FTC Staff Comment to the Hon. Lois Pines Concerning Massachusetts H.B. 5768 to Regulate Certain Business Combinations
us-ftc-advocacy-filings-ed15b66360b6489358d42136d539f9dfFTC Staff Comment to the Hon. Lois Pines Concerning Massachusetts H.B. 5768 to Regulate Certain Business CombinationsAdvocacy Filing
Matter Number
V890078
06/23/1989 11:09 FTC BOSTON 617 7236344 06602093 P.02
V890'J78
June 23, 1989
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"'EI>f·;J(1\1. TRADE COMMISSION
floSTON IU;;GIONAI. OFFICE
CDMMISSION AIlTHORlZED
The Honorabl. Lois Pin••
Massachuaetta Seate Senate
State Houae
Boaton, Massachusetts
Dear Senator Pines:
The staff of the Federal Trade Commission ia pleased to
respond to your letter of invitation of June 15, 1989, to
comment on House Bill 5768, WAn Act Relative to Corporate
Takeovers and Competitiveness of the Maseachusette Economy. I' 1/
If enacted, the bill, among other things, would amend the
Masaachusetts General Laws to reQulate certain "busineas
combinations" involvin; Massachusetts corporations and would
authorize t.he use of "poison pills."
We believe that enactment of these provision would be likely
to deter takeovers that may increase economic welfare. If the
legislature nevertheless decides to enact the "business
combination" restrictions contained in Section 1, we suggest that
it consider making those provisions applicable 801ely to
corporations that affirmatively elect to be covered by them
through amenaments to their articles of organization. An
affirmative "optinq in" prOVision would enable the shareholders
of each corporation to determine whether restraints on the trans-
fer of corporate control are in the interests of the corporation.
In addition, to prevent the use of "poison pills" by managers to
protect their own interests at the expenee of shareholders, we
sU9geet a requirement that such devices be approved by a vote of
the majority of the outstanding share•.
A. Interest ond Experience of the StAff of the Pederal TrAd~
Commislion
The Federal Trade Commission ("FTC") is charqed by statute
with preventing unfair methods of competition and unfair or
deceptive acts or practices in or affecting commerce. 15 U.S.C.
5.45. Pursuant to this mandate, the staff of the PTe ••eke to
identify restrictions that impede competition or increase c08tS
without offering countervailing benefits to consumers. Our
efforts have included providing comments to federal, state, and
~/ These comments are the views of the staffa of the Boaton
Reqional Office and of the Bureau of Competition of the Federal
Trade Commission. They are not necessarily the views of the
Commission or any individual Commissioner.
FTC EOSTON 617 7236344 06602093 P.03 The Honorable Loia Pines Pa;. 2 local le9isla~ur&8 and admini8trative agencies on matter8 that raise issues of competition or consumer protection poliey. The ataff of the FTC has substantial experience in the area of mergers and acquisitiona. The Commission enforces Section 7 of the Clayton Act, 15 U.S.C. S 18, which prohibits acquiaitions of corporate assets or securities that may substantially lessen competition or tend to create a monopoly. Under the Hart-Scott- Rodino Antitrust Improvements Act of 1976, 15 U.S.C. S 18a, the Commi8sion review8 proposed acquisitions of corporate assets or securities, including tender offers, to determine whether they violate the antitrust laws. The staff of the PTC has addreased issue. related to the market for COrPOrate control through scholarly studies and com- ments to state governments. The Bureau of Economics of the FTC has published a study on the effects of takeover legislation enacted by New York in 1985. 2/ Last year the staff of the Boston Regional Office and the Bureau of Competition of the FTC provided the commission to Review the Massachusett. Anti-Takeover Laws with comments on the Massachusetts statutes that currently regulate corporate takeovers. l/ In the past three years, the ataff of the FTC has prOVided comments on the corporate control legislation of several states. i/ B. Effect of Takeoyers on Economic Welfare The corporate takeover is a mechanism for transferring control of corporate assets. The transfer of corporate control can serve a number ot economic functions, such AS facilitatin9 the redeployment of corporate assets to more efficient uses and improvin9 corporate management. Although not every takeover ultimately produces such benefits, we believe that takeovers in the aggreqate are likely to enhance economic efficiency. Some studies sugqest that management-opposed corporate acquisitions are most commonly carried out when outside bidders 2/ L. Schumann, State RegulAtion of Takeoyers and Sbareholder Wealth: The Effects of New York'l 1985 Tokeoyer Statute. (Federal Trade Commission, Bureau of Economics, 1987). 3/ Letter to Hon. Joseph D. Alvianl, Exec. Office of Economic Affairs of MAssachusetts, September 2, 1988. ~/ ~, Letter to Hon. Steven D. wolens, Texa. House of Representatives, May 10, 1989; L~tter to Hon. Barbara Flynn Currie, Illinois House of Representatives, May 3, 1989; Letter to Hon. Steven H. Amick, Delaware House of Repr•••ntative., January l~, 1988.
