CTS Corp. v. Dynamics Corp. of AmericaAnnotate this Case
481 U.S. 69 (1987)
U.S. Supreme Court
CTS Corp. v. Dynamics Corp. of America, 481 U.S. 69 (1987)
CTS Corp. v. Dynamics Corporation of America
Argued March 2, 1987
Decided April 21, 1987
481 U.S. 69
APPEAL FROM THE UNITED STATES COURT OF APPEALS FOR
THE SEVENTH CIRCUIT
The federal Williams Act and implementing regulations govern hostile corporate stock tender offers by requiring, inter alia, that offers remain open for at least 20 business days. An Indiana Act applies to certain business corporations chartered in Indiana that have specified levels of shares or shareholders within the State and that opt into the Act's protection. The Indiana Act provides that the acquisition of "control shares" in such a corporation -- shares that, but for the Act, would bring the acquiring entity's voting power to or above certain threshold levels -- does not include voting rights unless a majority of all preexisting disinterested shareholders so agree at their next regularly scheduled meeting. However, the stock acquiror can require a special meeting within 50 days by following specified procedures. Appellee Dynamics Corporation announced a tender offer that would have raised its ownership interest in CTS Corporation above the Indiana Act's threshold. Dynamics also filed suit in Federal District Court alleging federal securities violations by CTS. After CTS opted into the Indiana Act, Dynamics amended its complaint to challenge the Act's validity. The District Court granted Dynamics' motion for declaratory relief, ruling that the Act is preempted by the Williams Act, and violates the Commerce Clause. The Court of Appeals affirmed, adopting the holding of the plurality opinion in Edgar v. MITE Corp.,457 U. S. 624, that the Williams Act preempts state statutes that upset the balance between target company management and a tender offeror. The court based its preemption finding on the view that the Indiana Act, in effect, imposes at least a 50-day delay on the consummation of tender offers, and that this conflicts with the minimum 20-day, hold-open period under the Williams Act. The court also held that the state Act violates the Commerce Clause, since it deprives nonresidents of the valued opportunity to accept tender offers from other nonresidents, and that it violates the conflict-of-laws "internal affairs" doctrine in that it has a direct, intended, and
substantial effect on the interstate market in securities and corporate control.
1. The Indiana Act is consistent with the provisions and purposes of the Williams Act, and is not preempted thereby. Pp. 481 U. S. 78-87.
(a) The Indiana Act protects independent shareholders from the coercive aspects of tender offers by allowing them to vote as a group, and thereby furthers the Williams Act's basic purpose of placing investors on an equal footing with takeover bidders. Moreover, the Indiana Act avoids the problems the plurality discussed in MITE, since it does not give either management or the offeror an advantage in communicating with shareholders, nor impose an indefinite delay on offers, nor allow the state government to interpose its views of fairness between willing buyers and sellers. Thus, the Act satisfies even the MITE plurality's broad interpretation of the Williams Act. Pp. 481 U. S. 81-84.
(b) The possibility that the Indiana Act will delay some tender offers does not mandate preemption. The state Act neither imposes an absolute 50-day delay on the consummation of tender offers nor precludes offerors from purchasing shares as soon as federal law permits. If an adverse shareholder vote is feared, the tender offer can be conditioned on the shares' receiving voting rights within a specified period. Furthermore, even assuming that the Indiana Act does impose some additional delay, the MITE plurality found only that "unreasonable" delays conflict with the Williams Act. Here, it cannot be said that a 50-day delay is unreasonable, since that period falls within a 60-day period Congress established for tendering shareholders to withdraw their unpurchased shares. If the Williams Act were construed to preempt any state statute that caused delays, it would preempt a variety of state corporate laws of hitherto unquestioned validity. The longstanding prevalence of state regulation in this area suggests that, if Congress had intended to preempt all such state laws, it would have said so. Pp. 481 U. S. 84-87.
2. The Indiana Act does not violate the Commerce Clause. The Act's limited effect on interstate commerce is justified by the State's interests in defining attributes of its corporations' shares, and in protecting shareholders. Pp. 481 U. S. 87-94.
