Frank H. Easterbrook

“ We have not been elected custodians of investors' wealth. States need not treat investors' welfare as their summum bonum. Perhaps they choose to protect managers' welfare instead, or believe that the current economic literature reaches an incorrect conclusion and that despite appearances takeovers injure investors in the long run. Unless a federal statute or the Constitution bars the way, Wisconsin's choice must be respected. ”

“ A statute that precludes investors from receiving or accepting a premium offer makes them worse off. It makes the economy worse off too, because the higher bid reflects the better use to which the bidder can put the target's assets. (If the bidder can't improve the use of the assets, it injures itself by paying a premium.)
Universal, making an argument common among supporters of anti-takeover laws, contends that its investors do not appreciate the worth of its business plans, that its stock is trading for too little, and that if investors tender reflexively they injure themselves. ”

“ Every rule of corporate law affects investors who live outside the state of incorporation, yet this has never been thought sufficient to authorize a form of cost-benefit inquiry through the medium of the Commerce Clause.
Wisconsin, like Indiana, is indifferent to the domicile of the bidder. A putative bidder located in Wisconsin enjoys no privilege over a firm located in New York. So too with investors: all are treated identically, regardless of residence. ”

“ The corporate world is full of partially owned subsidiaries. If there is gain to be had from changing the debt-equity ratio of the target, that can be done consistent with Wisconsin law. The prospect of being locked into place as holders of illiquid minority positions would cause many persons to sell out, and the threat of being locked in would cause many managers to give assent in advance, as Wisconsin allows. (Or bidders might demand that directors waive the protections of state law, just as Amanda believes that the directors' fiduciary duties compel them to redeem the poison pill rights.) ”

“ Wisconsin's law is no different in effect from one saying that for the three years after a person acquires 10% of a firm's stock, a unanimous vote is required to merge. Corporate law once had a generally-applicable unanimity rule in major transactions, [8] a rule discarded because giving every investor the power to block every reorganization stopped many desirable changes. (Many investors could use their "hold-up" power to try to engross a larger portion of the gains, creating a complex bargaining problem that often could not be solved.) ”

“ To say that states have the power to enact laws whose costs exceed their benefits is not to say that investors should kiss their wallets good-bye. States compete to offer corporate codes attractive to firms. Managers who want to raise money incorporate their firms in the states that offer the combination of rules investors prefer. ”

“ Investors concerned about stock-watering often arranged for firms to issue pre-emptive rights, entitlements for existing investors to buy stock at the same price offered to newcomers (often before the newcomers had a chance to buy in) . Poison pills are dilution devices, and so pre-emptive rights ought to be handy countermeasures. [11] So too there are countermeasures to statutes deferring mergers. The cheapest is to lower the bid to reflect the costs of delay. Because every potential bidder labors under the same drawback, the firm placing the highest value on the target still should win. ”

“ State anti-takeover statutes . . . may be paradigm examples of cost-exporting legislation that is enacted in response to lobbying pressure by in-state constituents. [The managers who gain from the law live in-state; the investors who lose may live elsewhere.] In the long run, however, states have no ability to export costs to non-resident investors. When entrepreneurs want to raise capital for a corporate venture, they must decide where to incorporate. The choice of where to incorporate in turn affects the price investors are willing to pay for shares. ”

“ Laws that in the short run injure investors and protect managers will in the longer run make the state less attractive to firms that need to raise new capital. If the law is "protectionist", the protected class is the existing body of managers (and other workers) , suppliers, and so on, which bears no necessary relation to state boundaries. States regulating the affairs of domestic corporations cannot in the long run injure anyone but themselves. ”

“ Although a takeover-proof firm leaves investors at the mercy of incumbent managers (who may be mistaken about the wisdom of their business plan even when they act in the best of faith) , a takeover-resistant firm may be able to assist its investors. An auction may run up the price, and delay may be essential to an auction. Auctions transfer money from bidders to targets, and diversified investors would not gain from them (their left pocket loses what the right pocket gains) ; diversified investors would lose from auctions if the lower returns to bidders discourage future bids. ”

“ How about state laws that allow many firms to organize without traded shares? Universities, hospitals, and other charities have self-perpetuating boards and cannot be acquired by tender offer. Insurance companies may be organized as mutuals, without traded shares; retailers often organize as co-operatives, without traded stock; some decently large companies (large enough to be "reporting companies" under the '34 Act) issue stock subject to buy-sell agreements under which the investors cannot sell to strangers without offering stock to the firm at a formula price ”

“ An "interested stockholder" is one owning 10% of the voting stock, directly or through associates (anyone acting in concert with it) , § 180.726 (1) (e) . A "business combination" is a merger with the bidder or any of its affiliates, sale of more than 5% of the assets to bidder or affiliate, liquidation of the target, or a transaction by which the target guarantees the bidder's or affiliates debts or passes tax benefits to the bidder or affiliate, § 180.726 (1) (e) . ”

“ The Williams Act regulates the process of tender offers: timing, disclosure, proration if tenders exceed what the bidder is willing to buy, best-price rules. It slows things down, allowing investors to evaluate the offer and management's response. Best-price, proration, and short-tender rules ensure that investors who decide at the end of the offer get the same treatment as those who decide immediately, reducing pressure to leap before looking. ”

