Indiana Law Review


II. Business Associations

Paul J. Galanti*

A. In Pari Delicto Defense

This survey period^ offered the interesting case of Dan Purvis
Drugs, Inc. v. Aetna Life Insurance Co} In Purvis, the court of appeals
affirmed an order of the Dekalb Circuit Court dismissing on the

basis of the in pari delicto defense Purvis' complaint alleging a viola-

tion of the Indiana Antitrust Statutes.^ Purvis was attempting to
stop Aetna from terminating a third party provider agreement in

which Aetna reimbursed him for the costs of prescription drugs pro-

vided to employees of International Harvester at a minimal dispens-

ing fee. The nature of Purvis' antitrust claims against Aetna are not
clear from the opinions. The court did not have to resolve this issue
when it determined that the in pari delicto defense, which literally
means "in equal fault,"^ was still good law in Indiana. Indiana courts
have previously applied this doctrine to deny relief to an antitrust

plaintiff who initiated legal action after cooperating with the defen-
dant in an unlawful scheme.^

The thrust of Purvis' appeal was that the in pari delicto defense
as applied to private antitrust cases was struck down by the United
States Supreme Court's decision in Perma Life Mufflers, Inc. v. In-

*Professor of Law, Indiana University School of Law— Indianapolis. A.B., Bow-
doin College, 1960; J.D., University of Chicago, 1963.

*One decision worthy of at least passing reference in this section is Downham v.
Wagner, 408 N.E.2d 606 (Ind. Ct. App. 1980). One of the issues in Downham, a
workers' compensation case, was whether the defendant's husband was his wife's
agent which would make her liable for the injury. The court recognized that marriage
alone will not create an implied agency relationship. Id. at 613. Heffner v. White, 113

Ind. App. 296, 306, 45 N.E.2d 342, 346 (1942); Roper v. Cannel City Oil Co., 68 Ind.

App. 637, 640, 121 N.E. 96, 97 (1918). However, a person can be a spouse's agent, par-
ticularly if they are engaged in a joint enterprise, 408 N.E.2d at 613; see Pierce v. Hor-

vath, 142 Ind. App. 278, 233 N.E.2d 811 (1968), or if the spouse ratifies an otherwise

unauthorized act. Lichtenberger v. Graham, 50 Ind. 288 (1875); 408 N.E.2d at 613. The
Downham court concluded there was sufficient evidence of agency to submit the ques-
tion to the jury. Id.

*412 N.E.2d 129 (Ind. Ct. App. 1980).

Ind. Code §§ 24-1-1-1 to -4-4 (1976 & Supp. 1981).
*Black's Law Dictionary 711 (5th ed. 1979).
•Moore v. Barrett Co., 75 Ind. App. 352, 130 N.E. 649 (1921). The defense is not

limited to antitrust actions, and it was most recently applied in a 1975 Indiana
Securities Act case. See Theye v. Bates, 166 Ind. App. 652, 337 N.E.2d 837 (1975),
discussed in Galanti, Business Associations, 1976 Survey of Recent Developments in
Indiana Law, 10 Ind. L. Rev. 57, 76-79 (1976) [hereinafter cited as 1976 Survey].

31



32 INDIANA LAWREVIEW [Vol. 15:31

ternational Parts Corp.^ In Perma Life, the Court ruled that by
discouraging private actions the doctrine was contrary to the public
policy of fostering competition, which is the underlying basis for the

federal antitrust laws.^ The Purvis court noted that Perma Life in-
volved the Sherman Antitrust Act,* not a state antitrust law, and
concluded that the decision was not binding on Indiana courts.^ This
treatment of the plaintiff's contention was somewhat cavalier
because the Indiana antitrust statutes are patterned after the

federal antitrust laws.^° Consequently, it is appropriate to give con-

siderable weight to federal decisions in interpreting similar Indiana

statutes," particularly if the federal court is the United States

Supreme Court.
It is possible that Purvis is not the last word on the in pari

delicto issue. The plaintiff apparently simply asserted that Moore v.
Barrett Co.^^ should be overruled on the basis oi Perma Life without
substantiating arguments.^^ This was a fatal mistake because there
are arguments in favor of the defense in certain situations,^^ and

even federal courts have differed on the actual scope of Perma Life.

*392 U.S. 134 (1968). Perma Life generated considerable law review commentary
when it was decided. See, e.g.. The Supreme Court, 1967 Term, 82 Harv. L. Rev. 63,
260-66 (1968); Case Comment, 53 Minn. L. Rev. 827 (1969); 6 San Diego L. Rev. 117
(1969); 47 Tex. L. Rev. 322 (1969); 21 Vand. L. Rev. 1083 (1968).

'392 U.S. at 138-40. Bishop v. American Preservers Co., 105 F. 845, 846 (N.D. 111.

1900), was the first antitrust case applying the doctrine. For a general discussion of
the in pari delicto defense and the related unclean hands defense see L. Sullivan,

Handbook of the Law of Antitrust § 250 (1977); [1980] 16N J. von Kalinowski,
Business Organizations, Antitrust Laws and Trade Regulation § 109.02 (1969);
A.B.A., Antitrust Law Developments 297-99 (1975). The unclean hands defense to an
antitrust complaint was severely restricted in Kiefer-Stewart Co. v. Joseph E.
Seagram & Sons, Inc., 340 U.S. 211 (1951).

«15 U.S.C. §§ 1-7 (1976).

M12 N.E.2d at 131.
'"See Citizens Nat'l Bank v. First Nat'l Bank, 165 Ind. App. 116, 128 nn.6 &7, 331

N.E.2d 471, 478 nn.5 &6 (1975). See also Bell v. Speed Queen, 407 F.2d 1022, 1027 (7th
Cir. 1969); Orion's Belt, Inc. v. Kayser-Roth Corp., 433 F. Supp. 301, 302-03 (S.D. Ind.

1977); Sandidge v. Rogers, 167 F. Supp. 553, 556 (S.D. Ind. 1958) rev'd on other

grounds, 256 F.2d 269 (7th Cir. 1958); Fort Wayne Cleaners & Dyers Ass'n v. Price,
127 Ind. App. 13, 20, 137 N.E.2d 738, 742 (1956). Cf. In re City Investing Co., 411

N.E.2d 420, 427 (Ind. Ct. App. 1980) (Ind. Code § 23-2-3.1-1(1) (1976) was substantially
patterned on the Williams Act, 15 U.S.C. § 78n(d)(l) (1976), and the court looked to

decisions interpreting the federal statute).

"See 165 Ind. App. 116, 331 N.E.2d 471. "Due to the dearth of Indiana decisional
law under § 24-1-2-7, the similarity between § 24-1-2-7 and 15 U.S.C.A. § 15, and the

policy considerations identical to both provisions, federal decisional law enunciated

under 15 U.S.C.A. § 15, is of substantial value." Id. at 128 n.7, 331 N.E.2d at 478 n.6.
"75 Ind. App. 352, 130 N.E. 649 (1921).
"412 N.E.2d at 131-32.

"M at 132 n.l.



1982] SURVEY-BUSINESS ASSOCIATIONS 33

Specifically, it is unclear whether the decision absolutely abolished

the defense or whether it might yet be available to those without

equal responsibility for creating or establishing an illegal scheme or
who were required by economic pressures to accept such an
arrangement.-

One distinguished commentator has observed that the in pari
delicto defense should be available if it can be shown that the plain-
tiff voluntarily participated in an illegal scheme from the outset and
was equally responsible for carying out its objectives.^* The thrust
of Professor von Kalinowski's position is that persons without choice

should not be barred from antitrust recovery, but those who truly
are of equal fault should not receive the fruits of the illegality coupled

with treble damages for violation of the antitrust laws. Permitting
the latter to recover would be detrimental to the efficient enforce-

ment of and contrary to the underlying policy of the antitrust laws.^'
Purvis does not flatly foreclose this position because, as the

court noted, the plaintiff neither made allegations nor raised any in-
ferences regarding the circumstances of the contract to support a

conclusion that he was an unwilling participant in the scheme.^® The
court did note that it was "not clear that the policy of encouraging
private suits outweighs the public policy of denying relief to a per-

son who is equally at fault with the defendant."^® Thus in an appro-
priate case a participant in a scheme prohibited by the Indiana An-
titrust Statutes might not be barred under the in pari delicto doc-

trine.

Although the Purvis court did not discuss recent decisions from

other states considering the in pari delicto defense to actions

brought under state antitrust laws, the issue has arisen in other

jurisdictions. In Mailand v. Burckle,^^ the California Supreme Court

'^Compare Premier Elec. Constr. Co. v. Miller-Davis Co., 422 F.2d 1132, 1138-39

(7th Cir.), cert, denied, 400 U.S. 828 (1970) and South-East Coal Co. v. Consolidation

Coal Co., 434 F.2d 767, 784 (6th Cir. 1970), cert, denied, 402 U.S. 983 (1971) with

Memorex Corp. v. International Bus. Mach. Corp., 555 F.2d 1379, 1381 (9th Cir. 1977);
Semke v. Enid Auto. Dealers Ass'n, 456 F.2d 1361, 1369-70 (10th Cir. 1972); and
Schokbeton Prods. Corp. v. Exposaic Indus., Inc., 308 F. Supp. 1366, 1369 (N.D. Ga.

