Other Constituency Statutes

Missouri Law Review Volume 63 Issue 3 Summer 1998 Article 2 Summer 1998 Other Constituency Statutes Richard B. Tyler Follow this and additional works at: http://scholarship.law.missouri.edu/mlr Part of the Law Commons Recommended Citation Richard B. Tyler, Other Constituency Statutes, 63 Mo. L. Rev. (1998) Available at: http://scholarship.law.missouri.edu/mlr/vol63/iss3/2 This Article is brought to you for free and open access by the Law Journals at University of Missouri School of Law Scholarship Repository. It has been accepted for inclusion in Missouri Law Review by an authorized administrator of University of Missouri School of Law Scholarship Repository. Tyler: Tyler: Other Constituency Statutes Other Constituency Statutes* RichardB. Tyler" I. INTRODUCTION The takeover phenomenon of the 1980s resulted in a massive "releveraging" of American industry.' In addition to the profound impact on the companies directly involved and those that undertook drastic measures to avert being taken over, this "releveraging" has markedly affected groups outside the corporations involved, such as employees, suppliers, customers, and communities.2 To meet the debt-service obligations flowing from leveraged buy-outs, * Editor's Note: This article is reprinted as it originally appeared in an earlier volume of the MissouriLaw Review. See 59 Mo. L. REV. 373 (1994). ** Professor of Law, University of Missouri-Columbia School of Law. B.S., 1954, U.S. Military Academy; M.Sc.E., 1960, Purdue University; J.D. 1967, University of Minnesota School of Law. I wish to thank David Gallego, Robert Lay, Robin Lundstrum and Helen Vanek for their research assistance on this project, and my colleagues, William Fisch, David Fischer, Robert Lawless, and Al Neely for their comments on an earlier draft. Any errors that follow are solely my responsibility. 1. Clifford L. Whitehill, The American Law Institute Tentatively Approves Part VI of its Corporate Governance Project, in NATIONAL LEGAL CENTER FOR THE PUBLIC INTEREST, THE AMERICAN LAW INSTITUTE CORPORATE GOVERNANCE PROJECT IN MID- PASSAGE: WHAT WILL ITMEAN To You? 113, 120-22 (1991) (hereinafter "Whitehill"); Roberta S. Karmel, Is It Time for a FederalCorporationLaw?, 57 BROOK. L. REV. 55, 62 n.34 (1991); Deborah A. DeMott, Directors' Duties in Management Buyouts and LeveragedRecapitalizations,49 OHIO ST. L.J. 517, 517 & n.4 (1988). The "releveraging" resulted from the use of non-investment grade ('junk") bonds and other debt and debt-like instruments to finance hostile takeovers in leveraged buy-outs ("LBOs"), as well as the use by companies, which feared that they might be targets of hostile takeovers, of similar devices to eliminate public shareholders in management buy-outs ("MBOs")-the "going private" phenomenon. For a good illustration, as well as a good read, see BRIAN BURROUGH & JOHN HELYAR, BARBARIANS AT THE GATE (1990). To be sure, a fair amount of scholarly opinion defended the high levels of debt as a mechanism to compel management to work harder in order to service the debt. See Karmel, supra, at 63 n.37. 2. Whitehill, supra note 1 at 123-24; James Lyons, ConflictingInterests, FORBES, Mar. 30, 1992, at 48; Jonathon R. Macey, Externalities, Firm-Specific Capital Investments, and the Legal Treatment ofFundamentalCorporateChanges, 1989 DUKE L.J. 173 (arguing that stakeholders are not, in fact, harmed by hostile takeovers, and that they are capable of protecting themselves contractually). Contra, John C. Coffee, ShareholdersVersus Managers: The Strain in the Corporate Web, 85 MICH. L. REV. I (1986). See also Deals and Misdeals: A Sampling ofM&A Hits and Strikeouts in the 1980s, MERGERS AND ACQUISITIONS, March/April 1990, at 100 (a review of the results of a decade's combinations). Published by University of Missouri School of Law Scholarship Repository, 1998 1 Missouri Law Review, Vol. 63, Iss. 3 [1998], Art. 2 MISSOURILA WREVIEW [Vol. 63 many of which were financed with high-risk, noninvestment grade ('"junk") bonds, companies "restructured"; employees lost their jobs, 3 older facilities were closed to the detriment of communities dependent on them,4 existing bondholders found their claims downgraded or felt their security jeopardized, 5 and existing suppliers and customers found their relationships disrupted, if not dismantled entirely.6 Existing federal law7 sought to provide some protection for shareholders faced with deciding whether to tender, but nothing spoke directly to the concerns of these other groups; their concerns remained the focus of state law, such as statutory and common corporate law and the law of contract and fraudulent conveyance. Unfortunately, neither state corporation laws nor the common law rules applicable to corporations addressed these issues. Most statutes simply said that 3. Annie B. Fisher, Employees Left Holdingthe Bag, FORTUNE, May 20, 1991, at 83; Katherine Van Wezel Stone, Employees as Stakeholders Under State Nonshareholder Constituency Statutes, 21 STETSON L. REv. 45, 45 & n.4 (1991). See also Stephen M. Bainbridge, InterpretingNonshareholderConstituency Statutes, 19 PEPP. L. REv. 971, 1003 nn.136 & 137 (1993). Perhaps an even more threatening development has been the extent to which acquirors have used employee pension funds to finance takeovers, and the resulting risk to retirees, both current and future. See, e.g., Christi Harlan, LTV's Pension Liabilities Aren't Favored,Judge Says, WALL ST. J., Sept. 16, 1991, at A3 (reporting that a federal judge had ruled that LTV's underfunded pension plan should not be accorded preferred status in a bankruptcy proceeding following a merger that involved assuming a substantial amount of debt, as well as using "excess" reserves in the pension fund). See also Daniel Keating, PensionInsurance,Bankruptcy and Moral Hazard, 1991 Wis. L. REv. 65; Jonathon M. Moses & Milo Geyelin, RJR to Pay $72.5 Million to Settle Suit, WALL ST. J., Feb. 26, 1992, at B8 (reporting RJR's agreement to settle a class-action suit brought by former shareholders and employee stock-option holders who charged that the company failed to disclose takeover talks in the months preceding its LBO). 4. See Bainbridge, supra note 3, at 1004 & n.141; Joseph William Singer, The Reliance Interest in Property,40 STAN. L. REv. 611, 633-63 (1988). See also Arthur S. Hayes, CompaniesAre Findingit Harderto Move Out of Town, WALL ST. J., March 1, 1993, at B6, col. 1, mentioning, inter alia,a suit brought by the city of Ypsilanti against General Motors to block its planned closure of the Willow Run facility after the town had granted GM tax abatements in 1980. Although a trial court found for Ypsilanti, the Michigan Court of Appeals reversed. See Ypsilanti v. General Motors Corp., 506 N.W.2d I (Mich. Ct. App. 1993). 5. E.g., Metropolitan Life Ins. Co. v. RJR Nabisco, Inc., 716 F. Supp. 1504 (S.D.N.Y. 1989). In fact, the LBO phenomenon resulted in a massive shift of wealth from bondholders to shareho (...truncated)