Tuesday, August 28, 2007
A federal district court in Arizona has preliminarily enjoined the enforcement of the Arizona business combination statute and control share statute with respect to Roche Holding AG's hostile bid for Ventana Medical Systems Inc. (see the opinion here). This is the first court since the 1980s to hold a state anti-takeover statute invalid under commerce clause grounds (remember CTS and MITE from law school?).
In this case, Ventana was incorporated in Delaware but headquartered in Arizona and had substantial assets in that state. Arizona's third generation anti-takeover law, the Arizona Anti-Takeover Act, purports to cover Ventana since it has a substantial presence in the state. Roche sued in federal district court to have it declared unconstitutional and requested that enforcement of the statute be preliminarily enjoined. In granting this motion, the federal court found Roche to have a substantial likelihood of success on the merits because the statute applied to corporations organized under laws of states other than Arizona. Here the Court found that:
there is strong authority demonstrating that the Arizona statutes violate the Commerce Clause because the burden on interstate commerce “is clearly excessive in relation to the putative local benefits” to Arizona. In this case the burden on interstate commerce created by the broad application of Arizona statues includes the frustration and regulation generated by a tender offer made to a foreign corporation, such as Defendant. While Arizona clearly has an interest in protecting businesses that have significant contacts with Arizona, such as Defendant, Arizona clearly has “no interest in protecting nonresident shareholders of nonresident corporations.” In balancing such competing interests, the interference with interstate commerce created by the regulation of a foreign corporation controls. The instant case, based upon the Arizona statutes and their application to foreign corporations, is no different than the cases presented above as the Arizona statutes, while protecting businesses with significant contacts with Arizona, unreasonably interfere with interstate commerce based upon the regulation of businesses that are not incorporated in Arizona.
(citations omitted). The Court distinguished the Supreme Court's decision in CTS on the following grounds:
In CTS Corp., the Supreme Court upheld the constitutionality of Indiana’s Control Share Acquisition statute, which would impact the voting rights of an acquiring corporation in the event of a takeover of a target corporation, largely because the Indiana statute applied only to corporations organized under the laws of Indiana.
Thus, the difference for the Court here was the situs of incorporation for Ventana outsdie the state of Arizona. This opinion is therefore a strong statement in support of the internal affairs doctrine and should make life easier for M&A lawyers by more strictly confining the application of state takeover laws to companies organized in the state of their origin (although other federal cases from the '80s have held similarly - nice to know we are not going the other way though). And for those who engage in the race-to-the-bottom/race-to-the-top state corporate law debate, the case is a probably a good example of the need for a mediating and trumping federal presence in this debate. Here, I'll relate the historical tidbit that the Arizona Anti-takeover Law was initially proposed in 1987 by officials of Greyhound Corporation who claimed that they were the target of a hostile takeover.
Nonetheless, Ventana still can rely on its Delaware defenses including that state's business combination statute (DGCL 203) and the poison pill it has adopted. To be continued.
Thanks to Steven Haas for informing me of this decision.