FTC Staff Comment to the Hon. Steven D. Wolens Concerning an Act to Regulate Control Share Acquisitions and Certain Business Combinations

UNITED STATES OF AMERICA
FEDERAL TRADE COMMISSIO!'\
WASHINGTON, D.C. 20580
BUflEAU OF COMPETITION
MAY 	5 1988
The 	Honorable 	Steven 	D. 	Wolens
Chairman
Committee 	on 	Business 	and 	Commerce
Texas 	House 	of 	Representatives
15th 	and 	Congress 	Streets, 	Room 	231
Austin, 	Texas 	78711
Dear 	Mr. 	Wolens:
COMMISSION 	AUTHORIZED
The 	staff 	of 	the 	Federal 	Trade 	Commission 	is 	pleased 	to
respond 	to 	your 	letter 	of 	invitation 	of 	April 	27, 	1988, 	to
comment 	on 	"An 	Act 	Relating 	to 	Control 	Share 	Acquisitions,
Certain 	Business 	Combinations 	and 	Amending 	the 	Texas 	Business
Corporation Act." 	~/ 	The 	bill, 	if 	enacted, 	would 	amend 	the
Texas 	Business 	Corporation Act 	to 	regulate 	"control 	share"
acquisitions 	and 	certain 	"business 	combinations" 	involving 	both
Texas 	corporations 	and 	certain 	nonresident 	corporations. 	~/
Specifically, 	the 	bill 	would 	prohibit 	bidders 	for 	corporate
control 	from 	voting 	"control 	shares" 	unless 	a 	majority 	of
"disinterested" 	shareholders 	has 	voted 	to 	authorize 	the 	exercise
of 	that 	right, 	and 	it 	would 	restrict 	the 	ability 	of 	acquirers 	to
engage 	in 	business 	combinations 	with 	target 	corporations 	for 	a
period 	of 	five 	years 	after 	acquiring 	twenty 	percent 	of 	their
shares.
~/ 	These 	comments 	represent 	the 	views 	of 	the 	Federal 	Trade
Commission's 	Bureaus 	of 	Competition, 	Consumer 	Protection, 	and
Economics, 	and 	do 	not 	necessar~ly represent 	the 	views 	of 	the
Commission 	itself 	or 	any 	individual 	Commissioner. 	The 	Commission
has 	voted, 	however, 	to 	authorize 	us 	to 	submit 	these 	comments 	for
your 	consideration.
~/ 	Article 	13.03 	of 	the 	bill 	is 	similar 	to 	an 	Indiana 	"control
share" 	statute 	whose 	constitutionality was 	recently 	upheld 	by 	the
Supreme 	Court 	in 	CTS 	Corp. 	v. 	Dynamics 	Corp., 	107 	S. 	Ct. 	1637
(1987). 	The 	Court 	held 	that 	the 	Indiana 	law 	was 	not 	preempted 	by
the 	federal 	Williams 	Act, 	15 	U.S.C. 	§ 	78m(d)-(e), 	78n(d)-(:), 	or
Securities 	and 	Exchange 	Commission 	regulations 	promulgated
thereunder, 	and 	did 	not 	unconstitutionally 	interfere with
interstate 	commerce. 	Article 	13.03, 	however, 	differs 	from 	the
Indiana 	statute 	in 	that 	it 	also 	applies 	to 	nonresident
corporations. 	We 	do 	not 	address 	here 	the 	constitutional 	issues
raised 	by 	that 	feature 	of 	the 	proposed 	legi.slation. 	~ 	107
S.Ct. 	at 	1651-52; 	Edgar 	v. 	~ite, 	457 	u.s. 	624, 	645-46 	(1982).

The 	Honorable 	Steven 	D. 	Wolens 	-2-
We 	believe 	that 	enactment 	of 	the 	proposed 	legislatioT: 	is
likely 	to 	deter 	takeovers 	that 	benefit 	shareholders, 	employees,
consumers, 	and 	the 	economy 	as 	a 	whole. 	If 	the 	legislature
pevertheless 	decides 	to 	enact 	the 	bill, 	we 	recommend 	that 	it
consider making 	the 	legislation 	applicable 	solely 	to 	corporations
that 	affirmatively 	elect 	to 	be 	covered 	by 	it 	through 	amendments
to 	their 	articles 	of 	incorporation. 	2/ 	An 	affirmative 	"opting
in" 	provision would 	enable 	the 	shareholders 	of 	each 	corporation
to 	determine 	whether 	restraints 	on 	the 	transfer 	of 	corporate
control 	are 	in 	the 	interests 	of 	the 	corporation.
A. 	Interest 	and 	Experience 	of 	the 	Federal 	Trade 	Commission
The 	Federal 	Trade 	Commission 	is 	charged 	by 	statute 	with
preventing 	unfair 	methods 	of 	competition 	and 	unfair 	or 	deceptive
practices 	in 	or 	affecting 	commerce. 	15 	U.S.C. 	§ 	45. 	Pursuant 	to
this 	mandate, 	the 	Commission 	seeks 	to 	identify 	restrictions 	that
impede 	competition 	or 	increase 	costs 	without 	offering
countervailing 	benefits 	to 	consumers. 	Our, efforts 	have 	included
providing 	~omrnents to 	federal, 	state, 	and 	local 	legislatures 	and
administrative 	agencies 	on 	matters 	that 	raise 	issues 	of
competition 	or 	consumer 	protection policy.
The 	Commission 	has 	substantial 	experience 	in 	the 	area 	of
mergers 	and 	acquisitions. 	The 	Commission 	enforces 	section 	7 	of
the 	Clayton Act, 	15 	U.S.C. 	§ 	18, 	which 	prohibits 	acquisitions 	of
corporate 	assets 	or 	securities 	that 	may 	substantially 	lessen
competition 	or 	tend 	to 	create 	a 	monopoly. 	Under 	the 	Hart-Scott-
Rodino 	Antitrust 	Improvements 	Act 	of 	1976, 	15 	U.S.C. 	§ 	18a, 	the
Commission 	reviews 	proposed 	acquisitions 	of 	corporate 	securities,
including 	tender 	offers, 	to 	determine 	whether 	they 	violate 	the
antitrust 	laws.
The 	Commission's 	staff 	has 	addressed 	issues 	related 	to 	the
market 	for 	corporate 	control 	through 	scholarly 	studies 	and
comments 	to 	state 	governments. 	Last 	year, 	the 	Commission's
Bureau 	of 	Economics 	published 	a 	study 	on 	the 	effects 	of 	takeover
legislation 	enacted 	by 	New 	York 	in 	1985. 	l! 	In 	the 	past 	two
years, 	the 	Commission's 	staff 	provided 	comments 	on 	corporate
control 	legislation 	to 	the 	governor 	of 	New 	York 	and 	to 	the 	New
Jersey 	and 	Delaware 	legislatures.
2/ 	Article 	13.03 	of 	the 	bill, 	which 	governs 	"control 	share"
acquisitions, 	contains 	an 	opt-in 	provision.
l! 	L. 	Schumann, 	State 	Regulation 	of 	Takeoyers 	and 	Shareholder
Wealth: 	The 	Effects 	of 	New 	York's 	1985 	Takeover 	Statutes 	(Fede~al
Trade 	Commission, 	Bureau 	of 	Economics, 	1987).

