 523 issuance of shares, including the extinguishment of a debt owed to the president by the corporation, was mminent tender offers. 20• While undermined by serious questions regarding the validity and amount of such 1enced by management's control of debt. 209 These deficiencies led to the conclusion that the issue of control, msciousness will be considerably rather than the bona fides of the debt, motivated the issuance of shares. 210 offer context. A decision in such The unfortunate implication is that, had the debt been sufficiently res to third parties who may be established, the shift in control might have been accomplished despite ivalent to a collective rejection of, shareholder objection. If directors' actions are upheld under business judg­ 1ffer. The sale of control analogue ment considerations whenever there is "any rational business purpose,"211 ~ the issuance of shares upon two the extinguishment of a legitimate debt may well suffice, despite effects :e of shares may effectively under­ upon control or the availability of alternative, noncontroversial measures. ceeding, and a model that regards Mandating shareholder approval in control situations, including imminent le right to make a collective judg­ tender offer contexts, avoids the hair-splitting problems created by ,y fi. single control shareholder or "primary," "sole," "bona fides," and similar ambiguous standards.212 Shareholder approval of corporate actions during the pendency of ~~ and disclosure aspects would tender offers is the accepted norm in England, pursuant to the City Code termining "primary" purposes or on Take-Overs and Mergers. 215 Among the General Principles of the -concerns. The advantage of an Code, regarded as "good standards of commercial behavior, "21• is the pro­ icago Stadium Corp. v. Scallen. zoe vision that, during the pendency of an actual or imminent offer, no action !led fifty-two percent of the out­ may be taken by the Board without the approval of shareholders that ~ard of Directors at the time the "could effectively result in any bona fide offer being frustrated or in the of shares that would have reduced shareholders of the offeree company being denied an opportunity to 1t and shifted control to the cor­ decide on its merits."215 The limitation on Board activity is further imary purpose" approach, 208 the sis for issuance of the shares, an 209. Id. 210. ld. at 207-08. } BOt yet been made for purposes of the 211. Kaplan v. Goldsamt, 380 A.2d 556, 568 (Del. Ch. 1977). D 1ould not excuse a lack of full disclosure 212. The duality of the fiduciary concept is reflected by the Board's argument in :dfer. Nondisclosure of such information Chicago Stadium Corp. v. Scallen, 530 F.2d 204 (8th Cir. 1976), that "the Board felt that ,Q it was in the best interests of all stockholders to perpetuate Mr. Scallen's involvement with lations. At state court levels, it may be ·~ anced beyond the limited view expressed the ice show business of the defendant corporation and anticipated that plaintiffs would tp., 37 Del. Ch. 59, 136 A.2d 690 (Sup. terminate Mr. Scallen." Id. at 207 n.3. Is this not a judgment that the corporation and ~ . a potential tender offer was "wholly shareholders would be harmed by a sudden change in management, and is not such judg­ -1~ which stockholder approval was sought, ment appropriate within the fiduciary model? If so, as many would argue, then does the tion based upon the inadequacy of the fiduciary concern with corporate welfare permit action otherwise barred by the fiduciary offer. ld. at 64, 136 A.2d at 693. limitation upon measures taken to perpetuate control? The conflict created by fiduciary repurchase of shares in a defensive con­ concepts is not resolved except by arbitrary presumptions of priority. jections based upon traditional grounds 213. The City Code, which does not have the force of law, but is intended to govern · shares issued or excessive consideration commercial behavior in the securities market, is issued under the authority of the City ous shareholder consent would preclude Working Party, a representative body of banking and investment interests established by Inc., 33 Del. Ch. 69, 74, 90 A.2d 652, the governors of the Bank of England to consider good business practice and the conduct of tender offers and mergers. THE CITY CODE ON T AKE-0VERS AND MERGERS (Rev. Apr. 1976). 214. Id. at 4. 215. ld. General Principle No. 4, at 12 states: ~ who cause unissued or treasury At no time after a bona fide offer has been communicated to the board of an lely for the purpose of obtaining or offeree company or after the board of an offeree company has reason to believe each1 their fiduciary duty to the that a bona fide offer might be imminent shall any action be taken by the board of the offeree company in relation to the affairs of the company, without the approval in general meeting of the shareholders of the offeree company, which could effectively result in any bona fide offer being frustrated or in the 524 66 IOWA LAW REVIEW 475 [1981] TENDER OFFERS

