Tyson Foods, Inc. v. McReynolds

• Decision Date: 10 January 1989
• Docket Number: No. 88-6343,88-6343
• Citation: 865 F.2d 99
• Parties: Blue Sky L. Rep. P 72,954, 57 USLW 2450, Fed. Sec. L. Rep. P 94,143 TYSON FOODS, INC. and Holly Acquisition Corp., Plaintiffs-Appellees, v. Elaine A. McREYNOLDS and Charles W. Burson, Defendants, Holly Farms Corp., Defendant-Appellant.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 99

865 F.2d 99

Blue Sky L. Rep. P 72,954, 57 USLW 2450,

Fed. Sec. L. Rep. P 94,143

TYSON FOODS, INC. and Holly Acquisition Corp., Plaintiffs-Appellees, v. Elaine A. McREYNOLDS and Charles W. Burson, Defendants Holly Farms Corp., Defendant-Appellant.

No. 88-6343.

United States Court of Appeals, Sixth Circuit.

Argued Dec. 28, 1988.

Decided Jan. 10, 1989.

Ames Davis, Waller, Lansden, Dortch & Davis, Nashville, Tenn., Roderick H. Willcox, James J. Chester (argued), John J. Chester, Donald C. Brey, Chester, Hoffman, Willcox & Saxbe, Columbus, Ohio, for Tyson Foods, Inc. & Holly Acquisition Corp., plaintiffs-appellees.

John K. Maddin, Jr., Gracey, Maddin, Cowan & Bird, Nashville, Tenn., Paul Vizcarrondo, Jr. (argued), Wachtell, Lipton, Rosen, & Katz, New York City, for Holly Farms Corp., defendant-appellant.

Before MARTIN and JONES, Circuit Judges, and PECK, Senior Circuit judge.

BOYCE F. MARTIN, Jr., Circuit Judge.

Tyson Foods, Inc., through its wholly owned subsidiary, Holly Acquisition Corp., both Delaware corporations, has made a nationwide tender offer for the common shares of Holly Farms Corp., also a Delaware corporation. Holly Farms seeks a stay and/or expedited appeal of the district court's preliminary injunction preventing Holly Farms from enforcing or attempting to enforce the Tennessee Investor Protection Act, the Tennessee Business Combination Act, the Tennessee Control Share Acquisition Act, or the Tennessee Authorized Corporation Protection Act. ¹ 700 F.Supp. 906. On this expedited appeal, we affirm the district court's limited holding that the four Tennessee statutes violate the Commerce Clause of the United States Constitution to the extent that they apply to target corporations organized under the laws of states other than Tennessee.

On October 21, 1988, Tyson commenced its all cash offer for all shares of Holly Farms stock. Such offer was made to all Holly Farms shareholders throughout the United States and elsewhere. The offer was advertised nationally by use of the financial press and by interstate mail. The tender offer and the loan commitment pursuant to which the acquisition would be financed stated as a condition that Tyson not be threatened with the business combination or control share effects allegedly produced by the Tennessee statutes which the State of Tennessee was prepared to enforce. ² Tyson intended to propose a merger with Holly Farms if its tender offer was successful.

Holly Farms is organized as a Delaware corporation with principal executive offices located in Memphis, Tennessee. Its principal products are fresh and frozen chicken products. Holly Farms' shares of common stock are listed on the New York, Philadelphia, and Pacific Stock Exchanges. Holly Farms conducts operations through subsidiaries incorporated in ten states and has facilities in twenty-two states. Holly Farms opted to come under the protection of the Tennessee Authorized Corporation Protection Act. The Authorized Corporation Protection Act is the vehicle through which the Business Combination Act and the Control Share Acquisition Act govern foreign corporations. The Authorized Corporation Protection Act provides that an "authorized corporation" can adopt a by-law or charter provision in which it elects to be subject to the operative provision of the Business Combination Act and the Control Share Acquisition Act. These statutes then become applicable "to the same extent as such provisions apply to a resident domestic corporation." Holly Farms' contacts with Tennessee make it an "authorized corporation" under the Authorized Corporation Protection Act. Holly Farms also qualifies as a "offeree company" under the Investor Protection Act.

