Amicus Curiae Brief — CTS Corp. v. Dynamics Corp. of America

Supreme Court of the Pnited Mates

Ocroser Term, 1986

CTS CORPORATION,

Appellant,

— Vs. ——

DYNAMICS CORPORATION OF AMERICA,

Appellee.

STATE OF INDIANA,

Intervenor-Appellant,

—_ Vs. —=

DYNAMICS CORPORATION OF AMERICA.

Appellee.

ON APPEAL FROM THE UNITED STATES COURT OF APPEALS

FOR THE SEVENTH CIRCUIT

BRIEF AMICUS CURJAE OF THE STATE

OF NEW YORK IN SUPPORT OF APPELLANTS

OQ. Perer SHERWOOD RoBERT ABRAMS

Solicitor General of the Attorney General of the

State of New York State of New York

Counsel of Record 120 Broadway

New York, New York 10271

Mary E.ien Burns (212) 341-2020

Deputy Chief Assistant

Attorney General

Coivin W. GraNNUM

Assistant Attorney General

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TABLE OF CONTENTS

TABLE OF AUTHORITIES

INTEREST OF AMICUS CURIAE

SUMMARY OF ARGUMENT

ARGUMENT ..

I. The Preemption Holding Of The Courts Below

Finds Little Support In The Williams Act Or

Edgar v. MITE Corp., And Unnecessarily Casts

Doubt On State Laws That Do Not Conflict

With The Williams Act . . .

II. State Statutes, Like Indiana’s, That Adjust The

Various Interests Effected By Corporate

Takeovers Are Constitutional For They Are

Nondiscriminatory And Have Only Incidental

Effects On Interstate Commerce

CONCLUSION

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TABLE OF AUTHORITIES

Cases: Page

Agency-Rent-A-Car, Inc. v. Connolly, 686 F.2d

SE AE Gs ED ovo ccc c cc eerevceess 8

APL Limited Partnership v. Van Dusen Air, Inc..,

622 F. Supp. 1216, 1223 (D.C. Minn. 1985) ... 15

Brown-Forman Distillers Corp. v. New York State

Liquor Authority, 106 S. Ct. 2080 (1986) .... 12

Burks v. Lasker, 441 U.S. 471, 479-80 (1979) .... 7

City of Burbank v. Lockheed Air Terminal Inc.,

411 U.S. 624, 633, 643 (1973) (Rehnquist, J.,

ne oyun icake sie eek wks. 4 7 6

City of Philadelphia v. New Jersey, 437 U.S.

rod iso o's 00h e044 0040 > ee wake aes 12

Cort v. Ash, 422 U.S. 66, 84 (1975) ....... Salat 7, 14

Cooley v. Board of Wardens, 53 U.S. (12 How.)

gg EA a a 12

Dynamics Corp. of America v. CTS Corp., 794

F.2d 250, 262, 264 (7th Cir. 1986) ........... 5, 9, 10

Edgar v. MITE Corp., 457 U.S. 624, 632, 646,

EE a

Exxon Corp. v. Governor of Maryland, 437 U.S.

Nee ce ww dibs Ge 1]

Fleet Aerospace Corp. v. Holderman, 796 F.2d

ave ckdencveeesssees i 9

Florida Lime and Avocado Growers, Inc. v. Paul,

Bee Um. Bam, BORED (IGE... cc cccccccceess 6

Hillsborough County, Florida v. Automated

Medical Laboratories, Inc., 471 U.S. 707 (1985)

Hines v. Davidowitz, 312 U.S. 52, 67 (1941)

Jones v. Rath Packing Co., 430 U.S. 519, 525

CU au es aha e ace eee

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

, S | Serre re Terrie

Lewis v. B.T. Investment Managers, Inc., 447

a Be GE voc own cees

Martin-Marietta Corp. v. Bendix Corp., 690 F.2d

558 (6th Cir. 1982)....

Merrill Lynch, Pierce, Fenner & Smith, Inc. v.

Ware, 414 U.S. 117, 127 (1973)...

Minnesota v. Clover Leaf Creamery Co., 449

of of) | errr Vorerrr rrr ror

National City Lines, Inc. v. LLC Corp., 687

F.2d 1122 (8th Cir. 1982) .... a

Pacific Gas & Electric Co. v. State Energy

Resources Conservation and Development

Commission, 461 U.S. 190 (1983) ..........

9

6, 12

Pike v. Bruce Church. Inc., 397 U.S. 137 (1970) .12, 13, 14

Piper v. Chris-Craft Industries, Inc., 430 U.S. 1,

22, 29, 35 (1977).... ere ey oe

Rice v. Santa Fe Elevator Corp., 331 U.S. 218,

230 (1947) ........

Rondeau v. Mosinee Paper Corp., 422 U.S. 49, 58

(1975) ....... PEP Orr Te re TTT Lees Ty

Santa Fe Industries, Inc. v. Green, 430 U.S. 462.

478-79 (1977)....

Securities and Exchange Commission v. Carter

Hawley Hale Stores, Inc., 760 F.2d 945 (9th

>. re NPs eh ae TN

United States Constitution:

Art. VI, cl.2..

