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

) , » Supreme Court, U.S,

‘“ELUED

987

States. SPANIOL, JR

CLERK

Nos. 86-71 and 86-97

In the Supreme Court of the Unite

OCTOBER TERM, 1986

=e

CTS CORPORATION, APPELLANT

Vv.

DYNAMICS CORPORATION OF AMERICA, ET AL.

STATE OF INDIANA, APPELLANT

Vv.

DYNAMICS CORPORATION OF AMERICA, ET AL.

ON APPEALS FROM THE UNITED STATES COURT

OF APPEALS FOR THE SEVENTH CIRCUIT

BRIEF FOR THE

SECURITIES AND EXCHANGE COMMISSION

AND THE UNITED STATES AS AMICI CURIAE

CHARLES FRIED

Solicitor General

LOUIS R. COHEN

Deputy Solicitor General

Roy T. ENGLERT, JR.

DANIEL L. GOELZER Assistant to the Solicitor General

General Counsel Department of Justice

PAUL GoNSON Washington, D.C. 20530

Solicitor (202) 633-2217

DIANE SANGER

Assistant General Counsel

CATHERINE DIXON

JOAN E. MCKOWN

Attorneys

Securities and Exchange

Commission

Washington, D.C. 20549

ee

QUESTION PRESENTED

Whether the Control Share Acquisitions Chapter of the

Indiana Business Corporation Law is unconstitutional

under the Supremacy Clause or the Commerce Clause of

the United States Constitution.

(1)

TABLE OF CONTENTS

Interest of the Securities and Exchange Commission

ou nian pniisiiounansennmianetsen

RT ne

Introduction and summary of argument ...........................

Argument:

The Indiana Control Share Acquisitions Chapter

is invalid under the Commerce Clause ....................

A a

A. The Indiana Chapter can only be understood

as a restraint on transactions in voting rights

and the shares that embody them ......................

B. The broad power of a chartering state to gov-

ern the internal affairs and protect the share-

holders of its corporations does not save the

Indiana Chapter .................... SAAS Mateete te cacatintens

Is eeniininircsiatnsontonss

TABLE OF AUTHORITIES

Cases:

APL Ltd. Partnership vy. Van Dusen Air, Inc.,

622 F. Supp. 1216 (D. Minn. 1985), vacated as

moot, No. 85-5285 (8th Cir. Nov. 26, 1985)...

Arkansas Electric Cooperative Corp. v. Arkansas

Public Service Commission, 461 U.S. 375 (1983) ..

Baldwin v. G.A.F. Seelig, Inc., 294 U.S. 511

ca hdhiealtadnnmnieinmtistabinminemnsvees

Brown-Forman Distillers Corp. v. New York

State Liquor Authority, No. 84-2030 (June 3,

Page

20

29

15

20

24

SET sididetiassiibbrecinansenntidacianinenanervnemeeessetenereenscosssenenee 18, 20, 24

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

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

ES a

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

aac ates dansdirentnnsoanennesentesantetenn

16, 23

IV

Cases—Continued: Page

Cort v. Ash, 422 U.S. 66 (1975) .........2....--cccccccececcceees 24

Davidge v. White, 377 F. Supp. 1084 (S.D.N.Y.

ITTTIED ccieshscsathchsetdacaessahiteneetaatmmataniainnemnataciladuadianlicadaials 24

Dean Milk Co. vy. City of Madison, 340 U.S. 349

SITTIN scssctadsieccemctienadiidislammeinelsiiiasaeictelimancididinibadedenseimpaniiiduicsions 19

Diamond v. Oreamuno, 24 N.Y.2d 494, 248 N.E.2d

PRA 8 EF 24

Dirks v. SEC, 463 U.S. 646 (1983) ............-------cccee--e- 24

Doleman Vv. Meiji Mutual Life Insurance Co., 727

2 8 Fo fF eee 24

Dynamics Corp. of America Vv. CTS Corp., 635

ae St a) st ee Sl ee 6

Dynamics Corp. of America v. CTS Corp., 805 F.2d

ee I I oii ete ee a, 23

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

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

Re I vivcenicddsnceisihecntadeeninisesieaciatanaicialinaneiiiiien 21

First National City Bank vy. Banco Para El

Comercio Exterior de Cuba, 462 U.S. 611

TIED caiccssnincinitadiindsttenichitupidhiinipuciabcduaniaieniammentiaantiadiapens 24

Fleet Aerospace Corp. v. Holderman, 637 F. Supp.

742 (S.D. Ohio), aff’d, 796 F.2d 135 (6th Cir.

1986), appeal pending sub nom. Ohio v. Fleet

BAPE, TE. THEE seicatecsctacebinieteninnins 15, 25

Freeman V. Decio, 584 F.2d 186 (7th Cir. 1978).. 24

Freeman V. Hewit, 329 U.S. 249 (1946) ..................... 17-18

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

CE Fa: Fe, Ha ee ctairaiinsetiantiei sei ttarinantinnie 15, 25

Gerdes Vv. Reynolds, 28 N.Y.S.2d 622 (Sup. Ct.

SOIT scsceninisisinsttccshsscpuinamniia Rlimianditdiak dial iata iia ated 25

Glass v. Glass, 228 Va. 39, 321 S.E.2d 69 (1984). 25

Great Atlantic & Pacific Tea Co. v. Cottrell, 424

a: MGI SETI coccssecnciceceetiicinnadsniidiadeiebasttiabiamaiaiaaatelaeiaeaes 17

Great Western United Corp. Vv. Kidwell, 577 F.2d

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

sub nom. Leroy v. Great Western United Corp.,

Fi ee IIE civceusscntuicictensonstinicciecidtiagvtnteteemiele 26

H.P. Hood & Sons v. Du Mond, 336 U.S. 525

a a ee 17

Hall v. Geiger-Jones Co., 242 U.S. 539 (1917).... 21

Cases—Continued : Page

Hughes vy. Alexandria Scrap Corp., 426 U.S. 794

IIIT cinco soscecinoncdeiniadisibannscensenasadaneaeiaeaapenneniaeanedean 18

Hughes v. Oklahoma, 441 U.S. 322 (1979) ................ 17, 19

Icahn vy. Blunt, 612 F. Supp. 1400 (W.D. Mo.

IIIT, sisccesssieadiuatacietainsnanscnneeniieanpabsenieidaeiiaesdibalbidmaneanebesnapdtontén 15

Insuranshares Corp. v. Northern Fiscal Corp.,

36 F. Gem. SB CE... Fe. 1969) 2. -.--~2-2nnccnceecsseseee 25

Lewis v. BT Investment Managers, Inc., 447 U.S.

EEE ESS RE Rp or te AES ES PR Ee 19

MITE Corp. v. Dixon, 633 F.2d 486 (7th Cir.

1980), aff'd swb nom. Edgar v. MITE Corp.,

I i 7

Maine v. Taylor, No. 85-62 (June 23, 1986) ........ 18, 20-21

McDaniel vy. Painter, 418 F.2d 545 (10th Cir.

1969) ......... PPS LIES Mkt a nA o> BYNES oS a OO 24-25

Merrick v. N.W. Halsey & Co., 242 U.S. 568

IS sei as a 21

Northeast Bancorp, Inc. vy. Board of Governors of

the Federal Reserve System, 472 U.S. 159

(| IR SEREEEREER SSRN neeRiearc or Arm ce ero oar nomen one ny Cen er e 17

Panter Vv. Marshall Field & Co., 646 F.2d 271 (7th

Cir.), cert. denied, 454 U.S. 1092 (1981)........ 23

Perlman v. Feldmann, 219 F.2d 173 (2d Cir.

| RRR cS AERA ane cea ORONO oNE NT DOP FON ener 25

Piper v. Chris-Craft Industries, 430 U.S. 1 (1977).. 9

Polin v. Conductron Corp., 552 F.2d 797 (8th

Cir.), cert. denied, 434 U.S. 857 (1977)........ 24

Raymond Motor Transportation, Inc. v. Rice, 434

a 20

Ritchie v. McGrath, 1 Kan. App. 2d 481, 571 P.2d

ny 25

Santa Fe Industries v. Green, 430 U.S. 462 (1977) .. 23

Schein v. Chasen, 313 So. 2d 739 (Fla. 1975)........ 24

Schreiber v. Burlington Northern Inc., 472 U.S. 1

ERR en ee Ee RB PE SES ST ee 23

Shafer v. Farmers Grain Co., 268 U.S. 189

UES GR RES SRS ASR TR. SSE LU A 20

South-Central Timber Development, Inc. Vv. Wun-

nicke, 467 U.S. 82 (1981)

VI

Cases—Continued : Page

Southern Pacific Co. v. Arizona, 325 U.S. 761

CIDAG) ......ccccccececcecccercesseccsecessssessssnssnnnsoisasnepnetaconosases 19

State Tax Commission v. Aldrich, 316 U.S. 174

CID ocieececsccinnecessisnvenerisvonnssesenntsannennnssemmnananianinenant 18

Terry Vv. Yamashita, [Current] Fed. Sec. L. Rep.

(CCH) © 92,845 (D. Hawaii June 13, 1986)...... 15

Thomas V. Roblin Industries, 520 F.2d 1393 (3d

CR, TTD caeececevacenccnsencnneennteuhiniinianenmneenenatammmyrianatinies 24

Thompson V. Hambrick, 508 S.W.2d 949 (Tex.