(a) The Act does not discriminate against interstate commerce, since it has the same effect on tender offers whether or not the offeror is an Indiana domiciliary or resident. That the Act might apply most often to out-of-state entities who launch most hostile tender offers is irrelevant, since a claim of discrimination is not established by the mere fact that the burden of a state regulation falls on some interstate companies. Pp. 481 U. S. 87-88.
(b) The Act does not create an impermissible risk of inconsistent regulation of tender offers by different States. It simply and evenhandedly exercises the State's firmly established authority to define the voting rights of shareholders in Indiana corporations, and thus subjects such corporations to the law of only one State. Pp. 481 U. S. 88-89.
(c) The Court of Appeals' holding that the Act unconstitutionally hinders tender offers ignores the fact that a State, in its role as overseer of corporate governance, enacts laws that necessarily affect certain aspects of interstate commerce, particularly with respect to corporations with shareholders in other States. A State has interests in promoting stable relationships among parties involved in its corporations, and in ensuring that investors have an effective voice in corporate affairs. The Indiana Act validly furthers these interests by allowing shareholders collectively to determine whether the takeover is advantageous to them. The argument that Indiana has no legitimate interest in protecting nonresident shareholders is unavailing, since the Act applies only to corporations incorporated in Indiana that have a substantial number of shareholders in the State. Pp. 481 U. S. 89-93.
(d) Even if the Act should decrease the number of successful tender offers for Indiana corporations, this would not offend the Commerce Clause. The Act does not prohibit any resident or nonresident from offering to purchase, or from purchasing, shares in Indiana corporations, or from attempting thereby to gain control. It only provides regulatory procedures designed for the better protection of the corporations' shareholders. The Commerce Clause does not protect the particular structure or methods of operation in a market. Pp. 481 U. S. 93-94.
794 F.2d 250, reversed.
POWELL, J., delivered the opinion of the Court, in which REHNQUIST, C.J., and BRENNAN, MARSHALL, and O'CONNOR, JJ., joined, and in Parts I, III-A, and III-B of which SCALIA, J., joined. SCALIA, J., filed an opinion concurring in part and concurring in the judgment, post, p. 481 U. S. 94. WHITE, J., filed a dissenting opinion, in Part II of which BLACKMUN and STEVENS, JJ., joined, post, p. 481 U. S. 97.
JUSTICE POWELL delivered the opinion of the Court.
These cases present the questions whether the Control Share Acquisitions Chapter of the Indiana Business Corporation Law, Ind.Code § 23-1-42-1 et seq. (Supp.1986), is preempted by the Williams Act, 82 Stat. 454, as amended, 15 U.S.C. §§ 78m(d)-(e) and 78n(d)-(f) (1982 ed. and Supp. III), or violates the Commerce Clause of the Federal Constitution, Art. I, § 8, cl. 3.
On March 4, 1986, the Governor of Indiana signed a revised Indiana Business Corporation Law, Ind.Code § 23-1-17-1 et seq. (Supp.1986). That law included the Control Share Acquisitions Chapter (Indiana Act or Act). Beginning on August 1, 1987, the Act will apply to any corporation incorporated in Indiana, § 23-1-17-3(a), unless the corporation amends its articles of incorporation or bylaws to opt out of the Act, § 23-1-42-5. Before that date, any Indiana corporation can opt into the Act by resolution of its board of directors. § 23-1-17-3(b). The Act applies only to "issuing
public corporations." The term "corporation" includes only businesses incorporated in Indiana. See § 23-1-20-5. An "issuing public corporation" is defined as:
"a corporation that has:"
"(1) one hundred (100) or more shareholders;"
"(2) its principal place of business, its principal office, or substantial assets within Indiana; and"
" (A) more than ten percent (10%) of its shareholders resident in Indiana;"
" (B) more than ten percent (10%) of its shares owned by Indiana residents; or"
" (C) ten thousand (10,000) shareholders resident in Indiana."
