Amicus Brief — Edgar v. MITE Corp.

Doo FILED

UL 20 1981

JAMES EDGAR,

Appellant,

against

MITE CORPORATION AND MITE HOLDINGS, INC.,

Appellees.

On Arrnal. From TR Unirep Sratres Court

Or Appgats Fon Tue Sevents Cmourr

MOTION FOR LEAVE TO FILE BRIEF AND BRIEF FOR

NORTH AMERICAN SECURITIES ADMINISTRATORS

ASSOCIATION, INC. AS AMICUS CURIAE

— — iV ů ů —ͤ—“

— q ð —

Orestes J. MrinALx

Counsel for North American Securities

Administrators Association

Two World Trade Center

New York, N.Y. 10047

(212) 488-7563

—

Of Counsel:

Josxyn C. Lona, Special Counsel

North American Securities

Administrator’s Association, Inc.

Srernen M. Coons

Securities Commissioner

State of Indiana

K. Houston Matney

Securities Commissioner

State of Maryland

Jor, Peon, Counsel

Virginia Corporations Commission

Perer Rosertson, Counsel

Securities Division

Secretary of State

Commonwealth of Massachusetts

Rawypauzt E. Sonumann

General Counsel

Office of Commissioner of Securities

State of Wisconsin

Motion for Leave to File Brief Amicus Curiae

and Brief Amicus Curiae

The North American Securities Administrators Associa-

tion, Inc. (NASAA), a national organization whose mem-

bership includes the securities law administrators of the

50 States (except California), hereby respectfully moves

for leave to file the attached brief, as amicus curiae in

this case. The consent of the attorney for the Appellant

has been obtained. The consent of the attorney for the

Appellees was requested but was neither granted nor

opposed.

The interest of NASAA in this case arises from the fact

that thirty-six (36) of its member states have enacted

and administer state laws regulating take-over offers, and

that more than a dozen of those laws have been declared

unconstitutional by federal courts in the last eighteen (18)

months on the same Supremacy Clause and/or Commerce

Clause grounds enunciated in the lower court decisions

in this case. Several of the decisions regarding the laws

of other states are at various levels of the appeal process.

The Court’s decision in this case will have wide-ranging

impact on those appeals and on a number of state take-

over laws which may or may not have provisions identical

to those in the Illinois take-over law, particularly includ-

ing the laws of nine (9) states that have recently been

amended to remove Supremacy Clause problems regard-

ing areas of conflict with the federal take-over procedures

and to remove Commerce Clause problems concerning

adequate state interests in asserting jurisdiction that were

part of the basis of the lower court’s decision in this case.

In the instant case, the focus of the arguments of the

appellant and the appellees in the Court of Appeals re-

garding the Supremacy Clause and the Commerce Clause

issues was narrow, isolating on the provisions of the IIli-

nois law vis-a-vis the federal law. Since it is likely that

the same situation will exist in the treatment of issues

i

before this Court, it is believed that the brief which

amicus curiae is requesting permission to file will contain

a discussion of the issues on a wider scope to provide the

Court with a broader perspective as to how state take-

over laws are not violative of Constitutional standards.

Respectfully submitted,

Oxestes J. Mimary

Counsel for the North American

Securities Administrators

Association, Inc. as Amicus

Curiae

Two World Trade Center

New York, New York 10047

Dated: New York, New York

July 17, 1981

ii

TABLE OF CONTENTS

ARGUMENT:

Pornt I—The Illinois Act is both a securities regula-

tory measure and an organic corporate statute

dealing with internal corporate governance ....

Pont II— The Illinois Act is not A sala by the

WW GUS a UO bb bau) ceDoesccccdscisive

A. The substantive review provision of the

Illinois Act is not in conflict with the Williams

B. The delay caused under the hearing provision

of the Illinois Act does not make it in conflict

with the Williams Act ..............00000

Polxr III— The Illinois Statute Reasonably Regu-

lates Legitimate and Important State Interests

A. There is a strong presumption of validity of

state legislation in areas traditionally within

the regulatory powers of the states, such as

shareholder relations with corporations and

corporate mergers, combinations, and change

, s ctheccdsctccenaee

B. The Illinois Act does regulate a legitimate

and legislatively-determined important inter-

est of the State of Illinois ..................

iii

13

16

16

PAGE

C. Illinois as a mater of organic corporate law

has a legitimate interest in having its statutes

applied extraterritorially to govern the in-

ternal affairs of any corporation organized

ain 19

D. Illinois as a matter of organic corporate law

has a legitimate interest in having its statutes

applied extraterritorially to govern the in-

ternal affairs of any corporation which has its

executive office in the state or which has at

least 10% of its stated capital and paid-in

surplus in the state 21

E. Where Illinois has a legitimate state interest,

the protection of such interest will not be de-

featet under the Commerce Clause because

protection of that interest requires that state

action to be given extraterritorial effect .... 26

F. The Illinois statute does not place an imper-

missible burden on interstate commerce when

weighed against the legitimate local interest

sought to be protecte ll... ꝗ 29

D Keen e. 30

Tak or Cases

AMCA International Corp. v. Krouse, 482 F. Supp.

929 (S.D. Ohio 197909))))))))) 5, 16, 20, 30

Bank of Augusta v. Earle, 38 U.S. (13 Pet.) 519

nend. Fe de 19

Bibb v. Navajo Freight Lines, Inc., 359 U.S. 520

rc 00 16

Boston & Maine Railroad Co. v. Armburg, 285 U.S.

r cca; vi votes awa ae,

Canadian Pacific Enterprises, Inc. v. Krouse, 506 F.

Supp. 1192 (S.D. Ohio), appeal pend., No. 81-3083

%%ꝙů/ᷣ]¼ . K ̃˙ uiXu.. 9

Caldwell v. Sioux Falls Stock Yards Co., 242 U. S. 559

CO RE SES, ce RS te TAROT ay 2 17

Exxon v. Governor of Maryland, 437 U.S. 117 (1978) 27

Florida Lime & Avocado Growers, Inc. v. Paul, 373

, UN oa he ha lidesecic ctvccsendes 8

German-American Coffee v. Diehl, 216 N.Y. 57, 109

Fy OR CANAD .nl 21, 28

Gibbons v. Ogden, 22 U.S. 23 (1824))))))) 16

Great Western United Corp. v. Kidwell, 577 F.2d 1256

(5th Cir. 1978), rev’d on venue grounds sub nom.

Leroy v. Great Western United Corp., 443 U.S.

rene 5, 18, 20, 21, 26, 29

Hall v. Geiger Jones Co., 242 U. 3. 539 (1917) 17

Hammond Packing Co. v. Arkansas, 212 U.S. 322

%%%rCĩ ꝰ˙VV neee 27

Hines v. Davidowitz, 312 U.S. 52 (1941) 8

Huron Cement Co. v. Detroit, 362 U.S. 761 (1945) .. 26

International Paper Co. v. United States, 88 F. Supp.

Ok UG CAE renne

International Ticket Scale Corp. v. United States, 165

F. 2d 358 (2d Cir. 1948ùùhõ27ͥ7ʒhʒʒ „e 28

Irving Trust Co. v. Maryland Casualty Co., 83 F. 2d

168 (2d Cir.), cert. denied, 299 U.S. 571 (1936) . 27, 28

Jones v. Rath Packing Co., 43 U.S. 519 (1977) ...... 8

Leroy v. Great Western United Corp., 443 U.S. 173

%%% cota tika 6s oxides vanedss 2, 8, 10, 17

PAGE

Merrick v. N.W. Halsey d Co., 242 U.S. 568 (1917). 17

Minnesota v. Clover Leaf Creamery Co., —— US.

—, L. Ed. G47 (1981) ....... cc ccc cece eee 26

O’Gorman v. Hartford, 282 U.S. 251 (1931) ........ 17

Osborn v. Ozlin, 310 U.S. 53 (1940p: 27

People v. Western Airlines, 258 Cal. App.2d 286, 66

eee enn eee 27, 28

Pike v. Bruce Church, Inc., 397 U.S. 137 (1970) .... 29

Pinney v. Nelson, 183 U.S. 144 (1901)77)))̃/ 28

Piper v. Chris-Craft Industries, 430 U.S. 1 (1977) 17

Raymond Motor Transportation, Inc. v. Rice, 434

„„ „%%% Tet cccedobecdegedbecdcoetes 26

Rice v. Santa Fe Elevator Corp., 331 U.S. 218 (1947) 17

Santa Fe Industries v. Green, 430 U.S. 462 (1977) .. 17

Sharon Steel Corp. v. Whaland, Case No. 80-333, ——

A.2d —— (N.H. July 2, 1981) ............ 16, 25, 30

South Carolina Highway Dept. v. “Barnwell Bros.,

Rn 29

Southern Pacific Co. v. Arizona, ex rel. Sullivan, 325

. deen ene 16

State ex ‘rel: Weede v. Iowa Southern Utilities Co.,

231 Iowa 784, 2 N. W.2d 372, supplemental opin-

ion, 4 N. W. 2d 869 D 2¹

Strode v. Esmark, Inc. [1980], Fed. Sec. L. Rep.

