Guhan Subramanian has posted an interesting study of the Delaware takeover statute (§ 203), in which he and his co-authors find that “no bidder in the past nineteen years has been able to achieve 85% in a hostile tender offer against a Delaware target.” Because the federal courts that upheld the Delaware statute as constitutional did so because they believed the statute gave bidders “meaningful opportunity for success,” Subramanian argues that the constitutionality of the Delaware statute is now in play.
I don’t think so. As Subramanian admits, it’s “possible that the federal courts would uphold the constitutionality of Section 203 on different grounds.” In fact, based on my research on state takeover statutes (presented in my book Mergers & Acquisitions), I believe it is highly probable that they would do so. In my view, the constitutionality of the Delaware statute simply is not an open question.
Background: MITE
Simultaneously with Congress’ adoption of the Williams Act, the states began adopting what are now known as first generation state takeover laws.[1] Like the Williams Act, the first generation state laws were mainly disclosure statutes. Unlike the Williams Act, the first generation statutes also imposed certain procedural and substantive requirements creating substantial obstacles for takeover bidders.
The Illinois Business Takeover Act (IBTA), which the Supreme Court invalidated in Edgar v. MITE Corp.,[2] was typical of the first generation statutes. It differed from the Williams Act in three critical ways. First, the IBTA required bidders to notify the target and the Illinois Secretary of State twenty days before the offer’s effective date. Second, the IBTA permitted the Secretary of State to delay a tender offer by holding a hearing on the offer’s fairness. Moreover, the Secretary was required to hold such a hearing if one was requested by shareholders owning ten percent of the class of securities subject to the offer. Finally, the Secretary of State could enjoin a tender offer on a variety of bases, including substantive unfairness.
On January 19, 1979, MITE Corporation filed a Schedule 14D-1 with the SEC, indicating its intent to make a $28 per share cash tender offer for Chicago Rivet & Machine Company. On February 1, 1980, Illinois officials notified MITE that the proposed offer violated the IBTA and issued a cease and desist order and a notice of an administrative hearing. Chicago Rivet then notified MITE that it would file suit under the IBTA to restrain the tender offer. MITE thereupon sued in federal court, seeking to have the IBTA declared unconstitutional on both preemption and commerce clause grounds. The district court struck down the statute on both grounds and the Seventh Circuit affirmed.
Although the circuit court recognized that the federal scheme of regulating tender offers is not so pervasive that an implicit congressional intent to preempt parallel state legislation could be inferred from the Williams Act, it found that the IBTA empowered the Illinois Secretary of State to pass upon the substantive fairness of a tender offer and to prohibit it from going forward, if the Secretary judged the offer inequitable. Thus, the circuit court stated, “Illinois’ substitution of the judgment of its Secretary of State for an investor’s own assessment of the equitability of a tender offer is patently inconsistent with the Williams Act, . . . which contemplates unfettered choice by well-informed investors.” Consequently, the IBTA was preempted by the Williams Act. The circuit court also found that the IBTA unconstitutionally burdened interstate commerce. The circuit court relied on the balancing standard set forth by the Supreme Court in Pike v. Bruce Church: “Where the statute regulates evenhandedly to effectuate a legitimate local public interest, and its effects on interstate commerce are only incidental, it will be upheld unless the burden imposed on such commerce is clearly excessive in relation to the putative local benefits.”[3] Illinois asserted two interests: protection of resident shareholders and regulation of the internal affairs of Illinois corporations. The circuit court rejected both arguments. It found that the IBTA provided shareholders “marginal” benefits and that Illinois’ “tenuous interest” was counterbalanced by the statute’s “global impact” and its “significant potential to cause commercial disruption” by blocking an offer “even if it received the enthusiastic endorsement of all other States.” Consequently, because the IBTA substantially obstructed interstate commerce, without significant countervailing local benefits, it violated the dormant commerce clause.
The Supreme Court affirmed in a badly divided opinion.[4] Rejecting an argument that the preliminary injunction rendered the case moot, the plurality reached the constitutional issues. Among the substantive portions of Justice White’s opinion, only the Pike commerce clause analysis commanded a majority. On that issue, the Court found that Illinois had “no legitimate interest in protecting non-resident shareholders,” and offered only “speculative” protection for resident shareholders. The Court agreed with the circuit court “that the possible benefits of the potential delays as required by the Act may be outweighed by the increased risk that the tender offer will fail due to defensive tactics employed by incumbent management.” The Court also rejected Illinois’ “internal affairs” argument, noting that: “[t]ender offers contemplate transfers of stock by stockholders to a third party and do not themselves implicate the internal affairs of the target company. Furthermore, . . . Illinois has no interest in regulating the internal affairs of foreign corporations.” The Court therefore concluded that the IBTA was unconstitutional under the dormant commerce clause because it imposed a substantial burden on interstate commerce that outweighed the putative local benefits.
