Tyson Foods, Inc. v. McReynolds

• Citation: 700 F. Supp. 906
• Decision Date: 23 November 1988
• Docket Number: Civ. A. No. 3-88-0881.
• Parties: TYSON FOODS, INC. and Holly Acquisition Corp., Plaintiffs, v. Elaine A. McREYNOLDS, Commissioner of the Tennessee Department of Commerce and Insurance; Charles W. Burson, Attorney General of the State of Tennessee; and Holly Farms Corporation, Defendants.
• Court: U.S. District Court — Middle District of Tennessee

700 F. Supp. 906

TYSON FOODS, INC. and Holly Acquisition Corp., Plaintiffs, v. Elaine A. McREYNOLDS, Commissioner of the Tennessee Department of Commerce and Insurance; Charles W. Burson, Attorney General of the State of Tennessee; and Holly Farms Corporation, Defendants.

Civ. A. No. 3-88-0881.

United States District Court, M.D. Tennessee, Nashville Division.

November 23, 1988.

Ames Davis, Waller, Lansden, Dortch & Davis, Corabell Alexander, Nashville, Tenn., for plaintiffs.

Charles N. Jolly, Chattanooga, Tenn., William O. Collins, Jr., Cornelius & Collins, Nashville, Tenn., for Tennessee Assoc. of Business.

Charles W. Burson, John Knox Walkup, Albert L. Partee, III, Kathleen A. Eyler, Atty. General's Office, Nashville, Tenn., for defendants.

John K. Maddin, Jr., Malcolm L. McCune, Gracey, Maddin, Miller & McCune, James A. Vick, Nashville, Tenn., Ben Rosenberg, Paul Vizcarrondo, Jr., Wachtell, Lipton, Rosen & Katz, New York City, pro hac vice, for defendant Holly Farms Corp.

MEMORANDUM

WISEMAN, Chief Judge.

Plaintiffs move for a preliminary injunction enjoining defendants from enforcing or attempting to enforce in connection with plaintiffs' tender offer for shares of Holly Farms Corporation Tennessee's Investor Protection Act, Tenn.Code Ann. 48-35-101 to -113 (1988), Business Combination Act, Tenn.Code Ann. 48-35-201 to -209 (1988), Control Share Acquisition Act, Tenn.Code Ann. 48-35-301 to -312 (1988), and Authorized Corporation Protection Act, Tenn. Code Ann. 48-35-401 to -406 (1988). Plaintiffs' motion is granted. This Court finds that these Acts violate the Commerce Clause of the United States Constitution to the extent they apply to target corporations organized under the laws of states other than Tennessee. This Court does not reach plaintiffs' claim that the legislation at issue also violates the Supremacy Clause.

I. The Tennessee Acts

The challenged statutes became law on March 11, 1988. Their length dictates that this Court summarize the relevant provisions.

The Investor Protection Act ("IPA") applies to tender offers directed at corporations (called "offeree companies") that have "substantial assets" in Tennessee and that are either incorporated in or have their principal offices in Tennessee. The IPA requires an offeror making a tender offer for an offeree company to file with the Commissioner of Commerce and Insurance ("the Commissioner") a registration statement. This registration statement contains information similar to that which federal law requires to be disclosed. When the offeror intends to gain control of the offeree company, the registration statement must indicate any plans the offeror has for the offeree. The Commissioner may request additional information material to the takeover offer and may call for hearings. The IPA does not apply to an offer that the offeree company's board of directors recommends to shareholders.

The IPA requires the offeror and the offeree company to deliver to the Commissioner all solicitation materials used in connection with the tender offer. The Act prohibits "fraudulent, deceptive, or manipulative acts or practices" by either side. The IPA gives the Commissioner standing to apply for equitable relief to the Chancery Court of Davidson County whenever it appears to her that the offeror, the offeree company, or any of their affiliates has engaged in or is about to engage in a violation of the IPA. The IPA provides that "upon a proper showing," the Chancery Court may grant injunctive relief. The IPA provides civil and criminal penalties for violations.

The Business Combination Act ("BCA") provides that a party owning ten percent or more of stock in a "resident domestic corporation" (such party is called an "interested shareholder") cannot engage in a business combination with the resident domestic corporation unless the combination (1) takes place at least five years after the interested shareholder first acquired ten percent or more of the resident domestic corporation, and (2) either (a) is approved by at least two-thirds of the noninterested voting shares of the resident domestic corporation or (b) satisfies certain fairness conditions specified in the BCA.