specified in rule 38 of the Code, in which shareholder approval is expressly 3. l required for the issuance of any shares, the issuance or grant of options or Decisionmaking authori convertible rights, the sale of a material amount of assets, and any other narily .vested in the board o: contract not in the ordinary course of business. 216 express powers to shareholdl Although the scope of the English model may not appeal in all of its programs I?ay be base~ u~ aspects to authorities on this side of the Atlantic, its basic philosophy is reduction m excess capttalli consistent with the sale of control analogue and the avoidance of other use, and investment 1 discriminatory treatment between control and noncontrolling share­ porate stock as underv~uec holders. To those who argue that shareholders will uniformly reject chases may have the effect o1 regardl~ss of merit corporate transactions that impinge upon the tender by management or insiders 1 offer, it should be noted that both the English and proposed models pro­ power. U 1 A control sharehc vide for shareholder consideration of the merits of the issuance of shares, likely to permit the board to 1 not a shareholder vote on acceptance or rejection of the tender offer. 217 seriously impede his ability t Moreover, it would be inappropriate to place upon noncontrolling onistic minority block capabl shareholders presumptions and burdens that exceed limitations placed plans. 2u Noncontrol sharehc upon sales of control by dominant shareholders. The latter are free, sub­ under a sale of control analc ject to the noted limitations, 218 to sell their shares pursuant to their own the possibility of a substah~ financial interests. Noncontrolling shareholders, therefore, should not be holding, or creates a veto po1 denied the opportunity to approve or reject defensive measures simply to shareholder approval follo11 because they too may be motivated by personal financial interests. 219 It may be anticipated that s chase programs in nontende~ shareholders of the offeree company being denied an opportunity to decide on much more difficult to obtan its merits. announced or imminent tend 216. Id. at 30-31. 217. The arguments in Lipton, supra note 93, at 123-24, against a shareholder The likelihood or probal referendum on tender offers presumed that the sole issue before shareholders is the accep­ measures taken during a tendl tance or rejection of the offer. The English and proposed models both regard the tender a decisionmaking role to non offer as a matter of disclosure. Primary emphasis in such votes will be upon the merits of probable that a domi~ant shi the proposed transaction, a somewhat different context, although admittedly one that l; would undoubtfully be influenced by the effect that the transaction would have on the restraints in similar c1rc~2 impending offer. 220. DEL. CODE ANN. tit. 8, § 11 218. See notes 171-80 supra and accompanying text. 219. Required shareholder approval of an increase in authorized shares indirectly ~~~- . 221. See, e.g., note 40 suprtJt(cD. places the question of issuance before the shareholders. Often, however, corporations are organized with or develop a surplus of authorized but unissued shares for indeterminate, poration). 222. For example, suppose there i future purposes, and shareholder approval in calmer times is given without attention to block, along with a statutory pro~ the ultimate use of such shares to thwart takeover bids or aggrandize management con­ merger. A repurchase program of · trol. There is little logical basis for permitting management of Corporation X with an are tendered by neutral shareholdl excess of authorized, unissued shares unilaterally to use such shares for defensive purposes excess of one-third of the outstanditl without shareholder approval, while management of Corporation Y, enjoying no such proposal. The dominant sharehol~, excess, must obtain shareholder approval in the context of full disclosure of purpose and risk of such a repurchase program 1.1 effect. The former simply rewards management foresight, at the considerable expense of 223. The recommended sharehol abusing the good faith of shareholder approval. The district court in Treadway Cos. with the recommendation of sharehc v. Care Corp., 490 F. Supp. 668 (S.D.N.Y. 1980), rev'd, FED. SEc. L. REP. (CCH), during an actual or pending tender 97,603 (2d Cir. 1980), was notably disturbed by the repeated efforts of target manage­ disparity results from the effect of su~ ment to issue shares in a manner "so as to avoid shareholder scrutiny." Id. at 686. The may create an effective veto block Wl issuance created a market shift in control, yet the court of appeals inexplicably failed to subsequent corporate action without recognize that management's conduct substantially distorted any original purpose for the· shares, however, may raise the total authorization of such shares and, indeed, would not have been possible but for the for­ create an effective foreclosure. Third tuitous existence of an excess in authorized shares. See note 112 supra. may be of management, may in tiJJ favorable market or tender offer CODI

