Nature of the Case
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Facts
A new Indiana law included the Control Share Acquisitions Chapter (Indiana Act or Act). 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%, 33 1/3%, or 50%. An entity that acquires control shares does not necessarily acquire voting rights. Rather, it gains those rights only 'to the extent granted by resolution approved by the shareholders of the issuing public corporation.' § 23-1-42-9(a). Section 23-1-42-9(b) requires a majority vote of all disinterested shareholders holding each class of stock for passage of such a resolution. The practical effect of this requirement is to condition acquisition of control of a corporation on approval of a majority of the preexisting disinterested shareholders. On March 10, 1986, appellee Dynamics Corporation of America (P) 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, P announced a tender offer for another million shares in CTS; purchase of those shares would have brought P’s ownership interest in CTS to 27.5%. Also on March 10, P 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 § 23-1-17-3. Four days later, on March 31, Dynamics moved for leave to amend its complaint to allege that the Act is preempted by the Williams Act, and violates the Commerce Clause, Art. I, § 8, cl. 3. P sought a temporary restraining order, a preliminary injunction, and declaratory relief against [481 U.S. 76] CTS' use of the Act. On April 9, the District Court ruled that the Williams Act preempts the Indiana Act, and granted P’s motion for declaratory relief. The court concluded that the Act wholly frustrates the purpose and objective of Congress in striking a balance between the investor, management, and the takeover bidder in takeover contests. This holding rested on the court's conclusion that the substantial interference with interstate commerce created by the [Act] outweighs the articulated local benefits so as to create an impermissible indirect burden on interstate commerce. CTS appealed the District Court's holdings on these claims to the Court of Appeals for the Seventh Circuit. After disposing of a variety of questions not relevant to this appeal, the Court of Appeals examined P’s claim that the Williams Act preempts the Indiana Act. The court looked first to the plurality opinion in Edgar v. MITE Corp. in which three Justices found that the Williams Act preempts state statutes that upset the balance between target management and a tender offeror. The court ruled 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. As for P's Commerce Clause challenge to the Act. The court applied 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. The court addressed the 'internal affairs' doctrine, a principle of conflict of laws . . . designed to make sure that the law of only one state shall govern the internal affairs of a corporation or other association. The effect on the interstate market in securities and corporate control is direct, intended, and substantial. . . . That the mode of regulation involves jiggering with voting rights cannot take it outside the scope of judicial review under the commerce clause. The court affirmed the judgment of the District Court.
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