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E-MailLucian Bebchuk is Professor of Law, Economics, and Finance at Harvard Law School. Robert J. Jackson, Jr. is Associate Professor of Law, Milton Handler Fellow, and Co-Director of the Millstein Center at Columbia Law School. They are co-authors of Toward a Constitutional Review of the Poison Pill, a Harvard Law School discussion paper that is forthcoming in the Columbia Law Review, available here and discussed on the Forum here. This post replies to the criticism of their work put forward in a Wachtell, Lipton Rosen & Katz memorandum, posted on the Forum by Martin Lipton here.
We recently placed on SSRN a draft of a new paper, Toward a Constitutional Review of the Poison Pill, which will be published by the Columbia Law Review in the Fall of 2014. Last week, six senior partners of the law firm of Wachtell, Lipton, Rosen & Katz, including founding partner Martin Lipton, published a strongly-worded response, available on the Forum here. In this post, we rebut Wachtell’s criticism.
Wachtell’s response is a twelve-page, single-spaced Memorandum that describes us as “extreme” and “eccentric,” and characterizes our paper as “tendentious,” “misleading,” and “not a work of serious scholarship.” The Memorandum also attempts to offer a substantive rebuttal of the analysis in our paper. Given that Wachtell Lipton prides itself for creating the poison pill, we understand why an article raising doubt about the validity of the state-law rules authorizing the use of poison pills touches a sensitive nerve at the Firm. Wachtell’s response, however, fails to dispel those doubts—and, indeed, shows why there are serious questions about the constitutionality of state-law poison-pill rules today.
Wachtell does not dispute the analysis in our paper showing that state-law poison-pill rules today impose tighter restrictions on tender offers than those that federal courts have viewed as preempted by the Williams Act. Instead, Wachtell’s response asserts that the “true state of the law,” about which there is “no doubt,” is that the Williams Act “governs procedure, not substance,” and that the Act therefore does not preempt any antitakeover devices that states choose to authorize. As we explain below, this is not an accurate description of the state of the law: Wachtell’s view (1) is not established by Supreme Court precedent; (2) gives undue weight to two lower federal court opinions; and (3) discounts or ignores opinions of other lower federal courts that have expressed views that differ from Wachtell’s.
Supreme Court Decisions
To begin, Wachtell’s assessment of the “true state of the law” in this area has not been adopted by either one of the two major decisions that the Supreme Court has issued in this area—Edgar v. MITE and CTS v. Dynamics Corporation of America.
In Edgar, the Supreme Court invalidated an Illinois antitakeover statute that created impediments to tender offerors that are materially less significant than those imposed by state-law poison-pill rules today. Justice White, writing for a plurality of the Court, concluded that the delay imposed by Illinois law frustrated the purpose of the Williams Act, because in passing the Act “Congress itself recognized that delay can seriously impede a tender offer, and sought to avoid it.” Wachtell’s response simply asserts that Justice White “[m]isread[]” the Williams Act, and that his “stunning[]” analysis is “insupportable.”
In CTS—the last word from the Supreme Court in this area—the Court applied Justice White’s framework to determine whether the Indiana statute challenged in that case was consistent with the Williams Act. In upholding the statute, the Court emphasized that the delay imposed by the statute was relatively short. Wachtell’s response argues that the Court employed Justice White’s framework merely “for the sake of argument” and that the Court “did not issue a definitive holding on the Williams Act’s overall preemptive scope” in CTS.
We agree that the CTS Court did not provide a definitive analysis of the Williams Act’s preemptive scope. That is why the constitutionality of today’s state-law poison-pill rules is not fully resolved. However, Supreme Court opinions generally do not apply in their analysis, even for the sake of argument, a framework that is “insupportable” and clearly “not the state of the law.” Furthermore, CTS offers no basis for Wachtell’s view concerning the “true state of the law.” The Justices in CTS could have adopted, but did not choose to do so, Wachtell’s view of the Williams Act’s preemptive scope. Indeed, in a concurring opinion, Justice Scalia indicated that he held such a view of the Williams Act’s preemptive scope —but no other Justice in CTS joined Justice Scalia’s opinion.