·',- )WA LAW REVIEW 475 [1981] TENDER OFFERS 525 b shareholder approval is expressly 3. Repurchase of Shares the issuance or grant of options or tl amount of assets, and any other Decisionmaking authority for corporate repurchase of shares is ordi­ >usiness. 216 narily vested in the board of directors, as statutory provisions confer no express powers to shareholders relative to such decisions. uo Repurchase model may not appeal in all of its programs may be based upon a variety of legitimate purposes, such as 1e Atlantic, its basic philosophy is reduction in excess capitalization, obtaining shares for stock option or analogue and the avoidance of other use, and investment motivations when directors regard the cor­ ntrol and noncontrolling share­ porate stock as undervalued. Regardless of purpose, however, repur­ lareholders will uniformly reject chases may have the effect of aggrandizing the percentage of shares held ms that impinge upon the tender by management or insiders to a dominant position or an effective veto Uiglish and proposed models pro­ power.m A control shareholder, recognizing such possibilities, is not .e ~erits of the issuance of shares, likely to permit the board to undertake a repurchase program that would tr rejection of the tender offer. zn seriously impede his ability to transfer his shares by creating an antag­ ~ to place upon noncontrolling onistic minority block capable of vetoing merger or other reorganization as. ~hat exceed limitations placed plans. zu Noncontrol shareholders should be no less protected. Thus, ~holders. The latter are free, sub­ under a sale of control analogue, any repurchase program that carries beir shares pursuant to their own the possibility of a substantial increase in management's percentage ~holders, therefore, should not be holding, or creates a veto power within management, should be subject reject defensive measures simply to shareholder approval following full disclosure of control consequences. 9 personal financial interests. !1 It may be anticipated that shareholders will uniformly approve repur­ chase programs in nontender offer contexts. Approval, however, will be denied an opportunity to decide on much more difficult to obtain where the program may seriously impair announced or imminent tender offers. us ~ 93, at 123-24, against a shareholder The likelihood or probability of shareholder rejection of defensive ~le issue before shareholders is the accep­ measures taken during a tender offer contest are not grounds for denying proposed models both regard the tender 1 in such votes will be upon the merits of a decisionmaking role to noncontrolling holders, for it may be no less : context, although admittedly one that probable that a dominant shareholder would preclude the adoption of that the transaction would have on the restraints in similar circumstances. Where reasonable concern over the

11g text. 220. DEL CODE ANN. tit. 8, § 160 (1975); MODEL BUSINESS CORPORATION ACT § 6 ncrease in authorized shares indirectly (1975). Dlders. Often, however, corporations are 221. See, e.g., note 40 supra (discussion on the repurchase program of Marriott Cor­ II but unissued shares for indeterminate, poration). timer times is given without attention to 222. For example, suppose there is a dominant 50% shareholder and a 30% minority er bids or aggrandize management con­ block, along with a statutory provision requiring two-thirds majority approval of a management of Corporation X with an merger. A repurchase program of ll% of the outstanding shares, assuming all shares to use such shares for defensive purposes are tendered by neutral shareholders, would result in the minority block owning in nt of Corporation Y, enjoying no such excess of one-third of the outstanding shares, thus being capable of vetoing any merger context of full disclosure of purpose and proposal. The dominant shareholder, through control of the board, would assure that the Foresight, at the considerable expense of risk of such a repurchase program is avoided. I. The district court in Treadway Cos. 223. The recommended shareholder approval of all repurchase programs contrasts 180), rev'd, FED. SEC. L. REP. (CCH) , with the recommendation of shareholder approval of issuances of shares only occurring · the repeated efforts of tatget manage­ during an actual or pending tender offer. See text accompanying note 205 supra. The ! shareholder scrutiny." Id. at 686. The disparity results from the effect of such varying defensive measures. Repurchase programs e court of appeals inexplicably failed to may create an effective veto block within management that will IJ.Ot be overcome by any ~y distorted any original purpose for the·· subsequent corporate action without management approval. The issuance of additional not have been possible but for the for­ shares, however, may raise the total cost of a tender offer but may not so definitively ill. ~ee note 112 supra. create an effective foreclosure. Third party recipients of shares, however supportive they may be of management, may in time sell their shares to other parties or succumb to favorable market or tender offer conditions. 526 66 IOWA LAW REVIEW 475 [1981] TENDER OFFERS

