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

Nos. 86-71 & 86-97

IN THI

Supreme Court of the United States

OCTOBER TERM, 1986

>

CTS CORPORATION,

Appellant,

—V- =

DYNAMICS CORPORATION OF AMERICA,

Appellee.

STATE OF INDIANA,

Intervenor-Appellant,

Vv.

DYNAMICS CORPORATION OF AMERICA,

Appellee.

ON APPEAL FROM THE UNITED STATES COURT OF APPEALS

FOR THE SEVENTH CIRCUIT

AMICUS CURIAE BRIEF OF THE SECURITIES INDUSTRY

ASSOCIATION, INC. IN SUPPORT OF APPELLEE

WILLIAM J. FITZPATRICK MARC P. CHERNO

GERARD J. QUINN Counsel of Record

IRWIN BLUM

ol

FRIED, FRANK, HARRIS, SHRIVER

AND JACOBSON

One New York Plaza

Of Counsel New York, New York 10004

(212) 820-8000

The Securities Industry

Association, Inc.

120 Broadway

New York, New York 1027]

TABLE OF CONTENTS

PAGI

CARE GID FAP PORE UE so ve cc ccccccccscsesves i]

INTEREST OF THE SECURITIES INDUSTRY ASSO-

SE SNOin 60:2 60 eb ub vase bub ees eeteeeduesns 2

EPO PAI Se CIR ARGININE cc ccc cccccvccscecccess 5

TEE o 00 54.05040006hbsb000400cadeunewentens 9

I. THE INDIANA STATUTE IS PREEMPTED BY

ee WOR FU Bo oc knceceesesecccsevecces Y

A. Under Mite, State Statutes Must Not Delay Or

ED TOE GINUED ccc cccvccccencccvcess )

B. The Second Generation Statutes Violate The

Williams Act’s Policy Of Neutrality......... 12

C. The Second Generation Statutes Violate The

Williams Act’s Policy Of Investor Autonomy 14

Il. THE INDIANA STATUTE VIOLATES THE

COMMERCE CLAUSE OF THE CONSTITU-

NN a ah a al a cS a TE ae Ose a 17

A. The Indiana Statute Is Unconstitutional Per Se

As A Direct Burden on Interstate Commerce . 18

B. No Significant Local Benefits Exist Which

Outweigh The Indiana Statute’s Substantial

Interference With Interstate Commerce...... 23

EET ne4 SS o8éécadevekhnaunecneseeesoetens 29

TABLE OF AUTHORITIES

Cases: Page

APL Ltd. Partnership v. Van Dusen Air, Inc., 622 F.

Sump. 1206 Gd. RE. TG oc ccecssiececsccuseesns 9

Brown-Forman Distillers Corp. v. New York State

Liquor Authority, 106 S.Ct. 2080 (1986)..... 17, 18, 22, 26

Dynamics Corporation of America v. CTS Corp., 794

PP. ty tte ee 8, 21, 22

Edgar v. MITE, 457 U.S. 624 (1982) ................ passim

Exxon Corp. v. Governor of Maryland, 437 U.S. 117

(ISTE . cc ccccccécdoesecnseeeneueennnateee 23

Fleet. Aerospace Corp. v. Holderman, 796 F.2d 135 (6th

Cir. 1986), aff’g, 637 F. Supp. 742 (S.D. Ohio) .. .9, 15, 21

Gelco Corp. v. Coniston Partners, C.A. No. 3-86-847

(D. Minn. Nov. 10, 1986)

v)

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

Icahn v. Blunt, 612 F. Supp. 1400 (W.D. Mo. 1985) .9, 15, 21

Jones v. Rath Packing Co., 430 U.S. 519 (1977)....... 9

Schreiber v. Burlington Northern, Inc., 105 S.Ct. 2458

(IDES)... no cccccccevensecdecéeeeseseenae 1]

Shafer v. Farmers Grain Co., 268 U.S. 189 (1925)..... 19

Southern Pacific Co. v. Arizona, 325 U.S. 761 (1945).. 22

Terry v. Yamashita, 643 F. Supp. 161 (D. Hawaii 1986) .9, 21

ili

Statutes and Regulations:

Federal:

17 C.F.R. § 240.14d-2 (1985)...

17 C.F.R. § 240.14e-1(a) (1986)

State:

Ind. Code

§ 23-1-42-7(a) (1986). ...............

Ind. Code § 2

3-1-43-1 ef seg. (1986) ..

Other Authorities:

113 Cong. Rec. 24,665-6 (1967)

Exchange Act Release No. 16384, 44 Fed. Reg.

70,326 (1979)

Governor’s Program Memorandum, 1985 N.Y.

Laws Chap. 915

6

IN THI

Supreme Court of the United States

OCTOBER TERM, 1986

——_ << —_________

CTS CORPORATION,

Appellant,

DYNAMICS CORPORATION OF AMERICA,

Appellee.

STATE OF INDIANA,

Intervenor-Appellant,

—_—VY—

DYNAMICS CORPORATION OF AMERICA,

Appellee.

ON APPEAL FROM THE UNITED STATES COURT OF APPEALS

FOR THE SEVENTH CIRCUIT

AMICUS CURIAE BRIEF OF THE SECURITIES

INDUSTRY ASSOCIATION, INC. IN SUPPORT

OF APPELLEE

Pursuant to Rule 36.2 of this Court, and with the consent of!

the parties, The Securities Industry Association, Inc., submits

this brief as amicus curiae in support of appellee Dynamics

Corporation of America.

Nw

THE INTEREST OF THE SECURITIES INDUSTRY

ASSOCIATION, INC.

The Securities Industry Association, Inc. (“SIA”) is a trade

association comprised of approximately 500 securities brokers

and dealers transacting business both nationally and interna-

tionally. Its membership is responsible for over ninety percent

of the securities brokerage business conducted in this country

and includes members of every national securities exchange as

well as securities firms that are not members of any exchanges.

SIA’s members service securities investors of every size and

type and perform a complete spectrum of professional securi-

ties activities, including retail and institutional brokerage,

over-the-counter market making, underwriting and other in-

vestment banking activities, various exchange floor functions,

and money management and investment advisory services. As

a consequence, SIA 1s generally recognized as a spokesman for

the securities industry in general and the broker-dealer commu-

nity in particular.

The issues in this case involve the constitutionality of the

so-called “second generation” of state takeover statutes, which

are designed to regulate, and in most instances discourage,

tender offers for corporate control other than those favored by

incumbent management. These statutes purport to replace an

earlier series of state tender offer statutes whose unconstitu-

tionality was determined by this Court in Edgar v. MITE, 457

U.S. 624 (1982) (“MITE”). In fact, however, the efforts under-

taken by the states since MITE to accommodate their takeover

legislation to the concerns articulated by this Court in that case

have been largely cosmetic. The primary purpose and effect of

the state takeover statutes, to delay and deter unsolicited

control acquisitions, has remained unaltered in the transition

from the pre-M/TE statutes to the more modern variety, of

which the statute under review is a typical example.

