Indiana Law Review


94 INDIANA LAW REVIEW [Vol. 12:94

VI. Corporations

During the survey period several cases were decided which will
have significant ramifications and, therefore, require analysis. 1

A. Squeeze-Out Mergers

The first of these cases, Gabhart v. Gabhart, 2 is an example of
the developing trend under state law3 to protect minority
shareholders through judicial review of corporate mergers parallel-
ing the limiting of protection afforded by federal law.4 The plaintiff

There were two other decisions which require a limited discussion. In Cummings
v. Hoosier Marine Properties, Inc., 363 N.E.2d 1266 (Ind. Ct. App. 1977), the plaintiff

attempted to utilize the doctrine of respondeat superior to impose liability on the

defendant. The plaintiff asserted that the right of one defendant to supervise con-
tinuously the quality of the work was sufficient to negate the other defendant's in-
dependent contractor status. The court noted that the status between the parties was

to be determined from the contract as a whole, and the independent exercise of control

over the manner in which the work was to be performed was indicative of an indepen-
dent contractor relationship.

In Thompson Farms, Inc. v. Corno Feed Prods., Div. of Nat'l Oats Co., 366
N.E.2d 3 (Ind. Ct. App. 1977), the court held that a principal was bound by the acts of

its agent within the scope of the agency relationship. The case is interesting because it
indicates two bases for establishing that agency relationship. First, under the doctrine

of apparent authority, the third party must reasonably rely on a representation by the

principal that the agent has authority. The court found that the principal's name was
prominently displayed throughout a sales brochure, the project was personally pro-

moted by the principal, and the principal was directly involved in the sales transaction.

Thus, the plaintiff reasonably could have assumed that the defendant was the principal

in the transaction. Id. at 12. Second, the court indicated it was possible to conclude

that the defendant had contracted for a special agent and that the agent was author-

ized to act in pursuance of the principal's project, further signifying that the agent's acts

were within the scope of his actual authority. The court rejected the defendant's con-
tention that it could not be both the seller and the financing agency in the transaction.

This distinction is recognized in some jurisdictions. See In re Sherwood Diversified

Servs., Inc., 382 F. Supp. 1359 (S.D.N.Y. 1974); Atlas Indus., Inc. v. National Cash

Register Co., 216 Kan. 213, 531 P.2d 41 (1975). For another discussion of Thompson

Farms, see Greenberg, Contracts, Commercial Law, and Consumer Law, 1978 Survey

of Recent Developments in Indiana Law, 12 Ind. L. Rev. 81, 83-86 (1978).
2370 N.E.2d 345 (Ind. 1977).
3See, e.g., Bryan v. Brock & Blevins Co., 490 F.2d 563 (5th Cir.), cert, denied, 419

U.S. 844 (1974) (originally alleging federal securities law violations but decided under

Georgia law); Jones v. H.F. Ahmanson & Co., 460 P.2d 464, 81 Cal. Rptr. 592 (1969);
Singer v. Magnavox Co., 380 A.2d 969 (Del. 1977); Donahue v. Rodd Electrotype Co.
367 Mass. 578, 328 N.E.2d 505 (Mass. 1975).

4The extent to which the Securities Exchange Act of 1934, 15 U.S.C. § 78a-jj

(1976), and, more specifically, Securities and Exchange Commission Rule 10b-5, 17

C.F.R. § 240.10b-5 (1977), will protect minority shareholders in a merger has been

severely limited by the recent Supreme Court decision in Santa Fe Indus., Inc. v.

Green, 430 U.S. 462 (1977). In Green the defendants attempted to institute a short-form



1979] SURVEY- CORPORATIONS 95

in Gabhart raised two novel issues under Indiana law by alleging

that a squeeze-out merger in Indiana must have a legitimate

business purpose to be valid and that a former shareholder can have

standing to sue in a derivative action. The Seventh Circuit Court of
Appeals, after noting these issues required interpretation of Indiana

statutes and corporation policy, certified the questions to the

Indiana Supreme Court under Appellate Rule 15(0).5 By the Gabhart
decision, Indiana joins the growing number of states which judicially
examine statutorily conforming mergers that advance no valid

business purpose and which may be unfair to minority shareholders.
In Gabhart, the plaintiff and the four individual defendants in-

corporated Washington Nursing Center, Inc., a nursing home in
Washington, Indiana. Although all of the corporation's shareholders

merger between a wholly-owned subsidiary of Sante Fe and Kirby Lumber Company, a
Delaware corporation. The plaintiffs held approximately 5% of the outstanding stock
of Kirby and the Santa Fe subsidiary owned the remaining 95%. The defendant at-
tempted to merge the two corporations pursuant to § 253 of the Delaware Corporation
Law which permitted a parent corporation owning at least 90% of the corporate stock
of the subsidiary to merge the parent and the subsidiary with approval of only the

parent's board of directors and shareholders. The minority shareholders in the sub-
sidiary would, thus, be relegated to an appraisal remedy for their surrendered stock.

The plaintiffs petitioned the state court for an appraisal of the Kirby stock but
withdrew the petition and filed the federal action. The plaintiffs attempted to rescind

the merger, alleging that it was effected for no valid business purpose and that the ap-
praisal of the stock was fraudulent. They contended that the defendant's attempt to in-
situte the appraisal remedy at the perceived fraudulently deflated price constituted a
" 'device, scheme or artifice to defraud' and engaged in an 'act, practice' or course of

business which operates or would operate as a fraud or deceit upon any person, in con-

nection with the purchase or sale of any security.')" Id. at 467-68 (quoting 17 C.F.R. §
240.10b-5(a), (c) (1977)). The Supreme Court held that an alleged breach of fiduciary duty
would support a rule 10b-5 claim only if the conduct was manipulative or deceptive

within the meaning of the statute. The court noted the available state remedy provid-

ed evidence that Congress did not intend to create an implied federal cause of action if

the conduct was not manipulative or deceptive. Id. at 478-80. The court further con-
cluded that there had been no omission or misstatement in the documents accompany-

ing the merger and that this full disclosure was in accord with the fundamental pur-
pose of the Securities Exchange Act of 1934. Thus, a remedy for such conduct should
not be implied where "unnecessary to ensure the fulfillment of Congress' purposes."

Id. at 477. Most squeeze-out mergers are implemented in compliance with local cor-

porate statutes, and the Green decision will mean that challenges to these mergers
will not be permitted under rule 10b-5 unless the mergers are also manipulative or

deceptive. The Green decision indicates that § 10b will not empower the federal courts
to create an independent common law of fiduciary obligations. There has, however,
been some support for the displacing of local law and for instead establishing a federal

minimum standards act which would cover corporate fiduciary obligation. See The
Role of the Shareholder in the Corporate World: Hearings Before the Subcomm. on

Citizens and Shareholders Rights and Remedies of the Sen. Comm. on the Judiciary,
95th Cong., 1st Sess. (1977).

5
Ind. R. App. P. 15(0).



96 INDIANA LAW REVIEW [Vol. 12:94

were originally directors, the plaintiff was not able to devote suffi-
cient time to the enterprise and resigned as a director approximately

two years after incorporation.6 The remaining directors wanted to
purchase plaintiffs shares to gain total control of the corporation,

but extensive discussions concerning the stock purchase proved un-

successful. Thereupon, the majority shareholders who remained as
directors attempted to acquire plaintiffs shares through a corporate

restructuring merger. They formed a new corporation, the surviving
company, in which they were the sole shareholders, and, as directors
of both the surviving company and the merging company executed a
long-form merger agreement.7

The specific provisions of the merger agreement provided:

(1) The Merging Company will merge into and become a part
of the Surviving Company, leaving the Surviving Company
with all the property of both companies and all the rights

and liabilities of both companies.

