CTS CORP. v. DYNAMICS CORPORATION OF AMERICA
No. 86-71
Supreme Court of the United States
Argued March 2, 1987—Decided April 21, 1987
481 U.S. 69
*Together with No. 86-97, Indiana v. Dynamics Corporation of America, also on appeal from the same court.
James A. Strain argued the cause for appellant in No. 86-71. With him on the brief were Richard E. Deer and Stanley C. Fickle. John F. Pritchard argued the cause and filed a brief for appellant in No. 86-97.
JUSTICE POWELL delivered the opinion of the Court.
These cases present the questions whether the Control Share Acquisitions Chapter of the Indiana Business Corporation Law,
I
A
On March 4, 1986, the Governor of Indiana signed a revised Indiana Business Corporation Law,
“a corporation that has:
“(1) one hundred (100) or more shareholders;
“(2) its principal place of business, its principal office, or substantial assets within Indiana; and
“(3) either:
“(A) more than ten percent (10%) of its shareholders resident in Indiana;
“(B) more than ten percent (10%) of its shares owned by Indiana residents; or
“(C) ten thousand (10,000) shareholders resident in Indiana.”
§ 23-1-42-4(a) .1
The Act focuses on the acquisition of “control shares” in an issuing public corporation. Under the Act, an entity acquires “control shares” whenever it acquires shares that, but for the operation of the Act, would bring its voting power in the corporation to or above any of three thresholds: 20%, 33⅓%, or 50%.
The shareholders decide whether to confer rights on the control shares at the next regularly scheduled meeting of the shareholders, or at a specially scheduled meeting. The
Notes
B
On March 10, 1986, appellee Dynamics Corporation of America (Dynamics) owned 9.6% of the common stock of appellant CTS Corporation, an Indiana corporation. On that day, six days after the Act went into effect, Dynamics announced a tender offer for another million shares in CTS; purchase of those shares would have brought Dynamics’ ownership interest in CTS to 27.5%. Also on March 10, Dynamics filed suit in the United States District Court for the Northern District of Illinois, alleging that CTS had violated the federal securities laws in a number of respects no longer relevant to these proceedings. On March 27, the board of directors of CTS, an Indiana corporation, elected to be governed by the provisions of the Act, see
Four days later, on March 31, Dynamics moved for leave to amend its complaint to allege that the Act is pre-empted by the Williams Act,
CTS appealed the District Court‘s holdings on these claims to the Court of Appeals for the Seventh Circuit. Because of the imminence of CTS’ annual meeting, the Court of Appeals consolidated and expedited the two appeals. On April 23—23 days after Dynamics first contested application of the Act in the District Court—the Court of Appeals issued an order affirming the judgment of the District Court. The opinion followed on May 28. 794 F. 2d 250 (1986).
Aftеr disposing of a variety of questions not relevant to this appeal, the Court of Appeals examined Dynamics’ claim that the Williams Act pre-empts the Indiana Act. The court looked first to the plurality opinion in Edgar v. MITE Corp., supra, in which three Justices found that the Williams Act pre-empts state statutes that upset the balance between target management and a tender offeror. The court noted that some commentators had disputed this view of the Williams Act, concluding instead that the Williams Act was “an anti-takeover statute, expressing a view, however benighted,
“[I]t is a big leap from saying that the Williams Act does not itself exhibit much hostility to tender offers to saying that it implicitly forbids states to adopt more hostile regulations. . . . But whatever doubts of the Williams’ Act preemptive intent we might entertain as an original matter are stilled by the weight of precedent.” Ibid.
Once the court had decided to apply the analysis of the MITE plurality, it found the case straightforward:
“Very few tender offers could run the gauntlet that Indiana has set up. In any event, if the Williams Act is to be taken as a congressional determination that a month (roughly) is enough time to force a tender offer to be kept open, 50 days is too much; and 50 days is the minimum under the Indiana act if the target corporation so chooses.” Id., at 263.
The сourt next addressed Dynamic‘s Commerce Clause challenge to the Act. Applying the balancing test articulated in Pike v. Bruce Church, Inc., 397 U. S. 137 (1970), the court found the Act unconstitutional:
“Unlike a state‘s blue sky law the Indiana statute is calculated to impede transactions between residents of other states. For the sake of trivial or even negative benefits to its residents Indiana is depriving nonresidents of the valued opportunity to accept tender offers from other nonresidents.