As a recognized spokesman and representative of the securi-

ties industry on legislative and policy matters, SIA has re-

garded with growing concern the spectre of renewed efforts at

local regulation of the national securities market by means of

State takeover statutes. There are few economic phenomena

less local and more national in character than tender offers for

corporate ccntrol. Tender offers are offered on a non-dis-

criminatory nationwide basis to all shareholders of a target

corporation. Where large public corporations are involved,

these shareholders will generally be found in nearly every state

in the Union. Indeed, because the shares of such corporations

are generally traded on a daily basis on one or another of the

nationwide securities exchanges it is generally impossible to

pinpoint, On a geographic basis, where all shareholders are

located.

Shareholders who choose to accept an offer will generally

send their acceptances and, eventually, their stock certificates,

to the bidder’s depository, whose offices will usually be located

in one of the nation’s major financial centers, outside the state

of residence of most target shareholders and, more often than

not, outside the state of domicile of either the bidder or the

target corporation. Other shareholders, rather than awaiting

completion of an offer which might be withdrawn or defeated,

often choose to seek an immediate cash premium by selling

their shares on the open market at a price that will have risen

significantly in the wake of the tender offer announcement.

Such trading, which guarantees many shareholders a profit

even when an offer is withdrawn, usually takes place on the

floor of a national exchange, which again is usually located in

a State unrelated to the domicile of shareholder, target o1

bidder.

In the above ways and others, tender offers impact directly

and substantially on the national securities market. The market

factors and processes underlying these tender offers are conse-

quently nationwide in character and—save for the impact of

the local state statutes under review—are affected only slightly,

if at all, by considerations specific to any single locality.

State attempts to regulate, and, in most cases, burden,

nationwide tender offers occasion several negative results for

4

shareholders. In the first place, by discouraging and deterring

tender offers, they deny to shareholders the premium values

characteristic of such offers. Additionally, the threat, theoreti-

cal or actual, of a tender offer often forces an inefficient or

insensitive management to respond more directly to sharehold-

ers’ concerns with a consequential improvement in the market

position of the corporation’s stock. The removal of such threat

is likely to have a depressing effect on the shares of such

corporations and ultimately on the securities market as a

whole. MITE, 457 U.S. at 643.

Furthermore, even where local statutes do not ultimately

thwart a tender offer, they inevitably add a high level of

confusion and uncertainty to the tender offer process. Under

the federal scheme, set up by the Williams Act, the rules and

processes for tender offers are clear, uniform, and straight-

forward. Brokers, dealers, investment advisors and the other

members of the securities industry are generally conversant

with their details. The superimposition upon this interstate

framework of a variety of state regulatory schemes differing in

their particulars cannot help but confuse shareholders and

their investment advisors in reaching the economic decisions

they must make with respect to their shares.

It is the position of SIA that tender offers, for all the

controversy focused on them in recent years, are on the whole

a beneficial influence on the national economy and on the

national securities market. Even if additional regulation were

thought to be necessary to deal with any abuses in the tender

offer process, such regulation would be ultimately dysfunc-

tional and detrimental to securities holders unless it were

national in scope and operation. Through promulgation of the

Williams Act, and through frequent consideration of addi-

tional legislation, Congress has shown itself equal to the task

of providing the necessary regulation.

Conversely, local legislation, impacting upon and burdening

nationwide tender offers, clearly interferes with the interstate

commerce in corporate securities. Such legislation disturbs the

existent federal regulatory framework established by Congress

with respect to tender offers and complicates any additional

steps Congress may take with respect to regulating this inter-

state phenomenon. These considerations underlay this Court’s

decision in MITE, which effectively eliminated the first genera-

tion of state takeover legislation. It is respectfully submitted

that these same considerations mandate a similar conclusion

with respect to the statute under review, as well as with respect

to all local statutes similarly devised to evade the effects of the

MITE ruling.

SUMMARY OF ARGUMENT

During the 1960s, tender offers arose as an increasingly

common method for the achievement of corporate control.

Pursuant to this method of control acquisition, potential

acquirors, by-passing the sometimes hostile managements of

target corporations, placed their offers to purchase controlling

interests in corporations directly before the target’s share-

holders. Although tender offers generally offered substantial

premiums to shareholders, and, additionally, conferred

economic benefits to the economy as a whole, M/TE, 457 U.S.

at 633, Congressional concern increased over the fact that, at

the time, tender offers operated in a regulatory vacuum,

outside the disclosure requirements of the federal securities

laws, end with no specified time period in which they were

required to remain open.

The legislative reaction was the Williams Act, whose under-

lying purpose was to regulate tender offers for the protection

and benefit of shareholders faced with a request to tender their

shares. While, in its formative stages, the proposed Williams

Act legislation was infused with an avowedly pro-management

viewpoint, Congress’ Increasing realization of the substantial

economic benefits conferred by tender offers led it to adopt,

instead, a regulatory scheme designed not to inhibit tender

offers, but rather characterized by a strict neutrality between

the interests of incumbent target management, on the one

6

hand, and those of the offeror on the other. See MITE, 457

U.S. at 633.' The Williams Act legislation, as ultimately

adopted, provided that shareholders receive full and timely

disclosure with respect to matters material to their investment

decisions and that tender offers proceed within a time frame

carefully calibrated to benefit neither bidder nor management.

In the years since the promulgation of the Williams Act,

tender offers have become an increasingly significant phenom-

enon in our nation’s economic life. While Congress has often

been requested by groups responsive to existing corporate

management to enact legislation more restrictive of hostile

takeovers, it has consistently declined to upset the delicate

neutral balance embodied in the Williams Act.

These efforts, however, have often found more sympathetic

ears in the state legislatures, which bodies are, in any case,

more easily subject to the influences and pressures of local

corporations. Thus, although at the time of the promulgation

of the Williams Act there existed virtually no state legislation

purporting to regulate acquisitions of corporate control,’ in the

years following a large number of states adopted statutes

specifically designed to regulate tender offers. In most in-

Stances these state takeover statutes imposed requirements

more burdensome on offerors than those provided for in the

federal statute. These sometimes took the form of additional

disclosure obligations and requirements for prior administra-

tive review and approval of tender offers. Almost universally,

such statutes established time frames which virtually assured

that tender offers could not be consummated during the time

I The legislative history amply reveals that the promulgators of the

Williams Act had no intention to inhibit tender offers and even

believed that the act “might encourage them.” Nor did Congress intend

to deny to shareholders “the opportunities which result from the

competitive bidding for a block of stock of a given company,” 113

Cong. Rec. 24,665-6 (1967) (remarks of Sens. Williams and Javits)

~ In 1968, when the Williams Act was enacted, Virginia was the only

state which had a takeover statute and its law had been recently passed

and never enforced

periods established under the Williams Act. While the constitu-

tionality of such statutes was consistently challenged, these

takeover statutes often provided target managements with

effective tools to at least delay a hostile offer until a more

secure defensive device could be implemented.