1969). See generally authorities cited notes 6 & 7 supra.
'•[1980] 16N J, VON Kalinowski, Business Organizations, Antitrust Laws and

Trade Regulation § 109.02 at 109-11.

"/d. at 109-11 to -12. However, as Professor Sullivan points out "there is a public

as well as a private interest in having the unlawful arrangement challenged. . . . [and]

the crucial thing is to assure that notions of fairness inter se do not reduce unduly the

likelihood of competitive conditions being restored." L. Sullivan, Handbook of the
Law of Antitrust at 784 (1977).

'«412 N.E.2d at 132.

*'/d at 132 n.l (emphasis added).

^0 Cal. 3d 367, 572 P.2d 1142, 143 Cal. Rptr. 1 (1978).



34 INDIANA LAWREVIEW [Vol. 15:31

held that participants in a scheme illegal under the California Anti-

trust Act were not barred from recovery under the in pari delicto

doctrine when they did not bear equal responsibility for establishing
the scheme. Similarly, the Texas Court of Civil Appeals in Berman
V. City Products Corp.^^ held that under the Texas Antitrust Act the

"defense would not bar recovery for damages incurred after Berman
withdrew from the illegal arrangement."^^

There are many situations in which allowing a plaintiff to
recover for damages resulting from some illegal activity in which he
was a participant would be a mockery of justice.^^ On the other
hand, there are many situations involving antitrust laws and other
regulatory statutes^* in which blanket application of the in pari delic-

to defense would be counter-productive. There is considerable flexi-

bility in Purvis, and it is to be hoped that Indiana courts will follow

the lead of the California and Texas courts, as well as the federal

courts, and limit the defense to cases in which the antitrust plaintiff

truly is at *'equal fault" with the defendant or, as posited in another

context, in which the fault of the parties is "clearly mutual, simul-

taneous and relatively equal."^^

B. Securities Fraud

Several issues pertaining to civil suits brought under the Indi-

ana Securities Act^^ were resolved in Kelsey v. Nagy,^^ in which the
court of appeals affirmed a judgment of the Porter County Superior

Court in favor of the plaintiff Nagy.^® The dispute arose under sec-

"579 S.W.2d 313 (Tex. Civ. App. 1979).

""Id. at 319.

^See, e.g., State v. Aammco Automatic Transmissions, Inc., 199 N.W.2d 444
(Minn. 1972).

'*See, e.g.. Young v. Kwock, 52 Hawaii 273, 276, 474 P.2d 285, 288 (1970) (State
Securities Law).

"'Xaphes v. Shearson, Hayden, Stone, Inc., Fed. Sec. L. Rep. (CCH) 1 98,028, at

91,316 (S.D. Fla. 1981).

^IND. Code §§ 23-2-1-1 to -24 (1976 & Supp. 1981). For discussion of the Indiana
Securities Act see generally Boehm, Federal Business Law and the Indiana Lawyer:
The Impact of the Securities Law on the General Practitioner, 48 IND. L.J. 216 (1973);
Pasmas, Securities Issuance and Regulation: The New Indiana Securities Law, 38 Ind.
L.J. 38 (1962); Note, Securities Registration Requirements in Indiana, 3 Ind. Legal F.
270 (1969); Doxsee, Securities Problems in Indiana, 17 Res Gestae No. 9, at 6 (1973).

"410 N.E.2d 1333 (Ind. Ct. App. 1980).

^*The Nagys appealed from an order granting summary judgment in favor of cer-
tain defendants and from the trial court's failure to submit a question of punitive

damages as against defendant Kelsey to the jury on a common law fraud count. The
court concluded that they had failed to preserve the alleged errors and had forfeited

the right to appeal. Id. at 1334-35, 1337-38 (Garrard, P.J. concurring).



1982] SURVEY-BUSINESS ASSOCIATIONS 35

tion 23-2-l-19(a) of the Securities Act before it was amended in
1975.2^

The Nagys had purchased corporate shares from Kelsey think-
ing they were unissued or treasury shares but which in fact belonged

to him.^° The court concluded that Kelsey's failure to inform the
Nagys that they were purchasing his shares was an omission of a
material fact to "which a reasonable investor would attach impor-

tance when deciding on his course of action."^^ Failure to so inform
warranted rescission of the transaction. The court observed that a
purchaser of shares would be interested in knowing whether the

=^lND. Code § 23-2-l-19(a) (1971) (currently codified at Ind. Code § 23-2-l-19(a)

(1976)). Before the section was amended in 1975, it provided that:

(a) Any person who
(1) offers or sells a security in violation of sections 201, 204(d), 301(a) or

502(b); or

(2) offers or sells a security by means of any untrue statement of a material

fact or any omission to state a material fact necessary in order to make the
statements made, in the light of the circumstances under which they are

made, not misleading (the buyer not knowing of the untruth or omission), and

who does not sustain the burden of proof that he did not know, and in the ex-
ercise of reasonable care could not have known, of the untruth or omission, is

liable to the person buying the security from him, who may sue either at law
or in equity to recover the consideration paid for the security, together with

interest at six percent (6%) per year from the date of payment, costs, and

reasonable attorneys' fees, less the amount of any income received on the

security, upon the tender of the security and any income received on it, or

for damages if he no longer owns the security. Damages are the amount that
would be recoverable upon a tender less the value of the security when the
buyer disposed of it and interest at six percent (6%) per year from the date

of disposition.

Section 23-2-l-19(a) was similar but not identical to Uniform Securities Act (U.L.A.) §
410(a) (Master ed. 1978).

Ind. Code § 23-2-l-19(a) (1976) now provides that:
Any person who offers, purchases or sells a security in violation of any

of the provisions of this chapter, and who does not sustain the burden of
proof that he did not know, and in the exercise of reasonable care could not

have known, of the violation, is liable to any other party to the transaction,

who did not knowingly participate in the violation or who did not have, at
the time of the transaction, knowledge of the violation, who may sue either
at law or in equity to rescind the transaction or to recover the consideration

paid, together, in either case, with interest at eight percent (8%) per year

from the date of payment, costs and reasonable attorneys' fees, upon the

tender of the security or consideration received by the person bringing the

action.

Although the specific language of §23-2-l-19(a) has changed, the same result would be
reached if Kelsey were brought today.

'<'410 N.E.2d at 1336.

'7d See Arnold v. Dirrim, 398 N.E.2d 426 (Ind. Ct. App. 1979) discussed in
Galanti, Business Associations, 1980 Survey of Recent Developments in Indiana Law,
14 Ind. L. Rev. 91, 91-101 (1981) [hereinafter cited as 1980 Survey].



36 INDIANA LAWREVIEW [Vol. 15:31

proceeds would go to the corporation or to an individual and that if

the true source of the shares had been known, the Nagys might

have asked Kelsey why he was selling and would have put his repre-
sentations in an entirely different perspective.^^ There is certainly

no reason to quarrel with that conclusion.

Kelsey, however, claimed that the Nagys knew or in the exer-
cise of reasonable care and due diligence could have learned of the

omitted fact. The court concluded that nothing in the record in-
dicated they had actual knowledge of the omitted fact which would

have barred rescission under section 23-2-l-19(a) which provided a

cause of action only to a buyer "not knowing of the untruth or omis-

sion."^3

The court refused to impose an affirmative duty on purchasers
of shares to make inquiries and to discover the actual circumstances
underlying a securities transaction because if the legislature had in-

tended to require such an investigation, it would have expressly im-

posed the duty in the Securities Act.^^ For a court to impose a duty

of investigation on a buyer would frustrate the purpose of the

Securities Act "of substituting a policy of full disclosure for that of

caveat emptor."^^ The statutory reference to a buyer not knowing of

the untruth or omission was a clear expression of legislative intent
that the failure of a buyer to investigate would not bar a civil suit

for rescission under section 23-2-l-19(a).^®

The Kelsey court is undoubtedly correct in this conclusion, but
it may have overstated the proposition. As the Supreme Court of

^MIO N.E.2d at 1336.

^'IND. Code § 23-2-l-19(a) (1971) (currently codified at Ind. Code § 23-2-l-19(a)
(1976)).

^*410 N.E.2d at 1336. See also Bradley v. HuUander, 272 S.C. 6, 249 S.E.2d 486

(1978).

^^410 N.E.2d at 1336. The burden of proving a lack of knowledge of the untruth or
omission probably is on the plaintiff. See S & F Supply Co. v. Hunter, 527 P.2d 217
(Utah 1974). The requirement is the same for rescission actions brought under section
12(2) of the Securities Act of 1933, 15 U.S.C. § 77«2) (1976), which is the basis for civil

liability provisions like section 23-2-l-19(a). See generally R. Jennings & H. Marsh,
Securities Regulations 840 (4th ed. 1977). Knowledge of the untruth or omission is a
defense to actions brought under section 11 of the Securities Act, 15 U.S.C. § 77k(a)

(1976), but under section 11 the burden is on the defendant to prove knowledge. See
generally 11 H. Sowards, Business Organizations, The Federal Securities Act §
9.02 (3) (rev. 1980).