future corporate welfare exists, management's concerns should be tested 4. in an independent forum, analogous to derivative actions that may be The sale of control analogw brought against controlling shareholders. For example, the repurchase of ing on behalf of the corporatia shares by management from the potential acquiror in Kors v. Careym ceedings against the pending Cl may have been necessary to protect the goodwill and customer relations brought to safeguard the interes1 of the target corporation. It is possible that, if given the opportunity, the corporate entity, are analc shareholders would have disapproved the repurchase on the premise that minority shareholders on behalf the repurchase denied an opportunity for a premium sale of their shares. shareholder's sale of control. M; Inferences and assumptions about shareholder judgment, however, are beyond raising issues similar_ inadequate bases to preclude shareholder involvement in favor of restraints upon the transference unilateral management action. If potential misuse, waste, or other tive role for tendering shareholc serious concern reasonably exists-as it may have in Kors v. Carey-with tion to litigate in a· collective regard to potential control of corporate assets by the acquiror, the proper material, to the statutory safeg1 response is not to deny shareholder involvement in decisionmaking, but takeover statutes, and other st; rather to emphasize the right of management to seek an injunction Act, 227 the Interstate Commerc against the acquisition of control. Litigation would focus attention upon use of loans to finance tender Cl the alleged potentialities of misuse in a context directly analogous to Antitrust litigation require common-law limitations on the sale of control. Management, acting on prevalence, potentiality for bw behalf of the corporation, would seek to enjoin a collective sale of control target to manufacture claims Jt on the grounds that the sale of shares cannot be made in circumstances Field, for example, sought to hCl indicating a significant danger of misuse or waste of corporate assets by posed Carter Hawley Hale teJ II the acquiring company. additional stores. 280 Moreover, The proposed approach substantially equates the transferability adequate attention to wheth rights of controlling and noncontrolling shareholders, permitting the lat­ resolvable by the acquiring com ter the same opportunity to influence decisions affecting their abilities to substantial expenditures of c~ sell as enjoyed by dominant shareholders. Concerns for corporate well­ tion, suggest that relatively hij being would be met not by unilateral management actions to issue or issuance of a preliminary injunJ repurchase shares, but rather through litigation to enjoin the acquisition based upon standards discussed in the following section. 225 226. Williams Act, see note 1 supra, I, 14d, together with statutory requireD I' 224. 39 Del. Ch. 47, 53, 158 A.2d 136, 139 (1960). aspects of the offer, were designee 225. In Mite Corp. v. Dixon, 633 F.2d 486 (7th Cir. 1980), the court denied the tender shareholders. Piper v. Chris-Craft lnd1 offeror's motion for preliminary injunction against a competing repurchase offer institu· ious to accept a premium offer are not ted defensively by target corporation. /d. at 490. There was no explicit finding about cor· is necessarily thrust into the role of eJ porate purpose other than a concem that the tender offer price was too low. A r~purchase cems involve potential violations uncL program unilaterally adopted by target management in opposition to an announced offer under§ 14e appear to have rendered s may create for shareholders two offers rather than one. However, it does not follow that & H. MARSH, SECURITIES REGULATIOII shareholders are therefore not adversely affected by target's competing offer. Where the 227. 15 U.S.C. § 80 (1976); see All target corporation, by acquiring a fairly limited number of shares, increases the percen· 470, 476 (S.D.N.Y. 1969). tage holding of shares of management to the point of an effective veto power, see text 228. 49 U.S.C. § 5 (1976); see B. F. accompanying notes 39-41 supra, a target offer limited in scope may have the effect of 1349, 1351 (3d Cir. 1970). , eliminating, not enlarging, the transferability opportunities of shareholders. Although 229. 12 C.F.R. §§ 207, 220 (1980); blocking of shareholder opportunity was apparently not involved in Mite Corp. v. Dixon, Corp .• 303 F. Supp. 1354, 1356 (S.D.l where the repurchase offer was for 350,000 shares, approximately 40% of the outstanding 230. During the pendency of its anti shares, competing tender offers by target corporation should not be regarded as favorable to acquire five Liberty House stores in to shareholders in all circumstances. The text's recommendation of shareholder approval a shopping complex in Houston, Tal is an appropriate safeguard against repurchases that may create the adverse consequences 1168, 1183 (N.D. Ill. 1980). noted. 231. See note 124 supra. )WA LAW REVIEW 475 (1981) TENDER OFFERS 527 mtent's concerns should be tested 4. Litigation :o derivative actions that may be The sale of control analogue does not deny target management, act­ :s. For example, the repurchase of ing on behalf of the corporation, the ability to initiate injunction pro­ ttial acquiror in Kors v. Careyu• ceedings against the pending or proposed tender offer. Such actions, ~ gt\Odwill and customer relations brought to safeguard the interests of nontendering shareholders as well as e that, if given the opportunity, the corporate entity, are analogous to derivative actions brought by te repurchase on the premise that minority shareholders on behalf of the corporation to enjoin a dominant t)r a premium sale of their shares. shareholder's sale of control. Management's authority, however, extends :-eholder judgment, however, are beyond raising issues similar to such common-law and equitable tolder involvement in favor of restraints upon the transference of control. It also encompasses a protec­ tential misuse, waste, or other tive role for tendering shareholders, unable because of their fragmenta­ mar have in Kors v. Carey-with tion to litigate in a· collective manner, to assure adherence, where assets by the acquiror, the proper material, to the statutory safeguards of the Williams Act, zu state anti­ l)}vement in decisionmaking, but takeover statutes, and other statutes such as the Investment Company tagement to seek an injunction 228 Act, ZZ 7 the Interstate Commerce Act, and regulations regarding the trion would focus attention upon use of loans to finance tender offers. 