Finally, this Court, in M/TE, addressed head-on the question

of the constitutionality of the state takeover statutes. A clear

majority of the Court held that the Illinois takeover statute

violated the Commerce Clause of the Constitution by the

impermissible restrictions it imposed upon interstate securities

transactions. A plurality of the Court, additionally, held that

the statute violated the Supremacy Clause of the Constitution

by obstructing the regulatory scheme established by Congress

in the Williams Act. With respect to each of these constitu-

tional bases the operative impermissible characteristic of the

Statute was the same—that it operated to delay and impede

nationwide tender offers for corporate control.

Following this Court’s ruling in MITE, the state takeover

Statutes then extant were consistently struck down by the

courts, or their enforcement abandoned by state regulatory

commissions. Very recently, however, the investment commu-

nity has witnessed the resurrection of the state takeover stat-

utes in a different garb. Under the prodding of local corporate

managements, states have increasingly adopted “second

generation” takeover statutes variously labelled as “control

share” statutes or “business combination” statutes. These

Statutes purport to regulate not the tender offer process itself,

but rather the purchase of shares pursuant to such offers o- the

exercise of the essential rights of such shares following the

purchase of corporate control.’ While the statutes may vary in

their particulars, their purpose and effect is identical—to delay,

“Control share” statutes generally provide that one seeking

purchase more than a specified percentage (often 20%) of a cory

tion’s stock cannot complete such purchase absent the approva

majority of the shareholders of the corporation. The potential acquir

is generally excluded from participating in such vote. The Indiana

Statute under review technically permits a Sale transact

impede and ultimately thwart nationwide tender offers and

corporate control acauisitions.

+

Any differences between these “second generation” statutes

and the pre-M/TE legislation they replaced are more apparent

than real. As the Court of Appeals in the instant case noted,

while such statutes are “[c]leverly drafted . . . to skirt judicial

holdings that forbid states to delay tender offers beyond the

period required by the Williams Act, the cleverness is fairly

transparent.” 794 F.2d at 261 (emphasis supplied). Where the

purpose of a local statute is to delay and discourage hostile

tender offers and where the direct effect of the statute is the

Same, the particular form and method utilized to achieve this

result should not immunize the statute from constitutional

attack. To hold otherwise would be to permit form to rule

prior to sharehoider approval but biocks the transfer of any voting

rights absent such approval.

“Busin ~; combination” statutes operate to block an acquiror’s

ability to undertake a wide series of corporate transactions for an

extended period of time even if he has purchased most or all of the

shares in a target corporation. Thus, Indiana’s business combination

statute, Ind. Code, § 23-1-43-1 ef seq. (1986), which is not the subject

of the instant appeal, limits the acquiror’s ability to cause the corpora-

tion to engage in a wide number of corporate transactions, including

mergers, liquidations and the sale, lease, exchange, mortgage, pledge,

transfer or other disposition of assets or the issuance of dividends

beyond stated percentages and stated amounts. These restrictions,

however, apply only in the case of a hostile acquiror

The purpose and effect of both types of statutes is to deter and

discourage anyone from purchasing a control interest in a corporation

Thus, for example, while the State of New York in its amicus briet (at

p. 9) seeks to characterize its own business combination statute as

more neutral than the Indiana statute under review, the Governor's

Program Memorandum, 1985 N.Y. Laws Chap. 915, accompanying

the New York statute, candidly acknowledged that “the effect of the

legislation” was “to encourage a potential acquiror to negotiate 1s

proposed acquisition with the board of directors and to discourage

unilateral takeovers that depend on the assets of the target.” /d. at p. 8

(emphasis added)

We suggest that the Court, if it invalidates the Indiana control share

statute, make it clear in its opinion that other statutes such as business

combination statutes which similarly attempt to evade the MI/TI

holding and impede takeovers will also not pass constitutional m

9

substance, and to open the door to facile evasions of the

Court’s constitutional ruling.’

It is respectfully submitted that M/TE and its progeny are

fully dispositive with respect to the Indiana statute and to the

generality of “second generation” takeover statutes of which it

is representative. The continued attempt to use these statutes to

undermine federal policies and overstep constitutional bounda-

ries can only be prevented by this Court’s declaration, in

unambiguous terms, of the plain unconstitutionality of any

State legislation’ which obstructs the nationwide securities

market by setting up delays and impediments to nationwide

tender offers and other control acquisitions.

ARGUMENT

I. THE INDIANA STATUTE IS PREEMPTED BY THE

WILLIAMS ACT

A. Under Mite, State Statutes Must Not Delay Or Impede

Tender Offers

Under the preemption doctrine, which is founded upon the

Supremacy Clause of the Constitution, a state law will be

deemed unconstitutiona! where such law “stands as an obstacle

to the accomplishment and execution of the full purposes and

objectives of Congress.” Hines v. Davidowitz, 312 U.S. 52, 67

(1941); Jones v. Rath Packing Co., 430 U.S. 519, 526, 540-41

(1977). In MITE, a plurality of this Court held that a state

Statute whose terms operated to impede and delay nationwide

tender offers was unconstitutional in that it constituted an

4 Not surprisingly, the courts which have considered the “second

generation” state control acquisition statutes have, following M/TE,

ruled such statutes unconstitutional under ether the Commerce or

Supremacy Clauses of the Constitution or both. See, e.g., in addition

to the decision under review, Fleet Aerospace Corp. v. Hoiderman,

796 F.2d 135 (6th Cir. 1986); Gelco Corp. v. Coniston Partners, C.A

No. 3-86-847 (D. Minn. Nov. 10, 1986); /cahn v. Blunt, 612 F. Supp

1400 (W.D. Mo. 1985); APL Lid. Partnership v. Van Dusen Air, Inc

622 F. Supp. 1216 (D. Minn. 1985); Jerry v. Yamashita, 643 F. Supp

161 (D. Hawaii 1986)

10

obstacle to the purposes and objectives of Congress in enacting

the Williams Act which regulates the making and, in particular,

the timing of such tender offers.

It is respectfully submitted that the plurality opinion in

MITE was correct and that the same grounds anc reasons

which led the plurality to apply the preemption doctrine in

MITE clearly mandate a finding of unconstitutionality with

respect to the Indiana statute at issue here.

The »lurality opinion in MITE held that the Illinois statute

at issue in that case conflicted impermissibly with the Williams

Act in that, in its pro-management leanings, it disturbed the

balance of strict neutrality between management and offeror

which Congress, in enacting the Williams Act, had determined

to provide the best protection for shareholders in corporate

control contests.