§ 23-1-42-4(a). [Footnote 1]
The Act focuses on the acquisition of "control shares" in an issuing public corporation. Under the Act, an entity acquires "control shares" whenever it acquires shares that, but for the operation of the Act, would bring its voting power in the corporation to or above any of three thresholds: 20%, 33 1/3%, or 50%. § 23-1-42-1. An entity that acquires control shares does not necessarily acquire voting rights. Rather, it gains those rights only "to the extent granted by resolution approved by the shareholders of the issuing public corporation." § 23-1-42-9(a). Section 23-1-42-9(b) requires a majority vote of all disinterested [Footnote 2] shareholders holding each
class of stock for passage of such a resolution. The practical effect of this requirement is to condition acquisition of control of a corporation on approval of a majority of the preexisting disinterested shareholders. [Footnote 3]
The shareholders decide whether to confer rights on the control shares at the next regularly scheduled meeting of the shareholders, or at a specially scheduled meeting. The
acquiror can require management of the corporation to hold such a special meeting within 50 days if it files an "acquiring person statement," [Footnote 4] requests the meeting, and agrees to pay the expenses of the meeting. See § 23-1-42-7. If the shareholders do not vote to restore voting rights to the shares, the corporation may redeem the control shares from the acquiror at fair market value, but it is not required to do so. § 23-1-42-10(b). Similarly, if the acquiror does not file an acquiring person statement with the corporation, the corporation may, if its bylaws or articles of incorporation so provide, redeem the shares at any time after 60 days after the acquiror's last acquisition. § 23-1-42-10(a).
On March 10, 1986, appellee Dynamics Corporation of America (Dynamics) owned 9.6% of the common stock of appellant CTS Corporation, an Indiana corporation. On that day, six days after the Act went into effect, Dynamics announced a tender offer for another million shares in CTS; purchase of those shares would have brought Dynamics' ownership interest in CTS to 27.5%. Also on March 10, Dynamics filed suit in the United States District Court for the Northern District of Illinois, alleging that CTS had violated the federal securities laws in a number of respects no longer relevant to these proceedings. On March 27, the board of directors of CTS, an Indiana corporation, elected to be governed by the provisions of the Act, see § 23-1-17-3.
Four days later, on March 31, Dynamics moved for leave to amend its complaint to allege that the Act is preempted by the Williams Act, 15 U.S.C. §§ 78m(d)(e) and 78n(d)-(f) (1982 ed. and Supp. III), and violates the Commerce Clause, Art. I, § 8, cl. 3. Dynamics sought a temporary restraining order, a preliminary injunction, and declaratory relief against
CTS' use of the Act. On April 9, the District Court ruled that the Williams Act preempts the Indiana Act, and granted Dynamics' motion for declaratory relief. 637 F.Supp. 389 (ND Ill.1986). Relying on JUSTICE WHITE's plurality opinion in Edgar v. MITE Corp.,457 U. S. 624 (1982), the court concluded that the Act
"wholly frustrates the purpose and objective of Congress in striking a balance between the investor, management, and the takeover bidder in takeover contests."
637 F.Supp. at 399. A week later, on April 17, the District Court issued an opinion accepting Dynamics' claim that the Act violates the Commerce Clause. This holding rested on the court's conclusion that
"the substantial interference with interstate commerce created by the [Act] outweighs the articulated local benefits so as to create an impermissible indirect burden on interstate commerce."
Id. at 406. The District Court certified its decisions on the Williams Act and Commerce Clause claims as final under Federal Rule of Civil Procedure 54(b). Ibid.
CTS appealed the District Court's holdings on these claims to the Court of Appeals for the Seventh Circuit. Because of the imminence of CTS' annual meeting, the Court of Appeals consolidated and expedited the two appeals. On April 23 -- 23 days after Dynamics first contested application of the Act in the District Court -- the Court of Appeals issued an order affirming the judgment of the District Court. The opinion followed on May 28. 794 F.2d 250 (1986).
After disposing of a variety of questions not relevant to this appeal, the Court of Appeals examined Dynamics' claim that the Williams Act preempts the Indiana Act. The court looked first to the plurality opinion in Edgar v. MITE Corp., supra, in which three Justices found that the Williams Act preempts state statutes that upset the balance between target management and a tender offeror. The court noted that some commentators had disputed this view of the Williams Act, concluding instead that the Williams Act was "an anti-takeover statute, expressing a view, however benighted,
that hostile takeovers are bad." 794 F.2d at 262. It also noted:
"[I]t is a big leap from saying that the Williams Act does not itself exhibit much hostility to tender offers to saying that it implicitly forbids states to adopt more hostile regulations. . . . But whatever doubts of the Williams' Act preemptive intent we might entertain as an original matter are stilled by the weight of precedent."