Writing for a plurality of the court, Justice White also argued that the Williams Act preempted IBTA. According to White, the Williams Act adopted a policy of neutrality as between bidders and targets. In an oft-used metaphor, Congress supposedly intended to create a level playing field for takeover contests. The IBTA’s prenotification and hearing requirements imposed significant delays before a bid could commence, during which management could erect defenses and take other measures designed to prevent the offer from going forward, and thus frustrated Congressional purpose by tipping the playing field in target management’s favor. Drawing on the Williams Act’s legislative history, White noted that Congress had rejected an advance filing requirement precisely because “Congress itself ‘recognized that delay can seriously impede a tender offer’ and sought to avoid it.” In addition, White concluded that found that the administrative veto granted the Secretary of State conflicted with a Congressional intent that shareholders be allowed make the final decision as to whether to accept a tender offer.
The MITE decision’s immediate impact was unclear. Only those statutes with similarly “global” ability to block tender offers were directly rendered unconstitutional by the opinion of the Court. Because Justice White’s preemption analysis commanded the votes of only two other Justices, it seemed possible that state statutes with a more narrow jurisdictional basis but still having a pro-target bias could pass constitutional muster. Indeed, in refusing to join the preemption analysis, Justice Stevens expressly stated that he was “not persuaded . . . that Congress’ decision to follow a policy of neutrality in its own legislation is tantamount to a federal prohibition against state legislation designed to provide special protection for incumbent management.” Similarly, Justice Powell declined to join the preemption analysis, observing that the Court’s “Commerce Clause reasoning leaves some room for state regulation” and that “the Williams Act’s neutrality policy does not necessarily imply a congressional intent to prohibit state legislation [protecting] interests that include but are often broader than those of incumbent management.” Surprisingly, however, subsequent lower court decisions almost uniformly adopted the plurality’s preemption analysis.
Background: CTS
Justice White’s MITE opinion left open a narrow window of opportunity for states to regulate takeovers: the internal affairs doctrine, pursuant to which the state of incorporation’s law governs questions of corporate governance. The second generation of state takeover statutes was carefully crafted to fit within that loophole by being, for the most part, cautiously tailored to avoid direct regulation of tender offers. Instead, the second generation statutes addressed issues purporting to fall within the sphere of corporate governance concerns traditionally subject to state law. In the years between 1983 and 1987, many of these statutes were challenged and almost uniformly were struck down by the lower courts as unconstitutional. That trend was reversed following the Supreme Court’s decision in CTS Corp. v. Dynamics Corp.,[5] however.
There are two important variants of “second generation” statutes: Control share acquisition statutes rely on the states’ traditional power to define corporate voting rights as a justification for regulating the bidder’s right to vote shares acquired in a control transaction. A “control share acquisition” is typically defined as the acquisition of a sufficient number of target company shares to give the acquirer control over more than a specified percentage of the voting power of the target. The triggering level of share ownership is usually defined as an acquisition which would bring the bidder within one of three ranges of voting power: 20 to 33 1/3%, 33 1/3 to 50% and more than 50%. Most control share acquisition laws provide that shares acquired in a control share acquisition shall not have voting rights unless the shareholders approve a resolution granting voting rights to the acquirer’s shares.[6] The shares owned by the acquirer, officers of the target and directors who are also employees of the target may not be counted in the vote on the resolution.
The stated purpose of control share statutes is providing shareholders with an opportunity to vote on a proposed acquisition of large share blocks which may result in or lead to a change in control of the target. These statutes are premised on the assumption that individual shareholders are often at a disadvantage when faced with a proposed change in control. If the target’s shareholders believe that a successful tender offer will be followed by a purchase by the offeror of non-tendered shares at a price lower than that offered in the initial bid, for example, individual shareholders may tender their shares to protect themselves from such an eventuality, even if they do not believe the offer to be in their best interests.
