Appeals from the United States District Court for the Eastern District of Wisconsin. No. 88-C-1296, J.P. Stadtmueller, Judge. Previously Reported as Unpublished Opinion at:,. Fed. Sec. L. Rep. (CCH) P94,436.
Bauer, Chief Judge, Easterbrook, Circuit Judge, and Will, Senior District Judge.*fn*
EASTERBROOK, Circuit Judge
States have enacted three generations of takeover statutes in the last 20 years. Illinois enacted a first-generation statute, which forbade acquisitions of any firm with substantial assets in Illinois unless a public official approved. We concluded that such a statute injures investors, is preempted by the Williams Act, and is unconstitutional under the dormant Commerce Clause. MITE Corp. v. Dixon, 633 F.2d 486 (7th Cir. 1980). The Supreme Court affirmed the judgment under the Commerce Clause, Edgar v. MITE Corp., 457 U.S. 624, 643-46, 73 L. Ed. 2d 269, 102 S. Ct. 2629 (1982). Three Justices also agreed with our view of the Williams Act, id. at 634-40 (White, J., joined by Burger, C.J. & Blackmun, J.), while two disagreed, id. at 646-47 (Powell, J.), and 655 (Stevens, J.), and four did not address the subject.
Indiana enacted a second-generation statute, applicable only to firms incorporated there and eliminating governmental veto power. Indiana's law provides that the acquiring firm's shares lose their voting power unless the target's directors approve the acquisition or the shareholders not affiliated with either bidder or management authorize restoration of votes. We concluded that this statute, too, is inimical to investors' interests, preempted by the Williams Act, and unconstitutional under the Commerce Clause. Dynamics Corp. of America v. CTS Corp., 794 F.2d 250 (7th Cir. 1986). This time the Supreme Court did not agree. It thought the Indiana statute consistent with both Williams Act and Commerce Clause. CTS Corp. v. Dynamics Corp. of America, 481 U.S. 69, 95 L. Ed. 2d 67, 107 S. Ct. 1637 (1987). Adopting Justice White's view of preemption for the sake of argument, id. at 81, the Court found no inconsistency between state and federal law because Indiana allowed the bidder to acquire the shares without hindrance. Such a law makes the shares less attractive, but it does not regulate the process of bidding. As for the Commerce Clause, the Court took Indiana's law to be regulation of internal corporate affairs, potentially beneficial because it would allow investors to avoid the "coercion" of two-tier bids and other tactics. 481 U.S. at 83, 91-93. Justices White, Blackmun, and Stevens disagreed with the analysis under the Commerce Clause, id. at 99-101; only Justice White disagreed with the conclusion about preemption, id. at 97-99.
Wisconsin has a third-generation takeover statute. Enacted after CTS, it postpones the kinds of transactions that often follow tender offers (and often are the reason for making the offers in the first place). Unless the target's board agrees to the transaction in advance, the bidder must wait three years after buying the shares to merge with the target or acquire more than 5% of its assets. We must decide whether this is consistent with the Williams Act and Commerce Clause.
Amanda Acquisition Corporation is a shell with a single purpose: to acquire Universal Foods Corporation, a diversified firm incorporated in Wisconsin and traded on the New York Stock Exchange. Universal is covered by Wisconsin's anti-takeover law. Amanda is a subsidiary of High Voltage Engineering Corp., a small electronics firm in Massachusetts. Most of High Voltage's equity capital comes from Berisford Capital PLC, a British venture capital firm, and Hyde Park Partners L.P., a partnership affiliated with the principals of Berisford. Chase Manhattan Bank has promised to lend Amanda 50% of the cost of the acquisition, secured by the stock of Universal.
In mid-November 1988 Universal's stock was trading for about $25 per share. On December 1 Amanda commenced a tender offer at $30.50, to be effective if at least 75% of the stock should be tendered.*fn1 This all-cash, all-shares offer has been increased by stages to $38.00.*fn2 Amanda's financing is contingent on a prompt merger with Universal if the offer succeeds, so the offer is conditional on a judicial declaration that the law is invalid. (It is also conditional on Universal's redemption of poison pill stock. For reasons that we discuss below, it is unnecessary to discuss the subject in detail.)
