Wylain, Inc. v. TRE Corp.

• Decision Date: 31 January 1980
• Docket Number: No. 6039,6039
• Citation: 412 A.2d 338
• Parties: Fed. Sec. L. Rep. P 97,270 WYLAIN, INC., Plaintiff, And State of Delaware, Intervenor Plaintiff, v. TRE CORPORATION and Trelain Corporation, Defendants. Civ. A.(1979).
• Court: Court of Chancery of Delaware

Page 338

412 A.2d 338

Fed. Sec. L. Rep. P 97,270

WYLAIN, INC., Plaintiff And State of Delaware, Intervenor Plaintiff, v. TRE CORPORATION and Trelain Corporation, Defendants.

Civ. A. No. 6039 (1979).

Court of Chancery of Delaware, New Castle County.

Submitted Dec. 6, 1979.

Decided Dec. 14, 1979.

Revised Jan. 31, 1980.

PRELIMINARY INJUNCTION: GRANTED.

Charles S. Crompton, Jr. and Michael D. Goldman, of Potter, Anderson & Corroon, Wilmington, for plaintiffs.

Don C. Brown, of Dept. of Justice, Wilmington, for intervenor plaintiff.

A. Gilchrist Sparks, III, and Lewis S. Black, Jr., of Morris, Nichols, Arsht & Tunnell, Wilmington, for defendants.

HARTNETT, Vice Chancellor.

Plaintiff-Wylain, Inc. ("Wylain") seeks a preliminary injunction prohibiting defendants-TRE Corporation ("TRE") and Trelain Corporation ("Trelain") from consummating or taking any further action in connection with a cash tender offer made by the defendants for the outstanding shares of common stock of Wylain. It is undisputed that the defendants, in making the tender offer, did not comply with the Delaware Tender Offer Act 8 Del.C. § 203. The only real issue is whether the Delaware Tender Offer Act is unconstitutional as being in violation of the Commerce Clause of the U. S. Constitution (Art. I, § 8) or whether it is preempted by the Federal Williams Act, 15 U.S.C. §§ 78m(d)-(e), 78n(d)-(f) and therefore conflicts with the Supremacy Clause of the U. S. Constitution (Art. VI, P 2). For the reasons discussed, I find that the Delaware Tender Offer Act is not void on its face under either the Commerce or Supremacy Clause of the U. S. Constitution, and that its constitutionality would probably be upheld at a hearing for a permanent injunction. I also find that Wylain has established the criteria necessary for the issuance of a preliminary injunction.

I THE FACTS

The facts are, for the most part, undisputed. TRE caused Trelain to be incorporated in this State on November 23, 1979, apparently for the purpose of acquiring the outstanding securities of Wylain. On the following Monday November 26, 1979 TRE delivered to Wylain documents notifying it of a proposed cash tender offer for all of the outstanding securities of Wylain, of the filing with the Federal Trade Commission and the United States Justice Department of certain documents in connection therewith, required by the Hart-Scott-Rodino Antitrust Improvements Act (15 U.S.C. § 18a), and of the pendency of an action for injunctive relief filed by TRE and Trelain in the United States District Court for the Northern District of Texas attacking the Delaware Tender Offer Act (8 Del.C. § 203) on constitutional grounds. ¹ The U. S. District Court initially entered a temporary On December 6, 1979, defendants gave the notice to Wylain required by 8 Del.C. § 203 in order to be able to proceed with their tender offer in the event compliance with 8 Del.C. § 203 is required.

restraining order prohibiting Wylain from attempting to require the defendants to comply with the Delaware Tender Offer Act. On appeal, the restraining order was stayed pending a full hearing on a preliminary injunction also requested by TRE. The hearing on that preliminary injunction has not yet been held. Wylain then commenced this action in this Court and this is my decision on Wylain's application for a preliminary injunction enjoining defendants from proceeding with their tender offer until there has been compliance with the Delaware Tender Offer Act.

II THE PRESUMPTION OF CONSTITUTIONALITY

Although an application for preliminary injunctive relief is addressed to the sound discretion of the Court, Nebeker v. Berg, Del.Ch., 115 A. 310, 311 (1921), this Court has a duty to look primarily at two factors: the applicant's probability of success when the matter is considered at a final hearing, and his risk of sustaining irreparable injury in the event the requested relief is not granted. Gimbel v. Signal Companies, Inc., Del.Ch., 316 A.2d 599, 602 (1974) and cases cited therein. The requirement of a showing of probability of success at a final hearing, the burden of which is on the applicant, applies to questions of law as well as to those of fact. Gimbel v. Signal Companies, Inc., supra; David J. Greene & Co. v. Schenley Indus., Inc., Del.Ch., 281 A.2d 30 (1971); Gropper v. No. Cent. Tex. Oil Co., Del.Ch., 114 A.2d 231, 237 (1955); Allied Chemical & Dye Corp. v. Steel & Tube Co., Del.Ch., 122 A. 142, 158 (1923); Century Indus., Inc. v. Benoit, Del.Ch., C.A. No. 5964 (Sept. 5, 1979). The question here, however, is purely a question of law since the defendants concede that they have not complied with 8 Del.C. § 203.