Of course, much time has passed since CTS, and it is impossible to predict how the Court (whose composition has changed considerably) would rule today if it were to revisit this subject. We are not surprised that Wachtell hopes that the Court would adopt the view that the Williams Act imposes no substantive limits on the types of antitakeover devices that states can adopt. But that hope does not justify Wachtell’s claim that its view is the “true state of the law” at present.
Decisions by Lower Federal Courts
Wachtell’s claim that its view actually reflects the true state of the law is based on two post-CTS opinions by federal courts of appeals—the Amanda Acquisition opinion in the Seventh Circuit and the WLR Foods decision in the Fourth Circuit—that do indeed take the narrow view of the Williams Act that Wachtell advocates. Our paper discusses these opinions (as well as the Realty Acquisition opinion in the federal trial court in Maryland, which takes a similar view), and we acknowledge that, should this approach prevail in the future, federal courts would not hold current state-law poison-pill rules preempted by the Williams Act.
However, as we describe in detail in our paper, other federal courts take a different view. They apply other tests—the “meaningful opportunity for success,” “shareholder autonomy,” and “shareholder protection” tests—that impose meaningful limits on the antitakeover devices that states may authorize. Cases following such approaches include:
- The Hyde Park decision in the First Circuit, which was joined by then-Judge, and now Supreme Court Justice, Breyer;
- The BNS, RP Acquisition Corp., and Interco decisions by three federal district courts in Delaware;
- The West-Point Pepperell decision by a federal district court in Georgia; and
- The Firestone Tire decision by Judge Batchelder, then a federal trial judge in Ohio and now the Chief Judge of the Sixth Circuit.
As we explain in our paper, should the approaches described in these cases prevail in the future, they could well lead to invalidation of current poison-pill state rules.
In claiming claims that Amanda Acquisition and WLR represent the “final word” and “the true state of the law” on the preemptive scope of the Williams Act, Wachtell’s response:
- Fails to give adequate weight to the Hyde Park decision in the First Circuit that expresses a different view;
- Fails to acknowledge (or even cite) Judge Batchelder’s Firestone Tire decision—which, again, takes a rather different view from Wachtell’s position;
- Asserts that the BNS, RP Acquisition Corp., and Interco opinions from the federal trial courts in Delaware have been “discredited” although none of them has been overruled; and
- Fails to acknowledge that Amanda Acquisition and WLR do not bind federal courts outside the Fourth and Seventh Circuits, or address the reasons set forth in our paper why other courts may not adopt the approach of these decisions.
Our paper acknowledges the different approaches that the courts have taken to Williams Act preemption after CTS and analyzes how the adoption of some, but not others, could lead to the invalidation of state-law poison-pill rules. By contrast, favoring just one of these approaches, Wachtell’s response denies the significance—and in some cases fails to even acknowledge the existence of—federal opinions that express views it disfavors.
Finally, Wachtell’s response faults us for not addressing the discussion of the preemption of state-law poison-pill rules in Amanda, WLR, and the 1985 Moran decision by the Delaware Supreme Court. Our paper made clear that, should the approach described in Amanda and WLR prevail, state-law poison-pill rules would not be preempted. As to Moran, that decision is not binding on any federal court, and it took place before the developments in poison-pill state law that made pills a formidable antitakeover defense and brought them into significant tension with the Williams Act. For completeness, we will include in future drafts our paper a detailed discussion of the language in these decisions, which does not affect our conclusions: The Supreme Court cases and decisions of lower federal courts in this area noted above raise significant questions concerning the validity of current state-law poison-pill rules.
Conclusion
Wachtell’s response concludes with the emphatic proclamation that there “has never been any doubt, and never will be,” about the constitutionality of state-law poison-pill rules. This statement may reflect wishful thinking or Wachtell’s litigation position. But it is not an accurate picture of existing law.
Of course, the Supreme Court could ultimately revisit this subject, and a majority of the Justices might adopt Wachtell’s view of the Williams Act. For now, however, Wachtell’s response fails to show, as it purports to do, that the “true state of the law” is that the Williams Act imposes no substantive limits on state-law poison-pill rules.