'"The duty Kelsey was attempting to impose on the Nagys should be distinguish-
ed from the specific defense provided in section 23-2-l-19(a)(2) relieving of liability a

defendant who "did not know, and in the exercise of reasonable care could not have
known, of the untruth or omission . . . ." Ind. Code § 23-2-l-19(a)(2) (1971) (currently
codified at Ind. Code § 23-2-l-19(a) (1976)). 5ec S & F Supply Co. v. Hunter, 527 P.2d
217 (Utah 1974).



1982] SURVEY-BUSINESS ASSOCIATIONS 37

Utah posited in S & F Supply Co. v. Hunter,^'' a similar securities
act could not:

Fairly be understood as meaning that a buyer can naively or
blindly purchase stocks without concern for the truth or rea-

sonableness of representations made, [and] then if it later

develops that it would serve his interests, assert a claim of

falsity of a representation about which he previously had no

concern, and upon which he had placed no reliance, as a basis

for avoiding his contract. This is fairly deducible from the

parenthetical clause in the statute quoted above (the buyer

not knowing of the untruth or omission).^®

To be sure, the Hunter court was talking about misrepresentations,
but the same observation would apply to omissions. A buyer should
be barred from rescinding a transaction where an omitted fact was
obvious to anyone other than a person who was deliberately seeking
to avoid learning the true state of affairs. To construe the act other-
wise would make a mockery of the judicial system.^^

It should be pointed out that the parenthetical emphasized by

the Kelsey court was deleted in 1975 and that under the current sec-
tion 23-2-l-19(a) liability runs to persons "who do not have, at the
time of the transaction, knowledge of the violation . . . ."*° In part
this change was necessitated by the extension of the provision to
cover purchasers as well as sellers of securities who violate the
Securities Act."^ There is, however, no indication that the General

Assembly intended to impose a duty to investigate which would
reduce liability at the same time it was extending the provision to
cover purchasers. Presumably there is still no affirmative duty on a
party to make inquiries and discover the actual circumstances of a
securities transaction subject to the caveat about "none so blind as

those that will not see."*^

»'527 P.2d 217 (Utah 1974).

"M at 221.
'*It is interesting to note in this respect that Kelsey was decided by the third

district court of appeals which also decided Dan Purvis Drugs, Inc. v. Aetna Life Ins.
Co., 412 N.E.2d 129 (Ind. Ct. App. 1980), discussed in text accompanying notes 2-25

supra, applying the in pari delictio defense in an antitrust action in part on the authority

of Theye v. Bates, 166 Ind. App. 652, 337 N.E.2d 837 (1975), where the defense was
allowed in an action brought under the Indiana Securities Act. See generally 1976

Survey, supra note 5 at 76-79.

"Ind. Code § 23-2-l-19(a) (1976).
"See generally Galanti, Business Associations, 1975 Survey of Recent

Developments in Indiana Law, 9 Ind. L. Rev. 33, 60 (1975).
*TIenry, Commentaries on The Book of the Prophet Jeremiah, in Familiar

Quotations 386 (J. Bartlett, 14th ed. 1968).



38 INDIANA LAWREVIEW [Vol. 15:31

The Kelsey court also rejected the defendant's argument that
the Nagys had waived their right to rescind the transaction/^ No
authority on wavier was cited. It is, however, settled that a party
who does not promptly repudiate a securities transaction within a
reasonable time after discovering facts entitling him to rescind may
be barred by laches in an equity action/^ Section 23-2-l-19(a) permits

rescission ''either at law or in equity" so the same basic diligence re-
quirement would apply to a defense of waiver. The putative plaintiff
must act in good faith. The Nagys satisfied this requirement
because they initiated the law suit as soon as they learned of the

facts entitling them to rescind the purchase.
Kelsey's contention that the Nagys had to show reliance on the

omitted fact was also rejected. Relying on Arnold v. Dirrim,^^ the
court held that "reliance" need not be shown in an action based on
the omission of a material fact.'*^ It is not settled if a plaintiff seek-

ing rescission under the Indiana Securities Act because of misrepre-

sentations must prove reliance but such proof is unnecessary in

suits brought under section 12(2) of the Securities Act of 1933,*^

which is the prototype for civil liability provisions similar to section

23-2-l-19(a).*® All a plaintiff must show is that the fact withheld or
omitted was material.*^

Kelsey also contended that the Nagys were required to show
that the omission affected the price of the stock and that they had

failed to tender the shares as required by section 23-2-l-19(a). The
first contention was correctly rejected by the court because the suit
was not for damages but for rescission as authorized by section
23-2-l-19(a), and the second contention was properly disallowed

because the record showed that the shares and dividends had been

"410 N.E.2d at 1335.

"Schultz V. Rector-Phillips-Morse, Inc., 261 Ark. 4, 552 S.W.2d 4 (1977).
*'398 N.E.2d 426 (Ind. Ct. App. 1979). See generally 1980 Survey, supra note 31,

at 91-101.

"410 N.E.2d at 1337. See Forrestal Village, Inc. v. Graham, 551 F.2d 411 (D.C.

Cir. 1977); S & F Supply Co. v. Hunter, 527 P.2d 217 (Utah 1974). See also Affiliated
Ute Citizens v. United States, 406 U.S. 128 (1972). See generally 3A H. Bloomenthal,
Securities and Federal Corporate Law § 8.23 (rev. 1980).

*^15 U.S.C. § 77/(2) (1976).

"Sanders v. John Nuveen & Co., 619 F.2d 1222 (7th Cir. 1980), cert, denied, 101
S.Ct. 1719 (1981). See also John Hopkins Univ. v. Hutton, 422 F.2d 1124 (4th Cir. 1970),

cert, denied, 416 U.S. 916 (1974). See generally 3A H. Bloomenthal, Securities and
Federal Corporate Law § 8.23 (rev. 1980); 11 H. Sowards. Business Organizations,
The Federal Securities Acts § 9.04[1] (rev. 1980); Peterson, Recent Developments in
Civil Liability Under Section 12(2) of the Securities Act of 1933, 5 Hous. L. Rev. 274

(1967).

^'Associated Lathing & Plaster Co. v. Louis C. Dunn, Inc., 135 Cal. App. 2d 40,
286 P.2d 825 (1955); E.E. Atkinson & Co. v. Neisner Bros., 193 Minn. 175, 258 N.W. 151
(1935); Fawkes v. Knapp, 138 Minn. 384, 165 N.W. 236 (1917).



1982] SURVEY-BUSINESS ASSOCIA TIONS 39

tendered prior to the entry of judgment as permitted under the Act.^®

The court also held that the award of attorneys fees was proper.
It construed the applicable language of section 23-l-2-19(a) pertaining

to attorneys fees as "mandating" an award of attorneys fees, costs
and interest when a plaintiff prevails.^^ The court cited Young v,
Taylor^^ for this proposition although it is not clear this is correct

because the Young court was merely upholding an award of attor-
neys fees.^^ Generally, courts treat the award as discretionary.^*

C. Indiana Business Takeover Act

The Indiana Business Takeover Offers Act^^ was an issue in two
cases decided during the survey period.^* In City Investing Co. v.

Simcox,^'' the Seventh Circuit affirmed the dismissal of a complaint

challenging the constitutionality of the Act under the supremacy^®

and commerce clauses^^ of the United States Constitution. The dis-
trict court purportedly abstained from deciding the case on the

merits because of a perceived question of state law which if resolved

could dispose of the controversy and moot the constitutional claims.
It then, somewhat inconsistently, went on to uphold the constitu-
tionality of the Act as an alternative holding.®*'

The Seventh Circuit in fact did not reach the merits of the com-
plaint and affirmed on the ground that abstention was warranted
under the circumstances of the case.*^ However, on the same day
Simcox was decided, the court also decided Mite Corp. v. Dixon^^
declaring the Illinois Business Takeover Act invalid on grounds simi-

^"iND. CODE § 23-2-l-19(c) (1976).
^'410 N.E.2d at 1337.
^=^466 F.2d 1329 (10th Cir. 1972).

^/d at 1337.

^*See Tremps v. Ascott Oils, Inc., 561 F.2d 41 (7th Cir. 1977); Cola v. Terzano, 129
N.J. Super. 47, 322 A.2d 195 (1974). Cf. Melton v. Unterreiner, 575 F.2d 204 (8th Cir.

1978) (award of attorney fees was improper because the plaintiff prevailed under a
federal statute rather than state statute which would have permitted attorney fees).