Art. I, §8, cl.3

Federal Statutes:

Securities Exchange Act of 1934, 15 U.S.C. §§78a

et seq (1982) .

Section 28(a), 15 U.S.C. §78bb/(a)(1982)

The Williams Act, 15 U.S.C., §§78m/(d)-(e).

78n(d)-(f) (1982)

State Statutes:

IND. CODE ANN. §§23-1-42-1 to 11 (Burns

Cum. Supp. 1986) ...

KY. REV. STAT. §271A.397-99 (1984)

MD. CORPS. & ASS’NS CODE ANN. §§3-601 et

seq. (1985) .

MICH. COMP. LAWS §§450.177 et seq. (Supp.

1986)

1986 N.J. Sess. Law Serv. Chap. 74 (West)

N.Y. BUS. CORP. LAW §912 (McKinney 1986)

Page

passim

10

10

10

passim

PA. STAT. ANN. tit. 15, §1910 (Purdon Supp.

St ee ee ae Peale ey EEE Ta #

WISC. STAT. §§180.25(9), 180.725 (1986) .

Law Review Articles:

Coffee, Regulating the Market for Corporate

Control: A Critical Assessment of the Tender

Offer’s Role In Corporate Governance, 84 Col.

= Hf. APPT Tree

Lipton, Takeover Bids In The Target’s Board

Room, 35 Bus. Law 101 (1979) ..........

Note, State Regulation of Tender Offers:

Legislating Within The Constitutional

Framework, 54 Fordham L. Rev. 885 (1986) ..

Sargent, Do The Second Generation State

Takeover Statutes Violate The Commerce

ClauseP, 8 Corp. L. Rev. 3 (1985).

Tushnet, Rethinking The Dormant Commerce

Clause, 1979 Wisc. L. Rev. 125.....

Miscellaneous:

113 Cong. Rec. 24664 (1967) ............

S. Rep. No. 550, 90th Cong., Ist Sess. (1967)

(Senate Report) ......... Le ie ore re

Governor's Program Memorandum, 1985 N.Y.

Laws Chap. 915.......

Page

10

10

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13

18

9

9

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INTEREST OF AMICUS CURIAE

Amicus, State of New York, by Robert Abrams, Attorney

General of the State of New York, respectfully submits this brief

in support of appellants pursuant to Supreme Court Rule 36.4.

Amicus urges this Court to reverse the judgment of the court

of appeals and to affirm the power of a state to enact legisla-

tion that adjusts the variety of interests effected by takeovers

of local corporations.

New York has an interest in the issues presented by this ap-

peal because this Court’s decision may affect the validity of a

recent amendment to the New York Business Corporation Law

(“NYBCL”). The amendment, N.Y. BUS. CORP. LAW §912

(McKinney 1986), and the Indiana law challenged in this litiga-

tion, The Control Share Acquisitions Chapter of the Indiana

Business Corporation Law, IND. CODE ANN. §§23-1-42-1 to

11 (Burns Cum. Supp. 1986), operate quite differently, but they

advance common legitimate state interests. As amicus, New York

seeks to protect those interests. New York emphasizes the power

of states to enact legislation, consistent with Edgar v. MITE

Corp., 457 U.S. 624 (1982),' that apportions the local interests

and rights affected by changes in corporate control and fun-

damental corporate events even though the legislation inciden-

tally impacts on interstate commerce. The challenged Indiana

act, Section 912 and numerous other state laws represent the

best efforts of many states to exercise their traditional authori-

ty over such matters while complying with the limited guidelines

articulated in Edgar v. MITE, Corp.

This Court’s response to Indiana's attempt to prescribe rules

governing the exercise of the voting rights associated with newly-

acquired control shares may eventually guide lower courts’

assessment of New York’s statute. Like Indiana’s law, Section

912 governs internal corporate matters; it does so by setting re-

quirements for certain business combinations between New York

' The State of New York also participated as amicus curiae in Edgar v. MITE

Corp., and supported the constitutionality of the Illinois law challenged there.

resident domestic corporations and certain shareholders of 20

percent or more of the outstanding voting stock (“interested

shareholders”) of resident domestic corporations. Authority to

regulate the voting rights of shares and prescribe requirements

for business combinations traditionally has resided with the state

under whose laws the corporation is organized. For example,

section 912 restricts interested shareholders’ access to corporate

assets by prescribing requirements for mergers, consolidations,

dissolutions and other dispositions of significant corporate assets.

Its goal is to promote the long-term well-being of New York

resident domestic corporations.

The type of business combination affected by section 912

usually accompanies highly-leveraged unilateral takeovers.

These combinations frequently change the financial structure,

character, investment and employment policies, and earnings

of the local corporation. Too often such changes are initiated

in order to fund the takeover itself and operate to the long-term

detriment of the corporation. These combinations may also alter

the legal relationships and expectations among and between

shareholders of the resident domestic corporation. Interests out-

side the corporation may also be significantly affected, par-

ticularly those of suppliers and employees of the corporation

and other local businesses. Choosing from several approaches,

32 states have enacted statutes that protect and balance the

variety of interests implicated by transactions conceived to force

major internal corporate changes in corporations deeply rooted

in those states.’

