Saturday, March 22, 2014
Professors Lucian Bebchuk and Robert Jackson have recently posted a paper to SSRN, Toward a Constitutional Review of the Poison Pill. In the paper, they argue that state laws that facilitate the use of “poison pills” are unconstitutional in the sense that they are in conflict with the Williams Act, because they have the potential to introduce undue delay into the tender offer process. To the extent Profs. Bebchuk and Jackson purport to be summarizing existing doctrine, I have my doubts....
[More after the jump]
The Williams Act was passed in 1968 to regulate the tender offer process. Among other things, it requires various disclosures by offerors and by those who oppose the tender, and the statute (and implementing regulations) requires certain elements of substantive fairness in the terms of an offer (i.e., tendered shares must be accepted on a pro rata basis, all shareholders must receive the same price, shareholders must be permitted to withdraw shares while the offer remains open, etc)
In Edgar v. MITE Corp.(1982), the Supreme Court held that Indiana’s antitakeover statute – which permitted the secretary of state to review and approve proposed takeovers of domestic corporations – violated the Commerce Clause. In addition, a plurality of the Court held that the statute violated the Williams Act because, among other things, it permitted undue delay before shareholders would have an opportunity to consider and respond to a tender offer. Statutes that might result in more limited delays, designed to benefit shareholders, were approved in CTS Corp. v. Dynamics Corp. of America (1987).
Profs. Bebchuk and Jackson use MITE and subsequent caselaw to argue that state laws that do not command a delay in a tender offer, but simply permit delays as a result of tactics employed by the target’s management - and when those delays run far beyond the limited delays incident to protecting shareholders contemplated in CTS - they run equally afoul of the Williams Act. In other words, as I understand it, certain target management defensive tactics, such as the poison pill, are themselves prohibited by the Williams Act, and state laws that purport to authorize them are therefore invalid. Profs. Bebchuk and Jackson also argue that tactics that outright prevent the acquirer from purchasing a controlling block of the target’s shares, rather than tactics that prevent the acquirer from exercising control once shares are acquired (such as staggered boards), are particularly suspect.
Wachtell Lipton has responded to this argument at the CLS Blue Sky blog. But my basic problem with this argument is its failure to grapple with the Supreme Court’s holding in Schreiber v. Burlington Northern, Inc. (1985), which was decided by a unanimous Court (with Justices Powell and O’Connor not participating) three years after MITE.
Burlington involved a hostile takeover of a company called El Paso. The bidder made a partial tender offer for El Paso shares, then withdrew the offer, negotiated a deal with El Paso management, and, with management’s blessing, made a new tender offer, but for fewer El Paso shares (with the remainder to be purchased directly from El Paso instead of from the shareholders). As a result, a shareholder of El Paso brought a Section 14(e) lawsuit, objecting that the withdrawal of the original offer and the replacement with an inferior offer constituted a “fraudulent, deceptive, or manipulative” act in violation of Section 14(e) of the Williams Act.
The Supreme Court held that Section 14(e) regulates disclosures pertaining to tender offers, and not substantive behavior. As the Court put it:
It is clear that Congress relied primarily on disclosure to implement the purpose of the Williams Act… To implement this objective, the Williams Act added §§ 13(d), 13(e), 14(d), 14(e), and 14(f) to the Securities Exchange Act. Some relate to disclosure; §§ 13(d), 14(d), and 14(f) all add specific registration and disclosure provisions. Others -- §§ 13(e) and 14(d) -- require or prohibit certain acts so that investors will possess additional time within which to take advantage of the disclosed information…. [Section 14(e)] supplements the more precise disclosure provisions found elsewhere in the Williams Act, while requiring disclosure more explicitly addressed to the tender offer context than that required by § 10(b)….
Congress' consistent emphasis on disclosure persuades us that it intended takeover contests to be addressed to shareholders. In pursuit of this goal, Congress, consistent with the core mechanism of the Securities Exchange Act, created sweeping disclosure requirements and narrow substantive safeguards. The same Congress that placed such emphasis on shareholder choice would not at the same time have required judges to oversee tender offers for substantive fairness.