^^IND. Code §§ 23-2-3.1-1 to -11 (Supp. 1981).
^City Investing Co. v. Simcox, 633 F.2d 56 (7th Cir. 1980). In re City Investing

Co., 411 N.E.2d 420 (Ind. Ct. App. 1980).
"633 F.2d 56 (7th Cir. 1980) (affg 476 F. Supp. 112 (S.D. Ind. 1979)). See generally

1980 Survey, supra note 31, at 112-17.

^U.S. Const, art. VI, cl. 3.

^^Id. art. 1, § 8, cl. 3.

~476 F. Supp. at 116.

"633 F.2d at 57.
*''633 F.2d 486 (7th Cir. 1980), proh. juris, noted sub nom. Edgar v. Mite Corp.,

101 S. Ct. 2043 (1981). See generally 1980 Survey, supra note 31, at 112-17; Galanti,
Corporations, 1979 Survey of Recent Developments in Indiana Law, 13 Ind. L. Rev.
133, 161-72 (1980) [hereinafter cited as 1979 Survey].



40 INDIANA LAWREVIEW [Vol. 15:31

lar to those raised by the plaintiffs. Mite is presently before the

United States Supreme Court.

The dispute in Simcox involved the acquisition of shares of
Stokely-VanCamp, Inc. (Stokely) by GDV, Inc., a subsidiary of City
Investing Company (City). After GDV had acquired more than five
percent of Stokely's shares, it filed a Schedule 13D as required by
the Securities Exchange Act of 1934.*^ Stokely representatives then
contacted the Indiana Securities Commissioner who subsequently
issued a cease and desist order prohibiting City and GDV from pur-
chasing any additional Stokely shares.^* On the same day, the Com-
missioner brought suit in the Marion County Superior Court seeking

to preliminarily and permanently enjoin City and GDV from acquir-
ing any additional Stokely shares. City and GDV filed suit in the
federal court seeking declaratory and injunctive relief. The plaintiffs
alleged that the Business Takeover Offers Act was preempted by
the Securities and Exchange Act of 1934 as amended by the
Williams Act, that it imposed an unjustifiable burden on interstate

commerce in violation of the commerce clause, and that the Commis-
sioner was a prejudiced decision maker whose proceedings violated
their due process rights.®^

City and GDV then answered and filed a counterclaim in the
state court proceeding raising the same issues asserted in their
federal action. The district court subsequently entered final judg-
ment in Simcox denying the plaintiffs any relief on the basis of
abstention and, alternatively, on the basis that the claims were
without merit.®*

The abstention observed in Simcox was the so-called Pullman
abstention orginally articulated by Justice Frankfurter in Railroad

Commission v. Pullman,^'' Under the Pullman doctrine, federal courts
will refrain from prematurely deciding constitutional issues pending

determination in state court of state law issues central to the con-

stitutional dispute.*®

«n5 U.S.C. § 78m(d) (1976).

**The order was issued without a hearing although the Act then required a hear-
ing before orders could be issued. 633 F.2d at 58. See Ind. Code § 23-2-3.1-9(c) (Supp.
1980).

^^633 F.2d at 59. City and GDV originally sought damages but that claim was
struck by the district court and they did not appeal. Id. n.7. The Takeover Offers Act
has been amended to grant immunity to the Secretary of State, the Securities Commis-
sioner and his staff. Ind. Code § 23-2-3.1-9(c) (Supp. 1981). See notes 258-59 infra and ac-
companying text.

"633 F.2d at 59.
«'312 U.S. 496 (1941).

'^See Moore v. Sims, 442 U.S. 415 (1979). There are two other species of absten-
tion in addition to the Pullman abstention: (1) the Burford abstention where federal
courts relegate federal issues to state courts because those issues touch matters of



1982] SURVEY-BUSINESS ASSOCIATIONS 41

As the Supreme Court observed in Colorado River Water Con-
servation District v. United States,^^ federal court abstention from

exercising federal jurisdiction is the exception, and the abdication

of the obligation to decide cases is justified only where requiring the
parties to repair to a state court would serve an important counter-

vailing interest.^" Notwithstanding the Colorado River caveat,

abstention is appropriate where federal constitutional issues might
be mooted or presented in a different posture depending on the
determination of state law by a state court.

The Simcox court considered the case to fall within "the
paradigm of special circumstances" that makes Pullman abstention
appropriate. It concluded that Indiana courts were likely to find that
City and GDV were not making a takeover offer as defined in the
Act because GDV had made only unsolicited purchases of shares
through a broker-dealer in the ordinary course of its business.^^ The
Seventh Circuit was not persuaded that the circulation given to
GDV's Schedule 13D which indicated a possible interest in acquiring
fifteen to twenty percent of Stokely's shares was a tender offer in
disguise as the Securities Commissioner had decided. The court
observed that the Commissioner's "construction of the Act has all
the earmarks of a 'hometown call.' Indeed, were his interpretation to
be sustained by the Indiana courts, the conflict with the Williams
Act might well prove irreconcilable."^^ Of course any determination
by Indiana courts that the Takeover Act did not apply to GDV's
activities would moot the constitutional claims.

The Seventh Circuit rejected the plaintiffs' argument that the
Pullman abstention was inappropriate because there could not be a
speedy and authoritative state adjudication to protect their federal
rights. The existence of the two pending state proceedings that
could moot the constitutional claims belied that contention.^^ Their
argument that abstention would require them to pursue their

traditional state concern, see Burford v. Sun Oil Co., 319 U.S. 315 (1943); Bickham v.
Lashof, 620 F.2d 1238 (7th Cir. 1980); and (2) the Younger abstention where federal
courts abstain from interferring with state criminal or akin prosecutions out of respect
for state functions. See Younger v. Harris, 401 U.S. 37 (1971); Bickham v. Lashof, 620
F.2d 1238. See generally lA, Pt. 2 Moores Federal Practice f 0.203 (Supp.
1980-1981). C. Wright, A. Miller & E. Cooper, Federal Practice and Procedure §§
4241-4246 (1978).

•"424 U.S. 800 (1976).

'"Id. at 813. See also Babbitt v. United Farm Workers, 442 U.S. 289 (1979); County
of Allegheny v. Frank Mashuda Co., 360 U.S. 185 (1959); Cohens v. Virginia, 19 U.S. (6
Wheat.) 264 (1821).

"633 F.2d at 61 nn.ll & 12.
"/d at 61-62.

'^Id. at 62. Furthermore, the cases City and GDV relied on involved civil rights
which are "arguably more fundamental than the right to buy or sell stock." Id.



42 INDIANA LAWREVIEW [Vol. 15:31

remedy to the Indiana Supreme Court was also rejected. As the
Simcox court pointed out, if the Indiana Court of Appeals held that

the Act did not apply to City and GDV, it could dissolve the cease
and desist order and permit them to re-enter the market for Stokely
shares even without a definitive statement from the Indiana

Supreme Court.
In effect, City and GDV were arguing that abstention would be

inequitable because the state proceedings would be "inadequate."^*

It appears that they may have been hurt by their strategy of not
seeking an injunction in the federal proceeding against the hearing

scheduled by the Securities Commissioner.^^ City and GDV had been
precluded from purchasing Stokely shares, but this was not suffi-
ciently serious to warrant action contravening that abstention doc-

trine.

The second argument that City and GDV advanced for rejecting
the abstention doctrine was that the Securities Commissioner, who
would decide initially if the Act applied, was a "biased and prejudiced
decision maker" and that his presiding over the administrative pro-
ceedings would violate their due process rights.^^ They argued that
no interpretation of the Takeover Offers Act by an Indiana court
would resolve the due process claims so the federal courts should
rule. This might well have been the case, but, as Simcox noted, a
decision by an Indiana court would not necessarily "resolve" any of
the three challenges but simply make their resolution unnecessary.''^
Furthermore, the district court had found that the Commissioner

"held no bias or prejudice against plaintiffs at any time" and "did
not prejudge the issues heard by him."^® The Seventh Circuit did not
determine if this finding was clearly erroneous because City's and
GDV's due process arguments reduced to their essence were simply
a disagreement on whether the state law applied.^^

Thus, the Simcox court concluded that abstention on Pullman
grounds was not an abuse of discretion. There was, however, some
reluctance because abstention could cause inordinate delay or ad-

ministrative arbitrariness that might impair City's and GDV's
rights.*" Consequently, the court retained jurisdiction of the appeal

to consider the merits of the constitutional challenges to the

'*Id. at 63.

''^Id. City and GDV only sought injunctive relief against the proceedings in the In-
diana action. Id.

''Id.

"M at 63-64.
''Id.

'Ud.

''Id.



1982] SURVEY-BUSINESS ASSOCIATIONS 43

Takeover Offers Act so, if necessary, City and GDV could return for
resolution of those issues after the state law issues had been decided.