06/23/1989 11:11 FTC BOSTON 617 7236344 06602093 P.04 The Honorable Lois Pines Pai. 3 have an oppor~unity to improve the performan~. and thereby increase the value of target corporations. ~I Such bidders pay substantial premiums over the pre-offer market price of the ahares of tarQet corporations because they believe that the corporations will be worth more under their control. il There are a number of sources for the potential gain in an acquired firm's performance. In some cases, bidders are able to improve the manaqement of the target firm. In other cases, bid- ders may be able to combine firms with complementary strength., 1nteQrating production or distribution channels, eliminating duplicative functions, or facilitating mutually beneficial technology transfers. Takeovers may also permit firms to shift corporate assets to more efficient uses by .elling or changing the use of underperfor.mlng facilities. The transfer of corporate control in such circumstances is likely to benefit shareholders, employees, and the economy as a whole, a8 well as the successful bidder. Shareholders benefit in two ways. First, because bidders for corporate control offer .ubstantial premiums over the pre-offer market price of corporat. shares, target company shareholders enjoy rapid appreciation of the value of their shares. Second, the threat of takeovers may motivate incumbent corporate managers to improve corporate per- formance. Employees benefit from enhanced corporate efficiency and the accompanying qalns in corporate competitivene.a. 21 The economy can benefit both from the transfer of corporate control to more efficient management and from the incentives that take- overs create for improved managerial performance. Numerous scholarly studies have concluded that takeovers, 00 average, lead to an increase in the stock market'S valuation of both the acquired and the acquirin~ firms. According to a recent study, share prices of acquired firm. increa •• by an ~I sea Bradley, Desai' Kim, The Rational. Behind Interfirm Tender Offerl; Information or Synergy, 11 J. Fin. Econ. 183 (1983); Gilson, A Structural Approach to CorporAtions; The Caal AgOioit pefenaiye Tactic. in Tender Offers, 33 Stan. L. Rev. 819 (1981); Easterbrook' Fischel, The Prgper Role of A Target's ManAgement in Responding tg a TeDder Off@r, 94 Harv. L. Rev. 1161 (1981). ~I There iB evidence that ahare prices of moat tarqet companies significantly underperform the market in the pre-offer period. aaa Gilson, aupro note 5, at 852-53, and sources cited therein. 21 Profitable firmB provide the best opportunities for wage growth, new employment, and the fulfillment of pension and other contractual obliqatione to workers.
