-Appellee owned 9.6% of Appellant, CTS Corporation and announced a tender offer to increase their ownership to 27.5%.
-Six days before their announcement, an Indiana law, Indiana’s Control Share Acquisitions Act, came into effect.
-The Act allows for disinterested shareholders to hold a shareholders’ meeting to discuss the merits of a tender offer for controlling shares.
-Appellee argued that the Act is preempted by a federal law, the Williams Act.
-The Williams Act provides guidelines that offerors need to follow when making a tender offer. Appellee also argues that the Indiana Act violates the Commerce Clause because it treats in-state entities differently from out-of-state entities.
-The Indiana Act is not preempted by the federal law because entities can comply with both federal and state law without frustrating the federal law.
-The state law furthers the federal law’s goal of protecting shareholders from tender offer abuses but does not tip the balance between management and acquirers. Instead, the rights of shareholders are strengthened in a situation where many believe shareholders are traditionally at a disadvantage.
-The Indiana Act does not violate the Commerce Clause because corporations by definition are entities created by state law, and therefore it is only logical that states would define the rights and characteristics of corporations. The United States Supreme Court noted that there are several instances where states have laws regulating the powers of acquiring entities, such as supermajority voting requirements.
States, as the creators of corporate entities, have the ability to define the protections afforded to shareholders providing that it is possible to comply with the state law and federal law.
i. 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.
ii. 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.
iii. Second, the Williams Act, and the regulations that accompany it, establish procedural rules to govern tender offers.
Conflict Preemption Test
“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.”
i. After this case, only if simultaneous compliance is impossible would a state law be preempted by the Williams Act.
ii. Standard conflict preemption analysis.
d. NOT Preempted by Williams Act – Indiana statute is consistent with the provisions and purposes of the Williams Act and is not pre-empted by the federal statute, because (a) it protects independent shareholders against both the offeror and management, thereby furthering the basic purpose of the Williams Act to place investors on an equal footing with offerors, and (b) it does not unreasonably delay the consummation of tender offers.
e. Commerce Clause – Indiana statute does not violate the commerce clause, because (a) it does not discriminate against interstate commerce, (b) it does not create an impermissible risk of inconsistent regulations by different states, (c) its primary purpose is to protect the shareholders of Indiana corporations, and (d) even if the statute should decrease the number of successful tender offers for Indiana corporations, this would not offend the commerce clause.
-The dissent believed that the law prevented shareholders to act in their best interests by forcing them to act only after the shareholder meeting.
The concurring opinion would simplify the Commerce Clause analysis by just examining whether the state law discriminates against interstate commerce, and simply holds that state corporation codes should rarely if ever be preempted by federal law.
Interested in learning how to get the top grades in your law school classes? Want to learn how to study smarter than your competition? Interested in transferring to a high ranked school?