Cle. Ame. 19TE) n<-s0c--anc<es0-ecescccnsenprocncesenscesnnsapsacsone 25

Constitution and statutes:

U.S. Const. :

Art. I, § 8, Cl. 3 (Commerce Clause) ..........----.--. passim

Art. IV, Cl. 2 (Supremacy Clause) .................... 6,14

Amend. XIV (Due Process Clause) ................... 18

Securities Exchange Act of 1934, 15 U.S.C. (&

Bume. TIT) TOR 66 BOG. ....-2-<-2002---cccoreccnssescoccernnnnserness 2

8 ISG), 16 U.S. THER) 3naaanneneccnecencccnsseenes eee 2

§ 14(a), 15 U.S.C. 781 (a) ............-.-..-coccreceeeseensees 3

Williams Act, Pub. L. No. 90-439, 82 Stat. 454

CD cccccinsssntansseviniinssenatinnsnnpninisincemnasiansmnindaiaiiiel 3, 6, 7, 8, 9

Ind. Code Ann. (Burns Supp. 1986) :

0 005.595 tg ORDO O cence

I

cai

Ro ae

FEELS LOO

SE ET TENET

OLS EEE

ON ERLE AT

elimina

$§ 23-1-42-1 to 2-1-4 DVL oa cecceeecccveeecceeeccseeecennes

ESS REAL END

EEE A an

NES RE ae el

NN EEE LEENA

REET SS SIRT LETS

OSE TERE ae

ERE RR

bo bo

Lor rh he WR CLOT & RW OH

VII

Constitution and statutes—Continued : Page

TTT crash ctl dieipaetidaiiaptidenanatiabiadaanianinsiniiiced 3,4

TTI scape etaiaadleccaensinbnienanniiensinelionsiioeaiianes 5

8 SE Ney eer aan S eee ee te RT 5

III «1. cd cs cecal Ceuaieinabineeioneaoniadpinl 4

a okipeeeekamcndamenagiie 4

II cashes escicaeapepnneuisabinisnennsaessendinn 5

EE SE ae ae OAT reo TE 5

a ce leeediaelabieiaaliidile 5, 16

RE SER RRS iery een eee recs be a 25

Miscellaneous:

E. Aranow, H. Einhorn & G. Berlstein, Develop-

ments in Tender Offers for Corporate Control

) . | ae | LEE ELSE I PROP NIST OE ee OD 13, 26

E. Aranow & H. Einhorn, Tender Offers for Cor-

I I ITE scievininiatsteciesvinectetntevtuasbiatnanianiineens 13

Bebchuk, The Case for Facilitating Competing

Tender Offers, 95 Harv. L. Rev. 1028 (1982).... 27

Bebchuk, The Case for Facilitating Competing

Tender Offers: A Reply and Extension, 35

S| fll eee 27

Block, Barton & Roth, State Takeover Statutes:

The “Second Generation”, 13 Sec. Reg. L.J. 332

a satiededintbanetan 14

Bradley & Rosenzweig, Defensive Stock Repur-

chases, 99 Harv. L. Rev. 1377 (1986) ..................... 27

Buxbaum, Federalism and Company Law, 82

Mich. L. Rev. 1163 (1984) ..................... poe Ts 15, 22-23

Carney, Shareholder Coordination Costs, Shark

. Repellents, and Takeover Mergers: The Case

Against Fiduciary Duties, 1983 Am. B. Found.

SERENE Rey or mesenteric eee 27-28

Easterbrook & Fischel, Ayctions and Sunk Costs

in Tender Offers, 25 Stan. L. Rev. 1 (1982)... 27

Easterbrook & Fischel, Corporate Control Trans-

actions, 91 Yale L.J. 698 (1982) ............................. 27

Easterbrook & Fischel, The Proper Role of a

Target’s Management in Responding to a Ten-

der Offer, 94 Harv. L. Rev, 1161 (1981) 0.0.0.0... 27

vill

Miscellaneous—Continued : Page

Eule, Laying the Dormant Commerce Clause to

Rest, 91 Yale L.J. 425 (1982) -.....-.-.--------esee0--+ 17

Gilson, A Structural Approach to Corporations:

The Case Against Defensive Tactics in Tender

Offers, 33 Stan. L. Rev. 819 (1981) .............-.------ 27

Gilson, Seeking Competitive Bids Versus Pure

Passivity in Tender Offer Defense, 35 Stan. L.

Rev. 51 (1982)...............ccccsosoreeerecesserecesececcssnnnnseneees 27

Kozyris, Corporate Wars and Choice of Lew,

OR REE ——————————————— 21, 25

Langevoort, State Tender-Offer Legislation: In-

terests, Effects, and Political Competency, 62

Cornell L. Rev. 213 (1977) ........----------00+--eeeeee-eneeeees 28

Levmore, Interstate Exploitation and Judicial

Intervention, 69 Va. L. Rev. 563 (1983) .............-.. 22, 23

Lipton, Takeover Bids in the Target's Board-

room, 35 Bus. Law. 101 (1979) ........------------s--ee+--0++ 28

Lipton, Takeover Bids in the Target’s Board-

room: A Response to Professors Easterbrook

and Fischel, 55 N.Y.U. L. Rev. 1231 (1980)... 28

Lipton, Takeover Bids in the Target’s Board-

room: An Update After One Year, 36 Bus.

Oe 28

1 M. Lipton & E. Steinberger, Takeovers &

LR, ) 14

Loss, Foreword to Symposium, Controlling Cor-

porate Takeover Bids: State Regulation and

the Ohio Approach, 21 Case W. Res. L. Rev.

A) 28

L. Loss, Fundamentals of Securities Regulation

(19GB & Bape. 1986) .~.-ee--c--e0ee--ceoseccocescsenceecereeseeee 13, 14

Loss, The Conflict of Laws and the Blue Sky

Laws, 71 Harv. L. Rev. 209 (1957).....................- 21

Lowenstein, Pruning Deadwood in Hostile Take-

overs: A Proposal for Legislation, 83 Colum.

Se 8 fen 27

Manne, Mergers and the Market for Corporate

Control, 73 J. Pol. Econ. 110 (1965) ....................-- 27

Miscellaneous—Continued : Page

Newlin & Gilmer, The Pennsylvania Shareholder

Protection Act: A New State Approack to De-

flecting Corporate Takeover Bids, 40 Bus. Law.

OF) _____ ee 15

Note, Common Law Corporate Recovery for

Trading on Non-Public Information, 74 Colum.

Bn, De, BE CIO ecescccsessccerrsctcenereensnccecesssavenseresese 24

Note, Securities Law and the Constitution: State

Tender Offer Statutes Reconsidered, 88 Yale

ee 18, 22

Oldham, Regulating the Regulators: Limitations

upon a State’s Ability to Regulate Corporations

with Multistate Contacts, 5 Del. J. Corp. L. 181

CD ccccctecsccnesnstnncersesinsnncnmnanamnctamecsnmeiamtnennaete 21

Restatement (Second) of Conflicts of Laws

| ) cree nnn 26

Ruback, Assessing Competition in the Market for

Corporate Acquisitions, 11 J. Fin. Econ. 141

CD neces rcscsertesnensnctscnciemesesececesnenmnenenepeavemnecsuaeeeoces 27

Sargent, Do the Second-Generation State Take-

over Statutes Violate the Commerce Clause?,

8 Corp. L. Rev. 3 (1985)........-.---.c--ce--eceseeeceeneeeseeees 14, 22

Warren, Developments in State Takeover Regu-

lation: MITE and its Aftermath, 40 Bus. Law.

eee 14, 15

Wilner & Landy, The Tender Trap: State Take-

over Statutes and Their Constitutionality, 45

Fordham L. Rev. 1 (1976) ...........-------.2----222--220-00-+- 26

Winter, State Law, Shareholder Protection, and

the Theory of the Corporation, 6 J. Legal Stu-

dies 251 (1977) ...... Ms Lett ERA ee ee OO 28

R. Winter, Government and the Corporation

Iu the Supreme Court of the United States

OCTOBER TERM, 1986

No. 86-71

CTS CORPORATION, APPELLANT

Vv.

DYNAMICS CORPORATION OF AMERICA, ET AL.

No. 86-97

STATE OF INDIANA, APPELLANT

' Vv.

DYNAMICS CORPORATION OF AMERICA, ET AL.

ON APPEALS FROM THE UNITED STATES COURT

OF APPEALS FOR THE SEVENTH CIRCUIT

BRIEF FOR THE

SECURITIES AND EXCHANGE COMMISSION

AND THE UNITED STATES AS AMICI CURIAE

INTEREST OF THE SECURITIES AND

EXCHANGE COMMISSION AND THE UNITED STATES

These appeals present the question whether the Control

Share Acquisitions Chapter of the Indiana Business Cor-

poration Law is constitutional as applied to “control share

acquisitions” occurring in interstate commerce. The Secu-

rities and Exchange Commission and the United States

submit this brief primarily to address the constitutional-

ity of the Indiana statute under the Commerce Clause.

The Commission is responsible for the administration

and enforcement of the federal securities laws, including

(1)

2

the regulation of national securities exchanges and other

securities markets and the regulation of tender offers in

interstate commerce. See generally Securities Exchange

Act of 1934, 15 U.S.C. (& Supp. III) 78a et seg. As the

federal agency primarily responsible for regulating the

national securities marketplace in the public interest and

for the protection of investors, the Commission has a

substantial interest in the question whether a state law

regulating “control share acquisitions” unconstitutionally

burdens the national securities marketplace, which is an

important part of interstate commerce.

The United States has an interest in proper interpreta-

tion of the role of the Commerce Clause in our federal

system. The United States has an interest in both the

free flow of commerce among the states and »roper con-

sideration of the prerogatives of the states.

