Posted on 07/06/2004 6:06:38 AM PDT by wormsy
In the late eighties the Supreme Court upheld the constitutionality of state takeover laws, the most important being Delaware's merger moratorium law. This law prohibits a hostile acquirer from formally merging with the target for at least three years after buying a controlling interest. Widely regarded as a major deterrent, the Delaware law has an exception if the hostile bidder can acquire more than 85 percent of the target's stock, excluding shares held by inside managers and by certain kinds of employee stock-ownership plans. Since the law passed, Delaware-incorporated companies (which account for the majority of medium-size and large public companies in the United States) have engaged in various kinds of transactions to "lock up" more than 15 percent of stock in friendly hands, rendering these companies "bullet-proof" under Delaware law.
State antitakeover laws and the poison pill have dramatically reduced the scope for hostile tender offers in the U.S. market. Both defensive barriers can be overcome only by getting the target board of directors to approve the takeover. Therefore, hostile takeover activity has been moved directly into the boardroom, through the increasing use of proxy fights in conjunction with tender offers that are conditional on the bidder gaining control of the board or approval from the incumbent board. This hybrid proxy/tender offer approach is considerably more expensive, time-consuming, and risky than the hostile tender offer of the eighties. Consequently, hostile takeover activity has declined sharply, and the campaigns that have been waged were long, drawn-out proxy battles.
1. It makes mergers more difficult...which means incumbent management get (time and resources) to negotiate a better deal for the shareholders.
2. Businesses are more stable as management search for the best deal for shareholders....deals that grow the company.....which means the pple are employed gainfully.
Take the phrase "incumbent managers" to any fund manager. They will shudder. The first priority of "incumbent managers" is to maximize the compensation of "incumbent managers." Most of what is wrong with U.S. corporations can be traced back to managers acting as if they own the place.
For shure.
The poster who said the primary goal of "incumbent managers" is to increase the compensation of incumbent managers was spot on. The only way to get them to focus primarily on shareholder value is to tie the compensation of managers to performance of the company's stock (over the long term, since it's too easy to manipulate short term, and real growth, not simply growth due to inflation -- measure the return on capital compared to other companies in the industry, adjusted for leverage, etc.)
Interestingly, this fundamental point can be discerned from Smith's The Wealth of Nations. And, in an almost full-blown modern form it was described in James Burnham's The Managerial Revolution published in 1940, where he described the divorce of ownership from management and the primarly loyalty of the growing managerial class to itself, rather than to the owners. It described also the conflict between the interests of managers and owners. An owner, of course, manages for maximization of wealth creation, whereas a manager managers for maximization of the size of his organization and his own compensation. This stuff is really pretty basic human nature.
well, you know......Delaware is the most popular state for incorporating companies......top companies like Disney and News Corp incorporate in Delaware. So it could be quite likely that lower quality firms that are less assured wound up incorporating in other states......they are more open to acquisition.
In fact, a hefty percentage IPO issuers are incorporated in Delaware. I'm not sure but I think that markets has not generally penalized firms for incorporating in Delaware. In fact, with so many quality firms incorporating in Delaware, one might even expect the market-to-book ratios of Delaware incorporated companies to be higher.
As a matter of fact, historically, Delaware (with momentary competition from New Jersey early in the 20th century) has won the 'race to the bottom' and become the most popular place to incorporate because it was the most flexible with respect to corporate arrangements and the least favorable to entrenched management and takeover defenses. You should have seen some of the state takeover statutes passed in the '70s and '80s to aid incumbent managers and family owners of public companies!
Delaware is the home to most IPO issuers because Delaware is a known quantity, with relatively predictable corporate law and a chancery court where business matters are adjudicated by competent, honest judges. In many states, if you end up in state court, the judge will know less about corporate law than your average 1st year associate in a major M&A firm after a month on the job!
I should qualify the prior post. Delaware is very favorable to flexible, and hence pro-management, arrangements if they are put into place by the shareholders or at the time of incorporation. What Delaware has generally been less deferential of, because of fiduciary duty questions, are takeover defenses put into place after a hostile bid or without any big threat, but without the approval of the shareholders. For example, Delaware is more flexible than most states on restrictions on transfer of shares, but the restrictions need to be in the certificate of incorporation. And, if they weren't in the certificate when your shares were issued, and you didn't vote for the amendment that restricted the shares, Delware would probably not enforce the restriction on transfer. Note that the takeover statute is a state law, rather than a board enacted defense.
No, I am not a corporate lawyer. As I seen from your posts, I probably have a more naive view of Delaware than you.