There is no question that in imposing these requirements,

Congress intended to protect investors. But it is also

crystal clear that a major aspect of the effort to protect

the investor was to avoid favoring either management or

the takeover bidder. . . . As Senator Williams explained:

“We have taken extreme care to avoid tipping the

scales either in favor of management or in favor of

the person making the takeover bids.”

113 Cong. Rec. 24,664 (1967). This policy of “evenhand-

edness” represented a conviction that neither side in the

contest should be extended additional advantages vis-a-vis

the investor, who, if furnished with adequate information,

would be in a position to make his own informed choice.

We, therefore, agree with the Court of Appeals that

Congress sought to protect the investor not only by

furnishing him with the necessary information but also b)

withholding from management or the bidder any undue

advantage that could frustrate the exercise of an informed

choice.

1]

457 U.S. at 633-34 (emphasis supplied) (citations omitted).

A particular element of this carefully balanced approach

adopted by Congress with respect to tender offers involved

granting to the target’s shareholders sufficient time to receive

and digest the informational materials required to be distrib-

uted under the Williams Act while, at the same time, not

permitting tender offers to be so delayed as to impede their

consummation or grant to target management an undue advan-

tage in resisting takeover attempts.

. Congress intended to strike a balance between the

investor, management and the takeover bidder. The bidder

was to furnish the investor and the target company with

adequate information but there was no “inten[tion] to do

. more than give incumbent management an opportu-

nity to express and explain its position.” Once that oppor-

tunity was extended, Congress anticipated that the

investor, if he so chose, and the takeover bidder should be

free to move forward within the time frame provided by

Congress.

Id. at 634 (emphasis added) (citations omitted).

Noting that “[dJelay has been characterized as the most

potent weapon in a tender offer fight” (id. at 637 n.12), the

plurality of this Court concluded, on the basis of the legislative

history of the Williams Act as well as subsequent Congres-

sional expressions of policy, that timing was an integral ele-

ment of the legislative scheme inherent in the Williams Act.

Indeed the plurality in M/TE concluded, correctly we submit,

that the Illinois statute violated the Supremacy Clause precisely

) The clear intendment of Congress to adhere to a policy of strict

neutrality in corporate control contests was recently reaffirmed by the

unanimous opinion of this Court

The expressed legislative intent [of the Williams Act] was to

preserve a neutral setting in which the contenders could fully

present their arguments

Schreiber v. Burlington Northern, Inc., 105 S. Ct. 2458, 2463 (1985)

12

by reason of the fact that the provisions of such statute

contained the potential for delays greater than that provided in

the time framework mandated under the Williams Act. /d. at

639.°

B. The Second Generation Statutes Violate The Williams

Act’s Policy Of Neutrality

In the instant case the shareholder vote provisions of the

Indiana statute similarly offend against the time-frame manda-

ted by the Williams Act by virtually assuring that any tender

offer conducted pursuant to the Indiana statute will be subject

to delays greater than those established by the Williams Act.

The statute further provides that the ability to engender such

delays shall lie exclusively in the hands of target management.

In this manner the careful neutral balance which this Court has

recognized to be the essential policy of the Williams Act is

overthrown

Appellants’ attempts to reconcile the Indiana statute with

the Williams Act are unavailing. Thus, they argue that the

potential fifty-day delay imposed on bidders under the statute

is no greater a burden upon tender offers than the delays

imposed when bidders must leave their offers open due to the

necessity of obtaining prior state or federal regulatory ap-

provals, such as those required, for example, under the Hart-

Scott-Rodino Antitrust Improvements Act. Appellants’

analogy could not be more inapposite. There is no meaningful

similarity between delays necessarily imposed by external and

neutral regulatory requirements and delays operating at the

option and for the benefit of a hostile target management. The

extent of any delays created by the need to secure anti-trust

approvals will not depend on whether a proposed acquisition is

friendly or not. Conversely, the maximum delays permissible

under the Indiana statute will occur only when target manage-

6 Securities and Exchange Commission (“S.E.C.”) regulations pro

mulgated pursuant to the Williams Act piovide that the bidder is not

required to keep his tender offer open for more than twenty business

days. See 17 C.F.R. § 240. 14e-1(a) (1986)

ment wants them to and will serve no separate regulatory

function.

Appellants further argue that, unlike the statute deemed

unconstitutional in MITE, the Indiana statute does not delay

commencement or even consummation of the tender offer.

Under the statute, they claim, a bidder is free to close his offer

within the Williams Act time frame and only his subsequent

voting rights are affected. To the objection that no rational

tender offeror will purchase shares when he doesn’t know if he

will ever be able to vote them, appellants offer a “practical

alternative” (Brief of Intervenor-Appellant State of Indiana

(“Indiana Brief”) at pp. 62-73). They claim a purchaser can

close an offer within the Williams Act’s time frame but make

his purchases of target’s stock conditional on subsequent

shareholder approval of his voting rights.

,

However, appellants’ ‘‘practical alternative’’—in itself,

complex, burdensome, and unprecedented—ignores the basic

negative qualities of delay in tender offer situations which have

caused it to be termed ‘‘the most potent weapon’”’ against

hostile takeovers. Delay permits target management time to set

up a wide array of defensive measures—ranging from corpo-

rate restructuring, to poison pills, to self-tenders, to defensive

acquisitions—designed to irrevocably biock and impede the

takeover even if the shares already have been tendered. See

MITE, 457 U.S. at 638 n.13. Such defensive actions can be as

easily undertaken during the fifty-day delay prior to a share-

holder vote under the Indiana statute as during a delay prior to

the commencement or closing of a tender offer. The ‘‘practical

alternative’ offered by appellants therefore does nothing to

cure the negative effects of the delays which this Court con-

demned in MITE but which the Indiana statute still permits

target management to effect.

Furthermore, by excessively extending the period between

the announcement of an intention to make a bid and the actual

successful completion of the offer, the Indiana statute pro-

14

motes the very uncertainty and market volatility which the

Williams Act was intended to minimize.

C. The Second Generation Statutes Violate The Williams

Act’s Policy Of Investor Autonomy

The Indiana statute, moreover, conflicts with the Williams

Act in an even more fundamental way. Thus, the Indiana

Statute clearly establishes as a practical matter that no tender

offer can be consummated by any rational bidder absent a

shareholder vote that will grant him the voting rights that are

the reason for the offer in the first instance. This, in effect,

requires the bidder to conduct and win a proxy contest with

target management before he can purchase shares from any

shareholders. Yet the Williams Act clearly intended that the

decision to tender one’s shares be one that rested with the

individual shareholder alone and that it was not to be made

subject, by statute, to another’s control or veto.