(2) "Any claim existing or action or proceeding pending by or
against the Merging Company or the Surviving Company
may be prosecuted to judgment as if the merger had not
taken place or the Surviving Company may be substituted in
the place of the Merging Company."

(3) Each shareholder of the Merging Company shall sur-
render his shares and receive in exchange therefor a deben-

ture equal in amount to the number of his shares times $300,
the debenture to bear interest at 7V2% and to mature in 5
years.

(4) Each stockholder of the Merging Company shall cease to
be such and "shall have no interest in or claim against the

6370 N.E.2d at 348.
7There are two distinct types of merger v/hich can be used in an attempt to

freeze out minority shareholders. The long-form merger is more extensive and re-

quires the approval of boards of directors of both corporations and approval of the

merger by a majority of shareholders of the involved corporations. A long-form merger
also requires that notice of the proceedings be given to all shareholders. See Ind. Code

§ 23-1-5-2 (1976).

A short-form merger permits a parent corporation which owns a minimum
percentage of the corporate stock of a subsidiary (state laws vary on the amount of

stock required) to implement a short-form merger. Many states require a minimum
percentage of 90%; others, including Indiana, require 95% ownership to merge the
subsidiary with the parent corporation with the approval of the parent's board of

directors and usually a majority of its shareholders. The short-form merger generally

does not require a shareholder vote by minority shareholders of the subsidiary or any

prior notice to these minority stockholders. Indiana does not require a vote by the ma-

jority shareholders of the parent corporation, but does require notice to be sent to the

shareholders of the subsidiary. Id. § 23-1-5-8.



1979] SURVEY- CORPORATIONS 97

Surviving Company by reason of having been such a
shareholder, except the right to receive the above described

debenture."8

A special meeting of the merging company's shareholders was
held on July 3, 1972, to vote on acceptance of the merger proposal.

Ten days prior to that meeting, a notice of the meeting and a copy
of the proposed merger agreement was sent, by registered mail, to

the three addresses listed for the plaintiff on the corporate records.

The plaintiff, however, did not actually receive the notice until one

week after the meeting had taken place.9 In the plaintiffs absence,
the remaining shareholders approved the merger, and prior to the

effective date of the merger, the defendants exchanged their stock

in the merging company, leaving the surviving company as the ma-
jority shareholder in the merging company except for the minority
interest owned by the plaintiff. Pursuant to the merger agreement,
the plaintiff received the debenture for his shares in the merging

company. This procedure eliminated the plaintiff from any further

equity interest in either the merging company or the surviving com-
pany. The merging company was then dissolved.10

The plaintiff did not elect to utilize the object and demand pro-
cedure of the Indiana General Corporations Act which would have
provided him an appraisal remedy.11 Instead, before the date the
merger was to become effective, he filed a diversity action against
the merging company and individual defendants, alleging pecuniary
injury to the corporation and charging the individual defendants

with misappropriation of corporate funds. Further, the defendants

were charged with denying plaintiff the opportunity to participate
in corporate decisions and examine corporate records.12 Because

shareholder status is normally a prerequisite to bringing a

derivative suit on behalf of a corporation,13 the defendants moved
for summary judgment asserting that the plaintiff had no standing
to maintain the derivative claim. The plaintiff responded by amen-
ding his complaint to additionally charge that the merger could be
attacked under Indiana law because the "sole purpose of the merger
had been to deprive him of his interest in the business operated by
the Merging Company."14

8370 N.E.2d at 349.

'Id. This notice is required under Ind. Code § 23-2-5-2(a)(5) (1976). The form for
such notice is set forth in id. § 23-l-2-9(d).

10370 N.E.2d at 349.
u
Ind. Code § 23-1-5-7 (1976).

12See Great Fidelity Life Ins. Co. v. Circuit Court, 259 Ind. 441, 288 N.E.2d 143
(1972).

13370 N.E.2d at 356.

"Id. at 349.



98 INDIANA LAW REVIEW [Vol. 12:94

1. Appraisal and the Valid Business Purpose Requirement for
a Merger. — The Gabhart merger was consumated in procedural com-
pliance with the merger provisions of the Indiana General Corpora-
tions Act. Despite this compliance, the plaintiff attacked the merger
as having no legitimate business purpose and as being designed only

to squeeze him out of the corporation.

The term "squeeze-out" is used to denote those situations in
which the owners or majority of shareholders use "inside informa-

tion, or powers of control, or the utilization of some legal device or
technique, to eliminate from the enterprise one or more of its
owners or participants." 15 The term has come to imply a purpose to
force a liquidation or sale of the shareholders' shares, not incident to

a legitimate business purpose16 and normally does not contemplate

an adequate compensation to the minority shareholders.17

Under the Indiana General Corporations Act, the dissenting
shareholder in a merger may compel the surviving corporation, via
the remedy known as appraisal, to purchase his shares.18 Under the
controlling statute, a shareholder who votes against the proposed
merger or who does not vote may elect to use appraisal and object
to the proposed merger in writing within thirty days and demand
payment for his shares.19 If the corporation and the dissenting
shareholder are unable to agree on a value for the stock, then the

court will compute the stock's appraised value pursuant to the pro-
cedure found within the eminent domain statute.20 This procedure is
contrary to many states' practices which specify a separate pro-

16
F. O'Neal, "Squeeze-Outs" of Minority Shareholders § 101, at 1 (1975). See

also Vorenberg, Exclusiveness of the Dissenting Stockholder's Appraisal Right, 77

Harv. L. Rev. 1189 (1964). See generally Brudney, A Note on "Going Private, " 61 Va.
L. Rev. 1019 (1975); Brudney & Chirelstein, Fair Shares in Corporate Mergers and
Takeovers, 88 Harv. L. Rev. 297 (1974); Eisenberg, The Legal Roles of Shareholders

and Management in Modern Corporate Decisionmaking, 57 Cal. L. Rev. 1 (1969); Man-
ning, The Shareholders Appraisal Remedy: An Essay for Frank Coker, 72 Yale L.J.
223 (1962). The squeeze-out is often called a cash-out, freeze-out or take-out merger.

19Vorenberg, supra note 15, at 1192-93.
17
F. O'Neal, supra note 15, § 1.01, at 1. Although a squeeze-out can be ac-

complished through several techniques, they most commonly take the form of a merger

of a corporation into an existing parent or into a shell corporation formed for this pur-

pose. See Brudney & Chirelstein, A Restatement of Corporate Freezeouts, 87 Yale L.
J. 1354, 1357 (1978).

18
Ind. Code § 23-1-5-7 (1976). The appraisal remedy has traditional roots in Indiana

law and is used in mergers and consolidations. See State v. Bailey, 16 Ind. 46 (1861). It

is also available to shareholders who dissent from "special corporate transactions"
which involve the sale of all or almost all of the assets of a corporation. See Ind. Code

§§ 23-1-6-1, -5 (1976).
19
Ind. Code § 23-1-5-7 (1976).

20370 N.E.2d at 352. The procedure covering eminent domain in Indiana is codified

at Ind. Code § 32-11-1-6 (1976).



1979] SURVEY- CORPORATIONS 99

cedure for the computation of the stock's appraised value based on

its "fair value."
21

Often, the majority shareholder delays payment for the
tendered shares and the minority shareholders are forced to seek an

injunction to halt the merger until they are compensated.22 But the

use of the injunction is discouraged and present Indiana statutes

provide an exclusive procedure by which the surviving corporation

of a merger is compelled to purchase the shares of the dissenting
shareholders.

