Takeover Hurdle

Who rules the corporate takeover game? The U.S. Supreme Court threw considerable uncertainty into that multibillion-dollar question last week with a 6-to-3 ruling that seemed to give a greater say to state legislatures. The Justices affirmed that a 1986 statute restricting hostile takeover offers for companies incorporated in Indiana does not violate either the Williams Act of 1968, a federal law that regulates tender offers, or Article I of the Constitution, which says that only Congress can regulate interstate commerce.

The court's ruling involved a battle between Connecticut's Dynamics Corp. of America (1986 sales: $139 million), a maker of appliances and machinery, and CTS, a manufacturer of electronic components (1986 revenues: $246 million) based in Elkhart, Ind. In March 1986, Dynamics tendered an offer for 1 million CTS shares, which would have given it a controlling interest in the firm. CTS then invoked a state law governing so-called control shares, defined as the number of shares an investor must purchase to gain control of a target company. Under the Indiana statute, the voting power of such shares must be ratified by "disinterested" owners of stock -- shareholders other than management or the investor in question. The law gives the company up to 50 days to call a shareholders' meeting to consider the issue.

Dynamics sued, arguing that the Indiana statute interfered with interstate commerce and the Williams Act, which makes no mention of control shares and gives shareholders only 20 business days to consider tenders. But while the Indiana law placed some burdens on interstate commerce, said the court, it worked "for the better protection of the corporation's shareholders," and therefore was consonant with the 1968 federal statute.

In a separate concurring opinion, Justice Antonin Scalia noted that it was not the court's duty to decide whether the state law promoted shareholder welfare. As he put it, "A law can be both economic folly and constitutional." In fact, Scalia added, the law might protect incumbent management.

Many investors think that is exactly what the Indiana law does. They are concerned that the Supreme Court ruling may lead to a vexing patchwork of similar statutes in other states, 20 of which have already passed laws restricting takeovers. "It's a sad day for stockholders," Financier T. Boone Pickens told TIME. "I can't believe the Supreme Court fully understood what it was doing." The biggest impact would be felt if Delaware passed an Indiana-style law. Reason: nearly three-fourths of corporations on the FORTUNE 500 list of industrial firms are chartered in that state.