States of Grace

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

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.

Ohio also includes an “expanded constituency” section describing a director’s duty as being to “the long-term as well as short-term interests of the corporation and its shareholders,” and to a range of other stakeholders, including employees, suppliers, creditors, and customers. “This fits in well with [J.M.] Smucker’s values and philosophy, and we think that it is an important and appropriate thing for a state to encourage,” says Steven J. Ellcessor, vice president, finance and administration, and CFO of the Orrville, Ohio-based food-products concern. The Ohio statutes, under which Smucker is incorporated, “help keep control of the company in the hands of the directors,” which is where shareholders want it, he says.

Ohio further helps companies by applying a favorable “business judgment rule,” says attorney Jorgenson, who also is chairman of the American Bar Association’s committee on corporate laws. Ohio law says that “if directors act with care, decisions will not be second-guessed by judges, including decisions regarding takeovers.” In Delaware, on the other hand, directors have, on occasion, been second-guessed by judges.

“Just Say No”

For all their various benefits, the Ohio statutes distill down to one big advantage for AIT’s Whitten: “Basically, we can just say no,” if the board finds fault with a hostile offer. AIT and Smucker both merit high takeover-resistance scores–9.25 and 9.5, respectively, on a 10-point scale–from, a New York-based research firm specializing in “takeover defense intelligence.” The applicable state law, however, is one of many elements in the rating, says company president James Sussmann.


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