HOUSE BILL REPORT

SB 6084

BYSenators Vognild, Hayner, Fleming and Sellar

Regulating corporate acquisitions.

House Staff:Harry Reinert (786-7110)

AS PASSED HOUSE AUGUST 10, 1987

BACKGROUND:

Over the past twenty years there have been several rounds of corporate mergers and take-overs.  When each of these waves of mergers has occurred, the states and the federal government have enacted measures to restrict and regulate this activity.  The latest round of mergers and take-overs began in the late 1970's.  Because of federal court decisions striking down most of the state statutes, there has been considerable doubt as to the validity of any state regulation over corporate mergers.  In April, 1987 the U.S. Supreme Court affirmed an Indiana statute that required shareholder approval of voting rights for persons who acquired a substantial interest in Indiana corporations.  This decision means that states do have some authority to regulate mergers and take-overs.  The limits of the states' authority are still unknown.

Washington has enacted measures in the past few years to control some aspects of corporate take-overs in this state.  These controls have been designed to control tender offers and to assure that a fair price is paid for all stock acquired in a tender offer take- over.  The state has also restricted the ability of a person who has taken a substantial interest in a Washington corporation to call shareholders meetings and elect boards of directors.

A person who acquires twenty percent or more of a Washington corporation's outstanding shares is restricted from engaging in certain transactions with the corporation without approval of two- thirds of the disinterested shares.  The prohibited transactions are merger or consolidation, dissolution, or sale of assets outside the ordinary course of business.  This prohibition does not apply if a majority of the disinterested directors approves the transaction or determines that all shareholders have received a fair price for their shares.  Two-thirds of the disinterested shareholders may vote not to be covered by these provisions.

A Washington corporation's articles of incorporation may include limitations on the ability of shareholders to call special meetings.  The articles of incorporation may also allow the removal of members of the board of directors only for cause.

Corporations incorporated in this state are issued a certificate of incorporation by the secretary of state.  The certificate may be revoked by the secretary of state if the corporation violates certain statutory requirements.

Corporations incorporated under the laws of other states or countries must obtain a certificate of authority from the secretary of state in order to conduct business in the state.  The secretary of state has the authority to revoke the certificate of authority if the foreign corporation violates certain statutory requirements.

The state has authority under the state constitution to regulate the activity of foreign corporations in this state.  The legislature has declared, however, that it will not regulate the internal affairs of foreign corporations.

SUMMARY:

The legislature finds that corporations employing a substantial number of employees in this state are an important part of the state's economic well being.  The legislature also finds that hostile take-overs can result in injury to corporations and that the state has a legitimate interest in regulating these take-overs.  The legislature also finds that its interest in regulating take-over activity applies to corporations whose most significant contacts are with this state, whether or not those corporations are incorporated under the laws of this state.

A corporation which has significant contacts with Washington state is prohibited from entering into certain transactions with persons who own ten percent or more of the outstanding voting shares of the corporation.  Corporations which do not have voting stock registered with the Securities and Exchange Commission are not governed by the provisions of this act.

The significant contacts a corporation must have with Washington include:

(1) the value of the 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) ten percent of the corporation's shareholders must reside in Washington, ten 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 transactions a covered corporation is prohibited from engaging in with a person who owns ten percent or more of the corporation's shares are:

(1) merging or consolidating with the person;

(2) disposing or encumbering assets of the corporation, to benefit the person, in an amount equal to more than five percent of the corporations assets, five percent of the value of the shares of the corporation, or five percent of the income of the corporation;

(3) issuing shares or rights to acquire shares to the person on a basis different than shares or rights are offered to all other shareholders;

(4) adopting a plan for sale of assets, liquidation, or dissolution proposed by or in agreement with the person;

(5)  laying off more than five percent of the corporation's employees;

(6) reclassifying shares or securities of the corporation that has the effect of increasing the proportionate share of the outstanding shares or securities owned by the person;

(7) giving the person financial assistance, tax credits, or tax advantages other than the person is entitled to as a shareholder of the corporation; or

(8) agreeing to do any of the prohibited transactions.

The limitations on transactions do not apply to transactions entered into or agreed to by the corporation and the person before the person acquired ten percent or more of the corporation's shares or entered into five years or more after the person acquired ten percent of the corporation's shares.  If the board of directors has approved the acquisition before the person has acquired ten percent or more of the corporation's shares, the limitations on transactions between the corporation and the person do not apply.

If a corporation enters into a prohibited transaction, the transaction is void and the corporation's certificate of incorporation or certificate of authority will be revoked by the secretary of state.

The state will regulate the internal affairs of foreign corporations to the extent necessary to regulate the transactions proscribed by this act.

The act expires December 31, 1988 and does not apply to any transactions entered into after that date.

The act takes effect immediately.

Fiscal Note:      Not Requested.

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