“. . . Even if a corporation‘s tangible assets are immovable, the efficiency with which they are employed and the proportions in which the earnings they generate are divided between management and shareholders 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.” 794 F. 2d, at 264.
“We may assume without having to decide that Indiana has a broad latitude in regulating those affairs, even when the consequence may be to make it harder to take over an Indiana corporation. . . . But in this case the effect on the interstate market in securities and corporate control is direct, intended, and substantial. . . . [T]hat the mode of regulation involves jiggering with voting rights cannot take it outside the scope of judicial review under the commerce clause.” Ibid.
Accordingly, the court affirmed the judgment of the District Court.
Both Indiana and CTS filed jurisdictional statements. We noted probable jurisdiction under
II
The first question in these cases is whether the Williams Act pre-empts the Indiana Act. As we have stated frequently, absent an explicit indication by Congress of an intent to pre-empt state law, a state statute is pre-empted only
“‘where compliance with both federal and state regulations is a physical impossibility . . .,’ Florida Lime & Avocado Growers, Inc. v. Paul, 373 U. S. 132, 142-143 (1963), or where the state ‘law stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.’ Hines v. Davidowitz, 312 U. S. 52, 67 (1941). . . .” Ray v. Atlantic Richfield Co., 435 U. S. 151, 158 (1978).
Because it is entirely possible for entities to comply with both the Williams Act and the Indiana Act, the state statute can be pre-empted only if it frustrates the purposes оf the federal law.
A
Our discussion begins with a brief summary of the structure and purposes of the Williams Act. Congress passed the Williams Act in 1968 in response to the increasing number of hostile tender offers. Before its passage, these transactions were not covered by the disclosure requirements of the federal securities laws. See Piper v. Chris-Craft Industries, Inc., 430 U. S. 1, 22 (1977). The Williams Act, backed by regulations of the SEC, imposes requirements in two basic areas. First, it requires the offeror to file a statement disclosing information about the offer, including: the offeror‘s background and identity; the source and amount of the funds to be used in making the purchase; the purpose of the purchase, including any plans to liquidate the company or make major changes in its corporate structure; and the extent of the offeror‘s holdings in the target company. See
Second, the Williams Act, and the regulations that accompany it, establish procedural rules to govern tender offers. For example, stockholders who tender their shares may withdraw them while the offer remains open, and, if the offeror has not purchased their shares, any time after 60 days from commencement of the offer.
B
The Indiana Act differs in major respects from the Illinois statute that the Court considered in Edgar v. MITE Corp., 457 U. S. 624 (1982). After reviewing the legislative history of the Williams Act, JUSTICE WHITE, joined by Chief Justice Burger and JUSTICE BLACKMUN (the plurality), concluded that the Williams Act struck a careful balance between the interests of offerors and target companies, and that any state statute that “upset” this balance was pre-empted. Id., at 632-634.
The plurality then identified three offending features of the Illinois statute. JUSTICE WHITE‘S opinion first noted that the Illinois statute provided for a 20-day precommencement period. During this time, management could disseminate its views on the upcoming offer to shareholders, but offerors could not publish their offers. The plurality found that this provision gave management “a powerful tool to combat tender offers.” Id., at 635. This contrasted dramatically with the Williams Act; Congress had deleted express pre-commencement notice provisions from the Williams Act. According to the plurality, Congress had determined that the potentially adverse consequences of such a provision on shareholders should be avoided. Thus, the plurality concluded that the Illinois provision “frustrate[d] the objectives of the Williams Act.” Ibid. The second criticized feature of
C
As the plurality opinion in MITE did not represent the views of a majority of the Court,6 we are not bound by its reasoning. We need not question that reasoning, however, because we believe the Indiana Act passes muster even under the broad interpretation of the Williams Act articulated by JUSTICE WHITE in MITE. As is apparent from our summary of its reasoning, the overriding concern of the
The Indiana Act operates on the assumption, implicit in the Williams Act, that independent shareholders faced with tender offers often are at a disadvantage. By allowing such
In implementing its goal, the Indiana Act avoids the problems the plurality discussed in MITE. Unlike the MITE statute, the Indiana Act does not give either management or the offeror an advantage in communicating with the shareholders about the impending offer. The Act also does not impose an indefinite delay on tender offers. Nothing in the Act prohibits an offeror from consummating an offer on the 20th business day, the earliest day permitted under applicable federal regulations, see
D
The Court of Appeals based its finding of pre-emption on its view that the practical effect of the Indiana Act is to delay consummation of tender offers until 50 days after the commencement of the offer. 794 F. 2d, at 263. As did the Court of Appeals, Dynamics reasons that no rational offeror will purchase shares until it gains assurance that those shares will carry voting rights. Because it is possible that voting rights will not be conferred until а shareholder meeting 50 days after commencement of the offer, Dynamics concludes that the Act imposes a 50-day delay. This, it argues, conflicts with the shorter 20-business-day period established by the SEC as the minimum period for which a tender offer may be held open.
