Dynamics Corp. of America v. CTS Corp.

• Decision Date: 09 June 1986
• Docket Number: 86-1608,Nos. 86-1601,s. 86-1601
• Citation: 794 F.2d 250
• Parties: Fed. Sec. L. Rep. P 92,768, 1986-1 Trade Cases 67,134 DYNAMICS CORPORATION OF AMERICA, Plaintiff-Appellee, Counterdefendant-Appellee, v. CTS CORPORATION, Defendant-Appellant, Counterplaintiff-Appellant. State of Indiana, Intervenor-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 250

794 F.2d 250

Fed. Sec. L. Rep. P 92,768, 1986-1 Trade Cases 67,134

DYNAMICS CORPORATION OF AMERICA, Plaintiff-Appellee Counterdefendant-Appellee, v. CTS CORPORATION, Defendant-Appellant, Counterplaintiff-Appellant State of Indiana, Intervenor-Appellant.

Nos. 86-1601, 86-1608.

United States Court of Appeals Seventh Circuit.

Argued and Decided April 23, 1986.

Opinion May 28, 1986.

Amended June 9, 1986.

Stephen C. Sandels, McDermott, Will & Emery, Chicago, Ill., Authur T. Perry, Atty. Gen. Office, Indianapolis, Ind., for defendant-appellant, counterplaintiff-appellant.

Lowell E. Sachnoff, Sachnoff, Weaver & Rubenstein, Ltd., Chicago, Ill., for plaintiff-appellee, counterdefendant-appellee.

Before BAUER, CUDAHY, and POSNER, Circuit Judges.

POSNER, Circuit Judge.

On March 10 of this year Dynamics Corporation of America, which already owned 9.6 percent of the common stock of CTS Corporation, made a tender offer for another million shares. The offer if accepted would bring its stock holdings up to 27.5 percent of the company. On the same day, Dynamics filed this suit in the federal district court in Chicago; as later amended, the suit sought to enjoin the enforcement of Indiana's statute regulating takeovers, on the ground that the statute violates the supremacy and commerce clauses of the federal Constitution. When CTS "opted in" to a new Indiana statute on the subject, the Control Share Acquisition Chapter as it is called, Ind.Code Secs. 23-1-42-1 et seq., Dynamics further amended its complaint to challenge the new statute on the same grounds. A pendent count in the complaint sought to enjoin CTS from enforcing a recently adopted shareholders' rights plan ("poison pill"), on the ground that it violated the fiduciary obligations of CTS's management toward its shareholders. CTS counterclaimed against Dynamics, seeking an injunction against the tender offer on the grounds that it would result in a violation of section 8 of the Clayton Act, 15 U.S.C. Sec. 19 (interlocking directorates), and that it failed to disclose material information. There are some individual parties, but as they are not important to the legal issues we shall ignore them.

Both Dynamics and CTS moved for preliminary injunctions. After a month of frantic pretrial discovery a one-day evidentiary hearing was held before the district judge, who in a series of orders then ruled that the poison pill plan violated Indiana law, that the Indiana statute violated both the supremacy and commerce clauses of the federal Constitution, and that CTS was not entitled to a preliminary injunction. 637 F.Supp. 389 (N.D.Ill. 1986). She therefore granted the preliminary injunction requested by Dynamics, 637 F.Supp. 406 (N.D.Ill. 1986). CTS, joined by the Attorney General of Indiana, who has intervened in the case to defend his state's statute, appeals under 28 U.S.C. Sec. 1292(a)(1), which allows an immediate appeal from an order granting or denying a preliminary injunction. We accelerated our consideration of the appeal because Dynamics had only till April 24 to decide whether to buy the shares tendered in response to its offer. We heard argument on April 23 and later that day affirmed the district judge's orders, with a notation that an opinion explaining the grounds of our decision would follow.

The main issues we must address are the lawfulness of CTS's poison pill scheme, the district court's compliance with a federal statute requiring that a state's attorney general be notified that the constitutionality of a statute of his state is being challenged, the constitutionality of the new Indiana takeover statute under the supremacy clause and also under the commerce clause, the significance of the potential violation of the Clayton Act, and the adequacy of the disclosures made in the tender offer.