06/23/1989 11:12 FTC BOSTON 617 7236344 06602093 P.0S Th. Honorable Loi. Pines Page 4 average of 53.4 percent. 4/ Similarly, .hare prices of 80me acquirin9 firms have Increa.ed, albeit by .maller amounts. Varioue studies of .hare price. of acquiring firme have reported increases that ranged from 2 to approximately 7 percent in the past, II althou9 h other studies have found no gain. for acquirera in this decade. ~/ Even if the acquiring company's shares ex· periance no gain., these stUdies suggeat that the market value. the combination of the acquirer and the target company more highly than the individual firms absent a takeover. ~/ These studies measure the stock market performance of the companies involved during short periods of time 8urrounding takeover bids. They may be viewed as offerin9 the stock market's valuation of the lonq·term effects of takeover. ba.ed on the information available at the time the takeover is announced. Theae valuations may change over time as more information is il Office of the Chief Economist, Securities and Exchange Commission, ~he ECODomics of Any-or.!ll, Portial, and Two.Tier 7ender Offers, Table 4A (1985). if Those findings are summarized in Jensen & Ruback, The Market for Corporate Controls The Sci@ntific Evidence, 11 J. Fin. Bean. 5, 11 (Table 3), 16-22 (1983). sa. AlAQ Jarrell & Bradley, ~ Economic Effects of Federal and StAte Regulations of CAsh TInder Offerp, 23 J. Law Icon. 371, 393-95 (1980)f Council of Economic Advisers, Economic Report of the President 197 (1985). ~f S&e Jarrell, Brickley & Netter, The Market for Corporate Control: The gmpir1ca1 Evidence Since 198Q, 2 J. Beon. persp. 49 (1988). A recent study of acquiring firms in 78 manAgement resisted takeovers between 1976 and 1981 concluded that those firms lost 42 percent of the value of their stock prices over the three years following their acquisitions. Magenheim' Mueller, Are Acquiring.Firm Shareholders Batter Off After An ACQuisitiQn?, in Knighte. Raidere, and Targets 171 (J. Coffee, L. Lowenstein & S. Ro.e-Ackerman ed. 1988). That study has been criticized for using methodology that significantly overstates the lo••es of the acquiring firma' value. saa Bradley & Jarrell, Comment, ~. at 254. Bradley and Jarrell, usinq the data from the Magenheim- Mueller study and a different methodology, concluded that the acquiring firma' three year losses were actually statistically insiqnificant. Moreover, they note that even when -acquiring firms suffer capital losses, the gains to targets outweigh these losses, and the net effect is a significant increase in the value of the combined assets." ld.. at 256. ~f Similarly, 8hare prices of both bidding and target firms usually decline after unsuccessful tAkeover bids to below the pre-offer level. Bradley, Desai & Kim, eupro no~e 5, at 189- 204; Jensen. Rubeck, IPpra note 9, at 9.
FTC BOSTON 617 7236344 06602093 P.06 The Honorable Loi. Pines page S ;ained. Thus, th •••• tudi •••erve only a. indir.ct estimate. of long-term performance. Economic .cholara lar;ely aqre., however, that the increases in company valuation. reported by thes • • tudi•• represent efficiency gains. saa note 11, infrA. Of course, sharp fluctuationa in market values, such as those experienced in the October 1997 atock market, may require a cautious approach to long-term concluaion •. A substantial body of economic and legal literature support. the view that the.e increa.e. in the stock market valuation of firms following a takeover represent efficiency gain., and the creation of new wealth, attributable solely to the takeover. 11/ Participants in the .tock market are not likely to bid up the price of equity securities involved in takeover. unless prior takeovers, on average, produced such gains. Other studies quarrel with these conclusions, but many of thes. studies contain methodological errora. 11/ Some scholara have also questioned the overall effecta of mergera and unsolicited takeovers on eco- ll/ ~, a.g., Economic Report of the President, aupro note 9, at 187-216; Jen.en , Ruback, aupro note 9; Jarrell, Brickley & Netter, aupro note 10; Bradley, Deaai , Rim, ,upro note 5; Gilson, Iupro note 5; Easterbrook' Fiachel, lyprA note S; Easterbrook & Jarrell, Do TArgets Benefit t~om DefeAting Tender Offers, S9 H.Y.V.L. Rev. 277 (1984); Pound, Lehn , Jarrell, ~ Tokeovers Hostile to Economic PQrformonce?, Requlation, Sept.