VideoCorporate raiders are hardly a company's top worry these days, with the economy dampening acquisition activity of any kind and even the reemergent T. Boone Pickens sounding less threatening in recent interviews. But even without the barbarians storming the gates, it's still vital to keep the antitakeover barricades manned.
In certain industries, acquisitive corporations are on the prowl, cautions Northeastern University finance professor Donald Margotta, who expects unsolicited bids to become a wider trend. Further, a change in economic conditions could foster new generations of individual raiders at any time.
"Companies should always be thinking about this," says Margotta. "As a CFO or CEO you have a fiduciary duty, and it is in the company's best interests to have a strong takeover defense." Echoing the position of most defense-minded corporations, the professor thinks shareholders, on balance, benefit from poison pills and other "porcupine" measures--in part because their companies reap higher premiums if takeovers en-sue. (The standard shareholder- advocate position, of course, is that a well-defended firm commands a lower share price, reflecting less exposure to a possible bidding war.)
Where companies feel at all vulnerable, the use of state antitakeover laws can play an important defensive role. States nearly always seek to protect businesses by making hostile bids harder to mount (California and Texas, which have no antitakeover laws, are the major exceptions), and 90 percent of U.S. companies choose to incorporate in states that have antitakeover provisions. The nuances in each statute can affect a company's ability to resist. Some states, including Ohio and Pennsylvania, install "control-share" clauses, creating obstacles to the purchase of large blocks of stock. Other states, including Delaware, have moratorium laws that infringe less on voting rights, while still presenting barriers to unfriendly offers.
The most obvious time to design defensive strategies is before going public, when choosing a state of incorporation is part of the normal process. But for companies already incorporated, understanding existing statutes, and coordinating the corporate bylaws with them, can improve the ability to counter unwanted advances. It's best to do this before a firm becomes the target of a hostile bid, says Margotta. "You're judged by a different standard when you act in the heat of a takeover battle," he cautions, and courts may toss out your defenses.
Which state laws offer the strongest defenses? Experts usually put Pennsylvania, Ohio, Massachusetts, and Wisconsin on the list, ahead of Delaware, the state usually considered to be most responsive to director needs.
Mary Ann Jorgenson, of the Cleveland-based law firm Squire, Sanders & Dempsey, is especially high on the "Ohio model," which also combines many stronger elements adopted in other states. "We're not shy in seriously suggesting that when companies are ready to go public, they consider Ohio" as their state of incorporation, says Jorgenson.
For an illustration of the Ohio law's effect on a hostile bid, Professor Margotta points to TRW Inc.'s ongoing effort to resist Northrop Grumman Corp. The battle has put both the Ohio statute and the entire hostile-takeover genre in the spotlight. Los Angeles-based Northrop has challenged the constitutionality of Ohio's law, even while increasing its offering price from $47 to $53 a share since February. "Without that law, Northrop would currently be the proud owner of TRW at the price it originally offered," says Margotta.
The British Were Coming
TRW's battle has certainly been on the minds of other companies incorporated in Ohio or other states with particularly strong antitakeover protections. Consider Applied Industrial Technologies (AIT), a Cleveland-based industrial parts and services company that reincorporated from Delaware to Ohio back in the late 1980s, mainly to qualify for what were then brand-new Ohio takeover protections. "The whole idea is to be prepared," says John R. Whitten, vice president, treasurer, and CFO, who was controller when the company reincorporated.
Like most states that toughened their statutes at that time, Ohio acted in response to a particular hostile bid--British corporate raider Sir James Goldsmith's pursuit of The Goodyear Tire & Rubber Co. Around the same time, Pennsylvania adopted a strict new standard to help Armstrong Holdings Inc. fend off the Belzberg family of Canada.
The strong antitakeover provisions installed by Ohio may have been the attraction behind AIT's reincorporation, says Whitten, but the company first sought feedback from consultants about the potential effect on its stock price; all advised that it wouldn't be material. Shareholders approved the incorporation change with little debate.
Central to the Ohio law is the control-share provision, which blocks the purchase of more than a 20 percent interest in a firm unless the acquirer first wins majority approval from holders of the other shares. The Ohio control-share statute is still considered among the nation's strongest, even though half of U.S. states now have adopted similar provisions. A restriction on arbitrageurs, however, set Ohio apart from other states. This law limits voting power for those who purchase shares for short-term gains, and requires them to disgorge to the target firm any short-term deal profits over $250,000.
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