Brief Fact Summary. The Indiana Act (the Act) protected shareholders of Indiana corporations from hostile takeovers. Dynamics announced a tender offer for CTS shares but CTS used the Act to gain time in deciding whether to accept the takeover offer. Dynamics sued in federal court, arguing that the Indiana Act violated the Commerce Clause.
Synopsis of Rule of Law. If an evenhanded statute is used to effectuate a legitimate local interest, it may be challenged as having a discriminatory effect on interstate commerce. Under such a challenge, the question is whether the burden the law imposes on interstate commerce outweighs its benefit to local interests. If the burden imposed is incidental or trivial compared to the benefits obtained then the statute will be upheld.
Issue. Did the Control Share Acquisitions Chapter of the Indiana Business Corporation Law violate the Commerce Clause by creating a burden on interstate commerce?
Held. Justice Powell.
The Indiana Act does not discriminate against interstate commerce because it has the same effects on tender offers whether or not the offeror is a domiciliary or resident of Indiana. The effects are distributed equally upon both interstate and local businesses. The fact that many hostile takeover offers come from outside the state does not by itself establish a claim of discrimination against interstate commerce. Furthermore, Indiana is not trying to regulate outside its borders. The Act applies only to corporations that have a substantial number of shareholders in Indiana.
A State’s authority to regulate domestic corporations includes the authority to define the voting rights of shareholders. Congress would be less likely to intervene in this area of law because there is no confusion created by each state governing only those corporations created pursuant to its laws.
The State’s relevant interests here are to promote stable relationships among parties involved in its corporations and ensure that investors of such corporations have an effective voice in corporate affairs.
This law is like many others that a State uses to protect shareholders. Merger laws that require a greater vote for mergers in one state as opposed to another make it more difficult for corporations to merge. Some state laws provide dissenter’s rights where shareholders who disagree with a corporate decision can take actions to sell their shares to the corporation for fair market value. This may prevent a corporation from engaging in the specified transaction. This state law granting shareholders time to evaluate a takeover offer is consistent with the state’s power to promote relationships among investors in its corporations.
Dissent. Justice White, Blackmun and Stevens dissenting as to Part II.
This statute will completely foreclose some tender offers for stock in Indiana corporations. This undermines the policy of the Williams Act by effectively preventing minority shareholders from acting in their best interest by selling their stock. The Act therefore directly inhibits interstate commerce.
This law prevents individual investors from selling their stocks to out of state tender offerors and thereby frustrates any transfer of corporate control. This clearly interferes with the interstate market and conflicts with the Commerce Clause.
Concurrence. Justice Scalia concurring in part and concurring in judgment.
The Act neither discriminates against interstate commerce nor creates an impermissible risk of inconsistent regulation by different States. Without further analysis J. Scalia would therefore conclude it does not violate the dormant Commerce Clause.
J. Scalia disagrees with the balancing test used by the majority. As long as the State’s corporation law governs only its own corporations and does not discriminate against out-of-state interests, it should survive the Court’s scrutiny under the Commerce Clause. The balancing test to determine whether the Act promotes shareholder welfare or industrial stagnation is for Congress to decide, not the Court.
Discussion. The balancing approach used in this case is generally the appropriate Commerce Clause analysis when the statute in question is non-discriminatory in both motive and effect.