Source: http://clsbluesky.law.columbia.edu/2014/03/17/wachtell-responds-to-bebchuk-and-jacksons-toward-a-constitutional-review-of-the-poison-pill/
Timestamp: 2019-04-21 12:56:22+00:00

Document:
In a recent paper, Professors Lucian Bebchuk and Robert Jackson have extended Professor Bebchuk’s extreme and eccentric campaign against director-centric governance into a new realm—that of the Constitution of the United States. They claim that “serious questions” exist about the constitutionality of the poison pill—or, more precisely, “about the validity of the state-law rules that authorize the use of the poison pill.” It is likely, they argue, that these state-law rules violate the Supremacy Clause of the Constitution, and are thus preempted, because they frustrate the purposes of the Williams Act, the 1968 federal statute that governs tender-offer timing and disclosure.
And, as far as courts are concerned, Bebchuk and Jackson claim that their discovery of the pill’s unconstitutionality is utterly brand new: “litigation based on … a claim” that “state-law poison-pill rules may well be preempted has not yet been pursued.” Bebchuk and Jackson definitively declare that “no court has ever expressly considered a preemption challenge to the validity of state-law poison-pill rules.” (Emphasis added.) It is for this reason, they insist, that “the courts have not yet resolved” the question. Were a preemption challenge to the poison pill to be brought now for the first time, they argue, courts would likely look to whether the pill permits “tender offerors … a meaningful opportunity to successfully acquire the target and whether shareholders are given an opportunity to evaluate the merits of tender offers.” This test, they posit, the pill would fail.
that the district court decisions from which Bebchuk and Jackson derive their “meaningful opportunity” standard are based upon an overly expansive and now discredited view of Williams Act preemption that commanded the support of, at most, only three members of the Supreme Court some 32 years ago.
Bebchuk and Jackson’s article thus conveys a fanciful vision of Williams Act preemption standards that in no way reflects the true state of the law today. To set the record straight, we set forth here a short history of Supremacy Clause challenges to takeover statutes and to the poison pill.
The Constitution’s Supremacy Clause provides that “[t]his Constitution, and the Laws of the United States made in Pursuance thereof … shall be the supreme Law of the Land; and the Judges in every State shall be bound thereby, any Thing in the Constitution or Laws of any State to the Contrary notwithstanding.” It thus renders a state law ineffective—preempted—whenever that law conflicts with a federal statue.
These arguments are premised upon a gross overreading of the Williams Act. The Williams Act does not give hostile offerors a substantive right to have their offers succeed, and does not even give shareholders a right to receive such offers. And it does not remotely betray any intent to overturn any state law, statutory or decisional, that addresses the fiduciary duties of directors in matters relating to corporate control—or, for that matter, any substantive aspect of the relationships among shareholders, directors, and the corporation.
To the contrary, the Williams Act was a simple and narrow law. It was also commendably short, barely over four pages long; so that the reader can see it for himself or herself, we link to it here. It regulates only the process of tender offers. It thus addresses the disclosures that offerors must make, and when they must make them. It addresses the timing of offers—how long stockholders must have to withdraw their tendered shares. It addresses the terms of permissible offers, requiring bidders to pay the same price to all tendering shareholders, and requiring, in the event of oversubscription in partial offers, purchases to be prorated among all who tendered shares. Finally, the law contains a broad antifraud provision governing disclosures and practices in connection with tender offers.
The legislative history thus shows that Congress was intent upon regulating takeover bidders, theretofore operating covertly, in order to protect the shareholders of target companies. That tender offerors were not the intended beneficiaries of the bill was graphically illustrated by the statements of Senator Kuchel, cosponsor of the legislation in support of requiring takeover bidders, whom he described as “corporate raiders” and “takeover pirates,” to disclose their activities.
In short, as the Supreme Court explained in Rondeau v. Mosinee Paper Corp., “[t]he purpose of the Williams Act is to insure that public shareholders who are confronted by a cash tender offer for their stock will not be required to respond without adequate information regarding the qualifications and intentions of the offering party.” As a result, nothing about the Williams Act suggests that Congress intended in any way to regulate or restrict the substantive powers of directors to respond to takeover bids, or to otherwise displace the state law that controls a corporation’s internal affairs. To the contrary, as far as those matters were concerned, and apart from matters of disclosure, Congress sought to be neutral and evenhanded—it chose to leave the balance between targets and bidders, as established by state law, alone.
Justice White’s Misreading of the Williams Act in Edgar v. MITE Corp.
In arguing the contrary, Bebchuk and Jackson rely on an opposing view of the Williams Act that was suggested over 30 years ago by only three Justices of the Supreme Court—a view that has never commanded a majority. In 1982 in Edgar v. MITE Corp., the Supreme Court addressed a constitutional challenge, under the Commerce and Supremacy Clauses, to a so-called “first generation” takeover statute. The challenged Illinois law prohibited tender offers for the shares of any firm with substantial shareholdings in Illinois unless the offer were approved as fair by the Illinois secretary of state. The Seventh Circuit had struck the law as both violating the Commerce Clause and preempted by the Williams Act.