An applicant has the burden of showing that he will be irreparably harmed in the event the extraordinary relief requested is not granted. Bayard v. Martin, Del.Supr., 101 A.2d 329, 334 (1953), cert. denied, 347 U.S. 944, 74 S.Ct. 639, 98 L.Ed. 1092 (1954). Additionally, if the one against whom injunctive relief is sought shows that he will suffer irreparable injury in the event an injunction is granted, the applicant has the burden of showing that his potential harm is greater than that of his opponent. Gimbel v. Signal Companies, Inc., supra.

Wylain therefore must show: (1) that, at a hearing for final injunctive relief, this Court will probably uphold 8 Del.C. § 203 as constitutional despite both the Commerce and Supremacy Clauses of the U. S. Constitution, (U.S.Const. art. I, § 8 and art. VI, 57 2, respectively); (2) that Wylain will be irreparably harmed and, since the defendants have alleged and shown that they will be harmed by the requested injunctive relief, the harm to Wylain or to its stockholders will be greater than that to the defendants.

Wylain's initial burden of persuasion is, however, limited to showing the existence of 8 Del.C. § 203 and the failure of defendants to comply with it. The burden of showing the unconstitutionality of 8 Del.C. § 203 is upon the defendants because of the presumption of constitutionality accorded Acts of the Delaware General Assembly. Wylain may rely on that presumption alone to prove the probability of its success on the merits and the burden therefore shifts to the defendants to rebut that presumption. Philadelphia B. & W. R. Co. v. Mayor and Council of Wilmington, Del.Ch., 57 A.2d 759, 765 (1948).

The party asserting the unconstitutionality of an Act of the General Assembly must show that the question of the constitutionality of the attacked Act is fairly debatable. Wilmington Med. Ctr., Inc. v. Bradford, Del.Supr., 382 A.2d 1338, 1342 (1978); Justice v. Gatchell, Del.Supr., 325 A.2d 97, 102 (1974). Unless this hurdle is surmounted, this Court cannot consider arguments which contest the constitutionality of a statute.

If a party is able to establish that the issue of constitutionality is fairly debatable he is confronted with another, more serious, obstacle in his path he must, in order to overcome the presumption of constitutionality, establish clearly and convincingly the lack of constitutionality of the statute. Justice v. Gatchell, supra; State Hwy. Dept. v. Del. P. & L. Co., 167 A.2d 27,

31 (1961). The defendants here, therefore, have the burden of rebutting the prima facie case established for Wylain by the presumption of constitutionality accorded Acts of the Delaware General Assembly. In order to successfully do so, defendants must show clearly and convincingly that the Delaware Tender Offer Act, 8 Del.C. § 203, contravenes the letter or spirit of the Commerce or Supremacy Clauses of the U. S. Constitution on the theory that the statute unduly burdens interstate commerce or that it has been preempted by the Williams Act, supra.

III THE TEST OF CONSTITUTIONALITY UNDER THE COMMERCE CLAUSE

The Commerce Clause, U.S.Const. art. I, § 8, is an integral part of our system of federalism and is intended to promote the free flow of goods and services between and among the states of the federal union. The framers clearly perceived the evils attendant to allowing each state to govern commerce within its borders where that governance had an effect on commerce flowing between the states, and the parochial measures the states would create to promote internal production to the general detriment of interstate commerce. In order to protect the whole against the favoritism of the component states, the Constitution wisely allocated supreme power concerning interstate commerce to the federal government and not to the states themselves. The power to regulate intrastate commerce, where that regulation did not effect interstate commerce unduly, however, was left to the states. The role of the Courts in this field, therefore, has been to decide where state power ends and federal power begins. The tests used by the Courts to effect this demarcation have not always been consistent but, in an effort to clarify the area, the United States Supreme Court recently stated:

Where the (state) statute regulates even-handedly to effectuate a legitimate local public interest, and its effects on interstate commerce are only incidental, it will be upheld unless the burden imposed on such commerce is clearly excessive in relation to the putative local benefits. (citation). If a legitimate local purpose is found, then the question becomes one of degree. And the extent of the burden that will be tolerated will of course depend on the nature of the local interest involved, and on whether it could be promoted as well with a lesser impact on interstate activities.

Pike v. Bruce Church, Inc., 397 U.S. 137, 142, 90 S.Ct. 844, 847, 25 L.Ed.2d 174, 178 (1970).

Defendants can therefore prevail by showing: (1) that there is a discrimination based on the state of origin or destination of the goods or services in commerce, or through which they flow; (2) that there is no legitimate local public purpose to be served by the statute; (3) that the burden on interstate commerce does not aid the legitimate...