The Act does not impose an absolute 50-day delay on tender offers, nor does it preclude an offeror from purchasing shares as soon as federal law permits. If the offeror fears an adverse shareholder vote under the Act, it can make a conditional tender offer, offering to accept shares on the condition that the shares receive voting rights within a certain period of time. The Williams Act permits tender offers to be conditioned on the offeror‘s subsequently obtaining regulatory approval. E. g., Interpretive Release Relating to Tender Offer Rules, SEC Exchange Act Rel. No. 34-16623 (Mar. 5, 1980), 3 CCH Fed. Sec. L. Rep. ¶ 24,284I, p. 17,758, quoted in MacFadden Holdings, Inc. v. JB Acquisition Corp., 802 F. 2d 62, 70 (CA2 1986).8 There is no reason to doubt that
Even assuming that the Indiana Act imposes some additional delay, nothing in MITE suggested that any delay imposed by state regulation, however short, would create a conflict with the Williams Act. The plurality argued only that the offeror should “be free to go forward without unreasonable delay.” 457 U. S., at 639 (emphasis added). In that case, the Court was confronted with the potential for indefinite delay and presented with no persuasive reason why some deadline could not be established. By contrast, the Indiana Act provides that full voting rights will be vested—if this eventually is to occur—within 50 days after commencement of the offer. This period is within the 60-day period Congress established for reinstitution of withdrawal rights in
Finally, we note that the Williams Act would pre-empt a variety of state corporate laws of hitherto unquestioned validity if it were construed to pre-empt any state statute that may limit or delay the free exercise of power after a successful tender offer. State corporate laws commonly permit corporations to stagger the terms of their directors. See Model Business Corp. Act § 37 (1969 draft) in 3 Model Business Corp. Act Ann. (2d ed. 1971) (hereinafter MBCA); American
In our view, the possibility that the Indiana Act will delay some tender offers is insufficient to require a conclusion that the Williams Act pre-empts the Act. The longstanding prevalence of state regulation in this area suggests that, if Congress had intended to pre-empt all state laws that delay the acquisition of voting control following a tender offer, it would have said so explicitly. The regulatory conditions that the Act places on tender offers are consistent with the text and the purposes of the Williams Act. Accordingly, we
III
As an alternative basis for its decision, the Court оf Appeals held that the Act violates the Commerce Clause of the Federal Constitution. We now address this holding. On its face, the Commerce Clause is nothing more than a grant to Congress of the power “[t]o regulate Commerce . . . among the several States . . .,”
A
The principal objects of dormant Commerce Clause scrutiny are statutes that discriminate against interstate commerce. See, e. g., Lewis v. BT Investment Managers, Inc., 447 U. S. 27, 36-37 (1980); Philadelphia v. New Jersey, 437 U. S. 617, 624 (1978). See generally Regan, The Supreme Court and State Protectionism: Making Sense of the Dormant Commerce Clause, 84 Mich. L. Rev. 1091 (1986). The Indiana Act is not such a statutе. It has the same effects on tender offers whether or not the offeror is a domiciliary or resident of Indiana. Thus, it “visits its effects equally upon both interstate and local business,” Lewis v. BT Investment Managers, Inc., supra, at 36.