Lastly, the State of New York is the home of thousands of

corporations and corporate investors of every variety. The New

York and American Stock Exchanges are located in New York

and are pillars of the State’s economy. As the site of a stagger-

ing volume of transactions involving corporate securities, assets

and control, the State’s interest in the Court’s decision is

? Alaska, Arkansas, Delaware, Georgia, Hawaii, Idaho, Illinois, Indiana,

Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts,

Michigan, Minnesota, Mississippi, Missouri, Nebraska, New Hampshire, New

Jersey, New York, Ohio, Oklahuma, Pennsylvania, South Carolina, South

Dakota, Tennessee, Utah, Virginia, and Wisconsin.

keen: the decision may impact on the economy of the State, how

people do business within it, and the development of its com-

mercial law.

In sum, the State of New York has an interest in protecting

the power of states to enact statutes which, by constit:tionally

permissible means, adjust the variety of local interests affected

by corporate takeovers. We believe that the Indiana statute

satisfies the requirements of the Commerce and Supremacy

clauses. Likewise, we are satisfied that the New York statute

is fully compatible with the provisions of the United States Con-

stitution, although we recognize that the Court’s decision in this

case is not an occasion — and should not be the occasion —

to resolve this question.

SUMMARY OF ARGUMENT

Acting pursuant to powers granted to it under the Supremacy

and Commerce Clauses of the Constitution, Congress enacted

the Williams Act, 15 U.S.C. §§ 78m/(d)-(e), 78n(d)-(f) (1982),

which brought a measure of protection to shareholders of cor-

porations that were the targets of takeover efforts. In so doing,

Congress did not evince an intention to preempt state statutes

covering the same subject matter. It neither sought to impose

a national governmental policy regarding corporate takeover

contests nor to preclude the states from enacting laws that strike

a different balance.

Recently, in Edgar v. MITE Corp. this Court considered the

effect of the Williams Act on an Illinois statute which regulated

certain takeover contests and declined to hold that the Williams

Act preempts state regulation in this area or otherwise imposes

an overriding national policy respecting takeovers. Nevertheless,

the court of appeals devined the existence of such a policy and

invalidated the Indiana statute which sought to regulate the

exercise of voting rights in connection with takeovers of cor-

porations having substantial contacts with that state. In so

doing, the lower court cast grave doubt on the traditional power

of a state to enact legislation that affects transactions designed

to capture corporate control, alter corporate governance and

reallocate substantial assets of corporations firmly connected

to that state. Its decision should be reversed. <

Absent express preemption of state power by Congress, a

federal law preempts only state laws that cannot be reconciled

with it. The purpose and scope of the Williams Act are limited

to protecting shareholders through full and fair disclosure of

information pertinent to securities transactions. State laws that

provide other benefits to shareholders, regulate local corpora-

tions, accord rights to their employees and aid the surrounding

economies are not affected by the Williams Act. Rather than

regulating the purchase and sale of securities, such laws usual-

ly operate to limit an individual’s exercise of control over a cor-

poration or his ability to reallocate significant corprate assets.

Misconstruing the reach of the Williams Act, the courts below

erroneously struck down the Indiana act even though the pur-

poses and provisions of the two statutes do not conflict and could

easily have been reconciled. Contrary to the holdings of the

courts below, the Indiana act need not cause any delay that

conflicts with the provisions of the Williams Act.

The Commerce Clause itself imposes restraints on the power

of states to enact laws that directly burden interstate commerce

or discriminate against it. This Court has consistently

acknowledged the authority of the several states to implement

nondiscriminatory laws that are intended to carry out legitimate

state purposes.

The corporation is a creature of state law and regulation of

the internal affairs of resident corporations is manifestly a

legitimate state concern. In striking down the Indiana act on

Commerce Clause grounds, the court of appeals accorded only

lip service to Indiana’s substantial concern in apportioning rights

affected by changes in control and asset deployment of corpora-

tions that incorporate in Indiana and otherwise are strongly tied

to the state. The interests of states in those internal corporate

matters are legitimate and substantial, and if a state statute is

drawn to further them it should withstand challenges based on

the Commerce Clause.

Indiana’s statute is constitutional because it only regulates

post-acquisition voting rights for control share acquisitions. It

does not directly regulate interstate transactions; nor does it

discriminate against acquisitions commenced by out-of-state

residents. Despite the holdings of the courts below, the extent

of the Indiana statute’s burden on interstate commerce is

speculative. The record contains no evidence that the statute

will adversely affect interstate commerce. On the other hand.

the Indiana act benefits local shareholders by granting them

a voice in proposed material changes in voting control, permit-

ting them to consider a tender offer without fear of a shareholder

stampede, and promoting fair treatment of non-tendering

shareholders.

The Indiana act is only one of a variety of measures enacted

by states that bear on the subject of corporate takeovers. The

constitutionality of each such measure should be assessed in-

dividually given differences in the degree of local contact re-

quired, the particular state interest intended to be addressed

and other factors. The court of appeals’ decision appears to have

a broad sweep. It draws into question any state law which a

court may view as slowing “the important commerce of cor-

porate control,” see Dynamics Corp. of America v. CTS Corp.,

794 F.2d 250, 264 (7th Cir. 1986). This Court should reject the

lower court's effort to override state laws and impose a national

policy without the benefit of clear Congressional guidance.