(CCH) 797,538 (Ky. Cir. Ct. 1980), af’d ——

S.W.2d ——(Ky. App. Apr. 3, 1981) ..... 5, 16, 20, 30

Sun Life Group, Inc. v. Standard Life Ins. Co. [1979-

80], Fed. Sec. L. Rep. (CCH) 597,314 (S.D. Ind.

RD 12

TABLE OF AUTHORITIES vii

PAGE

Telvest, Inc. v. Bradshaw, 618 F.2d 1029 (4th Cir.

17J77%r« x ous cd cV ike kpees oe 30

Thomas v. Mathiessen, 232 U.S. 221 (1914) ........ 23

Toklan Royalty Corp. v. Tiffany, 193 Okl. 120, 141

P.2d 571, (1943) ....... 42 2¹

Travelers Health Association v. Virginia ex rel.

State Corporation Commission, 339 U.S. 643

r c 29

Western Airlines, Inc. v. Sobieski, 191 Cal. App. 2d

399, 12 Cal. Rptr. 719 (1961), subsequent deci-

sions Western Airliness, Inc. v. Schutebank, 258

Cal. App.2d 291, 66 Cal. Rptr. 293 (1968) ...... 27, 28

Wylain, Inc. v. TRE Corp., 412 A.2d 338 (Del. Ch.

SUT GU „„ „„ „„ 5, 20

Srarurrs Crrep

III. Rev. Stat. ch 121 1/2

r 5 . . 0 00 2

e ̃ ER oe eee 4, 18, 26

D eee een 13

/ ...a cccoe O14

eee .o ede 14

e.. „ne 18

D oed dee 18

Williams Act

15 U.S.C. § 78m(d)-(eãe )))) 1 2

§en(d)-( ft)) 44. * 2

viii TABLE OF AUTHORITIES

PAGE

eee ee eee 11

Securities Exchange Act § 28(a), 15 U.S.C. 5 78bb(a) 10,

11

Va. Code 1950

.be 11

. eee 12, 14

N.Y. Sess. Law 1897, ch. 384 1444 cece eee 22

N.H. RSA

, ee 25

Orner AUTHORITIES

American Law Institute, Federal Securities Code

Proposed Official Draft 5 1904(c) (1980) ....... 24

Aranow & Einhorn & Berlstein, Developments in

Tender Offer for Corporate Control 207-17

c 2

Baraf, The Foreign Corporation 4 Problem in

Choice-of-Law Doctrine, 33 Bklyn. L. Rev. 219

„ Rach evcbbadekebenkives 66d6000e0 0¢uees es 22, 28

Boehm, State Interests and Interstate Commerce: A

Look at the Theoretical Underpinnings of Take-

over Legislation: 36 Wash. & Lee L. Rev. 733

741-746 „ 6, 27

Chatlos, The SEC v. Investors on Tender Offers, 56

Harv. Bus. Rev. 6-7 (Sept.-Oct. 1978) .......... 15

Cowett, Reorganizations, Consolidations, Mergers,

and Related Corporate Events Under the Blue

Sky. Laws: Part II—Constitutional Considera-

tions, 13 Bus. Lawyer 760 (1958) ............. 19, 23

TABLE OF AUTHORITIES ix

PAGE

Hearings on S. 510 Before the Subcomm. on Securi-

ties of the Senate Comm. on Banking and Cur-

rency, 90th Cong., Ist Sess. 33 (1967) .......... 10

H. Henn, Appendix 4, Checklist 10, ‘‘Foreign Cor-

porations’’, in 2 N.Y. Bus. Corp. Law 636-643

J ( cnlveDdccccsccdcdeacnteWenece 22

H.R. Rep. No. 1711, 90th Cong., 2d Sess. (1968) 5

Is the Takeover Game About to End, 15 Financial

World 59-60 (March 15, 19817 15

Kaplan, Foreign Corporations and Local Corporate

Policy, 21 Vand. L. Rev. 433 (1968) ........ 21, 22, 28

Langevoort, State Tender Offer Legislation: Inter-

ests, Effects and Political Competency, 62 Cornell

L. Bev. (N! ù)ůʒ)) z 2

Latty, Pseudo-Foreign Corporations, 65 Yale L. J.

187 (19GG) . ii 19, 21

Lipton, Takeover Bids in the Target’s Boardroom, 35

„eee 15

McCauliff, Federalism and The Constitutionality of

State Takeover Statutes, 67 Va. L. Rev. 295,

R . 6, 30

Memorandum of Securities and Exchange Commis-

sion, Amicus Curiae, Sun Life Group v. Stand-

ard Life Ins. Co., C.A. No. IP 80-246-C (5.0

Ind.), dated Mar. 12, 1980 at 4 555. 12

Moylan, State Regulation of Tender Offers, 58 Marq.

een 2

Note, Commerce Clause Limitations upon State Regu-

lation of Tender Offers, 47 S. Cal. L. Rev. 1133,

„„ ANT.( 00.55. 0. b0u Cee neceidehicbeteccecs 6

Note, The Constitutionality of State Takeover Stat-

utes: A Response to Great Western, 53 N.Y.U.

L. Rev. 872, 981-9800. 22 680

* TABLE OF AUTHORITIES

PAGE

Note, Kneeling to the SEC Rules: The Virginia

Takeover Act and SEC Tender Offer Rule

14d-2(b), 22 Wm. & Mary L. Rev. 487 (1981). .9, 15, 30

Reese & Kaufman, The Law Governing Corporate

Affairs: Choice of Law and the Impact of Full

Faith and Credit, 58 Colum. L. Rev. 1118 (958) . .19, 23

8. 318, 96th Cong., 2d Sess. 0 10. 24

Sargent, On the Validity of State Takeover 2050

tion: State Response to Mite and Kidwell, ——

Ohio St. L. J. —— (due for Oct. 1981 publica-

tion, manuscript at 58-6DI]IJ]J]J]J]JIJ. 5

SEC Exchange Act Rel.,

No. 54-1634, [1979] Fed. Sec. L. Rep. (CCH)

9 82,378 (Nov. 29, 19790):ũ 8

No. 34-16623, 3 Fed. Sec. L. Rep. (CCH) J 24,2841

‘SOME MED Rescadvcccctadcatsebeces te 12

Sec. Reg. & L. Rep. (BNA) (No. 606), F-1-F-4 (June

e 2

Kl.. e cabedecvawmees ene 8, 9, 14, 30

een 14

SEC Rule 14d-2(b), 17 C. F. R. 5 240. 14d-2(b)

Fee ee 8, 9, 14

SEC Rule 14-1, 17 C. F. R. § 240.14 -1 (19800) 14

Shapiro, State Takeover Laws, in Practicing Law In-

stitute, Twelfth Annual Institute on Securities

eee eden 2

Shipman, Some Thoughts About the Role of State

Takeover Legislation: The Ohio Takeover Act,

21 Case W. Res. L. Rev. 722 (1970) ........... 5, 23

Wilner & Landy, The Tender Trap: State Takeover

Statutes. and Their Constitutionality, 45 Ford-

ham L. Rev. 1, 16-17 (19760))): 6

In THE

Supreme Court of the United States

OCTOBER TERM, 1981

+

*

JAMES EDGAR,

Appellant,

against

MITE CORPORATION AND MITE HOLDINGS, INC.,

Appellees.

On Appea From Tue Unirep Srares Court

Or Apprats For Tue Seventu Circuit

1

*

BRIEF FOR NORTH AMERICAN SECURITIES

ADMINISTRATORS ASSOCIATION, INC. AS

AMICUS CURIAE

Interest of the Amicus Curiae

The North American Securities Administrators Asso-

ciation, Inc. (NASAA) is a non-profit voluntary member-

ship corporation. Membership in NASAA is open to all

state and provincial securities regulators and agencies in

the United States, Canada, and Mexico. Presently its

membership includes the state officials charged with the

enforcement of the blue sky laws of all the states (except

California), the District of Columbia, and Puerto Rico

as well as all the Canadian provinces. The purpose of

the organization is to deal with issues of common interest,

to further the enforcement of the state blue sky laws, and

to coordinate such state statutes with the federal securi-

ties laws by cooperating with the Securities and Exchange

Commission (SEC) in areas of mutual interest.

2

Thirty-five states in addition to Illinois have takeover

laws similar in purpose to the one whose constitutionality

is challenged in the case at bar.“ Most of these statutes

are administered by the state securities agencies which

are the members of NASAA. The decision of this Court

as to the constitutionality of the Illinois Business Take-

Over Act (Illinois Act), III. Rev. Stat. ch 121 1/2

F 137.51 et seq., will have far reaching impact upon these

other state takeover statutes and NASAA members, as

many of such statutes have one or more provisions

identical or similar in purpose to those challenged in the

present case. This case is the first in which this Court will

consider takeover statutes on their merits, the Court hav-

ing disposed of a previous appeal involving the Idaho

takeover statute on venue grounds in Leroy v. Great

Western United Corp., 443 U.S. 173 (1979).