- OCt. 1996, 25. 13/ For example, Weidenbaum & Vogt, 7okeovere ond Stockholder,; Winners and Loee re , 19 Cal. Mgmt. Rev. 157 (1987), incorrectly relied on evidence concerning neqotiated merger. to conclude that management-opposed takeovers reduce efficiency. When the evi- dence of management-opposed takeovers reviewed by the authors i. examined separately, it supports the conclusion that takeover. enhance efficiency. Similarly, Lipton, Takeover Bids in the Torget's BoardrpQm, 35 BUB. Law. 101 (1979), offered evidence purporting to ahow that stockholders benefited from management re~istance that resulted in the defeat of takeover bid.. Lip- ton's evidence ahowed that the share prices of 80me firm. that had defeated takeover bids increased above the tender offer price a number of years later. His study did not compare the.e ahare price movement a to the overoll market's movement during the same period. More aystematic studies, which examine abnormal returns 00 shares of takeover targets compared to overall market trends, show that stockholders incur sigoificant 1088es from the defeat of takeover bids. see generally EAsterbrook & Jarrell, aupro note 12, at 282-84.
06/23/1989 11:13 FTC BOSTON 617 7236344 ~66~2~93 P.~7 The Honorable LOi. Pines 'age 6 nomic efficiency. 11/ Another major scholarly atudy that relied on Accountino data took i.aue with the conclusions of the atock market studies and concluded that takeovers neither improved nor degraded the performance of the target firma. lit Accordingly, no scholarly con.enaue on the economic effects of takeovers support. changes in the law to make management- opposed takeovera more costly and difficult. On the contrary, we believe that the preponderance of scholarly opinion on the sub- ject supports the conclusion that management-opposed takeovers produce economic benefits, and that new re.trictions on takeover. are likely to undermine economic efficiency. C. Aeeert.d QisadyAntAge. of Tokeoye~ Actiyity purported disadvantages of takeover activity are often asserted to justify restraining corporate acquisitions. Althouqh we know of no empirical research to aubstantiate thea. dis- advantages, they are often cited by incumbent ~anagera and other takeover critics in testimony before Congressional committe•• and in article. in the general press. In the absence of perauasive substantiating evidence, these claims do not support the enact- ment of curbs on takeover activity. Some takeover critics claim, for example, that acquirers often take over well-managed corporations, ouat qood management, ~I sea Ravenscraft' Scherer, The Long-Run PerformAnge of Mergers ond Takpoverm, in Public Policy Toward Corporate Tok.ov@rs 34 (M. Weidenbaum , K. Chilton ed. 1988); Herman & Lowenstein, The Efficienc~ Effects of HQltil. TAkeovers, in Knights, Raiders. and TDrgeta, aupro note 10, at 211. ~I D. Ravenscraft' P. Scherer, Merglr., Se11-0ffl. ond Econo- mic Efficienc¥ 101-03 (1987). The authors used accounting data to measure economic rates of return. This methodology is con- troversial because profits revealed by auch data are subject to wide variations resulting from the use of divergent aceountinq conventions by different firms. ~ gen@rollx Senston, ~ validity of Profite-Strycture Stud! •• yith Particular Reference tp the lTC', Lin@ of SueineR' Data, 75 Am. Econ. Rev. 37 (1985); Fisher & McGowan, Cn the MiBume of A~~Qunting Botle of Return tQ Inf.r Monopoly Prp£ite, 73 Am. Econ. Rev. 82 (1983). In addi- tion, because of constraints on the availability of data, the study focuses largely on conqlomerate mergers, and not manaqe- ment-opposed takeovers. Sae Raven.craft & Scherer, IUQro, at 22. As the authors observe, however, the incidence of horizontal mer~er activity has 1ncreaeed markedly in this decade, and "[t]he shift toward large horizontal mergers is more difficult to evaluate solely on the boo!. of.our reeeorch." ~. at 219.
