Repeal the Michigan Control Shares Acquisition Act of 1988

Since late 2002, two groups have battled for control of Taubman Centers, Inc. and its 30 shopping malls, including Briarwood Mall in Ann Arbor, Twelve Oaks Mall in Novi and Woodland Mall in Grand Rapids. One group consists mostly of Taubman family members who are long-time shareholders. The other is Simon Properties Group, an Indiana-based shopping mall operator. Much of the recent action has taken place in court over whether and how the Michigan Control Shares Act of 1988, Michigan’s anti-takeover law, applies to each group. Since then, the battle has shifted to the Michigan legislature, where the state House passed an amendment to the Michigan anti-takeover law (House Bill 4764) that appears to favor the Taubman group, and the Senate is expected to vote on the amendment (Senate Bill 218) in September.

Caught in the middle are the shareholders of Taubman Center, Inc. Taubman Centers stock was trading at about $15 when Simon initiated its takeover attempt. Simon offered $20 per share, and 85 percent of the non-Taubman-group shareholders accepted the offer before the matter entered the court system.

In the language of corporate law, this $20 offer for shares previously trading for $15 is a "hostile" takeover offer, because as much as shareholders may welcome an offer one-third higher than what anyone else was offering for their shares, the offer threatens the ability of the current management of the company to maintain their control.

Regardless of how the court rules and whether the proposed amendments to the Michigan anti-takeover law are enacted, the Taubman/Simon takeover battle illustrates a larger question — whether Michigan should have any anti-takeover law. The evidence after more than a decade of experience indicates that state anti-takeover laws are ineffective tools for discouraging takeovers of state corporation, and certainly impose great costs and delays on shareholders of the affected corporations.

The Michigan Control Shares Act of 1988 is generally similar to anti-takeover laws passed by many states in the 1980s to deter hostile takeovers of state corporations. The Michigan statute is modeled after Indiana’s anti-takeover law, which was upheld by the U.S. Supreme Court in 1987.

Under the Michigan statute, if a potential acquirer crosses certain ownership thresholds (the lowest of which is 20 percent of a class of stock), the acquirers shares lose their voting rights unless a majority of "disinterested" shareholders (which are owned by neither the acquiring group nor current officers of the company) vote to restore the lost voting rights. Thus, the statute has the potential to prevent an acquirer from gaining control of the company even if it owns a majority of the shares, by preventing the acquirer from voting on control issues in shareholder elections.

Defenders of anti-takeover laws point to the benefits of stable local ownership and to the potential destructive effects of acquisitions aimed at raiding company assets and eliminating jobs in the state. The U.S. Supreme Court has ruled that such concerns may be used to legally justify anti-takeover laws. But do any such benefits result from anti-takeover laws? A 1995 paper by Comment and Schwert in the Journal of Financial Economics found no evidence that state anti-takeover laws reduced the number of takeovers, and if anything may have actually increased the likelihood of takeovers.

By contrast, the same study found that anti-takeover measures adopted by the companies themselves, such as "poison pills," staggered director terms and multiple classes of voting stock, have been effective in deterring takeovers. A 2001 study by Bebchuk and Ferrell in the Virginia Law Review confirmed the lack of effectiveness of anti-takeover laws in deterring takeovers, and noted that state anti-takeover laws "received little if any support in the academic literature as there was no attempt by state legislatures to tailor them to any identifiable failure in the takeover process."

The destructive effects of anti-takeover laws were demonstrated by the 1996-98 battle for Conrail, a Pennsylvania corporation. The Pennsylvania anti-takeover law is more restrictive than the Michigan law, and thus would appear to be a stronger deterrent to hostile takeovers. In 1996, several years after being spun off from the federal government as a private company, Conrail’s management sought a friendly merger with the CSX railroad. Norfolk Southern railroad then made a "hostile" offer that topped the CSX offer, which Conrail’s management tried to deter under the Pennsylvania anti-takeover statute.

Absent the Pennsylvania anti-takeover law, the shareholders would have simply voted whether to accept the CSX offer, the Norfolk Southern offer, or neither, and the matter could have been resolved quickly. But the result instead was that shareholders and other stakeholders in Contrail had to endure almost two years of costly litigation before the parties settled by dividing up Conrail between CSX and Norfolk Southern.

In other words, the Conrail assets were divided up not so much due to a takeover, but rather to settle the litigation arising from the anti-takeover statute, with shareholders ultimately bearing the cost of the delays and years of litigation.

The Conrail case is not unique in imposing such costs on shareholders. A pre-Conrail paper by Szewcsyk and Tsetsekos in the 1992 Journal of Financial Economics found that the law imposed costs of $4 billion on shareholders of Pennsylvania corporations.

Anti-takeover laws give the appearance that the state is "doing something" to deter hostile takeovers of state corporations, when in fact the statutes may actually promote the very harms the statutes are supposed to prevent, while imposing great costs and delays on the shareholders and other stakeholders in the corporations.

The Michigan Control Shares Act is an expensive placebo, and should be repealed. Shareholders are free to enact their own private anti-takeover measures if they choose. While private anti-takeover measures have their critics, they at least have the virtue of having been approved by shareholders, rather than imposed on shareholders by the state, and may actually have some effect on reducing takeovers of state corporations.

Theodore Bolema is an adjunct scholar with the Mackinac Center for Public Policy and an attorney in the Finance and Law Department of Central Michigan University’s College of Business Administration, where he specializes in regulatory law and economics. He holds a Ph.D. in Economics from Michigan State University and a J.D. from the University of Michigan Law School, and is a graduate of Hope College.