B
This Court‘s recent Commerce Clause cases also have invalidated statutes that may adversely affect interstate commerce by subjecting activities to inconsistent regulations. E. g., Brown-Forman Distillers Corp. v. New York State Liquor Authority, 476 U. S. 573, 583-584 (1986); Edgar v. MITE Corp., 457 U. S., at 642 (plurality opinion of WHITE, J.); Kassel v. Consolidated Freightways Corp., 450 U. S. 662, 671 (1981) (plurality opinion of POWELL, J.). See Southern Pacific Co. v. Arizona, 325 U. S. 761, 774 (1945) (noting the “confusion and difficulty” that would attend the “unsatisfied need for uniformity” in setting maximum limits on train lengths); Cooley v. Board of Wardens, supra, at 319 (stating that the Commerce Clause prohibits States from regulating
subjects that “are in their nature national, or admit only of one uniform system, or plan of regulation“). The Indiana Act poses no such problem. So long as each State regulates voting rights only in the corporations it has created, each corporation will be subject to the law of only one State. No principle of corporation law and practice is more firmly established than a State‘s authority to regulate domestic corporations, including the authority to define the voting rights of shareholders. SeeC
The Court of Appeals did not find the Act unconstitutional for either of these threshold reasons. Rather, its decision rested on its view of the Act‘s potential to hinder tender offers. We think the Court of Appeals failed to appreciate the significance for Commerce Clause analysis of the fact that state regulation of corporate governance is regulation of entities whose very existence and attributes are a product of state law. As Chief Justice Marshall explained:
“A corporation is an artificial being, invisible, intangible, and existing only in contemplation of law. Being the mere creature of law, it possesses only those properties which the charter of its creation confers upon it, either expressly, or as incidental to its very existence. These are such as are supposed best calculated to effect the object for which it was created.” Trustees of Dartmouth College v. Woodward, 4 Wheat. 518, 636 (1819).
See First National Bank of Boston v. Bellotti, 435 U. S. 765, 822-824 (1978) (REHNQUIST, J., dissenting). Every State in this country has enacted laws regulating corporate gover
These regulatory laws may affect directly a variety of corporate transactions. Mergers are a typical example. In view of the substantial effect that a mеrger may have on the shareholders’ interests in a corporation, many States require supermajority votes to approve mergers. See, e. g.,
There can be no doubt that the Act reflects these concerns. The primary purpose of the Act is to protect the shareholders of Indiana corporations. It does this by affording shareholders, when a takeover offer is made, an opportunity to decide collectively whether the resulting change in voting control of the corporation, as they perceive it, would be desirable. A change of management may have important effects on the shareholders’ interests; it is well within the State‘s role as overseer of corporate governance to offer this opportunity. The autonomy provided by allowing shareholders collectively to determine whether the takeover is advantageous to their interests may be especially beneficial where a hostile tender offer may coerce shareholders into tendering their shares.
Nor is it unusual for partnership law to restrict certain transactions. For example, a purchaser of a partnership interest generally can gain a right tо control the business only with the consent of other owners. See
Appellee Dynamics responds to this concern by arguing that the prospect of coercive tender offers is illusory, and that tender offers generally should be favored because they reallocate corporate assets into the hands of management who can use them most effectively.13 See generally Easterbrook & Fischel, The Proper Role of a Target‘s Management in Responding to a Tender Offer, 94 Harv. L. Rev. 1161 (1981). As indicated supra, at 82-83, Indiana‘s concern with tender offers is not groundless. Indeed, the potentially coercive aspects of tender offers have been recognized by the SEC, see SEC Release No. 21079, p. 86,916, and by a number of scholarly commentators, see, e. g., Bradley & Rosenzweig, Defensive Stock Repurchases, 99 Harv. L. Rev. 1377, 1412-1413 (1986); Macey & McChesney, A Theoretical Analysis of Corporate Greenmail, 95 Yale L. J. 13, 20-22 (1985); Lowenstein, 83 Colum. L. Rev., at 307-309. The Constitution does not require the States to subscribe to any particular economic theory. We are not inclined “to second-guess the empirical judgments of lawmakers concerning the utility of legislation,” Kassel v. Consolidated Freightways Corp., 450 U. S., at 679 (BRENNAN, J., concurring in judgment). In our view, the possibility of coercion in some takeover bids offers additional justification for Indiana‘s decision to promote the autonomy of independent shareholders.
