64 CBJ 237. THE MOAT AROUND THE WALLS: CONNECTICUT'S CORPORATE TAKEOVER LAW.

• Author: By CHARLES T. LEE

Connecticut Bar Journal

Volume 64.

64 CBJ 237.

THE MOAT AROUND THE WALLS: CONNECTICUT'S CORPORATE TAKEOVER LAW

THE MOAT AROUND THE WALLS: CONNECTICUT'S CORPORATE TAKEOVER LAWBy CHARLES T. LEE(fn*) On June 7, 1988, the Governor of Connecticut signed into law Public Act No. 88-350, entitled "An Act Concerning Approval Of Certain Business Combinations," and more popularly known as the Connecticut Takeover Act [hereinafter cited as the "Act" or the "Connecticut Act"].(fn1) This Act drastically reduces the vulnerability of Connecticut corporations to hostile takeovers by prohibiting certain "business combinations," including the sale of assets by any acquiror for five years following the stock acquisition without the approval of the board of directors prior to the acquisition. As a result, Connecticut has joined more than twenty-five other states that have enacted tough new anti-takeover laws. The net effect of the Connecticut Act is to erect a moat around the walls of management, giving it greater protection from at least one type of hostile attack.

This article seeks to provide a guide to the new Connecticut law in several contexts. Part I analyzes some of the problems posed by corporate takeovers and efforts in the past to regulate them. Part II discusses the landmark 1987 Supreme Court decision in CTS Corporation v. Dynamics Corporation,(fn2) which opened the door to state regulation of takeovers. Part III examines the responses of other states to the possibility of regulating takeovers after CTS. Finally, Part IV analyzes the various aspects of the Connecticut Act of significance to Connecticut practitioners, including its constitutionality and practical effect.

1. THE PROBLEM

   The rise of the hostile takeover has changed the face of corporate America. In recent years, billions of dollars have been spent in the acquisition of companies and scores of familiar names have vanished from the business scene. In Connecticut alone, the recent years have seen the acquisition of Conoco by

   238DuPont, of Kennecott by Sohio, of the Continental Group by Peter Kiewit, of Aveo by Textron, of Chesebrough-Pond's by Unilever, of Richardson-Vicks by Proctor & Gamble and of Singer by Paul Bilzerian.

   Serious implications can arise for a state upon the acquisition of one of its companies. Often, profitable divisions or valuable assets are sold to pay off the debt incurred by the acquiror in making the acquisition. The target's board of directors is almost always disbanded. Lay-offs of personnel and relocation of facilities are common consequences of such hostile takeovers.

   The measures that some corporations have taken to resist such takeovers can produce results that may be as negative as the consequences of the acquisition. Having successfully resisted a takeover bid, companies often emerge saddled with onerous debt. Alternatively, they may have created such devices as large contingent compensation packages for high level executives ("golden parachutes"), potentially destructive defensive measures ("poison pills") and other mechanisms that ultimately may be antithetical to the corporation's economic health.

   Despite these problems, there is little federal regulation of corporate takeovers. In its first attempt in 1968, Congress extended the provisions of the Securities Exchange Act of 1934 to tender offers by creating the Williams Act.(fn3) The Williams Act requires a person or group acquiring more than five percent of the shares of a class of a company's securities to file within ten days certain disclosures with the Securities and Exchange Commission.(fn4) Further, the law and the regulations there under mandate that the tender offer remain open at least 20 days after the filing of the required schedule.(fn5) While the Act undoubtedly facilitates its purpose of providing the shareholder with greater information upon which to make a determination with respect to participating in the tender offer, it has not regulated or stopped the abuses discussed above.

   Furthermore, in Edgar v. MITE Corp. [hereinafter cited as "MITE"](fn6), the Supreme Court severely limited the scope of state regulation of tender offers while striking down an Illinois statute.