The wisdom of the Simcox decision was borne out by the deci-
sion of the Indiana Court of Appeals in In re City Investing Co.^^

reversing the Securities Commissioner's cease and desist order

against City and GDV. As anticipated by the Seventh Circuit, the
court concluded that GDV's purchase of Stokely shares was not a
takeover offer within the meaning of the Act because the filing of

GDV's Schedule 13D was not related to a rapid accumulation of
Stokely shares and the language of the Schedule 13D discouraged
shareholders from supposing that GDV was willing to pay a
premium over market price for the shares.®^ The court of appeals
also 'Concluded that the Securities Commissioner's finding that

statements in GDV's Schedule 13D were false and in violation of sec-
tion 23-2-1-12(2) of the Indiana Securities Act*^ was not supported by
substantial evidence.®^ The court of appeals rejected the state's con-
tention that the Takeover Offers Act was intended to regulate all
shifts in corporate control through stock purchases, and not just

tender offers, as being "overbroad and contrary to the plain

language of the Act."*^ A "takeover offer" is not limited to conven-
tional tender offers. However, the term has an established legal
significance. The court presumed that the legislature intended the
term to be given its customary legal meaning in the Act absent any
indication to the contrary."" The definition of takeover offers in the
Act contains language similar to that found in section 14(d) of the

Securities Exchange Act of 1934 as amended by the Williams Act.*^
Consequently, the City Investing court concluded that takeover offers

regulated by the Indiana Act are those offers to acquire the equity
securities of "a company pursuant to that which is regulated by the
Williams Act . . . ."««

One commentator has stated that "a tender offer has been con-
ventionally understood to be a publicly made invitation addressed to
all shareholders of a corporation to tender their shares for sale at a

"411 N.E.2d 420 (Ind. Ct. App. 1980).

*7d at 431.

»»lND. Code § 23-2-1-12(2) (1976).
"411 N.E.2d at 433-34.

"/d. at 426. Section 23-2-3-l(i) of the Act defines a "takeover offer," with some ex-
ceptions, to mean: An offer to acquire or an acquisition of any equity security of a
target company which would result in the offeror owning more than ten percent of the
target company.

"411 N.E.2d at 427. See Jensen v. Pritchard, 12 Ind. App. 439, 90 N.E.2d 518
(1950).

"15 U.S.C. § 78n(d)(l) (1976).
••411 N.E.2d at 427.



44 INDIANA LAWREVIEW [Vol. 15:31

specific price."®^ Congress did not define a tender offer in the

Williams Act so the meaning of the term has developed on a case by
case basis. The Securities and Exchange Commission, however, has
suggested eight factors for determining if an acquisition is a tender

offer under the Williams Act.^° These factors "set a tender offer

apart from open market purchases, privately negotiated transactions
or other kinds of public solicitations."^^

One proposed definition of a tender offer is whether an "offer to
purchase securities [is] likely to pressure shareholders into making
uninformed, ill-considered decisions to sell."^^ The City Investing
court, along with some other courts,^^ has found this definition
generally persuasive. Other courts, however, have rejected it as be-

ing too broad,*^ and even the City Investing court recognized that

an overly broad definition of tender offer that would encompass
open market purchases would make the Williams Act unworkable.*^
This would reflect the statutory requirements that shareholders

tendering shares be able to withdraw them and that shares be pur-
chased at an equal price and pro rata under certain circumstances.®®

Consequently, if open market purchases or privately negotiated pur-

chases of shares were treated as "tender offers," only conventional
tender offers would be lawful under the Williams Act. Nothing in

*'Note, The Developing Meaning of "Tender Offer" Under the Securities Ex-
change Act of 1934, 86 Harv. L. Rev. 1250, 1251 (1973) [hereinafter cited as Developing

Meaning].

^See Brascan Ltd. v. Edper Equities Ltd., 477 F. Supp. 773, 791 n.l3 (S.D.N.Y.

1979). These factors are: (1) whether there has been " 'active and widespread solicita-

tion of public shareholders;' " (2) whether the "solicitation is 'for a substantial percent-

age of the issuer's stock;' " (3) whether the "offer to purchase is 'at a premium;' " (4)

whether the "terms of the offer are 'firm rather than negotiable;' " (5) whether the "of-

fer is 'contingent on the tender of a fixed minimum number of shares;' " (6) whether
the "offer is 'open for only a limited period of time;' " (7) whether the shareholders are
" 'subjected to pressure to sell their stock;' " and (8) whether " 'public announcements

of a purchasing program . . . precede or accompany a rapid accumulation.' " The SEC
has proposed an amendment to rule 14d-l(b)(l) that would define an offer for purposes of
the Williams Act. [1980] 3 Fed. Sec. L. Rep. (CCH) f 24,281A.

'^Wellman v. Dickinson, 475 F. Supp. 783, 824 (S.D.N.Y. 1979).

^Developing Meaning, supra note 89, at 1281.
»»411 N.E.2d at 429-30. See also Panter v. Marshall Field & Co., [1979-1980

Transfer Binder] Fed. Sec. L. Rep. (CCH) 5 97,299 at 97,056 (N.D. 111. 1980); Nachman
Corp. V. Halfred, Inc., [1973-1974 Transfer Binder] Fed. Sec. L. Rep. (CCH) 1 94,455 at

95,590 (N.D. 111. 1973).

"See 477 F. Supp. at 790; D-Z Investment Co. v. Holloway, [1974-1975 Transfer

Binder] Fed. Sec. L. Rep. (CCH) 5 94,771 at 96,563 (S.D.N.Y. 1974).

^mi N.E.2d at 429. See generally Einhorn & Blackburn, The Developing Concept
of "Tender Offer": An Analysis of the Judicial and Administrative Interpretations of
the Term, 23 N.Y.L. SCH. L. Rev. 379 (1978).

^15 U.S.C. §§ 78n(d)(5)-78n(d)(7) (1976). See Kennecott Copper Corp. v. Curtiss-

Wright Corp., 584 F.2d 1195, 1207 (2d Cir. 1978).



1982] SURVEY-BUSINESS ASSOCIATIONS 45

the legislative history or text of the Act suggests this was the con-
gressional intent.^^

There is still considerable doubt that open market purchases
with an impact on shareholders similar to that of conventional ten-

der offers should be covered by section 14(d). There is authority for
applying the Williams Act to nontraditional acquisitions which im-

pose pressures on shareholders like those of conventional tender of-

fers,^* but assuming that regulation of such acquisitions is desirable,

it may be better accomplished by specific legislation rather than by
a questionable interpretation of "tender offer."^^

The City Investing court concluded that regardless of how open
market purchases should be treated, GDV's acquisition did not war-
rant condemnation. GDV's Schedule 13D did not generate sound and
fury in the market. The statement that they would purchase shares
from time to time depending on market conditions would discourage
shareholders from supposing City or GDV would pay a premium
over the market price to acquire shares immediately. Thus Stokely
shareholders were not pressured to sell quickly or lose the oppor-
tunity, which could induce hasty, ill-considered decisions.^""

The only one of the eight factors^'^^ listed by the SEC for identi-
fying a tender offer clearly present was GDV's expressed interest in
a substantial percentage of outstanding Stokely shares. This state-

ment, the Commissioner's finding to the contrary notwithstanding,

was not a solicitation because no premium was offered for the
shares.^"^ The court would not consider the natural rise in the
market price caused by the presence of an eager buyer to be a pre-
mium because the language of the Schedule 13D directly negatived
such an inference.

The City Investing court in effect characterized the SEC's
tender offer factors as conditions that impose undue pressures on
shareholders to make hasty and possibly ill-advised decisions. When

•'411 N.E.2d at 429 quoting from Brascan Ltd. v. Edper Equities Ltd., 477 F.

Supp. 773, 790 (S.D.N.Y. 1979).

'*See S-G Securities. Inc. v. Fuqua Inv. Co., 466 F. Supp. 1114 (D. Mass. 1978).
"411 N.E.2d at 430. See generally Einhorn & Blackburn, The Developing Concept

of "Tender Offer": An Analysis of the Judicial and Administrative Interpretations of
the Term, 23 N.Y.L. ScH. L. Rev. 379 (1978). The SEC has taken an intermediate posi-
tion—some open market purchases would and. others would not be covered by the

Williams Act. See proposed SEC Rule 14d-l(b)(l). [1980] 3 Fed. Sec. L. Rep. (CCH) 1
24,281A.

''"'411 N.E.2d at 431-33. Compare S-G Securities, Inc. v. Fuqua Inv. Co., 466 F.

Supp. 1114 (D. Mass. 1978) and Strode v. Esmark, Inc., [1980 Transfer Binder] Fed.

Sec. L. Rep. (CCH) 5 97,538 (Franklin Cir. Ct. Ky. 1980) with Chromalloy American

Corp. V. Sun Chem. Corp., 474 F. Supp. 1341 (E.D. Mo. 1979).
^"See note 90 supra.

"Mil N.E.2d at 432.



