The Wall Street Journal-20080118-The Original Corporate Raider
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The Original Corporate Raider
Late last month Louis E. Wolfson died at the age of 95. While his life was noted, none of the major media seemed to recognize this man's true significance.
Yes, the obituaries dutifully acknowledged that he was a serious and valued benefactor of children's health care, and that he devoted himself in later life to the cause of penal reform. But apparently the writers and editors of these obituaries thought that what mattered was his conviction and jail time for a securities violation in the 1960s (and the related resignation under pressure of Abe Fortas from the U.S. Supreme Court), and his ownership of the Triple-Crown winning racehorse Affirmed. Occasionally mentioned, in passing, was his family's rise from impoverished immigrant status to mega riches, and his early escapade as a professional boxer.
They missed the big story. Wolfson's contribution to human welfare far exceeded the total value of all private philanthropy in history. He invented the modern hostile tender offer. This invention, which activated and energized the market for corporate control, was the primary cause of the revolutionary restructuring of American industry in the 1970s and '80s, and the ensuing economic boom.
His remarkable reign as the king of unregulated takeovers began with his venture into Washington, D.C.'s shockingly mismanaged Capital Transit Co. in 1949. It continued with takeover ventures, some not successful, into American Motors, Montgomery Ward, Curtiss-Wright and other poorly managed companies.
The general success of the takeover mechanism proved that the large, publicly traded corporation was indeed a viable, efficient and benign institution -- responsible to its owners, suppliers, employees and the consuming public -- because it was subject to severe market constraints. This was contrary to the then prevailing paradigm (a famous thesis first proposed by Adolph Berle and Gardiner Means during the Great Depression) that the "separation of ownership and control" in the large corporation was the root cause of its failure to operate in the social interest.
The hostile tender offer was not a way of endearing oneself to the powerful corporate elite of the 1960s, or come to think of it, of today. In fact, Wolfson's activities so terrified managers fearful of losing their cushy positions that they scurried, hats and checkbooks in hand, to the most available members of Congress for protection from those pernicious "raiders."
Ultimately Congress obliged them in considerable measure in 1968 by adopting the Williams Act (named for disgraced bribe-taker Sen. Harrison Williams). This legislation effectively outlawed or regulated many salient features of the pure hostile tender offer, such as when announcements of plans for a takeover had to be made public, how much various shareholders could receive relative to others, and how much time raiders had to give to incumbents to arrange self-protective alternative plans.
The Williams Act and a number of restrictive state laws, such as those allowing poison pills, caused enormous capital losses to investors, and laid the foundation for most of the problems we have with corporate governance today.
In one of the most disgraceful episodes in American legal history, Wolfson was convicted in 1967 of a trumped-up securities law violation (selling some unregistered shares), which should never have been subject to a criminal charge. A second case found him guilty of one of the government's all-purpose, "perjury-and-obstruction-of-justice" charges.
After serving several months in prison, Wolfson indicated that he did not care to associate any longer with America's industrial elite or its regulatory minions. He sold his corporate businesses, turning to philanthropy and to raising thoroughbred racehorses.
But the cat was out of the bag. Everyone, including a very reticent SEC, now realizes that the corporate system cannot function satisfactorily without a market for corporate control -- even a heavily regulated one. Thus Wolfson's influence continues to this day to save us from most of the excesses Berle and Means attributed to unconstrained corporate managers. The market usually provides solutions for its failures. Government failures, at last report, survive almost indefinitely.
I met Wolfson in his later years. As an academic interested in the theory of the market for corporate control, I pressed him for his understanding of the real thrust of his innovation and of the merciless animosity that it generated. He seemed to harbor no grudge -- or even to understand what I was talking about. Happily, the market does not require theoretical understanding, just action.
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Mr. Manne is dean emeritus of the George Mason University School of Law.
