Wachtell, Lipton, Rosen & Katz has found a new antagonist at Harvard Law School. For years, Martin Lipton and Harvard's Lucian Bebchuk have disputed the justification for takeover defenses. Now their colleagues, Eric Robinson and Guhan Subramanian (pictured), have entered the fray.
The subject is Section 203 of the Delaware General Corporation Law, one of many anti-takeover statutes from the 1980s. Subramanian, a professor at Harvard law and business schools, and two consultants at Boston-based Analysis Group Inc., Steve Herscovici and Brian Barbetta, in September issued a draft of a paper in which they argue that 203 has become an insuperable barrier to hostile takeovers.
The law prevents a hostile bidder from completing a merger with a target for three years after buying more than 15% of its shares unless the bidder gains approval of the target board in advance; goes from less than 15% ownership to more than 85% in one tender offer; or gains approval from two-thirds of the disinterested shares after buying more than 15%. In hostile takeovers that succeed by turning friendly, the target board waives 203.
With the decline of poison pills, the authors say, 203 has become more important as an anti-takeover device. Their conclusion: "Using a new sample of all 61 hostile takeover bids against Delaware targets that were announced between 1988 and 2008 that were subject to Section 203, we find that no hostile bidder in the past nineteen years has been able to avoid the restrictions imposed by Section 203 by going from less than 15% to more than 85% in its tender offer."
The result has key implications for the constitutionality of 203, the authors claim. The three federal court decisions that upheld 203 in the late 1980s all did so, in part, on the theory that the statute still left bidders "a meaningful opportunity for success" but left open the possibility that future empirical evidence might change that conclusion. Subramanian and his co-authors believe they have supplied that evidence in their paper, entitled "Is Delaware's Antitakeover Statute Unconstitutional? Evidence from 1988-2008."
Robinson, a Wachtell partner, thinks otherwise. After a Wall Street Journal report on Subramanian's paper, Robinson and associate Ryan McLeod issued a Sept. 29 memorandum entitled "Flawed Academic Challenge to Constitutionality of Delaware's Anti-Takeover Statute." It claims that Subramanian lacks "a clear understanding of both fundamental corporate law principles and practical takeover market dynamics."
They attack Subramanian's methodology and dispute his contention that 203 is a "showstopper." Instead, they argue, "We are not aware of a single hostile takeover bid that satisfied all the other conditions but nevertheless failed because the bidder did not satisfy its Section 203 condition."
So who's right? "Almost no one gets an 85% percent vote on anything that is opposed by management," says Richard Hall, a partner at Cravath, Swaine & Moore LLP. "If that's the factual underpinning for 203, then Guhan's probably right." But, Hall adds, the poison pill remains a more powerful takeover defense than 203.
There are other constraints on 203. As Subramanian admits, companies with a single class of directors gain little from either 203 or a pill, since shareholders can oust the entire board in a single proxy fight and choose directors who will lift the pill and waive 203. And few companies with staggered boards have held fast against a bid when shareholders win even a single proxy fight. There's also the question of whether a target board would have a fiduciary duty to waive 203 in the face of a compelling offer. Subramanian argues that a court would be unlikely to force a board to do so: "It would seem unusual, and unprecedented, for a Delaware court to rule that a board's fiduciary duty prevented it from doing something that the Delaware legislature had explicitly authorized." Robinson and McLeod claim a court would likely require a board to waive 203 in a case where its fiduciary duties mandated redeeming a pill.
A lawyer not involved leans to the Wachtell side. "A board always has the fiduciary duty to decide whether to opt out of 203," this lawyer says. "That becomes even more true if a huge percentage of the stock is tendered. Theoretically, you're aware that your shareholders are voting. You don't want to put 16% to 20% in the position of being shareholders in a controlled public company." Meanwhile, 203's constitutionality remains unchallenged. Were it a critical barrier to hostile takeovers, it would have generated significantly more case law.
David Marcus is a writer for Corporate Control Alert.