The 	Honorable 	Steven 	D. 	Wolens
B. 	Effect 	of 	Takeoyers 	on 	EconQmic 	Welfare
-3-
The 	cQrporate 	takeover 	is 	a 	mechanism 	fQr 	transferring
~ 	cQntrQl 	Qf 	cQrporate 	assets. 	The 	transfer 	Qf 	cQrpQrate 	contrQl
can 	serve 	a 	number 	of 	desirable 	eCQnomic 	functions, 	such 	as
facilitating 	the 	redeployment 	of 	corpQrate 	assets 	tQ 	mQre
efficient 	uses 	and 	improving 	corporate 	management. 	AlthQugh 	nQt
every 	takeQver 	ultimately 	produces 	such 	benefits, 	we 	believe 	that
takeQvers 	in 	the 	aggregate 	are 	likely 	to 	enhance 	eCQnomic
efficiency 	and 	benefit 	sharehQlders, 	employees, 	and 	CQnsumers.
As 	discussed 	in 	further 	detail 	below, 	although 	SQme 	critics 	have
questiQned 	the 	benefits 	Qf 	takeovers, 	the 	criticism 	appears 	tQ
lack 	empirical 	suppQrt.
Studies 	suggest 	that 	management-QPPQsed 	corporate
acquisitiQns 	are 	most 	cQmmQnly 	carried 	out 	when 	outside 	bidders
have 	an 	opportunity 	to 	imprQve 	the 	perfQrmance 	and 	thereby
increase 	the 	value 	of 	target 	cQrpQratiQns. 	~/ 	Such 	bidders 	pay
substantial 	premiums 	over 	the 	market 	value 	of 	the 	shares 	of
target 	cQrpQrations 	because 	they 	believe 	that 	the 	cQrpQratiQns
will 	be 	worth mQre 	under 	their 	cQntrQl. 	~/
There 	are 	a 	number 	of 	SQurces 	fQr 	the 	PQtential 	gain 	in 	an
acquired 	firm's 	perfQrmance. 	In 	some 	cases, 	bidders 	are 	able 	to
imprQve 	the 	management 	Qf 	the 	target 	firm. 	In 	other 	cases,
bidders 	may 	be 	able 	tQ 	increase 	efficiency 	by 	combining 	firms
with 	complementary 	strengths, 	integrating 	production 	or
distribution 	channels, 	eliminating 	duplicative 	functions, 	Qr
facilitating 	mutually 	beneficial 	technQlogy 	transfers. 	Takeovers
may 	also 	permit 	firms 	to 	shift 	cQrporate 	assets 	to 	more 	efficient
uses 	by 	selling 	or 	changing 	the 	use 	of 	underperforming
facilities.
The 	transfer 	of 	corporate 	contrQl 	in 	such 	circumstances 	is
likely 	to 	benefit 	sharehQlders, 	employees, 	and 	the 	eCQnomy 	as 	a
whole, 	as 	well 	as 	the 	successful 	bidder. 	SharehQlders, 	many 	of
whQm 	are 	emplQyee 	pension 	funds, 	benefit 	in 	two 	ways. 	First,
~/ 	~ 	Bradley, 	Desai 	& Kim, 	The 	RatiQnale 	Behind 	Interfirm
Tender 	Offers; 	Information 	Qr 	Syner~, 	11 	J. 	Fin. 	ECQn. 	183
(1983); 	GilsQn, 	A Structural 	ApprQach 	tQ 	Corporations; 	The 	Case
Against 	Defensive 	Tactics 	in 	Tender 	Offers, 	33 	Stan. 	L. 	Rev. 	819
(1981); 	Easterbrook 	& Fischel, 	The 	Proper 	Role 	of 	a 	Target's
Management 	in 	Responding 	tQ 	a 	Tender 	Offer, 	94 	Harv. 	L. 	Rev. 	1161
(1981) .
~/ 	There 	is 	eV~Qence that 	share 	prices 	of 	most 	target 	companies
significantly 	underperform 	the 	market 	in 	the 	pre-offer 	period.
~ 	Gilson, 	supra 	note 	4, 	at 	852-53, 	and 	sources 	cited 	therein.

The 	Honorable 	Steven 	D. 	Wolens 	-4-
because 	bidders 	for 	corporate 	control 	offer 	substantial 	premiums
over 	the 	pre-offer 	market 	price 	of 	corporate 	shares, 	target
company 	shareholders 	enjoy 	rapid 	cppreciation 	of 	the 	value 	of
their 	shares. 	Second, 	the 	threat 	of 	takeovers 	may 	motivate
- 	incumbent 	corporate 	managers 	to 	improve 	corporate 	performance.
Employees 	benefit 	from 	enhanced 	corporate 	efficiency 	and 	the
accompanying 	gains 	in 	corporate 	competitiveness. 	~/ 	The 	entire
economy 	can 	benefit 	both 	from 	the 	transfer 	of 	corporate 	control
to 	more 	efficient 	management 	and 	from 	the 	incentives 	that
takeovers 	create 	for 	improved managerial 	performance.
Numerous 	scholarly 	studies 	have 	concluded 	that 	takeovers, 	on
average, 	lead 	to 	an 	increase 	in 	the 	stock market's 	valuation 	of
both 	the 	acquired 	and 	the 	acquiring 	firms. 	2/ 	According 	to 	a
recent 	study, 	share 	prices 	of 	acquired 	firms 	increase 	by 	an
average 	of 	53.4 	percent. 	~/ 	Different 	studies 	report 	that 	the
share 	prices 	of 	acquiring 	firms 	have 	tended 	in 	the 	past 	to
increase 	by 	smaller 	amounts, 	ranging 	from 	2 	percent 	to
approximately 	7 	percent, 	~/ although 	in 	this 	decade 	acquirers 	may
Q/ 	Profitable 	firms 	provide 	the 	best 	opportunities 	for 	wage
growth, 	new 	employment, 	and 	the 	fulfillment 	of 	pension 	and 	other
contractual 	obligations 	to 	workers.
2/ 	These 	studies 	measure 	the 	stock market 	performance 	of 	the
companies 	involved 	during 	short 	periods 	of 	time 	surrounding
takeover 	bids. 	Although 	these 	studies 	may 	be viewed 	as 	offering
a 	usnapshotU 	view 	of 	the 	stock 	market's 	valuation 	of 	takeovers,
and 	thus 	as 	only 	indirect 	measures 	of 	long-term 	performance,
economic 	scholars 	largely 	agree 	that 	the 	increases 	in 	company
valuations 	reported 	by 	these 	studies 	represent 	efficiency 	gains.
~ 	note 	12, 	infra, 	and 	accompanying 	text. 	Of 	course, 	sharp
fluctuations 	in 	market 	values, 	such 	as 	those 	experienced 	during
last 	year's 	stock market 	crash, 	may 	require 	a 	cautious 	approach
to 	long 	term 	conclusions. 	Some 	scholars 	have 	also 	questioned 	the
overall 	effects 	of 	mergers 	on 	economic 	efficiency. 	~
Ravenscraft 	& Scherer, 	The 	LonQ-Run 	Performance 	of 	MerQers 	and
Takeovers, 	in 	M. 	Weidenbaum 	& K. 	Chilton, 	Public 	Policy 	Toward
Corporate 	TakeQyers 	34 	(1988).
~/ 	Securities 	and 	Exchange 	Commission, 	Office 	of 	the 	Chief
EconQmist, 	The 	ECQnomics 	Qf 	Any-Qr-AII, 	Partial, 	and 	TwQ-Tier
Tender 	Offers, 	Table 	4A 	(1985).
~/ 	ThQse 	findings 	are 	summarized 	in 	Jensen 	& Ruback, 	The 	Market
fQr 	CQrpQrate 	CQntrQl: 	The 	Scientific 	Eyidence, 	11 	J. 	Fin. 	Econ.
5, 	11 	(Table 	3), 	16-22 	(1983). 	~ ~ 	Jarrell 	& Bradley, 	~
EccnQmic 	Effects 	Qf 	Federal 	and 	S~at€ Re~ulatiQns Qf 	Cash 	Tender
Offers, 	23 	J. 	Law 	ECQn. 	371, 	393-95 	(1980); 	CQuncil 	Qf 	ECQnQmic
Advisers, 	E;QnQmic 	Report 	Qf 	the 	President 	197 	(1985).

