Are Pills Preempted by the Williams Act?

Lucian Bebchuk and Robert Jackson think the answer there might be yes.  They have just posted their new paper, "Toward a Constitutional Review of the Poison Pill."

Abstract: In 1968, the Williams Act established a federal regime regulating attempts by outside buyers to acquire control of publicly traded companies through unsolicited tender offers. In the subsequent four decades, however, the states have developed a body of rules that impose additional impediments on such attempts. Recognizing the tension between the Williams Act and these state-law rules, between 1972 and 1985, the federal courts, including the Supreme Court, held some of these rules preempted by the Williams Act. To date, however, federal courts have not examined, and commentators have not analyzed, whether the state-law rules that authorize the use of the poison pill—the most powerful impediment to outside buyers of shares—are also preempted.

 In this Article, we examine this subject and conclude that there is a substantial basis for questioning the continued validity of current state-law rules that authorize broad use of the poison pill. Because these rules enable incumbents to block shareholder consideration of outside tender offers for lengthy periods of time, they may well impose tighter restrictions on unsolicited offers than the state antitakeover regulations that federal courts invalidated on grounds of preemption during the 1970s and 1980s. Indeed, we show that, upon a close examination of the state-law rules governing poison pills, the federal courts are likely to conclude that these rules are preempted.

 Finally, the Article provides a framework for lawmakers seeking to ensure that state-law poison-pill rules are not preempted. We explain that state-law rules that empower directors to block tender offers for long periods of time are least likely to withstand constitutional scrutiny. Thus, we argue, state corporate law that substantially limits the length of time during which a poison pill can be used to delay tender offers would be more likely to survive a preemption challenge. Whether preemption challenges lead to invalidation of existing state-law poison-pill rules or to their substantial modification, we show, these challenges could well have a major impact on the corporate-law landscape.

-bjmq