By requiring certain disclosures from the prospective purchaser and by allowing the target’s shareholders to vote on the acquisition as a group, control share acquisition statutes supposedly provide the shareholders a collective opportunity to reject an inadequate or otherwise undesirable offer. For example, since control share acquisition statutes generally require the offeror to disclose plans for transactions involving the target that would be initiated after the control shares are acquired, shareholders presumably would be unlikely to approve a creeping tender offer or street sweep which would be followed by a squeezeout back-end merger at a price less than or in a consideration different than that paid by the acquirer in purchasing the initial share block.
Fair price statutes are modeled on the approach taken in company charters that include fair price provisions. These statutes provide that certain specified transactions, sometimes called “Business Combinations,” involving an “interested shareholder” must be approved by a specified supermajority shareholder vote unless certain minimum price and other conditions are met. The term “interested shareholder” is typically defined by statute as a shareholder owning more than some specified percentage, often 10%, of the outstanding shares of the target. Business combination statutes are an extension of the fair price statute concept, providing substantially greater teeth. The typical statute prohibits a target from engaging in any business combination with an interested shareholder of the target corporation for a set period of time, often five years, following the date on which the interested shareholder achieved such status. Following the initial freeze period, a business combination with an interested shareholder is still prohibited unless the business combination is approved by a specified vote of the outstanding shares not beneficially owned by the interested shareholder or the business combination meets specified fair price and other criteria.[7] The definition of interested shareholder typically is comparable to that used in fair price statutes. As with fair price statutes, the term “business combination” typically is defined to include a broader variety of transactions than just a statutory merger.
In CTS Corp. v. Dynamics Corp.,[8] the Supreme Court upheld an Indiana control share acquisition statute. Justice Powell’s majority opinion began by noting that the MITE plurality’s preemption analysis was not binding on the Court, but he declined to explicitly overrule it. Instead, Powell claimed that the Indiana Act passed muster even under White’s interpretation of the Williams Act’s purposes. It is perhaps instructive, however, that Justice White was the lone dissenter from Powell’s preemption holding.
In fact, CTS’ preemption analysis differed from MITE’s in at least two key respects. Where Justice White emphasized Congress’ neutrality policy, Justice Powell emphasized Congress’ desire to protect shareholders.[9] Where Justice White would preempt any state statute favoring management, Justice Powell upheld the Indiana Act even though he recognized that it would deter some takeover bids. Justice Powell did so because he believed that, despite the Indiana statute’s deterrent effect,[10] Justice Powell believed that it protected shareholders by permitting them collectively to evaluate an offer’s fairness. He laid particular emphasis on a bidder’s ability to coerce shareholders into tendering, such as by making a two-tier tender offer. By allowing shareholders collectively to reject such offers, the Indiana statute defuses their coercive effect. That the statute also deters takeovers and thereby protects incumbent managers is merely incidental to its primary function of protecting shareholders. The Indiana act therefore did not conflict with the Williams Act; to the contrary, Justice Powell concluded that it furthered Congress’ goal of protecting shareholders.
Although Justice Powell acknowledged the Indiana act imposed a substantial delay on bidders, he reinterpreted MITE to only bar states from injecting unreasonable delay into the tender offer process. He then concluded that a potential 50 day waiting period was not unreasonable. Justice Powell noted that a variety of state corporate laws, such as classified board and cumulative voting statutes, limit or delay the transfer of control following a successful tender offer: “[T]he Williams Act would pre-empt a variety of state corporate laws of hitherto unquestioned validity if it were construed to pre-empt any state statute that may limit or delay the free exercise of power after a successful tender offer. . . . The longstanding prevalence of state regulation in this area suggests that, if Congress had intended to pre-empt all state laws that delay the acquisition of voting control following a tender offer, it would have said so explicitly.”
Justice White’s analysis implied that the Williams Act’s neutrality policy meant that any state laws which derogated from the level playing field established by the Williams Act were to be preempted. However, there was another, perhaps equally plausible, interpretation of the Act; namely, that Congress wanted to assure that the Act itself not affect the balance of power between bidders and targets but did not intend to prohibit all state laws that affected that balance. Powell’s opinion implicitly embraced the latter view.
