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

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URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385012_0299%3A10

## Record

- **Collection:** Supreme Court brief
- **Document type:** Amicus Curiae Brief
- **Published:** January 1, 1986
- **Citation:** 479 U.S. 810

## Text

) , » 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 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

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