229 :a context directly analogous to oontrol. Management, acting on Antitrust litigation requires particular consideration, owing to its :SJljoin a collective sale of control prevalence, potentiality for burdensome delays, and the ability of the annot be made in circumstances target to manufacture claims through defensive acquisitions. Marshall e or waste of corporate assets by Field, for example, sought to bootstrap its antitrust claims against a pro­ posed Carter Hawley Hale tender offer by a hurried acquisition of additional stores. 230 Moreover, Marshall Field directors failed to direct ally ~equates the transferability I adequate attention to whether potential antitrust problems were shareholders, permitting the lat­ resolvable by the acquiring company. 231 These factors, coupled with the ~ cisions affecting their abilities to substantial expenditures of corporate funds created by antitrust litiga­ r5. Concerns for corporate well­ I tion, suggest that relatively high standards should apply prior to the nanagement actions to issue or issuance of a preliminary injunction. In particular: :igation to enjoin the acquisition ollowing section. 22S 226. Williams Act, see note 1 supra, requirements of timely filing of schedules 13d and 14d, together with statutory requirements in § 14(e) of full disclosure of all material 1960). aspects of the offer, were designed principally for the protection of the target 1 Cir. 1980), the court denied the tender shareholders. Piper v. Chris-Craft Indus., Inc., 430 U.S. 1, 35 (1977). Shareholders anx­ It a competing repurchase offer institu­ ious to accept a premium offer are not likely to initiate litigation. Management therefore fhere was no explicit finding about cor­ is necessarily thrust into the role of enforcing Williams Act rc;quirements. Similar con­ ler offer price was too low. A repurchase cerns involve potential violations under rule 10b-5, although the disclosure obligations ent ill, opposition to an announced offer under§ 14e appear to have rendered superfluous rule 10b-5 considerations. R. JENNINGS none. However, it does not follow that & H. MARSH, SECURITIES REGULATION 737 (4th ed. 1977). by target's competing offer. Where the 227. 15 U.S.C. § 80 (1976); see Armour & Co. v. General Host Corp .. 296 F. Supp. lumber of shares, increases the percen­ 470, 476 (S.D.N.Y. 1969). int of an effective veto power, see text 228. 49 U.S.C. § 5 (1976); see B. F. Goodrich Co. v. Northwest Indus., Inc., 424 F.2d imited in scope may have the effect of 1349, 1351 (3d Cir. 1970). )])Ortunities of shareholders. Although 229. 12 C.F.R. §§ 207, 220 (1980); see Metro Goldwyn Mayer, Inc. v. Transamerica :ly not involved in Mite Corp. v. Dixon, Corp., 303 F. Supp. 1354, 1356 (S.D.N.Y. 1969). approximately 40% of the outstanding 230. During the pendency of its antitrust claim Marshall Field entered into agreements ion should not be regarded as favorable to acquire five Liberty House stores in Tacoma, Washington and Portland, Oregon, and :ommendation of shareholder approval a shopping complex in Houston, Texas. Panter v. Marshall Field & Co., 486 F. Supp. at may create the adverse consequences 1168, 1183 (N.D. Ill. 1980). 231. See note 124 supra. 528 66 IOWA LAW REVIEW 475 (1981] TENDER OFFERS

(a) Antitrust problems created by defensive acquisitions, that is, (d) In cash tender offe acquisitions initiated and made with knowledge of pending tender offers, substantial percentage of sh: should not be regarded as being raised in good faith unless such acquisi­ occasioned by antitrust probl tions are pursuant to shareholder approval following full disclosure of company. Although divestit the potential tender offer and antitrust implications. Otherwise, target target corporate interests sue management may achieve an effective block on the transferability of employee relationships, and 1 shares to the potential acquiror, utilizing antitrust laws in a manner that completely achieve, the cons controlling shareholders, if given the opportunity, may consider objec­ extent. Moreover, suppliers aJ tionable. have adequate insulation agai (b) Judicial attention should be directed not simply to alleged anti­ tractual processes or leverage trust problems, but also to whether any reasonable efforts were made to The foregoing analysis S1l seek resolution of such problems. If antitrust concerns represent the most management's claims of an1 serious challenge to what may be an otherwise favorable merger, the analogous application to o directors' good faith in litigating such issues may be questioned where judicial relief may be fashio~ remedial possibilities are ignored or deliberately avoided. 