Second-generation rights are also known as social and economic rights. These laws incorporated provisions on the following:
- Fair price
- Business combination
- Control share
- Cash-out statute
Fair Price Provision
This provision aims to discourage hostile takeovers. A successful tender offer lets shareholders receive the same price whether or not they have accepted the offer. This will help with the prevention of abuses occurring in two-tiered tender offers. These typically encompass first-tier tenders being offered a high price. Meanwhile, second-tier members are offered lower prices or with fewer advantages such as securities of uncertain value instead of cash.
Business Combination Provision
Here, target companies and the bidding company are not allowed to have business agreements for a certain period. The provision helps prevent leveraged hostile acquisitions and to avoid the transformations of local firms with low-risk capital structure into riskier companies. The wording of a business provision, for instance, may rule out the sales of the assets by the bidding company. Another example is when an acquiring company may be relying on the sale on the sales of assets by the target since it assumes a huge debt to finance a takeover. By doing so, they can pay the high-interest fees required.
Control Share Provision
Before purchases are allowed in acquisitions, current target stockholders should first approve. They usually apply to stock purchases beyond a certain percentage of the outstanding stock. Control share provisions are effective if the current share ownership has groups of stockholders who support the management. This may include employee stockholders.
This also sets limits on “creeping acquisitions” above 20%. Once it exceeds, the other shares must approve the controlling shareholder of the other shares prior to exercising its votes associated with the shares it owns.
Bidders usually have neutral feelings about this provision they do not like nor dislike it. Hence, they can serve as an early referendum on the possibility of a bid. Shareholders usually not vote against the bidder since they do not want to be deprived of the chance to get a good takeover premium. With that, the bidder can use this to put pressure on the board of the target. They may say that the shareholders are in full support of the bidder, not the board.
Not all states have this statute, such as Delaware. Ohio, Michigan, and Pennsylvania are among the states who practice this law.
Cash-Out Statute
The cash-out statute also sets boundaries to tender offers, just as the fair price provision does. If a bidder buys a percentage of stock in a target firm, they will be required to purchase every other outstanding share at the same terms during the first transaction. Acquiring firms who lack financial resources for a 100% stock acquisition are the most affected in this statute. Bidders who want to assume an even greater amount of debt with the associated high debt service are also at risk in terms of leveraged acquisitions. They may be discouraged to receive financing for a 100% purchase or simply because they do not believe their cash flow will service the increased debt.
Constituency Provisions
This provision lets the board consider how a deal may affect the relevant stakeholders like the worker or the community. In an offer that is in the financial interests of the shareholders, this is not so powerful. Still, it may give the board a secondary point to raise after saying that the offer is insufficient.
This statute is not present in all states.
Delaware Anti-Takeover Law
Deemed as one of the most important anti-takeover laws, this has helped the 850, 000 corporations in the state which are abundant compared to other states. Examples of corporations here are General Motors, Exxon Mobil, Wal-Mart, and DuPont. Half of all publicly traded companies are incorporated here, along with 63% of the Fortune 500 companies.
Many companies really prefer to incorporate in the state since its laws are developed well and the court system is sophisticated. It is considered sophisticated because it has very knowledgeable judges that can handle corporate lawsuits better than juries.
The low incorporation fees are also an obvious reason why Delaware is preferred by many companies. In fact, they are cheaper than all but 8 states. They also do not charge non-Delaware companies with Delaware corporate taxes. Lastly, companies love Delaware since companies and their shareholders do not need to be a resident of the state to incorporate there.
Researchers Bebchuk and Cohen stated that the law on anti-takeover has been an essential factor in decisions about which state to incorporate in. Meanwhile, Robert Anderson found that one of the most important factors influencing a company’s decision on where to incorporate was what law firm was representing the company around the time when the firm was formed. Delaware is the best selection when the law firm is a major national firm. But if it is merely local, the choice is usually incorporating in the particular state.
Wisconsin law
The anti-takeover law was actually passed on and signed late, as compared to the Wisconsin law which is more restrictive. The Wisconsin law was passed in 1988 but was made retroactive on December 23, 1987, the day before corporate raider Carl Icahn acquired 15% of Texaco Corporation. It was a response to an intense effort by companies to have a protective statute. They said they will reincorporate in states without anti-takeover laws if such a protective statute was not passed. Of course, the threat was effective as their fees account for about 20% of the Delaware state budget. The choice of the effective date testifies to the power of this lobbying effort. It states that an unwanted bidder who buys more than 15% of a target company’s stock may not complete the takeover for three years except under the following conditions:
- the bidder buys equal too more than 85% of the target company’s stock. This percentage may not include the stock held by directors or those by employees.
- If two-thirds of the stockholders approve this acquisition
- if the board of directors and the stockholders decide to waive the antitakeover provisions of this law.
Officially Section 203 of Delaware Corporation Law, this statute is designed to set limitations on takeovers financed by debt. The need to pay off the debt quickly becomes significant in the case of the billion-dollar takeover, as in the 1980s when interest payments were as much as half a million dollars per day. However, the law may not be effective when it comes to cash offers.
Effects of Anti-Takeover Laws on Wealth
In a study done by Karpoff and Malatesta, 40 state anti-takeover bills introduced from 182 to 1987 were examined. It is discovered that there is a small but statistically significant decrease in stock prices of companies incorporated in the various states contemplating the passage of such laws. Even those well-known businesses suffered the phenomenon. Additionally, Szewczyk and Tsetsekos found that Pennsylvania firms lost $4 billion during the time this state’s antitakeover law was being considered and adopted. Despite this, the loss was a short-term effect only as it was a result of the reactions of traders in the market during that time.
In another study, Comment and Schwert analyzed a large sample of takeovers in an effort to determine the impact of both the passage of state antitakeover laws and the adoption of poison pills. The found that laws didn’t really deter takeovers, but enhance them in terms of bargaining power. This, in turn, raised takeover premiums.
Effects of the 2nd-Generation laws
On the other hand, Bertrand and Mullainathan were curious about the effects of the 2nd generation laws on blue- and white-collar wages. They found that their wages went higher but did not pay for themselves. This is because operational efficiency was lower even years after the law was passed. There was a decline in plant creation and destruction. They generalized that the law insulates entrenched managers to “live the quiet life,” which may come at the expense of shareholders, although not of workers.
The impact of the passage of the 30 business combination statues on the performance of companies was studied by Giroud and Mueller. It was realized that in uncompetitive industries, there was a deterioration in the operating performance after the passage. In such industries, input costs, wages, and overhead increased, meaning competition can help reduce “managerial slack. The researchers also knew that the market correctly expected this.
In recent studies by Cain, McKeon, and Solomon, hostile takeovers and the passage of 17 takeover laws in 1965-2014 were the focus. Their results contradicted the usual results garnered. For instance, there were no wealth effects from the new laws while they found that fair price statutes were associated with reduced takeover activity, which, in turn, translates to fewer takeover premiums. They also found that greater takeover protection has a relationship with higher premium takeovers.
© Image credits to Anni Roenkae