   239The Court held that the law in question was preempted by the Williams Act for three reasons: (1) a provision for "precommencement notification" of management frustrated the congressional intent to strike a balance among the shareholders, management and offeror because it favored management; (2) a hearing requirement introduced extended delay in the takeover process because there was no deadline for completion of the hearing; and (3) the requirement that the Secretary of State rule on the substantive fairness of a takeover frustrated the congressional intent of having the investors make their own decisions.(fn7) Additionally, the Court found the law violated the Commerce Clause because it directly regulated and could prevent interstate tender offers, and because the burden imposed on interstate commerce was excessive compared to the local interests the Act was designed to further, especially because a nationwide tender offer could be stopped by an Illinois official where the corporation's only connection with the state was that ten percent of its shares were held by Illinois residents.(fn8)

   As a result of this decision, state regulation of tender offers was significantly limited. Many states had statutes similar to that of Illinois in which a hearing before a state official was interposed into the tender offer process.(fn9) Because these statutes were being struck down by lower federal courts under MITE, their effective scope came to be limited to the rare tender offer for a domestic corporation not covered by the Williams Act. As a result, these laws could not address or solve problems that were not dealt with under federal law.

2. CTS CORPORATION v. DYNAMICS CORPORATION OF AMERICA:

   THE SUPREME COURT OPENS THE DOOR To

   STATE REGULATION OF TAKEOVERS

   In 1987, the United States Supreme Court again profoundly influenced the field of state regulation of takeovers by its ruling in CTS Corporation v. Dynamics Corporation of America [hereinafter "CTS"](fn10). In that opinion, the Court upheld the Indiana Control Share Acquisitions Act,(fn11) finding it was neither preempted by the Williams Act nor violative of the Commerce

   240Clause. The Indiana Act, which applies only to Indiana corporations headquartered or with substantial assets in the state and with a substantial number of Indiana shareholders, provides, inter alia, that upon the acquisition of more than twenty percent, thirty-three and a third percent or fifty percent of the shares of the corporation, the voting power of the acquired shares is made contingent upon the affirmative vote of the majority of the disinterested shareholders of the corporation at a shareholders' meeting to be held within fifty days of the filing of a prescribed information statement.(fn12)

   In its decision, the Court initially found that its prior opinion in MITE was a plurality opinion and therefore not binding. The Court then turned to the question of preemption of the Indiana law by the Williams Act: As we have stated frequently, absent an explicit indication by Congress of an intent to preempt state law, a state statute is preempted only ... where compliance with both federal and state regulations is a physical impossibility . . . .'Florida Lime and Avocado Growers, Inc. v. Paul, 373 U.S. 132,142143 (1963)," or where the state's law stands as an obstacle to accomplishment and execution of the full purposes and objectives of Congress'. Hines v. Davidowitz, 312 U.S. 52, 67(1947) Ray v. Atlantic Richfield Co., 435 U.S. 151, 158 (1978).(fn13)

   Finding that it was possible to comply both with the Williams Act and with the Indiana statute, the Court next determined that the Indiana law did not frustrate the purposes of the Williams Act. In distinguishing MITE, the Court held: [T]he overriding concern of the MITE plurality was that the Illinois statute considered in that case operated to favor management against offerors to the detriment of shareholders. By contrast, the statute now before the court protects the independent shareholder against both of the contending parties. Thus, the act furthers a basic purpose of the Williams Act "placing investors on an equal footing with the takeover bidder." Piper v. Chris-Craft Industries, 430 U.S. at 30 (quoting the Senate Report accompanying the Williams Act, S. Rep. No. 550, 90th Cong., 1st Sess. 4 (1967)).(fn14) 241 The Court found that the Indiana statute protected independent shareholders from the coercive aspects of some tender offers and that it favored neither management nor the offeror. The Court further noted that the statute imposed no indefinite delay of the tender offer, as nothing prohibited the offeror from consummating the purchase of shares on the twentieth business day after filing. Nor did the Indiana statute contemplate a state official interposing his views on the fairness of the offer; rather, the shareholders were the final arbiters of the fairness of the offer.(fn15) Further, the Court found that voting rights could be vested within fifty days from the offer, which is consistent with the Williams Act.(fn16) As a result, the Court held that the Indiana Control Share Acquisition Act was not preempted by the Williams Act.

   The Court next found that the Act did not violate the Commerce Clause. The primary concern in...