STATEMENT

1. Appellant CTS Corporation (CTS) is an Indiana

corporation with its principal place of business and sub-

stantial assets in Indiana (CTS J.S. App. A5). The com-

mon stock of CTS is listed for trading on the New York

Stock Exchange (ibid.).1 This case arises out of efforts

of Dynamics Corporation of America (Dynamics), a pub-

licly held corporation organized under the laws of New

York, with its principal place of business in Connecticut,

to acquire additional shares of stock in CTS by means of

a Lender offer (ibid.).

As of March 10, 1986, Dynamics was the beneficial

owner of approximately 9.6% of the common stock of

CTS, which was then selling at approximately $36 per

share (CTS J.S. App. Al, A6, A13). On that date,

Dynamics initiated a cash tender offer for another 1 mil-

lion shares of CTS stock at $43 per share (id. at Al,

A5). The addition of 1 million shares to the stock it

already owned would give Dynamics a total of approxi-

1The common stock of CTS is registered with the Commission

pursuant to Section 12(b) of the Securities Exchange Act of 1934,

15 U.S.C. 78i(b) (CTS J.S. App. AB).

3

mately 27.5% of the common stock of CTS (id. at Al).

As required by the Williams Act, Pub. L. No. 90-439, 82

Stat. 454 (1968) (codified at 15 U.S.C. 78m(d)-(e) and

78n(d)-(f)), Dynamics and CTS made certain filings

with the Commission in connection with this tender offer.

Also on March 10, Dynamics announced its intention

to elect a full slate of nominees to the CTS board of di-

rectors at the annual shareholders meeting scheduled for

the following month (CTS J.S. App. A31-A32; CTS Br.

2; Dynamics Mot. to Aff. 2). On the same day, Dynamics

filed suit in the United States District Court for the

Northern District of Ilinois challenging CTS’s proxy

solicitations for the upcoming meeting (CTS J.S. App.

A2).2. The issues raised in the initial complaint are not

before this Court.

2. Several days before the commencement of Dynamics’

tender offer, the Governor of Indiana had signed into law

a revised Indiana Business Corporation Law (Ind. Code

Ann. §§ 28-1-17-1 to 23-1-54-2 (Burns Supp. 1986)),

which included the Control Share Acquisitions Chapter

(id. $§ 23-1-42-1 to -11).2 Starting August 1, 1987, the

new Business Corporation Law will apply to all Indiana

corporations (Ind. Code Ann. § 23-1-17-3(a)), but cor-

porations will be allowed to amend their articles of in-

corporation or bylaws to opt out of the Control Share

Chapter (id. § 23-1-42-5). Before August 1, 1987, the

statute is not automatically applicable but allows cor-

porations to opt into the new Business Corporation Law,

including its Control Share Acquisitions Chapter, by res-

2In its complaint, Dynamics sought to enjoin CTS’s proxy solici-

tations as violative of Section 14(a) of the Securities Exchange

Act of 1934, 15 U.S.C. 78n(a), and the Commission’s rules there-

under (CTS J.S. App. A29-A30).

3 The new law was signed on March 4, 1986. Hereafter, all cita-

tions to the Business Corporation Law and its Control Share

Acquisitions Chapter will be to the version appearing in the 1986

Cumulative Supplement to Burns Indiana Statutes Annotated, Code

Edition. The Control Share Acquisitions Chapter is reprinted in

CTS J.S. App. A167-A188.

4

olution of the board of directors and without any share-

holder action (id. § 23-1-17-3(b)). On March 27, 1986,

the CTS board of directors by resolution opted into the

new statute as of April 1, 1986 (CTS J.S. App. A2, A33).

Pursuant to the new law, shares acquired in an “issu-

ing public corporation” * in excess of certain prescribed

levels of voting power, termed “control shares,’® are

stripped of all voting rights unless the shareholders of

the corporation, in the manner described below, vote to

restore voting power to the control shares (Ind. Code

Ann. §§ 23-1-42-5, -9). The shareholders decide whether

to restore voting power to the control shares either at the

next special or annual meeting (id. § 23-1-42-7(c)) or at

a speciai meeting called at the request of the person who

proposes to make or has made a control share acquisition.

Management of the subject company must schedule a

special shareholders meeting within 50 days after the

acquiror (1) delivers an “acquiring person statement”

setting forth specified information; (2) requests such a

meeting; and (3) provides an undertaking to pay the

*An “issuing public corporation” is defined as an Indiana cor-

poration that has (1) 100 or more shareholders; (2) its principal

place of business, its principal office, or substantial assets in In-

diana; and (8) more than 10% of its shareholders resident in

Indiana, or more than 10% of its shares owned by Indiana resi-

dents, or more than 10,000 of its shareholders resident in Indiana.

Ind. Code Ann. §§ 23-1-20-5, 23-1-42-4(a).

5A “control share acquisition” is an acquisition of shares that

causes the acquiror to cross the 20%, 3314%, or 50% threshold

of voting power in an issuing public corporation. Ind. Code Ann.

§§ 23-1-42-1, -2(a). “Control shares” are those acquired in such a

transaction and any other shares acquired within 90 days or pur-

suant to a plan to make a control share acquisition. Jd. §§ 23-1-42-1,

-2(b). Dynamics’ proposed acquisition would have crossed the 20%

threshold. Certain acquisitions, such as acquisitions pursuant to

the laws of descent and distribution, are excepted from the defini-

tion of “control share acquisition.” Jd. § 23-1-42-2(d) and (e).

Acquisitions pursuant to an agreement of merger or plan of share

exchange to which the corporation is a party are also excepted

from the definition. Id. § 23-1-42-2(d) (5).

5

expenses of the meeting. Jd. §§ 23-1-42-6 and -7. If the

acquiror does not submit an acquiring person statement,

or if the control shares are not given voting rights by the

shareholders, then after a specified period the acquiror’s

shares may be redeemed by the subject company, if its

articles of incorporation or bylaws permit (id. § 23-1-

42-10).

In order for the control shares to get back their voting

rights, the acquiror must prevail on two votes.° Under

Ind. Code Ann. § 23-1-42-9(b) (1), there is a vote in

which all shareholders of record are entitled to vote.’

Under Ind. Code Ann. § 23-1-42-9(b) (2), there is a vote

in which “interested shares” are disqualified from voting.*®

The acquiror will prevail only if, in each vote, the grant

® This appears to be the reasonable construction of the statute.

The State, however, argues (Indiana Br. 29 n.*) that the new law

requires two votes only “if the proposed control share acquisition

would. if fully carried out, result in any of the changes described

in IC 23-1-38-4(a),” relating to changes in the capital structure of

the company.

T Section 23-1-42-9(b) (1) provides:

To be approved under this section, the resolution must be

approved by: * * * Each voting group entitled to vote sepa-

rately on the proposal by a majority of all the votes entitled

to be cast by that voting group, with the holders of the out-

standing shares of a class being entitled to vote as a separate

voting group if the proposed control share acquisition would,

if fully carried out, result in any of the changes described in

IC 23-1-38-4(a) * * *.

8“Tnterested shares” are defined in Ind. Code Ann. § 23-1-42-3

as shares owned by the acquiror, any officer of the issuing public

corporation, or any employee of the issuing public corporation who

is also a director. Shares held by directors who are not employees

are not “interested shares” and may be voted in both votes. The

requirement of a double victory poses a special problem for the

acquiror: if it seeks to offset management-controlled shares in the

“all-share” vote by buying tendered shares, these shares (which

presumably would have been likely to vote in favor of the acquiror)

will not be counted in the “disinterested share” vote,

of voting rights to the control shares is approved by a

majority of the votes entitled to be cast.°

8. After the CTS hoard elected to be governed by the

Control Share Acouisitions Chapter, Dynamics did not

comply with the provisions of the Chapter but instead

immediately amended its complaint in this action. Dyna-

mics sought injunctive relief and a declaration that the

Control Share Acquisitions Chapter was preempted by the

Williams Act and imposed an unconstitutional burden on

interstate commerce in violation of the Commerce Clause.

CTS J.S. App. A2, A33-A34.

The district court entered an order on April 9, 1986,

invalidating the Chapter as violative of the Supremacy

Clause (CTS J.S. App. A87). In a second opinion, issued

April 16, 1986, the district court ruled for Dynamics and

against CTS on the additional ground that the statute

impermissibly burdens interstate commerce (id. at A124,

A139).

In an expedited appeal, the court of appeals affirmed

both rulings of the district court (CTS J.S. App. A2,

A28).’° The court noted the dual-vote feature of the Con-

trol Share Chapter, i.e., that “[a] decision in favor of

awarding voting rights requires a majority both of all

shares and of all ‘disinterested’ shares” and that, “[w]ith-

out these two majorities, the acquirer’s shares remain

. nonvoting shares” (id. at A20). The court found it

“fairly transparent” that the Chapter was drafted “to

skirt judicial holdings that forbid states to delay tender

offers beyond the period required by the Williams Act”’

®In corporations with more than one class of stock, the approval

must be given by a majority of the votes entitled to be cast in each

“voting group,” as defined in Ind. Code Ann. § 23-1-20-28. In the

present case, because CTS has only one class of voting stock, there

would be only one “voting group” for purposes of each of the two

required votes.

10 After the ruling of the court of appeals, Dynamics acquired

tendered shares, increasing its ownership position in CTS to more

than 27%. Dynamics Corp. of America v. CTS Corp., 635 F. Supp.

1174, 1178 (N.D. Ill. 1986).