Thus, one of the vices of the Illinois statute, as found by the

plurality opinion in MITE, was that it made the individual

shareholder’s ability to accept a tender offer subject to the

judgment of others—in that case, the Illinois Secretary of

State:

The Court of Appeals understood the Williams Act and

its legislative history to indicate that Congress intended

for investors to be free to make their own decisions. We

agree. Both the House and Senate Reports observed that

the Act was “designed to make the relevant facts known

so that shareholders have a fair opportunity to make their

decision.” H.R. Rep. No. 1711, 90th Cong., 2d Sess., 4

Rule 14d-2, 17 C.F.R. § 240.14d-2 (1985), promulgated pursuant to

the Williams ..ct, which requires a tender offer to commence not more

than five days after public announcement of a bid, was adopted on the

basis that longer delays would encourage excessive market and arbi

trage activity and thereby “deny security holders the protect.ons which

that Act was intended by Congress to provide,” Exchange Act Release

No. 16384, 44 Fed. Reg. 70,326 (1979), at 70,329. In adopting Rule

14d-2, the S.E.C. stated an express intention to pre-empt state take

over statutes tnen existent which, by permitting longer delays, operated

to “frustrate the operation and purposes of the Williams Act.” /d. at

70.330

15

(1968); Senate Report, at 3. Thus, as the Court of Ap-

peals said, “[t]he state thus offers investor protection at

the expense of investor autonomy—an approach quite in

conflict with that adopted by Congress.”

Id. at 639-40 (emphasis supplied).

The individual shareholder’s autonomy with respect to his

investment decision is no less restricted by being made subject

to the veto of other shareholders. This indeed has been the

holding of the courts which, since M/TE, have considered

control share statutes similar to the Indiana statute. E.g., Fleet

Aerospace Corp. v. Holderman, 637 F. Supp. 742, 756 (S.D.

Ohio), aff’d, 796 F.2d 135 (6th Cir. 1986) (Ohio Control Shares

Acquisition Act unconstitutional on preemption grounds be-

cause “it prevents the individual investor from deciding

whether to sell his or her stock . . . and places the decision in

the hands of other shareholders of the target company.”);

Icahn v. Blunt, 612 F. Supp. 1400, 1420 (W.D. Mo. 1985)

(Missouri statute unconstitutional where decision of “whether

to buy or to sell [control shares] would be taken out of the

hands of the shareholder and the purchaser and placed in the

hands of management and other shareholders”).

Appellants argue that whatever its purpose or impact, the

Indiana statute is constitutionally acceptable because it pur-

ports technically to deal with the internal governance of cor-

porate affairs, an area that is the exclusive domain of the

States, rather than with the sale or acquisition of securities in a

tender offer. Such an elevation of form over substance would,

however, be an absurd constitutional principle: if it were

accepted, a state could simply provide that a hostile offeror

could never merge with the target company, never receive

dividends, never have representation on its Board of Directors,

or never be allowed to choose corporate officers, all matters

which similarly can be said to be matters of “internal govern-

ance.” The purpose and impact of a statute, and not its title or

placement in the state statute book, obviously should deter-

mine its constitutional merits.

16

Indeed, even if viewed mechanistically, the Indiana statute

still would not pass constitutional muster, since it is directed

not to corporate activity, but rather to the purchase and sale of

shares among shareholders. Unlike staggered boards, cumula-

ive voting, Or supermajority provisions (corporate governance

devices cited by appellants as within the state’s power to

legislate), which protect minority rights within a corporation

by regulating the circumstances pursuant to which the corpora-

tion can undertake certain actions, the control share statutes

operate to directly regulate and discourage transactions among

individual shareholders.

Furthermore, unlike the control share statutes, the tradi-

tional corporate governance provisions cited by appellants do

not operate primarily or exclusively against an acquiror seeking

corporate control.” The Indiana statute however operates

solely and punitively against a bidder for corporate control.

Rather than incidentally affecting his ability to influence the

operations of the corporation, it immediately and instantly—

upon purchase of the control shares—eliminates the voting

rights of his stock and his ability to exercise influence, let alone

control, over the company. It is clear, in short, that “internal

corporate affairs” is a mere facade for regulation designed

directly to deter and delay hostile tender offers.

The State of Indiana does not, in fact, seriously dispute that

this is the statute’s purpose and effect. Thus, it concedes

(Indiana Brief at pp. 91-95) that one effect of the Indiana

legislation will be to substantially deter partial tender offers

although such tender offers have been consistently recognized

8 Indeed, the effects of these common corporate governance provi-

sions apply even where corporate ownership is diffused. A supermajor

ity provision may Operate just as well to prevent a merger favored by a

majority of individual shareholders of a corporation as to prevent a

merger favored by a single controlling shareholder. Indeed, such

provisions can even benefit a potential acquiror. Thus, a potential

acquiror holding 20% of a corporation’s voting stock can benefit from

an 80% supermajority merger requirement by being able to block a

defensive merger undertaken by management. Similarly, cumulative

voting guarantees him representation on the board even prior to his

achieving a majority position. It is only the takeover statutes, such as

the one at issue, which cut but one way—in favor of incumbent

management

17

as permissible under the Williams Act. And it admits further

that the intent and “practical effect” of the statute is to replace

the federal securities law policies of the Williams Act with the

securities policies of the United Kingdom:

[T]he Indiana Statute will have a practical effect analo-

gous to that of legislation in the United Kingdom which

requires majority shareholder approval of tender offers.

The British regulations allow shareholders to simulta-

neously tender their shares and vote for or against the

offer.

Indiana Brief at 95.

While economists might profitably argue the merits of the

British approach versus the informed free-market policy em-

bodied in federal law, it is respectfully submitted that the issue

of the right of any state to make this choice was settled long

ago in our federal Constitution. It is difficult to imagine a

clearer violation of the Supremacy Clause than for a state, in a

matter broadly affecting the national economy, to choose to

adopt the legislative approach of a foreign power over that of

the Congress of the United States.

In short, the clear legislative intent of the Williams Act and

the reasoning underlying the plurality opinion in M/TE man-

date a finding that the Indiana statute upsets the balance struck

by the Williams Act, and is, hence, unconstitutional.

Il. THE INDIANA STATUTE VIOLATES THE COM-

MERCE CLAUSE OF THE CONSTITUTION

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

Authority, 106 S. Ct. 2080 (1986), this Court, relying inter alia

on its plurality opinion in MITE, recently reaffirmed the

“two-tiered approach” traditionally followed in determining

the constitutionality of state economic regulation under the

Commerce Clause:

When a state statute directly regulates or discriminates

against interstate commerce, or when its effect is to favor

18

in-state economic interests over out-of-state interests, we

have generally struck down the statute without further

inquiry. When, however, a statute has only indirect effects

on interstate commerce and regulates evenhandedly, we

have examined whether the State’s interest is legitimate

and whether the burden on interstate commerce clearly

exceeds the local benefits.