23 The majority of states, by statute or case law,
recognize the right of appraisal as the sole relief available to a

dissenting shareholder in a merger.24 However, some recent cases
question the appraisal remedy's ability to adequately compensate

the minority shareholders in a squeeze-out merger.25 In Gabhart, the

Indiana Supreme Court recognized the possible adequacy of the ap-
praisal remedy in the sense that a minority shareholder could
receive the investment value of his interest.26 The inability of ap-
praisal rights to adequately compensate minority shareholders may
be an additional justification for limiting the application of the

remedy in a squeeze-out merger.27

Prior to Gabhart, Indiana courts adhered to the traditional rule

and refused to enjoin a merger unless there was evidence of fraud
or a breach of fiduciary duty. In Raff v. Darrow,

2* the Indiana

Supreme Court stated:

21
See, e.g., Ariz. Rev. Stat. Ann. § 10-081(k) (1977); Cal. Corp. Code § 1300(a)

(West 1977); Conn. Gen. Stat. Ann. § 33-374(d) (West 1960); Del. Code Ann. tit. 8, §
262(f) (1977); Ga. Code Ann. § 22-1202(g)(4) (1977); Md. Corp. & Ass'ns Code Ann. §
3-210 (1975); Neb. Rev. Stat. § 21-2080 (1977); Ohio Rev. Code Ann. § 1701.85(c) (Page

1977); Pa. Stat. Ann. tit. 15, § 805 (Purdon 1967); Tenn. Code Ann. § 48-909(5) (1964);
Texas Bus. Corp. Act art. 15.16(E)(1) (Vernon 1977); Wis. Stat. Ann. § 180.72(2) (West
1977); Model Bus. Corp. Act § 81 (1971).

The appraisal remedy is not available to the shareholders of any corporation
which is the surviving corporation in a merger with respect to which no vote of the

shareholders was required under the General Corporations Act, Ind. Code § 23-1-5-7

(1976), nor to the holders of shares registered on a national securities exchange on the

date fixed to determine shareholders entitled to receive notice of and to vote on

mergers, consolidations, or special corporate transactions unless the articles of incor-

poration otherwise provide. Id. §§ 23-1-5-7, -6-5.

"370 N.E.2d at 352,

""Id.

24H. Henn, Handbook of the Law of Corporations § 349 (2d ed. 1970). The Model
Business Corporation Act provides for an appraisal remedy in mergers, consolidations,
and actions where the majority of a corporation's assets are transferred outside the
regular course of business. See Model Bus. Corp. Act Ann. §§ 73-74 (2d ed. 1971).

^See authorities cited in note 3 supra.
26370 N.E.2d at 354.

"See Brudney, supra note 15, at 1024; Vorenberg, supra note 15, at 1201-03.
28184 Ind. 353, 111 N.E. 189 (1916).



100 INDIANA LAW REVIEW [Vol. 12:94

It is the policy of the law to leave corporate affairs to the

control of corporate agencies and the courts are not war-

ranted at the suit of minority shareholders in interfering

with the management of such agencies even though it may
be unwise and may result in loss, except in a plain case of
fraud, breach of trust, or such maladministration as works a
manifest wrong to them.29

Some recent cases have invaded the corporate boardroom and
have indicated a willingness to emphasize the fiduciary duty owed
by the controlling shareholders, directors, and officers to the minority
and, thus, have restricted the application of a squeeze-out merger.30

This fiduciary duty concept implies that the majority may not exer-
cise corporate powers if the operation simply enriches the majority

at the minority's expense.
31

There are few cases which have considered the legitimate

business purpose requirement in a merger. A brief examination of
some of these major cases will serve to illustrate some of the prob-
lems inherent in this analysis and provides some interesting com-
parisons with the approach followed by the Indiana Supreme Court
in Gabhart.

In Bryan v. Brock & Blevins Co., 32 the majority shareholders at-
tempted to utilize a squeeze-out merger to gain total control of the
corporation. Although the merger was in procedural compliance
with Georgia law,33 the court concluded that a merger could be
challenged unless it was justified by a valid business purpose in-
herent in the merger itself.34 The Delaware Supreme Court has
recently ventured into the uncharted waters surrounding the

legitimate business purpose, or lack thereof, of an otherwise

statutorily valid merger. In Singer v. Magnavox Co., 35 the court held

"Id. at 360, 111 N.E. at 191.

'"'See cases cited in note 3 supra and accompanying text.
31The United States Supreme Court set out the standard of conduct for

fiduciary in Pepper v. Litton, 308 U.S. 295, 311 (1939):

[The majority shareholder] cannot violate rules of fair play by doing indirectly

. . . what he could not do directly. He cannot use his power for his personal
advantage and to the detriment of the stockholders and creditors no matter

how absolute in terms that power may be and no matter how meticulous he
is to satisfy technical requirements. For that power is at all times subject to

the equitable limitation that it may not be exercised for the aggrandizement,
preference, or advantage of the fiduciary to the exclusion or detriment of the

cestuis.
32490 F.2d 563 (5th Cir. 1974).

^Ga. Code Ann. § 22-1001 (1970).
"490 F.2d at 570.

^O A.2d 969 (Del. 1977).



1979] SURVEY- CORPORATIONS 101

that a long-form merger by controlling shareholders, effected only to

squeeze out minority shareholders, was a violation of the fiduciary
duty that the majority shareholders owed to the minority.36 Under
the Singer approach, a court examining a challenged merger would

analyze the entire merger process to see if the fiduciary obligation

of the majority fulfilled the "entire fairness" test of Sterling v.

Mayflower Hotel Corp. 37 The Singer court further held that "entire
fairness" includes more than merely a valid business purpose and,
even if the court were to find a legitimate business purpose, "the

fiduciary obligation of the majority to the minority shareholders re-

mains and proof of a purpose, other than such freeze-out, without

more, will not necessarily discharge it." 38

The Indiana Supreme Court in Gabhart was unwilling to intrude
into corporate management to the same extent as the Singer court.39

The court, confining the corporation to the statutory procedures
outlined under the Indiana General Corporations Act, analyzed a

merger without a legitimate business purpose as a "defacto cor-
porate dissolution" and concluded that the squeeze-out merger
operated as a dissolution favoring the selected majority
shareholders.40 Because a dissolution is designed to sever relation-

ships among corporate shareholders, the court reasoned there was
no justification for allowing the majority shareholders to apply the

more restricted merger provisions to accomplish the same result.41

Consequently, under Gabhart, minority shareholders may
challenge any offending merger as a "defacto dissolution." As the
court noted: "In a dissolution, a shareholder is not limited to ap-

praisal proceedings if he questions the fairness of the process.

Rather, the liquidation and distribution of the corporate assets are

subject to all principles of equity."
42 This unique analysis seems to

indicate that the minority shareholders will receive fair treatment

but, at the same time, it does not force the majority shareholders to
offer the minority an equity interest in the new corporation. This
result has been suggested in some cases.43 In reality, though, the im-
pact may be the same because the dissolution of a profitable cor-
poration may be too high a price to pay for gaining complete
shareholder control.

3733 Del. Ch. 293, 93 A.2d 107 (1952).

^O A.2d at 980.
^O N.E.2d at 356.
40/d
41ta
i2
I<L

"See Singer v. Magnavox Co., 380 A.2d 969 (Del. 1977).



102 INDIANA LAW REVIEW [Vol. 12:94

The Indiana Supreme Court contemplated that their "defacto
dissolution" remedy would not intrude into corporate management
to the extent of having every proposed merger subject to judicial
review. Still, the practical effect will probably not result in a reduc-

tion of judicial review because the court is required to assess the

legitimate business purpose of any merger that is attacked, and, if
such purpose is lacking, it is immaterial if the remedy is an injunc-
tion to the merger or a forced recourse to the statutorily provided
method of dissolution.

The Gabhart court concluded that, to attack a proposed merger
under the defacto dissolution approach, the merger must be without
any valid business purpose and must operate to reduce or eliminate
the equity position of minority shareholders.44 This dual requirement

is necessary because it is not the fact that the merger is without a
valid business purpose which disadvantages the minority
shareholders. Rather, the elimination of the minority's equity posi-

tion works the ultimate hardship.