7

(ibid.), because an acquiror who is not interested in

acquiring nonvoting shares is in effect forced to await

the shareholders meeting before accepting tendered

shares. “So he must hold the tender offer open for 50

days, rather than the 28 days required (on average) by

the SEC’s regulations under the Williams Act. * * *

And he can have no great confidence in being able to win

the vote on voting rights, since he cannot vote his own

shares.” Ibid.

The court of appeals explored the legislative history of

the Williams Act and the substantial body of precedent

interpreting it to forbid state legislation that adds delay

to tender offers or otherwise upsets the balance that Con-

gress struck between target management and tender

offeror (CTS J.S. App. A21-A23). Despite admitting

“doubts” about that precedent (id. at A23, A24), the

court felt bound to follow it in light of MITE Corp. v.

Dixon, 683 F.2d 486, 490-499 (7th Cir. 1980), aff’d on

other grounds sub nom. Edgar v. MITE Corp., 457 U.S.

624 (1982)."' The court found it a “straightforward”

matter to apply that precedent to invalidate the Chapter,

since both the delay imposed by the Control Share Chapter

and its shareholder-vote provisions were inimical to ten-

der offers (CTS J.S. App. A23).

In deciding the Commerce Clause issue, the court

weighed the local benefits provided by the Control Share

Chapter against the burden that it places on interstate

commerce (CTS J.S. App. A24-A27). The court found

a burden on interstate commerce because “we can assume

that the vast majority of both [CTS’s] shareholders and

Dynamics’ shareholders are nonresidents [of Indiana, and

t]he statute gravely impairs Dynamics’ ability to do busi-

4 Justice White’s opinion in MITE reached the Williams Act

issue and agreed with the Seventh Circuit (457 U.S. at 630-640),

but that portion of the opinion was joined by only three Justices.

The other two Justices who addressed the issue disagreed (id. at

646-647 (opinion of Powell, J.); id. at 655 (opinion of Stevens,

J.)). See note 12, infra.

8

ness with any of CTS’s shareholders” (id. at A25) ; be-

cause “the Indiana statute is calculated to impede trans-

actions between residents of other states” (ibid.); and

because “the efficiency with which [corporate assets] are

employed * * * depends on the market for corporate

control—an interstate, indeed international, market that

the State of Indiana is not authorized to opt out of, as in

effect it has done in this statute” (id. at A26 (citing

Edgar v. MITE Corp., 457 U.S. at 463 (opinion of the

Court) )). The court found no sufficient countervailing

local benefit because “Indiana has no interest in protect-

ing residents of Connecticut from being stampeded to

tender their shares to Dynamics at $43” (CTS J.S. App.

A25 (citing MITE, 457 U.S. at 642-643 (opinion of the

Court))) and because residents of Indiana _ receive

“trivial or even negative benefits” from the Control Share

Chapter (CTS J.S. App. A25). The court rejected a

claim that the “internal affairs” doctrine could save the

statute, since “in this case the effect on the interstate

market in securities and corporate control is direct, in-

tended, and substantial; it is not merely the incidental

effect of a general regulation of internal corporate gov-

ernance” (id. at A27). Thus, the court held that the

Control Share Chapter is invalid under the Commerce

Clause.

INTRODUCTION AND SUMMARY OF ARGUMENT

The Commission and the United States believe that the

judgment of the court of appeals should be affirmed. This

brief argues for affirmance only on the ground that the

Chapter violates the Commerce Clause for a more specific

reason than the reasons offered by the court of appeals.

The United States believes that the Indiana Chapter

is not preempted by the Williams Act. As stated by ap-

pellant CTS (Br. 16-17), there is no conflict between any

provision of the Williams Act and any provision of the

Indiana Chapter that makes it impossible to comply with

9

both statutes. As also stated by appellant CTS (Br. 21-

22), there is no preemptive federal statutory policy that

the Indiana Chapter violates: the Williams Act was

designed to favor neither the takeover bidder nor target

management, see Piper v. Chris-Craft Industries, 430

U.S. 1, 29 (1977), but it does not prohibit states from

adopting laws that operate to favor one side or the other,

unless those laws conflict with the Williams Act or the

Commission’s regulations under that Act. Cf. ibid.

The Indiana Chapter does offend the Commerce Clause.

It applies to “public” corporations, a category defined so

as to consist, in substantial part, of corporations whose

shares have been offered and sold in interstate commerce.

CTS is such a corporation: its common stock is listed

on the New York Stock Exchange. The central feature

of the Indiana Chapter is an express restraint on cer-

tain transfers of the voting rights of such shares: the ap-

proval of “disinterested” shareholders is required before

a willing seller may sell his voting rights to a willing

purchaser in a transaction that meets the definition of

“contro! share acquisition.” As a practical matter, in all

cases in which the buyer’s objective is in fact “control,”

the Indiana Chapter makes that approval a precondition

to the sale of the shares themselves.

A chartering state does not violate the Commerce

Clause when it exercises its broad power to define, mod-

ify from time to time, and enforce the rights represented

by shares of stock of the corporations it charters. In

particular, a state may, in the exercise of its chartering

function, require or permit voting rights to be distrib-

uted in a virtually limitless variety of ways: for ex-

ample, a chartering state may provide (should it for

some reason wish to do so) for a class of corporations

in which no person may own more than 20% of the

voting shares. A state performing its chartering func-

tions does not offend the Commerce Clause, notwith-

standing the obvious effects of the state’s actions on the

10

value and transferability of shares of the corporations

it charters, because the chartering state is responsible

for the very existence of the corporation and its shares,

and it may define the latter as it wishes notwithstand-

ing effects on their transferability.

Indiana has done something different. The Indiana

Chapter does not define (or permit the corporate drafts-

man to define) voting rights in a manner (however com-

mon or uncommon) equally applicable to whoever holds or

acquires shares. It is written as a restraint on the trans-

ferability of voting rights in certain transactions, and

it could not be written in any other way without chang-

ing its meaning. Its effect is to tend to preserve what-

ever pattern of voting rights (and, consequently, share

ownership) exists in a given corporation at a given time

against transactions that would alter the pattern.

The Indiana Chapter provides that whatever voting

rights the corporate charter grants to shares, and what-

ever the pattern of ownership of those shares may now

be, no share transaction in which the buyer crosses one

of the three specified thresholds of share ownership will

be effective to transfer voting rights without the consent

of disinterested shareholders. For example, Shareholder

A, who today owns 20.1% of the common stock of an

Indiana corporation whose shares are listed on the New

York Stock Exchange, may vote all of the shares, and

may freely buy more (up to 33144%, the next thresh-

old); but no person B who today holds less than 20%

of the shares can freely cross the 20% threshold and

catch up with A, because the transfer of voting rights

to B in a threshold-crossing transaction is prohibited

unless approved in a shareholder vote that will not in-

clude B but will (unless A is an officer or a director-

employee of the corporation) include A. It is impossible

to state the rule that produces this result as a rule of

general applicability to both A and B: the positions of

A and B are separated by a burden, imposed by Indiana,

on the transfer from third parties to B of the voting

11

rights (and the shares that embody them) necessary to

put B in the same position as A. Indiana is regulating

not voting rights but transactions in interstate com-

merce.

In Edgar v. MITE Corp., 457 U.S. 624, 643-644

(1982), the Court invalidated an Jllinois statute that

regulated interstate tender offers on the ground that the

statute imposed a burden on interstate commerce for

which (even as applied to Illinois corporations) there

was no valid offsetting “legitimate local interest.” In

MITE, the Court rejected the two principal arguments

offered by appellants in defense of the Indiana Chapter:

the right of a chartering state to prescribe rules govern-

ing the internal affairs of the corporations it charters,

and the right of a chartering state to protect the share-

holders of such corporations. The Court said that the

“internal affairs doctrine” is a “conflict of laws princi-

ple” of “little use to the State in [the tender offer] con-

text. Tender offers contemplate transfers of stock by

stockholders to a third party and do not themselves im-

plicate the internal affairs of the target company.” Id.

at 645. The Court also rejected the protection-of-share-

holders argument on the ground that “the State has no

legitimate interest in protecting nonresident sharehold-

ers. Insofar as the Illinois law burdens out-of-state trans-

actions, there is nothing to be weighed in the balance to

sustain the law.” Id. at 644.

The United States believes that the language with

which the Court in M/TE rejected these two arguments

was too broad. Prescribing rules governing corporate

“internal affairs” and protecting the rights of sharehold-

ers are both valid and important activities of a charter-

ing state. A corvvsration’s chartering state is respon-

sible for, inter alia, defining and enforcing the rights of

all shareholders, both resident and nonresident, against

the corporation, its directors and officers, and each other.

Carrying out these responsibilities is an entirely legiti-

12

mate state function even though the state is necessarily

projecting its law into interstate commerce whenever

shares of a corporation it chartered are sold in the na-

tional marketplace.

Once it has defined the bundles of rights represented

by shares and allowed the shares to enter interstate com-

merce, however, the chartering state does not have ple-

nary power to define the circumstances under which the

shares may be transferred. Such subsequent transfers,

as this Court said in MITE, 457 U.S. at 645, “do not

themselves implicate the internal affairs” of the corpora-

tion, and they therefore do not implicate the shareholder

rights that the state is responsible for protecting.

Appellants seek to defend the Indiana Chapter on the

ground that it merely deprives certain shares of voting

rights under certain conditions and does not prohibit the

transfer of anything. But as stated above the Indiana

Chapter cannot be understood as a regulation of voting

rights; it can only be coherently explained as a restraint

on their transferability (and therefore on the transfer-

ability of the shares that embody them) in specified

transactions. As the district court said, the Indiana

Chapter “deprives the [control share] transaction of all

value and therefore blocks the transaction in practical

terms as much as would a direct prohibition on control

acquisitions.” CTS J.S. App. A79.