No firm incorporated in Wisconsin and having its headquarters, substantial operations, or 10% of its shares or shareholders there may "engage in a business combination with an interested stockholder . . . for 3 years after the interested stockholder's stock acquisition date unless the board of directors of the [Wisconsin] corporation has approved, before the interested stockholder's stock acquisition date, that business combination or the purchase of stock", Wis.Stat. § 180.726(2). An "interested stockholder" is one owning 10% of the voting stock, directly or through associates (anyone acting in concert with it), § 180.726(1)(e). A "business combination" is a merger with the bidder or any of its affiliates, sale of more than 5% of the assets to bidder or affiliate, liquidation of the target, or a transaction by which the target guarantees the bidder's or affiliates debts or passes tax benefits to the bidder or affiliate, § 180.726(1)(e). The law, in other words, provides for almost hermetic separation of bidder and target for three years after the bidder obtains 10% of the stock -- unless the target's board consented before then. No matter how popular the offer, the ban applies: obtaining 85% (even 100%) of the stock held by non-management shareholders won't allow the bidder to engage in a business combination, as it would under Delaware law. See BNS, Inc. v. Koppers Co., 683 F. Supp. 458 (D.Del. 1988); RP Acquisition Corp. v. Staley Continental, Inc., 686 F. Supp. 476 (D.Del. 1988); City Capital Associates L.P. v. Interco, Inc., 696 F. Supp. 1551 (D.Del.), affirmed, 860 F.2d 60 (3d Cir. 1988). Wisconsin firms cannot opt out of the law, as may corporations subject to almost all other state takeover statutes. In Wisconsin it is management's approval in advance, or wait three years. Even when the time is up, the bidder needs the approval of a majority of the remaining investors, without any provision disqualifying shares still held by the managers who resisted the transaction, § 180.726(3)(b).*fn3 The district court found that this statute "effectively eliminates hostile leveraged buyouts". As a practical matter, Wisconsin prohibits any offer contingent on a merger between bidder and target, a condition attached to about 90% of contemporary tender offers.
Amanda filed this suit seeking a declaration that this law is preempted by the Williams Act and inconsistent with the Commerce Clause. It added a pendent claim that the directors' refusal to redeem the poison-pill rights violates their fiduciary duties to Universal's shareholders. The district court declined to issue a preliminary injunction. 708 F. Supp. 984 (E.D.Wis. 1989). It concluded that the statute is constitutional and not preempted, and that under Wisconsin law (which the court believed would follow Delaware's) directors are entitled to prevent investors from accepting tender offers of which the directors do not approve.*fn4 Amanda prevailed on one issue, however: the court held that Universal does not have a private right of action to enforce the margin regulations issued by the Federal Reserve Board, and it therefore declined to consider Universal's argument that Amanda had arranged to borrow more than 50% of the cost of its bid.
As a practical matter, the decision denying preliminary relief ends the case. The parties treat their appeals as if taken from the conclusive denial of relief; so shall we. The financial stakes on both sides cancel out, and the question becomes who is right on the merits. CTS, 794 F.2d at 252; see also FTC v. Elders Grain, Inc., 868 F.2d 901, 903-05 (7th Cir. 1989). The parties ask us to decide whether Universal has a private right of action to enforce the margin rules, whether Universal's directors violated their fiduciary duties under Delaware law (or Wisconsin law if it differs) in refusing to redeem the poison pill rights, and whether § 180.726 is consistent with the Constitution and federal law.
Courts try to avoid constitutional adjudication. There is no escape for us today, however. Even if we were to conclude that Universal has a private right of action and that its board acted within its rights in refusing to redeem the poison pill, we would have to reach the constitutional question. Amanda is entitled to attack each hurdle in its path. Although the poison pill might be an insuperable obstacle if the statute were held invalid, Amanda may gain from having one fewer stumbling block, which gives it standing to protest the statute independently of the pill. See arson v. Valente, 456 U.S. 228, 238-43, 72 L. Ed. 2d 33, 102 S. Ct. 1673 (1982); Tyson Foods, Inc. v. McReynolds, 865 F.2d 99, 101 (6th Cir. 1989). The reverse is not true, however. At oral argument counsel for Amanda said that if the statute is within Wisconsin's powers, then its offer is doomed. So starting with the statute holds out the prospect of avoiding some issues, while starting with private rights of action or directors' duties would not enable us to avoid the constitutional question. If we conclude that § 180.726 is within Wisconsin's power, the offer is defunct, and ...