I majored in accounting and finance. The papers that I read says that Delaware is "management friendly". The academics (which include Ivy league professors)use that phrase to mean mechanisms that obstruct market for corporate control from operating.
I thought of sending you a private email but that other pple might be interested as well.
You said "Delaware is the home to most IPO issuers because Delaware is a known quantity, with relatively predictable corporate law and a chancery court where business matters are adjudicated by competent, honest judges. In many states, if you end up in state court, the judge will know less about corporate law than your average 1st year associate in a major M&A firm after a month on the job!"
Where do I get more information about this kind of stuff?
Where to start.... some of what I've hinted at you would only learn practicing mergers and acquisitions law at a major firm in a big city, a lot can be learned from reading a good law school case book on Corporations (Cary & Eisenberg comes to mind as a standard for the past 30 years through many editions), some of it can be gleaned from a good hornbook (that's legal jargon for a textbook, as opposed to a casebook) or a practitioner's guide to start-ups. I'm not in the office, so no titles come to mind as particularly good or available. The 'Nutshell' series is decent, if too general, and the Corporations Nutshell was OK, IIRC. You might find some of the information in books on mergers and acquisitions used in the better business schools, but I don't know what they are. Best place to go would be a good law library and ask the librarian for help. Law books are notoriously expensive, so you don't want to experiment buying them.
thanks for your reply. Gee, if I have to look through law cases to arrive at the same conclusion, I wouldn't be the naive idiot that I am now.
Nevertheless, your post did point me in some directions. The URL of a good link on the Delaware courts as follows
http://corporate-law.widener.edu/shorthis.htm
Briefly, the Delaware Court of Chancery is widely recognized as the nation's preeminent forum for the determination of disputes involving the internal affairs of the thousands upon thousands of Delaware corporations and other business entities through which a vast amount of the world's commercial affairs is conducted.
The rise of the corporation as the preferred form of business organization and the subsequent incorporation of numerous corporations in Delaware was, of course, critical to the Court's evolution and survival. Equally important, however, was that the Court, through its equitable doctrines and remedies, was able to provide an excellent forum for resolution of corporate internal controversies. Chancery practice in nineteenth century Delaware already included many of the remedies sought and defenses raised in corporate disputes.(40) From these remedies and from the equitable principles underlying them, the Court's jurisdiction in corporate matters developed.>
<Another development during the late nineteenth century was that the legislature began to designate the Court of Chancery as a forum for certain corporate matters. For example, the general provisions concerning corporations enacted in 1883 gave the Chancellor jurisdiction over dissolution proceedings and concurrent jurisdiction with the Superior Court to order corporate books brought to Delaware.(46) The trend to make Chancery the forum for actions under the corporate statute continued into the twentieth century, including actions to compel a stockholders' meeting.(47) Thus, in the nineteenth century, the Court began to emerge as a forum for various statutory and equitable claims relating to Delaware corporations.
After years of effort, a new Constitution was promulgated by a Constitutional Convention in 1897. The Constitution of 1897 eliminated the time honored and highly political process of creating corporations by special legislative act and provided for incorporation only under general law.(48) Pursuant to this constitutional provision, a new general corporation law was enacted in 1899.(49) The new law took full advantage of liberal enabling breadth offered by the Constitution: perpetual corporate existence and broadly stated general powers became the corporate norms. In essence, Delaware law recognized that the American corporation had been largely transformed to a decidedly free wheeling, private enterprise mode; it had lost its original prime character as a state instrument for public improvement. Indeed, the passage of the law itself was generally attributed to the prospect of a new private enterprise, the corporation service company.(50) The business and legal change was not lost upon commentators and, in an inkling of things to come, Delaware was promptly criticized as a "little community of truck-farmers and clam-diggers ... determined to get her little, tiny, sweet, round, baby hand into the grab-bag of sweet things before it is too late."(51) Thus, even as the starter's gun went off, Delaware was already being accused of participating in a "race to the bottom."
The (takeover) fever finally broke in the early 1990s. However, the Court's body of opinions deciding, usually within a few days, complex legal issues arising from extremely complicated transactions stands as a remarkable judicial achievement. Under intense scrutiny, the Court proved it was up to the task of deciding quickly and coherently whatever corporate America and its advisors could concoct.
One shift in the Court's approach to fiduciary duty cases is the increased emphasis placed on the significance of full disclosure of all material facts. Consistent with its desire to let business decisions be made by the directors and stockholders of Delaware corporations rather than by the Court, there has been enhanced focus on whether the stockholders have been provided with the information needed to make an informed choice.
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