In the United States alone, there are plenty of laws with regards to running a business. These laws also differ from state to state, so there is a lot of stuff to memorize and get familiar with. However, if you have studied laws and business administration, you already know a majority of these laws. But as for non-Americans, it can get a little confusing as most of these laws are conflicting sometimes. It refers in general to government anti-takeover legislation.
The combination of federal laws and state laws creates some conflicts sometimes. For instance, under the current federal and state takeover laws, there is still a possibility that you are violating certain state laws by conforming to some aspects of federal laws.
With this in mind, you are probably asking yourself, where do we draw the line? Well, the line of demarcation has something to do with the focus of both federal takeover laws and their state counterparts. There is a thin line in between.
Federal Laws vs State Laws
First things first, you need to distinguish federal laws and state laws when it comes to running a company. For instance, federal laws are more directed towards security regulations, antitrust considerations and tender offers
On the other hand, state laws are focused more on governing corporate charters and their bylaws. To this day, there is still a lot of inconsistency when it comes to state laws. And that’s all across the U.S.
Why were these laws passed?
When particular corporations found themselves as the object of interest by potential acquirers, the pressure was on. Picture this: a local firm finds out that they are the target of an acquirer? What is the next logical step?
They petition the state legislature to pass an antitakeover law or amend the current one. By doing so, it is more difficult for the acquirer to take over. And so, the passing of state antitakeover laws commenced. We will discuss more this in a little bit.
Politics and Pressure
Allegations that a takeover by a “foreign raider” will result in a significant loss of jobs put a lot of political pressure on the state legislature. Not only will millions of hard-working Americans lose their jobs, but also community support such as charitable donations by the local corporation.
This is not only happening in the United States but in other countries as well. Take the EU for instance. They also have a system of differing state laws. The country has worked to achieve a common set of merger rules. In the end, they only achieved approval for a limited set of rules.
In the EU, countries have the right not to abide by the new EU merger rules and apply their own differing country-specific laws. It is somewhat similar to what is happening in the United States.
Laws for both the United States and the United Kingdom emphasize the rights of shareholders. On the other hand, certain European countries such as Italy, Germany, Austria, and France the creditors’ rights are more emphasized.
Additionally, in the United States and the United Kingdom, in the hands of families and insiders, shareholdings are less concentrated. This sheds some light on why the laws have evolved differently in these two great nations, to some extent.
Difference between US & UK
However, while there are plenty of similarities between the United States and the United Kingdome when it comes to the security markets and laws, there are also significant differences.
For instance, there are plenty of states in the U.S. that allow management to engage in aggressive antitakeover actions. On the other hand, the laws of the United Kingdom forbid management from engaging in such evasive actions without the approval of the shareholders first. There are also plenty of differences between the United States and the United Kingdom’s antitakeover laws, but that is another topic for another day
History of the State Antitakeover Laws in the United States
We have previously talked about how state antitakeover laws came about. Let’s discuss the history. In 1968, the state of Virginia was the first to adopt an antitakeover law.
Shortly after, many states started following and applied antitakeover laws. Typically, it is required for these statuses for disclosure materials to be filed following the initiation of the bid.
However, the process was not as smooth as it was intended. The “first-generation” state antitakeover laws had flaws and problems on its own. One of the major problems with these first state antitakeover laws was that they applied to firms that did only a small amount of business in that state.
As you can imagine, this did not go down well with bidding corporations. It just seemed unfair to the bidding corporations. And so, the stage was set and a legal challenge ensued.
Key Court Decisions Relating to Antitakeover Laws
As one would expect, legal challenges take place in court, and certain court decisions have defined the types of state antitakeover laws that are acceptable and those that are not. Most of these decisions were recorded back in the 1980s, but they are still relevant to this day.
Challenges to State Antitakeover Laws
As previously mentioned, the first-generation antitakeover laws had some flaws. In 1982, the constitutionality of these first-generation antitakeover laws was successfully challenged in the famous Edgar v. MITE decision. The United States Supreme Court ruled that the Illinois Business Takeover Act was unconstitutional on the grounds that it violated the commerce clause of the U.S. Constitution.
In 1987, the first-generation antitakeover laws were once again challenged in the Dynamics v. CTS and again in November 1989 in the Amanda Acquisition Corporation v. Universal Foods Corporation.
These challenges brought forward the second-generation antitakeover laws. Changes have been made to the anti-takeover laws of the first century. Most of the second-generation laws incorporate some incredible provisions such as fair price provision, control share provision, business combination provision, and cash-out statute.
There are also constituency provisions in some state laws (with the exception of Delaware) mentioned in the article Type of Merger: Short-Form Merger. These provisions allow the board to take into account the impact of a certain deal on other relevant stakeholders.
© image credits to Steve Johnson