46 INDIANA LA WREVIEW [Vol. 15:31

those conditions exist, treating the acquisition as a tender offer sub-

ject to the requirements of section 14(d) of the Securities Exchange

Act is not improper.^"^ In the absence of such pressure, the protec-

tion afforded shareholders by section 13(d)^°^ and the information

contained in the Schedule 13D is sufficient.^°^

The Indiana Securities Commissioner found that City and GDV
had violated section 23-2-1-12(2) of the Indiana Securities Act/°^ The
court concluded that this finding was contrary to law and unsup-
ported by the evidence.^"' It was bound to accept the facts as found
by the Commissioner if supported by the evidence,^"® but the

evidence simply did not support the conclusions that City and GDV
had made false statements in the Schedule 13D.^°^ The Commissioner
was in effect drawing self-contradictory inferences from inconsistent
findings of fact and attempting to use these inferences to support

his conclusions of law.^^° These improper findings and conclusions,

with a cease and desist order which in part was meaningless and
unenforceable, ^^^ required the court to set aside the order."^

The result in City Investing is clearly correct as a matter of law.
Although lay persons may decry Indiana's supposed inability "to in-
fluence the buy-outs of Hoosier corporations by out-of-state

firms — and the state's ability to protect shareholders in those buy-

^nS U.S.C. § 78n(d) (1976).
''*Id. § 78m(d).

^"'411 N.E.2d at 433. See Rondeau v. Mosiner Paper Corp., 422 U.S. 49 (1975);
Chromalloy American Corp. v. Sun Chem. Corp., 474 F. Supp. 1341 (E.D. Mo. 1979);

Jewelcor, Inc. v. Pearlman, 397 F. Supp. 221 (S.D.N.Y. 1975).

'"Mil N.E.2d at 434.

''Ud.

'''See Mishawaka v. Stewart, 261 Ind. 670, 310 N.E.2d 65 (1974).
^*"For example, the Commissioner found that GDV's statement that it had no cur-

rent intent to seek control of Stokely was false although GDV could not acquire
anywhere near the number of shares owned by incumbent management. 411 N.E.2d at
434.

""Perhaps this is the genesis of the remark in City Investing Co. v. Simcox, 633

F.2d 56 (7th Cir. 1980) that the Commissioner's decision had the "earmarks of a

'hometown call.' " Id. at 61.
"^411 N.E.2d at 434 n.9.

'''Id. at 434. See generally In re McDonald, 241 Ind. 239, 171 N.E.2d 691 (1961);

Hatcher v. Smith, 152 Ind. App. 299, 283 N.E.2d 582 (1972). A reviewing court cannot
surmise an agency found facts necessary to support its order, Wabash Valley Coach
Co. V. Arrow Coach Lines, Inc., 228 Ind. 609, 94 N.E.2d 753 (1950), nor can it direct an
agency to amend or change its findings because a court has no power to decide mat-
ters on the merits which are the legislatively decreed province of an agency. Public

Serv. Comm'n v. Chicago, I. & L. Ry., 235 Ind. 394, 134 N.E.2d 53 (1956); Braschler v.
Review Bd., 120 Ind. App. 294, 90 N.E.2d 362 (1950), or draw inferences counter to
those drawn by the agency, Indiana Bd. of Pharmacy v. Horner, 241 Ind. 326, 172
N.E.2d 62 (1961). All it can do is reverse.



1982] SURVEY-BUSINESS ASSOCIATIONS 47

outs""^ or "to halt creeping tender offers,""^ the question is simply

whether the Business Takeover Offers Act applies to the trans-

action. If it does not, the answer is different legislation — assuming,
of course, that states have the constitutional power to legislate in

this area.

D. Definition of Security

An unsuccessful condominium development in Connecticut was
the genesis of a dispute involving Indiana law in American Fletcher
Mortgage Co. v. U.S. Steel Credit Corp.^^^ In American Fletcher,
the Seventh Circuit Court of Appeals affirmed a decision of the

United States District Court for the Southern District of Indiana

denying defendant U.S. Steel Credit Corporation's (Steel) motions

for partial summary judgment on the plaintiffs' complaint, summary
judgment on its counterclaim, and an order dismissing its securities

fraud count.

The original action was brought by American Fletcher Mortgage
Company (Mortgage) and American Fletcher National Bank & Trust
Company (AFNB) to recover monies disbursed for Steel under a loan
participation agreement entered into in connection with the con-

dominium development. Mortgage had made two loans to the con-
dominium developer. It also signed a loan participation agreement
with Steel, AFNB, and American Fletcher Mortgage Investor Trust
(Trust) for the loan funds."^ Subsequently, Mortgage proposed an in-
crease in the loans to provide additional funds for the development.

Because only AFNB and Trust agreed, the proposal could not be im-
plemented, and the developer eventually defaulted on its obliga-

tions. Ultimately, Mortgage, the three loan participants, and the

developer entered into a settlement agreement. Steel apparently

refused to cooperate unless the other parties waived all claims

against it."^

The plaintiffs refused to waive their rights. Instead, they filed
suit seeking actual and punitive damages for Steel's alleged breach
of its express and implied contractual obligations, interference with

contractual relations, and breach of duty to its co-participants."®

"'Indianapolis Star, Nov. 18, 1980, at 28, col. 1.

"Vd at col. 3. Interestingly, the "concerns" expressed by the author of this ar-
ticle, the Business Editor of the Indianapolis Star, are just the "concerns" that would
justify declaring the Business Takeover Offers Act unconstitutional.

"^635 F.2d 1247 (7th Cir. 1980), cert, denied, 101 S. Ct. 1982 (1981).

"Yd at 1248-49. Steel was to furnish 40% of the funds, AFNB 10%, and Trust
50%. The participants were to receive principal and interest payments proportional to
their loan shares.

"7d at 1249.
"«M at 1249-50.



48 INDIANA LAWREVIEW [Vol. 15:31

Steel counterclaimed against the plaintiffs and filed a complaint

against American Fletcher Corporation, the plaintiffs' parent
coproration, alleging that the loan participation offerings were
securities"^ sold in violation of the Securities Act of 1933,^^° the

Securities Exchange Act of 1934,^^^ and the Indiana Securities Act.^^^
Steel's summary judgment motions were denied, the plaintiffs' mo-
tions to dismiss or for judgment on the pleadings on the security
fraud counts were granted, and Steel's cross-motion for summary
judgment declaring the loan participation a security was denied by
the district court/^^

Steel had argued in its motion for summary judgment that
neither AFNB nor Trust were third party beneficiaries of Steel's
agreement with Mortgage. The American Fletcher court upheld the
district court's conclusion that summary judgment was inappro-
priate because there was a genuine issue of fact whether the partici-
pation agreements were intended to benefit AFNB and Trust/^* The
court rejected the contention that under Indiana law an intent to

benefit AFNB and Trust had to appear affirmatively from the lan-
guage of the document. Steel was contractually obligated to reim-
burse Mortgage for costs and expenses incurred in protecting and
preserving the security, to minimize losses in the project and im-

pliedly obligated to act fairly and in good faith. Because these fac-

tors would produce a direct benefit to AFNB and Trust, the require-
ments of Indiana law appeared to have been satisfied.^^^ Even if the
contract was not clearly intended to benefit AFNB and Trust, it was
sufficiently ambiguous for interpretation of the contractual language
to be appropriate for trial.^^^

The Seventh Circuit also held that Indiana courts would not re-
quire an actual breach of the agreement among Mortgage, AFNB,
and Trust to make Steel liable for damages to Mortgage resulting
from Steel's dilatoriness. It concluded that Indiana would recognize

the somewhat loosely defined tort of interference with contractual

"Yd at 1250.
'^"15 U.S.C. § 77q (1976).

'''Id. § 78j(b).

'^'IND. Code §§ 23-2-1-12, -19(a) (1976).
^^^635 F.2d at 1250-51. Counts in the complaint and counterclaim were dismissed

by stipulation and counts in the counterclaim alleging common law fraud and breach of
contract were not in issue. Id. at 1250 nn.2 & 3.

^"635 F.2d at 1251.

'^^Id. See Jackman Cigar Mfg. Co. v. John Berger & Son Co., 114 Ind. App. 437, 52
N.E.2d 363 (1944). See generally 4 A. CoRBiN, Corbin on Contracts §§ 772-773, 776-776

(1951); 2 S. WiLLiSTON, A Treatise on the Law of Contracts §§ 347, 356, 356A (1959).
'"''635 F.2d at 1251. Furthermore, even if AFNB and Trust were not intended

beneficiaries, Mortgage still could sue for Steel's alleged breach of its duty of good

faith. Id.



