HOUSE BILL REPORT

HB 1729

BYRepresentatives Wang, Patrick and Locke

Changing provisions relating to corporate takeovers.

House Committe on Commerce & Labor

Majority Report:  The substitute bill be substituted therefor and the substitute bill do pass.  (7)

      Signed by Representatives Wang, Chair; Cole, Vice Chair; Fisher, Jones, R. King, O'Brien and Sayan.

Minority Report:  Do not pass. (4)

      Signed by Representatives Patrick, Sanders, C. Smith and Walker.

House Staff:Chris Cordes (786-7117)

AS REPORTED BY COMMITTEE ON COMMERCE & LABOR FEBRUARY 3, 1988

BACKGROUND:

Until 1987, the validity of state regulation over corporate mergers was doubtful.  However, a 1987 United States Supreme Court case approved an Indiana statute controlling corporate takeovers through regulation of shareholder voting rights.  Since that decision, several states have enacted statutes regulating corporate acquisitions.

During a special session in 1987, the Washington legislature enacted legislation that prohibits, for five years from the share acquisition date, very large publicly traded corporations with significant contacts in Washington state from entering into specified transactions with persons who own 10 percent or more of the outstanding voting shares of the corporation.

To be covered under the law:  (1) a corporation's property subject to taxation in Washington must exceed the value of the corporation's property subject to taxation in all other states; (2) the corporation must have its principal executive offices in Washington; (3) the majority of the corporation's employees must live in Washington; (4) the majority of the corporation's assets must be in Washington; (5) the corporation must employ at least 20,000 Washington residents; and (6) 10 percent of the corporation's shareholders must reside in Washington, 10 percent of the shares of the corporation must be owned by Washington residents, or 5,000 Washington residents must own shares of the corporation.

The law expires December 31, 1988.

SUMMARY:

SUBSTITUTE BILL:  The prohibitions against corporations entering into specified transactions over a 5 year period with an acquirer of 10 percent or more of the corporation's shares are extended to all publicly traded domestic corporations that have:  (1)  the principal corporate executive office in Washington; and (2) either a majority of the corporation's employees as residents of Washington or more than 1,000 Washington residents as employees.  The prohibitions are also extended to publicly traded foreign corporations that have:  (1) the principal corporate executive office in Washington; (2)  more than 10 percent of its shareholders as Washington residents, more than 10 percent of its shares owned by Washington residents, or more than 1,000 shares owned by Washington residents; (3) either a majority of the corporation's employees as residents of Washington or more than 1,000 Washington residents as employees; and (4)  a majority, or at least $50 million, of the corporation's assets located in Washington.

The definition of "acquiring person" is changed to exclude persons who own shares on the effective date of the act, who acquire shares by gift or other transaction in which no consideration is exchanged, or who exceed the 10 percent threshold because of action taken by the target corporation.

The prohibition against the termination of five percent of more of the employees while the corporation has an acquiring person is clarified.  A presumption is established that terminations over the 5 year period are prohibited except for terminations that result from death or disability or bona fide voluntary retirement, transfer, resignation, or leave of absence.  Bona fide voluntary transfers between the target corporation and its subsidiaries, or between subsidiaries, are not terminations within the meaning of the act.

If a prohibited termination of employees occurs, the target corporation and subsidiaries are required to pay severance pay to the employees terminated during the 5 year period, whether the termination occurred before or after the 5 percent threshold was reached.  The amount of severance pay is equal to three months' wages and benefits for each year of employment.

The statute's expiration date is eliminated. 

SUBSTITUTE BILL COMPARED TO ORIGINAL:  The substitute bill changes the definition of an "acquiring person" to exclude persons who own shares on the effective date of the act, who acquire shares by gift or other transaction in which no consideration is exchanged, or who exceed the 10 percent threshold because of action taken by the target corporation.  A provision is added to exclude bona fide voluntary transfers between the target corporation and its subsidiaries, or between subsidiaries, from the term "termination."  A provision is added requiring the target corporation and subsidiaries to pay severance pay to the employees terminated during the 5 year period if a prohibited termination of employees occurs.

Effective Date:The bill contains an emergency clause and takes effect immediately.

Fiscal Note:      Not Requested.

House Committee ‑ Testified For:    Evelyn Sroufe, Boeing Company; Tom Baker, Aerospace Machinists Union (with concerns); Jeff Johnson, Washington State Labor Council (with concerns); and Dan Wolfe, Safeco Corporation.

House Committee - Testified Against:      None Presented.

House Committee - Testimony For:    The state has an interest in reducing the potential for hostile takeovers of all publicly traded corporations with significant contacts in Washington.  The bill makes clarifying amendments to the 1987 law and provides a firm constitutional basis for the state's interest in regulating corporate takeovers.

House Committee - Testimony Against:      None Presented.