The 	Honorable 	Steven 	D. 	Wolens 	-5-
have 	experienced 	no 	gains 	at 	all. 	~/ 	These 	studies 	suggest 	that
the 	market 	values 	the 	combination 	of 	the 	acquiring 	company 	and
the 	target 	company 	more 	highly 	than 	the 	individual 	firms 	that
~ 	~ould exist 	in 	the 	absence 	of 	a 	takeover. 	~/
A substantial 	body 	of 	economic 	and 	legal 	literature 	supports
the 	view 	that 	these 	increases 	in 	the 	stock market's 	valuation 	of
firms 	following 	a 	takeover 	represent 	efficiency 	gains, 	and 	the
creation 	of 	new wealth, 	attributable 	solely 	to 	the 	takeover. 	12/
Participants 	in 	the 	stock market 	are 	not 	likely 	to 	bid 	up 	the
price 	of 	equity 	securities 	involved 	in 	takeovers 	unless 	prior
takeovers, 	on 	average, 	produced 	such 	gains. 	A smaller 	group 	of
studies 	quarrels 	with 	these 	conclusions, 	but 	many 	of 	these
studies 	contain methodological 	errors. 	~/ 	A major 	scholarly
lQ/ 	~ 	Jarrell, 	Brickley 	& Netter, 	The 	Market 	for 	Corporate
Control; 	The 	Empirical 	Eyidence 	Since 	1980, 	2 	J. 	Econ. 	Persp. 	49
(1988).
~/ 	Similarly, 	share 	prices 	of 	both 	bidding 	and 	target 	firms
usually 	decline 	after 	unsuccessful 	takeover 	bids 	to 	below 	the
pre-offer 	level. 	Bradley, 	Desai 	& Kim, 	supra 	note 	4, 	at 	189-204;
Jensen 	& Ruback, 	supra 	note 	9, 	at 	8.
12/ 	The 	economic 	and 	legal 	literature 	discussing 	the 	benefits 	of
takeovers 	is 	vast. 	~,~.~., Economic 	Report 	of 	the 	President,
supra 	note 	9, 	at 	187-216; 	Jensen 	& Ruback, 	supra 	note 	8; 	Jarrell,
Brickley 	& Netter, 	supra 	note 	10; 	Bradley, 	Desai 	& Kim, 	supra
note 	4; 	Gilson, 	supra 	note 	4; 	Easterbrook 	& Fischel, 	supra 	note
4; 	Easterbrook 	& Jarrell, 	Do 	TarQets 	Benefit 	from 	DefeatinQ 	Ten-
der 	Offers, 	59 	N.Y.U.L. 	Rev. 	277 	(1984); 	Pound, 	Lehn 	& Jarrell,
Are 	Takeoyers 	Hostile 	to 	Economic 	Performance?, 	Regulation,
Sept.-Oct. 	1986, 	25.
~/ 	For 	example, 	weidenbaum 	& Vogt, 	Takeovers 	and 	Stockholders;
Winners 	and 	Losers, 	19 	Cal. 	Mgmt. 	Rev. 	157 	(1987), 	incorrectly
relied 	on 	evidence 	concerning 	negotiated 	mergers 	to 	conclude 	that
management-opposed 	takeovers 	reduce 	efficiency. 	When 	the
evidence 	of 	management-opposed 	takeovers 	reviewed 	by 	the 	authors
is 	examined 	separately, 	it 	supports 	the 	conclusion 	that 	takeovers
enhance 	efficiency. 	Similarly, 	Lipton, 	Takeover 	Bids 	in 	the
TarQet's 	Boardroom, 	35 	Bus. 	Law. 	101 	(1979), 	offered 	evidence
purporting 	to 	show 	that 	stockholders 	benefited 	from 	management
resistance 	that 	resulted 	in 	the 	defeat 	of 	takeover 	bids.
Lipton'S 	evidence 	showed 	that 	the 	share 	prices 	of 	some 	firms 	that
had 	defeated 	takeover 	bids 	increased 	above 	the 	tender 	offer 	price
a 	number 	of 	years 	later. 	His 	study 	did 	not 	compare 	these 	share
price 	movements 	to 	the 	overall 	market's 	movement 	during 	the 	same
period. 	More 	systematic 	studies, 	which 	examine 	abnormal 	returns
(continued ... )

