[Corporation 2]_18_CTS Corp. v. Dynamics Corp. of America

[앨리]

2-18 CTS Corp. v. Dynamics Corp. of America 

Ⅰ. Fact

On March 4, 1986, Indiana Business Corporation Law that included the Control Share Acquisitions Chapter (Indiana Act or Act, Hereinafter, A) was revised. On March 10, 1986, Dynamics Corporation of America (Hereinafter, D) owned 9.6% of the common stock of CTS Corporation, an Indiana corporation (Hereinafter, C). Six days after A went into effect, D announced a tender offer in C. On March 10, D filed suit against C for violating the federal securities laws that are no longer relevant to these proceedings. On March 27, the board of directors of C elected to be governed by the provisions of A. D moved for leave to amend its complaint to allege that A is pre-empted by the Williams Act (Hereinafter, WA), 15 U.S.C. §§ 78m(d)-(e) and 78n(d)-(f), and violates the Commerce Clause, Art. I, § 8, cl. 3. D sought a temporary restraining order, a preliminary injunction, and declaratory relief against C's use of A. The District Court granted Ds' motion for declaratory relief. The District Court accepted Ds' claim that A violates the Commerce Clause. The District Court certified its decisions on WA and Commerce Clause claims as final under Federal Rule of Civil Procedure 54(b). C appealed. The Court of Appeals consolidated and expedited the two appeals. The Court of Appeals affirmed the judgment of the District Court.

Ⅱ. Issue

1.     Whether the validity of preemption on the Control Share Acquisitions Chapter of the Indiana Business Corporation Law under the Williams Act is an issue.

2.     Whether the validity of the Control Share Acquisitions Chapter of the Indiana Business Corporation Law under Commerce Clause of the Federal Constitution, Art. I, § 8, cl. is an issue.

Ⅲ. Rule

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 or where the state law stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.

Ⅳ. Application

Preemption is most often an issue in areas in which Congress and the state’s share authority. In this case, D alleged that A is pre-empted by the Williams Act, 15 U.S.C. §§ 78m(d)-(e) and 78n(d)-(f), and violates the Commerce Clause, Art. I, § 8, cl. 3.

But the state statute can be pre-empted only if it frustrates the purposes of the federal law. In Edgar v. MITE Corp., although, A conflicted with WA, the plurality opinion in MITE did not represent the views of a majority of the Court, the concern was that the Illinois statute operated to favor management against offerors, to the detriment of shareholders.  Also, A furthers a basic purpose of WA, placing investors on an equal footing with the takeover bidder. Because A operates on the assumption that independent shareholders faced with tender offers often are at a disadvantage, A protects them from the coercive aspects of some tender offers. However, the Court of Appeals based its finding of pre-emption on its view that the practical effect of A is to delay the consummation of tender offers until 50 days after the commencement of the offer.

D contends that A imposes a 50-day delay because no rational offeror will purchase shares until it gains assurance that those shares will carry voting rights.

But, A also does not impose an indefinite delay on tender offers, also, A provides that full voting rights will be vested within 50 days after commencement of the offer. This period is within the 60-day period Congress established for restitution of withdrawal rights in 15 U.S.C. § 78n(d)(5).  Although WA would pre-empt a variety of state corporate laws 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, A will delay some tender offers is insufficient to require a conclusion that WA pre-empts A.  Accordingly, the regulatory conditions that A places on tender offers are consistent with the text and the purposes of WA, WA does not pre-empt A.

D contends that the statute is discriminatory because it will apply most often to out-of-state entities.

But this argument rests on the contention that most hostile tender offers are launched by offerors outside Indiana.  Also, it does not establish a claim of discrimination against interstate commerce. Because nothing in A imposes a greater burden on out-of-state offerors than it does on similarly situated Indiana offerors. Also, A has the same effects on tender offers whether or not the offeror is a domiciliary or resident of Indiana. Because a corporation is an artificial being, invisible, intangible, and existing only in contemplation of law. Also, a beneficial free market system depends upon the fact that a corporation is organized under the law of a single jurisdiction, traditionally the corporate law of the State of its incorporation. Thus, these regulatory laws may affect directly a variety of corporate transactions. Because A protects the shareholders of Indiana corporations by affording shareholders an opportunity to decide collectively whether the resulting change in voting control of the corporation would be desirable.

D argued 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.

But the potentially coercive aspects of tender offers have been recognized by the SEC. Also, Constitution does not require the States to subscribe to any particular economic theory. Thus, the possibility of coercion in some takeover bids offers additional justification for Indiana's decision to promote the autonomy of independent shareholders.

D contends that the State has no legitimate interest in protecting the nonresident shareholders. D relies heavily on the statement by the MITE Court that insofar as the law burdens out-of-state transactions, there is nothing to be weighed in the balance to sustain the law.

But that comment was made in reference to an Illinois law that applied as well to out-of-state corporations as to in-state corporations. Although Indiana has no interest in protecting nonresident shareholders of nonresident corporations, A applies only to corporations incorporated in Indiana. Because Indiana has a substantial interest in preventing the corporate form from becoming a shield for unfair business dealing. Moreover, unlike the Illinois statute invalidated in MITE, A applies only to corporations that have a substantial number of shareholders in Indiana. Thus, every application of A will affect a substantial number of Indiana residents, whom Indiana indisputably has an interest in protecting. Ds' argument that A is unconstitutional ultimately rests on its contention that A will limit the number of successful tender offers. But A 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. Also, the very commodity that is traded in the "market for corporate control is one that owes its existence and attributes to state law. Because it only provides regulatory procedures designed for the better protection of the corporations' shareholders.

Accordingly, even if A should decrease the number of successful tender offers for Indiana corporations, this would not offend the Commerce Clause. Because to the limited extent that A affects interstate commerce, this is justified by the State's interests in defining the attributes of shares in its corporations and in protecting shareholders.

Ⅴ. Conclusion

The judgment was reversed.

Ⅵ. Comment  

Conflict preemption occurs when simultaneous compliance with both federal and state regulations is impossible or when state law poses an obstacle to the accomplishment of federal goals.