Turning to the commerce clause issues, Powell held that the Indiana statute also passed muster under the dormant commerce clause. The statute did not discriminate against out of state entities. It did not bar tender offers, leaving a meaningful opportunity for the offeror to succeed. Because the statute was limited to Indiana corporations, the statute did not have significant extraterritorial effects. As to the local benefits aspect of the balancing test, Justice Powell held that the state had a legitimate interest in defining the attributes of its corporations and protecting shareholders of its corporations. He opined, for example, that “[n]o principle of corporation law and practice is more firmly established than a State’s authority to regulate domestic corporations, including the authority to define the voting rights of shareholders.”[11] Accordingly, it “is an accepted part of the business landscape in this country for States to create corporations, to prescribe their powers, and to define the rights that are acquired by purchasing their shares.”[12]
Interpreting CTS
Clearly CTS contemplated a greater degree of state regulation than did MITE, but how much greater remained uncertain. Because Justice Powell so narrowly focused on the specific provisions of the Indiana Act, he failed to provide a generally applicable analysis. Indeed, both proponents and opponents of state takeover legislation can mine CTS for support for their arguments. Faced with this uncertainty, two distinct lower court readings of CTS’s preemption analysis developed.
A meaningful opportunity for success
The more restrictive interpretation of CTS requires states to preserve a meaningful opportunity for successful hostile bids. This standard is most fully developed in a trilogy of cases involving the Delaware takeover statute’s constitutionality.[13] DGCL § 203 is a variant on the older business combination statutes. Section 203 prohibits a Delaware corporation from entering into a business combination for a period of three years after an offeror becomes an interested stockholder. Business combination is defined to include freezeout mergers and other common post-acquisition transactions.[14] Interested shareholder is defined, subject to various exceptions, as the owner of 15% or more of the target’s outstanding shares.
Unlike the older business combination statutes, the Delaware statute does not impose either a supermajority approval or a fair price requirement in connection with business combinations after the freeze period expires. Thus, once the three-year period expires, the interested stockholder may complete a second-step business combination on whatever terms and conditions would be lawful under applicable corporate and securities law provisions. In addition, the three-year freeze period is waived if any of four conditions are satisfied: (1) prior to the date on which the bidder crosses the 15% threshold, the business combination or the triggering acquisition is approved by the target’s board of directors; (2) the bidder, in a single transaction, goes from a stock ownership level of less than 15% to more than 85% of the target’s voting stock (not counting shares owned by inside directors or by employee stock plans in which the employees do not have the right to determine confidentially whether shares held by the plan will be tendered); (3) during the three year freeze period, the transaction is approved by the board of directors and by two-thirds of the outstanding shares not owned by the bidder; or (4) the target’s board of directors approves a white knight transaction. Section 203(b) also sets forth various other conditions under which the statute will not apply, most prominently an opt-out provision pursuant to which a corporation may exempt itself from the statute through appropriate charter or bylaw provisions.
In the leading case of the trilogy, BNS Inc. v. Koppers Co.,[15] Chief District Judge Schwartz began by interpreting CTS as meaning that neutrality between bidders and targets was no longer regarded as a purpose of the Williams Act in itself, but rather merely as a means towards the true congressional end of shareholder protection. State statutes having a substantial deterrent effect are now permissible, as are statutes favoring management, so long as these effects are merely incidental to protecting shareholders.[16] This proviso, however, is critical. As Chief Judge Schwartz saw it, CTS does not permit states to eliminate hostile takeovers. Rather, states must preserve a “meaningful opportunity” for hostile offers that are beneficial to target shareholders to succeed. Chief Judge Schwartz offered a four part test to decide whether a state law did so: (1) does the state law protect independent shareholders from coercion; (2) does it give either side an advantage in consummating or defeating an offer; (3) does it impose an unreasonable delay; and (4) does it permit a state official to substitute his views for those of the shareholders. Concluding that Section 203 probably satisfied these standards, Chief Judge Schwartz declined to enjoin its enforcement.
Amanda Acquisition
The 1980s takeover wars took many a surprising turn. Perhaps none was more surprising, however, than Judge Frank Easterbrook’s decision in Amanda Acquisition Corp. v. Universal Foods Corp.[17] Judge Easterbrook is an unabashed proponent of hostile takeovers, of course; indeed, Amanda Acquisition itself sings their praises. Yet in upholding the Wisconsin business combination statute, Judge Easterbrook authored the most permissive preemption analysis of state takeover legislation to date.[18]
Like most post-MITE state takeover statutes, the Wisconsin law deters tender offers by regulating freezeout mergers and other post-acquisition transactions. Like most business combination statutes, it imposes a statutory freeze period, here three years, following the acquisition during which business combinations are prohibited. The sole viable exception to the freeze period is prior approval by the incumbent directors: “In Wisconsin it is management’s approval in advance, or wait three years.”