One potential problem Gabhart left unresolved is whether the
valid purpose test45 should focus on the merging company or the sur-
viving company. This problem was recognized in Singer where the
court described the scope of the business purpose inquiry: "Is that

[the business purpose] of the corporations whose shares are (or
were) held by the minority? . . . And if the business purpose of the
parent (or dormant) corporation should be examined . . . minority
shareholders of the subsidiary (or controlled corporation) may have
difficulty in raising or maintaining the issue."46 The post-Singer
Delaware case of Tanzer v. International General Industries, Inc.,*7

concluded that a legitimate purpose of a parent or surviving cor-

poration is sufficient to validate the merger. If the scope of the

business purpose test focuses only on the surviving corporation, the

minority shareholders may have difficulty in asserting a lack of a
legitimate business purpose.48 Probably the most reasonable ap-

"370 N.E.2d at 356.

^See Scott, Going Private: An Examination of Going Private Transactions Using
the Business Purpose Standard, 32 Sw. L.J. 641 (1978) for a discussion of those ac-

tivities which have traditionally been considered legitimate business purposes.
46380 A.2d at 976.

"379 A.2d 1121 (Del. 1977).
48The courts are often liberal in deciding what will constitute a legitimate

business purpose. The court, in Grimes v. Donaldson, Lufkin & Jenrette, Inc., 392 F.
Supp. 1393 (N.D. Fla. 1974), affd mem., 521 F.2d 812 (5th Cir. 1975), concluded that

operational efficiencies and the elimination of potential conflicts of interest are valid

business purposes. If the scope of the valid business purpose test focuses on only the

surviving corporation, then it will be fairly simple to show some benefit which will only

accrue to the survivor.



1979] SURVEY- CORPORATIONS 103

proach is to examine the entire transaction for a legitimate business

purpose.49 The procedure will force the majority shareholders to
prove the merger's necessity in advancing a legitimate business pur-

pose before the minority shareholders have only an appraisal

remedy at their disposal.
The Gabhart decision does not indicate if the legitimate business

purpose test is also to be applied to mergers attempted pursuant to

Indiana's short-form merger statute. One Delaware case50 suggested
that the purpose of the short-form merger statute is actually to
eliminate minority interests, and probably the legitimate business

purpose test should not be extended to cover short-form mergers.

The Gabhart court missed an opportunity to add some much-
needed guidance to the rapidly expanding body of case law on cor-

porate freeze-outs or squeeze-outs by failing to differentiate among
the variations of such transactions. As noted by other commen-
tators, freeze-outs seem to fall into three distinct catagories: (1)
Two-step mergers (the tender offer and the merger), (2) pure going-

private transactions, and (3) mergers of long-held affiliates.51 Each of
these distinct categories represent different policy considerations

and, hence, require different levels of examination and different

levels of minority shareholder protection. A generalized business
purpose test applied to all such transactions might prove

undesirable when universally applied to all fact situations.
Nonetheless, the Indiana decision in Gabhart is representative

of the trend toward requiring a legitimate business purpose for

mergers. It is important that these state remedies continue to be

established now that the United States Supreme Court has refused
to imply a federal cause of action for non-manipulative breaches of

fiduciary obligation under rule 10b-5.

2. Standing in Derivative Actions. — In addressing the
derivative claim for corporate mismanagement by the Gabhart plain-
tiff, the Indiana Supreme Court held that equitable factors may

i9
See, e.g., Bryan v. Brock & Blevins Co., 490 F.2d 563 (5th Cir.), cert, denied, 419

U.S. 844 (1974). The Indiana Supreme Court also failed to specify exactly which party

will be required to carry the burden of proof in demonstrating that a legitimate

business purpose exists. The New York Supreme Court in Tanzer Economic Assocs.
Profit Sharing Plan v. Universal Food Specialties, Inc., 87 Misc. 2d 167, 383 N.Y.S.2d

472 (N.Y. Sup. Ct. 1976) placed the burden on the plaintiff. The Gabhart decision seems

to indicate that, once the plaintiff has charged that the merger has no legitimate

purpose, the surviving corporation will be required to demonstrate that the merger

contains a valid business purpose.

^Stauffer v. Standard Brands Inc., 41 Del. Ch. 7, 187 A.2d 78 (1962).
51See Brudney & Chirelstein, A Restatement of Corporate Freezeouts, 87 Yale

L.J. 1354 (1978); Green, Corporate Freeze-out Mergers: A Proposed Analysis, 28 Stan.
L. Rev. 487, 490-96 (1976).



104 INDIANA LAW REVIEW [Vol. 12:94

allow a former shareholder to maintain a derivative suit.52 Generally,

a plaintiff in a derivative suit must be a present shareholder of the
corporation whose cause of action is being pursued.53 This require-
ment ensures that the shareholder-plaintiff will have at least an in-
direct property interest in the outcome of the derivative action

because the recovery that will accrue to the corporation will

enhance the value to all shareholders.54

In Gabhart the derivative cause of action which arose on behalf

of the merging company was transferred to the surviving corpora-
tion along with all the corporation's other assets and liabilities.55

Consequently, if the merging company itself is barred from assert-
ing a claim because its cause of action is transferred to the surviv-

ing company, then the shareholders of the merging company have no
derivative rights. However, if the shareholders of the merging com-

pany are made shareholders of the surviving company, there is no
bar to their individual assertion of a derivative claim. The surviving
company itself will usually be able to maintain such a claim, and, if
the directors of the surviving company do not pursue the cause of
action in the name of the surviving company, then the shareholders
can invoke their own derivative claim.56 Thus, standing is usually
available in some capacity and majority shareholders or directors
probably will not be able to insulate themselves from liability for

personal misconduct through a merger.

However, if none of the shareholders of the surviving corpora-
tion are entitled to assert a derivative claim, equitable constraints

may also prevent the successor corporation from enforcing the
claim. This equitable constraint was first enumerated in the oft-cited
case of Home Fire Insurance v. Barber57 which was followed by the
United States Supreme Court in Bangor Punta Operations, Inc. v.
Bangor & Aroostook Railroad.™ In Bangor Punta the Court held that
a corporation which purchased all of the assets of another corpora-
tion, for a fair consideration, may not recover against the vendor
corporation for alleged acts of corporate mismanagement if the
shareholders of the purchasing corporation were not injured by the
alleged wrongful activities.59

52370 N.E.2d at 357.

<*See Ind. R. Tr. P. 23.1.

"See Meyer v. Fleming, 327 U.S. 161, 167 (1946).
56See Ind. Code § 23-1-5-5 (1976). See also Heit v. Tenneco, Inc., 319 F. Supp. 884

(D. Del. 1970).
56Meyer v. Fleming, 327 U.S. at 167. It is irrelevant that the minority

shareholders own a miniscule percentage of the corporation's outstanding shares.

Ashwander v. TVA, 297 U.S. 288, 318 (1936).
5767 Neb. 644, 93 N.W. 1024 (1903).
M417 U.S. 703 (1974).
69There were 20 shareholders of the purchasing company who also were

shareholders of the vendor corporation. The court was unwilling to let the existence of



1979] SURVEY- CORPORATIONS 105

In Gabhart, because all of the surviving corporation's

shareholders had participated in the alleged wrongdoing, they would

be unwilling to assert a claim against themselves, and, even if they

did, equity would preclude the corporation from asserting any

claim, and they could escape liability. However, just as courts of
equity have prevented surviving corporations from succeeding to

the merging company's cause of action where none of the
shareholders have the requisite standing, the courts can also direct-

ly attack the merger, insuring that the wrongdoers will not escape

liability and that innocent shareholders will be protected.60

As the Gabhart court noted, any merger which is attempted
only to cover up wrongdoing may be attacked as having no
legitimate business purpose.