06/23/1989 11:14 FTC BOSTON 617 7236344 06602093 P.08 The Honorabl. Lois Pin•• 'ag. 7 and reduce corporate efficiency by in.talling le •• capable man- a;ement teams. Thi. may happen in 80me ca.es. Corporate acquirers, like all other bu.ine ••persons, may make mistak.s. This possibility, however, doee not ju.tify controle on takeover activity any more than the possibility of poor 1nvestftlents in plant or equipment justifies government control. on investmant decisions mad. by corporate manaqera. In a market economy, investment decisions Qenerally are best left to inve.tors, who stand to profit from correct decisions and lose from poor ones. The critical fact ia that takeover activity, in the aggregate, has not been demonstrated to have adverse effects and in fact appears to benefit 8ociety. Because the evidence 8uqqe.ts that the benefita of takeovers outweigh their coats, restricting takeovers in the hope of preventing unwise investmants ie likely to harm Bociatal welfare. It also has been arQued that manaqement-opposed takeovers result disproportionately in facility closings and lay-off., which impose great aocial costa on individuals and communities in which plants are located. But factual support for the position that takeovers lead to plant closinqs and lay-offs that would not have occurred otherwise is, at best, scanty. 11/ Indeed, it is difficult to assess whether or not closinqa or lay-offa that occur after takeovers would have been carried out by the target'. management in any event to keep the firm competitive. Moreover, moat economic chanQea that increase efficiency •• and thereby increase aQQreqate .ocietal wealth -- create dislocations that reduce the welfare of aome individuals. 11/ Virtually every ~/ saa Jensen, TokeQye~s; Folklpr@ And Sciene., Harv. Bus. Rev. Nov.-Dec. 1984, at 114 I ~. American Enterpri.e Institute, PrQposals Aff8ct~ng Cobporots Takeoyerl 31 (1985) (citing findin9 that ·very few jobs were affected" by 6,000 corporate acquisi- tions in 1970s). The APL-CIO estimates that a total of 80,000 jobs of members of its affiliated unions have been lost as a "result of corporate restructuring" in recent yaars. Hoetile TAkeoyere, Searinqs Before the Senate Committe. on Banking, Housing, and Urban Affairl, 100th Conq., let Se.a. 262 (1987) (statement of Thomas R. Donahue). Even a •• uming that this estimate, for which the time frame is unspecified but presumably spans a number of years, is correct, it is difficult to assess how many of thoae jobs would have been aboliahed in any event to improve the competitiveness of the affected companies. To put the figure in perspective, a total of 5.1 million workers lost their jobs becauae of plant closinqs or efficiency measures in the years 1979-1983. Bureau of Labor Statistics, Konthlx Lobor Reyjew (June 1985). 12/ It would seem preferable for government to re8pond to these inevitable economic dislocations by initiatinq effective remedial (continuod ••• )
06/23/1989 11:15 FTC BOSTON 617 7236344 06602093 P.09 The Honorable Loi. Pin•• • 498 8 major technol091ca1 advance renders an earlier technology ob.o- lete and thus may diaadvantage firm. and individuals dependent on the earlier technologies. Finally, it i. ar9ued that takeovere force corporate managers to focus on ahort-term profits and forego long-term investments. The evidence show., however, that foregoing lonq- term investment makes companies more, not less, vulnerable to takeovers. Takeover targets tend to have below-average r.a.arch and development budget., .howing a l •••• r eommitm.nt to loftg- term inveatment. than the average firm. 11/ . D. Empirical Byidenc8 on Effect. of Anti-Tokeoyer L.gi.lot~on Three recent empirical studi.s concerning the effect. of anti-takeover le;islation have concluded that anti-takeover laws harm shoreholdere and undermine economic efficiency. A 1987 empirical study by the Commission'. Bureau of Economies of a N.w York statute 11/ similar to Section 1 of H.B. 5768 analyzed the extent of the eeonomic harm caused by reatriction. on "business combination •. " ~/ The study found that the announcement by New York'S qovernor of the proposed leqislation that ultimately became the New York law resulted in a statiatically significant decline in the average value of .hares of New York corporation •• The decline was equal to approximately one percent of the value ll/( ..