The 	Honorable 	Steven 	D. 	Wolens 	-6-
study 	that 	took 	issue 	with 	the 	conclusions 	of 	the 	stock market
studies, 	relying 	instead 	on 	accounting 	data, 	concluded 	that
takeovers 	neither 	improved 	nor 	degraded 	the 	performance 	of 	the
~ 	Larget 	firms. 	~/
Accordingly, 	no 	scholarly 	consensus 	on 	the 	economic 	effects
of 	takeovers 	supports 	changes 	in 	the 	law 	to 	make 	management-
opposed 	takeovers 	more 	costly 	and 	difficult. 	On 	the 	contrary,
the 	preponderance 	of 	scholarly 	opinion on 	the 	subject 	supports
the 	conclusion 	that 	management-opposed 	takeovers 	produce 	economic
benefits. 	New 	restrictions 	on 	takeovers 	are 	likely 	to 	undermine
economic 	efficiency 	by 	impeding 	the 	flow 	of 	corporate 	assets 	to
value-maximizing 	uses 	and 	by 	entrenching 	inefficient 	managers.
C. 	Asserted 	Disadvantages 	of 	Takeover 	Actiyity
Several 	purported 	disadvantages 	of 	takeover 	activity 	are
often 	cited 	to 	justify 	restraining 	corporate 	acquisitions.
Although 	these 	disadvantages 	have 	not 	been 	substantiated 	through
empirical 	research, 	they 	are 	often 	cited 	by 	incumbent 	managers
and 	other 	takeover 	critics 	in 	testimony 	before 	Congressional
committees 	and 	in 	articles 	in 	the 	general 	press. 	In 	the 	absence
of 	persuasive 	evidence 	substantiating 	these 	asserted
disadvantages, 	these 	claims 	do 	not 	support 	the 	enactment 	of 	curbs
on 	takeover 	activity.
~/( ... continued)
on 	shares 	of 	takeover 	targets 	compared 	to 	overall 	market 	trends,
show 	that 	stockholders 	incur 	significant 	losses 	from 	the 	defeat
of 	takeover 	bids. 	~ 	generally 	Easterbrook 	& Jarrell, 	supra
note 	11, 	at 	282-84.
~/ 	D. 	Ravenscraft 	& F. 	Scherer, 	Mergers. 	Sell-Offs. 	and
Economic 	Efficiency 	101-03 	(1987). 	The 	authors 	used 	accounting
data 	to 	measure 	economic 	rates 	of 	return. 	This 	methodology 	is
controversial 	because 	profits 	revealed 	by 	such 	data 	are 	subject
to 	wide 	variations 	resulting 	from 	the 	use 	of 	divergent 	accounting
conventions 	by 	different 	firms. 	~ 	generally 	Benston, 	~
validity 	of 	PrQfits-Structure 	Studies 	with 	Particular 	Reference
tQ 	the 	FTC's 	Line 	Qf 	Business 	Data, 	75 	Am. 	ECQn. 	Rev. 	37 	(1985);
Fisher 	& McGQwan, 	On 	the 	Misuse 	Qf 	Accounting 	Rates 	Qf 	Return 	tQ
Infer 	MQnQpQly 	PrQfits, 	73 	Am. 	ECQn. 	Rev. 	82 	(1983). 	In 	addi-
tiQn, 	because 	of 	constraints 	on 	the 	availability 	of 	data, 	the
study 	fQcuses 	largely 	on 	conglQmerate mergers. 	~ 	Ravenscraft 	&
Scherer, 	supra, 	at 	22. 	As 	the 	authors 	observe, 	however, 	the
incidence 	of 	horizontal 	merger 	activity 	has 	increased markedly 	in
this 	decade, 	and 	"[t]he 	shift 	tQward 	large 	hQrizontal 	mergers 	is
mQre 	difficult 	tQ 	evaluate 	sQlely 	on 	the 	basis 	of 	our 	research."
IQ. 	at 	219.

The 	Honorable 	Steven D. 	Wolens 	-7-
Some 	takeover 	critics 	claim 	that 	acquirers 	often 	take 	over
well-managed 	corporations, 	oust 	good management, 	and 	reduce
~ 	corporate 	efficiency 	by 	installing 	less 	capable 	management 	teams.
This, 	indeed, 	may 	happen 	in 	some 	cases. 	Corporate 	acquirers,
like 	all 	other 	businesspersons, 	may make 	mistakes. 	This
possibility, 	however, 	does 	not 	justify 	controls 	on 	takeover
activity 	any 	more 	than 	the 	possibility 	of 	poor 	investments 	in
plant 	or 	equipment 	justifies 	government 	controls 	on 	investment
decisions 	made 	by 	corporate managers. 	In 	a 	market 	economy,
investment 	decisions 	generally are 	best 	left 	to 	investors, 	who
stand 	to 	profit 	from 	correct 	decisions 	and 	lose 	from 	poor 	ones.
The 	critical 	fact 	is 	that 	takeover 	activity, 	in 	the 	aggregate,
appears 	to 	benefit 	society. 	Because 	the 	evidence 	suggests 	that
the 	benefits 	of 	takeovers 	outweigh 	their 	costs, 	restricting
takeovers 	in 	the 	hope 	of 	preventing 	unwise 	investments 	is 	likely
to 	harm 	societal 	welfare.
It 	also 	has 	been 	argued 	that 	management-opposed 	takeovers
result 	disproportionately 	in 	facility 	closings 	and 	lay-offs,
which 	impose 	great 	social 	costs 	on 	individuals 	and 	communities 	in
which 	plants 	are 	located. 	But 	factual 	support 	for 	the 	position
that 	takeovers 	in 	fact 	lead 	to plant 	closings 	and 	lay-offs 	that
would 	not 	have 	occurred 	otherwise 	is, 	at 	best, 	scanty. 	~/ 	Any
closings 	or 	lay-offs 	that 	are 	necessary 	to 	achieve 	greater
efficiency 	likely would 	have 	been 	carried 	out 	by 	the 	target's
management 	in 	any 	event 	if 	the 	firm 	were 	to 	remain 	competitive.
Moreover, 	most 	economic 	changes 	that 	increase 	efficiency 	-- 	and
thereby 	increase 	aggregate 	societal 	wealth 	create 	dislocations
~/ 	~ 	Jensen, 	Takeovers; 	Folklore 	and 	Science, 	Harv. 	Bus. 	Rev.
Nov.-Dec. 	1984, 	at 	114 	; 	~. 	American 	Enterprise 	Institute, 	•
Proposals 	Affectin~ Corporate 	Takeovers 	31 	(1985) 	(citing 	finding
that 	"very 	few 	jobs 	were 	affected" 	by 	6,000 	corporate
acquisitions 	in 	1970s). 	The AFL-CIO 	estimates 	that 	a 	total 	of
80,000 	jobs 	of 	members 	of 	its 	affiliated 	unions 	have 	been 	lost 	as
a 	"result 	of 	corporate 	restructuring" 	in 	recent 	years. 	Hostile
Takeovers, 	Hearings 	Before 	the 	Senate 	Committee 	on 	Banking,
Housing, 	and 	Urban 	Affairs, 	100th Cong., 	1st 	Sess. 	262 	(1987)
(statement 	of 	Thomas 	R. 	Donahue) 	(hereinafter 	"Hearin~s on
Hostile 	Takeovers"). 	Even 	assuming 	that 	this 	estimate, 	for 	which
the 	time 	frame 	is 	unspecified 	but 	presumably 	spans 	a 	number 	of
years, 	is 	correct, 	it 	is 	difficult 	to 	assess 	how many 	of 	those
jobs 	would 	have 	been 	abolished 	in 	any 	event 	to 	improve 	the
competitiveness 	of 	the 	affected 	companies. 	To 	put 	the 	figure 	in
perspective, 	a 	total 	of 	5.1 	million 	workers 	lost 	their 	jobs
because 	of 	plant 	closings 	or 	efficiency measures 	in 	the 	years
1979-1983. 	Bureau 	of 	Labor 	Statistics, 	Monthly 	Labor 	Reyiew
(June 	1985).