Summary of Argument

The Illinois Act does not stand as an obstacle to the

accomplishment and execution of the full purposes and

objectives of Congress under the Williams Act. There-

fore, the Illinois Act is not constitutionally preempted by

the Williams Act, 15 USC § 78m(d)-(e) 78n(d)-(f) (1976),

and the SEC Rules thereunder. While the Illinois Act

as written, but not as interpreted by the Illinois Secretary

of State, suggests that it regulates questions of substan-

tive fairness in connection with takeover offers, such sub-

*See State of New York, Amicus Brief, p. 22 n. for a cita-

tion of the individual statutes. For surveys of the different

forms of state takeover tion see E. Aranow, H. Einhorn

& Berlstein, Developments in Tender Offers for Corporate Con-

trol 207-17 (1977); ; Langevoort, State Tender Offer Legislation:

Interests, Effects and Political Competency, 62 Cornell L. Rev.

213,219.40 (1977) and Moylan, State Regulation of Tender Offers,

58 Marq. L. Rev. 687,689-98 (1975). None of these surveys,

however, reflect the changes in the state schemes effected in 1980

and 1981. For a more recent, although still incomplete survey,

see Shapiro, State Takeover Laws, in Practicing 9 — Institute,

Twelfth Annual Institute on Securities tion 401-442 (1980).

1 ion Sec. 28 & L. Rep. (BNA) (No. 606), F-1-F-4 (June

3

stantive or merit regulation is not inconsistent with the

Congressional mandates of the Williams Act. The Wil-

liams Act adopts a full disclosure standard at the federal

level, but does not prohibit the application of traditional

state blue sky law standards of substantive or merit re-

view of such offers under the state acts including the Illi-

nois Act. Any incidental delay which may result from

the Illinois Act inures to the benefit of investors and is

therefore not inconsistent with Congressional objectives

under the Williams Act.

Congress has specifically permitted state regulation of

tender offers. The Illinois Act is not only a securities

regulatory statute in the traditional sense, but it is also

an organic corporate statute. Because it is a hybrid

statute, it serves two separate, but clearly legitimate in-

terests of the State of Illinois. As a securities regula-

tory statute, it seeks to protect the investors in the target

company residing in the State of Illinois. As an organic

corporate statute it seeks to protect all investors, whether

located within the State of Illinois or elsewhere, who own

securities of corporations incorporated under Illinois law

or which have a substantial nexus with the State by hav-

ing their executive offices and 10% of their capital within

the State. It accomplishes this goal by providing a rule

applicable to all shareholders governing the change of

control of the corporation similar to rules involving sale

of assets, mergers, consolidations, reorganizations, and

the solicitation of proxies. The benefits conferred upon

the shareholders by the Illinois Act far outweigh any

alleged burdens of compliance.

The decision of this Court should acknowledge the con-

stitutionality of the Illinois statute in its entirety under

both the Supremacy and Commerce Clauses. However,

should the Court feel compelled to invalidate one or more

provisions of the Illinois Act, it should limit its decision

in order to preserve those portions of the Illinois Act

and other state takeover statutes which are constitutional.

Further, it should provide Illinois and the other states

with guidance as to the specific constitutional infirmities

4

that the Court finds in the Illinois Act, so that Illinois

and other states may adopt takeover statutes which will

be constitutionally permissible.

ARGUMENT

POINT |

The Illinois Act is both a securities regulatory

measure and an organic corporate statute dealing

with internal corporate governance.

The key to the NASAA position on the constitutionality

of the Illinois Act lies in its belief that the Act is a

hybrid statute combining two different investor protection

concepts into a single statute. In one respect, it is a

traditional blue sky statute aimed at the protection of

Illinois investors. At the same time, it is an organic

corporate statute protecting investors wherever they are

located in connection with the change of control of the

target corporation. In this sense the Act is similar to

other traditional organic corporate statutes which control

the internal governance of a corporation in connection

with mergers, consolidations, sales of assets, reorganiza-

tions, and the solicitation of proxies.

The key section is Section 137.52-10 which defines a

„target company“ and reads:

‘Target Company’ means a corporation or other

issuer of securities (1) of which 10% of the outstand-

ing securities of the class of its equity securities

which is the subject of a takeover offer is held of

record by securityholders located in this State as

determined by post office address as shown on the

records of the issuer, or (2) which meets any two

of the following conditions:

(a) has its principal executive office in this State;

(b) is organized under the laws of this State;

(c) has at least 10% of its stated capital and paid-in

surplus represented in this State.

5

NASAA submits that the first of these jurisdictional

bases, that dealing with 10% stock ownership within the

state, is a traditional securities regulation provision aimed

only at the protection of Illinois shareholders and clearly

within the legitimate interests of the State of Illinois as

will be seen in Point III. The second basis, dealing

with incorporation within the state or substantial pres-

ence therein, is a conventional state corporate law con-

cept aimed at providing internal governance rules for

corporations in which Illinois has a strong state interest.

Again, this state interest will be developed in Point ITI.

The Seventh Circuit in the present case and the Fifth

Cireuit in Great Western United Corp. v. Kidwell, 577 F. 2d

1256, 1280 n.53 (5th Cir. 1978), rev’d on venue grounds

sub nom. Leroy v. Great Western United Corp., 443 U.S.

173 (1979), did not adequately evaluate the dual nature

of the jurisdictional bases of the statute. Had they done

so, NASAA submits that they would have reached an

opposite conclusion on both the Supremacy and Commerce

Clause issues. See AMCA International Corp. v. Krouse,

482 F. Supp. 929 (S.D. Ohio 1979); Wylain, Inc. v. TRE

Corp., 412 A.2d 338 (Del. Ch. 1980); Sharon Steel Corp.

v. Whaland, Cas. No. 80-333, —— A.2d —— (N. H. July

2, 1981); Strode v. Esmark, Inc., [1980] Fed. Sec. L. Rep.

(CCH) 997,538 (Ky. Cir. Ct. 1980), aff'd —— S. W. 2d

—— (Ky. App. Apr. 3, 1981).

The dual nature of the statute was recognized by Pro-

fessor Shipman in his article, Some Thoughts About the

Role of State Takeover Legislation: The Ohio Takeover

Act, 21 Case W. Res. L. Rev. 722, 740-756 (1970). He

stated:

An implicit premise of the Act is that a takeover bid

is essentially an internal affairs matter—one involv-

ing the relationships inter sese of the corporation,

its directors, officers, and stockholders—which Ohio

may reasonably regulate on a global basis.

Id. at 741-742. He then discusses the pros and cons of

such a position including the fact that Congress in adopt-

6

ing the Williams Act considered takeover bids to be sim-

ilar to proxy fights. H.R. Rep. No. 1711, 90th Cong., 2d

Sess. (1968).

Professor Shipman concludes:

[Flor the tendering securityholder in a securities

bid, the effects are similar to those resulting from a

merger, a classic internal affairs transaction.

Id. at 744-45. This concept has been recognized by the

majority of recent legal commentators who have written

in the area. See, e.g., McCauliff, Federalism and The

Constitutionality of State Takeover Statutes, 67 Va. L.

Rev. 295, 303-304 (1981); Boehm, State Interests and

Interstate Commerce: A Look at the Theoretical Under-

pinnings of Takeover Legislation, 36 Wash. & Lee L. Rev.

733, 741-746 (1979); Sargent, On the Validity of State

Takeover Regulation: State Response to Mite and Kid-

well, —— Ohio St. L. J. —— (due for Oct. 1981 publica-

tion), manuscript at 58-61; Note, The Constitutionality

of State Takeover Statutes: A Response to Great Western,

53 N. V. U. L. Rev. 872, 931-934 (1978).

Two articles noted by the Seventh Circuit have rejected

this concept on the basis that a takeover is nothing more

than a collection of individual sales of securities. Wilner

& Landy, The Tender Trap: State Takeover Statutes and

Their Comstitutionality, 45 Fordham L. Rev. 1, 16-17

(1976); Note, Commerce Clause Limitations upon State

Regulation of Tender Offers, 47 S. Cal. L. Rev. 1133, 1153-

55 (1974). However NASAA suggests this approach is

near-sighted and rather naive. If this were true there

would be no need for the Williams Act or the state take-

over statutes. The entire area could be regulated by the

anti-fraud provisions of the federal and state securities

acts.

As noted above, four courts have reached the conclu-

sion that the dual nature of the takeover statutes is sound.

NASAA would agree and urges the Court to concur.

7

POINT Il

Fama Illinois Act is not preempted by the Williams

The Court of Appeals based its conclusion that the IIli-

nois Act is preempted by the Williams Act on its inter-

pretation of the Congressional intent underlying the

Williams Act:

We therefore conclude, purely in light of the con-

gressional judgment and analysis, that tender offers

may not be unduly hindered (by grossly extended

delay under state law) to the detriment of investors.