Appellants seek to distinguish MITE on the ground

that the Illinois statute conferred power to block trans-

actions on a state regulator, whereas the Indiana Chap-

ter can be characterized as conferring a right on “dis-

interested” shareholders to participate in determining

whether there will be an increase in the concentration

of share ownership. We agree that this argument is not

without substantial force. We nevertheless urge the

Court to reject it on the ground that a state may not

confer on shareholders a right that, inherently, is not a

power to govern the corporation but a right to restrain

interstate commerce.

13

ARGUMENT

THE INDIANA CONTROL SHARE ACQUISITIONS

CHAPTER IS INVALID UNDER THE COMMERCE

CLAUSE

INTRODUCTION

State regulation of takeovers and tender offers began

with a Virginia statute passed in 1968. ©. L. Loss,

Fundamertals of Securities Regulation JJ1 (1983). The

impetus for the Virginia legislation and legislation that

followed in other states was generally said to be “[flears

that established local concerns might be taken over by

outside interests which in turn would close down plants

and leave local residents jobless.” E. Aranow & H. Ein-

horn, Tender Offers for Corporate Control 153 (1973);

accord L. Loss, supra, at 601. By 1977, a substantial

majority of the states had enacted tender-offer legisla-

tion. See E. Aranow, H. Einhorn & G. Berlstein, Deve’-

opments in Tender Offers for Corporate Control 207

(1977); see also L. Loss, supra, at 601-602 & n.120;

Note, Securities Law and the Constitution: State Tender

Offer Statutes Reconsidered, 88 Yale L.J. 510, 510

(1979). After one of these “first-generation” state take-

over statutes failed to pass constitutional muster in Ed-

gar v. MITE Corp., 457 U.S. 624 (1982), courts applied

the Court’s reasoning to invalidate similar statutes. See

12In MITE, this Court held the Illinois Business Take-over Act

unconstitutional on Commerce Clause grounds. The Illinois Act

required a tender offeror to notify the Secretary of State of

Illinois 20 business days before commencement of a tender offer.

The Secretary of State was empowered to convene a hearing, and

the tender offer could not proceed until that hearing was com-

pleted. One function of the hearing was to permit the Secretary

to review the substantive fairness of the tender offer; if an offer

was found “unfair,” it could be permanently blocked.

The Court’s Commerce Clause opinion, written by Justice White,

had two branches. One branch stands as the opinion of the Court,

joined by five Justices (Chief Justice Burger and Justices White,

Powell, Stevens, and O’Connor). It held that the Illinois Act was

invalid under the Commerce Clause because it placed a substantial

14

cases cited in 1 M. Lipton & E. Steinberger, Takeovers

& Freezeouts § 5.02[4] (1984); L. Loss, Fundamentals

of Securities Regulation 603 (1983 & Supp. 1986) ; Block,

Barton & Roth, State Takeover Statutes: The “Second

Generation”, 13 See. Reg. L.J. 332, 337-339 (1986) ;

Warren, Developments in State Takeover Regulation:

MITE and its Aftermath, 40 Bus. Law. 671, 686-694

(1985).

Since MITE and the lower court decisions following it,

several state legislatures have reconstructed their regu-

latory schemes in an attempt to regulate takeovers in

ways that will survive constitutional scrutiny.“ A com-

mon theme of these statutes is that, instead of purport-

ing to regulate takeover bidders’ activities as such, they

invoke the state’s authority to regulate corporate struc-

ture and shareholders’ rights. See L. Loss, supra, at 100

& n.129c (Supp. 1986). Some commentators still seek

burden on interstate commerce that outweighed any local benefits.

457 U.S. at 648-646.

In the other Commerce Clause branch of the opinion, joined

by only four Justices (Chief Justice Burger and Justices White,

Stevens, and O’Connor), the plurality concluded that the statute

regulated interstate transactions taking place wholly outside of

Illinois. Thus, the statute constituted a “direct” restraint on inter-

state commerce and was void even without an inquiry into the

state interests involved. 457 U.S. at 641-648.

Three Justices (Chief Justice Burger and Justices White and

Blackmun) found that the Illinois Act was invalid under the

Supremacy Clause. 457 U.S. at 630-640. Two Justices (Justices

Powell and Stevens) declined to join that holding. Three Justices

(Justices Brennan, Marshall, and Rehnquist) believed that the

case was moot and did not discuss the merits. 7d. at 655-667.

Justice Powell agreed that the case was moot but nevertheless

joined the part of Justice White’s opinion that constituted the

opinion of the Court. Jd. at 646-647.

13 For a detailed discussion of these “second-generation” statutes,

see 1 M. Lipton & E. Steinberger, supra, §§ 5.02-5.07; L. Loss,

supra, at 99-101 (Supp. 1986); Block, Barton & Roth, supra, 13

Sec. Reg. L.J. at 339-354; Warren, supra, 40 Bus. Law. at 694-

700; Sargent, Do the Second-Generation State Takeover Statutes

Violate the Commerce Clause?, 8 Corp. L. Rev. 3, 5-6, 8-12 (1985).

15

to defend these statutes on the ground that they serve

a legitimate local interest in preventing emigration of

corporations and their assets. See, e.g., Warren, supra,

40 Bus. Law. at 673 n.15; Newlin & Gilmer, The Penn-

sylvania Shareholder Protection Act: A New State Ap-

proach to Deflecting Corporate Takeover Bids, 40 Bus.

Law. 111, 111-112 (1984). Others, however, defend

them on the ground that they are merely a legitimate

extension of more traditional forms of state corporation

law. See, e.g., Buxbaum, Federalism and Company Law,

82 Mich. L. Rev. 1163, 1175 (1984). Most courts that

have ruled on the constitutionality of second-generaticn

statutes have found them constitutionally infirm.’* This

case presents this Court with its first opportunity to

pass on the constitutionality of a second-generation stat-

ute designed to avoid some of the problems that the MITE

Court found with the first-generation statutes.

A. The Indiana Chapter Can Only Be Understood As A

Restraint On Transactions In Voting Rights And The

Shares That Embody Them

The Indiana Control Share Acquisitions Chapter pre-

vents a shareholder of an Indiana “issuing public cor-

poration,” who may be situated anywhere in the nation,

from conveying his voting rights to a buyer, wherever

situated, in a “control share acquisition,” unless two

shareholder votes approve the conveyance. The category

“issuing public corporation” is defined so as to include

virtually every Indiana corporation that has offered and

sold shares in interstate commerce (including appellant

CTS). Most “control share acquisitions” would take

14 See Fleet Aerospace Corp. V. Holderman, 796 F.2d 135 (6th

Cir. 1986), appeal pending sub nom. Ohio v. Fleet Aerospace, No.

86-344; Gelco Corp. Vv. Coniston Partners, Civ. No. 3-86-847 (D.

Minn. Nov. 10, 1986); Terry v. Yamashita, [Current] Fed. Sec. L.

Rep. (CCH) § 92,845 (D. Hawaii June 13, 1986); APL Ltd. Part-

nership Vv. Van Dusen Air, Inc., 622 F. Supp. 1216 (D. Minn. 1985),

vacated as moot, No. 85-5285 (8th Cir. Nov. 26, 1985); Icahn Vv.

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

16

place in interstate commerce. The Indiana Chapter ex-

pressly restrains the transfer of voting rights in such

transactions, and its obvious practical consequence is to

restrain the transfer of the shares as well.

Appellants contend that the Indiana Chapter merely

defines voting rights in certain shares in certain situa-

tions, as the chartering state has plenary authority to

do, and does not restrain interstate commerce except in

the same incidental manner as many other state statutes

defining shareholder rights. Although chartering states

have broad authority to define shareholder voting rights,’®

that is not what Indiana has done in this case. The In-

diana Chapter expressly restrains the transfer of what-

ever voting rights do attach to shares of an Indiana

“issuing public corporation,” and it could not, without

changing its meaning, be written in any other way.

The Indiana Chapter expressly restrains only the

transfer of voting rights, but the obvious practical effect

of the Control Share Chapter, in every case with which

it is concerned,’® is to delay the sale of the shares them-

15 A chartering state may define, create, and limit corporate

voting rights in ways that affect the attractiveness of shares

without triggering any question under the Commerce Clause. The

Commerce Clause does not require a state to define in any par-

ticular way the bundle of rights that will be put into interstate

commerce as corporate shares. To the contrary, a co-poration is a

mere “ ‘creature[] of state law’” (Burks v. Lasker, 441 U.S. 471,

478 (1979) (citations omitted)), and a share of stock has no

inherent rights except those that state law and the relevant corpo-

rate documents give it. The district court’s statement (CTS J.S.

App. A79) that “[v]oting rights * * * [must be] an integral part

of the ownership interest purchased along with a stock certificate”

was quite wrong to the extent it meant that a state may not, for

example, authorize nonvoting or restricted-vote stock.

16 There can, of course, be share purchases that meet the defi-

nition of “control share acquisition” where the buyer is not inter-

ested in voting rights and thus will not be deterred by the share-

holder approval provisions of the Chapter. But see Ind. Code Ann.

§ 23-1-42-10. The Chapter, however, is by its very terms aimed at

transactions whose objective is “control.” The fact that it also

has an incidental impact on some transactions where the buyer is

not seeking control does not alter the analysis.