ARGUMENT

I. The Preemption Holding Of The Courts Below Finds

Little Support In The Williams Act Or Edgar v.

MITE Corp., And Unnecessarily Casts Doubt On

State Laws That Do Not Conflict With The Williams

Act

Absent explicit preemptive language in a federal! statute,

courts should not declare a state statute invalid under the

Supremacy Clause, U.S. Const. art. VI, cl.2, unless the federal

and state laws are irreconcilable. Hillsborough County, Florida

v. Automated Medical Laboratories, Inc. , 471 U.S. 707 (1985);

Pacific Gas & Electric Co. v. State Energy Resources Conser-

vation and Development Commission, 461 U.S. 190 (1983); see

Jones v. Rath Packing Co., 430 U.S. 519, 525 (1977). The

preemption analysis starts with the assumption that in fields

traditionally occupied by the states, “the historic police powers

of the States were not to be superceded by the Federal Act unless

that was the clear and manifest purpose of Congress.” Rice v.

Santa Fe Elevator Corp., 331 U.S. 218, 230 (1947). See City

of Burbank v. Lockheed Air Terminal Inc., 411 U.S. 624, 643

(1973) (Rehnquist, J., dissenting).

Aside from express preemptive language, the clear and

manifest purpose of Congress to preempt all state law may be

found where: the nature of the subject matter regulated per-

mits no other conclusion, Florida Lime and Avocado Growers,

Inc. v. Paul, 373 U.S. 132 (1963); a pervasive scheme of federal!

regulation leaves no room for supplementary state regulation,

City of Burbank v. Lockheed Air Terminal Inc., 411 U.S. at

633; “compliance with both federal and state regulations is a

physical impossibility,” Florida Lime and Avocado Growers,

Inc. v. Paul, 373 U.S. at 142-43; or state law “stands as an

obstacle to the accomplishment and execution of the full pur-

poses and objectives of Congress.” Edgar v. MITE Corp., 457

U.S. at 631 quoting Hines v. Davidowitz, 312 U.S. 52, 67 (1941).

States have traditionally occupied the field of corporate law.

Burks v. Lasker, 441 U.S. 471, 479-80 (1979). “Corporations

are creatures of state law, and ... state law will govern the in-

ternal affairs of the corporation.” Cort v. Ash, 422 U.S. 66, 84

(1975); Santa Fe Industries, Inc. v. Green, 430 U.S. 462, 478-79

(1977). In this appeal, the presumption against preemption is

entitled to great weight due to the absence of any contentions

that the Williams Act contains express preemptive language,

evinces an intent to occupy the entire field or that it would be

impossible to comply with the provisions of the Williams Act

and the significantly different provisions of the Indiana law.

See Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Ware, 414

U.S. 117, 127 (1973). Here, as in Edgar v. MITE Corp., the

sole issue is whether the Indiana law frustrates the objectives

of the Williams Act in “some substantial way.” Edgar v. MITE

Corp., 457 U.S. at 632 (White, J.).

Resolution of this issue requires that operation of the challeng-

ed state law be measured against the purpose of the federal

statute. The Williams Act, passed in 1968, sought to close the

regulatory gap caused by the increased use of cash tender of-

fers in corporate acquisitions, “a device that had ‘removed a

substantial number of corporate control contests from the reach

of existing disclosure requirements of the federal securities law.’ ”

Edgar v. Mi .'E Corp., 457 U.S. at 632, quoting Piper v. Chris-

Craft Industries, Inc. , 430 U.S. 1, 22 (1977). The Williams Act

is primarily a full disclosure law which furnishes important in-

formation to all target shareholders, and provides certain pro-

tections to target shareholders who elect to tender their stock.*

> Under the Williams Act, disclosure is required of persons who acquire more

than five percent of certain classes of securities or commence a tender offer

which would give them ownership of more than five percent of certain classes

of securities. 15 U.S.C. §§78m/(d)(1), 78n(d)(1). The information that must

be disclosed includes: the background and identity of the acquiror; the source

of the funds to be used in making the purchase; the purpose of the purchase,

including any plans to liquidate the company or make major changes in cor-

porate structure; and the extent of the acquiror’s holdings in the target

(Footnote continued)

When Congress amended the Securities Exchange Act of 1934

(“1934 Act”), 15 U.S.C. §§78a et seq. by enacting the Williams

Act, the amendment did not disturb section 28(a) of the 1934

Act, 15 U.S.C. §78bb(a). In pertinent part, Section 28(a) pro-

vides as follows:

Nothing in this title shall affect the jurisdiction of the

securities commission (or any agency or officer per-

forming like functions) of any State over any securi-

ty or any person insofar as it does not conflict with

the provisions of this title or the rules and regulations

thereunder.

Section 28(a) clearly expresses Congress’ intent to limit the

preemptive effect of the federal securities laws. This intent is

grafted onto the Williams Act. Thus, any inquiry into the

preemptive effect of the Williams Act must be illuminated by

the unmistakeable fact that section 28(a) is intended to “pro-

tect, rather than limit, state authority.” Leroy v. Great Western

United Corp. 443 U.S. 173, 182 (1979); see Agency-Rent-A-Car,

Inc. v. Connolly, 686 F.2d 1029, 1038 (1st Cir. 1982).