We reiterate that we possess no independent insight,

based on evidence or research, about what the effect

of slight or interminable delay may be. But we think

the perspectives informing congressional legislation

are reasonably clear and are binding upon us. There-

fore, we conclude that the Illinois Act is preempted

by the Williams Act because the former (1) tends

inordinately to substitute regulatory control for in-

vestor autonomy, (2) provides for hearings the

institution of which may be indirectly delegated to

incumbent management and which are potentially in-

terminable in length, (3) provides for other delays

and mechanisms for delay which are potentially

grossly in excess of the delay mandated by Congress

and deemed by Congress to be appropriate to the

protection of investors and (4) provides for lengthly

prenotification delay, a requirement Congress specific-

ally rejected. 633 F.2d 498-9.

NASAA submits, however, that the Court of Appeals

erred in its conclusion because it misinterpreted the in-

tent of Congress in enacting the Williams Act and mis-

construed the effect the Illinois Act would have on a

tender offer.

NASAA agrees with the Court of Appeals that Con-

gress has neither expressly barred the states from regu-

lating tender offers, nor enacted so pervasive a regulatory

8

scheme that implicit preemption may be inferred. 633

F.2d 491. Congess has declared that states may regulate

tender offers provided that such regulation is not in con-

flict wtih the Williams Act. Securities Exchange Act

§ 28(a), 15 U.S.C. §78bb(a). Leroy v. Great Western

United Corp., 443 U.S. 173, 182 (1979). Where there is

no explicit or implicit preemption, the Illinois Act must

be upheld absent a showing that it is in conflict with the

Williams Act. Jones v. Rath Packing Co., 43 U.S. 519,

525-526 (1977). See Hines v. Davidowitz, 312 U.S. 52

(1941); Florida Lime d Avocado Growers, Inc. v. Paul,

373 U.S. 132 (1963).

NASAA submits that the Seventh Circuit erred in hold-

ing that the Illinois Act conflicts with the Williams Act

and that it is an obstacle to the execution of Congres-

sional objectives. NASAA in this brief will consider two

of the four grounds which the Seventh Circuit felt caused

the preemption of the Illinois Act: (1) that the Illinois

Act tends inordinately to substitute regulatory control for

investor autonomy, and (2) that the Act provides for other

delays and mechanisms for delay which are potentially

interminable in length. NASAA will not address the

remaining two points, but joins with the State of Illinois

in its brief in urging the Court to reverse these grounds

also.

NASAA has not addressed the point of prenotification

because it believes that the Court need not deal with this

issue or, in the alternative, need only consider it in the

limited factual context of this case. Since the filing of the

original complaint in this case, the SEC has adopted SEC

Rule 14d-2(b), 17 C.F.R. § 240.14d-2(b) (1980). This Rule

created and was intended by the SEC to create a conflict

between the prenotification filing requirements of the

various state statutes and the Williams Act and the Rules

thereunder. See SEC Exchange Act Rel. No. 34-1634,

[1979] Fed. See. L. Rep. (CCH) {82,373 (Nov. 29,

1979). NASAA contends that such Rule exceeds the

SEC statutory rule-making authority under the Williams

Act. See Note, Kneeling To The SEC Rules: The Vir-

ginia Takeover Act and SEC Tender Offer Rule 14d-2(b),

22 Wm. & Mary L. Rev. 487 (1981). That issue has been

litigated in Canadian Pacific Enterprises, Inc. v. Krouse,

506 F. Supp. 1192 (S.D. Ohio), appeal pend., No. 81-3083,

(6th Cir.), where the regulations were held to have been

validly adopted. Because of the Ohio litigation, the pre-

notification issue may not be ripe for final adjudication

until the validity of SEC Rule 14d-2(b) is before the Court.

In the interim, several states have eliminated the pre-

notification conflict with SEC Rule 14d-2(b) by amending

their takeover laws by statute or rule.“

Likewise, a number of states have eliminated the pro-

vision which the Seventh Circuit found offensive in See-

tion 147-57 A, requiring the Secretary to hold a hearing

when asked by a majority of the directors of the target

company or 10% of the shareholders.** III. Rev. Stat.

ch. 121 1/2 § 137-57 A. It should be noted that the Seventh

Circuit did not find offensive a hearing provision which

was discretionary with the state agency upon the request

of the directors or shareholders of the target company.

633 F. 2d at 495 n. 18.

A. The Substantive Review Provision of the Illinois Act

is not in conflict with the Williams Act.

The Seventh Circuit concluded that the substantive

merit review provision of Section 137.57 E allowing the Sec-

retary of State to determine that an offer was inequitable

and to seek an injunction barring it was in conflict with

the free market approach which it felt was the essence of

the Williams Act.* The Seventh Circuit said:

Illinois’ substitution of the judgment of its Secretary

* Connecticut, Idaho, Indiana, New Hampshire and Wisconsin.

% 14 states originally had such requirements, at least five,

Connecticut, Idaho, Indiana, New Hampshire and Wisconsin, have

repealed these provisions.

* Twelve states originally had such a requirement: Hawaii,

Idaho, Illinois, Indiana, Louisiana, Minnesota, Mississippi, New

Jersey, South Dakota, Tennessee, Texas and Wisconsin. At least

four, Idaho, Indiana, South Dakota and Wisconsin, have removed

this provision.

10

of State for an investor’s own assessment of the

equitability of a tender offer is patently inconsistent

with the Williams Act. . [T])his approach to in-

vestor protection by benevolent bureaucracy is pre-

empted by the conflicting approach of the Williams

Act, which contemplates unfettered choice by well-

informed investors. Both the House and Senate

Reports observed that Itjhis Bill is designed to make

the relevant facts known so that the shareholders have

a fair opportunity to make their decision.’ 633 F.2d

at 494. Footnotes and citations omitted.

The key to the Seventh Circuit’s position is the quote

from the House and Senate Reports and a statement of

SEC Chairman Cohen quoted at 633 F.2d at 494 n. 14

from Hearings on S. 510 Before the Subcomm. on Securi-

ties of the Senate Comm. on Banking and Currency, 90th

Cong., Ist Sess. 33 (1967). If the quoted passage reflects

Congressional intent to exclude any type of regulation

other than disclosure regulation, as the Seventh Circuit

claims, then the Court of Appeals is correct. However,

it is NASAA’s position that the quoted language does not

support that interpretation. Rather, NASAA believes that

the quoted language is nothing more than a statement

to the effect that the Williams Act follows the approach

of all the other federal securities-related statutes and

relies on full disclosure rather than the merit approach

often used at the state level in securities regulation. The

same is true of Chairman’s Cohen’s statement. It is not a

statement that he disagrees with the merit approach or

that the full disclosure approach is the only permissible

one compatible with the Williams Act, it is merely a state-

ment that the SEC will follow its traditional approach of

requiring full disclosure. In order to support its position,

NASAA points to three specific items.

First, the Williams Act was made a part of the Securi-

ties Exchange Act of 1934. That Act contains Section

28(a) which this Court in Leroy v. Great Western United

Corp., 443 U.S. 173, 182 (1979) said ‘‘was plainly intended

to protect, rather than to limit, state authority.“ As

11

NASAA noted in Point I, and as the Seventh Circuit

observed, the takeover statutes were not the type of ac-

tivities originally contemplated by Section 28(a) since

that Section preserves the right of the states to regulate

securities matters and it is NASAA’s position that the

takeover statutes are hybrid securities and organic cor-

porate statutes. However, it is clear that Section 28(a)

was intended to preserve the right of the states in se-

curities areas to continue the ‘‘benevolent bureaucracy“

approach of fair, just, and equitable review which had

long existed at the time of the passage of both the Se-

curities Act of 1933 and the Securities Exchange Act of

1934.

At the time of the passsage of the Williams Act, there

was only one state takeover statute, the Virginia Act,

Va. Code 1950 4$§ 13.1-528 et seq., a disclosure statute.

Therefore, NASAA believes that the SEC and Congress

did not form a strong opinion for or against merit regu-

lation of takeovers. As evidenced by the legislative his-

tory quoted by the Seventh Circuit, it merely continued

the traditional federal pattern of disclosure regulation.

However, NASAA submits that what limited opinion there

was favored the continuation of the existing pattern of

complementing state merit regulation.

The key to Congressional intent, NASAA submits, lies

in the fact that Congress elected to insert the Williams

Act into the existing Exchange Act which already con-

tained Section 28(a). In 1968, under Section 28(a), state

merit regulation and federal full disclosure had success-

fully co-opted for some 34 years in the securities area.

Their complementary, rather than conflicting, nature was

well known and considered desirable. NASAA urges that,

by inserting the Williams Act in the 1934 Act, Congress

consciously elected to continue this established comple-

mentary pattern into the takeover area as state statutes

developed.