Ibid. Once the court had decided to apply the analysis of the MITE plurality, it found the case straightforward:
"Very few tender offers could run the gauntlet that Indiana has set up. In any event, if the Williams Act is to be taken as a congressional determination that a month (roughly) is enough time to force a tender offer to be kept open, 50 days is too much; and 50 days is the minimum under the Indiana act if the target corporation so chooses."
Id. at 263.
The court next addressed Dynamic's Commerce Clause challenge to the Act. Applying the balancing test articulated in Pike v. Bruce Church, Inc.,397 U. S. 137 (1970), the court found the Act unconstitutional:
"Unlike a state's blue sky law, the Indiana statute is calculated to impede transactions between residents of other states. For the sake of trivial or even negative benefits to its residents, Indiana is depriving nonresidents of the valued opportunity to accept tender offers from other nonresidents."
". . . Even if a corporation's tangible assets are immovable, the efficiency with which they are employed and the proportions in which the earnings they generate are divided between management and shareholders depends on the market for corporate control -- an interstate, indeed international, market that the State of Indiana is not authorized to opt out of, as in effect it has done in this statute."
794 F.2d at 264.
Finally, the court addressed the "internal affairs" doctrine, a
"principle of conflict of laws . . . designed to make sure that the law of only one state shall govern the internal affairs of a corporation or other association."
Ibid. It stated:
"We may assume, without having to decide, that Indiana has a broad latitude in regulating those affairs, even when the consequence may be to make it harder to take over an Indiana corporation. . . . But in this case, the effect on the interstate market in securities and corporate control is direct, intended, and substantial. . . . [T]hat the mode of regulation involves jiggering with voting rights cannot take it outside the scope of judicial review under the commerce clause."
Ibid. Accordingly, the court affirmed the judgment of the District Court.
Both Indiana and CTS filed jurisdictional statements. We noted probable jurisdiction under 28 U.S.C. § 1254(2), 479 U.S. 810 (1986), and now reverse. [Footnote 5]
The first question in these cases is whether the Williams Act preempts the Indiana Act. As we have stated frequently, absent an explicit indication by Congress of an intent to preempt state law, a state statute is preempted only
"'where compliance with both federal and state regulations is a physical impossibility. . . ,' Florida Lime & Avocado Growers, Inc. v. Paul,373 U. S. 132, 373 U. S. 142-143 (1963), or where the state 'law stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.' Hines v. Davidowitz,312 U. S. 52, 312 U. S. 67 (1941). . . ."
Ray v. Atlantic Richfield Co.,435 U. S. 151, 435 U. S. 158 (1978). Because it is entirely possible for entities to comply with both the Williams Act and the Indiana Act, the state statute can be preempted only if it frustrates the purposes of the federal law.
Our discussion begins with a brief summary of the structure and purposes of the Williams Act. Congress passed the Williams Act in 1968 in response to the increasing number of hostile tender offers. Before its passage, these transactions were not covered by the disclosure requirements of the federal securities laws. See Piper v. Chris-Craft Industries, Inc.,430 U. S. 1, 430 U. S. 22 (1977). The Williams Act, backed by regulations of the SEC, imposes requirements in two basic areas. First, it requires the offeror to file a statement disclosing information about the offer, including: the offeror's background and identity; the source and amount of the funds to be used in making the purchase; the purpose of the purchase, including any plans to liquidate the company or make major changes in its corporate structure; and the extent of the offeror's holdings in the target company. See 15 U.S.C. § 78n(d)(1) (incorporating § 78m(d)(1) by reference); 17 CFR §§ 240.13d-1, 240.14d-3 (1986).
Second, the Williams Act, and the regulations that accompany it, establish procedural rules to govern tender offers. For example, stockholders who tender their shares may withdraw them while the offer remains open, and, if the offeror has not purchased their shares, any time after 60 days from commencement of the offer. 15 U.S.C. § 78n(d)(5); 17
CFR § 240.14d-7(a)(1) (1986), as amended, 51 Fed.Reg. 25873 (1986). The offer must remain open for at least 20 business days. 17 CFR § 240.14e-1(a) (1986). If more shares are tendered than the offeror sought to purchase, purchases must be made on a pro rata basis from each tendering shareholder. 15 U.S.C. § 78n(d)(6); 17 CFR § 240.14(8) (1986). Finally, the offeror must pay the same price for all purchases; if the offering price is increased before the end of the offer, those who already have tendered must receive the benefit of the increased price. § 78n(d)(7).