The Indiana control share acquisitions law does not conflict

with the Williams Act or frustrate its objectives in a substan-

tial way. The statutes operate in related, but separate arenas.

The Indiana law defines the post-acquisition voting rights of

certain controlling shares while the sole purpose of the Williams

Act is to provide investors with full and fair disclosure regard-

ing tender offers. Piper v. Chris-Craft Industries, Inc. , 430 U.S.

at 35; Rondeau v. Mosinee Paper Corp., 422 U.S. 49, 58

(Footnote continued)

company. 15 U.S.C. §78m(d)(1). With respect to tender offers: (1) stockholders

who tender their shares may withdraw them during the first 7 days of a tender

offer and if the offeror has not yet purchased their shares, at any time after

60 days from the commencement of the offer, 15 U.S.C. §78n(d)(5); and (2)

all shares tendered must be purchased for the same price; if an offering price

is increased, those who have already tendered receive the benefit of the in-

crease. 15 U.S.C. §78n(d)(7). See Edgar v. MITE Corp., 457 U.S. at 632.

(1975); 113 Cong. Rec. 24664 (1967)(Comments of sponsor,

Senator Williams); S. Rep. No. 550, 90th Cong., Ist Sess.

(1967)(Senate Report). Moreover, the Indiana law protects a

broader range of interests than those protected by the Williams

Act, including local economic and social interests likely to be

affected by transfers of corporate control. See Edgar v. MIT™

Corp., 457 U.S. at 647 (Powell, J., concurring in part).

The court of appeals swept aside the Indiana law on the

ground that it frustrated an objective of the Williams Act —

the “delicate balance” struck between the tender offeror and

incumbent rnanagement. Dynamics Corp. of America v. CTS

Corp., 794 F.2d 250, 262 (7th Cir. 1986). However, in Piper

v. Chris-Craft Industries, Inc., this Court stated:

Congress was indeed committed to a policy of

neutrality in contests of control, but its policy of

evenhandedness does not go to either the purpose of

the legislation or to whether a private cause of ac-

tion is implicit in the statute. Neutrality, is, rather,

but one characteristic of legislation directed toward

a different purpose — the protection of investors.

430 U.S. at 29. Moreover, in Edgar v. MITE Corp., Justice

White’s conclusion that the policy of neutrality underlying the

Williams Act should be accorded preemptive effect failed to

command a majority of this Court.* See Edgar v. MITE Corp..,

457 U.S. at 646 (Powell, J., concurring); Jd. at 655 (Stevens,

J., concurring). In brief, the decision to strike down the Indiana

act was supported neither by this Court’s case law nor the

* Justice White's opinion has been accorded great weight bv several courts

of appeals, Fleet Aerospace Corp. v. Holderman, 796 F.2d 135 (6th Cir. 1986):

Securities and Exchange Commission v. Carter Hawley Hale Stores, Inc. , 760

F.2d 945 (9th Cir. 1985); Martin-Marietta Corp. v. Bendix Corp., 690 F.2d

358 (6th Cir. 1982); National City Lines, Inc. v. LLC Corp., 687 F.2d 1122

(8th Cir. 1982), but none of the statutes reviewed by those courts was anologous

to Indiana’s law

10

legislative history of the Williams Act. Tacitly conceding that

it had found no clear and manifest intent of Congress to preempt

state laws like the one challenged here, the court of appeals

nevertheless took the required “big leap,” and toppled the In-

diana law. Dynamics Corp. of America v. CTS Corp. , 794 F.2d

at 262.

The court of appeals’ “delicate balance” analysis also casts

doubt on a variety of other state statutes which amicus believes

do not frustrate the full and fair disclosure purpose of the

Williams Act or upset that act’s policy of neutrality. General-

ly, these statutes protect interests far broader than those ad-

dressed in the Williams Act. These statutes reflect a variety of

approaches. Control share acquisitions statutes, like that of In-

diana, allow shareholders or their duly elected directors to deter-

mine voting rights for control share acquisitions. Business com-

bination statutes generally require similar approval for business

combinations, broadly defined to include a wide range of tran-

sactions involving substantial corporate assets.‘ Fair value

statutes grant non-tendering minority shareholders the right to

receive a statutorily prescribed fair price to protect them from

being “freezed out” by the controlling shares.* Still other statutes

combine features of each of the above laws.’ The delicate

balance reasoning adopted by the court of appeals implies that

it would invalidate all of these statutes because they may make |

acquisition of control of a corporation or access to its assets more

*‘ New York, N.Y. BUS. CORP. LAW §912 (McKinney 1986), New Jersey,

1986 N.J. Sess. Law Serv. Chap. 74 (West), and Kentucky, KY. REV. STAT.

§271A.397 (1984) have enacted different versions of business combination

statutes.

* Pennsylvania, PA. STAT. ANN. tit. 15, §1910 (Purdon Supp. 1986), has

enacted a fair value statute.

