Armstrong World Industries, Inc. by Wolfson v. Adams
| Decision Date | 10 April 1992 |
| Docket Number | No. 91-1503,91-1503 |
| Citation | 961 F.2d 405 |
| Parties | , Fed. Sec. L. Rep. P 96,589 ARMSTRONG WORLD INDUSTRIES, INC., derivatively by Tessie WOLFSON and Rodney B. Shields, as well as in their own right v. William W. ADAMS; Barbara Hackman Franklin; E. Allen Deaver; George A. Lorch; William Wallace Abbott; Francis V. Breeze; William M. Ellinghaus; Mary Joan Glynn; Joseph L. Jones; James E. Marley; Robert F. Patton; J. Phillip Samper; Harry K. Wells; James J. Haggerty, Secretary of State of the Commonwealth of Pennsylvania in his official capacity; Ernie Preate, Jr., Attorney General of the Commonwealth of Pennsylvania in his official capacity; Armstrong World Industries, Inc. Tessie Wolfson and Rodney B. Shields, individually in their own right and derivatively on Behalf of Armstrong World Industries, Inc., Appellants. |
| Court | U.S. Court of Appeals — Third Circuit |
Mark C. Rifkin (argued), Richard D. Greenfield, Greenfield & Chimicles, Haverford, Pa., for appellants.
Thomas L. Vankirk (argued), Stanley Yorsz, Buchanan Ingersoll Professional Corp., Pittsburgh, Pa., for appellees William W. Adams, Barbara Hackman Franklin, E. Allen Deaver, George A. Lorch, William Wallace Abbott, Francis V. Breeze, William M. Ellinghaus, Mary Joan Glynn, Joseph L. Jones, James E. Marley, Robert F. Patton, J. Phillip Samper, Harry K. Wells, and Armstrong World Industries, Inc.
Before: SCIRICA, ALITO and SEITZ, Circuit Judges.
This case involves a challenge to the constitutionality of the Pennsylvania anti-takeover act of 1990. Plaintiffs, shareholders of Armstrong World Industries, Inc., 1 brought this action seeking declaratory and injunctive relief on behalf of themselves and Armstrong against the board of directors, state officials charged with implementing the Act, and Armstrong nominally. The district court dismissed plaintiffs' complaint for lack of subject matter jurisdiction. Because we conclude that plaintiffs' claims are not ripe for judicial review, we will affirm.
On April 27, 1990, Act No. 36, 1990 Pa.Laws 129, became law. Considered one of the nation's toughest anti-takeover statutes, the Act enhances the ability of management of Pennsylvania corporations to fend off hostile takeover attempts. See Comment, Beyond the Third Generation: An Analysis of Pennsylvania's Latest Attack on Hostile Takeovers, 29 Duq.L.Rev. 579, 591 n. 73 (1991). Among other things, Act 36 revises directors' fiduciary duties, restricts the voting rights of shareholders who initiate control-share acquisitions, and empowers corporations to disgorge short-swing profits realized by bidders who place corporations "in play."
The fiduciary duties provision expands directors' discretion in determining the "best interests of the corporation." Directors may now consider whether the corporation's long-term interests and plans would be "best served by the continued independence of the corporation," as well as "[t]he resources, intent and conduct (past, stated and potential) of any person seeking to acquire control of the corporation." 15 Pa.Cons.Stat.Ann. § 1715(a)(2) & (3) (Purdon Supp.1991-92) (originally enacted as Act of Apr. 27, 1990, No. 36, § 1721(e)(2) & (3), 1990 Pa.Laws 129). 2 Moreover, "in considering the ... effects of any action," directors need not "regard any corporate interest or the interests of any particular group affected by such action as a dominant or controlling interest or factor." Id. § 1715(b) (Act 36, § 1721(e)(4)).
The fiduciary duties provision also fortifies the presumption that directors' actions are in the "best interests of the corporation." Directors are under no "greater obligation to justify" their actions "relating to an acquisition or potential or proposed acquisition of control of the corporation" than in any other circumstances. Id. § 1715(d) (Act 36, § 1721(g)). Furthermore, actions taken by disinterested directors in the change-of-control context are presumed to be in the "best interests of the corporation," except where it is proven that such actions were not taken "in good faith after reasonable investigation." Id. 3
The control-share acquisitions provision restricts the voting rights of any person who acquires shares in connection with a "control-share acquisition." See id. § 2564(a) (Act 36, § 2563(a)). A control-share acquisition occurs whenever a person acquires voting power for the first time over 20, 33 1/3, or 50% of the voting shares of a corporation. Id. § 2562. Persons who initiate control-share acquisitions are denied voting rights in "control shares," except where such rights are granted by a majority of disinterested shares and a majority of all voting shares. Id. § 2564(a) (Act 36, § 2563(a)). Control shares are "[t]hose shares of a corporation that, upon acquisition of voting power over such shares by an acquiring person, would result in a control-share acquisition." Id. § 2562.
