The merger game continues. So far, the 1985 cavalcade of megadeals have included such titans as General Motors (Hughes Aircraft), R. J. Reynolds (Nabisco), American Broadcasting Companies (Capital Cities), and Trans World Airlines (Texas Air). But behind the scenes, there's some tinkering going on with the rules of the game.
Not by the deregulation-minded White House, which for the most part has been content to let market forces reign. And not by Congress, which appears hamstrung over what steps to take, if any.
Rather, it's state legislators who are sparking changes. In the last 21/2 years 10 states have adopted anti-takeover laws to protect businesses within their borders from hostile ``raiders.'' Ohio, Maryland, and Pennsylvania have passed model legislation, according to a report by the Investor Responsibility Research Center, Washington, D.C.
And last month, New York legislators quietly passed a landmark anti-takeover bill that has sent Wall Street into a tizzy.
``Never have so many legislators done so much for so few,'' rails James Balog, senior executive vice-president of Drexel Burnham Lambert, the brokerage firm. Drexel is the premier financier of takeovers.
The New York law aims to protect local companies and resident shareholders by effectively limiting takeover bids to cash offers alone. The law is apparently the first to exclude ``junk bond'' bids -- often used to finance a hostile takeover. (Here, a relatively small company can finance the takeover of a larger one by selling high-yielding ``junk'' bonds backed by the assets of the target company.)
Ted Turner's bid for CBS, for instance, could be in jeopardy if the bill -- which passed the New York Legislature by a whopping margin -- is signed by Gov. Mario M. Cuomo.
``This is primarily an economic-development issue for New York,'' contends supporter Ed Reinfurt, vice-president of the Business Council of New York State, in Albany. He says that because of takeover concern, companies are sacrificing jobs and long-term development for immediate short-term gains in stock prices.
Dubbed the battle of Wall Street and State Street, brokerage firms are lobbying hard to get Governor Cuomo to veto the bill. ``This town hasn't seen this type of pressure in years,'' Mr. Reinfurt says.
Wall Street firms that orchestrate takeovers or offer defensive advice see the law as a direct threat to their business. And shareholders say the legislation would keep a lid on the prices of undervalued stocks. Some institutional investors worry the law will reduce the value of stock in New York-based corporations by reducing the likelihood of a price-raising takeover bid.
The bill requires non-cash offers either to win a majority vote of directors not affiliated with a takeover bid or win the vote of two-thirds of all shareholders and a majority of shareholders not involved in the bid. It applies to companies that are incorporated in New York State and have principal operations, headquarters, and 15 percent of their shareholders there. About 30 Fortune 500 companies, including IBM, AT&T, Avon, and Philip Morris, would probably fall under this protective umbrella.
There is an escape clause: The bill would not apply if two-thirds of a company's shareholders vote against it.
A veto or signature is expected by August, but Governor Cuomo could send the bill back to the Legislature and tie it up until December, political observers say.
The trend toward blocking takeovers through state laws is simply an end run around shareholders, says Yakov Amihud, associate professor of finance at New York University. ``If management wants to pass an amendment to their corporate charter, why don't they let shareholders vote on it?'' he asks. And he answers, ``Because CEOs [chief executive officers] find it easier to convince the legislators than the shareholders.''
That disturbs Mr. Amihud, because shareholders, as owners, should have the right to vote on such changes in the corporate charter. ``The Legislature is confiscating the rights of shareholders,'' he says.
Indeed, even supporters of the bill expect a court challenge. Traditionally, laws governing corporations are set at the state level. But federal laws take precedence over state laws. And the changes states are making in corporate charters to protect against takeovers may conflict with federal securities and interstate commerce laws.
In 1982, the Supreme Court ruled that the Williams Act of 1968 (governing tender offers) took precedence over an Illinois law that set up delaying obstacles to takeovers. And the state law interfered with interstate commerce laws, since it allowed Illinois to block a tender offer from anywhere in the nation. State anti-takeover laws -- including New York's -- have since been written to get around that ruling, but none have been tested by the Supreme Court.
``The Williams Act, as viewed by the Supreme Court, is designed to let the marketplace slug it out in a posture of neutrality,'' says Tamar Frankel, a securities law professor at Boston University. It could be argued that the New York State law tips the scale in favor of corporations, she says.
But proponents say the scales now favor raiders and need to be balanced. Reinfurt at the New York Business Council says, ``The Williams Act, despite what people say, has not kept a level playing field for corporations subject to takeover attempts.''
In a separate development, last week the Securities and Exchange Commission did a bit of field leveling.
Earlier this year, courts in Delaware and California upheld the use of a weapon employed by Unocal Corporation to protect itself from a T. Boone Pickens Jr. takeover bid. The weapon: a tender offer that excludes certain shareholders (in this case Mr. Pickens). Now the SEC is proposing a ban on exclusionary tender offers, made to just certain shareholders. The SEC reasons that management must deal equally with all shareholders. The proposal is open to public comment for 60 days.
In another merger move, the SEC said this week it will require corporations to be more open about secret merger talks. Often when merger talks are under way, rumors will cause sharp run-ups or drops in a company's stock price. The public or a stock exchange will often ask the company if it knows why its stock is behaving this way. In the past, some companies made misleading statements to hide delicate merger discussions.
Now, if a company does comment on unusual market activity, it must disclose whether merger talks are in progress. Under some circumstances, the SEC will allow it to issue a ``no comment'' statement.