Twenty years ago, an unprecedented explosion of corporate takeover activity sparked lawmakers in approximately 40 states to adopt legislative protections against the perceived evils of unsolicited tender offers. Some states even passed laws intended to thwart specific takeover bids. (1) Florida lawmakers adopted two of the most popular versions of the so-called second generation anti-takeover statutes--an affiliated transaction statute and a control-share acquisition statute (control-share statute). This article examines the control-share statute in the context of real takeover battles from the 1980s and the current decade and argues that the statute should be repealed. We begin by winding back the clock to 1987.
The Bid for Harcourt Brace
William Jovanovich, the head of Orlando-based publishing company Harcourt Brace Jovanovich, was not in his office when the phone rang on the afternoon of Monday, May 18, 1987. (2) The caller was flamboyant and controversial British media baron Robert Maxwell. Unable to reach Jovanovich by phone, Maxwell faxed a letter to Jovanovich announcing Maxwell's intention to commence an unsolicited $44 per share bid for Harcourt. Maxwell's bid was the third takeover attempt launched against Harcourt, the long-time textbook publisher that had grown into a mini-conglomerate by acquiring rival publishing companies, insurance companies, and the Sea World entertainment parks.
In the frantic eight days that followed, Harcourt's bankers crafted a complex $3 billion recapitalization plan that would allow Harcourt to declare a special dividend of $40 per share in cash plus one share of 12 percent preferred stock. As part of the plan, Harcourt's employee stock ownership plan (ESOP) would acquire a 24 percent stake in Harcourt, thereby placing a large block of stock in friendly hands to ward off future takeover attempts. Harcourt would take on $1.6 billion in debt to finance the recapitalization. Meanwhile, Harcourt successfully lobbied the Florida Legislature to pass legislation thwarting unsolicited tender offers for Florida-based companies. (3) Armed with this ambitious recapitalization plan, Harcourt's board of directors firmly rejected Maxwell's $44 per share bid. (4)
Unfortunately, the newly debt-burdened Harcourt quickly had to divest assets and eliminate 10 percent of its workforce to comply with lender requirements. (5) In 1989, Harcourt was forced to sell its prized Sea World theme parks; by 1991, Harcourt was compelled to sell out to conglomerate General Cinema Corporation in order to stave off bankruptcy. (6) Harcourt shareholders who held their shares until the sale to General Cinema received a total of $41.50 per share ($2.50 per share less than the Maxwell bid)--$40 in the special dividend and only an extra $1.50 in the General Cinema acquisition. On the other hand, the result was devastating to Harcourt's ESOP, which did not participate in the dividend and lost nearly its entire investment. (7)
The Hostile Tender Offer
For Florida corporations, the Harcourt takeover battle created a legislative legacy--a set of takeover laws designed to deal with unsolicited tender offers. Tender offers allow the bidder to bypass the board of directors and take their offer directly to the shareholders, providing to each shareholder the choice to accept or decline the bidder's offer. (8) But while the tender offer has advantages for the bidder, some tender offers--the "two-step, front-end loaded" tender offers--are coercive to the target's shareholders. (9)
In this two-tiered takeover structure, the bidder makes a tender offer to acquire a controlling percentage of the target's stock for cash, while announcing its express intention to freeze out the remaining shares in a subsequent merger at a lower price, often payable in the form of junk bonds. Shareholders of the target who do not believe the price offered in the tender offer is fair may nonetheless feel pressured to tender for fear of receiving less value in the second-step merger if the bidder acquires control. (10)
The Florida Control-share Acquisitions Law
Florida's takeover laws (11) consist of two statutes corresponding to the two steps of a hostile takeover: The tender offer, by which the acquirer obtains voting control; and the second-step merger, which squeezes out any shareholders who decline to tender their shares to the bidder. The control-share statute (12) purports to give shareholders greater say in the takeover, (13) while Florida's affiliated transactions statute (14) is designed to assure that squeezed-out shareholders receive a fair price for their shares. (15)
A Bitter Pill
The control-share statute does not directly prevent the bidder's acquisition of shares. Instead, the statute deters or delays takeovers by denying voting rights to "control shares." (16) Control shares are shares owned by the bidder that (but for the operation of the statute) would raise the bidder's voting power to or above certain threshold levels (20 percent, 33.3 percent, or 50.1 percent). (17) Voting rights may be restored only if the bidder files an acquiring person statement and requests a shareholder meeting to vote on whether the bidder's shares should be accorded voting rights. (18) Voting rights are restored only to the extent approved by the disinterested shareholders (which excludes both the bidder and management shareholders). (19)
Alternatively, the bidder's shares will have voting rights if the acquisition is approved by the target company's board of directors. (20) The practical effect of the control-share statute is to prevent bidders from assuming immediate control of the tendered shares, thereby allowing management time to mobilize its defenses. In essence, the statute requires bidders to negotiate with the board or to face the delay and uncertainty of a shareholder vote on whether the bidder will be able to exercise control.
The statute expressly authorizes a corporation to opt out of the control-share statute by amending its articles of incorporation or bylaws. (21) In addition, the statute allows corporations to adopt a charter or bylaw provision authorizing the corporation to redeem, at fair value, control shares 1) for which no acquiring person statement has been filed, or 2) which are not accorded voting rights at the shareholder meeting. (22)
The control-share statute was adopted partly in response to lobbying efforts by Harcourt, a corporation headquartered in Florida but incorporated in New York. Thus, the original version of the statute purported to apply to both Florida corporations and foreign corporations that met specified nexus tests with Florida. (23) In Grand Metropolitan P.L.C. v. Butterworth, 1988 WL 1045191 (N.D. Fla. 1988) nonfinal order), however, a federal district court judge held that the control-share statute was constitutionally infirm to the extent it purported to regulate foreign corporations. The Grand Metropolitan decision held that regulation of foreign corporations created an impermissible risk of inconsistent regulations by different states in violation of the commerce clause of the U.S. Constitution. (24) Accordingly, the control-share statute has been amended so that it no longer applies to Florida-headquartered foreign corporations. (25) The control-share statute now applies to any Florida corporation that has a) 100 or more shareholders;...