’ Hybrid statutes have been enacted by Wisconsin, WIS. STAT. §§180.25/9),

180.725 (1986); Maryland, MD. CORPS. & ASS’NS CODE ANN. §§3-601

et seq. (1985); Kentucky, KY. REV. STAT. §271A.397-99 (1984); Michigan,

MICH. COMP. LAWS §§450.177 et seq. (Supp. 1986); and other states.

1]

difficult to accomplish.* As demonstrated earlier, the Williams

Act should not be construed to have such an intrusive impact

on traditional state authority.

In sum, read in light of settled principies of federalism, sec-

tion 28(a) of the 1934 Act, the legislative history of the Williams

Act and the broad traditional role of the states in regulating

corporations, no basis exists for concluding that Congress in-

tended to preempt state laws pertaining to the exercise of voting

rights, use of corporate assets, transfer of corporate control or

treatment of minority interest shareholders. All of these tran-

sactions impact on internal corporate matters and implicate in-

terests beyond those sought to be protected by the Williams Act.

In addition, no policy or objective of the Williams Act is

frustrated by these state laws. Lower court decisions that find

preemption appear to be based upon the mistaken belief that

since interstate securities transactions are used to accomplish

these major corporate changes, no state can enact legislation

which affects these transactions. Cf. Exxon Corp. v. Governor

of Maryland, 437 U.S. 117, 127 (1978) (Court rejected the “novel

suggestion that because the economic market for petroleum pro-

ducts is nationwide, no state has the power to regulate the retail

marketing of gas.”) But Congress has not addressed the impact

of these major corporate changes, and until it does so, this Court

should leave the states free to serve as laboratories for finding

effective ways of regulating takeovers. Accordingly, th‘

* The business combinations regulated by Section 912, including mergers, con-

solidations, dissolutions and other reallocations of substantial corporate assets,

have long been regulated by New York law in some fashion. Measuring sec-

tion 912 against the Williams Act reveals that it does not: interfere with the

disclosure requirements of the Williams Act; purport to regulate the purchase

and sale of securities; impose time limits inconsistent with the Williams Act

(§912(b)); effect voting rights; restrict the acquiror’s ability to oust incum-

bent management; or permit a state official to usurp shareholders’ decisions

to sell their shares. The New York act only restricts the freedom of resident

domestic corporations to execute a business combination that will redirect

substantial corporate assets principally for the benefit of the newly -acquired

controlling interest.

12

Court should hold that Indiana’s control share acquisitions

statute is not preempted by the Williams Act. See Hillsborough

County, Florida v. Automated Medical Laboratories, Inc.;

Pacific Gas & Electric Co. v. State Energy Resources Conser-

vation and Development Commission.

II. State Statutes, Like Indiana’s, That Adjust The

Various Interests Effected By Corporate Takeovers

Are Constitutional For They Are Nondiscriminatory

And Have Only Incidental Effects On Interstate

Commerce

The Commerce Clause provides that “Congress shall have

Power... to regulate Commerce... among the several States.”

U.S. Const. art I, §8, cl. 3. While it is well settled that the dor-

mant Commerce Clause is a limitation on the power of the states

to affect interstate commerce, Cooley v. Board of Wardens, 53

U.S. (12 How.) 299 (1852), it is also clear that states are not

precluded from enforcing local laws that incidentally burden

interstate commerce. Lewis v. B.T. Investment Managers, Inc..,

447 U.S. 27 (1980); Minnesota v. Clover Leaf Creamery Co..,

449 U.S. 456 (1961). Direct burdens on interstate commerce

are prohibited, but the Commerce Clause permits states to im-

plement laws which affect interstate commerce if the state in-

terest is legitimate, and the state regulation is nondiscriminatory.

Brown-Forman Distillers Corp. v. New York State Liquor

Authority (“NYSLA”), 106 S. Ct. 2080 (1986); Pike v. Bruce

Church, Inc., 397 U.S. 137 (1970).

Minimal inquiry is required to recognize the constitutional

infirmity in state statutes that directly regulate or discriminate

against interstate commerce. See, e.g., Brown-Forman Distillers

Corp. v. NYSLA, 106 S. Ct. at 2080; City of Philadelphia v.

New Jersey, 437 U.S. 617 (1978). In contrast, when a state

statute has only indirect effects on interstate commerce and

regulates evenhandedly, courts must examine whether the state's

interest is legitimate and whether the burden on commerce is

outweighed by the local benefits. Brown-Forman Distillers

13

Corp. v. NYSLA, 106 S. Ct. at 2080; Edgar v. MITE Corp..,

457 U.S. at 640; Pike v. Bruce Church, Inc., 397 U.S. at 142.

Where, as here, the challenged state statute furthers weighty,

legitimate state interests it does not offend the constitution.

Citing Edgar v. MITE Corp., the courts below held that In-

diana’s control share acquisitions statute violated the Commerce

Clause. However, the majority opinion in Edgar v. MITE Corp.

supports neither the holding nor reasoning of the courts below.

