Tuesday, July 24, 2007
As the M&A boom simmers along, one of the most interesting developments has been the reemergence of state law. More specifically, with the rising number of takeovers we are once again witnessing the effect state takeover law other than Delaware can have in deciding takeovers. I say once again, because this was an issue last seen in the 1980s as the debate swirled over the constitutional validity of state anti-takeover laws. Well, the states are back. Here are three different ways state law other than Delaware's has recently acted to effect the course of a takeover battle:
1. Differing Merger Requirements. The course of the recently completed Biomet and Clear Channel takeovers were both heavily influenced by their place of incorporation: Biomet was incorporated in Indiana and Clear Channel in Texas. Indiana law requires a 75% approval vote on a merger while Texas requires a 66 2/3% approval vote. In both instances, acquiring private equity consortium were forced into raising the consideration offered to win over shareholders. Undoubtedly, this pressure was exacerbated by their need to obtain approval from more than the bare majority of holders otherwise required under Delaware law.
2. State Anti-takeover Laws. Acquirers are increasingly finding that fourth generation state anti-takeover laws enacted in the late 1980s in the wake of the Supreme Court's CTS decision and which have been seldom triggered since are now affecting their own takeovers. Perhaps the most prominent example of this is AirTrans's hostile bid for Midwest Air Group. Midwest is incorporated in Wisconsin which has a business combination statute, a control share statute, a fair price statute and a constituency statute. Midwest has recently invoked this constituency statute to justify its refusal to accept the AirTrans bid despite a Midway shareholder vote in which 57% of Midway shareholders elected a short slate of directors nominated by AirTrans (it was a short slate because of Midway's staggered board, showing once again the powerful anti-takeover effects of this device).
3. The Interstate Reach of State Anti-Takeover Laws. Perhaps one of the most interesting aspects of this state resurrection is the effects these state anti-takeover laws are now having on companies incorporated outside their jurisdiction. This is being illustrated aptly with Roche Holding AG's hostile bid for Ventana Medical Systems Inc. Venatana is incorporated in Delaware but headquartered in Arizona. Arizona's anti-takeover law, the Arizona Anti-Takeover Act which includes a business combination statute and a control share statute, purports to cover Ventana since it has a substantial presence in the state. Roche has sued in federal district court to have it declared unconstitutional (though it has a weak case under CTS).
And there are other ways state laws are affecting shareholder rights in takeovers in unexpected ways. For example, Biomet shareholders were denied dissenters' rights in their transaction under Indiana law. Had Biomet been incorporated in Delaware these would have been available.
Thus, state law increasingly matters again in takeovers. This is a development which would certainly warm the heart of Yale law professor Roberta Romano, author of The Genius of American Corporate Law and a leading scholar on the state competition for corporate charters.