State Regulation of Hostile Takeovers: The Constitutionality of Third Generation Business Combination Statutes and the Role of the Courts

St. John's Law Review Volume 64 Number 1 Volume 64, Fall 1989, Number 1 Article 3 April 2012 State Regulation of Hostile Takeovers: The Constitutionality of Third Generation Business Combination Statutes and the Role of the Courts Joseph V. Cuomo Follow this and additional works at: https://scholarship.law.stjohns.edu/lawreview Recommended Citation Cuomo, Joseph V. (1989) "State Regulation of Hostile Takeovers: The Constitutionality of Third Generation Business Combination Statutes and the Role of the Courts," St. John's Law Review: Vol. 64 : No. 1 , Article 3. Available at: https://scholarship.law.stjohns.edu/lawreview/vol64/iss1/3 This Note is brought to you for free and open access by the Journals at St. John's Law Scholarship Repository. It has been accepted for inclusion in St. John's Law Review by an authorized editor of St. John's Law Scholarship Repository. For more information, please contact . NOTE STATE REGULATION OF HOSTILE TAKEOVERS: THE CONSTITUTIONALITY OF THIRD GENERATION BUSINESS COMBINATION STATUTES AND THE ROLE OF THE COURTS Due to the regulatory burdens associated with a proxy contest,' the 1960s witnessed the emergence of the "hostile takeover"2 I See Brown, The Role of the Courts in Hostile Takeovers, 93 DICK. L. REV. 195, 197 n.4 (1989) (proxy contests were "subject to the regulatory strictures of the Securities Exchange Act of 1934"); Note, The Developing Meaning of "Tender Offer" Under the Securities Act of 1934, 86 HARV. L. REV. 1250, 1253-54 (1973) ("Federal regulatory statutes required comprehensive advance disclosure from.., proxy challengers"); see also 15 U.S.C. § 78n(a)-(c) (1988) (federal statute regulating proxy solicitations). See generally E. ARANOW & H. EINHORN, PROXY CONTESTS FOR CORPORATE CONTROL 81-139 (1957) (discussing SEC regulation of proxy solicitations). A proxy contest has been defined as "a dispute between groups attempting to retain or gain control of the board of directors of a company by using the proxy device to gather sufficient voting support." 5 W. FLETCHER, CYCLOPEDIA OF THE LAW OF PRIVATE CORPORATIONS § 2052.2 (rev. perm. ed. 1987). See generally E. ARANOW & H. EINHORN, supra, passim (comprehensive work on topic of proxy contests). 2 See Brown, supra note 1, at 196. A "hostile takeover" occurs when one entity, the predator, acquires control of another, the target, through the acquisition of stock, despite resistance by the target's management. See id. at 197; see also Prentice, The Role of States in Tender Offers: An Analysis of CTS, 1988 COLUM. Bus. L. REV. 1, 4 (1988) (defining hostile tender offer). See generally J. BROOKS, THE TAKEOVER GAME passim (1987) (effect of takeovers on Wall Street); M. JOHNSTON, TAKEOVER passim (1986) (work on major players in takeover game); A. MICHEL & I. SHAKED, TAKEOVER MADNESS passim (1986) (compilation of specific takeover bids); CORPORATE TAKEOVERS: CAUSES AND CONSEQUENCES passim (A. Auerbach ed. 1988) [hereinafter CORPORATE TAKEOVERS] (collection of articles on takeovers). A "hostile takeover" is usually implemented through a "tender offer," see Brown, supra note 1, at 197, which is "conventionally understood [as] a publicly made invitation addressed to all shareholders of a corporation to tender their shares for sale at a specified price." Note, supra note 1, at 1251; see Edgar v. MITE Corp., 457 U.S. 624, 626 n.1 (1982) (definition cited by Court). See generally 1 M. LIPTON & E. STEINBERGER, TAKEOVERS & FREEZEOUTS § 1.1-1.2 (1978) (discussion of tender offers); Chester, Definition of "Tender Offer", in TENDER OFFERS 310-15 (M. Steinberg ed. 1985) (describing term "tender offer" as ST. JOHN'S LAW REVIEW [Vol. 64:1:107 as the predominant method of corporate acquisition.' Initially takeovers were a virtually unregulated area,4 and the opportunity for potential abuse 5 led to both state and federal legislative intervention.6 Thereafter, a conflict developed as "first generation" state antitakeover statutes 7 were constitutionally attacked on both elusive); Note, Target Directors' Fiduciary Duties: An Initial Reasonableness Burden, 61 NOTRE DAME L. REV. 722, 722 n.1 (1986) (how courts define "tender offer"). 3 See Warren, Developments in State Takeover Regulation: MITE and Its Aftermath, 40 Bus. LAW. 671, 672 (1985) (dramatic rise in level of cash offers for equity securities preceded 1960's regulation); Note, The Constitutionalityof Second Generation Takeover Statutes, 73 VA. L. REV. 203, 203 (1987) (tender offer emerged as effective and popular method of gaining control of a publicly held corporation in the 1960's); Comment, State Takeover Legislation After CTS: Does It Give States a Free Hand To Regulate Tender Offers?, 13 DEL. J. CORP. L. 1029, 1029 (1988) (due to speed and lack of regulation, cash tender offer replaced proxy contest as most popular mode of gaining corporate control). See Easterbrook & Fischel, The ProperRole of a Target's Management in Responding to a Tender Offer, 94 HARV. L. REV. 1161, 1162 (1981); see also Johnson, The Eventual Clash Between Judicial and Legislative Notions of Target Management Conduct, 14 J. CORP. L. 35, 66 (1988) (only common law principles regulated cash tender offers prior to 1968); Warren, supra note 3, at 672-73 (tender offer almost free of government regulation in 1960's); Note, Beyond MITE-CTS v. Dynamics: Has Management Won the Battle in the Fight Against the Tender Offer, and What Injury has the Individual Shareholder Suffered?, 9 N. ILL. L. REV. 187, 189 (1988) (tender offers are preferred method of takeover because they are not heavily regulated); Comment, Beyond CTS: A Limited Defense of State Tender Offer Disclosure Requirements, 54 U. CHI. L. REV. 657, 659-60 (1987) (tender offers not subject to same level of regulation as proxy contests). ' See Warren, supra note 3, at 673 ("In the absence of regulation, abuses emerged"). Concern developed over what was known as the "Saturday Night Special." See Brennan, SEC Rule 14d-8 and Two-Tier Offers, in TENDER OFFERS 110 (M. Steinberg ed. 1985). A "Saturday Night Special" is a "tender offer[] that [was] begun and completed in a very short period of time-perhaps over a weekend-which precluded any rational investor decision over whether or not to tender." Fay, State Takeover Law: ShareholderProtection, The Constitution, and The Delaware Approach, 24 GONz. L. REv. 249, 250 (1989). 8 See Boyer, When It Comes To Hostile Tender Offers, Just Say No: Commerce Clause And CorporationLaw in CTS Corp. v. Dynamics Corp. of America, 57 U. CIN. L. REV. 539, 540 (1988); Prentice, supra note 2, at 6; Note, supra note 3, at 203-04. The first state to enact a regulatory statute was Virginia, in 1968. Note, State Regulation of Tender Offers Reexamined, 19 TULSA L.J. 225, 232 (1983); see Prentice, supra note 2, at 6; Romano, The Future of Hostile Takeovers: Legislation and Public Opinion, 57 U. CIN. L. REv. 457, 458 (1988); see also VA. CODE ANN. §§ 13.1-528 to -541 (repealed 1989) (fir (...truncated)