106 S. Ct. at 2084 (citations omitted). Under either of the two

tests applied “the critical consideration is the overall effect of

the statute on both local and interstate activity.” Jd.

In MITE, a majority of this Court determined that a state

Statute that regulated and restricted the purchase and sale of

securities pursuant to a nationwide tender offer violated the

Commerce Clause in that the substantial burdens it imposed

upon interstate commerce outweighed the putative local bene-

fits intended to be served by the legislation. This Court, by a

plurality of four justices, additionally held that, irrespective of

the balance of national and local interests, the state takeover

Statute violated the Commerce Clause, because such legislation

constituted a direct, rather than incidental, regulation of inter-

State tender offers, a vehicle of interstate commerce.

As has been noted, the second generation post-MI/TE state

takeover statutes, of which the Indiana statute is a fair exam-

ple, differ only in form from the statute struck down in MITE;

their intended and operative effects remain the same. The

identical reasoning and constitutional considerations which

impelled the overturning of the Illinois statute in M/TE conse-

quently mandate a similar determination with respect to the

Indiana statute under review.

A. The Indiana Statute Is Unconstitutional Per Se As A

Direct Burden on Interstate Commerce

[A] state statute which by its necessary operation directly

interferes with or burdens [interstate] commerce is a

prohibited regulation and invalid, regardless of the pur-

pose with which it was enacted.

19

MITE, 457 U.S. at 642 (plurality opinion), citing and quoting

this Court’s decision in Shafer v. Farmers Grain Co., 268 U.S.

189, 199 (1925).

The Indiana statute constitutes a direct burden upon inter-

State commerce in that the practical effect of the statute is to

burden, regulate, and restrict interstate securities transactions

outside the territorial jurisdiction of the state. That nationwide

tender offers constitute interstate commerce was clearly deter-

mined by this Court’s decision in MITE and cannot be dis-

puted by appellants. 457 U.S. at 641-42 (plurality opinion).

Indeed, in the sheer multitude of its myriad securities trans-

actions carried out across state lines and national boundaries,

few business phenomena exhibit more of the characteristics of

interstate and international commerce and less of the iridicia of

localized transactions than does the modern tender offer. The

commerce in control shares generally does not involve discus-

sions Or negotiations in any particular locality. Buyers and

sellers rarely if ever meet. The operative transfers of securities

involved occur anonymously and often simultaneously on the

floor of a national exchange or by mail or wire receipt of a

transmitta! form at the central offices of a designated deposi-

tory. The transactions of this nature involved in even a single

modeiate-sized tender offer may account for hundreds of

millions of dollars in interstate commerce, and tender offers

generate transactions involving many billions of dollars of

interstate commerce yearly in the United States.

The drastic impact of contro: share statutes such as In-

diana’s on such interstate securities transaciions simply cannot

be questioned. The Indiana statute plainly restricts and bur-

dens the ability of a bidder to purchase and the shareholder to

sell, by means of a tender offer or other control share acquisi-

tion, securities of a target company. The Indiana legislation so

? In nationwide tender offers, generaily, the consummation of all sale

and purchase transactions with respect to the shares tendered pursuant

to the offer occur at a single moment, upon the expiration of the offer

At that moment, under the customary terms of the offer, the shares are

deemed “accepted” for payment. Actual payment, usually by mail or

wire transmittal, occurs shortly afterwards

20

operates even though neither the bidder nor the majority of

target’s shareholders may reside in Indiana and although no

operative act of the tender offer will occur in that state.

The Indiana statute accomplishes its burdensome and intru-

sive effect by granting to entities other than the bidder or the

individual investor the ability to delay and thwart, as a practi-

cal matter, the tender offer or proposed stock transaction.

Thus, as discussed above, under the statute, target manage-

ment is given the power to delay consummation of the tender

offer sufficiently beyond the periods mandated by federal law

so as to facilitate defensive mechanisms that may permanently

defeat the bid. The shareholder approval provisions further

deter tender offers by denuding shares purchased pursuant to

such offers of any voting rights, making the regaining of such

rights subject to a subsequent vote by a majority of the other

shareholders. At best, such provisions force the bidder to

follow up his offer with an expensive and time-consuming

proxy contest. At worst, it may leave him, having already

paid premium value, with “control” shares which give him no

influence, let alone control, over the corporation.

The plain effect of these provisions, in most cases, will be

that tender offers for target corporations subject to such

statutes will simply not be made unless favored and approved

mn advance by incumbent management. In the rare event that

an unsolicited tender offer is conducted, it will be made subject

the condition of subsequent shareholder approval, a condi-

that management, using the time provided by the statute’s

built-in delay, will seek to assure will never be met. The

attendant difficulties and uncertainties created for the bidder

will, in any case, virtually guarantee that, even where tender

offers do proceed under the Indiana statute, a much lesser cash

premium will be extended to shareholders in the offering price.

Although the Indiana statute’s restrictive effect on na-

tionwide tender offers is especially apparent, the statute’s

1V Indeed, under the Indiana Statute not only must the bidder bear his

own expenses in such a contest but he must also give “an undertaking

to pay the corporation's expenses” in calling and holding the required

stockholders meeting. Ind. Code § 23-1-42-7(a) (1986) (emphasis sur

plied)

2]

burdensome effect on interstate commerce is not restricted to

its effect on tender offers alone. The Indiana statute would

substantially deter any unsolicited acquiror from purchasing—

on the open market, by privately negotiated transaction, or

otherwise—any shares that would bring his total shareholdings

in the corporation to over 20%. Yet the vast majority of

transactions thus affected would clearly not involve Indiana

residents or acts taking place in Indiana. The Williams Act, by

contrast, only requires that full disclosure as to intentions and

background of a holder of over 5% of an issuer’s shares be

made prior to any additional purchases. The substantial bur-

dens added on by the Indiana statute clearly restrict, in a major

fashion, the freedom of non-resident shareholders to engage in

interstate commerce.

As the plurality in this Court determined in MITE, the

imposition by a state of such extraterritorial burdens on a

nationwide tender offer directly regulates and restricts inter-

State commerce and constitutes a per se violation of the

Commerce Clause.

[T}he Illinois law, unless complied with, sought to prevent

MITE from making its offer and concluding interstate

transactions not only with Chicago Rivet’s stockholders

living in Illinois, but also with those living in other States

and having no connection with Illinois. . . . It is there-

fore apparent that the Illinois statute is a direct restraint

On interstate commerce and that it has a sweeping extra-

territorial effect.

MITE, 457 U.S. at 642.

The conclusions reached in MITE, it is submitted, apply

equally to the ‘second generation’ statutes enacted to avoid

MITE’s clear impact. Such, at least, has been .he consensus of

the courts which since MITE have considered control share

acquisition laws such as the Indiana statute. See Fleet Aero-

space Corp. v. Holderman, 637 F. Supp. at 760-61; /cahn y.