This conclusion is further suppogted by NASAA’s sec-

ond and third points. The SEC, the agency charged with

12

administratively interpreting the Williams Act, has con-

sistently taken the position that merit regulation of take-

overs in state or federally regulated industries, such as

insurance, banking, and public utilities, is not inconsistent

with the Williams Act. Nor did Congress itself consider

merit regulation inconsistent with the Williams Act when

it later passed the Hart-Scott-Rodino Act requiring sub-

stantive review in the anti-trust field.

Second, the SEC is on record as indicating that merit

regulation is consistent with the Williams Act in connec-

tion with certain regulated industries. In SEC Exchange

Act Rel. No. 16384, [1979] Fed. Sec. L. Rep. (CCH) 82,

373 (Nov. 29, 1979), at p. 82, 584, the Commission acknowl-

edged the validity of federal merit review of regulated

industry takeovers when it said:

Thus, it appears that a tender offer which is appro-

priately conditioned upon obtaining the necessary regu-

latory approval may be published or sent or gun in

compliance with Rule 14d-2(b) without conflicting with

such statutes.

See also Exchange Act Rel. No. 34-16623, 17 C.F.R.

§ 241.6623, 3 Fed. Sec. L. Rep. (CCH) { 24, 2841 (Mar. 5,

1980), question and answer 5.

Both the SEC and the District Court recognized the

right of a state to conduct merit regulatory review of a

regulated industry in Sun Life Group, Inc. v. Standard

Life Ins. Co., [1979-80] Fed. Sec. L. Rep. (CCH) 7 97,314

(S. D. Ind. 1980); Memorandum of Securities and Exchange

Commission, Amicus Curiae, Sun Life Group v. Standard

Life Ins. Co., C. A. No. IP 80-246-C (S. D. Ind.), dated Mar.

12, 1980 at 4-5.

Finally, Congress itself subjected takeover bids to merit

regulation when it passed the provisions of the Hart-Scott-

Rodino Antitrust Improvements Act in 1976 requiring

antitrust review by the Department of Justice the Fed-

eral Trade Commission (FTC). 15 U.S.C. §18a (1976).

If merit regulation in regulated industries at both the

state and federal level and substantive review for anti-

13

trust purposes are consistent with the Williams Act, then

why is not merit regulation under state takeover acts also

consistent? Review under the Hart-Scott-Rodino Act and

by regulatory agencies other than the securities commis-

sioners clearly interfere with the free market concept

which the Seventh Circuit finds paramount in the Williams

Act. Yet such review is clearly contemplated. NASAA

submits that merit review under the state takeover statutes

is also consistent with the Williams Act and that the

Seventh Circuit was in error concluding otherwise.

B. The delay caused under the hearing provision of the

Illinois Act does not make it in conflict with the

Williams Act.

The Seventh Circuit concluded that the delay caused

by the hearing provision of the Illinois Act, III, Rev. Stat.,

ch. 121 1/2 § 137.57, caused the Illinois statute to be in

conflict with the Williams Act. The essence of its holding

is found in the following statement:

[TIhere is no evidence in the record about what actual

effect of the potential for delay, inherent in the IIli-

nois Act, has been. In absence of such evidence we

ought not to second-guess Congress’ judgment that

delay grossly in excess of that contemplated by the

Williams Act redounds to the detriment of stock hold-

ers by substantially deterring the making of tender

offers.

633 F.2d at 498.

NASAA submits that this statement contains three con-

clusions, all of which are incorrect. First, it concludes

that the delay under the Illinois Act is ‘‘ grossly in excess’’

of what is allowed in the Williams Act. Second, it con-

cludes that Congress felt that delay was contrary to the

purpose of the Williams Act. And finally, it concludes

that delay is detrimental to investors.

The Illinois Act provides for a hearing to be called

within 15 business days after the filing and the hearing

14

to be held within 10 business days after the request. III.

Rev. Stat., ch. 121 1/2, §§ 137.57 A, C. There is no time

set for the hearing to be concluded, but the Secretary

must render his decision within 15 business days after

the conclusion of the hearing. Thus, as a maximum the

process will take 40 business days after the filing exclud-

ing the time necessary for the hearing. This is a max-

imum; there is no indication that in actual practice that

such would be the case. Is this delay grossly in excess

of the time under the Williams Act?

As the Seventh Circuit and most people prior to the

adoption of SEC Rule 14d-2(b), 17 C. F. R. 5 240.14d-2(b)

{1980), contemplated, the offeror would file his notice with

the states 20 days before making the offer under the

Williams Act. In fact, SEC Rule 14d-2(b) was specifically

adopted to place the Williams Act in conflict with this 20

day pre-filing provision. Thus, the 40 business day period

under the Illinois Act began to run 20 business days

before an offer was made under the Williams Act. There-

fore, half of the hearing delay runs before the Williams

Act comes into play.

The Williams Act itself requires a 10 day waiting period.

Because the SEC found that this period was too short

and tipped the supposedly neutral scheme of the Williams

Act too much in favor of the offeror, see SEC Exchange

Act Rel. No. 34-16384, [1979-80] Fed. Sec, L. Rep. (CCH)

82,373 (Nov. 29, 1979), Rule 14e-1, 17 C. F. R. 5 240.14e-1

(1980), requiring the offer to be open for a period of 20

business days was adopted. When the remaining 20 busi-

ness day delay is measured against this standard, NASAA

submits that it is not grossly excessive.

Further, NASAA submits that Congress does not ob-

ject to delay under the Williams Act. Much of the legis-

lative history which the Seventh Circuit used to support

its conclusion came from its consideration of the Hart-

Scott-Rodino Antitrust Improvements Act of 1976, 15

U.S.C. § 18a (1976). However, that Act requires a filing

with the FTC and the Department of Justice in the case

of certain takeover offers. There follows a 15 day wait-

15

ing period which can be extended another 10 days by

the Justice Department or the FTC. Thus, in connection

with tender offers, there is superimposed a 25 day poten-

tial administrative delay mandated by the Hart-Scott-

Rodino Act. This administrative delay can be further

extended by court order. It is hard to reconcile such

delay under that Act with the conclusion of the Seventh

Circuit that the Williams Act does not allow delay.

Finally NASAA submits that there is much evidence

that delays are helpful to investors and not detrimental.

Indeed, studies demonstrate that during the period be-

tween 1974 and 1980, taking all competitive hostile take-

over bids into consideration, shareholders reaped $1.7

billion in premiums over the original offer price (rather

than the lower market price), which premiums are at-

tributable to extended time periods under state takeover

laws. See, e.g., Is the Takeover Game About to End, 15

Financial World 59-60 (March 15, 1981); Chatlos, The

SEC vs. Investors on Tender Offers, 56 Harv. Bus. Rev.

6-8 (Sept.-Oct. 1978). Another study of thirty-six un-

solicifed tender offers which were rejected by the target

company between the end of 1973 and June 1979 indicates

that more than half of the targets have their securities

presently selling on the open market for more than the

rejected offering price or were taken over by another

company at a price higher than the first offering price.

Lipton, Takeover Bids in the Target’s Boardroom, 35

Bus. Law. 101, 106 (1979); Note, Kneeling to The SEC

Rules: The Virginia Takeover Act and SEC Tender Rule

14d-2(b), 22 Wm. & Mary L. Rev. 486, 513 (1981). Still

another study of 85 takeovers from January 1, 1976 to

June 8, 1979, shows that in the case of virtually every

company which initially resisted takeover and was subse-

quently acquired, the shareholders have received a price

higher than the original offering price. Unpublished Study

of Goldman, Sachs & Co., cited in Note, Kneeling to The

SEC Rules: The Virginia Lakeover Act and SEC Tender

Offer Rule 14d-2(b), supra.

This type of information has led at least three courts

to conclude that the delay caused by state takeover stat-

16

utes similar to that of Illinois is not inconsistent with

the Williams Act. ACA International Corp. v. Krouse,

482 F. Supp. 929 (S.D. Ohio 1979); Strode v. Esmark,

[1980] Fed. See. L. Rep. (CCH) $97,538 (Ky. Cir. Ct.

1980), af d —— S8.W.2d —— (Ky. App. Apr. 3, 1981);

Sharon Steel Corporation v. Whaland, Cas. No. 80-333,

—— A.2d —— (N. H. July 2, 1981). NASAA submits that

this Court should so hold in the case at bar.

POINT III

The Illinois Statute Reasonably Regulates Legiti-

mate and Important State Interests.

The plenary authority to regulate interstate commerce is

given to Congress under the Commerce Clause. Gibbons

v. Ogden, 22 U.S. 23 (1824). This power does not prevent

the states from adopting legislation on matters affecting

interstate commerce. Rather, states have always retained

their authority to govern in areas of local concern. See

e.g., Southern Pacific Co. v. Arizona, ex rel. Sullivan, 325

U.S. 761, 767 (1945). A successful challenge to the Illinois

Act or any other such statute must overcome a strong

presumption of the statute’s validity and demonstrate that

the statute not only does not further legitimate important

state interests, but also that it impermissibly burdens

interstate commerce.