282 Restricting the impact of tb (c) A preliminary injunction against the tender offer may not be the create substantial, adverse c most appropriate response even where potential antitrust problems are interests. Legitimate, nonanti evident. Judge Friendly's oft-quoted statement in support of preliminary or of other adverse consequt11 relief233 is not a signal for reflex injunctions against tender offers, but able through other forms of I rather was designed to encourage district court judges to frame orders at an early stage that permit flexibility and accommodation of competing ;. ~Oth• interests. The "variety of tools" available to courts include permitting the The preceding discussion tender offer to proceed with sufficient safeguards so that potential employed by target manage divestiture or other remedy may be readily imposed if appropriate. Thus, analogue, substantial questiQJ temporary limitations upon the absorption or disposal of major assets, measures not discussed may a1 changes in employee and customer practices, and other protective tion provisions in loan agr~ measures maintain a relative status quo and facilitate a nondisruptive lists, 238 other measures genen transition if remedial action is eventually required. 254 1979}, where, after a preliminary ilij 232. Judicial cognizance of the use and effects of antitrust claims for defensive pur­ rier Corp. v. United Technologies ( poses is well reflected by the circuit court's statement in Missouri Portland Cement Co. v. 1978-2 Trade Cas., 1 62,405 (2d ( Cargill, Inc., 498 F.2d 851 (2d Cir.), cert. denied, 419 U.S. 883 (1974): Order requiring United to maiRtain [D)rawing Excalibur from a scabbard where it would doubtless have remained will be capable of being divested pw sheathed in the face of a friendly offer, the target company typically hopes to 203. Accord, Anaconda Co~ v. CraJ obtain a temporary injunction which may frustrate the acquisition since the 235. One example is the alleged offering company may well decline the expensive gambit of a trial or, if it per­ laws in General Host Corp. v. Tri\ sists, the long lapse of time could so change conditions that the offer will fail 1973}, involving relatively minor lU even if, after a full trial and appeal, it should be determined that no antitrust other grounds in the complaint led t violation has been shown. Such cases require a balancing of public and private preliminary injunction, it would h; interests of various sorts. apparently resolvable shipping ~d I Id. at 854. Accord, Raybestos-Manhatten, Inc. v. Hi-Shear Indus., Inc., FED. SEC. L. the tender offer. REP. (CCH) 197,806, at 90,048-49 (E.D.N.Y. 1980). 236. Target management may 1 233. Judge Friendly observed: measures, as a tactic to force a high« [D)istrict judges would do well to ponder whether, if a violation has been suffi. defeated. Antitrust litigation, howev ciently proved on an application for a temporary injunction, the opportunity for this result, for the antitrust bullet II doing equity is not considerably better then than it will be later on. The court though target management's opposi1 will have a variety of tools useable at that stage. Wachtell, supra note 50, at 1437. Electronic Specialty Co. v. International Controls Corp., 409 F.2d 937, 947 (2d Cir. 2117. See note 46 supra. 1969). 2118. See Mesa Petroleum Co. v.. 234. See United States v. United Technologies Corp., 466 F. Supp. 196 (N.D.N.Y. WA LAW REVIEW 475 (1981] TENDER OFFERS 529 defensive acquisitions, that is, (d) In cash tender offer situations involving the acquisition of a 1wledge of pending tender offers, substantial percentage of shares, the costs of divestiture and damages n good faith unless such acquisi­ occasioned by antitrust problems will be borne heaviest by the acquiring oval following full disclosure of company. Although divestiture may create adverse consequences to implications. Otherwise, target target corporate interests such as goodwill, relations with suppliers, and block on the transferability of employee relationships, and preacquisition status quo may be difficult to r antitrust laws in a manner that completely achieve, the consequences may be remote and of uncertain >portunity, may consider objec- extent. Moreover, suppliers and employees of the acquired company may have adequate insulation against the effects of divestiture by normal con­ ~ted not simply to alleged anti­ tractual processes or leverage. reasonable efforts were made to The foregoing analysis suggests a cautious judicial response to target rus~ concerns represent the most management's claims of antitrust violations, and perhaps may have 1therwise favorable merger, the analogous application to other claimed violations where adequate ISSues may be questioned where judicial relief may be fashioned short of enjoining the tender offer. m lberately avoided. 2 3 ~ Restricting the impact of this string in the defensive bow would not . the tender offer may not be the create substantial, adverse consequences to shareholders or corporate >otential antitrust problems are interests. Legitimate, nonantitrust concerns of misuse of corporate assets mtent in support of preliminary or of other adverse consequences of control transference may be answer· lions against tender offers, but able through other forms of litigation and defensive measures. 