Blunt, 612 F. Supp. at 1415-16; Dynamics Corporation of

America v. CTS Corp., 794 F.2d at 264; Jerry v. Yamashita,

643 F. Supp. at 165

9

sf

Appellants’ contention that the Indiana statute does not

regulate interstate commerce because it achieves its deterrent

effect through elimination of voting rights rather than through

a technical prohibition on the purchase or sale of the target’s

securities argues on behalf of a formalism which has long since

been rejected by this Court. As this Court has made clear, it is

not form but practical effect that will be determinative on the

issue of whether a state’s economic regulation impermissibly

intrudes on interstate commerce. E.g., Southern Pacific Co. vy.

Arizona, 325 U.S. 761. 775 (1945) (state law overturned on

Commerce Clause grounds where “practical effect of such

regulation is to control [conduct]. . . beyond the boundaries

of the state. . . .”); Brown-Forman Distillers Corp. v. New

York State Liquor A uthority, 106 S. Ct. 2080 at 2086 (fact that

New York law “is addressed Only to sales of liquor in New York

is irrelevant if the ‘Practical effect’ of the law is to control

liquor prices in other States.”); MITE, 457 U.S. at 643 (plural-

ity Opinion).

In short, the Seventh Circuit’s observation on the effect and

operation of the Indiana statute is fully accurate:

[I]n this case thé effect on the interstate market in securi-

ties and corporate contro] is direct, intended, and sub-

Stantial; it is not merely the incidental effect of a general

regulation of internal corporate governance. The law in

question is an explicit regulation of tender offers: that the

mode of regulation involves jiggering with voting rights

cannot take it Outside the scope of judicial review under

the commerce clause. Any other conclusion would invite

facile evasions of the clause.

794 F.2d at 264. The Indiana statute, as a direct State attempt

to regulate interstate commerce, is thus unconstitutional per

se.

I] Appellants’ recurrent emphasis that the Indiana statute must be

constitutional because it is ‘non-discriminatory’ is merely a red her

ring. The Indiana statute is olfensive to the Commerce Clause not

because it discriminates against other states but because it Operates to

burden and regulate interstate commerce, which alone is sufficient to

violate the Commerce ( lause. Lack of discrimination onl, becomes an

nN

w

B. No Significant Local Benefits Exist Which Outweigh The

Indiana Statute’s Substantial Interference With Interstate

Commerce

In MITE this Court determined that no local benefits pur-

portedly conferred by “first generation” takeover statutes,

such as the Illinois law overturned in that case, were commen-

Surate with the statutes’ “substantial” adverse effects on inter-

State commerce. These adverse effects were, in the Court’s

view, drastic in impact and national in scope, affecting both

target shareholders and the national economy as a whole:

The effects of allowing the [state regulatory authority]

to block a nationwide tender offer are substantial. Share-

holders are deprived of the opportunity to sell their shares

at a premium. The reallocation of economic resources to

their highest valued use, a process which can improve

efficiency and competition, is hindered. The incentive the

tender offer mechanism provides incumbent management

to perform well so that stock prices remain high is

reduced.

457 U.S. at 643.

Such negative impact on non-resident shareholders, non-

resident bidders and the United States economy were, this

Court observed, offset by no substantial countervailing local

benefits conferred on the state or its residents: “Insofar as the

Illinois law burdens out-of-state transactions, there is nothing

to be weighed in the balance to sustain the law.” Id. at 644

(emphasis supplied).

The burdensome impact on interstate commerce created by

control share statutes such as Indiana’s is identical to, if not

greater than, those arising out of the “first generation” pre-

MITE statutes. Indeed, appellants do not seriously contend

that the national market in control shares will continue undis-

—

issue where, as in Exxon Corp. v. Governor of Maryland, 437 U.S. 11

(1978), the statute is designed to affect transactions occurring solely

within a state’s own borders and thus, absent a discriminatory effect

would pose no constitutional problem

ew

turbed in the face of these ‘‘second generation’

24

,

Statutes. Nor,

indeed, do they set against this substantial interference with

interstate commerce any substantive local benefits allegedly

accruing from the Indiana legislation. Appellants rather re-

spond with a talismanic formula—the ‘‘internal affairs’’ doc-

trine—the mere invocation of which they suppose sullicient to

dissipate all constitutional concerns like so much mist.

1?

Indiana, while not seriously claiming that its legislation will leave

tender offers unaffected, puts forward the unique suggestion that the

Indiana statute will facilitate rather than impede corporate takeover

acquisitions. Making the Indiana statute sound like nothing so muc!. as

a Hostile Bidders’ Bill of Rights, the State stresses that the law allows

offerors an “immediate shareholder vote on the merits of their offers,”

and that the moral suasion flowing from a favorable vote in this

plebiscite will make it more difficult for management to “wage war”

against a hostile bid. (Indiana Brief at pp. 75-76). Indeed, Indiana

Suggests that, by mandating a shareholder vote on voting rights, within

“only” SO days, the “months-long” duration of “bitterly fought

takeover battles” will be truncated (Indiana Brief at p. 102).

This prognosis is not only disingenuous in concept, but also flies in

the face of logic and experience. Under the federal regulatory scheme

tender offers are not required to remain open longer than t-venty

business days, approximately half the time span provided for by

Indiana’s provision for an ‘‘immediate’’ shareholder vote. If some

tender offers now extend beyond the Williams Act’s twenty day period

it is primarily because (a) other bidders have arisen and a prolonged

auctioning process has ensued; (b) legal deficiencies, such as securities

or anti-trust violations, have been found to exist in the bidder’s offer;

Or, most commonly, (c) target management has put in place defensive

Strategies, in the form of poison pills, self-tenders, or the like, and

consummation of the tender offer is made to await judicial determina-

tions as to the propriety of these entrenchment measures designed ‘‘to

wage war’’ against the oller. Statutes such as Indiana’s obviously do

nothing to eliminate the first two of these causes of delay and would

contribute to the final cause by giving target management more time to

implement defensive tactics, generating even further delay

In sum, the argument that the statu.e is intended to confer benefits

on hostile acquirors is as much of a facade as the statute itself. Far

better the candor of the Indiana Chamber of Commerce, which

participated in the formulation and drafting of the statute, and whic

concedes in its amicus brief (at p. 18 n.9) that one of the purposes ol

the statute was “protecting the quality of corporate governance in

Indiana by granting certain protections to corporate directors” (em

phasis supplied)

25

Thus, appellants contend that because the Indiana statute on

its face deals with voting rights of shareholders, which appel-

lants claim, under the “internal affairs” doctrine, to be the

province of the states, the practical effect of the statute to

deter and burden extraterritorial interstate securities trans-

actions may be conveniently ignored. Appellants’ argument

proves too little, too much, and, ultimately, nothing at all.