The 	Honorable 	Steven 	D. 	Wolens 	-8-
that 	reduce 	the 	welfare 	of 	some 	individuals. 	~/ 	Virtually 	every
major 	technological 	advance 	renders 	an 	earlier 	technology
obsolete 	and 	thus 	may 	harm 	firms 	and 	individuals 	dependent 	on 	the
~arlier technologies.
It 	has 	been 	asserted 	that 	the 	financing 	of 	corporate
acquisitions 	through 	high 	yield 	(or 	"junk") 	bonds 	saddles
acquiring 	firms 	with 	"excessive" 	debt. 	Some 	critics 	argue 	that
the 	assertedly 	high 	debt 	burden 	assumed 	by 	corporate 	acquirers
will 	lead 	persons 	who 	gain 	control 	of 	a 	target 	firm, 	among 	other
things, 	to 	close 	productive 	plants, 	terminate 	expenditures 	for
activities 	that 	lead 	to 	long-term 	benefits, 	such 	as 	research 	and
development 	operations, 	and 	"loot" 	corporate 	cash 	accounts 	and
other 	assets 	of 	the 	firm. 	Although 	the 	focus 	of 	the 	criticism
has 	been 	acquirers' 	use 	of 	high 	yield 	bonds 	to 	finance 	takeovers,
relatively 	little 	takeover 	financing 	is 	made 	through 	high 	yield
bonds. 	In 	the 	first 	nine 	months 	of 	1986, 	a 	year 	of 	significant
takeover 	activity, 	high 	yield 	bonds 	represented 	only 	7.6 	percent
of 	tender 	offer 	financing. 	12/
It 	is 	highly 	improbable, 	moreover, 	that 	corporate 	acquirers
would 	undertake" debt 	obligations 	they 	believe 	likely 	to 	render 	an
acquired 	company 	unprofitable, 	because 	doing 	so 	would 	tend 	to
defeat 	the 	very 	purpose 	of 	their 	investment. 	It 	is 	not 	in 	the
interest 	of 	acquirers 	to 	shut 	down 	profitable 	operations 	or
~/ 	It 	would 	seem 	preferable 	for 	government 	to 	respond 	to 	these
inevitable 	economic 	dislocations 	by 	initiating 	effective 	remedial
measures 	to 	assist 	displaced 	individuals 	rather 	than 	severely
restricting 	economic 	activity 	that 	benefits 	society. 	Such
measures 	may 	include, 	for 	example, 	programs 	to 	retrain 	workers
displaced 	from 	declining 	industries.
12/ 	H. 	Sherman 	& R. 	Schrager, 	Junk 	Bonds 	and 	Tender 	Offer
FinancinQ 	18 	(1987), 	reprinted in Hearings 	on 	Hostile 	Takeoyers,
supra 	note 	15, 	at 	627. 	To 	put 	the 	point 	in 	pe~spective, in 	1985,
only 	600 	U.S. 	companies 	qualified 	for 	investment 	grade 	ra~ings,
while 	19,000 	additional 	companies 	with 	assets 	of 	more 	than 	$25
million 	did 	not 	qualify. 	Impact 	of 	Corporate 	Takeoyers, 	Hearings
Before 	the 	Senate 	Committee 	on 	Banking, 	Housing, 	and 	Urban
Affairs, 	99th 	Cong., 	1st 	Sess. 	699 	(1985) 	(statement 	of 	Frederick
Joseph). 	Many 	of 	these 	corporations 	use 	high 	yield 	bonds 	to
finance 	internal 	growth 	because 	debt 	securities 	offer 	them 	more
flexibility 	than 	bank 	loans 	or 	term 	loans 	by 	insurance 	companies,
which 	until 	recently 	had 	been 	their 	only 	available 	avenue 	for
debt 	financing. 	Thus, 	in 	1985, 	firms 	issued 	a 	total 	of 	$15
billion 	in 	high 	yield 	bonds. 	Sherman 	& Schrager, 	supra, 	at 	4.
During 	the 	same 	year, 	the 	total 	value 	of 	debt 	securities 	issued
to 	finance 	tender 	offers, 	including 	investment 	grade 	securities,
was 	$4.3 	billion. 	~. 	at 	17.

The 	Honorable 	Steven 	D. 	Wolens 	-9-
eliminate 	beneficial 	research 	and 	development 	efforts for 	the
purpose 	of 	satisfying 	debt 	obligations. 	Divestiture 	of 	corporate
assets 	or 	reduction 	in 	research 	and 	development 	efforts 	for 	the
~ 	~ake of 	satisfying 	debts, 	rather 	than 	for 	business 	reasons, 	will
rob 	the 	divesting 	firm 	of 	a 	source 	of 	future 	earnings 	to 	satisfy
future 	debt 	obligations. 	~/ 	Moreover, 	the 	principal 	purchasers
of 	high yield 	bonds 	are 	sophisticated 	institutional 	investors
such 	as 	pension 	funds, 	insurance 	companies, 	and 	mutual 	funds, 	who
are 	unlikely 	to 	lend money 	for 	takeovers 	unless 	they 	expect 	them
to 	be 	profitable.
Finally, 	it 	is 	argued 	that 	takeovers 	force 	corporate
managers 	to 	focus 	on 	short 	term 	profits 	and 	forego 	long 	term
investments. 	The 	evidence 	shows, 	however, 	that 	foregoing 	long
term 	investment makes 	companies 	more, 	not 	less, 	vulnerable 	to
takeovers. 	Takeover 	targets 	tend 	to 	have 	below-average 	research
and 	development 	budgets, 	showing 	a 	lesser 	commitment 	to 	long 	term
investments 	than 	the 	average 	firm. 	~/
D. 	Effects 	of 	nControl 	Share n Restrictions
Article 	13.03 	of 	the 	proposed 	legislation 	concerns 	"control
share 	acquisitions. n 	The 	bill 	would 	create 	a 	new 	category 	of
corporate 	securities 	under 	Texas 	law, 	labeled 	ncontrol 	shares."
Article 	13.03(A)(1) 	defines 	ncontrol 	shares n 	as 	newly-acquired
shares 	that, 	but 	for 	the 	bill's 	requirements, 	when 	added 	to 	the
acquiring 	person's 	preexisting 	shares, 	would 	entitle 	the 	acquirer
to 	exercise voting 	power 	within 	one 	of 	three 	ranges: 	one-fifth 	to
one-third, 	one-third 	to 	one-half, 	or a 	majority 	of 	all 	voting
~/ 	Of 	course, 	acquirers 	may 	sell 	portions 	of 	acquired 	firms
because 	they 	do 	not 	fit 	into 	the 	firms' 	business 	plans, 	and 	will
shut 	down 	inefficient 	facilities, 	including 	inefficient 	research
and 	development 	operations, 	because 	they 	are 	unprofitable 	in 	the
long 	run. 	But 	this 	is 	precisely 	the 	sort 	of 	redeployment 	of
corporate 	assets 	to 	more 	efficient 	uses 	that 	results 	in 	benefits
to 	society.
~I 	This 	proposition 	is 	supported 	by 	a 	recent 	empirical 	study 	of
the 	investment 	patterns 	of 	takeover 	targets. 	The 	study, 	which
examined 	all 	217 	takeover 	targets 	that 	were 	acquired 	between 	1980
and 	1984, 	found 	that 	takeover 	targets 	had 	below 	average 	ratios 	of
(i) 	research 	and 	development 	expenditures 	to 	total 	expenditures
and 	(ii) 	capital 	investment 	to 	earnings. 	Securities 	and 	Exchange
Commission, 	Office 	of 	the 	Chief 	Economist, 	Institutional
Ownership. 	Tende= 	Offers, 	and 	LonQ-Term 	Investment 	8-10 	(1985).