Judge Easterbrook began with the Williams Act’s neutrality policy. Congress unquestionably expected the federal tender offers rules to be neutral as between bidders and targets. In MITE, Justice White read that expectation as forbidding state statutes from tipping the balance between them. Both Justices Powell and Stevens rejected that reading in their concurrences. And, of course, CTS implicitly backpedals from the spirit of Justice White’s analysis. Judge Easterbrook recognized that all of this might open the door for nonneutral state laws, but he claimed to “stop short of th[at] precipice.” At a minimum, however, Amanda Acquisition implicitly treats neutrality as a means rather than an end in itself. Easterbrook’s decision to uphold the Wisconsin statute in the face of its admitted deterrent effects only makes sense if he has rejected Justice White’s analysis in MITE of the neutrality policy’s preemptive power.
In any case, Judge Easterbrook thereafter essentially ignored the Williams Act’s neutrality policy. Instead, he asserted that Congress intended the Williams Act to regulate the process by which tender offers take place and the disclosures to which shareholders are entitled. He then used this reading of congressional purpose to distinguish MITE from CTS. The IBTA threatened to preclude a bidder from purchasing target shares even if the bidder complied with federal law. In contrast, the Indiana control share acquisition statute did not interfere with the federally mandated tender offer process; indeed, it did not even come into play until that process was completed and the shares acquired.
The Wisconsin business combination statute, like the Indiana Act, left the tender offer process alone. According to Judge Easterbrook, the Wisconsin statute therefore could be preempted only if the Williams Act gives investors a federal right to receive tender offers. He determined, however, that no such federal right exists: “Investors have no right to receive tender offers. More to the point—since Amanda sues as bidder rather than as investor seeking to sell—the Williams Act does not create a right to profit from the business of making tender offers. It is not attractive to put bids on the table for Wisconsin corporations, but because Wisconsin leaves the process alone once a bidder appears, its law may coexist with the Williams Act.” The state statute need not even leave the bidder an opportunity—meaningful or otherwise—for success. Accordingly, the issue is not whether the statute deters tender offers. The issue is whether the state law directly interferes with an undeterred bidder’s ability to go forward on schedule and in compliance with federal law.
Choosing a standard
Selection of the standard of review is often determinative. Plausible arguments can be made for both the meaningful opportunity for success standard and Amanda Acquisition. On balance, however, Amanda Acquisition seems preferable. The meaningful opportunity for success standard inherently poses difficult interpretative problems for legislators attempting to remain within constitutional bounds and for judges reviewing new statutes. More important, Amanda Acquisition is a logical extension of the Supreme Court’s recent trend in drawing the dividing line between state corporate law and federal securities law.
As for ease of application, what does “meaningful opportunity for success” mean? Against what potential injuries may the state guard shareholders? Which proxy contests are “beneficial to shareholders”? How much deterrence is too much? How open must the window of opportunity be to be meaningful? Admittedly, stringing together rhetorical questions is not the most powerful of argumentative devices, but each of these is critical to application of the standard. Yet, each also has no readily apparent answer.[19] Amanda Acquisition thus offers courts a standard posing much simpler questions.
As for consistency with CTS, there are perhaps as many theories about what the Supreme Court did in CTS, why it did it, and whether it should have done it as there are corporate law professors. While disputes as to the latter two questions were unavoidable in light of the hot debate over corporate takeovers, disagreement as to the former was avoidable. The disparate readings offered by BNS and Amanda Acquisition were only possible because Justice Powell failed to face and resolve the tensions inherent in his analysis.
On the one hand, recall that Justice Powell argued that the Indiana statute actually furthered the Williams Act’s purpose. While the MITE plurality had emphasized Congress’ neutrality policy, Justice Powell emphasized Congress’ desire to protect shareholders. Because he believed that the Indiana act protected shareholders by giving them a collective opportunity to pass on a tender offer, he concluded that the state statute was consistent with congressional intent. Chief Judge Schwartz used this aspect of CTS as the intellectual underpinnings of the meaningful opportunity for success standard.
On the other hand, however, there is Justice Powell’s broad language about the traditional primacy of state regulatory authority in the corporate governance field. Recall that Justice Powell limited his preemption analysis by noting the “long-standing prevalence of state regulation.”[20] Accordingly, absent express congressional direction, he declined to interpret the Williams Act in a manner that might permit it to preempt any state law that interfered with tender offers. Justice Powell’s commerce clause analysis even more strongly endorsed the primacy of the states in corporate governance regulation. Proponents of state takeover regulation seize on that language to argue for a broad reading of CTS. Correspondingly, opponents of an active state role feared that subsequent decisions might make this aspect of CTS the basis for preemption analysis in this area. In Amanda Acquisition, that chicken came home to roost.