61 The merger itself may have a valid
motivation, but corporate misconduct can also accompany the
merger and a legitimate business purpose alone should not control
the liability of the wrongdoers. The Gabhart court concluded:

[A] Court of Equity may grant relief, pro-rata to a
former shareholder, of a merged corporation whose equity
was adversely affected by the fraudulent act of an officer or
director and whose means of redress otherwise would be cut
off by the merger, if there is no shareholder of the surviving

corporation eligible to maintain a derivative action for such

wrong and said shareholder had no prior opportunity for
redress by derivative action against either the merged or
the surviving corporation.62

This reasoning indicates that the court will carefully apply equitable

discretion only if the plaintiff has no other opportunity to assert the

claim.

B. Successor Corporation's Liability for Product Liability Claims

In Travis v. Harris Corp. 63 the Seventh Circuit Court of Appeals

curbed the trend of imposing liability on successor corporations for

harm caused by a defective or dangerous product of the predecessor
corporation.

64

20 minority shareholders entitle the corporation to recover damages, in the amount of

$7,000,000, where the corporation would be the principal beneficiary. Id at 712 n.8. For

a novel discussion of potential reasons for not extending equitable constraints on stand-

ing, where creditors may be benefited by the recovery and the public can be benefited
through improved railroad transportation, see the dissenting opinion of Justice Mar-

shall.

"See Schenley Distillers Corp. v. United States, 326 U.S. 432, 437 (1946).
61370 N.E.2d at 357.
«2I& at 358.
™565 F.2d 433 (7th Cir. 1977).

"See also Knapp v. North Am. Rockwell Corp., 506 F.2d 361 (3d Cir. 1974), cert,
denied, 421 U.S. 965 (1975); Cyr v. B. Offen & Co., 501 F.2d 1145 (1st Cir. 1974); Ray v.



106 INDIANA LAW REVIEW [Vol. 12:94

In 1973, one of the plaintiffs in Travis caught his hand in a die

press machine as he tried to extricate cardboard from the machine's

pincher bar.65 The die press machine was originally designed,
manufactured, and sold by T.W. & C.B. Sheridan Company to Inland
Container Corporation in 1957; Inland, in 1972, sold the machine to

Ohio Valley Container Corporation, the plaintiffs employer. Eight

years before Inland sold the die press machine to Ohio Valley, T.W.

& C.B. Sheridan Company had sold most of its assets, for a cash con-
sideration, to Harris-Intertype Corporation. Harris-Intertype formed

a new subsidiary, T.W. & C.B. Sheridan Company, a new company
using the name of the selling company, to receive the assets of the
sale.

Subsequently, the subsidiary was merged into Harris-Intertype.
In 1974 Harris-Intertype changed its name to Harris Corporation,
but before that, in 1972, it had sold the assets used in manufacturing

the die press and related spare parts, including the good will related

thereto to the Bruno Sherman Corporation.66 Plaintiffs filed suit
against Harris and Bruno Corporations for negligence and strict
liability for the design, manufacture, and distribution of the die

press machine. The district court decision granted the defendants'
motion for summary judgment and the plaintiffs appealed.67

When a corporate acquisition or transfer is structured as a
merger or consolidation, the acquiring or new corporation
automatically becomes liable for claims against the merging or con-
stituent corporations.

68
Traditionally, a corporation that merely pur-

chases the assets of another corporation for cash will not be respon-
sible for the liabilities of the predecessor.69 The transfer of assets is
essentially a transfer of property between different entities. There
are, however, four well-established exceptions to this general rule.
There will be liability if: (1) The purchasing corporation expressly or
impliedly agrees to assume the sellers' liabilities,70 (2) the transac-
tion amounts to a defacto merger or consolidation of the purchaser
and seller,71 (3) the purchasing corporation acts as a mere continua-
tion of the seller,72 or (4) the transaction is fraudulently entered for

Alad Corp., 560 P.2d 3, 136 Cal. Rptr. 574 (1977); Turner v. Bituminous Cas. Co., 397

Mich. 406, 244 N.W.2d 873 (1976).
96565 F.2d at 445.

"Id.

"Id.

"See Ind. Code § 23-l-5-5(e) (1976).
"565 F.2d at 446.
10
See, e.g., Bouton v. Litton Indus. Inc., 423 F.2d 643 (3d Cir. 1970); Turnbull Inc.

v. Commissioners, 373 F.2d 91 (5th Cir.), cert denied, 389 U.S. 842 (1967).
n
See, e.g., Shannon v. Samuel Langston Co., 379 F. Supp. 797 (W.D. Mich. 1974).

"See, e.g., Cyr v. B. Offen & Co. Inc., 501 F.2d 1145 (1st Cir. 1974).



1979] SURVEY- CORPORATIONS 107

the purpose of escaping liability for the seller's debts.
73

Usually, a corporation that has sold most of its assets will usually

dissolve pursuant to state statute. Even if the corporation remains
intact, there might well be few assets to satisfy any potential

claims. This leaves the product liability plaintiff with little alter-

native except to try to establish a basis of liability for the successor

corporation through one of these exceptions.

The four exceptions in which the successor corporation in the
sale of assets situation is held liable have traditional roots in protect-

ing the appraisal remedy of dissenting shareholders, protecting
established creditor claims, and for tax purposes.74 Courts have ex-

tended the use of these exceptions to cover the transferee liability

in products liability cases.75

The express or implied assumption of liability is often of little

use to the products liability plaintiff. When the assumption is even
mentioned, it is usually to specifically limit the liability of the pur-

chasing corporation.76 In Travis the sales contract specifically ex-

cluded the assumption of any such liability.77

Similarily the fourth exception, the avoidance of debts, has little

application. A products liability claim is contingent and, thus, not an
existing debt of the corporation when the transfer was made. Of
course, a different situation exists where a corporation sells its
assets after a products liability claim arises, but before any judg-

ment is imposed.
Under the defacto merger exception, if the purchase of the

assets amounts to a merger or consolidation, the purchaser assumes
the liabilities of the seller.

78 Courts have consistently refused to find

a defacto merger where the asset seller remains in existence, or
where there was cash consideration for the sale of the assets which
is available to satisfy any judgments.79 The payment of cash con-
sideration indicates a break in the corporate entities. Similarly,

where the seller remains in existence, it indicates no intended
assumption of the seller's liabilities by the purchaser which is

characteristic of a merger.

™See, e.g., Pierce v. Riverside Mortgage Sec. Co., 25 Cal. App. 2d 248, 251, 77
P.2d 226, 229 (1938) (quoting West Tex. Ref. & Dev. Co. v. Commissioner, 68 F.2d 77,
81 (10th Cir. 1933)).

uSee Note, Assumption of Products Liability in Corporate Aquisitions, 55 B.U.
L. Rev. 86,94-95 (1975)/

7BSee authorities cited in note 64 supra.
n
See, e.g., McKee v. Harris-Seybold Co., 109 N.J. Super. 555, 264 A.2d 98 (1970),

affd per curiam, 118 N.J. Super. 480, 288 A.2d 585 (1972), overruled on other grounds,

Wilson v. Fare Well Corp., 140 N.J. Super. 476, 356 A.2d 458 (1976).
77565 F.2d at 445-46.

™See Forest Laboratories, Inc. v. Pillsbury Co., 452 F.2d 621, 625 (7th Cir. 1971).
79Kloberdanz v. Joy Mfg. Co., 288 F. Supp. 817, 821 (D. Colo. 1968).



108 INDIANA LAW REVIEW [Vol. 12:94

Where two corporations are separate and distinct before and
after the sale, there will be no defacto merger. In Travis the court

treated the transfer of the assets for cash as conclusively indicative

of no defacto merger.80

The "mere continuation" exception will impose liability on the
purchasing corporation where the new entity is only a re-creation of
the original entity and not merely a corporation similar with regard

to various common factors.81 The mere continuation exception also
requires the continued control of individuals who managed the
predecessor corporation.82 In Kloberdanz v. Joy Manufacturing Co., 83

the court found no continuation where "there was no common identity
of stock, directors, or officers or shareholders . . . ." 84

The Travis court noted that, although former employees of
Sheridan worked for Harris, there was not the continuity of stock,
stockholders, or directors required under the traditional continuity

exception.85 The purchaser and seller existed as distinct corporate
entities after the sale.