“ Buyers of stock in Wisconsin firms may exercise full rights as investors, taking immediate control. No interstate transaction is regulated or forbidden. True, Wisconsin's law makes a potential buyer less willing to buy (or depresses the bid) , but this is equally true of Indiana's rule. Many other rules of corporate law -- supermajority voting requirements, staggered and classified boards, and so on -- have similar or greater effects on some person's willingness to purchase stock. CTS, 481 U.S. at 89-90. States could ban mergers outright, with even more powerful consequences. ”

“ Indiana enacted a second-generation statute, applicable only to firms incorporated there and eliminating governmental veto power. Indiana's law provides that the acquiring firm's shares lose their voting power unless the target's directors approve the acquisition or the shareholders not affiliated with either bidder or management authorize restoration of votes. We concluded that this statute, too, is inimical to investors' interests, preempted by the Williams Act, and unconstitutional under the Commerce Clause. Dynamics Corp. ”

“ The price of a firm's stock represents investors' consensus estimate of the value of the shares under current and anticipated conditions. Stock is worth the present value of anticipated future returns -- dividends and other distributions. Tender offers succeed when bidders offer more. ”

“ I Amanda Acquisition Corporation is a shell with a single purpose: to acquire Universal Foods Corporation, a diversified firm incorporated in Wisconsin and traded on the New York Stock Exchange. Universal is covered by Wisconsin's anti-takeover law. Amanda is a subsidiary of High Voltage Engineering Corp., a small electronics firm in Massachusetts. Most of High Voltage's equity capital comes from Berisford Capital PLC, a British venture capital firm, and Hyde Park Partners L.P., a partnership affiliated with the principals of Berisford. ”

“ Delaware allows a merger to occur forthwith if the bidder obtains 85% of the shares other than those held by management and employee stock plans. If the bid is attractive to the bulk of the unaffiliated investors, it succeeds. Wisconsin offers no such opportunity, which Amanda believes is fatal.
Even in Wisconsin, though, options remain. Defenses impenetrable to the naked eye may have cracks. Poison pills are less fatal in practice than in name (some have been swallowed willingly) , and corporate law contains self-defense mechanisms. ”

“ Governor of Maryland held that the law is consistent with the Commerce Clause, even on the assumption that it injures consumers and investors alike. A state with the power to forbid mergers has the power to defer [p509] them for three years. Investors can turn to firms incorporated in states committed to the dominance of market forces, or they can turn on legislators who enact unwise laws. The Constitution has room for many economic policies. " [A] law can be both economic folly and constitutional." ”

“ The best available data show that if a firm fends off a bid, its profits decline, and its stock price (adjusted for inflation and market-wide changes) never tops the initial bid, even if it is later acquired by another firm. ”

“ Click for Enhanced Coverage Linking Searchesissued non-voting stock to outside investors while reserving voting stock for the family, thus preventing outsiders from gaining control (dual-class stock is becoming more common) ; firms issue and state law enforces poison pills. All of these devices make tender offers unattractive (even impossible) and greatly diminish the power of proxy fights, success in which often depends on buying votes by acquiring the equity to which the vote is attached. ”

“ Investors have no right to receive tender offers. More to the point -- since Amanda sues as bidder rather than as investor seeking to sell -- the Williams Act does not create a right to [p505] profit from the business of making tender offers. It is not attractive to put bids on the table for Wisconsin corporations, but because Wisconsin leaves the process alone once a bidder appears, its law may co-exist with the Williams Act. ”

“ But the limitation of our inquiry to equity investors does not affect the analysis, because no evidence of which we are aware suggests that bidders confiscate workers' and other participants' investments to any greater degree than do incumbents -- who may (and frequently do) close or move plants to follow the prospect of profit. ”

“ Nor can a state export costs to the founding entrepreneur since corporations can be incorporated anywhere, regardless of the firm's physical location. States that enact laws that are harmful to investors will cause entrepreneurs to incorporate elsewhere. ”

“ Often only the slow forces of competition reveal that information. Early economic studies may mislead, or judges (not trained as social [p508] scientists) may misinterpret the available data or act precipitously. ”

“ Antidotes for flip-in rights also could be issued. In general, whenever one firm can issue rights allowing the purchase of cheap stock, another firm can issue the equivalent series of contingent preemptive rights that offsets the dilution. ”

“ No matter how popular the offer, the ban applies: obtaining 85% (even 100%) of the stock held by non-management shareholders won't allow the bidder to engage in a business combination, as it would under Delaware law. See BNS, Inc. v. Koppers Co., 683 F. Supp. 458 (D.Del. 1988) ; RP Acquisition Corp. v. Staley Continental, Inc., 686 F. Supp. 476 (D.Del. 1988) ; City Capital Associates L.P. v. Interco, Inc., 696 F. Supp. 1551 (D.Del.) , affirmed, 860 F.2d 60 (3d Cir. 1988) . Wisconsin firms cannot opt out of the law, as may corporations subject to almost all other state takeover statutes. ”

“ So § 28 (a) allows states to stop some transactions federal law would permit, in pursuit of an approach at odds with a system emphasizing disclosure and investors' choice. Then there is the traditional reluctance of federal courts to infer preemption of "state law in areas traditionally regulated by the States", California v. ”

“ See also Ronald J. Gilson & Reinier Kraakman, Delaware's Intermediate Standard for Defensive Tactics: Is There Substance to Proportionality Review?, 44 Bus.Law. 247, 256-60, 267-73 (1989) .↑ Because both the district court and the parties -- like the Williams Act -- examine tender offers from the perspective of equity investors, we employ the same approach. States could choose to protect "constituencies" other than stockholders. Creditors, managers, and workers invest human rather than financial capital. ”