1982] SURVEY-BUSINESS ASSOCIA TIONS 49

or business relations^^^ and would not limit an actionable wrong to
cases in which a breach of contract actually occurred. Decisions such

as Kiyose v. Trustees of Indiana University^^^ and Martin v. Platt^^^

were of no help to Steel in standing for the proposition that only a
third party and not a party to the contract may be liable for tortious
interference. This particular aspect of the dispute was not over the
contract between Mortgage and Steel, but the contract between

Mortgage and AFNB and Trust to which Steel was a third party.
Steel's argument that it was entitled to summary judgment for

breach of duty to AFNB and Trust floundered because it could not
be taken as a matter of law that they were not third party benefi-

ciaries of the agreement between Mortgage and Steel. ^^° Further-

more, when Mortgage acquired title to the project, the loan partici-
pants became real estate developers, and Steel's actions delaying
Mortgage's ability to implement its proposals for the project con-

stituted a breach of the duty of a party engaged in a common enter-
prise to act in good faith toward co-venturers.^^^

The most important issue in American Fletcher was whether
the loan participation was a security within the meaning of section
2(1) of the Securities Act of 1933,^'" section 3(a)(10) of the Securities

Exchange Act of 1934,^^^ and section 23-2-l-l(k) of the Indiana Securi-
ties Act.^^* Steel's entire securities fraud case depended upon the

status of the participation. It was undisputed that the meaning of
"security" is the same under all three statutes. ^^^ The resolution of
this issue depended on the effect of the qualifying phrase "unless

the context otherwise requires" on the definition of security which

'^'See Spier v. Home Ins. Co., 404 F.2d 896 (7th Cir. 1968); Martin v. Piatt, 386
N.E.2d 1026 (Ind. Ct. App. 1979); Gibson v. Miami Valley Milk Producers, Inc., 157 Ind.

App. 218, 299 N.E.2d 631 (1973). See generally Restatement (Second) of Torts § 766A

(1979); W. Prosser, Handbook of the Law of Torts § 129 (4th ed. 1971).
^=^^166 Ind. App. 35, 333 N.E.2d 886 (1975).
^^386 N.E.2d 1026 (Ind. Ct. App. 1979).
^^"635 F.2d at 1252-53.

'^'See Grover v. Marott, 192 Ind. 552, 559, 136 N.E. 81, 83 (1922). See generally J.

Crane & A. Bromberg, Law of Partnership §§ 35, 69 (1968); H. Reuschlein & W.
Gregory, Agency and Partnership § 266 (1979).

"^5 U.S.C. § 77b(l) (1976).
»^M § 78c(a)(10).
''*Ind. Code § 23-2-l-l(k) (1976).
"®635 F.2d at 1253. However, some courts have given a broader meaning to

"security" under state securities statutes than under the federal statutes. See, e.g.,

Silver Hills Country Club v. Sobieski, 55 Cal. 2d 811, 361 P.2d 906, 13 Cal. Rptr. 186

(1961); State ex rel. Healy v. Consumer Business Systems, Inc., 5 Or. App. 19, 482 P.2d
549 (1971). Cf. Wieboldt v. Metz, 355 F. Supp. 255 (S.D.N.Y. 1973) (holding that the sale

of franchises was not covered by the Securities Act of 1933).



50 INDIANA LAWREVIEW [Vol. 15:31

included "any note ... or participation in any profit-sharing agree-

ment."^^«

The court applied the SEC v. W.J. Howey Co.^^'^ test of a security
as refined in United Housing Foundation v. Forman^^^ and concluded

that the loan participation was not a security. Under Forman four
elements must be satisfied before a security exists: (1) an invest-
ment; (2) in a common venture; (3) premised upon a reasonable ex-
pectation of profit; (4) to be derived from the entrepreneurial or

managerial efforts of others. ^^^ Here only the second element, a com-
mon venture, was present. Utilizing the increasingly conventional
wisdom that the term "security" should be construed narrowly, the
American Fletcher court considered the participation as merely a
collateralized commercial loan. Although the loan was risky, it was
no more than "the ordinary commercial risk taken by any secured
lender"^*" and not an investment risk. Even Steel must have had
some doubts as to how persuasive its argument was going to be
because it drafted the participation agreements on typical lenders'

forms. Its own loan officer who prepared the proposal recommended
that the loans be made contingent on a first mortgage on the prop-
erty and improvements. Apparently Steel considered the develop-

ment to be a plain and simple real estate development until it was
sued.

The fact that the loan paid interest did not make it a security
because Steel did not participate in any profits from the project.

Neither the repayment of the loan nor the rate of return was de-
pendent on any profits.^" Rather, the interest was fixed at a rate

*'*635 F.2d at 1253. Steel conceded the notes from the developer to Mortgage

were not securities, and Mortgage and AFNB conceded that a loan participation could
be a security even though the underlying note is not. See C.N.S. Enterprises, Inc. v.

G & G Enterprises, Inc., 508 F.2d 1354 (7th Cir.), cert denied, 423 U.S. 825 (1975).
^^^328 U.S. 293 (1946).
^^«421 U.S. 837 (1975).

^^'635 F.2d at 1253. See International Bd. of Teamsters v. Daniel, 439 U.S. 551

(1979); Kirk v. Agri-Research Council, Inc., 561 F.2d 96 (7th Cir. 1977). See generally 3

H. Bloomenthal, Securities and Federal Corporate Law §§ 2.02 & 2.19 to -.19B
(rev. 1980); 4B Z. Cavitch, Business Organizations § 93.01[l][b] (rev. 1981); 11 H.

SowARD, Business Organizations, The Federal Securities Act § 2.01 (rev. 1980).
•%35 F.2d at 1254 (quoting Lincoln Nat'l Bank v. Herber, 604 F.2d 1038 (7th Cir.

1979)). Furthermore, Steel could not contend it was relying solely on Mortgage's en-

treprenurial efforts in the venture, another hallmark of a security, because the in-

terest came from the loan not Mortgage's efforts and Steel retained the rights of a
creditor such as the right to foreclose. 635 F.2d at 1254.

"*See Canadian Imperial Bank of Commerce Trust Co. v. Fingland, 615 F.2d 465
(7th Cir. 1980); C.N.S. Enterprises, Inc. v. G & G Enterprises, Inc., 508 F.2d 1354 (7th
Cir.), cert denied, 423 U.S. 825 (1975).



1982] SURVEY-BUSINESS ASSOCIATIONS 51

above the prime rate which was a further indication of a commercial
real estate loan transaction.

^^^

The Seventh Circuit reemphasized its recent Lincoln Nebraska
Bank v. Herber^*^ decision that Congress did not intend to regulate
commercial loan transactions which would not have an impact on the

securities market even if the literal wording of the definition of

security might include a particular arrangement. The key is the
qualifying phrase "unless the context requires otherwise" and the

context here is that commercial loans were probably not intended to

be encompassed by the securities laws. The American Fletcher
court refused to follow decisions of the Second Circuit Court of

Appeals^*^ finding similar arrangements to be securities under the

literal language of the statutes. In doing this the American Fletcher
court seems correct. If the Supreme Court did anything in Forman,
it rejected the literal language approach to the definition of security.

To think that the current Supreme Court would consider an
arrangement clearly smacking of a commercial real estate venture a

security simply because of the literal language of the securities laws

is to engage in wishful thinking.

E. Rights and Liability of a Promoter

The problems faced by a promoter of a corporation or one who
renders services to promoters were brought out in Kincaid v.
Lazar^^^ reversing a judgment of the Hendricks County Circuit

Court in Lazar's quantum meruit suit for professional accounting
services rendered in forming a corporation. The trial court's findings
were in Lazar's favor, but the court of appeals concluded that the
findings were clearly erroneous.

Lazar was engaged by Kincaid to form a corporation in which
they and three others would be the principals. Kincaid and Lazar

agreed that the latter would receive twenty percent of the cor-

porate shares as compensation. There was no agreement that he
would receive compensation for his sevices other than the shares.

The parties did a rather poor job in reaching an understanding as to
their rights and obligations. Subsequently, at a subscribers' meeting

after the certificate of incorporation was issued, Lazar did not ac-
cept or demand his shares because he was concerned with possible

^«635 F.2d at 1254.

"'604 F.2d 1038 (7th Cir. 1979). See also National Bank of Commerce v. All
American Assurance Co., 583 F.2d 1295 (5th Cir. 1978); Emisco Indus. Inc. v. Pro's Inc.,

543 F.2d 38 (7th Cir. 1976).

'**See authorities cited 635 F.2d at 1254 n.8.

"^405 N.E.2d 615 (Ind. Ct. App. 1980).



52 INDIANA LAWREVIEW [Vol. 15:31

liability stemming from the corporation's thin debt-equity ratio. He
then resigned as a shareholder, director, and officer/^^

The incorporators continued discussions and eventually reached
an "Agreement for the Release and Resignation of Alexander
Lazar" under which the remaining subscribers and shareholders

agreed to hold Lazar harmless from any liability he may have incurred
and he in turn relinquished his interest in the corporation and

resigned as an officer and director.
^''^

Lazar's quantum meruit action sought quasi-contractual relief
for benefits rendered the defendants at their request under cir-

cumstances where equity demands compensation to prevent unjust
enrichment.^^* The existence of an express contract for services
would preclude implication of a contract,^*^ and the rights of the par-

ties would be controlled by the express contract. The Kincaid court
concluded that two express contracts barred Lazar's action.^^° The
first was the "understanding" that he would receive twenty percent
of the shares for his accounting and consulting services in forming

the corporation. He had signed a subscription agreement for these
shares. The court upheld the validity of this agreement but, unfor-
tunately, it did not consider the effect of section 23-l-2-6(e) of the

Indiana General Corporation Act which provides that "consideration

for the issuance of shares of any corporation may be paid, in whole
or in part, in money, in other property, tangible or intangible, or in

labor actually performed for, or services actually rendered to the

corporationy^^^ Even if a corporation accepts liability for profes-
sional services involved in its formation, it is not clear that such

services meet the statutory consideration requirement.
The corporation did not yet exist so it cannot be said the ser-

vices were rendered "to" it. This problem is not unique to Indiana. ^^^

Judicial legerdemain might validate such agreements by considering

the shares to be issued for "property" and not "promotional ser-

vices" or by construing the agreement as contemplating that the
shares would be issued after the corporation was organized for ser-

"«M at 617.
'*'Id. at 619.