256 : court judges to frame orders at i accommodation of competing 5. Other Defensive Measures to courts include permitting the The preceding discussion has focused upon the defensive techniques t safeguards so that potential employed by target management that raise, under a sale of control : ly imposed if appropriate. Thus, l· i9n or disposal of major assets, analogue, substantial questions of legitimacy. Although certain defensive ractices, and other protective measures not discussed may also be of doubtful validity, such as accelera · ~ 257 1 and facilitate a nondisruptive tion provisions in loan agreements and the withholding of shareholder 258 284 lists, other measures generally do not create serious concern under a y required. ~~·· 1979), where, after a preliminary injunction barring a tender offer had been denied, Car­ !I of antitrust claims for defensive pur· ,,,~ s rier Corp. v. United Technologies Corp., 1978-2 Trade Cas., , 62,393, at 76,378, af.fd, ent in Missouri Portland Cement Co. v. 1978-2 Trade Cas., , 62,405 (2d Cir. 1978), the district court issued a Hold Separate t, 419 883 (1974): u.s. Order requiring United to maintain Carrier "as a separate corporation such that Carrier it would doubtless have remained will be capable of being divested pursuant to any subsequent decree ..." 466 F. Supp. at target company typically hopes to 203. Accord, Anaconda Co. v. Crane Co., 4ll F. Supp. 1210, 1213 (S.D.N.Y. 1975). frustrate the acquisition since the 235. One example is the alleged violations of federal shipping and communication lSive gambit of a trial or, if it per­ laws in General Host Corp. v. Triumph American, Inc., 359 F. Supp. 749 (S.D.N.Y. ~ conditions that the offer will fail 1973), involving relatively minor aspects of the target company. Id. at 750. Although ld be determined that no antitrust other grounds in the complaint led to a cumulative effect that caused the court to issue a a balancing of public and private preliminary injunction, it would have been unfortunate had the relatively minor and apparently resolvable shipping and FCC issues been a determinative factor in precluding r. Hi-Shear Indus., Inc., FED. SEC. L. the tender offer. •80). 236. Target management may regard litigation, in common with other defensive measures, as a tactic to force a higher price from the tender offeror if the offer cannot be ~ther, if a violation has been suffi­ defeated. Antitrust litigation, however, is a particularly inappropriate method to achieve ary injunction, the opportunity for this result, for the antitrust bullet may not be readily shoved back into the barrel even than it will be later on. The court age. though target management's opposition to the tender offer may have been dropped. See Wachtell, supra note 50, at 1437. Is Corp., 409 F.2d 937, 947 (2d Cir. 237. See note 46 supra. 2!18. See Mesa Petroleum Co. v. Aztec Oil & Gas Co., 406 F. Supp. 910, 914 (N.D. 1 Corp., 466 F. Supp. 196 (N.D.N.Y. 530 66 IOWA LAW REVIEW 475 [1981] TENDER OFFERS sale of control analogue. For example, a defensive merger with a "white low, a strenuous publicity cam 243 knight" may be accomplished only pursuant to shareholder approval. 239 obligatory. More difficult questit Assuming full disclosure of the adverse effect of such a merger upon a price is a bona fide concern and Valuation Consequences of Cash Tender Offers, 33 J. FINANCE 505, 514 even if higher bids are achieved. (1978) ("Comparatively speaking, premiums for the resisted tenders ... are significantly fOWA LAW REVIEW 475 [1981] TENDER OFFERS 531

~. a defensive merger with a "white low, a strenuous publicity campaign is appropriate and perhaps usuant to shareholder approval. U 9 obligatory. 243 More difficult questions relate to judging when the issue of :se effect of such a merger upon a price is a bona fide concern and determining which defensive measures e merger is equivalent to majority may be justified as a means of augmenting the offering price. Aggressive offer. Broad-scale publicity cam­ defensive measures undertaken unilaterally by target management are an ler options, are consistent with full inappropriate response to the issue of price inadequacy. A market price tely policed by the disclosure stan­ viewed by management as unrealistically low may well be the result of :ion in liquidity through increased perceived judgments as to management's capabilities. Moreover, a bid ayments, and other uses of liquid that is in fact inadequate may generate competing bids of higher values, ~t as a brake upon a tender offer. and the advance notice provisions in numerous state statutes2H provide a the capitalization structure of the time frame for competing bids to be formulated. In an era of substantial hey, are governed by standards of merger activity, the absence of competing bids may belie management's il give directors considerable pause assertions that defensive measures are necessary to avoid inadequate cash outlays. 241 Other defensive offers. 245 Morevoer, litigation, and the invoking of regulatory provisions .