The 	Honorable 	Steven 	D. 	Wolens 	-10-
power. 	2Q/ 	Article 	13.03(G) 	provides 	that 	a 	person who 	acquires
ncontrol 	shares n may exercise 	the 	right 	to 	vote 	those 	shares 	only
if 	the 	holders 	of 	a 	majority 	of 	the 	corporation's 	shares 	and 	of
_ 	~ach 	class 	thereof, 	other 	than 	"interested 	shares," 	vote 	to 	grant
the 	acquirer 	that 	right. 	The 	term 	"interested 	shares" 	is 	defined
in 	Article 	13.03(A)(3) 	as 	shares 	owned or controlled 	by 	the
acquirer, 	by 	the 	corporation's 	officers, 	or 	by 	the 	corporation's
inside 	directors 	(corporate 	directors 	who 	are 	employed 	by 	the
corporation). 	Shares 	owned 	by 	outside 	directors 	are 	not
considered 	"interested."
Under Article 	13.03(E)(1), 	an 	acquirer 	of 	"control 	shares"
may 	demand 	a 	special 	shareholder meeting 	"for 	the 	purpose 	of
considering 	whether 	the 	shares 	acquired 	or 	to 	be 	acquired 	in 	the
control 	share 	acquisitions 	shall 	be 	accorded 	voting 	rights. 	If
the 	request 	is 	accompanied 	by 	"an 	undertaking 	to 	pay 	the
corporation's 	expenses 	reasonably 	incurred 	in 	... 	any 	special
meeting," 	Article 	13.03(E)(5), 	the 	corporation 	must 	hold 	such 	a
meeting 	within 	50 	days 	of 	the 	date 	of 	the 	demand 	and 	undertaking,
Article 	13.03(E)(2). 	If 	no 	such 	demand 	is 	made, 	voting 	rights 	of
control 	shares 	must 	be 	considered 	at 	the 	next 	annual 	meeting 	of
the 	corporation. 	Article 	13.03(E)(4). 	If 	"disinterested"
shareholders 	vote 	to 	confer voting 	rights 	upon 	"control 	shares,"
dissenting 	shareholders 	gain 	the 	right 	to 	receive 	for 	their
shares 	"the 	highest 	price 	paid 	per 	share 	by 	the 	acquiring 	person
in 	the 	control 	share 	acquisition." 	Article 	13.03(H)(2).
If 	enacted, 	Article 	13.03 would 	impose 	a 	number 	of
restrictions 	on 	the 	ability 	of 	potential 	acquirers 	to 	obtain
control 	of 	target 	companies. 	First, 	a 	potential 	acquirer 	who 	has
purchased 	a 	majority 	of 	a 	corporation's 	voting 	shares 	would 	not
be 	assured 	of 	obtaining 	actual 	control 	of 	the 	firm. 	Rather, 	the
acquirer 	would 	be 	required 	to 	wager 	that 	the 	so-called
"disinterested" 	shareholders 	would 	agree 	to 	grant 	it 	the 	voting
power 	that 	ordinarily passes 	with 	the 	ownership 	of 	shares. 	In
the 	event 	that 	the 	"disinterested" 	shareholders 	do 	not 	so 	agree,
the 	value 	of 	the 	acquired 	shares 	is 	likely 	to 	decline
significantly. 	This 	restriction may 	discourage 	many 	potential
acquirers 	from 	even 	attempting 	takeover 	bids. 	Moreover, 	the
proposed 	legislation 	is 	likely 	to 	exact 	from 	acquirers 	a 	penalty
that 	increases 	directly with 	the 	size 	of 	their 	investment 	in 	the
target 	firm; 	the 	larger 	the 	acquirer's 	investment 	in 	a 	firm, 	the
less 	likely 	it 	would 	be 	to 	gain 	control, 	since 	the 	remaining
"disinterested" 	shares 	would 	likely 	be 	in 	the 	hands 	of 	entities
friendly 	to 	management, 	such 	as 	outside 	directors 	and 	employee
stock 	ownership 	plans. 	.
2U/ 	In 	practical 	terms, 	for 	most 	purposes 	of 	the 	bill, 	any
shares 	whose 	acquisition would 	give 	the 	acquirer more 	than 	20
percent 	of 	the 	corporation's 	voting 	power 	are 	"control 	shares."

The 	Honorable 	Steven 	D. 	Wolens 	-11-
Second, 	although 	an 	acquirer may 	demand 	a 	special
shareholder 	meeting 	to 	consider 	the 	voting 	rights 	to 	be 	accorded
"control 	shares," 	the 	special 	meeting 	can 	be 	delayed 	for 	as 	much
- 	as 	50 	days 	after 	it 	is 	requested. 	At 	a 	minimum, 	this 	requirement
will 	add 	three 	weeks 	to 	the 	20-business 	day 	minimum 	tender 	offer
period 	that 	bidders 	now 	face 	under 	federal 	law. 	~ 	17 	C.F.R.
S 	240.14(e)(1). 	During 	that 	additional 	period, 	potential
acquirers 	must 	bear 	a 	significant 	financial 	burden. 	To 	avoid 	the
risk 	of 	paying 	a 	premium 	price 	for 	what 	ultimately 	will 	be 	non-
voting 	shares, 	bidders 	will 	have 	to 	extend 	the 	duration 	of 	tender
offers 	to 	at 	least 	the 	50-day waiting 	period 	imposed 	by 	the
statute. 	During 	that 	period, 	they 	must 	bear 	the 	cost 	of 	capital
for 	financing 	the 	acquisition, 	though 	they 	have 	no 	assurance 	that
the 	acquisition 	will 	ultimately 	be 	made. 	By 	so 	increasing 	the
costs 	of 	acquisition 	efforts, 	the 	legislation 	is 	likely 	to 	reduce
their 	frequency. 	21/
Finally, 	the 	legislation would 	grant 	shareholders 	who 	vote
against 	giving 	the 	right 	to 	vote 	to 	control 	shares 	the 	right 	to
receive 	for 	their 	shares 	the 	highest 	price 	paid 	by 	the 	acquirer
in 	a 	control 	share 	acquisition. 	This 	guarantee 	may 	create 	an
incentive 	for 	shareholders 	to 	vote 	against 	granting 	the 	right 	to
vote 	to 	control 	shares. 	This 	incentive, 	in 	turn, 	is 	likely 	to
increase 	the 	bidders' 	uncertainty 	concerning 	the 	likelihood 	of
securing 	the 	right 	to 	vote, 	which 	ordinarily 	is 	a 	normal
attribute 	of 	share 	ownership.
The 	overall 	effect 	of 	legislation 	that 	increases 	both 	the
cost 	and 	uncertainty 	of 	takeover 	bids 	is 	likely 	to 	be 	a 	reduction
in 	the 	number 	of 	tender 	offers 	and 	the 	diminution 	of 	the 	ability
of 	shareholders 	to 	exercise 	their 	rights 	as 	owners 	to 	transfer
control 	of 	corporations. 	22/
~/ 	Alternatively, 	bidders 	could make 	conditional 	tender 	offers,
pursuant 	to 	which 	acceptance 	of 	tendered 	shar~s is 	contingent 	on
the 	subsequent 	approval 	of 	voting 	rights 	for 	those 	shares.
Because 	the 	50-day waiting 	period 	in 	the 	proposed 	legislation
exceeds 	the 	minimum 	offering 	period 	under 	federal 	law 	by 	three
weeks, 	however, 	incumbent 	management 	would 	gain 	an 	additional
three 	week 	period 	between 	the 	conditional 	acceptance 	and 	the
shareholder 	vote 	in which 	to 	adopt 	defensive 	measures 	to 	thwart
the 	tender 	offer, 	such 	as 	the 	sale 	of 	corporate 	assets 	to 	another
firm. 	Under 	the 	"business 	judgment 	rule," 	such 	actions 	may 	be
insulated 	from 	judicial 	scrutiny. 	In 	addition, 	a 	conditional
offer 	is 	less 	likely 	to 	be 	successful 	than 	an 	unconditional 	one,
since 	some 	shareholders 	will 	not 	wish 	to 	tie 	up 	their 	shares 	for
the 	period 	during 	which 	the 	voting 	right 	issue 	remains 	unsettled.
22/ 	--	~ 	gene=ally 	Easterbrook 	& Fischel, 	supra 	note 	4.