• continued) measurea to assist displaced individuals rather than .everely restricting economic activity that benefits society. Such measures may include, for example, programs to retrain workers displaced from declinin9 industries. la/ This proposition ia supported by a recent empirical study of the investment patterns of takeover tar;ets. The study, which examined all 217 takeover targets that were acquired between 1980 and 1984, found that takeover tar;eta had b.low average ratios of (i) research and development expenditures to total expenditures and (ii) capital investment to earning•. Office of the Chief Economist, Securities and Exchange Commis- sl~n, Institutional Pwngrsbip, Tender Offers, And LQng-Term Inyestment 8-10 (1985). ~/ N. Y. Bus. Corp. Law S 912. 2n1 Schumann, lupra note 2. "Business combination" .tatutes restrict the ability of acquirin~ firma to merqe or engag8 in other specified business activity with unsolicited takeover targets for a specified period of tim. following the acquisition of target company ahare•.
06/23/1989 11:16 FTC BOSTON 617 7236344 06602093 P.10 The Honorabl. Loi. Pine. Page , of the aharea, or $1.2 billion. 21/ As the study no~ed in conclu.ion. [D) ••pite the political rhetoric advocating the re9ulation of takeovera on behalf of shareholders, the evidence • . • indicate. that thia very atronq statute doe. not protect .hareholdera; rather, the law protect a manaqera at the expense of sharehold- ers" • •. [In addition, the atatute] may promote the inefficient management of society' •••s.ts by l.s.ening the ability of capital market. to effi- ciently reallocate assets. Consequently, the real cost of the ~oods and service. produced by the firms affected by [the statute] may increas., injuring consumer. as well as ahareholders. 22/ Another stUdy, conducted by the Office of the Chief Econo- mist of the Securities and Exchange Commi.sion, also concludes that anti-takeover leqislation is harmful to the intereata of shareholder.. The .tudy examined the effecta of a recent Ohio law that, among other things, authorized corporate directors to consider the interests .0£ persons other than the shareholders in a.se.ainq takeover bids. 21/ The SIC study found that enactment of the Ohio law cau.ed an immediate two percent decline in the equity value of corporations in8ulated from takeovers. Pinally, a 1987 study on the effects of Indiana"s anti-takeover statute, which contains a "business combination!' provision .imilar to that in the propoaed le9islation, found that the enactment of Indiana'. law caused a 4.2 to 6.1 percent decline in the value of shares of Indiana corporations. l!7 211 ~. at 41, 46-47. Continuing research by the .ame author suggests that the decline in the value of New York corporations cau••d by the enactment of the legislation may have been aiqni- ficantly qreater than reported in this study. Hea.ured over the entire 205-day courle of the legislative process, the decline was 9.7 percent, net of market. L. Schumann, StAte RegulAtion Qt Takeoyers and ShArehQlder WeAlth; The CAse of Hew York', 1985 :okeoyer Statutes 19 Rand J. of Economics 557 (1988). ~I Schumann, lupro note 2, at 47. 211 Office of the Chief Economist, Securiti •• and !xchanq8 Commission, Shoreholder Wealth Effectl of Ohio Legi,lation Affecting Takeoyerl (1987). The Ohio law ia codified in Ohio Rev. Code Ann. S 1701.01 At~. (Po;e 1986 Supp.). 21/ Sidak' Woodward, Corporate Tokeoyers. The Commerce CloUSQ, and the Efficient Anonymity of Shareholders (mimeo March 1997). The 4.2 percent decline represents a portfolio 1n which equal (oontinued ••• )