Recent court decisions on transfer liability have shown a tendency
to relax the traditional corporate law exceptions and place more em-
phasis on the policy considerations underlying strict liability. Some
courts, however, appear more willing to try to expand the somewhat
inflexible exceptions to fit the particular fact situations than to

abandon the traditional rules.

An illustration of this trend is the Indiana Court of Appeals
decision in Cyr v. B. Offen & Co., 86 in which the court imposed liability
on a successor corporation using the mere continuation exception87

although, as noted above, generally there is no liability if there is a

separation of ownership between the purchaser and seller.88 The Cyr
court recognized the applicability of using tort policy considerations

in evaluating the contingent tort liability of the purchaser.89

*°5G5 F.2d at 447.

"National Dairy Prods. Corp. v. Borden Co., 363 F. Supp. 978, 980 (E.D. Wis.

1973).
82Lopata v. Bemis Co., 383 F. Supp. 342, 345 (E.D. Pa. 1974), vacated, 517 F.2d

1398 (3d Cir. 1975).

^S F. Supp. 817 (D. Colo. 1968).
M/d at 821.
M565 F.2d at 447.

"501 F.2d 1145 (1st Cir. 1974).

"Id. at 1154.

"See, e.g., Kloberdanz v. Joy Mfg. Co., 288 F. Supp. 817 (D. Colo. 1968) (requiring

common identity of stock, directors, officers, and stockholders).
"See, e.g., Bazan v. Kux Mach. Co., 358 F. Supp. 1250 (E.D. Wis. 1973). The court

noted that the successor was not the legal entity which launched the defective product

into the stream of commerce. The court reasoned, however, that the purchaser prof-
ited from the goodwill the product and the corporation may have acquired. 501 F.2d at
1154.



1979] SURVEY- CORPORATIONS 109

However, the court's attempt to combine these policies into the

traditional continuation corporate exception produced an unclear

result. The Cyr decision indicates a willingness to relax, but not
totally abandon, the traditional corporate law exceptions.

Other cases have rejected the attempt to fit the traditional cor-

porate law exceptions into successor liability and focus on the

policies underlying products liability. In Turner v. Bituminous

Casualty Co. 90 the Michigan Supreme Court established a "products
liability continuity principle" for gauging the degree of continuity

resulting from the transfer regardless of the traditional boundaries

of the corporate law exceptions.91

In Ray v. Alad Corp. 92 the California Supreme Court held that a
successor corporation that continued the predecessor's same product
line was liable for products liability claims arising from defective
products sold by the predecessor. The court did not attempt to ex-
pand traditional corporate law exceptions to support its conclusion,

but grounded its holding on the basis of the policies underlying prod-

ucts liability.
98 The court stated three factors which would support

the liability placed on the successor corporation. First, the dissolu-

tion of the predecessor corporation will usually leave the injured

plaintiff without a remedy. Second, the successor corporation is in

the best position to spread the costs of the injuries on the present

customers. Finally, a continued product line insures that the suc-

cessor corporation will enjoy the goodwill associated with the

predecessor. The court concluded that, if the successor corporation
enjoys this goodwill, it must also bear the burden of the
predecessor's defective products.

94 The Ray decision focused on the
continued product line and rejected traditional corporate defenses.

Instead, it attempted to incorporate the social costs of defective prod-

ucts into the cost of production.

The plaintiffs in Harris attempted to assert the Ray product line
test, but the court declined to adopt such a far-reaching rule and

concluded that such a result is best left to the legislature.95 The
court could have certified the issue to the Indiana Supreme Court
which, arguably, is in a better position to evaluate Indiana's commit-

ment to products liability and decide if an Indiana remedy for suc-
cessor corporate liability is appropriate.96

°°397 Mich. 406, 244 N.W.2d 873 (1976).
91
I<L at 416, 244 N.W.2d at 877-79.

^O P.2d 3, 136 Cal. Rptr. 574 (1977).
Mta at 7, 136 Cal. Rptr. at 578.
M/d
95565 F.2d at 447-48.

The new issue could have been certified to the Indiana Supreme Court as was
done in Gabhart See Ind. R. App. P. 15(0).



110 INDIANA LAW REVIEW [Vol. 12:94

Although a legislative scheme might be the best method to
resolve the liability of the transferee corporation, no state has yet
developed such legislation. Both the Ray and Turner decisions
illustrate the need to dispense with traditional corporate analysis in
assessing the transfer liability of a corporation in a products liability

suit and to develop rules which will impose liability in accord with
the policies associated with products liability. An expansion of the
corporate law exceptions will only inhibit their usefulness and cer-
tainty for the original purposes for which they were intended.

C. Capacity To Be Sued: Unincorporated Associations

In O'Bryant v. Veterans of Foreign Wars, No. 1552, 91 the Indiana
Court of Appeals held that a member of an unincorporated associa-
tion can sue the association for negligence. The plaintiff brought suit
against the VFW for bodily injuries allegedly suffered because of
the VFW's negligence. The trial court granted defendant's motion
for summary judgment, adhering to the traditional rule which pro-
hibits the individual members of an unincorporated association from
suing the association in tort.98

The traditional rule of non-liability for an association is ground-
ed on concepts dealing with partnerships. A partnership is formed
by individual members who each control the operations of the part-
nership, and each partner represents the partnership in the transac-

tion of its business. The members of an unincorporated association
are similar to the partnership parties in that they, too, form the

association and have the legal right to control the business of the

association. In such a joint enterprise each individual is both prin-

cipal and agent for all the members of the association and the
negligence of any member will then be imputed to all of the
members."

These technical factors will often have little relevance to a

modern unincorporated association because the association's
business is likely to be carried out through elected officials, and the

individual members have little input in association decisions or
exert little control over the association's daily operations.

Both California, in White v. Cox, 100 and Ohio, in Tanner v. Colum-

bus Lodge No. 11, Loyal Order of Moose, 101 have rejected the tradi-

97376 N.E.2d 521 (Ind. Ct. App. 1978).

"Id. at 522.

"See Marshall v. International Longshoremen's & Warehousemen's Union, 371
P.2d 987, 22 Cal. Rptr. 211 (1962).

100
17 Cal. App. 3d 824, 95 Cal. Rptr. 258 (1971).

10144 Ohio St. 2d 49, 337 N.E.2d 625 (1975).



1979] SURVEY- CORPORATIONS 111

tional rule and have held that an unincorporated association is en-

titled to general recognition as a separate legal entity apart from its

members and, thus, a member of the association can sue the associa-
tion in tort. To help support its conclusion, the White court noted
the development of California statutory and case law limiting the

liability of individual members for the debt of the association.
Similarly, the court in O'Bryant placed substantial emphasis on

Indiana Trial Rule 17(E) which states:

A partnership or an unincorporated association may sue or
be sued in its common name. A judgment by or against the
partnership or unincorporated association shall bind the

organization as if it were an entity. A money judgment
against the partnership or unincorporated association shall

not bind an individual partner or member unless he is named
as a party or is bound as a member of a class in an ap-
propriate action.102

The court noted that Trial Rule 17(E) can be effective as a rule
of both procedural and substantive law and concluded that an unin-

corporated association should be an artifical entity separate from

the members.103 In this way associations can still serve as "principals
of their officers, agents, and employees without need to resort to

the fiction that the members of the association are the principals." 104

D. Statutory Developments

The Indiana General Assembly produced no noteworthy
statutory developments in the corporation law area. However, the

recent decision of the Fifth Circuit Court of Appeals in Great

Western United Corp. v. Kidwell,105 affirming a district court's rul-
ing holding the Idaho Corporate Takeover Act106 unconstitutional,

casts doubt on the constitutionality of all state statutes regulating

corporate tender offers107 including the Indiana Business Takeover

102
Ind. R. Tr. P. 17(E).

108376 N.E.2d at 523.
m

IcL

106
[1978] Fed. Sec. L. Rep. (CCH) 1 96,529 (5th Cir. Aug. 10, 1978).

