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Preempting Professors Bebchuk and Jackson: Poison Pills, State Corporate Law, and the Williams Act
by
Lyman Johnson & David Millon
Washington & Lee University School of Law
Professors Lucian Bebchuk and Robert Jackson recently posted a provocative paper, Towards a Constitutional Review of the Poison-Pill, forthcoming in the Columbia Law Review. The paper, regrettably, makes several claims that are flatly wrong, and it also misreads the Williams Act.
First, Professors Bebchuk and Jackson assert that "corporate law scholars have overlooked the unresolved validity of state-law poison-pill rules"; such scholarship has "focused exclusively on anti-takeover statutes, ignoring the validity of state-law poison-pill rules"; and, [the Bebchuk-Jackson paper is the] "first systematic analysis of the possibility that these rules are preempted by the Williams Act…"
These assertions are incorrect. Twenty-five years ago, we wrote a lengthy article that pointedly examined possible Williams Act preemption of all non-statutory state corporate law rules, including those sanctioning poison pills, that might impede corporate takeovers.[1] We took no final position on the preemption issue in that piece (we addressed that larger question in a companion article published in the Michigan Law Review discussed below[2]) but instead sought only to extend the then lively preemption debate beyond its narrow focus on anti-takeover statutes. Thus, we expressly considered whether state legal rules condoning poison pills might be preempted, concluding, critically, that if "the Williams Act mandates shareholder autonomy, this state law rule clearly undermines that federal policy." We also explicitly noted that, under the so-called "meaningful opportunity to succeed" standard crafted by federal district judges in Delaware, state common law rules upholding poison pills lack just such a safety valve, and thus may be preempted under that test.
Moreover, we did not confine our analysis to poison pills, but more broadly subjected to preemption analysis all state corporate law rules that might impede takeover bids, including Delaware's quite extensive judge-made law of takeovers. State decisional law, like state statutes, must, of course, yield to federal law under the Supremacy Clause. Unlike Professors Bebchuk and Jackson, therefore, we were able to explain (in our footnote 15) precisely why it is not the poison pill plans themselves but, rather, judicial rulings upholding them that comprise the state "law" subject to constitutional review. This is a particularly important point for any preemption attack on Delaware poison pill law because it is almost exclusively common law in origin. In focusing on statutes authorizing poison pills and, in the absence of statute, on poison pills as "private contracts," Professors Bebchuk and Jackson therefore continue to underestimate the potential breadth of the preemption issue we first identified in 1989 and actually make the preemption analysis as to non-statutory poison pills much more elaborate than it needs to be.
Second, Professors Bebchuk and Jackson state that "no court has ever expressly considered a preemption challenge to the validity of state-law poison-pill rules." That too is an inaccurate statement. In 1995, the Fourth Circuit Court of Appeals rejected a preemption challenge to four of Virginia's corporate statutory provisions, including a provision authorizing poison pills and a provision codifying the director standard of conduct as being 'good faith business judgment."[3] The Williams Act challenge thus went far beyond the Control Share Acquisition and Business Combination statutes. The Fourth Circuit considered the argument made by Tyson Foods, the challenger, that Virginia's statutes were, in concert, so potent that they made it "impossible" in practice to succeed with a bid. The Court, in forthrightly rejecting the Delaware federal court's "meaningful opportunity to succeed" standard, observed that the Williams Act did not protect bidders, and upheld all of Virginia's laws, including the pill provision, against both Supremacy and Commerce Clause attacks. The Supreme Court denied certiorari.[4] Presumably the same analysis would apply to state court judgments validating poison pills in the absence of a statute.
Third, and perhaps of greatest importance, Bebchuk and Jackson's arguments about the Williams Act's preemption of poison pill rules are faulty regardless of whether they are sanctioned by statute or judicial decision. As we explained at length in our Michigan Law Review article cited above, the Williams Act does not mandate a federal pro-takeover policy. Rather, Congress chose not to take a position on one side or the other of the then novel debate about the costs and benefits of hostile takeovers. For example, the Senate Report on the bill that became the Williams Act states that it "avoids tipping the balance of regulation either in favor of management or in favor of the person making the hostile takeover bid." SEC Chairman Cohen echoed this sentiment when he stated that "[t]he Commission does not believe that any bill should be adopted which would either encourage or discourage takeover bids . . .." Instead, Congress' objective was the more modest one of requiring disclosure of information relevant to shareholders confronted with a tender offer (consistent with the basic premise of federal securities regulation) and alleviating pressures on shareholders to tender who might otherwise prefer to hold their shares.
As we noted in our Michigan piece, we think the mistake that scholars like Bebchuk and Jackson make when they ascribe preemptive force to the Williams Act results from a mistaken equation of Congressional assumptions about the world of hostile takeovers in 1968 with Congressional intentions about the appropriate balance of power between target company management and shareholders then and in the future. In 1968 state corporate law did little to limit the freedom of shareholders to decide for themselves whether to accept a hostile bid. Congress took that fact for granted and sought to enhance the ability of shareholders to make these choices in an informed, deliberate manner within the existing legal framework. It is wrong, however, to claim that Congress sought not only to make a limited adjustment to the then current legal regime but sought also to in effect freeze that larger context and preserve it for future generations. In 1968, Congress had no reason to foresee that by the late 1980s state legislation and judicial opinions would confer broad authority on target company management to block shareholder access to hostile bids. That was not the problem that Congress chose to address in the Williams Act. That statute thus is irrelevant to current debates about the lawfulness of poison pills and other state law anti-takeover devices. Those seeking to resolve such questions in favor of shareholder autonomy need to look elsewhere for legal support.
Shareholder decisions about whether to accept hostile tender offers are more than simply choices about whether to sell or hold securities. Because hostile bids are designed to achieve a change of control, shareholder responses have important corporate governance implications. In this respect, efforts to tie target company management's hands by attacking the legality of poison pills are not just an effort to give target company shareholders the opportunity to realize short-term gains. They are also part of the larger shareholder empowerment agenda that would limit the discretion of management to determine the long-run best interests of the corporation and its shareholders. That's a bad idea in other contexts and it's a bad idea here too.
[1] Lyman Johnson and David Millon, Does the Williams Act Preempt State Common Law in Hostile Takeovers?, 16 Sec. Reg. L.J. 339 (1989).
[2] Lyman Johnson and David Millon, Misreading the Williams Act, 87 Mich. L. Rev. 1862 (1989).
[3] WLR Foods, Inc. v. Tyson Foods, Inc., 65 F.3d 1172 (4th Cir. 1995).
[4] 516 U.S. 1117 (1996).