17

selves for up to 50 days, and bar it altogether unless

the “disinterested” shareholders approve it. It is en-

tirely incorrect to say that tue Control Share Chapter

“has utterly no effect on any shareholder’s ability to

sell his shares” (CTS Br. 39). As the district court said,

“Ttbly limiting the rights that a tender offeror [or, of

course, any other acquiror] can purchase in a control

[share] acquisition, the Indiana Act deprives the trans-

action of all value and therefore blocks the transaction

in practical terms as much as would a direct prohibition

on control [share] acquisition[s]” (CTS J.S. App. A79).

The Commerce Clause, of its own force, prohibits state-

imposed restraints on transactions in interstate com-

merce in the absence of a substantial state interest

served by the statute. At least since this Court’s decision

in Cooley v. Board of Wardens, 53 U.S. (12 How.) 298

(1851), it has been clear that the Commerce Clause ”

not only authorizes “ ‘Congress to enact laws for the

protection and encouragement of commerce among the

states, but by its own force create[s] an area of trade

free from interference by the States.’” Great Atlantic

& Pacific Tea Co. v. Cottrell, 424 U.S. 366, 370-371

(1976) (quoting Freeman v. Hewit, 329 U.S. 249, 252

17 Congress is empowered, under the Commerce Clause of the

Constitution, “[t]o regulate Commerce with foreign Nations, and

among the several States.” Art. I, §8, Cl. 3. As the Court ex-

plained in Hughes v. Oklahoma, 441 U.S. 322, 325-326 (1979),

[t]he few simple words of the Commerce Clause * * * reflected

a central concern of the Framers that was an immediate

reason for calling the Constitutional Convention: the convic-

tion that in order to succeed, the new Union would have to

avoid the tendencies toward economic Balkanization that had

plagued relations among the Colonies and later among the

States under the Articles of Confederation.

See Northeast Bancorp, Inc. v. Board of Governors of the Federal

Reserve System, 472 U.S. 159, 174 (1985); South-Central Timber

Development, Inc. v. Wunnicke, 467 U.S. 82, 92 (1984); H.P. Hood

& Sons v. Du Mond, 336 U.S. 525, 533 (1949); see also Eule,

Laying the Dormant Commerce Clause to Rest, 91 Yale L.J. 425,

434-435 (1982).

18

(1946) ); accord Maine v. Taylor, No. 85-62 (June 23,

1986), slip op. 6. There is a strong constitutional bias

against direct state regulation of interstate markets.

Interstate markets are generally to be left unregulated

except to the extent that Congress chooses to regulate

them. See Hughes v. Alexandria Scrap Corp., 426 U.S.

794, 806 (1976) (dormant Commerce Clause protects

“natural functioning of the interstate market” against

state “prohibition or * * * burdensome regulation’’) .”*

The Indiana Chapter is not saved by the fact that it

expressly restrains only the transfer of voting rights and

not the transfer of shares. Direct restraints obviously

must be judged by the items they reach, not merely the

items they name: a direct restraint on transfers of

steering wheels directly restrains transfers of automo-

biles as well. Cf. Brown-Forman Distillers Corp. v. New

York State Liquor Authority, No. 84-2030 (June 3,

1986), slip op. 9 (“[t]hat the ABC 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

18 The force of these Commerce Clause principles is not, as CTS

asserts (CTS Br. 35), limited to situations in which a state has

discriminated against interstate commerce or has imposed burdens

on interstate commerce that may be duplicative of or inconsistent

with burdens placed by other states. The argument that the Com-

merce Clause reaches only discriminatory state action was rejected

in Freeman v. Hewit, 329 U.S. at 252, 254, and the argument that

state action must pose a risk of multiple and inconsistent burdens

was rejected in id. at 256-257. In that same case, the Court made

clear that the Commerce Clause applies to the sale of shares of

stock, even though shares of stock are only intangible property (id.

at 258-259). On the other hand, as we suggest below, regulation

by the state of incorporation of the sale of shares of stock (which

was not at issue in Freeman v. Hewit) cannot be subjected to the

same Commerce Clause analysis as state regulation of sales of

tangible goods. As this Court has strongly indicated in a related

context, the state as creator of the corporation has powers over the

movement of its stock that it would not have over the movement

of tangible goods. See State Tax Commission v. Aldrich, 316 U.S.

174, 180 (1942) (upholding against Due Process Clause challenge

Utah tax on transfer at death of shares of stock in Utah cor-

poration).

19

other States’); Southern Pacific Co. v. Arizona, 325

U.S. 761, 775 (1945) .”

Indiana has broad authority to define the rights rep-

resented by the shares of its corporations and to define

such rights in ways that may affect the value of the

shares or the ease with which they may be transferred.

But the Indiana Chapter does not provide that all

shares, or some class of shares, of some or all Indiana

corporations shall be without voting rights. Instead,

Indiana has declared that whatever voting rights the cor-

porate articles and bylaws confer may not be transferred

in a “control share acquisition” except under specified con-

ditions. The meaning of the Indiana Chapter cannot be

explained without reference to the transactions that it

restrains, and its effect is not to provide a general rule

applicable to whatever persons hold or acquire shares but

to protect whatever pattern of voting power (and, con-

sequently, share ownership) exists in a given corporation

at a given time against transactions that would alter the

pattern. When a share of stock defined under Indiana

law to represent certain rights has lawfully entered the

national marketplace in securities, Indiana may not, un-

der the Commerce Clause, directly restrain its further

transfer in the absence of a substantial state interest.”

The Indiana Chapter is such a direct restraint.

18 The Court has repeatedly stated that “[t]he principal focus of

inquiry [under the Commerce Clause] must be the practical oper-

ation of the [state] statute, since the validity of state laws must

be judged chiefly in terms of their probable effects.” Lewis v. BT

Investment Managers, Inc., 447 U.S. 27, 37 (1980); see Hughes

v. Oklahoma, 441 U.S. 822, 336 (1979); Dean Milk Co. v. City of

Madison, 340 U.S. 349, 354 (1951). This is not to say that every

statute with an impact on a shareholder’s ability to sell his shares

is unconstitutional, or even requires any particular Commerce

Clause scrutiny. But where a statute directly restrains the transfer

of voting rights and the obvious practical effect of that bar is to

restrain transfers of shares as well, the statute must be judged

by its practical as well as its literal effects.

2° This point does not depend on an assessment of the impact of

the Control Share Chapter on economic efficiency. In MITE (457

U.S. at 643-644), the Court observed that economic efficiency is

20

B. The Broad Power Of A Chartering State To Govern

The Internal Affairs And Protect The Shareholders

Of Its Corporations Does Not Save The Indiana

Chapter

While some of this Court’s opinions have suggested

that “direct” regulation of interstate commerce is un-

constitutional without further inquiry (see, e.g., Brown-

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

thority, No. 84-2030 (June 3, 1986), slip op. 5; MITE,

457 U.S. at 640 (plurality opinion) ; Shafer v. Farmers

Grain Co., 268 U.S. 189, 199 (1925)), the Court has in

other cases suggested that the label “direct” does not

always end the inquiry but instead exposes a statute to

“more demanding scrutiny.” Maine v. Taylor, No. 85-62

(June 23, 1986), slip op. 7. See Arkansas Electric Co-

operative Corp. v. Arkansas Public Service Commission,

461 U.S. 375, 390 (1983). At bottom, “the critica! con-

sideration is the overall effect of the statute on both

local and interstate activity” (Brown-Forman, slip op. 5

(citing Raymond Motor Transportation, Inc. v. Rice,

434 U.S. 429, 440-441 (1978))). Just last Term, for

example, in Maine v. Taylor, supra, the Court upheld

a ban on fish importation that discriminates on its face

against interstate commerce on the ground that importa-

poorly served by regulation that impedes takeovers. In the present

case, the court of appeals (CTS J.S. App. A25) ruled that the

Indiana statute is vulnerable to economic attack on the same

grounds as the Illinois statute struck down in MITE. Cf. R. Winter,

Government and the Corporation 42-44 (1978) (although economic

efficiency is generally best served by allowing states broad latitude

to enact corporation legislation, including even legislation that

seems in isolation to run counter to the interests of efficiency,

antitakeover legislation is an exception to that general rule). On

the other hand, there are economic arguments that might be

thought to support the Indiana legislation from an efficiency stand-

point (see Indiana Br. 91-97, 100-101). The Constitution does not

dictate that states, when acting within their proper spheres, act

in accordance with any particular theory of economic efficiency,

or that they pursue economic efficiency at all. The question in

this case is whether the State of Indiana has acted within a proper

sphere.

21

tion posed “significant threats to Maine’s unique and

fragile fisheries” that could not be otherwise countered.

Slip op. 9-10 (footnote omitted).

An older example of a permissible state restraint on

commerce is state blue sky laws, which typically prohibit

the sale of securities into the regulating state or to its

residents except on specified conditions. These statutes

have been upheld as valid measures to protect a state’s

residents against fraud and other evils in the sale of

securities, notwithstanding what the Court saw as an

incidental effect on interstate commerce. Hall v. Geiqer-

Jones Co., 242 U.S. 539, 554-556 (1917); Merrick v.

N.W. Halsey & Co., 242 U.S. 568, 590 (1917); Caldwell

v. Sioux Falls Stock Yards Co., 242 U.S. 559, 564-566

(1917). See MITE, 457 U.S. at 641 (plurality opinion) ;

see also Loss, The Conflict of Laws and the Blue Sky

Laws, 71 Harv. L. Rev. 209, 241-253 (1957).

21 Wile blue sky laws plainly affect interstate commerce, they

differ from statutes like the Indiana Chapter in that they seek

to protect state residents from a palpable harm to them from

transactions with them that take place within the enacting state.

