Article by Patrick J. Ryan
Hostile takeovers, according to “common knowledge,” often bring job layoffs, plant closings, or severe reductions in worker compensation to companies targeted for acquisition. During 1984 and the first half of 1985, an estimated 550,000 employees' jobs were affected by takeover-related restructuring decisions. At an individual company, the acquisition process may eliminate a significant portion of the workforce. These job dislocations are “social costs” of takeovers, and have become part of the takeover controversy. While some supporters of an active market for corporate control point to these job consequences as beneficial effects of hostile bids in facilitating economic restructuring, takeover critics frequently regard layoffs and closings as partial proof of the wasteful nature of the merger and acquisition process. From either perspective, however, there is a rigid link between the highly active 1980s market for corporate control and negative job consequences for corporate employees. The takeover's effect on corporate employees then becomes just another debating point in the continuing effort to assess the overall utility of the hostile takeover bid.
Positing a rigid link between an active takeover market and negative job consequences, however, may obscure more than it reveals. For example, much of the current economic upheaval in the United States can be traced in large part to several fundamental changes in the world economy (such as energy price changes and increased foreign competition), which began to have a significant impact in the 1970s. Thus, it is entirely possible that many of the layoffs and plant closings would have occurred anyway, and not simply as a result of merger and acquisition activity. Moreover, the troubling assertion that corporate managers and shareholders are using the active corporate control market to generate unnecessary and wasteful job destruction does not make much sense on close examination. If a plant or organization is profitable before a takeover bid, it is not likely that management would destroy it in the postbid scramble for revenue.
Perhaps the most significant flaw in the common knowledge approach to the social costs of takeovers is that it reflects a monolithic understanding of the hostile acquisition process, one in which all takeovers are the same, either helpful or harmful. Actually, a particular takeover may be either beneficial or not, depending on many factors, among them the relative skills of target and bidder control groups and the asset packages represented by the firms before and after the acquisition. These factors vary from deal to deal. As a consequence, interpreting and responding to the takeover phenomenon is a far more complex task than merely praising or damning takeovers, and pressuring regulators to act accordingly. The relationship between takeovers and job dislocations is, then, an equivocal one. It is nonetheless real. Job dislocations do occur in connection with the takeover process, but these dislocations in and of themselves do not make takeovers either desirable or undesirable as a matter of social policy.
A more helpful approach to the effects of takeovers on workers is bound up with the relationship between two categorical possibilities. One category includes layoffs or closings that are unnecessary, but which result from a bid or acquisition; the other embraces those which are necessary whether or not provoked by a bid or acquisition. Although no empirical evidence yet exists about these two categories, they can assist in discerning a more accurate picture of the social costs of takeovers. They help describe, from a public policy perspective, the two distinct problems that arise from the relationship of takeovers to job dislocations. The first problem, unnecessary job dislocation, could be the result of an inefficient takeover, in which the target's existing management group is replaced by a less skilled group. The second, necessary layoffs, could result from a takeover, a threatened takeover, or simply from a corporate restructuring in this highly competitive business era. Necessary layoffs are a public concern only to the extent that displaced workers are unable to find suitable replacement work relatively easily. Both these problems are highly complex. The relationship between takeovers and job dislocations would require further empirical study to identify the scope of the problems before attempting to design remedies.
It is likely, however, that any study or solution to these problems would focus on the role of corporate management in responding to takeovers in particular, and to economic change in general. This is so because a corporation's management establishes general business policy for the organization, whether that policy concerns an imminent takeover, the need for employee layoffs, or some other matter concerning the corporation. In the legal community, management's prominence has generated a complex system of legislative, judicial, and administrative regulation of corporate behavior. This prominence also has provoked a continuing discussion about the more-than-technical, social aspects of corporate behavior, a discussion that usually is referred to as the “corporate social responsibility debate.” One aspect of this debate is a recurring preoccupation with the effects of managerial decisions on shareholder and nonshareholder constituents. The problems of worker dislocation related to takeover behavior in the market for corporate control would seem to be inevitable candidates for inclusion in the ongoing corporate social responsibility discussion.
Against this background, the “tin parachute” is a particularly intriguing development. The tin parachute plan is one of the odder novelties in the corporate takeover process. Tin parachutes are installed voluntarily by a potential takeover target's board of directors, usually in advance of a takeover bid announcement. Essentially, a tin parachute plan requires that the successful raider pay lump sums to the corporation's employees who leave the target's employ during a fixed interval after a hostile takeover. The payment obligation applies whether the employee is discharged, laid off, or quits because wages or other compensation have been significantly reduced. The payment amounts are usually computed for each employee based on salary and time of service and can equal as much as two years' wages.
Corporate managers could have in mind one or more of three possible goals when adopting a tin parachute. First, the tin parachute could make the target unattractive, at least to some bidders, because it is burdened with worker benefits triggered only after a hostile bid. Second, a tin parachute could be provided in an attempt to preserve the corporation's productivity during the bidding process, on the theory that workers would be more willing to remain in the target's employ and work hard if they knew that they would be compensated if discharged after an acquisition. Third, a tin parachute may be an attempt by the directors to ameliorate some of the harsh effects of the takeover process. Thus, the tin parachute is a prime example of what already have been identified as the central aspects of the relationship between takeovers and job dislocations: properly viewed, the tin parachute is an attempt by directors to deal with either the problem of the inefficient takeover or of the job dislocations caused by otherwise efficient takeovers and defensive restructurings. Consequently, its appearance implicates not only the public problem of job dislocations in an era of rapid economic change, but also the appropriate role of corporate directors in coping with, or brokering those changes.
The tin parachute has not developed in a vacuum. On the contrary, there exists a well-established legal, economic, and political framework for director decisionmaking. In particular, this framework includes the corporate social responsibility debate mentioned earlier. This discussion of the tin parachute, presented as an example of director decisionmaking about the social costs of economic change, begins by acknowledging the existing framework. Specifically, the tin parachute raises two threshold questions: is this device permissible as a matter of corporate law, and is it a desirable development? Answering these two questions will provide at least the beginning of an inquiry into the social costs of takeovers, and in particular what role corporate directors should play in ascertaining such costs and providing compensation for them. Such an inquiry will lead inevitably to a discussion of the tin parachute as a potential example of responsible corporate behavior.
Part II of this Article addresses the tin parachute's legality, and focuses on the corporate law regulating directors' defensive tactics against hostile takeovers. Part III assesses the tin parachute's desirability by comparing the tin parachute to other measures proposed or enacted to ameliorate the social costs of takeovers. Part IV explores the implications of the tin parachute for the ongoing debate about corporate social responsibility.
About the Author
Patrick J. Ryan. Associate Professor, Rutgers Law School, Camden. B.A. 1976, Loyola Marymount University; M.A. 1977; J.D. 1980, Loyola Law School, Los Angeles; LL.M. 1987, Columbia University; Wien Fellow and Associate in Law, 1984-86.
Citation
64 Tul. L. Rev. 3 (1989)