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States Are Offering, But Some Firms Say ‘No, Thanks’ Graphic

July 12, 1990

Undated (AP) _ Last week, H.J. Heinz Co. announced it was ″opting out″ of Pennsylvania’s anti-takeover law, making the food manufacturer the latest company to voluntarily give up the protections offered by the new statute.

States increasingly are offering corporations more protection from hostile threats. But faced with growing shareholder activism and other considerations, some companies would rather tough it out on their own.

″We don’t need the protection ... We will live on our performance,″ said Bob Pugliese, Westinghouse Electric Corp.’s executive vice president for legal and corporate affairs.

The Pennsylvania Legislature passed the anti-takeover law, considered the nation’s toughest, last spring after to an unwanted foray against Armstrong World Industries Inc. by Canada’s Belzberg family.

Armstrong welcomed the bill. But other Pennsylvania-chartered companies, including Westinghouse and Heinz, began to take advantage of a 90-day period during which they could opt out of any or all of its provisions.

David H. Gunning, a partner with the law firm Jones, Day, Reavis & Pogue in Cleveland, said corporate managers have had to weigh the advantages and disadvantages of accepting the law’s provisions.

He described the dilemma: ″If I opt out of it, I haven’t gotten the added protection, but I haven’t gotten the more immediate problem of more active shareholders.″

Shareholders, particularly big pension funds, don’t like anti-takeover laws that have been enacted in recent years because they perceive the statutes as barriers to higher stock prices. Shares of companies considered to be vulnerable to takeover frequently shoot higher on speculation or when an actual bid is made.

Some of the big shareholders campaigned against the new law. The California Public Employees Retirement System, the nation’s largest public pension fund, urged Pennsylvania corporations to opt out.

Many companies complied with the request, realizing ″they’re going to deter investors from acquiring shares in the company,″ said William Tyson. professor of legal studies at the Wharton School of the University of Pennsylvania.

Westinghouse’s Pugliese said, ″We don’t want them to have a disincentive to invest in Westinghouse.″

New takeover defenses continue being enacted, although the merger wave of the late 1980s continues to recede. The takeover business has slowed as financing has become more scarce, but this does not mean U.S. corporations are safe from hostile bids - especially if financing becomes easier to obtain.

″There will come a time ... when money is going to become available again,″ Gunning said. ″These statutes will probably serve as inhibitions to some acquisitions in some place.″

Stat anti-takeover laws have flourished since 1987. That year, the Supreme Court upheld Indiana’s anti-takeover statute in a ruling that recognized the states’ rights to develop corporate defenses against hostile bidders.

The Indiana law gave shareholders the right to decide whether an investor who buys a big stake in a company, even a majority interest, could vote those shares in corporate elections. The law, known as a control-share statute, has been copied in other states.

Anti-takeover laws also have been evolving. More than half the states have adopted merger moratorium statutes, which generally prevent a hostile acquiror from taking control of a company’s assets for several years without the approval of a specific percentage of shareholders.

Such laws were aimed at raiders who sought to pay for debt-financed takeovers by breaking up a target company and selling it piece by piece.

The Pennsylvania statute has both control-share and merger moratorium provisions and contains a provision that disarms corporate raiders. Under the law, a raider is forced to return any profits made after announcing a buyout bid that is intended solely to drive up the company’s stock price or set off a bidding war.

Westinghouse and Heinz opted out of all the provisions.

Tyson said states continue passing takeover laws with new embellishments partly because many believe the Indiana-style control share laws aren’t strong enough.

Furthermore, he said, ″The trend seems to be getting stronger because the courts seem to be supporting these takeover statutes″ and upholding their constitutionality.

Judges themselves continue to craft takeover defenses. In May, the Delaware Chancery Court continued its inclination toward giving boards of directors leeway in defending against unwanted bids.

The court said the board of Apple Bancorp Inc., which is facing an unwanted bid, did not violate a duty to shareholders by delaying setting a date for its annual meeting, where suitor Stanley Stahl was threatening a proxy fight.

Delaware court decisions are watched closely because many of the nation’s biggest companies are incorporated in the state.

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