The case for Amanda Acquisition begins with the burden of proof in preemption litigation. When a state takeover law is challenged, the challenger bears the burden of proof. This is not an easy burden to carry. The Supreme Court is generally reluctant to infer preemption.[21] This is especially true in areas traditionally regulated by the states.[22] That corporate law is such an area goes a long way towards explaining CTS.
States have been in the business of regulating corporate governance since before the United States was founded. Throughout that same time span, many have argued for federalizing corporate law. Yet, the federal government did not enter the picture until the New Deal securities legislation of the 1930s and 1940s. Moreover, when Congress finally did get involved, it did so in a fairly limited way. Congress was mainly concerned with disclosure and with providing procedural safeguards to make the disclosure requirements more effective.
In a long line of cases, the Supreme Court has respected the balance created by Congress by holding that the federal securities laws merely place a limited gloss on state corporate law.[23] Unless federal law expressly governs some corporate law question, the court will treat state law as controlling.[24] The corporation thus is recognized as a creature of the state, “whose very existence and attributes are a product of state law.”[25] The court therefore acknowledges that states have legitimate interests in overseeing the firms they create and in protecting the shareholders of their corporations. Finally, the CTS court further accepted a state’s “interest in promoting stable relationships among parties involved in the corporations it charters, as well as in ensuring that investors in such corporations have an effective voice in corporate affairs.” If so, state regulation not only protects shareholders, but also protects investor and entrepreneurial confidence in the fairness and effectiveness of the state corporation law.[26]
The country as a whole benefits from state regulation in this area, as well. The markets that facilitate national and international participation in ownership of corporations are essential for providing capital not only for new enterprises but also for established companies that need to expand their businesses. This beneficial free market system depends at its core upon the fact that corporations generally are organized under, and governed by, the law of the state of their incorporation.[27]
This is so in large part because ousting the states from their traditional role as the primary regulators of corporate governance would eliminate a valuable opportunity for experimentation with alternative solutions to the many difficult regulatory problems that arise in corporate law. As Justice Brandeis pointed out many years ago, “It is one of the happy incidents of the federal system that a single courageous State may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of country.”[28] So long as state legislation is limited to regulation of firms incorporated within the state, as it generally is, there is no risk of conflicting rules applying to the same corporation. Experimentation thus does not result in confusion. In contrast, a uniform federal standard would preclude experimentation with differing modes of regulation.
In this light, MITE can be seen as an aberration that CTS corrected. If read broadly, MITE threatened to preempt any state corporate law that affected control contests. As Justice Powell recognized, much of state corporate law was potentially vulnerable to challenges based on such a reading of MITE. By limiting the Williams Act’s preemptive force, Justice Powell prevented this scenario. The tensions and contradictions in Justice Powell’s preemption arguments resulted from his failure to face the full implications of his own analysis. In contrast, Judge Easterbrook saw and accepted those implications. Judge Easterbrook was unable to find a firebreak between preemption of the Wisconsin business combination statute and preemption of the host of state corporate laws that affect tender offers. If the Williams Act preempted the Wisconsin statute, there was no principled basis upon which to preserve classified boards, cumulative voting, supermajority voting requirements, dual class voting rights, and takeover defenses. While BNS essentially ignores this risk, Amanda Acquisition drew the logical conclusion from Justice Powell’s refusal to preempt that body of state law.
Accordingly, I believe courts today would follow Amanda Acquisition rather than BNS. Which is why I don’t think Subramanian’s study changes the constitutional landscape.
[1] Indeed, Virginia’s first generation statute was adopted several months prior to the William Act’s passage. Stephen M. Bainbridge, State Takeover and Tender Offer Regulations Post-MITE: The Maryland, Ohio and Pennsylvania Attempts, 90 Dickinson L. Rev. 731, 736 (1986).
[2] Edgar v. MITE Corp., 457 U.S. 624 (1982).
[3] Pike v. Bruce Church, Inc., 397 U.S. 137, 142 (1970) (citation omitted). The commerce clause of the U.S. constitution is both a grant of power to Congress and a limitation on state power. Under the supremacy clause a valid congressional exercise of the commerce power will preempt conflicting state regulation. However, even in the absence of congressional legislation, the “dormant” commerce clause bars direct state regulation of commerce. Edgar v. MITE Corp., 457 U.S. 624, 640 (1982) (White, J.).