Thus, in the absence of any argument that the offeror had withheld information or misrepresented the truth, a Section 14(e) claim could not proceed.
But that’s not the entire story. As the Supreme Court acknowledged in a footnote, the Court had granted cert in Burlington to resolve a circuit split. That circuit split, however, was not simply about whether “deception” was an element of a Section 14(e) violation. That circuit split was specifically about whether target corporations may employ defensive tactics in response to tender offer bids – including defensive tactics that introduce substantial delays in the process.
For example, in Mobil Corp. v. Marathon Oil Co., 669 F.2d 366 (6th Cir. 1981) (cited by the Supreme Court as representing one side of the split), the Sixth Circuit held that the target corporation violated Section 14(e)’s prohibitions on “manipulation” by granting a favored bidder the option to acquire the corporate “crown jewel” in the event that a hostile bidder gained control of the company, and by granting “lock up” options to the favored bidder, allowing it to obtain 17% of the target’s shares, and thus dramatically increasing costs to the hostile bidder. These tactics were, of course, fully disclosed to shareholders, but the Sixth Circuit believed they artificially manipulated the price of the target’s stock, in violation of the Williams Act.
On the other side of the split, the Second Circuit in Data Probe Acquisition Corp. v. Datatab, Inc., 722 F.2d 1 (2d Cir. 1983) – also cited by the Supreme Court – held that a target corporation did not violate Section 14(e) awarding to a favored acquirer a sufficient number of stock options to prevent any hostile tender offeror from obtaining a controlling block of the target’s shares for an entire year. In the Second Circuit’s view, this tactic was fully disclosed, and thus was not a manipulative device under Section 14(e); at most, it was a breach of fiduciary duty, a matter relegated to state law. The Second Circuit distinguished MITE on the ground that MITE involved a legislatively-imposed restriction on tender offers, rather than a corporation’s choice to engage in defensive tactics.
In Burlington, when the Supreme Court sided with the circuits that interpreted Section 14(e) to require some element of deception, it explicitly approved of the Second Circuit’s holding in Data Probe. Indeed, Data Probe was cited by the Delaware Supreme Court in Moran v. Household Int’l, Inc., 500 A.2d 1346 (Del. 1985) – decided just a few months after Burlington – when it held that poison pills do not run afoul of the Williams Act.
The punchline to Burlington, of course, is that literally six days after the decision issued, the Delaware Supreme Court decided Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985) – in which it began to set limits on the defensive tactics that target corporations could employ to fend off hostile bidders. In other words, as the federal courts retreated from this arena, Delaware stepped in. (A more extensive discussion of Burlington can be found in Tyson, The Proper Relationship Between Federal and State Law in the Regulation of Tender Offers, 66 Notre Dame L. Rev. 241 (1990)).
But more importantly, for the purposes of this discussion, it seems that Burlington, as well, drew a distinction between deceptive conduct, and disclosed conduct that involved tactics employed by incumbent management to defeat a takeover bid.
Now, to be fair, Burlington only addressed a claim under Section 14(e), and not the Williams Act as a whole or its preemptive effect on state laws facilitating poison pills. Section 14(d) was mentioned only in passing, and it is Section 14(d) that the MITE plurality relied upon when discussing the evils of introducing excessive delays in the tender offer process. Additionally, Data Probe and Mobil Corp. involved takeover contests, where management favored one bidder over another; they did not involve simple attempts by incumbent management to retain control of the target.
Nonetheless, Burlington’s approval of Data Probe suggests that the Williams Act does not bar target corporations from using defensive tactics that impose extensive delays on bidders attempting to acquire controlling blocks of shares. Thus, though I am sympathetic to the argument that the distinction between state antitakeover laws, and state laws facilitating antitakeover defenses, is an artificial one, a prediction regarding how courts are likely to address such a challenge is incomplete unless it grapples with the implications of Burlington.