1mIdaho Code §§ 30-1501 to 1513 (Supp. 1977).
107The following states have enacted statutes regulating corporate takeovers:

Alaska Stat. §§ 45.57.010 - .120 (Supp. 1976); Colo. Rev. Stat. §§ 11-51.5-101 to 108

(Supp. 1976); Conn. Gen. Stat. §§ 36-347a to 347n (Supp. 1976); Del. Code Ann. tit. 8, §
203 (Supp. 1977); 1977 Fla. Laws ch. 77-441; Ga. Code Ann. §§ 22-1901 to 1915 (Supp.
1977); Hawaii Rev. Stat. §§ 417E-1 to 15 (1976); Idaho Code §§ 30-1501 to 1513 (Supp.

1978); Ind. Code §§ 23-2-3-1 to 12 (1976 & Supp. 1978); Ky. Rev. Stat. §§ 292.560 - .630
(Supp. 1976); La. Rev. Stat. Ann. §§ 51:1500 - -.1512 (West Supp. 1978); Md. Corps. &
Ass'ns Code Ann. §§ 11-901 to 908 (Supp. 1977); Mass. Ann. Laws ch. HOC, §§1-13



112 INDIANA LAW REVIEW [Vol. 12:94

Act.108

In 1971, Great Western United, a Delaware corporation, an-
nounced a tender offer for 2,000,000 shares109 of the stock of Sun-

shine Mining Company. Sunshine Mining was incorporated under
Washington law but over fifty percent of its assets and its corporate

headquarters were located in Idaho.110 Great Western initially com-
plied with the disclosure requirements of the Williams Act amend-

ments to the Securities Exchange Act of 1934111 and then attempted

to comply with the more stringent disclosure provisions of the Idaho
takeover law. After the Idaho Securities Commissioner determined

that the disclosed information was inadequate, Great Western filed
suit to prevent the enforcement of the statute, alleging that the

state law was pre-empted by the provisions of the Williams Act and
placed an undue burden on interstate commerce. The district court
found the statute unconstitutional on both grounds,112 and the deci-

sion was appealed.
After resolving several procedural issues,113 the court first ad-

dressed the pre-emption issue.114 This doctrine gives effect to the

(Michie/Law Co-op Supp. 1977); Mich. Comp. Laws Ann. §§ 451.910 - .917 (Supp. 1977);

,

Minn. Stat. Ann. §§ 80B.01 - .13 (West Supp. 1978); Miss. Code Ann. §§ 75-72-1 to 23
(Supp. 1977); Nev. Rev. Stat. §§ 78.376 - .3778 (1973); N.H. Rev. Stat. Ann. 421-A-l to

A-15 (1977); N.Y. Bus. Corp. Laws §§ 1601 - 1613 (McKinney Supp. 1977); Ohio Rev.
Code Ann. § 1707.041 (Page Supp. 1978); Pa. Stat. Ann. tit. 70, §§ 71 - 85 (Purdon

Supp. 1978); S.D. Compiled Laws Ann. §§ 47-32-1 to 47 (Supp. 1978); Tenn. Code Ann.
§§ 48-2101 to 2114 (Supp. 1977); Utah Code Ann. §§ 61-4-1 to 13 (Supp. 1976); Va. Code
§§ 13.1-528 to 541 (1978); Wis. Stat. Ann. §§ 552.01 - .25 (West 1978). See generally

Galanti, Business Associations, 1977 Survey of Recent Developments in Indiana Law,

11 Ind. L. Rev. 27 (1977).
108
Ind. Code §§ 23-2-3-1 to 12 (1976 & Supp. 1978).

109The offer represented approximately 35% of Sunshine's outstanding stock. Sun-
shine's board of directors, dissatisfied with Great Western's offer of $15.75 per share,

characterized the offer as "unfriendly."
110Under Idaho Code § 30-1501(6) (Supp. 1978), the Idaho Takeover Act applied if

the target company had a substantial portion of its assets or its principal office in
Idaho.

U1
15 U.S.C. §§ 78m(b) - (c), 78n(d) - (f) (1976).

m439 F. Supp. 420 (N.D. Tex. 1977). The court of appeals decision elicited national
interest and amici curiae briefs were filed on behalf of Connecticut, Ohio, Mississippi,

Louisiana, New York, Utah, and the Securities and Exchange Commission.
u3Among the plethora of defenses to Great Western's suit were jurisdiction,

venue, and service. All defenses were rejected by the court. [1978] Fed. Sec. L. Rep.

(CCH) 1 96,529, at 94,095-102.
114
In 1968 Congress enacted the Williams Act, the principle federal statute which

regulates the use of cash tender offers and which may pre-empt a corresponding state
statute. The use of cash tender offers increased from under 10 in 1960 to over 100 in

1966. See E. Aranow & H. Einhorn, Tender Offers for Corporate Control 65 n.3
(1973). The Williams Act was designed to provide information to investors so they

would be reasonably informed of the substance of the tender offer and could then

make a better-reasoned decision. The Act requires the corporation making the tender
offer to disclose to the SEC its background, the course and amount of the considera-



1979] SURVEY- CORPORATIONS 113

supremacy clause of the United States Constitution.116

The court recognized that Congress did not intend to completely

exclude all state regulation of securities. Section 28 of the Securities

Exchange Act of 1934116 provides that state securities regulation is

permissible as long as it does not conflict with federal law. Even if
federal law does not completely exclude state regulation, however,

the state statute must fail if it conflicts with the federal statute and
frustrates the full purposes and objectives of Congress.117

After identifying the relevant criterion to be applied, the court

analyzed the purposes of the Williams Act. The court concluded the
recent Supreme Court decision in Piper v. Chris-Craft Industries,
Inc.,

11* held that the primary purpose behind the Williams Act is to

protect investors. The Supreme Court noted in Piper that neutrality
between the target company and the corporation attempting the
takeover is but one of the characteristics toward protecting in-

vestors.
119

State corporate takeover statutes generally require disclosure of

more information than is required under the Williams Act,120 and
provide that the disclosure be made before the effective date of the
tender offer.121 The Idaho takeover statute also provided for a hear-
ing to determine the fairness of the tender offer.122 The Great
Western court found that the Idaho statute increased a target com-
pany's ability to defeat a tender offer. The court identified the ad-
vance notice of the tender offer, the ability to delay the offer

through the use of a hearing, and the ability of the target corpora-

tion, any other interests held in the target company, and the purpose of transaction.

The post-effective waiting period gives the shareholders a chance to make their in-
formed investment decisions.

116
U.S. Const, art. VI, cl. 2. See Goldstein v. California, 412 U.S. 546 (1973); Hines

v. Davidowitz, 312 U.S. 52 (1941).
116
15 U.S.C. § 78bb(a) (1976). See SEC v. National Sec. Inc., 393 U.S. 453, 461

(1969). Section 28 of the Securities Exchange Act of 1934 has been widely used to help

justify the existence of state takeover laws. When the Williams Act was promulgated,
only one state, Virginia, had a corporate takeover law. Thus, it can be argued that,

although § 28 preserves existing Blue Sky laws, there was no intent to preserve the
later adopted takeover laws.

117
[1978] Fed. Sec. L. Rep. (CCH) 1 96,529, at 94,102-03.