06/23/1989 11:17 FTC BOSTON 617 7236344 06602093 P.ll The Honorable Loi. Pines Page 10 E. Effect of MB4.tn••, CQmbin§t~on" BeatristigDo If enacted, Section 1 of H.B. 5768 would 90vern -bu.ineee combinations" between "interested stockholders" and takeover target firma. The bill defines "interested stockholders" a. owners of five percent or more of the voting ahare. in corpo- rations. The proposed legi.lation would prohibit luch .tock- holders from merging with or eonductinQ other specified buainess activities with tarQ8t corporations for three years after becoming interested stockholders, unless one of three conditions is met. First, the business combination may be carried out if the tarQet corporation's board of directors approved the bu.iness combination or the purchase of shar.. before the acquirer became an interested stockholder. Second, the buainea. combination may be carried out if the interested stockholder became owner of a~ least 90 percent of those share. not owned at the time the transaction commenced by certain employee stock plana or directors who are also officers. Third, the business combination may be carried out if is approved by the board of directors and authorized at an annual or special meetinQ by a vote of two thirds of the outstanding votin; shares not owned by the interested stockholder. The proposed leQislation is likely to deter takeovers whose profitability depends on the ability of the acquirer to merge with the tarQet corporation. The successful bidder for corporate control commonly .e.ka to consolidate the tar;et into ita opera- tions by means of a merger. ~/ A three-year merQer prohibition will likely require many acquirers to maintain inefficient forms of business orQanization and thus would undercut their ability to improve the efficiency of tar~et corporations. Thia, in turn, may deter some takeover bids that would benefit the economy. The bill would also prohibit the sale or other dispo.ition of substantial tarQet company assets to or with an affiliated shareholder for three years after the shareholder become. an affiliated shareholder. This prohibition would increaae the cost of financing, and in many cases may deter, takeovers designed to redeploy asaets to more efficient uses. The proposed legislation would restrict the freedom of ahareholders to control and dispose of their property. When 2!/( ..• continued) weiqht is given to all Indiana firms. The 6.1 decline represents a value-weiqhted portfolio. lSI ~ R. Gilson, The Law ond Finance of CQr~rote Acqyiaitiono 854 (1986).
06/23/1989 11:18 FTC BOSTON 617 7236344 06602093 P.12 The Honorable Lois '1n•• 'a9- 11 shareholders determine, for whatever reason, to tran.fer control of • corporation, the .tate should not fruatrate their will and requ1re them to reta1n mana;er. they wish to displace. F. CODsideration of on "Opting-In" Mechanism If the legislature decides to enact the -bualne8s combination- restrictions in 80me form d •• pite the concerns discus.ed above, we .u9ge.t that the relevant provisions be modified to make them inapplicable to corporations who.e shareholders do not affirmatively elect to be covered by them through amendment. to th.ir articles of or;aniaation. In it. pre.ent form, the proposed legislation, if enacted, would apply to all corporations that do not ·opt out" by an amendment to their article. of or;ani&ation or bylaws. To the extent that the wbusines. combination" provisions of H.B. 5768 are motivated by a concern tor shareholders, their purpo.e would be better .erved by a requirement that shareholders approve a decision to opt into that aspect of the legislation. We recommend that a corporation'S decision to opt into the statutory scheme be made solely through a shareholder vote amendin; the article. of or;anization. 1&/ If the le;i.lature decides to retain the proposed optin;-out mechanism, we recommend that shareholder d.terminations to opt out be ;iven immediate effect. The bill now provid.s that amendments to a corporation'S articl•• of organization or bylaws that expressly s~ate that the corporation will not be governed by the statutory prOVisions restricting ·buainess combinations" would not become effective for twelve months. This ia a seriou8 restraint on the freedom of shareholders to control the corpo- rations they own. The inclusion of an opting-out provision in the bill embodies an implicit recognition that the "business combination" provisions of the proposed legislation may be harmful to the interests of shareholders. An opting-out provision that contemplates a substantial delay in effectuating shareholders' d.sires, however, does little to ameliorate that harm. 2A/ Corporate bylaws generally may b. amended without the ap- proval of the shareholder.. sae M.G.L. c. 1568 S 17. Consequently, we believe that the le;islation ehould require decisions to opt in to be mad. in the form of amendments to the article. of or~Qn1zAt1on.