First, the characteristics of the Indiana control share acquisi-

tions statute bear no resemblance to the provisions of the II-

linois Business Takeover Act which this Court invalidated. Fur-

thermore, the Court acknowledged the legitimacy of Illinois’

interest in protecting local investors, but concluded that the

means used unnecessarily burdened interstate commerce and

did not plainly further the interests asserted by Illinois. Id. at

643-46. Ignoring the limited reach of this Court’s holding in

Edgar v. MITE Corp., the courts below invalidated the Indiana

law without giving proper weight to the legitimate interests of

Indiana or the variety of benefits derived from its statute. In

fact, the court of appeals went so far as to suggest that general-

ly states have limited interests in regulating the effects of cor-

porate takeovers. Of course, several weighty interests support

state legislation that adjusts the variety of local interests likely

to be directly effected by corporate takeovers. Note, State

Regulation of Tender Offers: Legislating Within The Constitu-

tional Framework, 54 Fordham L. Rev. 885, 901 (1986).

Takeovers are designed to have a direct impact on the fun-

damental internal affairs of target corporations, specifically cor-

porate control and the allocation of assets. For example, they

implicate interests of employees, minority shareholders and in-

cumbent management as well as businesses located in the area

where the corporation does substantial business. Thus, while

takeovers may be accomplished by interstate transactions, local

interests traditionally regulated by the states are frequently im-

pacted directly.

* The Illinois act allowed the Illinois Secretary of State to block indefinitely

a nationwide tender offer. The Indiana act, on the other hand, assigns no

role to the state in takeover contests, and does not regulate the transfer of stock.

14

Corporations and corporate shares are creatures of state law.

Cort v. Ash, 422 U.S. at 84. Despite increased trading of cor-

porate shares in interstate and international commerce, shares

remain items over which the states have significant authority.

The initial features of corporate stock, including voting rights,

were created by states, and states retain the authority to modify

or amend those features. That authority includes the power to

define the circumstances under which shares may be used to

gain control over a corporation or to reallocate corporate assets.

Thus, contrary to the court of appeals’ belief, the federal govern-

ment and states share a joint interest in the “commerce of cor-

porate control.” Dynamics Corp. of America v. CTS Corp., 794

F.2d at 264.

Some of the specific goals states seek to achieve by enacting

various forms of takeover legislation include: (1) protecting local

non-tendering shareholders from the effects of two-tier “freeze-

out” transactions; (2) permitting shareholders to participate in

decisions regarding fundamental corporate events such as

mergers, consolidations, and sales and pledges of assets; (3) en-

couraging certain types of investment strategies considered good

for the economy of the state; and (4) eliminating the need for

incumbent management to focus upon certain defensive

strategies considered unhealthy for the state’s economy. Each

of these interests is important to the states and in assessing the

validity of a state statute under the Commerce Clause, courts

should accord these interests great weight.

The court of appeals’ failure to accord proper weight to In-

diana’s stated interests renders its Pike analysis defective.'° Unlike

the statute considered in Edgar v. MITE Corp., Indiana has

a strong interest in the corporations covered by its control share

acquisitions act. The Indiana act applies only to corporations

organized under the laws of Indiana with 100 or more

’ Application of the Pike balancing test is appropriate because the Indiana

act does not directly regulate interstate transactions. Instead, once the stock

acquisition is completed, the statute allows shareholders to determine whether

voting rights will be accorded to an acquiror of a controlling interest.

15

shareholders which have their principal place of business, prin-

cipal offices or substantial assets within Indiana, and more than

ten percent of their shares owned by Indiana residents. Thus.

the Indiana act covers corporations that were incorporated in

the state and in which Indiana residents have a substantial

ownership interest and which do substantial business in the state

or maintain substantial assets there.

These firm ties between the covered corporations and Indiana

permit the state to pursue several permissible objectives: pro-

tecting resident shareholders and local economies, and

regulating internal corporate affairs. Sargent, Do The Second

Generation State Takeover Statutes Violate The Commerce

Clause?, 8 Corp. L. Rev. 3 (1985). Because the Indiana law

is directed at local matters, its effect on interstate commerce

is incidental and its burden on interstate commerce is modest.

Additionally, the Indiana law regulates evenhandedly inasmuch

as it makes no distinction between acquisitions initiated by out-

of-state residents and those initiated by state residents.

The Indiana law advances the legitimate state interests iden-

tified. It benefits Indiana shareholders because it only applies

to Indiana corporations in which Indiana residents have a

substantial ownership interest. It protects shareholders by per-

mitting a majority of disinterested shareholders to determine

whether a material change in voting control is in their best in-

terests. Because it requires express shareholder approval of a

transfer of controlling voting rights in a corporation, the statute

allows resident shareholders to discount the possibility of a

shareholder stampede and permits them to focus on factors.

including the probable local economic and social impact of a

takeover, which they might not otherwise evaluate.

The Indiana act also advances the state’s interest in regulating

the internal affairs of corporations organized under the laws

of Indiana. The statute is drawn to further this interest. It ap-

plies to voting rights, manifestly an internal matter, of corpora-

tions organized under the laws of Indiana. APL Limited Part-

nership v. Van Dusen Air, Inc., 622 F. Supp. 1216, 1223 (D.C.

16

Minn. 1985). It does not apply to foreign corporations as did

the statute examined in Edgar v. MITE Corp.