Justice White’s commodious view of the Williams Act’s preemptive scope fared no better with his colleagues in CTS Corp. v. Dynamics Corp. of America, a 1987 decision that represents the Supreme Court’s only other encounter with takeover defense. CTS presented Commerce Clause and Supremacy Clause challenges to a “second generation” takeover statute—an Indiana statute that provided that a bidder’s shares lose their voting power unless either the target’s directors approved the acquisition, or the target shareholders not affiliated with the bidder or management did so. The Seventh Circuit struck down this law as well, again on both Commerce Clause and preemption grounds.
This time, however, the Supreme Court reversed, and upheld the statute by a 6-to-3 vote. Justice White dissented—and was the only Justice who argued that the Indiana law was preempted. Justice Powell’s opinion for the Court squarely rejected the preemption claim. In doing so, the Court pointedly noted that Justice White’s “opinion in MITE did not represent the views of a majority of the Court”—that it was joined “only by Chief Justice Burger and by Justice Blackmun,” and that “[t]wo Justices disagreed with Justice White’s conclusion.” As a result, the Court emphasized, “we are not bound by its reasoning.” The CTS Court nevertheless applied its understanding of Justice White’s approach in MITE for the sake of argument—and found that “the Indiana Act passes muster even under the broad interpretation of the Williams Act articulated by Justice White in MITE.” As a result, in rejecting the bidder’s preemption argument in CTS, the Court did not issue a definitive holding on the Williams Act’s overall preemptive scope.
Most of the post-CTS cases involved challenges brought in 1988 and 1989 to “third generation” takeover statutes, such as Section 203 of the Delaware General Corporation Law. Generally speaking, these third-generation takeover statutes—also known as “business combination” laws—prohibit a would-be acquirer from engaging in a back-end merger with a target if the acquirer purchases a certain threshold percentage of the target’s stock without first obtaining the approval of the target’s board. These laws were consistently found to be consonant with the Williams Act and thus constitutional.
Some courts reached this conclusion by following the approach that the Supreme Court took in CTS: they assumed the validity of Justice White’s capacious view of the Williams Act, but found the preemption claims to be meritless anyway. Thus, for example, in a leading case addressing Delaware’s Section 203, RP Acquisition Corp. v. Staley Continental, Inc., the federal district court in Delaware applied Justice White’s “‘broad interpretation’” “for the sake of argument,” and, given its conclusion that “Section 203 survives [that] standard,” saw no need to “explore what narrower standard the CTS court might have approved.” RP Acquisition, and other district court cases like it, went on to apply a standard that Bebchuk and Jackson now argue should doom the poison pill—the “meaningful opportunity for success” test. The third-generation laws were not preempted by the Williams Act, these courts held, because hostile bidders still had a meaningful opportunity for success.
But these cases, decided in 1988 and 1989, did not provide the final word on the question of Williams Act preemption. To the contrary, that word comes from two seminal court of appeals decisions that decisively rejected the “meaningful opportunity for success” test—and effectively put to rest Justice White’s erroneous view of the Williams Act. These appellate decisions leave no doubt today that state laws governing poison pills are entirely constitutional. Indeed, both of the decisions so stated, and one of the two expressly so held.
The first was the Seventh Circuit’s powerful decision in 1989 in Amanda Acquisition Corp. v. Universal Foods Corp.—a case that our Firm briefed, argued, and won. Amanda Acquisition rejected a bidder’s constitutional challenges to Wisconsin’s third-generation takeover law. Interestingly enough, the opinion’s author was none other than Judge Frank Easterbrook—a former University of Chicago law professor who, as a corporate law scholar, had published an article that directly attacked our Firm’s views on the role that directors should and must properly play in protecting companies from hostile takeover bids. Then-Professor Easterbrook’s article famously took the extreme position that directors’ fiduciary duties should prohibit any and all defensive tactics, and instead should require directors to be entirely passive in response to all hostile bids. Needless to say, he was no friend of takeover statutes, or of the pill. In fact, in Amanda Acquisition itself, as a matter of policy, he strongly criticized both.
CTS observed that laws affecting the voting power of acquired shares do not differ in principle from many other rules governing the internal affairs of corporations. Laws requiring staggered or classified boards of directors delay the transfer of control to the bidder; laws requiring [a] supermajority vote for a merger may make a transaction less attractive or impossible. Yet these are not preempted by the Williams Act, any more than state laws concerning the effect of investors’ votes are preempted by the portions of the Exchange Act regulating the process of soliciting proxies. Federal securities laws frequently regulate process while state corporate law regulates substance. Federal proxy rules demand that firms disclose many things, in order to promote informed voting. Yet states may permit or compel a supermajority rule (even a unanimity rule) rendering it all but impossible for a particular side to prevail in the voting. Are the state laws therefore preempted?