A. There is a strong presumption of validity of state

legislation in areas traditionally within the regulatory

powers of the states, such as shareholder relations

with corporations and corporate mergers, combina-

tions, and change of control.

A strong presumption of validity of state legislation

exists in areas traditionally within the police powers of

the state. Bibb v. Navajo Freight Lines, Inc., 359 U.S.

520, 529 (1959). This presumption of validity cannot be

overcome unless the local benefits are ‘‘so slight or prob-

lematical as not to outweigh the national interest .’’.

Southern Pacific Co. v. Arizona, 325 U.S. at 776. Thus,

17

under the Commerce Clause, a state statute with respect

to a legitimate state interest will be sustained unless the

burden of interstate commerce is clearly shown to out-

weigh the state interest. See also, O’Gorman v. Hartford,

282 U.S. 251 (1931). As this Court said in Boston d

Maine Railroad Co. v. Armburg,

The interstate commerce clause did not withdraw

from the states the power to legislate with respect

to their local concerns, even though such legislation

may indirectly and incidentally affect interstate com-

merce and persons engaged in it.

285 U.S. 234, 238 (1932). Moreover, when a state statute

is challenged under the Commerce Clause, it must be pre-

sumed that the historie police powers of the state were

constitutionally exercised. See e.g., Rice v. Santa Fe

Elevator Corp., 331 U.S. 218, 230-31 (1947).

This presumption of constitutionality is particularly

important in areas such as corporate regulation which

have been traditionally left to the states, see, e. g., Santa

Fe Industries, Inc. v. Green, 430 U.S. 462, 479 (1977);

Piper v. Chris-Craft Industries, 430 U.S. 1, 40-41 (1977),

and securities regulation where the federal and state

governments have shared regulatory responsibility. See,

e.g., Hall v. Geiger-Jones Co., 242 U.S. 539 (1917); Mer-

rick v. N. W. Halsey d Co., 242 U.S. 568 (1917); Caldwell

v. Sioux Falls Stock Yards Co., 242 U.S. 559 (1917).

B. The Illinois Act does regulate a legitimate and legis-

latively-determined important interest of the State

of Illinois.

The key to determining whether the Illinois Act regulates

a legitimate and important interest of the State of Illinois

is to examine the purpose for which the statute was passed.

The acknowledged purpose of the Illinois Act, like all

other takeover statutes and the Williams Act itself, is

investor protection. Leroy v. Great Western United Corp.,

443 U.S. 173 (1979); Piper v. Chris-Craft Industries, Inc.,

430 U.S. 1 (1977). However, the protection afforded under

18

the Illinois Act, like most takeover statutes, is not limited

to Illinois investors. The Illinois Act is clearly intended

to have extraterritorial effect. Under Section 137.57 E,

the Illinois Secretary of State is required to determine, if

a hearing is held: (1) that the offer makes full and fair

disclosure; (2) that it is not inequitable; and (3) that the

offer is being made to Illinois offerees on substantially

equal terms. III. Rev. Stat. ch 121 1/2 5 137.57 E. If he

determines that these conditions are not met then he is

empowered to seek ar injunction under Section 137.62

against the making of the offer, not only in the State of

Illinois, but elsewhere as well. Ill. Rev. Stat. ch 121 1/2

§ 137.62.

It is this extraterritorial effect of the statute which

caused the Seventh Circuit in the case at bar and the

Fifth Cireuit in Great Western United Corp. v. Kidwell,

supra, to include that the Illinois and Idaho Acts, re-

spectively, did not serve legitimate state interests. NASAA

submits that both courts reached an improper conclusion

on the state interest issue because neither court adequately

considered all the jurisdictional bases of the statutes as

identified in the statutes themselves.

The Illinois Act in Section 137.52-10 indicates two sep-

arate jurisdictional bases: (1) if 10% of the outstanding

securities of the class of equity securities subject to the

tender offer are owned by Illinois security holders of

record; or (2) if any two of the following three conditions

are present (a) the target company has its principal

executive office in Illinois; (b) target company is organ-

ized under the laws of the State of Illinois; or (e) the

target company has at least 10% of its stated capital and

paid-in surplus in the state. III. Rev. Stat. ch. 121 1/2

§ 137.52-10.

NASAA submits that the first of these is a traditional

securities regulation basis. Except as noted below in sub-

point E, where it is necessary to give extraterritorial ef-

fect to the local statute to protect the effect of the statute

within the enacting jurisdiction, such statutes are not to

19

be given extraterritorial effect. Thus, the primary goal

here is not to protect investors in general wherever they

live, but rather to protect Illinois investors. To do so,

however, may require that Illinois incidentally protect

other states’ investors also. The second jurisdictional

basis, however, is not a securities regulation basis, but

derives from organic corporate law. It does not purport

to protect only the Illinois investors, rather it purports to

protect all the securities holders of the target corporation

wherever they are located.

C. Illinois as a matter of organic corporate law has a

legitimate interest in having its statutes applied

extraterritorially to govern the internal affairs of any

corporation organized under its laws.

The first branch of the second jurisdictional basis is

that the target company is an Illinois corporation because

it is organized under the laws of Illinois. It has long

been recognized by this Court and commentators that

the corporate law of a particular state will be given

extraterritorial effect when governing the internal affairs

of a corporation. See, e.g., Bank of Augusta v. Earle,

38 U.S. (12 Pet.) 519 (1839); Reese & Kaufman, The

Law Governing Corporate Affairs: Choice of Law and

the Scope of Full Faith and Credit, 58 Colum. L. Rev.

1118 (1958); Latty, Pseudo-Foreign Corporations, 65 Yale

L.J. 137 (1955). The application of the law of the place

of incorporation has also been applied to extraordinary

corporate transactions such as mergers, consolidations,

and other reorganizations, See, e.g., Cowett, Reorganiza-

tions, Consolidations, Mergers, and Related Corporate

Events Under the Blue Sky Laws: Part IT— Consti-

tutional Considerations, 13 Bus. Lawyer 760, 766 (1958),

where Mr.Cowett takes the position that the blue sky law

of the state in which the investors are located would not

apply, but that the law of the state of incorporation

would control.

As pointed out in Point I, NASAA takes the position

that a takeover bid involves not only the collective sale

20

by individual shareholders, but also the effective transfer

of control of the corporation. Therefore, a takeover bid

should not be treated exclusively as a securities regulation

matter, but should be treated as a matter involving the

internal governance of the corporation as well. This latter

element — the internal governance aspect —— is tradi-

tionally regulated by state organic corporate law. Thus,

as to this aspect, takeover bid regulation is an organic

corporate matter governed not by securities concepts but

rather by state organic corporate law principles.

The Seventh Circuit in the case at bar, as did the Fifth

Cireuit in Kidwell, supra, 577 F.2d at 1280 n.53, recog-

nized the validity of the extraterritorial application of

the takeover statutes had the target corporation involved

been incorporated in either Illinois or Idaho. This con-

elusion coupled with the above discussion would suggest

that incorporation within the state alone would provide

the necessary state interest to prevent invalidation on

Commerce Clause grounds because of the extraterritorial

application of the statute. It was so held in Wylain, Inc.

v. TRE Corp., 412 A.2d 338 (Del. Ch. 1980), where the Dela-

ware court concluded that the Delaware Takeover Statute

was constitutional whether classified as an internal govern-

ance statute or merely regulating affairs between cor-

porate shareholders and third parties.

The Illinois statute does not attempt to occupy the en-

tire constitutionally acceptable field, but requires the

presence of one or the other of the two remaining juris-

dictional branches within the second basis. Other courts

have held that incorporation plus additional state interest

are sufficient to support a takeover statute. AMCA Inter-

national Corp. v. Krouse, 482 F. Supp. 929 (S.D. Ohio

1979) ; Strode v. Esmark [1980], Fed. Sec. L. Rep. (CCH)

97,538 (Ky. Cir. Ct. 1980), fd —— S.W.2d --— Ky.

App. April 3, 1981). Chicago Rivet in the case at bar

was not an Illinois corporation; consequently this juris-

dictional branch was not applicable.

D. Illinois as of organic corporate law has a

in having its statutes applied

extraterritorially to govern the internal affairs of any

corporation which has its executive office in the state

or which has at least 10% of its stated capital and

paid-in surplus in the state.

The second and third jurisdictional branches are that

the target corporation had its executive office in Illinois

and that it had 10% of its capital and paid-in surplus

in the state. These items will be considered together

since the Illinois Act requires two out of the three

branches to be present before jurisdiction attaches and

the necessary state interest would be supplied by the fact

of incorporation within the state if that were one of the

two branches. Further, it appears that these were the

two items relied upon by the Illinois Secretary of State.

The Seventh Cireuit did not address these jurisdictional

grounds in its opinion. The Fifth Circuit dismissed sim-

ilar grounds under the Idaho statute in a single footnote.