[4] Edgar v. MITE Corp., 457 U.S. 624 (1982). In his lead opinion, Justice White determined that the IBTA was preempted by the Williams Act and also invalid under the commerce clause because (1) the IBTA directly regulated interstate commerce and (2) the IBTA’s legitimate local benefits did not outweigh its indirect burden on interstate commerce. Only the latter holding, however, commanded a majority of the Court.
[5] CTS Corp. v. Dynamics Corp. of Am., 481 U.S. 69 (1987).
[6] E.g., Ind. Code Ann. § 23-1-42. A few states took a slightly different approach, under which the shareholders determine whether or not the proposed acquisition may be made. E.g., Ohio Rev. Code Ann. § 1701.831. This is a slightly more aggressive position than the more usual approach, which simply requires shareholder approval for voting rights to be accorded to the acquirer’s shares.
[7] See, e.g., N.Y. Bus. Corp. Law § 912(c). Delaware § 203 is similar to the original business combination statutes in a number of respects, but there is no requirement of shareholder approval after the freeze period expires. Shareholder voting may still occur, however, because the freeze period will be waived if at any time during it a proposed transaction is approved by the board of directors and by the two-thirds of the outstanding shares not owned by the bidder. DGCL § 203.
[8] CTS Corp. v. Dynamics Corp. of Am., 481 U.S. 69 (1987).
[9] In dissent, Justice White argued that the Williams Act was primarily intended to protect individual investors. CTS Corp. v. Dynamics Corp. of Am., 481 U.S. 69, 98-99 (1987) (White, J., dissenting). In contrast, Justice Powell believed that the Williams Act was intended to protect shareholders. Id. at 82. The difference between investors and shareholders is more than just semantic. Under Justice White’s view, a statute will be preempted if it interferes with an individual investor’s ability to freely make his own decision. In contrast, Justice Powell would uphold state takeover statutes that make shareholders as a group better off, even if the wishes of some individual investors are thereby frustrated.
[10] Arguably, the control shareholder acquisition statutes are an ineffective takeover deterrent. The bidder’s ability to request a special shareholder meeting to consider its proposed acquisition provides corporate raiders with an opportunity to cheaply advertise a target’s takeover vulnerability. Likewise, a bidder can reduce the impact of a control share acquisition statute by simply delaying consummation of a purchase until a shareholder vote has been held and requiring a favorable vote as a condition to its tender offer. Most control share statutes prohibit both bidders and target insiders from voting on the resolution, but do not impose any minimum holding period on the “disinterested” shareholders in order for them to be eligible to vote. As a result, the outcome of the vote likely will depend in large part on the views of takeover arbitragers and other speculators who can be expected to favor the bidder over target management.
[11] CTS Corp. v. Dynamics Corp. of Am., 481 U.S. 69, 89 (1987).
[12] Some ten years after the Supreme Court’s decision, CTS Corporation (the target) agreed to acquire Dynamics Corporation of America (the bidder) for $210 million in cash and stock. Dynamics still owned a 44 percent stake in CTS, which dated back to the contested control share acquisition. Ironically, the CTS acquisition was intended to thwart WHX Corporation’s hostile takeover bid for Dynamics. CTS’ chairman described the acquisition as a major benefit to “our shareholders.” He also observed that the two companies’ product families were complementary. The deal was structured as a cash tender for part of the Dynamics shares, to be followed by a stock swap for the rest of the shares, which gave Dynamics shareholders an opportunity to reject the cash end and take CTS shares, thereby avoiding tax on unrealized gain. Wall St. J., May 12, 1997, at B9.
[13] City Capital Assoc. Ltd. v. Interco, Inc., 696 F. Supp. 1551 (D. Del. 1988), aff’d on other grounds, 860 F.2d 60 (3d Cir. 1988); RP Acquisition Corp. v. Staley Cont’l, Inc., 686 F. Supp. 476 (D. Del. 1988); BNS Inc. v. Koppers Co., Inc., 683 F. Supp. 458 (D. Del. 1988).
[14] Section 203 puts fewer restrictions on the raider’s use of target assets to finance an acquisition than do the older business combination statutes. For example, it permits the raider to sell off target assets to third parties (subject to the usual fiduciary duty and voting rules).
[15] BNS Inc. v. Koppers Co., Inc., 683 F. Supp. 458 (D. Del. 1988).