Before taking up these issues we shall comment briefly on the procedural posture of the case in this court, an appeal from orders granting and denying requests for preliminary injunctions. As emphasized in our recent opinions, in different but compatible formulations, the task for a district judge asked to grant a preliminary injunction is to compare the irreparable harm to the plaintiff if the injunction is denied, weighted by the likelihood that the denial would be erroneous because the plaintiff will prevail in the plenary trial, with the irreparable harm to the defendant if the injunction is granted, weighted by the likelihood that the grant would be erroneous because the defendant, not the plaintiff, will prevail in the trial. See Lawson Products, Inc. v. Avnet, Inc., 782 F.2d 1429, 1433-34 (7th Cir.1986); American Hospital Supply Corp. v. Hospital Products Ltd., 780 F.2d 589, 593 (7th Cir.1986); Roland Machinery Co. v. Dresser Industries, Inc., 749 F.2d 380, 387-88 (7th Cir.1984). So, for example, the greater the probability that the plaintiff will win the case in the end, the less irreparable harm he need show relative to the defendant in order to get the preliminary injunction. If both parties are likely to suffer the same amount of irreparable harm, so far as estimation is possible, then likelihood of success becomes decisive. See American Hospital Supply Corp. v. Hospital Products Ltd., supra, 780 F.2d at 598. That seems a reasonable description of the present case; the fact that both parties sought preliminary injunctions does not affect the analysis.

If the tender offer is blocked, Dynamics will lose an opportunity that may never recur. The present owners of shares in CTS who have tendered them to Dynamics may lose, too, but their loss is easily quantified--it is the difference between the price in the tender offer and the price to which CTS stock falls. The only problem is uncertainty as to how many shares Dynamics would actually have bought if its offer was oversubscribed, as it was. But, conversely, if the tender offer is not blocked, CTS's shareholders will be irrevocably harmed if, as CTS predicts, they are stampeded into selling their shares to Dynamics for a lower price than the shares would eventually command if the tender offer were defeated, or if shareholders who do not tender are coerced into surrendering their shares later at inadequate prices in a "back-end" deal engineered by a board of directors that Dynamics is expected to control if its tender offer succeeds. The harms are very difficult to quantify and it seems best to treat them as offsetting. Hence Dynamics is entitled to the relief it sought (including the denial of the preliminary injunction sought by CTS) if but only if it is more likely than CTS to prevail at a full trial, in the unlikely event that one is ever held.

When the only issue on appeal from an order granting or denying a request for a preliminary injunction is likelihood of success, the role of the appellate court is little different from that in an appeal from a final judgment. Review of the district judge's legal rulings is plenary, review of the judge's findings of fact limited to clear errors. Since the complex, particularistic, often intuitive process of weighing likelihood of success against the balance of irreparable harms is not involved when that balance is assumed to be even, the deference that we give the district judge's striking of that balance is not a factor in this appeal.

Against this background we first ask whether the district court was right to conclude that the adoption of the poison pill violated the fiduciary obligations of CTS's management to its shareholders. The parties agree both that the question is governed by the common law of Indiana and that Indiana takes its cues in matters of corporation law from the Delaware courts, which are more experienced in such matters since such a large fraction of major corporations is incorporated in Delaware and such a small fraction in Indiana.

The whole issue of permissible defensive tactics in the face of a tender offer is immensely contentious, and it is no business of ours, whose duty on this branch of the appeal is only to predict how the Indiana courts would evaluate CTS's poison pill maneuver, to choose sides. There are two polar positions in the debate. One views hostile takeovers as a bad thing, on a variety of grounds such as that they make managers of companies that are potential targets of takeover bids worry too much about short-term financial results and that they promote absentee ownership and control. See, e.g., Scherer, Takeovers: Present and Future Dangers, Brookings Rev. (winter-spring 1986), at 15; Herman, Corporate Control, Corporate Power 100-01 (1981). Whether or not Dynamics ever merges CTS into it, the parties seem agreed that if the tender offer succeeds, Dynamics, as by far the largest shareholder of CTS, will probably be able to elect a majority of the board of directors. Dynamics is a New York corporation with headquarters in Connecticut, CTS an Indiana corporation with headquarters in Indiana. The record is not clear on where the firms' assets and employees are concentrated, and indeed reveals little about the companies except that CTS is a manufacturer of electronic and electromechanical components and Dynamics a diversified manufacturer of consumer and industrial products and that both are large companies whose stock is traded on the New York Stock Exchange.

The other pole is that all resistance to takeover attempts is bad. See, e.g., Easterbrook & Fischel, The Proper Role of a Target's Management in Responding to a Tender Offer, 94 Harv.L.Rev. 1161 (1981); Gilson, A Structural Approach to Corporations: The Case Against Defensive Tactics in Tender Offers, 33 Stan.L.Rev. 819 (1981); cf. SEC Office of Chief Economist, A Study on the Economics of Poison Pills, Fed.Sec.L.Rep. (CCH) p 83,971 (March 5, 1986). The market price of publicly traded stock impounds all available information about the value of the stock, and anyone who offers a higher price (Dynamics' tender offer price was $43, and when the offer...