The granting or denial of a preliminary injunction is within the sound judicial discretion of the trial court. Virginia Railway Co. v. System Federation, R.E.D., 300 U.S. 515, 551, 57 S.Ct. 592, 601, 81 L.Ed. 789 (1937). Therefore, the scope of review on appeal from the denial or granting of a preliminary injunction is limited to a determination of whether the district court abused its discretion. Martin-Marietta Corp. v. Bendix Corp., 690 F.2d 558, 564 (6th Cir., 1982). In determining on appeal whether the district court abused its discretion in granting or withholding preliminary injunctive relief, this circuit has set forth four standards which must be considered: 1) whether the plaintiffs have shown a strong or substantial likelihood or probability of success on the merit; 2) whether the plaintiffs have shown irreparable injury; 3) whether the issuance of a preliminary injunction would cause substantial harm to others; 4) whether the public interest would be served by issuing a preliminary injunction. Id. at 564; Mason County Medical Ass'n. v. Knebel, 563 F.2d 256, 260-62 (6th Cir.1977); Adams v. Federal Express Corp., 547 F.2d 319, 322 (6th Cir.1976). Under such a detailed analysis, the district court did not abuse its discretion in this case.

Holly Farms fails under the first prong of the four-part test because it will not prevail on the merits. The district court is correct in its limited holding that the four Tennessee statutes at issue violate the Commerce Clause of the United States Constitution to the extent that they apply to Holly Farms, a target corporation organized under the laws of the State of Delaware, not Tennessee. Holly Farms argues that Tyson's tender offer contains several conditions and, therefore, the constitutional issue is not ripe until all of the other non-constitutional issues have been resolved. As the district court correctly pointed out, courts routinely reach the merits of actions challenging less than all the impediments to the success of a tender offer. See, e.g., Gelco Corp. v. Coniston Partners, 652 F.Supp. 829, 837 (D.Minn.1986), aff'd in part and vacated in part on other grounds, 811 F.2d 414 (8th Cir.1987) (adjudicating poison pill and Minnesota take-over statute where offer subject to six conditions).

The Supreme Court in Edgar v. MITE Corp., 457 U.S. 624, 640, 102 S.Ct. 2629, 2639, 2640, 73 L.Ed.2d 269 (1982) (plurality opinion) (citing Shafer v. Farmers Grain Co., 268 U.S. 189, 199, 45 S.Ct. 481, 485, 69 L.Ed. 909 (1925)), stated that "the commerce clause permits ... only incidental regulation of interstate commerce by the States; direct regulation is prohibited." Tennessee's Authorized Corporation Protection Act directly regulates offers for out of state corporations doing business in Tennessee. It effectively insulates these foreign corporations from competition by directly regulating nationwide tender offers. Such direct regulation is prohibited. See MITE, 457 U.S. at 641-43, 102 S.Ct. at 2640-41 (Illinois statute regulating offers for domestic and foreign corporations is an impermissible direct restraint on interstate commerce); CTS Corporation v. Dynamics Corp. of America, 481 U.S. 69, 107 S.Ct. 1637, 95 L.Ed.2d 67 (1987) (distinguishing MITE and stating that the burdens on interstate commerce created by the Indiana statute at issue were incidental regulation of interstate commerce because the Indiana statute regulated only Indiana corporations). See also Lewis v. BT Investment Managers, Inc., 447 U.S. 27, 100 S.Ct. 2009, 64 L.Ed.2d 702 (1980) (the commerce clause prohibits a state from using its regulatory power to protect its own citizens from outside competition).

Even if we assume, as argued by Holly Farms, that the "direct regulation" test is a minority viewpoint in MITE and should not be applied as the current law, see Hyde Park Partners, L.P. v. Connolly, 839 F.2d 837, 845 n. 9 (1st Cir.1988), the four Tennessee statutes also impose a burden on interstate commerce excessive in relation to local interests served by the statute. Pike v. Bruce Church Inc., 397 U.S. 137, 142, 90 S.Ct. 844, 847, 25 L.Ed.2d 174 (1970). Protecting shareholders of resident corporations is a legitimate state interest. CTS Corp., 107 S.Ct. at 1651. However, the Business Combination Act, the Control Shareholders Acquisition Act and the Authorized Corporation Protection Act protect incumbent management and not the shareholders. Under the Business Combination Act, an out-of-state offeror cannot consumate a merger or other combination with a domestic offeree or out-of-state offeree covered by the Authorized Corporation Protection Act for at least two years and possibly five absent approval of incumbent management. See Tenn.Code Ann. Secs. 48-35-205-207(5) (1988). Under the Control Shareholders Acquisition Act, a purchaser wishing to acquire a control share in a domestic corporation or foreign corporation covered by the Authorized Corporation Protection Act must acquire ten percent of the outstanding shares before the purchaser can even determine whether it will be able to vote the control share. See Tenn.Code Ann. Secs. 48-35-304-307 (1988).

The Investor Protection Act applies to offers for foreign corporations having "substantial assets" in Tennessee and that are either incorporated in or have their principal offices in Tennessee. Tenn.Code Ann. 48-35-102(7) (1988). Compared to the local benefits...