Investors have no right to receive tender offers. More to the point … the Williams Act does not create a right to profit from the business of making tender offers.
As a result, the court concluded that “events leading bidders to cease their quest do not conflict with the Williams Act any more than a state law leading a firm not to issue new securities could conflict with the Securities Act of 1933.” Because “Wisconsin leaves [the tender offer] process alone,” the Seventh Circuit concluded, “its law may co-exist with the Williams Act.” The bidder petitioned for certiorari in Amanda Acquistion, but the Supreme Court refused to hear the case.
When Amanda Acquisition came down, we wrote to our clients that Amanda Acquisition “should end constitutional doubts” about state takeover laws that addressed the internal governance of domestic corporations. That prediction turned out to be quite accurate. So trenchant was the Seventh Circuit’s analysis, that constitutional challenges to such takeover laws virtually ceased after Amanda Acquisition. Nonetheless, one of the very few post-Amanda challenges actually resulted in another important court of appeals decision—one that explicitly addressed and rejected a preemption challenge to the poison pill.
That decision came from the Fourth Circuit in 1995. WLR Foods, Inc. v. Tyson Foods, Inc. presented a constitutional challenge to four Virginia statutes. According to the bidder, Tyson Foods, the four laws, operating together, “impermissibly restrict[ed] the ability of a bidder to effect a takeover of a Virginia corporation.” Two of the statutes were takeover laws—one, a second-generation vote-sterilization statute akin to the Indiana law upheld in CTS, and the other, a third-generation business-combination law resembling the Wisconsin statute affirmed in Amanda Acquisition.
The third challenged provision was Virginia’s “Poison Pill Statute,” Va. Code Ann. § 13.1–646. That law explicitly authorizes Virginia corporations to create shareholder rights plans. It also provides that “[a]ny action or determination by the board of directors with respect to the issuance, the terms of or the redemption of [a rights plan] shall be subject to the provisions of § 13.1–690 and shall be valid if taken or determined in compliance therewith.” In turn, Section 13.1–690, referred to in the pill statute, was the fourth provision challenged by Tyson. And it was none other than Virginia’s codification of the business judgment rule—not the modern Delaware version, but rather the traditional, historic, pre-Unocal, pure business-judgment rule, which protects directors from liability for any good faith business judgment, without regard to whether it involves matters of corporate control, and with no heightened scrutiny for those matters.
Thus, by challenging both Virginia’s statute authorizing pills and its no-heightened-scrutiny business-judgment rule as it applies to pills, Tyson brought the very challenge that Bebchuk and Jackson now erroneously say has never been brought: to borrow words from their article, the court in WLR Foods v. Tyson Foods “expressly considered a preemption challenge to the validity of state-law poison-pill rules.” What is more, the preemption challenge in WLR Foods could not have been made in a posture more favorable to Bebchuk and Jackson’s position: not only were the Virginia “state-law poison-pill rules” challenged in conjunction with two potent antitakeover laws, but those “state-law poison-pill rules” were also considerably more forgiving of directors than Delaware’s, as the Virginia regime commands the application of the pure, traditional, no-heightened-scrutiny business-judgment rule. No better test case for Bebchuk and Jackson’s thesis could possibly be found.
Congress did not forbid the result that Virginia has achieved with the statutory scheme in the instant case. The fact that Congress, when it created the Williams Act, did not intend to create an advantage for target management in the takeover situation, does not necessarily mean that Congress meant to prevent the states from allowing management an advantage which is not unfair to investors.
The means by which the Williams Act achieves its purpose of protecting investors is by requiring disclosure of information in order to allow shareholders to make an informed decision and to prevent coercion in the tender offer context; Tyson has not shown that the Virginia statutes controvert the purpose of the Williams Act by removing protection from investors, for example, by keeping information from the shareholders. In fact, Tyson has not shown that the shareholders in this case were deprived of any relevant information. The goal of neutrality between bidder and target, emphasized by Tyson, is not so central to the purpose of the Williams Act that the Act should be held to preempt a group of state statutes that regulate the balance between a target and a bidder, but do not disadvantage the shareholders or prevent them from gaining access to pertinent information.
And with that, the court of appeals dispensed with Tyson’s claim that Virginia’s director-friendly poison-pill rules were preempted by the Williams Act. As in Amanda, the bidder petitioned for certiorari—and once again, the Supreme Court refused to take the case.
There has never been any doubt, and never will be: The pill, and the state-law doctrines permitting it, entirely comport with the Williams Act and the Constitution of the United States.
The full and original memo was published by Wachtell, Lipton, Rosen & Katz on March 13, 2014 and is available here.

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