D
Dynamics’ argument that the Act is unconstitutional ultimately rests on its contention that the Act will limit the number of successful tender offers. There is little evidence that this will occur. But even if true, this result would not substantially affect our Commerce Clause analysis. We reiterate that this Act does not prohibit any entity—resident or nonresident—from offering to purchase, or from purchasing, shares in Indiana corporations, or from attempting thereby to gain control. It only provides regulatory procedures designed for the better protection of the corporations’ shareholders. We have rejected the “notion that the Commerce
IV
On its face, the Indiana Control Share Acquisitions Chapter evenhandedly determines the voting rights of shares of Indiana corporations. The Act does not conflict with the provisions or purposes of the Williams Act. To the limited extent that the Act affects interstate commerce, this is justified by the State‘s interests in defining the attributes of shares in its corporations and in protecting shareholders. Congress has never questioned the need for state regulation of these matters. Nor do we think such regulation offends the Constitution. Accordingly, we reverse the judgment of the Court of Appeals.
It is so ordered.
JUSTICE SCALIA, concurring in part and concurring in the judgment.
I join Parts I, III-A, and III-B of the Court‘s opinion. However, having found, as those Parts do, that the Indiana
One commentator has suggested that, at least much of the time, we do not in fact mean what we say when we declare that statutes which neither discriminate against commerce nor present a threat of multiple and inconsistent burdens might nonetheless be unconstitutional under a “balancing” test. See Regan, The Supreme Court and State Protectionism: Making Sense of the Dormant Commerce Clause, 84 Mich. L. Rev. 1091 (1986). If he is not correct, he ought to be. As long as a State‘s corporation law governs only its own corporations and does not discriminate against out-of-state interests, it should survive this Court‘s scrutiny under
I also agree with the Court that the Indiana Control Share Acquisitions Chapter is not pre-empted by the Williams Act, but I reach that conclusion without entering into the debate оver the purposes of the two statutes. The Williams Act is governed by the antipre-emption provision of the Securities Exchange Act of 1934,
I do not share the Court‘s apparent high estimation of the beneficence of the state statute at issue here. But a law can
JUSTICE WHITE, with whom JUSTICE BLACKMUN and JUSTICE STEVENS join as to Part II, dissenting.
The majority today upholds Indiana‘s Control Share Acquisitions Chapter, a statute which will predictably foreclose completely some tender offers for stock in Indiana corporations. I disagree with the conclusion that the Chapter is neither pre-empted by the Williams Act nor in conflict with the Commerce Clause. The Chapter underminеs the policy of the Williams Act by effectively preventing minority shareholders, in some circumstances, from acting in their own best interests by selling their stock. In addition, the Chapter will substantially burden the interstate market in corporate ownership, particularly if other States follow Indiana‘s lead as many already have done. The Chapter, therefore, directly inhibits interstate commerce, the very economic consequences the Commerce Clause was intended to prevent. The opinion of the Court of Appeals is far more persuasive than that of the majority today, and the judgment of that court should be affirmed.
I
The Williams Act expressed Congress’ concern that individual investors be given sufficient information so that they could make an informed choice on whether to tender their stock in response to a tender offer. The problem with the approach the majority adopts today is that it equates protection of individual investors, the focus of the Williams Act, with the protection of shareholders as a group. Indiana‘s Control Share Acquisitions Chapter undoubtedly helps protect the interests of a majority of the shareholders in any cоrporation subject to its terms, but in many instances, it will effectively prevent an individual investor from selling his stock at a premium. Indiana‘s statute, therefore, does not
In discussing the legislative history of the Williams Act, the Court, in Piper v. Chris-Craft Industries, Inc., 430 U. S. 1 (1977), looked to the legislative history of the Williams Act and concluded that the Act was designed to protect individual investors, not management and not tender offerors: “The sponsors of this legislation were plainly sensitive to the suggestion that the measure would favor one side or the other in control contests; however, they made it clear that the legislation was designed solely to get needed information to the investor, the constant focal point of the committee hearings.” Id., at 30-31. The Court specifically noted that the Williams Act‘s legislative history shows that Congress recognized that some “takeover bids . . . often serve a useful function.” Id., at 30. As quoted by the majority, ante, at 82, the basic purpose of the Williams Act is “‘plac[ing] investors on an equal footing with the takeover bidder.‘” Piper, supra, at 30 (emphasis added).