One commentator points out that, “[u]nlike blue-sky laws, * * *

which cover only intrastate transactions, takeover statutes reach

tender offers, wherever made, if the target corporation, not the

transaction, has certain contacts with the state.” Kozyris, Cor-

porate Wars and Choice of Law, 1985 Duke L.J. 1, 36 (footnote

omitted); see Oldham, Regulating the Regulators: Limitations

upon a State’s Ability to Regulate Corporations with Multistate

Contacts, 5 Del. J. Corp. L. 181, 242 (1980) (state tender-offer.

statutes, which “purport to govern offers made to shareholders

regardless where domiciled,” are “obviously more expansive than

normal blue sky laws, which are limited to offers made to share-

holders who reside in the state’’).

Contrary to CTS’s contention (Br. 11-12, 34, 47), it is the blue

sky cases rather than this case that resemble Exxon Corp. V.

Governor of Maryland, 437 U.S. 117 (1978) (upholding Maryland’s

prohibition of ownership of retail service stations by gasoline

producers and refiners). Like the law upheld in Exron and unlike

the Control Share Chapter in this case, blue sky laws regulate

transactions that occur in the regulating state, and their inter-

state repercussions, although they indisputably exist, are indirect.

This case, unlike Exxon and the blue sky cases, involves out-of-state

transactions.

22

Appellants advance two reasons why the Control Share

Chapter should be considered a legitimate form of state

regulation.” First, the State asserts a general interest

in regulating the “internal affairs” or “corporate govern-

ance” of Indiana corporations, and CTS appears to agree

(Indiana Br. 81-86; see CTS Br. 39-40 & n.19). Second,

both appellants argue that “[t]he Chapter serves the

legitimate State interest of protecting non-dominant

shareholders in Indiana corporations by allowing them to

vote on a fundamental change in the corporation—its

transformation from a company owned by scattered

shareholders to one controlled by a single dominant

shareholder” (CTS Br. 11; accord id. at 25, 37-38; In-

diana Br. 88).

A chartering state does have a legitimate and substan-

tial interest in governing the “internal affairs” of its

corporations, including the rights of shareholders vis-d-

vis the corporation itself, its directors and officers, and

fellow shareholders. And having defined the rights of

shareholders, a chartering state has an important and

legitimate interest in protecting those rights with respect

to all shareholders, resident and nonresident alike. A

nonresident who buys shares in an Indiana corporation

accepts that state’s definition of his rights and buys that

state’s protection. See generally Buxbaum, Federalism

22 The state alone suggests a third interest, a “strong interest

in the welfare of employees of Indiana corporations with head-

quarters, factories or other operations in the State”; it argues that

shareholders accordingly should be able to block a control share

acquisition on the basis of “possible removal [of the corporation

or its assets] from the State” (Indiana Br. 89-90). This asserted

interest requires no extended discussion. If the dormant Commerce

Clause means anything at all, it means that a state may not justify

legislation on the ground that an impairment of commerce is

necessary to prevent economic forces from moving resources out of

that state and into another. See Levmore, /nterstate Exploitation

and Judicial Intervention, 69 Va. L. Rev. 563, 623-624 & n.240

(1983); Sargent, Do the Second-Generation State Takeover Stat-

utes Violate the Commerce Clause?, 8 Corp. L. Rev. 3, 31 (1985);

Note, Securities Laws and the Constitution: State Tender Offer

Statutes Reconsidered, 88 Yale L.J. 510, 528 (1979).

23

and Company Law, 82 Mich. L. Rev. 1163, 1167 (1984) ;

Levmore, supra, 69 Va. L. Rev. at 624.

A chartering state’s governance of the internal affairs

of its corporations, including its definition of the rights

of shareholders, obviously affects interstate commerce.

Indeed, whenever the corporation then sells shares in

interstate commerce, the chartering state may be said

to be projecting its law beyond its borders.** Accord-

ingly, much of corporation law properly comes within an

23Jn particular, in the absence of congressional action, it is a

task for the state to define and enforce the fiduciary obligations of

directors, officers, and controlling shareholders in connection with

a tender offer. See Schreiber v. Burlington Northern, Inc., 472 U.S.

1 (1985); cf. Santa Fe Industries v. Green, 430 U.S. 462 (1977) ;

see also Panter v. Marshall Field & Co., 646 F.2d 271 (7th Cir.),

cert. denied, 454 U.S. 1092 (1981). See generally Burks v. Lasker,

441 U.S. 471 (1979). The Commerce Clause plainly does not require

a state to enact legislation (or interpret its common law or legisla-

tion) to force corporate management to exercise its fiduciary duties

in any particular way, a point the court of appeals made in a later

chapter of this case. Dynamics Corp. of America v. CTS Corp.,

805 F.2d 705, 718 (7th Cir. 1986); see also CTS J.S. App. A10

(validity of “poison pills” is “a matter committed to the author-

ity of the states”). The dormant Commerce Clause is a reservation

to Congress of the exclusive right to legislate in certain ways

affecting interstate commerce; it is not a command to states to leg-

islate or adjudicate in any particular way.

24 The traditional state-law provisions that appellants claim are

threatened by the decision below all clearly relate to internal affairs

and are clearly constitutional notwithstanding the fact that they are

projected beyond the state’s borders whenever the corporation sells

shares in interstate commerce. For example, “the scheduling and

voting methods for electing directors” and “restrictions on freeze-

out or back-end mergers that may injure minority shareholders”

(CTS Br. 49) relate, respectively, to corporate governance and to

merger transactions to which the corporation itself is a party.

These are legitimate matters of state regulation notwithstanding

effects on the attractiveness of shares and consequent effects on

transactions in those shares in interstate commerce. Similarly, a

state statute that authorizes cumulative voting or staggered terms

for directors of corporations incorporated in that state relates

directly to corporate governance and raises no question under the

Commerce Clause merely because it may make the shares more or

less attractive.

24

exception to the principle that a state may not “project

its legislation into” other states (Baldwin v. G.A.F. See-

lig, Inc., 294 U.S. 511, 521 (1935); Brown-Forman,

slip op. 8-9), for the very placement of a security into

interstate commerce is a projection of legislation into the

home states of those who choose to buy the security.”

Moreover, the “internal affairs” of a corporation, in-

cluding the rights of shareholders, of course comprise

many matters that may bear on transactions in its

shares. A few states have imposed on insiders a state-

law fiduciary duty to the corporation or its shareholders

not to sell or buy shares on the basis of undisclosed

“inside information.” *° Controlling shareholders have a

duty, at least in some states, not to sell control to a

buyer who could be expected to loot the corporation.??

“> Indeed, the application of a single state’s law to the rights

associated with a share of stock, wherever situated, contributes

to the free flow of commerce in shares of stock. See MITE, 457

U.S. at 645 (opinion of the Court) (noting that “internal affairs

doctrine,” as a conflict-of-laws principle, fosters certainty in cor-

porate relationships). This Court has observed that,

as a general matter, the law of the state of incorporation nor-

mally determines issues relating to the internal affairs of a

corporation. Application of that body of law achieves the need

for certainty and predictability of result while generally pro

tecting the justified expectations of parties with interests in

the corporation.

First National City Bank vy. Banco Para El Comercio Exterior de

Cuba, 462 U.S. 611, 621 (1983); see also Cort v. Ash, 422 U.S.

66 (1975).

*6 See Polin v. Conductron Corp., 552 F.2d 797, 810-811 (&th Cir.)

(Delaware law), cert. denied, 434 U.S. 857 (1977); Thomas v.

Roblin Industries, 520 F.2d 1393, 1397 (3d Cir. 1975) (Delaware

law); Davidge v. White, 377 F. Supp. 1084, 1089 (S.D.N.Y. 1974)

(Delaware law); Diamond vy. Oreamuno, 24 N.Y.2d 494, 248

N.E.2d 910, 301 N.Y.S.2d 78 (1969); see also Dirks v. SEC, 463

U.S. 646, 672 (1983) (Blackmun, J., dissenting). But see Freeman

v. Decio, 584 F.2d 186 (7th Cir. 1978) (Indiana law); Schein v.

Chasen, 313 So. 2d 739, 746 (Fla. 1975). See generally Note,

Common Law Corporate Recovery for Trading on Non-Public Infor-

mation, 74 Colum. L. Rev. 269 (1974).

*7 See, e.g., Doleman v. Meiji Mutual Life Insurance Co., 727

F.2d 1480, 1483-1484 (9th Cir. 1984); McDaniel v. Painter, 418

25

And of course ‘internal affairs” also include the roles

played by directors, shareholders, and others in approv-

ing or disapproving transactions between the corporation

itself and other persons, including merger and acquisi-

tion transactions to which the corporation is a party.”

The question in this case is whether the Indiana Chap-

ter does constitute regulation of “internal affairs.” In

MITE, the Court said that stock transactions between

corporate shareholders and third parties do not “them-

selves” come under the heading “internal affairs.” See

F.2d 545, 547-548 (10th Cir. 1969); Insuranshares Corp. v. North-

ern Fiscal Corp., 35 F. Supp. 22 (E.D. Pa. 1940); Ritchie v.

McGrath, 1 Kan. App. 2d 481, 486-488, 571 P.2d 17, 22 (1977);

Gerdes vy. Reynolds, 28 N.Y.S.2d 622, 652 (Sup. Ct. 1941);

Thompson v. Hambrick, 508 S.W.2d 949, 953 (Tex. Civ. App. 1974),

writ ref’d n.r.e; Glass v. Glass, 228 Va. 39, 47-48, 321 S.E.2d 69,

74 (1984). The chartering state can, of course, prohibit looting,

and these cases impose liability on a shareholder who has abetted

the looter. Cf. Perlman v. Feldmann, 219 F.2d 173, 179 (2d Cir.

