States of Grace

The state with the toughest antitakeover statutes? It's not Delaware.

Corporate 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.


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