The Indiana Act differs in major respects from the Illinois statute that the Court considered in Edgar v. MITE Corp.,457 U. S. 624 (1982). After reviewing the legislative history of the Williams Act, JUSTICE WHITE, joined by Chief Justice Burger and JUSTICE BLACKMUN (the plurality), concluded that the Williams Act struck a careful balance between the interests of offerors and target companies, and that any state statute that "upset" this balance was preempted. Id. at 457 U. S. 632-634.
The plurality then identified three offending features of the Illinois statute. JUSTICE WHITE's opinion first noted that the Illinois statute provided for a 20-day precommencement period. During this time, management could disseminate its views on the upcoming offer to shareholders, but offerors could not publish their offers. The plurality found that this provision gave management "a powerful tool to combat tender offers." Id. at 457 U. S. 635. This contrasted dramatically with the Williams Act; Congress had deleted express precommencement notice provisions from the Williams Act. According to the plurality, Congress had determined that the potentially adverse consequences of such a provision on shareholders should be avoided. Thus, the plurality concluded that the Illinois provision "frustrate[d] the objectives of the Williams Act." Ibid. The second criticized feature of
the Illinois statute was a provision for a hearing on a tender offer that, because it set no deadline, allowed management "to stymie indefinitely a takeover,'" id. at 457 U. S. v. Dixon, 633 F.2d 486, 494 (CA7 1980)). The plurality noted that "`delay can seriously impede a tender offer,'" 457 U.S. at 457 U. S. 637 (quoting Great Western United Corp. v. Kidwell,@ 577 F.2d 1256, 1277 (CA5 1978) (Wisdom, J.)), and that "Congress anticipated that investors and the takeover offeror would be free to go forward without unreasonable delay," 457 U.S. at 457 U. S. 639. Accordingly, the plurality concluded that this provision conflicted with the Williams Act. The third troublesome feature of the Illinois statute was its requirement that the fairness of tender offers would be reviewed by the Illinois Secretary of State. Noting that "Congress intended for investors to be free to make their own decisions," the plurality concluded that
"'[t]he state thus offers investor protection at the expense of investor autonomy -- an approach quite in conflict with that adopted by Congress.'"
Id. at 457 U. S. 639-640 (quoting MITE Corp. v. Dixon, supra, at 494).
As the plurality opinion in MITE did not represent the views of a majority of the Court, [Footnote 6] we are not bound by its reasoning. We need not question that reasoning, however, because we believe the Indiana Act passes muster even under the broad interpretation of the Williams Act articulated by JUSTICE WHITE in MITE. As is apparent from our summary of its reasoning, the overriding concern of the
MITE plurality was that the Illinois statute considered in that case operated to favor management against offerors, to the detriment of shareholders. By contrast, the statute now before the Court protects the independent shareholder against the contending parties. Thus, the Act furthers a basic purpose of the Williams Act, "plac[ing] investors on an equal footing with the takeover bidder,'" Piper v. Chris-Craft Industries, Inc., 430 U.S. at 430 U. S. 30 (quoting the Senate Report accompanying the Williams Act, S.Rep. No. 550, 90th Cong., 1st Sess., 4 (1967)). [Footnote 7]
The Indiana Act operates on the assumption, implicit in the Williams Act, that independent shareholders faced with tender offers often are at a disadvantage. By allowing such
shareholders to vote as a group, the Act protects them from the coercive aspects of some tender offers. If, for example, shareholders believe that a successful tender offer will be followed by a purchase of nontendering shares at a depressed price, individual shareholders may tender their shares -- even if they doubt the tender offer is in the corporation's best interest -- to protect themselves from being forced to sell their shares at a depressed price. As the SEC explains:
"The alternative of not accepting the tender offer is virtual assurance that, if the offer is successful, the shares will have to be sold in the lower priced, second step."
Two-Tier Tender Offer Pricing and Non-Tender Offer Purchase Programs, SEC Exchange Act Rel. No. 21079 (June 21, 1984), [1984 Transfer Binder] CCH Fed.Sec.L.Rep.
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