These provisions apply unless one of two events occurs. A business combination with an entity can proceed without delay when approved by the target corporation's board of directors before that entity becomes an interested shareholder. Or the resident domestic corporation may enact a charter amendment or bylaw to remove itself entirely from the BCA. This charter amendment or bylaw must be approved by a majority of those shareholders who have held shares for more than one year prior to the vote. It may not take effect for at least two years after the vote.

The BCA exempts from liability officers and directors of resident domestic corporations who do not approve proposed business combinations or charter amendments and bylaws removing their corporations from BCA coverage. The officers and directors must act in "good faith belief" that the proposed business combination would adversely affect their corporation's employees, customers, suppliers, or the communities in which their corporation operates.

The Control Share Acquisition Act ("CSAA") strips a purchaser's shares of voting rights anytime an acquisition of shares in a covered Tennessee corporation brings the purchaser's voting power to one-fifth, one-third, or a majority of all voting power. The purchaser's voting rights can be established only by a majority vote of the other shareholders. The purchaser may demand a special meeting of shareholders to conduct such a vote. The purchaser can demand such a meeting before acquiring a control share only if it holds at least ten percent of outstanding shares and announces a good faith intention to make the control share acquisition. A target corporation may or may not redeem the purchaser's shares if the shares are not granted voting rights.

The Authorized Corporation Protection Act ("ACPA") is the gateway through which the BCA and CSAA can govern foreign corporations. The ACPA provides that an authorized corporation can adopt a bylaw or charter provision electing to be subject to the operative provisions of the BCA and CSAA, which then become applicable "to the same extent as such provisions apply to a resident domestic corporation." Authorized corporations are those that are required to obtain a certificate of authority from the Tennessee Secretary of State and that satisfy two or more of these tests:

(1) The corporation has its principal place of business located in Tennessee;

(2) The corporation has the principal office(s) or place(s) of business of significant subsidiaries, representing in the aggregate not less than twenty percent of such corporation's consolidated net sales, located in Tennessee;

(3) A majority of such corporations's fixed assets, including those of any subsidiary, located in the United States, as valued by reference to the balance sheet at the end of its most recent fiscal year, are located in Tennessee;

(4) More than ten percent of the beneficial owners of the voting stock or more than ten percent of such corporation's share of voting stock are beneficially owned by residents of Tennessee;

(5) The corporation, including any significant subsidiary, employs more than two hundred fifty individuals in Tennessee or has a combined annual payroll paid to residents of Tennessee that is in excess of five million dollars;

(6) The corporation, including any significant subsidiary, produces goods and/or services in Tennessee that result in annual gross receipts in excess of ten million dollars;

(7) The corporation, including any significant subsidiary, has physical assets and/or deposits, including those of any subsidiary, located within Tennessee that exceed ten million dollars in value.

The ACPA seeks to protect the target's "shareholders, employees, customers, suppliers and local communities," and to prevent local "unemployment, plant closings, reduced charitable donations, declining population base, reduced income to fee-supported local government services, reduced tax base and reduced income to other businesses."

The ACPA contains a conflicts provision. Section 48-35-405 provides:

If any jurisdiction under the laws of which an authorized corporation is organized adopts any laws containing provisions that are expressly inconsistent with the provisions of this part as applicable to such authorized corporation, the provisions of this part shall be inapplicable to such authorized corporation to the extent necessary to resolve such inconsistency.

II. Findings of Fact

Tyson Foods, Incorporated, through its wholly-owned subsidiary, Holly Acquisition Corporation, commenced a nationwide tender offer for common shares of Holly Farms Corporation on October 21, 1988. The tender offer and the loan commitment pursuant to which the acquisition will be financed state as a condition that Tyson not be threatened with the business combination or control share effects allegedly produced by the Tennessee statutes. Tyson intends to propose a merger with Holly Farms if its offer is successful.

Tyson Foods and Holly Acquisition are Delaware corporations. Holly Farms is also a Delaware corporation. Holly Farms' principal executive offices are in Tennessee. Holly Farms conducts operations through subsidiaries incorporated in ten states and has facilities in twenty-two states. Holly Farms' contacts with Tennessee suggest that it is an "authorized corporation" under the ACPA. Holly Farms opted into the ACPA on November 2, 1988. Holly Farms thus acquired the protection of Tennessee's BCA and CSAA. Holly Farms qualifies as an "offeree company" under the IPA.

Elaine A. McReynolds is the Commissioner of the Tennessee Department of Commerce and Insurance. Charles W. Burson is the Attorney General of the State of Tennessee.

III. Plaintiffs' Challenge is Ripe

Holly Farms asserts that this action...