1955) (Swan, J., dissenting) (knowledge or reasonable suspicion

that buyer will loot the corporation “will terminate the dominant

shareholder’s privilege to sell and will create a duty not to transfer

the power of management to such purchaser. The duty seems to me

to resemble the obliga.ion which everyone is under not to assist

another to commit a tort rather than the obligation of a fiduciary.’’).

28 Mergers and other “fundamental changes” that generally re-

quire shareholder approval are changes in the very structure of

the corporation, and are accordingly an “internal” matter of legiti-

mate interest to the state under the internal affairs doctrine. See

Fleet Aerospace Corp. Vv: Holderman, 637 F. Supp. 742, 746 (S.D.

Ohio), aff’d, 796 F.2d 185 (6th Cir. 1986), appeal pending sub nom.

Ohio v. Fleet Aerospace, No. 86-344; Gelco Corp. v. Coniston Part-

ners, Civ. No. 3-86-847 (D. Minn. Nov. 10, 1986). As one commenta-

tor has noted, “acquisitions of stock under a tender offer do not in

themselves alter the corporate structure, procedures, and relation-

ships, nor do they necessarily lead to a structural change; the

acquirer may be content with control at the shareholder level.

Furthermore, the tender offeror need not be a shareholder and the

accepting offeree ceases to be one.” Kozyris, supra note 21, 1985

Duke L.J. at 36-37 (footnote omitted). Any changes that an offeror

making a contro] share acquisition does seek to make in the struc-

ture of the corporation are matters of internal affairs, and the

state can require that shareholder approval be sought. See Ind.

Code Ann. §§ 23-1-40-3, 23-1-41-2, 23-1-45-2.

26

MITE, 457 U.S. at 645 (opinion of the Court) (“Tender

offers contemplate transfers of stock by stockholders to

a third party and do not themselves implicate the in-

ternal affairs of the target company.”).” Illinois could

not, the Court held, treat interstate commerce in shares

of a public corporation as an internal matter and impose

restraints on transactions between shareholders and third

parties in the national securities marketplace. But, it is

argued, the Illinois statute at issue in MITE was con-

cededly a restraint on a class of interstate transactions

—tender offers—whereas the Indiana Chapter, while it

refers to a class of transactions (control share acqui-

sitions) does not purport to bar transactions in shares

but only to govern voting rights (normally an internal

matter) in light of them. The Indiana Act cannot, how-

ever, be understood as an act merely defining voting

rights. It is written as a restraint on the transferability

of voting rights in specified transactions, and it could

not be written in any other way without changing its

meaning. Since the restraint on the transfer of voting

rights is a restraint on the transfer of shares, the In-

diana Chapter, like the Illinois Act, restrains “transfers

of stock by stockholders to a third party.”

Indiana argues that, by conferring the right to block

the transfer on the shareholders themselves, rather than

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

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

Vv. Great Western United Corp., 443 U.S. 173 (1979); see also

Restatement (Second) of Conflicts of Laws § 802 comment e, at

810 (1971) (citing the transfer of stock as an example of matters

that are not within the scope of “internal affairs regulation”) ;

E. Aranow, H. Einhorn & G. Berlstein, supra, at 230; Wilner &

Landy, The Tender Trap: State Takeover Statutes and Their Con-

stitutionality, 45 Fordham L. Rev. 1, 17 (1976) (footnote omitted)

(“[A]} multistate tender offer has nothing to do with internal cor-

porate procedures. Although transfer of control is the goal * * * it

is accomplished in a tender offer without reference to the legal

attributes of the domestic corporation. Hence, regardless of pur-

pose, state regulation of an offer aimed at a domestic target is argu-

ably unjustifiable, at least under the ‘internal affairs’ doctrine.’’).

27

a state official, it has created a scheme that is valid

notwithstanding M/TE. To put the argument in what

we think is its strongest form, Indiana says that what

it has done is to confer on all shareholders the right to

participate in deciding whether the corporation in which

they have invested goes from having (to use the current

case aS an example) a 9.6% shareholder to having a

27.5% shareholder. This argument is not without force,

particularly since Indiana is quite correct that other

shareholders may have a genuine interest in that trans-

action.*°

30 Shareholders may, of course, also benefit from transactions

meeting the definition of “control share acquisition,” and the pro-

cedures Indiana has required may deter bidders from entering into

transactions that shareholders would favor. There has been a

lively debate about whether measures that make takeover bids

harder to accomplish harm shareholders in all cases. See, ¢.g.,

Easterbrook & Fischel, Auctions and Sunk Costs in Tender Offers,

35 Stan. L. Rev. 1 (1982); Easterbrook & Fischel, Corporate Con-

trol Transactions, 91 Yale L.J. 698 (1982); Easterbrook & Fischel,

The Proper Role of a Target’s Management in Responding to a

Tender Offer, 94 Harv. L. Rev. 1161 (1981); Manne, Mergers and

the Market for Corporate Control, 73 J. Pol. Econ. 110 (1965) ;

Ruback, Assessing Competition in the Market for Corporate Acqui-

sitions, 11 J. Fin. Econ. 141 (1985) (all critical of defensive

tactics); Bebchuk, The Case for Facilitating Competing Tender

Offers, 95 Harv. L. Rev. 1028 (1982); Bebchuk, The Case for

Facilitating Competing Tender Offers: A Reply and Extension, 35

Stan. L. Rev. 23 (1982) (some defensive tactics that lead to

“auctions” are desirable, although author is generally in agree-

ment with Easterbrock/Fischel objections to defensive tactics) ;

Gilson, A Structural Approach to Corporations: The Case Against

Defensive Tactics in Tender Offers, 33 Stan. L. Rev. 819 (1981);

Gilson, Seeking Competitive Bids Versus Pure Passivity in Tender

Offer Defense, 35 Stan. L. Rev. 51 (1982) (same); Bradley &

Rosenzweig, Defensive Stock Repurchases, 99 Harv. L. Rev. 1377

(1986) (some properly regulated defensive stock repurchases pro-

mote shareholder welfare); Lowenstein, Pruning Deadwood in

Hostile Takeovers: A Proposal for Legislation, 83 Colum. L. Rev.

249 (1983) (arguing that both improper defensive tactics and

coercive takeover tactics require legislative correction); Carney,

Shareholder Coordination Costs, Shark Repellents, and Takeout

Mergers: The Case Against Fiduciary Duties, 1983 Am. B. Found.

Res. J. 341 (arguing that tender offers are often used by raiders

28

We think the Court should nevertheless reject this

argument, on the ground that a state may not give share-

holders of a public corporation the right to preserve the

present pattern of share ownership against the operation

of interstate commerce. An Indiana corporation whose

shares are traded in the national securities marketplace

remains a creature of Indiana law: many of its impor-

tant attributes are determined by state law and are sub-

ject to modification by the state. But one of its impor-

tant attributes, the identity of its shareowners and the

size of their holdings, is (by virtue of the interstate sale

of shares that Indiana allowed in the first place) a func-

tion of interstate commerce. An Indiana “public” cor-

poration has, virtually by definition, raised capital by

selling shares into the national securities marketplace.

Raising capital in that manner is possible in part because

that national marketplace enables shareowners to resell,

and generally to trade in securities, in transactions de-

termined by market forces, subject only to such regula-

tion as Congress chooses to impose. Protecting that na-

tional market from intrusive state regulation is close to

the heart of what the Commerce Clause is about.

to expropriate the wealth of target shareholders); Lipton, Take-

over Bids in the Target’s Boardroom, 35 Bus. Law. 101 (1979);

Lipton, Takeover Bids in the Target’s Boardroom: A Response to

Professors Easterbrook and Fischel, 55 N.Y.U. L. Rev. 1231 (1980) ;

Lipton, Takeover Bids in the Target’s Boardroom: An Update After

One Year, 36 Bus. Law. 1017 (1981) (same). It has also been sug-

gested that state antitakeover measures are more likely to have

been enacted in order to protect incumbent management than to

protect shareholders. See, e.g., Winter, State Law, Shareholder

Protection, and the Theory of the Corporation, 6 J. Legal Studies

251, 268 (1977); Langevoort, State Tender-Offer Legislation:

Interests, Effects, and Political Competency, 62 Cornell L. Rev. 213,

238-240 (1977); Loss, Foreword to Symposium, Controlling Cor-

porate Takeover Bids: State Regulation and the Ohio Approach,

21 Case W. Res. L. Rev. 605, 609, 611 (1970). The court of appeals

in this case engaged in second-guessing of the Indiana legislature

on these issues. We think that was not the appropriate course,

and that this Court’s decision should not rest on a substitution of

its judgment for that of the State of Indiana on where the best

interests of shareholders lie.

—

29

CONCLUSION

The judgment of the court of appeals should be af-

firmed insofar as it rests on the ground that the Control

Share Chapter is invalid under the Commerce Clause.

Respectfully submitted.

CHARLES FRIED

Solicitor General

DANIEL L. GOELZER LouIs R. COHEN

General Counsel Deputy Solicitor General

PAUL GONSON Roy T. ENGLERT, JR.

Solicitor Assistant to the Solicitor General

DIANE SANGER

Assistant General Counsel

CATHERINE DIXON

JOAN E. MCKOWN

Attorneys

Securities and Exchange

Commission

JANUARY 1987

3 OU. S. GOVERNMENT PRINTING OFFICE; 1987 161483 40186