The Control Share Acquisitions Chapter, by design, will frustrate individual investment decisions. Concededly, the Control Share Acquisitions Chapter allows the majority of a corporation‘s shareholders to block a tender offer and therеby thwart the desires of an individual investor to sell his stock. In the context of discussing how the Chapter can be used to deal with the coercive aspects of some tender offers, the majority states: “In such a situation under the Indiana Act, the shareholders as a group, acting in the corporation‘s best interest, could reject the offer, although individual shareholders might be inclined to accept it.” Ante, at 83. I do not dispute that the Chapter provides additional protection for Indiana corporations, particularly in helping those corporations maintain the status quo. But it is clear to me that Indiana‘s scheme conflicts with the Williams Act‘s careful balance, which was intended to protect individual investors and permit them to decide whether it is in their best interests
The majority claims that if the Williams Act pre-empts Indiana‘s Control Share Acquisitions Chapter, it also pre-empts a number of other corpоrate-control provisions such as cumulative voting or staggering the terms of directors. But this view ignores the fundamental distinction between these other corporate-control provisions and the Chapter: unlike those other provisions, the Chapter is designed to prevent certain tender offers from ever taking place. It is transactional in nature, although it is characterized by the State as involving only the voting rights of certain shares. “[T]his Court is not bound by [t]he name, description or characterization given [a challenged statute] by the legislature or the courts of the State,’ but will determine for itself the practical impact of the law.” Hughes v. Oklahoma, 441 U. S. 322, 336 (1979) (quoting Lacoste v. Louisiana Dept. of Conservation, 263 U. S. 545, 550 (1924)). The Control Share Acquisitions Chapter will effectively prevent minority shareholders in some circumstances from selling their stock to a willing tender offeror. It is the practical impact of the Chapter that leads to the conclusion that it is pre-empted by the Williams Act.
II
Given the impact of the Control Share Acquisitions Chapter, it is clear that Indiana is directly regulating the purchase and sale of shares of stock in interstate commerce. Appellant CTS’ stock is traded on the New York Stock Exchange, and peоple from all over the country buy and sell CTS’ shares daily. Yet, under Indiana‘s scheme, any prospective purchaser will be effectively precluded from purchasing CTS’
The United States, as amicus curiae, argues that Indiana‘s Control Share Acquisitions Chapter “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 Indiana Chapter, like the Illinois Act [in MITE], restrains ‘transfers of stock by stockholders to a third party.‘” Brief for Securities and Exchange Commission and United States as Amici Curiae 26. I agree. The majority ignores the practical impact of the Chapter in concluding that the Chapter does not violate the Commerce Clause. The Chapter is characterized as merely defining “the attributes of shares in its corporations,” ante, at 94. The majority sees the trees but not the forest.
The Commerce Clause was included in our Constitution by the Framers to prevent the very type of economic рrotectionism Indiana‘s Control Share Acquisitions Chapter represents:
“The few simple words of the Commerce Clause—‘The Congress shall have Power . . . To regulate Commerce . . . among the several States . . .‘—reflected a central concern of the Framers that was an immediate reason for calling the Constitutional Convention: the conviction 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.” Hughes, supra, at 325-326.
The State of Indiana, in its brief, admits that at least one of the Chapter‘s goals is to protect Indiana corporations. The State notes that the Chapter permits shareholders “to deter
Unlike state blue sky laws, Indiana‘s Control Share Acquisitions Chapter regulates the purchase and sale of stock of Indiana corporations in interstate commerce. Indeed, as noted above, the Chapter will inevitably be used to block interstate transactions in such stock. Because the Commerce Clause protects the “interstate market” in such securities, Exxon Corp. v. Governor of Maryland, 437 U. S. 117, 127 (1978), and because the Control Share Acquisitions Chapter substantially interferes with this interstate market, the Chapter clearly conflicts with the Commerce Clause.
With all due respect, I dissent.