[16] Accord Hyde Park Partners, L.P. v. Connolly, 839 F.2d 837, 850 (1st Cir. 1988) (“protection of management that is incidental to protection of investors does not per se conflict with the purpose or purposes of the Williams Act.”).
[17] Amanda Acquisition Corp. v. Universal Foods Corp., 877 F.2d 496 (7th Cir. 1989).
[18] Some observers posit that Judge Easterbrook did not mean what he said, but said it only to goad the Supreme Court or Congress into preempting state takeover legislation. Perhaps so, but then why did he not simply say so, instead of creating an elaborate justification for state takeover regulations? It is not uncommon for lower court judges to follow Supreme Court precedents they disagree with, while expressly urging the Supreme Court to reconsider its prior holdings. No one doubts the appropriateness of such behavior. At the very least, however, there would be something unseemly about a judge deliberately misrepresenting his position in an attempt to force the Supreme Court to reverse him. Accordingly, it seems better to take Judge Easterbrook at his word, as several subsequent cases have done. E.g., Hoylake Investments Ltd. v. Washburn, 723 F. Supp. 42, 48 (N.D. Ill. 1989); Glass, Molders, Pottery, Plastics, and Allied Workers Int’l Union v. Wickes Co. Inc., 578 A.2d 402, 406 (N.J. Super. 1990).
[19] Recall that Chief Judge Schwartz offered a four part test in BNS to supplement the meaningful opportunity for success standard. BNS Inc. v. Koppers Co., Inc., 683 F. Supp. 458, 469 (D. Del. 1988). Unfortunately, there are several problems with that attempted clarification. First, several of the prongs are as unclear or as uncertain as the basic standard; so too is the question of how many prongs must be satisfied. Second, neither BNS nor its progeny solely operated within this framework. Finally, the second prong—whether the law gives one side an advantage—may be inconsistent with CTS. Justice Powell had asked whether the Indiana Act gave either side an advantage in communicating with shareholders; Chief Judge Schwartz recast that question to essentially ask whether the statute helped either side prevail. BNS thus “restated the question much more broadly and gave greater weight to the neutrality principle than the Court in CTS may have intended.” Evelyn Sroufe & Catherine Gelband, Business Combination Statutes: A “Meaningful Opportunity” for Success?, 45 Bus. Law. 891, 917 n.119 (1990).
[20] CTS Corp. v. Dynamics Corp. of Am., 481 U.S. 69, 86 (1987).
[21] Exxon Corp. v. Governor of Md., 437 U.S. 117, 132 (1978).
[22] California v. ARC America Corp., 490 U.S. 93 (1989).
[23] E.g., Kamen v. Kemper Fin. Servs. Inc., 502 U.S. 974 (1991); Burks v. Lasker, 441 U.S. 471 (1979); Santa Fe Indus., Inc. v. Green, 430 U.S. 462 (1977); Piper v. Chris-Craft Indus., Inc., 430 U.S. 1 (1977); Cort v. Ash, 422 U.S. 66 (1975).
[24] Cort v. Ash, 422 U.S. 66, 84 (1975).
[25] CTS Corp. v. Dynamics Corp. of Am., 481 U.S. 69, 89 (1987). There is an on-going debate within academia as to “whether the modern corporation is essentially a matter of public or private concern.” Lawrence E. Mitchell, Private Law, Public Interest?: The ALI Principles of Corporate Governance, 61 Geo. Wash. L. Rev. 871, 876 (1993). For those who come down on the public side of the debate, the CTS arguments about the states’ interests in regulating the corporation should be conclusive. For them the corporation, and thus corporate law, is a matter of public concern that the state has a strong interest in regulating. For those on the private law side of the debate, however, the CTS arguments also should prove persuasive. They acknowledge that the state has an interest in ensuring that the gains of private transacting are maximized and further acknowledge that state regulation is more likely to maximize those gains than is national regulation.
[26] Some argue that the state also has an interest in corporations that make a substantial contribution to the state. Corporations provide employment, a crucial tax base, sell and purchase goods and services, and supply support for community activities. This interest in any corporation will vary from case to case, but it is a real interest, deriving from the corporation’s existence as a tangible economic entity created by state law. See Mark A. Sargent, Do the Second Generation State Takeover Statutes Violate the Commerce Clause?, 8 Corp. L. Rev. 3, 23 (1985).
[27] CTS Corp. v. Dynamics Corp. of Am., 481 U.S. 69, 90 (1987).
[28] New State Ice Co. v. Liebmann, 285 U.S. 262, 311 (1932) (Brandeis, J., dissenting).
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