The 	Honorable 	Steven 	D. 	Wolens
E. 	Effect 	of 	"Business 	Combination" 	Restrictions
-12-
Proposed Article 	13.04 	governs 	"business 	combinations"
between 	"affiliated 	shareholders" 	and 	takeover 	target 	firms.
Article 	13.04(a)(2) 	defines 	'~ffiliated shareholders" 	as 	owners
of 	20 	percent 	or more 	of 	the 	voting 	shares 	in 	corporations. 	The
proposed 	legislation would 	prohibit 	such 	shareholders 	from
merging 	with 	or 	conducting 	other 	specified 	business 	activities
with 	target 	corporations 	for 	five 	years 	after 	becoming 	affiliated
shareholders, 	unless 	one 	of 	two 	conditions 	is 	met. 	The 	business
combination may 	be 	carried 	out 	if 	the 	target 	corporation's 	board
of 	directors 	approved 	the 	business 	combination 	or 	the 	purchase 	of
shares 	before 	the 	acquirer 	became 	an 	affiliated 	shareholder.
Alternatively, 	the 	business 	combination may 	be 	carried 	out 	if 	is
approved 	by 	a 	vote 	of 	66 	2/3 	percent 	of 	the 	shares 	not 	owned 	by
the 	affiliated 	shareholder. 	~ Articles 	13.04(B); 	13.04(A)(6)
The 	proposed 	legislation 	is 	likely 	to 	deter 	takeovers 	whose
profitability 	depends 	on 	the 	ability 	of 	the 	acquirer 	to 	merge
with 	the 	target 	corporation. 	The 	successful 	bidder 	for 	corporate
control 	commonly 	seeks 	to 	consolidate 	the 	target 	into 	its
operations 	by 	means 	of 	a 	merger. 	~/ 	A five-year 	merger
prohibition 	will 	likely 	require many 	acquirers 	to 	maintain
inefficient 	forms 	of 	business 	organization 	and 	thus 	would
undercut 	their 	ability 	to 	improve 	the 	efficiency 	of 	target
corporations. 	This, 	in 	turn, 	may 	deter 	some 	takeover 	bids 	that
would 	benefit 	the 	economy.
The 	bill 	would 	also 	prohibit 	the 	sale 	or 	other 	disposition
of 	substantial 	target 	company 	assets 	to 	or with 	an 	affiliated
shareholder 	for 	five 	years 	after 	the 	shareholder 	becomes 	an
affiliated 	shareholder. 	Articles 	13.04(B); 	13.04(A)(6)(b).
This 	prohibition 	would 	increase 	the 	cost 	of 	financing, 	and 	in
many 	cases 	may 	deter, 	takeovers 	designed 	to 	redeploy 	assets 	to
more 	efficient 	uses.
The 	proposed 	legislation would 	restrict 	the 	freedom 	of
shareholders 	to 	control 	and 	dispose 	of 	their 	property 	without
government 	scrutiny. 	Owners 	of 	assets 	should 	be 	free 	to 	sell
property 	without 	having 	the 	state 	examine 	the 	merits 	of 	the
transaction, 	absent 	a 	compelling 	ju£tification. 	When
shareholders 	determine, 	for 	whatever 	reason, 	to 	transfer 	control
of 	a 	corporation, 	the 	state 	should 	not 	frustrate 	their 	will 	and
require 	them 	to 	retain managers 	they 	wish 	to 	displace.
2l/ 	~ 	R. 	Gilson, 	The 	Law 	and 	Finance 	of 	Corporate 	ACQuisitions
854 	(1986).

The 	Honorable 	Steven 	D. 	Wolens 	-13-
F. 	Empirical 	Evidence 	on 	Effect 	of 	Anti-Takeover 	LeQislation
Three 	recent 	empirical 	studies 	concerning 	the 	effect 	of
anti-takeover 	legislation 	have 	concluded 	that 	anti-takeover 	laws
harm 	shareholders 	and 	undermine 	economic 	efficiency. 	A recent
empirical 	study by 	the 	Commission's 	Bureau 	of 	Economics 	of 	a 	New
York 	statute 2i/ 	similar 	to 	proposed 	Article 	13.04 	analyzed 	the
extent 	of 	the 	economic 	harm 	caused 	by 	restrictions 	on 	"business
combinations." 	25/ 	The 	study 	found 	that 	the 	announcement 	by 	New
York's 	governor 	of 	the 	proposed 	legislation 	that 	ultimately
became 	the 	New 	York 	law 	resulted 	in 	a 	statistically 	significant
decline 	in 	the 	average 	value 	of 	shares 	of 	New 	York 	corporations.
The 	decline 	was 	equal 	to 	approximately 	one 	percent 	of 	the 	value
of 	the 	shares, 	or 	$1.2 	billion. 	~/ 	As 	the 	study 	noted 	in
conclusion:
[D]espite 	the 	political 	rhetoric 	advocating
the 	regulation 	of 	takeovers 	on 	behalf 	of
shareholders, 	the 	evidence 	... 	indicates
that 	this 	very 	strong 	statute 	does 	not
protect 	shareholders; 	rather, 	the 	law
protects 	managers 	at 	the 	expense 	of
shareholders. 	. 	.. 	[In 	addition, 	the
statute] 	may 	promote 	the 	inefficient
management 	of 	society's 	assets 	by 	lessening
the 	ability 	of 	capital 	markets 	to 	efficiently
reallo=ate 	assets. 	Consequently, 	the 	real
cost 	of 	the 	goods 	and 	services 	produced 	by
the 	firms 	affected 	by 	[the 	statute] 	may
increase, 	injuring 	consumers 	as 	well 	as
shareholders. 	21/
Another 	study, 	conducted by 	the 	Office 	of 	the 	Chief
Economist 	of 	the 	Securities 	and 	Exchange 	Commission, 	also
concludes 	that 	anti-takeover 	legislation 	is 	harmful 	to 	the
interests 	of 	shareholders. 	The 	study 	examined 	the 	effects 	of 	a
recent 	Ohio 	law 	that, 	among 	other 	things, 	authorized 	corporate
2i/ 	New 	York 	Bus. 	Corp. 	Law 	§ 	912.
~/ 	Schumann, 	supra 	note 	3.
~/ 	~. 	at 	41, 	46-47. 	Continuing 	research 	by 	the 	same 	author
suggests 	that 	the 	decline 	in 	the 	value 	of 	New 	York 	corporations
caused 	by 	the 	enactment 	of 	the 	legislation 	may 	have 	been
significantly 	greater 	than 	repo~ted in 	his 	original 	paper.
Measured 	over 	the 	entire 	20S-day 	course 	of 	the 	legislative
process, 	the 	decline 	was 	9.7 	percent, 	net 	of 	market. 	L.
Schumann, 	State 	ReQulation 	0: 	Takeovers 	anG 	Shareholder 	Wealth:
The 	Case 	of 	New 	York's 	1985 	Takeoyer 	S;atutes 	(mimeo 	April 	1988).
22/ 	Schumann, 	supra 	note 	3, 	at 	47.

