The Validity of Washington's Antitakeover Act Under the Commerce and Supremacy Clauses

• Publication year: 1989
• Citation: Vol. 13 No. 01

UNIVERSITY OF PUGET SOUND LAW REVIEWVolume 13, No. 1FALL 1989

The Validity of Washington's Antitakeover Act Under the Commerce and Supremacy Clauses

Maureen B. Callahan and David J. Burman(fn*)

In 1987, amid rumors that an entity controlled by T. Boone Pickens was acquiring stock of The Boeing Company and might seek control of the company, the Washington Legislature enacted a law designed to limit the hostile takeover of large corporations with substantial economic ties to the state ("the Washington Act" or "the Act").(fn1) The Act is a type of third generation antitakeover statute(fn2) known as a moratorium statute.(fn3) Unlike those antitakeover statutes that make all hostile takeovers less attractive by making either the total cost or the acquisition of control uncertain,(fn4) the Act temporarily restricts an acquiror's ability to mortgage or break up the acquired company for short term gain or to finance the acquisition debt.

Although the United States Supreme Court in 1987 upheld the constitutionality of Indiana's control share statute,(fn5) the constitutionality of the Washington Act has been questioned. The constitutional uncertainty results primarily from the Act's extraterritorial reach. Unlike the Indiana statute and most of the moratorium statutes enacted in other states,(fn6) the Washington Act prohibits transactions between some foreign corporations and their shareholders.(fn7)

This Article addresses the constitutionality of the Washington Act under the Commerce(fn8) and Supremacy Clauses(fn9) of the United States Constitution,(fn10) and concludes that despite its extension to a limited group of foreign corporations, the Act is indeed constitutional under both clauses.

I. The Terms of the Washington Act

The Washington Act prohibits a target corporation subject to the Act's terms from engaging in "significant business transactions" with an "acquiring person" within five years of a shareholder's becoming such an "acquiring person" unless the transaction or the acquisition is approved in advance by a majority of the target corporation's board of directors.(fn11) The Act defines "acquiring person" as "a person or group of persons, other than the target corporation or a subsidiary of the target corporation, who beneficially owns ten percent or more of the outstanding voting shares of the target corporation."(fn12) "Significant business transaction" is defined to include: the merger or consolidation of the target or any subsidiary with the acquiring person or its affiliates; the disposition or encumbrance of more than five percent of the target corporation's assets, outstanding shares, earning power or net income; the termination of five percent or more of the target corporation's Washington employees; the issuance, transfer or redemption by the target corporation of shares, options, warrants, or rights to acquire shares of the target to the acquiring person on a non-pro rata basis (excluding involuntary redemptions); the adoption of a plan for the disposition of assets or the dissolution of the target proposed by or pursuant to an understanding with the acquiring person; the reclassification of securities to increase the proportionate share of the outstanding shares of a particular class of voting shares owned by the acquiring person; and the grant of nonproportional financial assistance to the acquiring person.(fn13)

Corporations defined as "target corporations" under the Act include domestic corporations with principal executive offices in Washington if either a majority of their employees (including the employees of their subsidiaries) are Washington residents or they and any of their subsidiaries employ more than one thousand state residents.(fn14) Foreign corporations doing business in Washington that have their principal executive offices in the state are also defined as target corporations if: 1) more than ten percent of their shareholders of record are Washington residents, more than ten percent of their shares are owned by Washington residents, or one thousand or more of the shareholders of record reside in Washington; 2) a majority of their employees are Washington residents or they employ more than one thousand Washington residents; and 3) a majority of their tangible assets are located in Washington or they have more than fifty million dollars worth of tangible assets located in Washington.(fn15) All three factors must be present, which effectively limits the Act's coverage to domestic corporations based in Washington and a very few foreign corporations with a substantial Washington presence.

In enacting this legislation, the Washington Legislature found that hostile or unfriendly attempts to gain control of publicly held corporations can cause corporate management to dissipate a corporation's assets and energies to the detriment of the long-term interests of the shareholders and the economic health of the state.(fn16) It stated that the Act's purpose is to balance the substantial and legitimate interests of the state in corporations that employ a large number of citizens of the state and that have a substantial economic base in the state with: The interests of citizens of other states who own shares of such corporations; the interests of the state of incorporation of such corporations in regulating the internal affairs of corporations incorporated in that state; and the interests of promoting interstate commerce.(fn17)

II. The Washington Act's Constitutionality Under the Commerce Clause

As with any state regulation affecting interstate economic activity, the Act's validity under the federal Constitution's Commerce Clause must be assessed. Under any of the several measures of the effect of state regulation on interstate commerce, and more particularly under the Supreme Court's recent Commerce Clause analysis of Indiana's antitakeover statute in CTS Corp. v. Dynamics Corp. of America,(fn18) the Act is constitutional.

Virtually from its inception, the Commerce Clause has been understood to prohibit unduly burdensome state action even in the absence of direct federal regulation of a commercial activity.(fn19) How much state regulation is permissible, and how the burden on interstate commerce should be evaluated, have proven to be intractable problems under this so-called "dormant" Commerce Clause.(fn20) Regardless of which of the Supreme Court's competing analyses are applied, two general principles must be considered in evaluating state laws under the dormant Commerce Clause. First, one must determine whether the state law discriminates against nonresidents in favor of residents of the regulating state.(fn21) Where legislation affects both residents and nonresidents, a political check exists which is absent when legislation is discriminatory.(fn22) Consequently, regardless of the analysis used, nondiscriminatory legislation is more likely to be upheld.(fn23) Second, even if the legislation is nondiscriminatory, one must measure the extent of the burden on interstate commerce.(fn24) This second step has taken a number of forms in the Supreme Court's Commerce Clause decisions(fn25) including inquiries into whether the state law poses a substantial risk of inconsistent regulation,(fn26) whether the burden placed upon interstate commerce is direct or indirect,(fn27) and whether the parochial interest furthered by the state law outweighs the burden on interstate commerce.(fn28) Regardless of its specific form, some version of this quantifying step occurs in virtually all of the Court's dormant Commerce Clause analyses.

We therefore first apply a discrimination analysis to the Washington Act and then apply the two more frequently used measures of the extent of a state law's burden on interstate commerce. We conclude our Commerce Clause discussion by addressing briefly the Act's consistency with the Clause's underlying non-protectionist goals.

A. The Discrimination Analysis

1. The Definition of Discrimination Under the Commerce Clause

Despite the frequent use of discrimination analyses in the Commerce Clause jurisprudence, the contours of the discrimination inquiry are unclear.(fn29) Although the Washington Act by its terms treats both residents and nonresidents of the state identically, this renders the Act nondiscriminatory for Commerce Clause purposes only if facial neutrality is sufficient.(fn30) Facially neutral state laws do not necessarily pass constitutional muster under the Supreme Court's equal protection analysis(fn31) if the application of the law is discriminatory.(fn32) Unless their respective functions justify the application of different standards as to what constitutes discrimination, facial neutrality can no more be sufficient for Commerce Clause purposes than it is for Equal Protection purposes. Because both clauses protect those who lack political recourse from being burdened disproportionately by state action, the Commerce Clause discrimination inquiry should be no less complete than that applied in the equal protection context. Thus, the Washington Act's discriminatory application to the several types of shareholders likely to be affected by its application must be assessed.

2. The Act's Potential for Discrimination Against Two Types of Shareholders

Because a target corporation's shareholders' interests are not necessarily aligned, we consider the potential for discrimination with respect to two groups of...