U8430 U.S. 1 (1977).
119/d at 29.
120Schedule 13D was the disclosure form required for Great Western when it made

its tender offer. The current required disclosure form is Schedule 14D. Compare
Schedule 14D-1, 17 C.F.R. § 240.14d-4 (1977) with Ind. Code § 23-2-3-2 (1976).

™See, e.g., Ind. Code § 23-2-3-2(b) (1976).
122Idaho Code § 30-1503(4) (Supp. 1978). Idaho is not alone in the hearing require-

ment. See, e.g., Ind. Code § 23-2-3-2(e) (1976); Minn. Stat. Ann. § 80B.03 subd. 4 (West

Supp. 1978); Va. Code § 13.1531(a) (Supp. 1978); Wis. Stat. Ann. §§ 552.05(4) - (5) (West
1978).



114 INDIANA LAW REVIEW [Vol. 12:94

tion's board of directors to exclude the offer from state regulations

by approving the offer as factors weighing in favor of the target

company's management.123 The Idaho Director of Finance124 asserted
that these pro-management provisions were not meant to prevent
tender offers but instead to help directors fulfill their fiduciary

duties to shareholders by allowing additional time to assess the
tender offer. This novel "fiduciary approach" to investor protection

was unpersuasive to the court. It held that the Williams Act con-
templated a "market approach" to investor protection where the in-
vestor and not the management of the target company evaluates the
tender offer.125 These elements were more than enough to convince
the court that the Idaho statute conflicted with the Williams Act
and was thereby pre-empted.126

After deciding the pre-emption issue, the court examined the

Idaho statute to see if it imposed an undue burden on interstate
commerce. The commerce clause127 is designed to promote flexibility
and commercial activity between states.128 The interstate movement
of securities is within the scope of the commerce clause. In deter-
mining if a state law unreasonably burdens interstate commerce, the

court used the analysis found in Pike v. Bruce Church, Inc., 129 first

examining to see if the law promoted a legitimate local interest,

then assessing the burden the law placed on interstate commerce,

and, finally, balancing the burden and the benefit.

The court noted that any attempt to justify the Idaho legislation
based on safeguarding the local economy would fail, but accepted
the regulation of changes in management, by outsiders, as a
legitimate local interest.130 The incumbent management of the cor-
poration has an impact on local lifestyle through various civic ac-

tivities and may be more responsive to local interests than would
outside management. The court accepted the regulation of the

123
[1978] Fed. Sec. L. Rep. (CCH) 1 96,529, at 94,105.

124The original defendant in the district court case, Thomas L. Kidwell, the At-
torney General of Idaho, elected not to appeal the case.

125
[1978] Fed. Sec. L. Rep. (CCH) 1 96,529, at 94,106.

128The court concluded that the provisions of the Idaho law would cause delay for
the acquiring corporation and that delay is one of the most effective means of
defeating a tender offer. Id. at 94,105. See also D. Austin & J. Fishman, Corporation
in Conflict: The Tender Offer 127 (1970); Wilmer & Landy, The Tender Trap: State
Takeover Laws and Ther Constitutionality, 45 Fordham L. Rev. 1, 9 (1976-77). Prior
courts have also noted that delay is the target company's strongest ally. Copperheld

Corp. v. IMETAL, 403 F. Supp. 579, 608 (W.D. Pa. 1975).
127
U.S. Const, art. I, § 8, cl. 3.

™See National Bellas Hess, Inc., v. Department of Revenue, 386 U.S. 753, 760
(1967).

129397 U.S. 137 (1970).
130
[1978] Fed. Sec L. Rep. (CCH) 1 96,529, at 94,109.



1979] SURVEY- CORPORATIONS 115

means by which outsiders can change management as a legitimate
local interest.

131 This interest may be significant, especially in
smaller Indiana communities where local management can have a
significant impact on local lifestyle.

It was also argued that the Idaho takeover law was designed to
protect investors. While accepting this as a legitimate purpose, the

court noted that Idaho had little reason to protect shareholders of

other states unless the securities transaction took place in Idaho or

would substantially affect Idaho's shareholders.132 Only about two
percent of Sunshine Mining's shareholders resided in Idaho. The
state had a local interest in protecting these shareholders but, even

if no shareholders had resided in Idaho and no securities transaction

had taken place in Idaho, the takeover law still would have applied

because Sunshine had fifty percent of its assets and its principal

place of business within the state boundaries of Idaho.133

In examining the burden on interstate commerce, the court con-

cluded that the Idaho statute disrupted normal securities markets

through the advance notification procedure,134 and, in this case, the

court noted that the Idaho statute effectively stopped over thirty-

one million dollars of interstate commerce.135 The requirements of a
state exercising control over a tender offer will prevent an acquir-

ing company from making any tender offer until the state re-
quirements are satisfied.

When the court attempted to balance the interest and the
burden, the result was apparent. The local interest in protecting
Idaho investors, in this case a very small percentage of the
shareholders, and the indirect and incidental interests of corporate
civic responsibility through fuller disclosure were not persuasive
when weighed against Idaho's extraterritorial regulation of tender
offers which could interfere with securities transactions all over the
country. Thus, the court concluded the Idaho statute imposed an un-
due burden on interstate commerce.136

If the Fifth Circuit Court of Appeal's result is affirmed on ap-
peal to the United States Supreme Court, it seems apparent that
the Indiana Business Takeover Act is also unconstitutional. The In-
diana Act requires substantially more disclosure than the provisions
of the Williams Act. In addition, Indiana also provides for a hearing

131/d
132Id
133/d The Indiana Business Takeover Act also applies if a target company is

organized under Indiana law, has its principal place of business in Indiana, or has a
substantial portion of its total assets in Indiana. Ind. Code § 23-2-3-l(j) (1976).

134
[1978] Fed. Sec. L. Rep. (CCH) 1 96,529, at 94,109.
mId at 94,110.
mId at 94,112.



116 INDIANA LAW REVIEW [Vol. 12:116

and seems to follow the "fiduciary approach" rejected by the Great
Western court by excluding tender offers approved by the board of
directors of the target company from the definition of a "takeover
offer."

137
Finally, the Indiana law also does not require that a majority

of the shareholders of the target company reside in Indiana. Instead,
the Indiana statute may be effective where the target company was
incorporated in Indiana, or had its principal place of business in In-
diana, or had a substantial portion of its assests in Indiana.138

Lex L. Venditti

VII. Criminal Law and Procedure

Richard P. Good*

The decisions discussed in this Article deal solely with criminal
procedure. There have been no appellate decisions on substantive

criminal law under the new Indiana Penal Code 1 which became effec-
tive October 1, 1977. The discussion is presented in the general
order in which the respective issues would arise in the various

stages of the criminal process, beginning with pre-trial issues and

continuing with issues pertaining to the trial and post-trial stages.

In addition, several significant amendments to the penal code during
the 1978 session of the General Assembly will be discussed.2

A. Search and Seizure

1. Arrest Warrants. —There are two contrary lines of cases in
Indiana on whether warrantless arrests are proper absent exigent

circumstances.3 One holds that, in order to have a valid warrantless
arrest for a crime not committed in the presence of the officer,

there must be probable cause to believe that a crime was committed

137
Ind. Code § 23-2-3-l(i)(5) (1976).

m
Ia\ § 23-2-3-Kj).

* Executive Director, Indiana Prosecuting Attorneys Counsel; Instructor in

Criminal Justice, Indiana University— Purdue University at Indianapolis and Indiana

University at Kokomo.

The author wishes to express his appreciation to Paul H. Ellison for his

assistance in the preparation of this Article.
x
Ind. Code § 35-1-1-1 to 50-6-6 (Supp. 1978).

2See notes 275-88 infra and accompanying text.
aSee Kerr, Criminal Law and Procedure, 1975 Survey of Recent Developments

in Indiana Law, 9 Ind. L. Rev. 160, 162 (1975).