The disgorgement provision enables corporations to recover short-swing profits realized by any "controlling person" from the sale of shares in connection with a control-share acquisition. Id. § 2575 (Act 36, § 2574). A controlling person is any person or group that (1) acquires, offers to acquire, or announces its intention to acquire voting power over at least 20% of the shares entitled to vote in an election of directors, or (2) announces that "it may seek to acquire control of a corporation through any means." Id. § 2573. All profits realized within eighteen months after obtaining controlling-person status from the sale of shares acquired two years prior to, or eighteen months subsequent to, attaining such status may be recovered by the corporation through an enforcement action. Id. § 2575 (Act 36, § 2574).
Unlike the fiduciary duties provision, which governs all actions taken by directors, the control-share acquisitions and disgorgement provisions only apply in the change-of-control context. Under the Act, corporations may "opt-out" of any or all of the foregoing provisions. See id. §§ 1711(b) (Act 36, § 1721(j)), 2561(b) & 2571(b). Although many corporations subject to Act 36 have elected to opt-out, Armstrong has not and remains subject to the Act's change-of-control and fiduciary duties provisions. 4
On the day Act 36 became law, plaintiffs brought this action in federal district court seeking declaratory and injunctive relief. In their complaint, plaintiffs allege that the Act's control-share acquisitions and disgorgement provisions violate the Supremacy Clause of the United States Constitution, by contravening and frustrating the purposes of the Williams Act 5; the Commerce Clause, by discriminating against interstate commerce, namely, out-of-state shareholders; the Contracts Clause, by impairing the contractual rights acquired by plaintiffs upon their purchase of Armstrong shares; and the First Amendment, by restricting the free speech rights of plaintiffs and potential tender offerors. In addition, plaintiffs contend that the fiduciary duties provision violates the Contracts Clause, for the same reason as the Act's change-of-control provisions; and the Fifth Amendment, by diminishing the value of their property interest in Armstrong stock. 6
Plaintiffs maintain that they have been harmed as a direct result of the passage of the Act. First, they contend that defendant directors actively lobbied for and expended vast amounts of corporate assets in support of the passage of Act 36. Second, they claim that Armstrong was the subject of an "unsolicited tender offer" initiated by the Belzberg family of Canada in July 1989, which was withdrawn because of Act 36. 7 Third, plaintiffs assert that the passage of Act 36 precipitated the decline in the market value of Armstrong stock, which dropped 18% from the date the Act was introduced (October 20, 1989) to the date it became law (April 27, 1990), and 52% in the year following its enactment. 8 Finally, plaintiffs allege that Act 36 will deter potential tender offerors from placing Armstrong "in play," thus depriving them of their right to sell Armstrong shares to a hostile tender offeror.
Defendants filed a motion to dismiss for lack of subject matter jurisdiction. According to defendants, plaintiffs' complaint does not present a within the meaning of Article III of the Constitution, because the challenged provisions of Act 36 cannot affect plaintiffs until and unless Armstrong becomes the subject of a takeover attempt triggering the Act. Therefore, defendants maintain, plaintiffs' action is not ripe for judicial review.
The district court agreed. Applying the test set forth in Step-Saver Data Systems, Inc. v. Wyse Technology, 912 F.2d 643 (3d Cir.1990), it held that "plaintiffs' claims do not constitute a real and immediate controversy appropriate for judicial resolution," and dismissed plaintiffs' complaint for lack of subject matter jurisdiction. Armstrong World Indus., Inc. v. Adams, No. 90-2920, 1991 WL 83087 . 9 This appeal followed.
We have jurisdiction under 28 U.S.C. § 1291. At issue is the justiciability of plaintiffs' complaint, and, in particular, whether their claims are ripe for judicial review. Our review of the district court's order dismissing plaintiffs' complaint for lack of subject matter jurisdiction is plenary. Haydo v. Amerikohl Mining, Inc., 830 F.2d 494, 496 (3d Cir.1987). 10
Article III, section 2 of the United States Constitution limits federal jurisdiction to actual "cases" and "controversies." U.S. Const. art. III, § 2. It was intended to ensure that federal courts decide only those disputes of "a Judiciary nature," M. Farrand, 2 Records of the Federal Convention of 1787, at 430 (1911), and stands as a direct prohibition on the issuance of advisory opinions, Flast v. Cohen, 392 U.S. 83, 96, 88 S.Ct. 1942, 1950, 20 L.Ed.2d 947 (1968).
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