The 	Honorable 	Steven 	D. 	Wolens 	-14-
directors 	to 	consider 	the 	interests 	of 	persons 	other than 	the
shareholders 	in 	assessing 	takeover 	bids. 	la/ 	The 	SEC 	study 	found
that 	the 	enactment 	of 	the 	Ohio 	law 	caused 	an 	immediate 	two
_ 	percent 	decline 	in 	the 	equity 	value 	of 	corporations 	insulated
from 	takeovers 	by 	the 	Ohio 	law. 	Finally, 	a 	recent 	study 	on 	the
effects 	of 	Indiana's 	anti-takeover 	statute, 	which 	contains 	both 	a
Ucontrol 	share" 	and 	a 	business 	combination 	provision 	similar 	to
those 	in 	this 	proposed 	legislation, 	found 	that 	the 	enactment 	of
Indiana's 	law 	caused 	a 	4.2 	to 	6.1 	percent 	decline 	in 	the 	value 	of
shares 	of 	Indiana 	corporations. 	~/
G. 	Consideration 	of 	an 	"OptinQ-In" 	Mechanism
If 	the 	legislature 	decides 	to 	enact 	the 	proposed 	legislation
in 	some 	form 	despite 	the 	concerns 	discussed 	above, 	we 	suggest
that 	the 	bill 	be 	modified 	to 	make 	it 	inapplicable 	to 	corporations
that 	do 	not 	affirmatively 	elect 	to 	be 	covered 	by 	its 	provisions
through 	amendments 	to 	their 	articles 	of 	incorporation. 	In 	its
present 	form, 	Article 	13.03, 	which 	governs 	"control 	share"
acquisitions, 	applies 	only 	to 	corporations 	that 	do 	not 	opt 	in
through 	amendments 	to 	either 	their 	articles 	of 	incorporation 	or
their 	bylaws. 	Article 	13.03(C)(1). 	Article 	13.04, 	which 	governs
"business 	combinations," 	applies 	to 	all 	corporations 	that 	do 	not
"opt 	out" 	by 	an 	amendment 	to 	their 	articles 	of 	incorporation 	or
bylaws 	by 	a 	yet-unspecified 	date 	in 	1988, 	or, 	thereafter, 	by 	a
two-thirds 	vote 	of 	the 	shareholders, 	excluding 	"affiliated"
shareholders. 	Article 	13.04(D). 	To 	the 	extent 	that 	the 	proposed
legislation 	is 	motivated by 	a 	concern 	for 	shareholders, 	JQ/ 	its
purpose 	would 	be 	better 	served 	by 	a 	requirement 	that 	shareholders
approve 	a 	decision 	to 	opt 	into 	any 	aspect 	of 	the 	legislation. 	We
recommend 	that 	a 	corporation's 	decision 	to 	opt 	into 	the 	statutory
2li/ 	Securities 	and 	Exchange 	Commission, 	Office 	of 	the 	Chief
Economist, 	Shareholder Wealth 	Effects 	of 	Ohio 	LeQisl~tion .
Affectin~ 	Takeovers 	(1987). 	The 	Ohio 	law 	is 	codified 	in 	Ohio
Rev. 	Code 	Ann. 	§ 	1701.01 	~~. 	(Page 	1986 	supp.).
~/ 	Sidak 	& Woodward, 	Corporate 	Takeove=s. 	The 	Commerce 	C:ause,
and 	the 	Efficient 	Anonymity 	of 	Shareholders 	(mimeo 	March 	1987).
The 	4.2 	percent 	decline 	represents 	a 	portfo:io 	in 	which 	equal
weight 	is 	given 	to 	all 	Indiana 	firms. 	The 	6.1 	decline 	represents
a 	value-weighted 	portfolio.
JQ/ 	If 	enacted, 	the 	bill 	would 	be 	entitled 	the 	Texas 	Shareholder
Rights 	Law. 	Article 	13.01.

The 	Honorable 	Steven 	D. 	Wolens 	-15-
scheme 	be made 	solely 	through 	a 	shareholder 	vote 	amending 	the
articles 	of 	incorporation. 	~/
If 	the 	legislature 	decides 	to 	retain 	the 	proposed 	opting-out
mechanism 	of 	Article 	13.04, 	we 	recommend 	that 	shareholder
determinations 	to 	opt out 	be 	given 	immediate 	effect. 	Under
proposed 	Article 	13.04(D), 	an 	amendment 	to 	a 	corporation's
articles 	of 	incorporation 	or 	bylaws 	expressly 	electing 	not 	to 	be
governed 	by 	the 	legislation 	does 	not 	become 	effective 	for
eighteen months 	if 	it 	is 	made 	after 	a 	yet-unspecified 	date 	in
1988. 	We 	also 	suggest 	that 	decisions 	to 	opt out 	be 	implemented
by 	a 	majority 	vote 	of 	all 	shareholders. 	The 	proposed
legislation, 	as 	noted, 	requires 	a 	two-thirds 	vote 	and
disenfranchises 	"affiliated" 	shareholders 	from 	the 	vote. 	These
are 	serious 	restraints 	on 	the 	freedom 	of 	shareholders 	to 	control
the 	corporations 	they 	own. 	The 	inclusion 	of 	an 	opting-out
provision 	embodies 	an 	implicit 	recognition 	that 	the 	proposed
legislation may 	be 	harmful 	to 	the 	interests 	of 	shareholders. 	An
ineffectual 	opting-out 	provision, 	however, 	does 	little 	to
ameliorate 	that 	harm.
Conclusion
The 	case 	has 	not 	been made 	to 	date 	that 	the 	proposed
legislation 	is 	a 	necessary 	or 	desirable 	response 	to 	corporate
takeover 	activity. 	On 	the 	who:e, 	we 	believe 	that 	vigorous
takeover 	activity 	enhances 	economic 	efficiency 	and 	thus 	benefits
consumers, 	workers, 	and 	shareholders. 	We 	are 	troubled 	that 	the
proposed 	legislation 	would 	impede 	many 	of 	the 	beneficial
consequences 	of 	takeovers 	without 	offering 	countervailing
benefits. 	We 	urge 	you 	to 	consider 	whether 	the 	proposed
legislation 	would 	unduly 	interfere 	with 	the 	market 	for 	corporate
control 	to 	the 	detriment 	of 	the 	economy 	and 	consumer welfare
generally.
Sincerely,
bjIyf -J
Jeffrey 	I. 	Zuckerman
Di:::-e::tor
Bureau 	of 	Competition
~/ 	Corporate 	bylaws 	generally may 	be 	amended 	without 	the
approval 	of 	the 	shareholders. 	~ Tex. 	Bus. 	Corp. 	Law 	Ann 	§ 	2.23
(Vernon 	1988). 	Consequently, 	we 	believe 	that 	the 	legislation
should 	require 	decisions 	to 	opt 	in 	to 	be 	made 	in 	the 	form 	of
amendments 	to 	the 	articles 	of 	incorporation.