Kidwell, supra, 577 F.2d at 1280 n. 53. With due respect

to both courts, NASAA submits that this constituted an

error of major proportions. While it has long been recog-

tnized, as oulined in previous subpoint III B that the law of

the state of incorporation will normally govern the internal

operations of a corpore on, in recent years there has

been growing recognition by both the courts and the legal

commentators that a state, other than the state of incor-

poration, may have a sufficient nexus with a particular

corporation to replace the law of incorporation with its

own substantive corporate law. See, e.g., German-Amer-

ican Coffee Co. v. Diehl, 216 N.Y. 57, 109 N. E. 875 (1915)

(per Cardozo, J.); Toklan Royalty Corp. v. Tiffany, 193

Okl. 120, 141 P.2d 571 (1943); State ex rel. Weede v. Iowa

Southern Utilities Co., 231 Iowa 784, 2 N.W.2d 372, sup-

plemental opinion, 4 N.W.2d 869 (1942); Latty, Pseudo-

Foreign Corporations, 65 Yale L.J. 137 (1955); Kaplan,

Foreign Corporations and Local Corporate Policy, 21

Vand. L. Rev. 433 (1968); Baraf, The Foreign Corpora-

22

tion—A Problem in Choice-of-Law Doctrine, 33 Bklyn. L.

Rev. 219 (1967).

New York has long imposed certain provisions of its

corporate statutes on foreign corporations doing business

in New York. The original statute enacted in 1897, N.Y.

Sess. Law 1897, ch. 384, § 4, did not place any limitations

on the applicability of these sections other than that the

corporation had to be doing business in New York. Kap-

lan, Foreign Corporations and Local Corporate Policy, 21

Vand. L. Rev. 433, 448 (1968). In the more than sixty

years that this statute was in effect it was never chal-

lenged on constitutional grounds even though there were

numerous cases brought under it imposing liability out-

side the borders of New York. Kaplan, swpra, at 449.

See generally, Baraf, The Foreign Corporation—A Prob-

lem In Choice-of-Law Doctrine, 33 Bklyn. L. Rev. 219

(1967). In 1963, the New York statute was amended to

limit the application to corporations which did more than

50% of their business in New York and were not listed

on a national stock exchange. See H. Henn, Appendix 4,

Checklist 10, Foreign Corporations’, in 2 N.Y. Bus.

Corp. Law 636-643 (McKinney 1963).

While originally applied by Professor Latty to corpora-

tions which had all of their business and most of their

shareholders in a state other than their state of incorpo-

ration, the reach of the doctrine was extended by Pro-

fessor Kaplan to ‘‘quasi-foreign’’ corporations and ‘‘na-

tional’’ corporations. He defined a ‘‘national’’ corpora-

tion as one which is incorporated in one state, has its main

offie / in another, and business activities scattered through-

out the country. Kaplan, supa, at 439. A ‘‘quasi-for-

eign’’ corporation he defined as a corporation incorporated

in one state but doing business in two or three other states

in relatively equal shares. Kaplan, supra, at 439.

Even commentators such as Professors Reese and

Kaufman and Mister Cowett, who argue strongly for the

application of the law of the state of incorporation, recog-

nize the validity of the pseudo-foreign corporation con-

23

cept and the ability of the host state to impose its law.

Reese & Kaufman, The Law Governing Corporate Affairs:

Choice of Law and the Impact of Full Faith and Credit,

58 Colum. L. Rev. 1118 (1958); Cowett, Reorganizations,

Consolidations, Mergers, and Related Corporate Events

Under the Blue Sky Laws, 13 Bus. Lawyer 760, 766 (1958).

None of these authorities find that the imposition of

the local corporate law on a foreign col poration by the

host state is unconstitutional. Professor Kaplan sum-

marized saying:

There is apparently no constitutional barrier pres-

ently raised against such action by the host state; it

also appears within the power of the host state to

impose conditions of entry which require that the

foreign corporation be bound by specified statutory

requirements concerning the internal affairs of the

corporation.

Kaplan, supra, at 460.

This Court has considered and upheld provisions of the

California Corporation Code imposing liability upon share-

holders of a foreign corporation doing business in Cali-

fornia. Pinney v. Nelson, 183 U.S. 144 (1901) and Thomas

v. Mathiessen, 232 U.S. 221 (1914).

The application of the pseudo-foreign corporation doc-

trine has also been approved by a number of commenta-

tors as a proper justification for state jurisdiction under

state takeover statutes similar to the Illinois provision.

Professor Shipman, discussing the Ohio Takeover Act,

recognized the extraterritorial effect of the Act and justi-

fied it on the basis of the pseudo-foreign corporation

doctrine. Shipman, Some Thoughts About the Role of

State Takeover Legislation: The Ohio Takeover Act, 21

Case W. Res. L. Rev. 722, 751-756 (1970). He indicates

that he feels that the legislature has sufficient nexus with

any ‘‘Ohio-based’’ corporation to sustain the application

of the Ohio Takeover Act to that corporation. Id. at 755.

He then defines an Ohio-based corporation to include cor-

24

porations having either its principal place of business or

substantial assets in the state.

Professor Shipman’s position was later adopted by the

American Law Institute and Professor Loss in drafting

the proposed Federal Securities Code. The Code in

Section 1904(e) pre-empts all state takeover statutes ex-

cept those which limit their regulation to takeovers in-

volving corporations which have their principal place of

business within the regulating state as well as 50% or

more of their shareholders, either legally or beneficially,

located in the state. American Law Institute, Federal

Securities Code Proposed Official Draft 5 1904(c) (1980).

This same scheme was recommended to Congress by the

SEC in its proposed amendments to the Williams Act.

S. 3188, 96th Cong., 2d Sess. §10. While this provision

does require the additional nexus of stock ownership

within the state, it clearly recognizes that a state other

than a state of incorporation, the state where the principal

place of business is located, the equivalent of the Illinois

requirement of the corporate executive office be located

within the state, does have a legitimate interest in regu-

lating takeover bids for corporations not incorporated

within the state.

As to the necessity of coupling the principal place of

business requirement with stock ownership, Professor

Kaplan, commenting upon the New York provisions dis-

cussed above, which required 50% of foreign corporate

business within the state before application said:

Whether the criteria selected by New York as broad

or as comprehensive as they might constitutionally

be, is unlikely. Another state, following the same

theory of defining the area in which its desires to

have its local policy applied, might select other cri-

teria, thereby embracing different categories of for-

eign corporations.

Kaplan, supra, at 449. Emphasis added.

NASAA submits that the requirement that the principal

place of business or executive office located within the

25

state, as under the Illinois Aci, is sufficient nexus to provide

legitimate state interest so that the host state may regulate

he takeovers of such corporations. However, clearly, this

state interest is present when the principal place of busi-

ness concept is joined with some other nexus such as stock

ownership, assets located in the state, or, as in the Illinois

Act a percentage of capital located within the state.

This position won favorable approval from the Supreme

Court of New Hampshire in the most recently decided

takeover case. Sharon Steel Corp. v. Whaland, Case No.

80-333, —— A.2d —— (N.H. July 2, 1981). N.H. RSA

§421-A:2 VI defines a takeover bid to include a bid for

the securities of any corporation formed under the laws

of New Hampshire; having its principal place of busi-

ness in New Hampshire; or having its principal executive

office in the state. Sharon Steel Corporation made an

offer for the stock of Nashua Corporation. Nashua was

a Delaware corporation with its principal place of busi-

ness in New Hampshire and between 10-15% of its shares

were owned by New Hampshire residents. The court

turned back a claim that the statute was a burden on

interstate commerce saying:

The State of New Hampshire has a legitimate local

interest in regulating takeover attempts involving a

possible change of control of companies headquartered

in this State who likely would have a disproportion-

ately large percentage of stockholders located here.

Slip Opinion at 14-15.

NASAA echoes the statement of the New Hampshire

court and urges thé Court to find, contrary to the Seventh

Circuit, that the State of Illinois had a legitimate state in-

terest in controlling the possible change of control of

Chicago Rivent under the standards of the Illinois Act.

Chicago Rivet had its headquarters in Illinois and ap-

parently more than 10% of its capital and paid-in surplus

there. Further, as the Seventh Circuit identified, 27% of

Chicago Rivet’s shareholders of record were Illinois resi-

dents and they held 43% of Rivet’s outstanding shares.

26

633 F.2d at 501. Thus under the facts of the case at

bar, the Illinois jurisdictional tests are more than met,

and Illinois has a strong and legitimate state interest in

the transfer of control of Rivet, even though Rivet is not

an Illinois corporation.

E. Where Illinois has a legitimate state interest, the

protection of such interest will not be defeated

under the Commerce Clause because protection of

that interest requires that state action to be given

extraterritorial effect.

This Court in a long series of cases has held that the

mere fact that local action also has a non-local effect does

not necessarily vitiate a state scheme of regulation. See,

€.g., Minnesota v. Clover Leaf Cremery Co., —— US.