As this Court observed in MITE, when faced with the

identical argument, the internal affairs doctrine is not a con-

cept relevant to constitutional law but a principle of the

conflict of laws. Such principle apportions the power to regu-

late corporations between the States so as to avoid inconsistent

rulings or legislation:

The internal affairs doctrine is a conflict of laws principle

which recognizes that only one State should have the

authority to regulate a corporation’s internal affairs—

matters peculiar to the relationships among or between

the corporation and its current officers, directors, and

shareholders—because otherwise a corporation could be

faced with conflicting demands. See Restatement (Sec-

ond) of Conflicts of Laws § 302, Comment b, pp. 307-308

(1971). That doctrine is of little use to the State in this

context. Tender offers contemplate transfers of stock by

stockholders to a third party and do not themselves

implicate the internal affairs of the target company.

457 U.S. at 645.

There is no basis for attaching to this doctrine constitutional

implications. That courts will apply Delaware law to Delaware

corporations anu Indiana law to Indiana corporations does not

mean that either Delaware or Indiana is permitted to enact,

under an “internal affairs” rubric, corporate laws that, in

violation of the national Constitution, impermissibly intrude

upon interstate commerce. The danger of inconsistent rulings

which the internal affairs doctrine was intended to minimize is

simply not implicated where an area is determined by the

Commerce Clause to be the province of federal jurisdiction to

the exclusion of that of any of the states

26

Thus, even were the instant statute predicated on a good

faith concern with respect to the internal affairs of Indiana

corporations, this would, nevertheless, still not provide the

Indiana legislature with carte blanche to ignore constitutional

limitations and intrude upon interstate commerce.’? In the

instant case, however, appellants’ attempts to justify the Indi-

ana statute under the pretext of the internal affairs doctrine are

in any event a mere charade. Even the enacters and enforcers

of second generation statutes such as Indiana’s do not pretend

that their statutes are not designed to regulate and restrict

hostile tender offers. As noted above, Indiana itself admits

that the practical effect of its legislation is to substantially

deter otherwise legitimate partial tender offers and to imple-

ment a British approach to tender offers by requiring majority

approval of shareholders for the sale of control shares.

Similarly, the State of Minnesota, which has enacted a

second generation control share statute of its own, admits in its

amicus brief to this Court (“Minn. Brief”) that the purpose

and effect of such statutes is to “inhibit the abusive use of

takeover tactics” and to mitigate the supposedly “coercive

nature of control share acquisitions” (Minn. Brief at 11). The

State of New York, as notcd, has similarly admitted, for its

own part, that the effect of its legislation is to “discourage

unilateral takeovers” (supra at p. 8 n. 3). It is thus clear that

the states themselves do not deny the fully-intended impact of

their control share statutes on tender offers.

That the State of Indiana effects such regulation of tendet

offers through in terrorem provisions respecting essential vot-

ing rights rather than by directly prohibiting purchases of the

tendered shares themselves makes, as has been noted, no

See, tor examy Brown-Forman Distillers, where, despite the

“wide latitud git the States under the Twenty-First Amendment

regulate the importation and distribution of liquor w.thin then

Court overturned provisions of a New York law

reguiating the sa f liquor on the basis of the stat ite’s “practi

106 S. Ct. at 2086

27

practical or legal difference. It is as if a state rather than

prohibiting the rental of automobiles permitted their rental—

but with their engines removed. As the State of Minnesota has

stated in the amicus brief it has filed on behalf of Indiana’s

position (id. at 15), to attempt any distinction of ithe Indiana

statute on this basis ‘‘elevates form over substance’”’:

Although the [Indiana statute] does not actually require

shareholder approval prior to the control share acquisi-

tion, the practical effect of the Indiana statute may be just

that.

Id. at 15 n.15.

If the practical effect of a state statute is to regulate and

restrict tender offers, the nature of the particular device effect-

ing such regulation, or the chapter heading of the corporate

Statute pursuant to which it takes place, cannot be of any

constitutional significance. To accept otherwise is to open the

door to wholesale regulation of interstate commerce by any

state willing to cloak its economic regulation under an appro-

priate facade. A state, under such a theory, would presumably

have the constitutional authority to permanently strip control

shareholders of voting rights upon a vote, not of the majority

of shareholders, but simply of the incumbent board of direc-

tors. For that matter the rights could be removed without

recourse to any vote at all, if the state determined that this

were an appropriate policy. Nor would a state’s regulation be

limited to removal of voting rights; it could choose to strip the

bidder of dividend rights or of any of the other indicia of

ownership as well.

Appellants’ invocation of such traditional state corporate

governance rules as supermajorities and cumulative voting, as

examples of permissible internal governance statutes which

impact on interstate commerce, does nothing to support their

contentions. As has been noted, such true corporate govern-

ance statutes, which genuinely seek to regulate the internal

operations of the corporation, bear no reation to the Indiana

statute’s direct attempt to influence the purchase and sale of

28

securities between shareholders of the corporation and other

shareholders or third parties. Indeed, these statutes demon-

strate the power of the states to adequately legislate interna!

corporate governance to protect minority shareholders without

recourse to legislation designed to obstruct the interstate se-

curities market or national tender offers."

Similarly, it adds nothing to appellants’ arguments to point

out that the voting rights stripped away by the Indiana statute

in control share transactions are themselves creatures of state

corporate law. Such an argument proves too much, since the

same could be said with respect to any of the rights attached to

corporate securities. Indeed, such securities themselves, as an

ultimate matter, are nothing more or less than an agglomera-

tion of various contract and property rights, all created and

sustained under state law. This meta-legal truth, however, has

never caused this Court or Congress any hesitation in consider-

ing transactions involving the sale or purchase of these bundles

of rights as interstate commerce. Indeed, the extensive federal

regulation of the securities markets, including the Williams

Act, is based squarely on the assumption that such transactions

do constitute interstate commerce.

In sum, the balancing test required under the Commerce

Clause for the Indiana statute is no different than that which

was undertaken by this Court in MITE. As in MITE, the

Statute here is clearly unconstitutional.

14 The attempt to support the Indiana statute as an exercise in “share

holder democracy” (see, e.g., Minn. Brief at p. 11) Is particular

disingenuous, especially in view of the act's direct effect and intent t

4

disenfranchise shareholders who would otherwise possess over 20°

the shareholder vote, a singularly undemocratic provision

CONCLUSION

This Court should affirm the judgment below.

Dated: January 20, 1987

Respectfully submitted,

MARC P. CHERNO

Counsel of Record

IRWIN BLUM

of

FRIED, FRANK, HAKRIS, SHRIVER

AND JACOBSON

One New York Plaza

New York, New York 10004

(212) 820-8000

WILLIAM J. FITZPATRICK

GERARD J. QUINN

The Securities Industry Association, Inc.

120 Broadway

New York, New York 10271

Of Counsel