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American business in the last twenty-five years has experienced an explosion in the number of hostile corporate takeovers. Attempts to acquire billion-dollar companies are becoming commonplace. Smaller takeovers barely attract the attention of the financial press. The likelihood of a tender offer has become another everyday concern of management, as much a part of the business landscape as sales figures and profit margins.
Proponents of hostile corporate takeovers argue that such takeovers generally benefit society and corporate shareholders. They provide a way to discipline the management of companies which are operating inefficiently or not returning the full value of their operations to the company's shareholders. They help produce synergistic combinations of companies to achieve economies of scale and a more rational organizational structure. They help insure that corporate assets end up in the hands of those able to use them most efficiently. In the process, proponents argue that hostile takeovers provide value to target company shareholders that otherwise they would not have received.
Opponents argue that hostile takeovers have detrimental effects on both the corporation and on society as a whole. According to the opponents, hostile takeovers represent not an increase in corporate efficiency, but inefficient empire-building by the bidder. They result in an unhealthy increase in corporate indebtedness and force corporate management to focus on short-term profits at the expense of long-term economic growth. Opponents of hostile takeovers argue that target shareholders are coerced into selling their shares at less than their fair value. Even if the target shareholders are adequately compensated, opponents argue that hostile takeovers have a detrimental effect on the local community in which the target company operates, on employees of the target company, on creditors and other debt-holders of the target, and on other constituencies which have no voice in the tender offer decision.
Congress reacted to the perceived abuses in tender offers in 1968, passing the Williams Act as an amendment to the Securities Exchange Act of 1934. At that time, only one state, Virginia, had a statute directly regulating takeovers. After the adoption of the Williams Act, states began to respond in kind; by 1979, thirty-seven states had enacted takeover statutes. This first generation of state statutes was subjected to continual constitutional attack until 1982 when the United States Supreme Court, in a greatly divided opinion, struck down the Illinois takeover statute. That decision was followed by a second generation of state statutes which changed their focus from direct regulation of tender offers to the use of procedural requirements in state corporation codes to protect the shareholders of the target company. The constitutionality of these second generation statutes remained in doubt until 1987, when the Supreme Court approved the constitutionality of the Indiana Control Share Acquisitions Chapter in CTS v. Dynamics Corp. of America. CTS was followed by the adoption of a number of state statutes mimicking and, in many cases, going beyond the Indiana statute.
The premise of this article is that most of the recent state legislation is ill-advised and misguided. The problems envisioned by the critics of hostile takeovers are either grossly exaggerated or nonexistent, and the statutes do little to eliminate those problems that may exist. Many of these statutes present serious constitutional problems. In addition, drafting errors and ambiguities have resulted in unintended consequences.
This article uses recent Nebraska legislation as a vehicle to examine takeovers and some of the problems with antitakeover legislation. In its 1988 legislative session, the Nebraska Legislature responded to the CTS decision by enacting its third in a series of corporate takeover bills, the Nebraska Shareholders' Protection Act. Although the appellation is appealing, it is a mischievous misnomer. The Act does not protect shareholders; it harms them. The Legislature's acceptance of the popular criticism of corporate takeovers has created a bill that promotes economic inefficiency and corporate waste at the expense of the shareholders the bill was designed to protect. The legislative rush to fall in step with other states and address the increasing number of corporate takeovers has resulted in a poorly drafted statute that is bad policy and partially unconstitutional.