——, 66 L. Ed. 647, 649 (1981); Raymond Motor Trans-

portation, Inc. v. Rice, 434 U.S. 429, 440 (1978) Huron

Cement Co. v. Detroit, 362 U.S. 761, 770 (1945). NASAA

submits that the Court should reach the same conclusion

when the State of Illinois acts upon the first of its juris-

dictional bases—when 10% or mere of the outstanding

shares sought are owned by Illinois residents, III. Rev.

Stat. ch 121 ½, §1387.52-10(1). Here, clearly, the State’s

interest is in protecting the shareholders resident within

its borders, and not protecting the residents of other

states. Both the Seventh Circuit in the present case and

the Fifth Cireuit in Kidwell, supra, acknowledged that

protection of its own citizens would be a legitimate state

interest.

The problem seen by the Fifth Cireuit in Kidwell and

the Seventh Cireuit in the present case is the extraterri-

torial effect of the state agency’s action under the take-

over statute. NASAA submits that the non-local impact

under this jurisdictional bases is merely incidental, albeit

necessary to protect the local Illinois interest of Illinois

investor protection. Without the extraterritorial effect

of the state action to stop the entire takeover bid, the

takeover could be completed and control of the corporation

shifted to the detriment of Illinois and its shareholders.

An injunction which was limited in its scope to restrain-

27

ing the takeover bid within the borders of Illinois would

be ineffective. Western Airlines, Inc. v. Sobieski, 191 Cal.

App.2d 399, 12 Cal. Rptr. 719 (1961), subsequent decisions

Western Airlines, Inc. v. Schutebank, 258 Cal. App.2d 291,

66 Cal. Rptr. 293 (1968) and People v. Western Airlines,

Inc., 258 Cal. App.2d 286, 66 Cal. Rptr. 316 (1968). The

offeror could merely purchase the securities necessary to

complete his takeover from shareholders residing in other

states. Thus while the takeover would clearly impact upon

Illinois and its residents, Illinois would be powerless

to act.

There are a number of situations involving corpora-

tions where state statutes which are normally accorded

only territorial effect are allowed to impact outside the

state’s boundaries without running afoul of the Commerce

Clause. The state ‘anti-trust laws are one such example.

See Boehm, State Interests and Inierstate Commerce: A

Look at the Theoretical Underpinnings of Takeover Leg-

islation, 36 Wash. & Lee L. Rev. 733, 744 (1979). In

Hammond Packing Co. v. Arkansas, 212 U.S. 322 (1909),

where Argansas was allowed to exclude a corporation

from doing business in the state for anti-trust activity

which took place outside Arkansas and which had no im-

pact within the state. See also Exxon v. Governor of

Maryland, 437 U.S. 117 (1978); Osborn v. Oelin, 310 U.S.

53 (1940).

Another example is the New York foreign corporation

restrictions discussed in the last subpoint. One of these

restrictions is on the ability of the foreign corporation

to pay dividends when allowed by the state of incorpora-

tion, but not allowed by New York law. If this provision

was not given extraterritorial effect, New York could

prohibit the payment of dividends to New York residents,

but not the payment to non-residents. This would defeat

the purpose of the statute which is to prevent the dissi-

pation of corporate assets and would cause shareholders

to be treated unequally. In a series of cases, the New

York restrictions have been upheld, Jrving Trust Co.

v. Maryland Casualty Co., 83 F.2d 168 (2d Cir.) (per

L. Hand, J), cert. denied, 299 U.S. 571 (1936); Interna-

tional Ticket Scale Corp. v. United States, 165 F.2d 358

(2d Cir, 1948); International Paper Co. v. United States,

88 F. Supp. 891 (Ct. CI. 1950); German-American Coffee

Co. v. Diehl, 216 N.Y. 57, 109 N. E. 875 (1915) (per Car-

dozo, J.), discussed in Baraf, The Foreign Corpoartion—

A Problem in Choice-of-Law Doctrine, 33 Bklyn. L. Rev.

219 (1967).

Probably the best example of the extraterritorial appli-

cation of a state statute designed to protect local interest

is Western Airlines, Inc. v. Sobieski, 191 Cal. App.2d 399,

12 Cal. Rptr. 719 (1961); subsequent opinions Western

Airlines, Inc. v. Schutzbank, 258 Cal. App. 291, 66 Cal.

Rptr. 292 (1968) and People v. Western Airlines, 258

Cal. App.2d 286, 66 Cal. Rptr. 316 (1968). This case is

directly in point in that the California Corporation Com-

missioner determined that the amendment of Western's

charter to eliminate cumulative voting constituted a sale

of securities under the California Securities Act and was

not fair, just, and equitable. Western was a Delaware

corporation and a Delaware court had ordered the airline

to elect its directors under straight voting according to

the amended charter. The California Commissioner

sought and received an injunction prohibiting such elec-

tion. The appellate court upheld the Commissioner

against constitutional attack. 191 Cal, App.2d 399, 411, 12

Cal. Rptr. 719, 727 (1961). See also, Kaplan, supra, 453-

457.

In this case granting an injunction which was only ef-

fective in California would not work. In order to protect

the California interest in seeing that the change in voting

rights was fair, just, and equitable, it was necessary to

bar straight voting by all shareholders whether located

in or outside California.

NASAA submits that the same is true in the present

case. To allow a takeover offer to continue in viola-

tion of the Illinois Act outside Illinois would have the

effect of undercutting the legitimate state interest of

protecting Illinois investors. Therefore the protection of

29

non-Illinois investors is merely incidental to an act aimed

at the protection of Illinois’ own residents and should be

held not to violate the Commerce Clause. Illinois does

have a valid interest to protect and has used the only

method available to it to protect that interest. See also

Travelers Health Association v. Virginia ex rel. State

Corporation Commission, 339 U.S. 643 (1950) and South

Carolina Highway Dept. v. Barnwell Bros., 303 U.S. 177

(1938).

F. The Illinois statute does not place an impermissible

burden on interstate commerce when weighed against

the legitimate local interest sought to be protected.

Both the Seventh Circuit in the present case and the

Fifth Circuit in the Kidwell case, supra, spent little time

attempting to balance the state interests claimed against

the purported burden of interstate commerce as required

by this Court’s decision in Pike v. Bruce Church, Inc., 397

U.S. 137 (1970). Judge Wisdom in Kidwell, supra, at

1286 disposed of the issue by the conclusory statement

that: ‘‘Idaho’s law halted over 31 million dollars of in-

terstate commerce.“ The Seventh Circuit made reference

to a 23 million dollar impact and the fact that two or

more states might attempt to assert jurisdiction, admitting

that this was muted by the comity provision in the Illinois

Act, allowing Illinois to defer to another state. 633 F.2d

at 502 n. 31. The Seventh Circuit did not point out that

Pennsylvania, the only other state which appeared to have

any interest in the takeover of Chicoga Rivet, refused to

take jurisdiction of the takeover.

This leads NASAA to believe that the real issue is

whether the states have sufficient local interest to adopt

takeover statutes and once this has been decided favor-

ably to them, there will be little problem with the balanc-

ing issue. In light of this conclusion, NASAA will not

extend its amicus brief on this issue beyond several very

simple observations, but will adopt the arguments made

on this point by the State of Illinois iis brief and by the

State of New York in its amicus brief.

30

The statements by the Seventh and Fifth Circuit are

merely conclusory. In fact, the takeover statutes do

not in any real way prohibit takeover offers, merely re-

quire them to go forward under additional regulation for

the protection of investors. Several courts have found

that the takeover statutes have not in any way inhibited

takeovers at all in that the number of takeovers has vastly

increased even though the number of takeover statutes

has likewise increased. See, e.g., AMCA International

Corp. v. Krouse, 482 F. Supp. 929 (S8.D. Ohio 1979);

Sharon Steel Corp. v. Whaland, Cas. No. 80-333, —— A.2d

— (N.H. July 2, 1981); Strode v. Esmark, Inc., [1980]

Fed. Sec. L. Rep. (CCH) 97,538 (Ky. Cir. Ct. 1980),

aff’d —— S. W. 2d —— (Ky. App. Apr. 3, 1981). See also,

Telvest, Inc. v. Bradshaw, 618 F.2d 1029 (4th Cir. 1980)

and Note, Kneeling to the SEC Rules: The Virginia Take-

over Act and SEC Tender Offer Rule 14d-2(b), 22 Wm. &

Mary L. Rev. 487, 513 (1981).

NASAA submits that the balancing of the legitimate

state interests established above when balanced against

any purported burden on interstate commerce will neces-

sarily come down on the side of the constitutionality of

the state statutes. See e.g., MeCauliff, Federalism and

The Constitutionality of State Takeover Statutes, 67 Va.

L. Rev. 295, 303-305 (1981); Note, The Constitutionality

of State Takeover Statutes: A Response to Great Western,

53 N. V. U. L. Rev. 872, 939 (1978).

CONCLUSION

The decision of the Court of Appeals should be

reversed.

Dated: New York, N.Y.

July 17, 1981

Respectfully submitted,

Orestes J. MinaLx

Counsel, North American Securities

Administrators Association

Two World Trede Center

New York, N.Y. 10047