State Anti-Corporate Takeover Laws: Issues and Arguments

If there was one distinguishing characteristic of the U.S. business environment in the 1980s it was the emergence of a powerful corporate governance device--the hostile takeover. At no time in our history has the number and dollar value of takeover activity approached that which occurred during this decade. Fueled by easy access to large amounts of money through junk bond financing and bank credits, acquirers, both corporate and individual, captured target companies by gaining controlling equity positions in the target firms. Even if they failed in their capture attempts, These acquirers often forced the management of target companies to restructure their organizations to ward off the takeover bid or to seek a friendly merger partner. During this decade, managers were increasingly portrayed as incompetent self-serving members of a closely knit corporate aristocracy. Critics accused this aristocracy of creating an army of nonproductive workers, entrenching themselves in their jobs, benefiting themselves at the expense of shareholders, managing for the short term, avoiding necessary levels of risk, and failing to respond to changing competitive pressures. The takeover was been as a tool for eliminating these alleged wasteful activities. Proponents of takeovers argue that these events are merely actions of the free market concept of maximizing shareholder wealth. Indeed, by the end of the 1980s the takeover had replaced the proxy fight as the more potent mechanism with which to replace incumbent management. Takeover opponents, on the other hand, argue that the takeover market is myopic and that the consequences of this activity are devastating to the future competitive success of companies as well as the overall health of the economy and the nation. The takeover threat has been blamed for forcing managers to adopt a short-term stock price orientation that is inconsistent with future growth and business Competitiveness. Institutional investors, whose ownership in U.S. corporations has grown from 12 percent of common stock in 1949 is over 50 percent in many industries today, are increasingly criticized for the role they play in forcing this short-term orientation (Graves and Waddock, 1990). Supporters of this view believe that institutional investors encourage an active market for corporate control. This market, however, often overvalues short-term performance and undervalues long-term risky investments (such as RD Drucker, 1984). For these reasons it has been suggested that the more important impact of the takeover might be on these firms that are not taken over, but who change their behavior as a result of the generalized takeover threat (Coffee, 1986; Drucker, 1984). Thus, while takeovers captured a tremendous amount of public attention and took center stage over all other matters of corporate governance, there still exists a lack of consensus on the overreaching question of whether takeovers are generally good or bad. What is certain is that the two sides to the takeover debate reach very different conclusions about the takeover market and the role of measures to impede it. Those supporting takeovers see an active market for corporate control pressuring management to undertake actions that maximize the value of the firm. Since state takeover protection provides managers with a degree of insulation from this market, thus reducing pressure to maximize firm value, those supporting takeovers view protective legislative measures as harmful. Since state takeover protection allows managers greater autonomy to engage in future-oriented projects, takeover opponents view these actions as beneficial for the long-term health of the company, the economy, and the nation. The purpose of this paper is to examine existing takeover evidence and discuss the takeover controversy along the shareholder-manager axis. …