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House Bill 4764 (As Passed House)
Topic: Corporation Law
Position: The Department of Consumer and Industry Services is not opposed to the version of the bill that passed the House. The Legislature may wish to consider a definition of the term “group”.
Background: Approximately 2/3 of the states have adopted legislation designed to protect companies from hostile takeovers. These anti-takeover laws have taken various approaches in an effort to thwart hostile takeovers. For instance, Minnesota’s law passed in 1987 requires a firm to consider the best interests of the corporation and continues by stating that in considering the best interests of the corporation, the corporation may consider “the interests of the corporation’s employees, customers, suppliers, and creditors, the economy of the state and nation, community and societal considerations.” Several states, including Massachusetts, Pennsylvania, and Delaware, require the target board to balance shareholders interests against those of other “stakeholders”. Much of the legislative activity in this area was in the 1980’s. There has been less activity in recent years.
Michigan’s efforts in this area of law go back at least to 1976. A Michigan law enacted in 1976 that required registration of tender offers was ultimately declared unconstitutional. In 1984 Michigan adopted a “fair price” law based on a 1983 Maryland law. These provisions became Chapter 7A of Michigan’s Business Corporation Act. In 1987 the United States Supreme Court upheld an Indiana law. This led to the passage in 1988 of Michigan’s Control Share Acquisition Act. This is Chapter 7B of the Business Corporation Act. Michigan’s law closely followed the Indiana model in most respects.
In corporate governance the board generally manages the corporation and if shareholders disagree with management they may remove directors and select new directors they believe will act in their best interests. In Delaware there has been some anti-takeover defense activity in which the shareholders have adopted bylaws and article provisions allowing for the removal of directors if the shareholders believe the directors are not acting in the best interest of the shareholders.
The bill was introduced in response to a recent federal court decision (Simon Property v. Taubman Centers, Inc.) in which the court rejected Taubman’s argument that the voting agreement entered into as a means of blocking the Simon offer was not a control share acquisition. It may then be argued that the voting block is invalid, because the procedures required by law for control share acquisitions were not followed. If the voting block was invalidated, this would strengthen Simon’s takeover efforts.
Another bill was introduced in the Senate earlier this year that revolves around the takeover battle between Simon and Taubman. Senate Bill 218 contains a “dead hand poison pill” that would deter takeovers by having the old board continue to vote on proposed takeovers. House Bill 4764 does not contain such a provision.
Bill Content: The bill amends the Business Corporation Act to provide additional protection from hostile takeovers in some circumstances.
The bill creates an additional exception to the definition of “control share acquisition”. The formation of a group does not constitute a control share acquisition of shares held by members of the group.
Shares without voting rights because the formation of a group after April 1, 1988 was deemed to be a control share acquisition have the same voting rights as were accorded the shares before the formation of the group.
The House substitute (H-6) removed two other provisions designed to bring Michigan’s law more closely in line with Delaware’s provisions.
Arguments For: A recent federal court decision undermines the protections afforded to Michigan companies in 1988 under the Control Share Acquisitions Act. There is also an issue of fairness here. The court decision makes it possible for out of state and foreign corporations to join with shareholders to launch a hostile takeover, but prevents the founding members of the company to join with shareholders to prevent the takeover.
A recent federal court decision misinterpreted Michigan’s Control Share Acquisition Act. The act was passed in 1988 to help protect Michigan companies from hostile takeovers. The court decision appears to turn the act on its head and assist those attempting the takeover rather than those who are trying to prevent it. The Legislature should clarify the decision so that protection for Michigan companies is not undermined.
Against: Michigan should be extremely careful in enacting anti-takeover legislation. In testimony on Senate Bill 218, another anti-takeover bill, the Council of Institutional Investors reported that several studies have shown that such laws diminish the value of in-state companies. Such laws are an issue of concern to institutional investors, because mergers and takeovers make significant contributions to the value of stock held by the shares held by pension funds and other institutional investors. The Control Share Acquisition Act is a positive feature in Michigan law, but legislative efforts on behalf of a party engaged in a takeover battle upsets the stability and fairness that companies expect in the law.
The essence of good corporate governance is a balance between shareholders and management. Michigan law already provides such a balance. It has been demonstrated, for instance, that structured boards are a very effective device for protecting a company from a hostile takeover. Many Michigan companies have divided their board into classes as this bill recognizes. We should recognize the value of the protective measures currently available rather than amending the law to deal with one specific situation. Furthermore, a federal judge issued a stay of the preliminary injunction granted by the federal court so that Taubman can appeal the case to the Sixth Circuit Court of Appeals. Ultimately, the courts may find for Taubman and this bill may be unnecessary and perhaps harmful.
The bill creates a loophole in the Control Share Acquisition Act that may be used by outside acquirers to circumvent the act. It does this by permitting those outside acquirers to join together with groups of similarly minded shareholders with holdings just below the statutory thresholds. Because formation of a group is not considered a control share acquisition, the outside acquirers would potentially be able to accomplish their takeover without a shareholder vote.
Supporters/Opponents: Representatives from the Taubman Centers testified in favor of the bill at the House Committee meeting. Other Michigan companies supporting the bill in the House included DTE and Compuware. The Michigan Manufacturers Association, the Michigan Retailers Association, the Michigan Banker’s Association, and the Teamsters supported the bill. Opponents included representatives of the Simon Group, the American Association of Retired Persons, and the AFL/CIO. The passage of the substitute bill by the House may have changed the position of one or more of those who testified for or against the bill in the House.
Fiscal Impact: The bill will have no direct fiscal impact on the Department of Consumer and Industry Services.
Administrative Rules Impact: No new or revised administrative rules will be required as a result of this bill.
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