· primarily because any effort to are high risk methods of adducing a higher offering price, for legal !le of defensive strategies is doomed arguments once raised may not be conveniently ignored when a higher bid ~uities of corporate management has been obtained. l, however, that analysis of new ~e sale of control analogue, thus CONCLUSION ly ambiguous or conflicting stan- Determining the validity of defensive measures by target manage­ ment through fiduciary, statutory, or economic perspectives is impeded Means of Improving the by ambiguities and conflicts inherent in those traditional standards. Shareholders Efforts to resolve competing claims by reference to macrocosmic theories have inevitably created conflicting arguments. Judicial response has not it:ken towards management if their created clarity because opinions tend to confuse distinctions among stan­ sis viewed as a method of forcing a dards and often fail to address adequately the full implications of par­ r. Indeed, shareholders may often ticular concepts cited in support of their decisions. ffers as a result of management's An effort to avoid ideological ambiguities that defy consensus or ~lieves the offering price to be too greater than the passive tenders."). For discussion regarding the potential adverse effects ,_r4-1975 Transfer Binder] FED. SEC. L. REP. of competing tender offers initiated by target management, see note 225 supra. 243. If price inadequacy is based upon nondisclosed material information unknown to ot be required for the target corporation the offeror and target shareholders, rule 10b-5 considerations might require disclosure so ~of its shares to its acquired partner, this ,that shareholders may make informed judgments about the value of the target stock. The 11easuie than the more common merger of goal of informed decisionmaking by shareholders has been cited as the basis for recom· ~. e.g., Brown Group to Acquire Outdoor mending that the Williams Act be amended to require management communication to Wall St. J., May 8, 1979, at 12, col. 3. shareholders for all tender offers. Lynch & Steinberg, supra note 74, at 938. Management pp. 660, 662 (D. Mass.), vacated on other is currently under no duty to respond to tender offers, Broffe v. Horton, 172 F.2d 489, 494 (2d Cir. 1949), subject to disclosure concerns noted above. ctors who consent to the payment of any 244. Delaware, for example, requires a minimum 20 days advance notice to the cor­ . DEL. CORP. CODE§ 174 (1974). Directors poration. DEL. CODE ANN. tit. 8, § 203(a)(l) (Supp. 1978) . nte assets determined through derivative 245. See A. FLEISCHER, supra note 18, at 100-01, suggesting that, in light of the pro­ 405, 409 (Del. 1962). of an "auction" by reason of the delays occasioned by state statutes, "the conten­ a negotiated offers by "white knights" or that management should seriously consider opposing an initial offer in order to ing the period of delay created by defen· a better price for shareholders is strengthened." No indication is given as to what ing offers the bids may be raised to meet-, "opposing" measures would be appropriate, but presumably the argument does not sug­ nessure on management. See Kummer at-·j or countenance measures that effectively preclude hostile offers from proceeding Tender Offers, 33 J. FINANCE 505, 514 if higher bids are achieved. · the resisted tenders . . . are significandy 532 66 IOWA LAW REVIEW 475 [1981] reasonable accommodation, and to view defensive measures in more Contribution c direct and realistic terms, is reflected by the sale of control analogue. The analogue views the tender offer as an effort to achieve a collective Multiparty Actio1 sale of control through the common response of tendering shareholders. There is no persuasive justification for imposing greater impediments upon the collective sale of control than are imposed upon a dominant M. Patri shareholder's private transference of control shares. Judicial limitations that have developed to restrain the actions of dominant shareholders are appropriate guidelines to evaluate restraints upon transferability Most private civil actions 1 imposed by defensive measures. In this context certain measures lack reas­ Exchange Act of 19341 and rule ~ onable justification while others may be appropriate only if consistent than by trial. 3 The reluctance tot with express or implied shareholder consent. Whatever the result of of catastrophic damages in the evaluation, the sale of control analogue is better suited than currently When all defendants participate prevalent rationales to reflect the dynamics of the tender offer context. defendant in settlement is arrive ants and the plaintiff, and the~ ficult questions involved in app 5 with violating rule IOb-5. It is I ferent economic and tactical int

*Assistant Professor of Law, Hofstt J.D. 1974, University of Virginia_. 1. Securities Exchange Act of 1954 gives the Securities and ExchangeConil prohibit "any manipulative or deceptiv 2. 17 C.F.R. § 240.10b-5 (1976). It shall be unlawful for any pc means or instrumentality of in~ facility of any national securities·~ (a) To employ any device, scl (b) To make any untrue state material fact necessary in order to· circumstances under which they ~ (c) To engage in any act, pra would operate as a fraud or deceit chase or sale of any security. 3. Mullaney, Theories of Me'asur~ Damages on Liability, 46 Fo~HAM L, 4. See, e.g., S.E.C. v. Texas Gul (Friendly, J., concurring), cert. den~ Sulphur-The Second Round: Privity c Cases, 63 Nw. L. REV. 423, 423 (196E 5. See Duban v. Diversified Mort. L. REP. (CCH), 97,351 (S.D.N.Y. 19 of an action under rule 10b-5 and,diso reasonableness of the individual defen( evaluating the fairness of settlement, t pensation is being paid to the class, I tribution of each defep.dant." I d. at Dismissal of Stockholders' Actions - (1969).