06/23/1989 11: 18 FTC BOSTON 617 7236344 06602093 P.13 The Honorable Loi. Pine. 'age 12 G. Effect of "Ppi.on Pill" BI.trLctioD. Section 12 of H.B. 5768 would amend Chapter 156B of the Maasachu.etts General Laws to grant corporations explicit authority to iaaue rights or options that cannot be tran.farred to or exercised, received, or held by persona owning or offering to acquire a certain number or percentage of outstandinq ehare•. The•• right. or options are often called a "poison pill." The term "poison pill" refars to a family of shareholder rights plana that, when triggered by a tender offer or the accumulation of a specified percentage of share. by an acquirer, provide other shareholders with rights to purchase additional ahares or to .ell shares to the target at very attractive prices. These rights, when triggered, may significantly reduce the value of the target to a ho.tile bidder and may sub.tantially lower the value of the tarqet's shares that a hostile bidder has already acquired. According to a 1986 study by the SEC's Office of the Chief Economist, "poison pills" are very effective deterrents against hostile takeovers due to two important features I 1) when they can be cheaply and qUickly red.emed by target management, they force potential acquirers to neqotiate directly with the target's board if they wish to have the pill removed; and 2) if not redeemed, they make hostile acquisitions exorbitantly expensive. 22/ The 1986 SEC .tudy examined the effects of ·poison pilla" on the wealth of target shareholders. The study reports on the effects of 245 "poison pills" announced between 1983 and July 4, 1986, and focuses on ~he effects of pills that appeared in 37 firms subject to takeover speculation. The authors find that "poison pills" are as.ociated with qains to tarqat shareholders followinq an auction for the firm. In such ca.e. the target shareholders gained 14 percent on average. However, in other cases the pille led to the defeat of the takeover and the target shareholders' stock fell 17 percent in value over the next 6 months. On net, the authors find that ·poison pill" announce- ments are generally associated with a 10.s of shareholder value of .66 percent. "Poison pills" may result from market failure with respect to corporate qovernance that enables manaqers to thwart takeovers and protect their own interests at the expense of shareholders. Nevertheless, shAreholders of some firma may have legitimate· objections to hostile takeovers and desire lon9-term contracts with incumbent managers. Shareholders may also desire "poison ~I Office of the Chief Economist, Securities and Exchange Commission, The Effects of Poison Pills on the Wealth of Target Shareholqerl, October lS86.
" ~he Honorable Loi. Pines Pa9- 13 pille" 1n order to provide mana;era greater leverage in- negotia- tion_ with potential bidders. To correct any market failure that enable. manaqer. to use "poison pilla" to protect their own inter_ats at the expense of _har_holdera, l_qislation that allowa for the adoption of "poi_on pills" should stipulate that such shareholder right. plan. can be adopted only upon approval of a majority of out.tanding .hare- holders. By requiring shareholder approval, legislation permitting the adoption of "poison pills" would prevent the abuse of "poison pille" by manaqement, while allowing for their us. when shareholders believe them to be in the shareholders' best interest. CODclu.ioQ On the whole, we believe that takeover activity may enhance economic efficiency and thue benefits consumers, workers, and shareholders. We believe that Sections 1 and 12 of H.B. 5768 are likely to impede many of the potential benefieial consequences of takeovers without offerinq countervailing benefits. The legi.lature therefore may wish to consider whether these provisions of the leqialation unduly interfere with the market for corporate control to the detriment of the economy and consumer welfare generally. Sincerely, ~M~.~Regional Director • TOTAL P.1.:1
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