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The Bidder's Gauntlet: State Takeover Legislation

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Title: The Bidder's Gauntlet: State Takeover Legislation
Authors: Lau, Jason
Issue Date: 26 Sep 2014
Publisher: University of Hawaii at Manoa
Abstract: Financial and legal scholars have continuously debated over the effects of takeover laws. This essay analyzes the influence of state takeover legislation on shareholder's wealth, and evaluates the constitutionality of these state laws. Part I summarizes the strategies of a bidder and the defenses of the incumbent management. An important part of management's defense is using state laws to protect the corporation. State laws allow management to deploy delay tactics, hearing provisions, and can even handcuff the bidder with the new control share acquisition law. Part II evaluates the effect on shareholder wealth. W. Thomas Conner, of The George Washington Law Center, studied the Minnesota Control Share Acquisition Act's impact on stock prices. Conner observed the stock prices of companies incorporated and headquartered in Minnesota (regulated group), and the prices of companies headquartered but not incorporated in Minnesota (non-regulated group). In his eleven day event study, Conner found the cumulative abnormal return (CAR) of the regulated group to have a significantly lower return than the non-regulated group. To verify Conner's results, this paper uses a more complete capital asset pricing model (CAPM) to calculate CAR, instead of a simple beta adjusted model. Furthermore, this paper investigates two additional time periods, a bull and a bear market, to analyze the influence of market conditions and the longevity of the effect. The results show that the state legislation diminishes shareholder wealth, but only in the short-run. Part III explains the federal laws that govern takeovers. This section outlines the Supremacy Clause, the Commerce Clause, and the Williams Act. Part IV reviews the landmark case Edgar v. MITE Corp. to understand the legal conflicts between the federal and state laws. The four areas that have the greatest conflict are the advance notification provision, the hearing delay provision, the state's power to decide the equity of the deal, and the violations of the Commerce Clause. State takeover legislation diminishes shareholder wealth and often overstep their constitutional authority. Congress needs to provide uniform regulation that protects shareholder rights while not diminishing their wealth.
Pages/Duration: v, 43 pages
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