We are especially troubled by the aspect of the court of ap-

peals’ opinion that suggests that the Commerce Clause condemns

state statutes that require shareholder or board of director ap-

proval of fundamental internal corporate changes initiated

through interstate stock transactions. This notion implicates

statutes like the one enacted by New York even though they

plainly advance legitimate state interests without excessively

burdening interstate commerce.

In this regard, Section 912, furthers several legitimate state

interests. As a threshhold matter, the “resident domestic cor-

porations” covered by section 912 are closely connected to New

York so as to achieve the State’s permissible purposes.'' Secondly,

Section 912 furthers several important state objectives, chief

among them is promoting the long-term well-being of New York

resident domestic corporations. See Governor's Program

Memorandum, 1985 N.Y. Laws Chap. 915. The New York law

accomplishes this goal by forbidding resident domestic corpora-

tions from engaging in business combinations with an interested

shareholder for five years unless the business combination or

controlling share acquisition was approved by the board of direc-

tors prior to the interested shareholder’s stock acquisition date.

Section §912(b). Five or more years after the interested

shareholder’s stock acquisition date, the resident domestic cor-

poration may engage in a business combination with the in-

terested shareholder if it obtains the affirmative vote of the

holders of a majority of ie outstanding stock not beneficially

owned by such interested shareholder or pays the shareholders,

other than the interested shareholder, a statutorily prescribed

formula price designed to ensure that all holders of shares of

" The jurisdictional predicate required to trigger Section 912 is more strict

than under Indiana law. Section 912 only covers corporations organized under

the laws of New York and which have (1) their principal offices and (2) signifi-

cant business operations and (3) at least 10 percent of the ownership of its

voting stock located in New York. NYBCL §912(a)(13

17

voting stock will receive at least the highest price per share paid

by the interested shareholder, determined as of the date such

business combination was first proposed in its final, definitive

form. NYBCL §912(c).”

Thus, section 912 has the following effects: (1) it encourages

takeovers that the acquiror and target management agree are

in the best interests of New York corporations, their employees

and shareholders; (2) it discourages unilateral takeovers which

depend on immediate access to significant assets of the corpora-

tion; (3) it encourages long-term investment commitment by

interested shareholders who acquired their controlling interest

without the approval of the board of directors; and (4) it pro-

tects resident non-tendering shareholders from “freeze-out” tran-

sactions. '* Achieving each of these benefits is important to the

economic and social well-being of New York.

On the other side of the scale, section 912 does not excessive-

ly burden interstate commerce. It has a limited impact on the

interstate commerce of corporate stock and control. In contrast

to the statutes struck down in Edgar v. MITE Corp., and by

various other federal courts, section 912 does not: (1) regulate

the sale of shares; (2) protect incumbent management from

replacement by an interested shareholder; (3) limit the voting

rights of newly-acquired shares; (4) require approval of the ac-

quisition of controlling interests; (5) prohibit a change of the

corporation’s line of business; (6) grant the State a role in deter-

mining whether an interstate acquisition will proceed; or (7)

deprive shareholders of the right to sell their shares at a

premium.

* A related provision of New York law, NYBCL §513, restricts the use of

“greenmail” by resident domestic corporations by requiring board of direc-

tor and shareholder approval of such purchase or agreement to purchase

' Two corollary benefits are discouraging excessive corporate debt and en-

couraging long-term interests, especially research and development and

business diversification.

18

The court of appeals’ opinion nonetheless calls statutes like

Section 912 into question apparently on the ground that the

Commerce Clause bars states from sanctioning any activity that

slows “the important commerce in corporate control.” Dynamics

Corp. of America v. CTS Corp., 794 F.2d at 264. Implicit in

the court’s opinion is its belief that tender offers benefit

shareholders and, therefore, the Commerce Clause should pro-

tect tender offers. In other words, under the guise of a Com-

merce Clause analysis, the court of appeals imposed its economic

judgment regarding the value of tender offers. Such economic

policy judgments, however, are reserved for the Congress or

state legislatures. In the absence of a national policy regarding

corporate takeovers, it is not appropriate for federal courts to

attempt to fill the void by judicial interpretations of the Com-

merce Clause. This is especially so in light of Congress’

disinclination, to date, to formulate an approach to the issue

and the disputed economic data regarding the value of

takeovers, particularly highly-leveraged hostile ones. Coffee,

Regulating the Market for Corporate Control: A C ritical Assess-

ment of the Tender Offer’s Role In Corporate Governance, 84

Col. L. Rev. 1145 (1984), see Tushnet, Rethinking the Dormant

Commerce Clause, 1979 Wisc. L. Rev. 125, 156; Lipton,

Takeover Bids in the Target's Board Room, 35 Bus. Law.

101 (1979).

19

CONCLUSION

For all the foregoing reasons, the decision below should be

reversed.

Dated: New York, New York

December 4, 1986

O. PETER SHERWOOD ROBERT ABRAMS

Solicitor General of the Attorney General of the

State of New York State of New York

120 Broadway

Counsel of Recora New York, New York 10271

Tel. No. (212) 341-2020

MARY ELLEN BURNS

Deputy Chief Assistant

Attorney General

COLVIN W. GRANNUM

Assistant Attorney General