''^Id. (citing Kody EngV Co. v. Fox & Fox Ins. Agency, Inc., 158 Ind. App. 498,
303 N.E.2d 307 (1973)).

'"Deck V. Jim Harris Chevrolet-Buick, 386 N.E.2d 714 (Ind. Ct. App. 1979); Myers
V. Maris, 164 Ind. App. 34, 326 N.E.2d 577 (1975); Engelbrecht v. Property Developers,

Inc., 156 Ind. App. 354, 296 N.E.2d 798 (1973).
'^"405 N.E.2d at 619.

'"Ind. Code § 23-l-2-6(e) (1976) (emphasis added).
^^^See H. Henn, Handbook of the Law of Corporations § 113 at 188 (2d ed. 1970)

[hereinafter cited as Henn].



1982] SURVEY-BUSINESS ASSOCIATIONS 53

vices rendered previously /^^ Permitting shares for promotional ser-

vices can be an invitation for fraud because it is possible to form a

corporation and issue all of its shares for promotional services which

results in an entity with no assets other than its simple corporate

existence. ^^'^ This area is one rife with problems and it is only for-

tunate that few cases arise questioning the issuance of shares for

promotional services.

The release agreement signed by Lazar also barred his action.^^^

He argued that it did not prevent him from recovering the reason-
able value of his services because it was not supported by considera-
tion, the twenty percent interest in the corporation was inadequate

consideration for his services, the agreement did not expressly men-

tion release or satisfaction of a claim for services, and he did not in-

tend to relinquish any claim in the agreement. The court correctly
rejected these arguments.^^® The court was satisfied that Lazar did
intend to relinquish his rights in an all-encompassing agreement and

would not inquire into the admittedly indeterminate value of the

consideration because that judgment had been made by the parties
themselves.^" Thus, Lazar's attempt to recover from the corporation

failed because he expressly gave up his compensation in return for

the release.

Lazar's attempt to hold Kincaid personally liable for his services

also was unsuccessful. Although he won below, the court held the
finding of liability clearly erroneous and reversed. ^^* This aspect of

the case put Lazar on the horns of a dilemma. In effect, Lazar

argued that Kincaid was a corporate promoter who employed him.

'"M at nn.9 & 10. See generally Z. Cavitch, Business Organizations § 55.02[1]
(rev. 1981); 1 G. Hornstein. Corporation Law and Practice § 94 (1959) [hereinafter
cited as Hornstein].

A similar problem exists when proceeds for the shares are paid back to the
organizers for services. At least technically the full consideration would not have been
paid. This problem has been resolved in the Model Business Corporation Act by sec-
tion 22 which permits the payment of reasonable charges and expenses of organization
of a corporation out of the consideration received "by it in payment for its shares
without thereby rendering such shares not fully paid or accessible." 1 ABA-ALI Mod.
Bus. Corp. Act Ann § 22 [hereinafter cited as Model Act].

'^^An Indiana corporation cannot lawfully transact business until consideration of

$1000 has been paid for its shares, Ind. Code § 23-1-3-5 (1976), but the determination by
the board of directors of the "value" of property or services received as consideration

for shares is conclusive in the absence of "actual fraud" in the transaction. Id. §
23-l-2-6(e).

•^^405 N.E.2d at 621.

'''Id. at 620-21.

'"/d at 620. See Cook v. American States Ins. Co., 150 Ind. App. 88, 275 N.E.2d
832 (1971).

'^M05 N.E.2d at 621.



54 INDIANA LAWREVIEW [Vol. 15:31

promising to pay with shares. This would bring the case within the

general rule that a promoter is personally liable on contracts made
on behalf and for the benefit of a not-yet-formed corporation even if

the contract is subsequently adopted by the corporation/^* The
defendants countered that Lazar was a promoter and unlike a third

party who contracts with a promoter on behalf of a projected cor-
poration, a promoter is not entitled to compensation from co-

promoters for services rendered in furthering the enterprise absent

some agreement.^^" The mere relationship of promoters does not in
and of itself imply a promise by some promoters to compensate
others/^^ Such an agreement can be implied, but it must be specific
and definite enough to warrant enforcement.^^^

Lazar was in a no-win situation. If he was a promoter, he was
not entitled to compensation from co-promoters because there was
no clear agreement to that effect. If he was a third party retained
by a promoter, he could not recover because the presumption that

the promoter, Kincaid, was personally liable^^^ was effectively rebut-
ted.^^^

Kincaid is undoubtedly correct. However, it should be a warn-
ing to persons organizing a corporation of the importance of making
the rights of the parties clear so the corporation can be organized

as intended, or, failing that, making it clear as to what, if any,
arrangements are to be made for compensating promoters for pro-
motional services.

F. Retaliatory Discharge

Campbell v. Eli Lilly & Co.^^^ re-enforces the ukase that at will
employees of Indiana businesses "blow the whistle" at career peril.

In Campbell, the court in a split decision affirmed the Marion County
Circuit Court's summary judgment for Lilly against Campbell's
claim that he was discharged in retaliation for disclosing practices

'^^Id.; Mount Pleasant Coal Co. v. Watts, 91 Ind. App. 501. 506-07, 151 N.E. 7, 9
(1926). See generally Henn, supra note 152, § 111; HORNSTEIN, supra note 153, § 93.

'^^Hart V. Miller, 49 Del. 477, 119 A.2d 751 (1955); Bailey v. Interstate Airmotive,

Inc., 358 Mo. 1121, 219 S.W.2d 333 (1949); Babbitt v. Gibbs, 150 N.Y. 281, 44 N.E. 952

(1896).

>«'Hart V. Miller, 49 Del. 477, 119 A.2d 751 (1955); Bailey v. Interstate Airmotive,

Inc., 358 Mo. 1121, 219 S.W.2d 333 (1949); Babbitt v. Gibbs, 150 N.Y. 281, 44 N.E. 952
(1896).

'''See Turley v. Thomas, 31 Nev. 181, 101 P. 568 (1909).
'''See Stanley J. How & Assocs. v. Boss, 222 F. Supp. 936 (S.D. Iowa 1963).
'•"'405 N.E.2d at 621. See Quaker Hill, Inc. v. Parr, 148 Colo. 45, 364 P.2d 1056

(1961).

•"'^413 N.E.2d 1054 (Ind. Ct. App. 1980), transfer denied, 421 N.E.2d 1099 (Ind.

1981). Hunter, J., dissented from the denial of transfer. Id.



1982] SURVEY-BUSINESS ASSOCIATIONS 55

allegedly contrary to the federal drug regulatory scheme as im-

plemented by the Food and Drug Administration/^*
The majority in Campbell acknowledged that Frampton v. Cen-

tral Indiana Gas Co.^^'^ recognizes an exception to the rule that an

employer can fire an at will employee at any time.^*® Under Framp-
ton, an at will employee discharged for exercising a right bestowed

by statute has a cause of action against the former employer. In-

diana courts, however, have refused to go beyond situations in

which there is a statutory source for the right or duty the former

employee was exercising^*^ to protect the whistle-blowing
employee.^^" Even though there may be a general duty to do that
which public policy encourages or to refuse to do that which public

policy forbids, this general duty is not sufficient to create an excep-

tion to the at will employment relationship.
This result is unfortunate. As Professor R. Bruce Townsend has

observed, decisions such as Martin v. Platt,^^^ denying a cause of ac-

tion for retaliatory discharge, "exhibit a lack of humanitarian con-

siderations which make bankruptcy a way of life and unionization
the main tool of employee protection."^'^ The employer also has
rights in the employment relationship, and a large corporation
should be accorded wide latitude in determining whom it will hire
and fire,^^^ but Indiana may go too far in protecting the interests of
employers. Certainly the courts that have recognized a cause of ac-

tion for retaliatory discharge apart from statutes,^'* and Judge
Ratliff, who dissented in part on this issue,"^ would agree. Judge
Ratliff disagreed with the view that a general public policy excep-

tion to the at will rule was a legislative m.atter^^* and urged the

"*M at 1063. The court rejected Campbell's contention that the trial court was
"biased, prejudiced and hostile" toward Campbell because of the judge's supposed

antipathy towards the FDA and the federal bureaucracy in general. The argument was
rejected because the majority concluded the trial court correctly applied the law. From
the opinion, however, it would seem the trial court was less than judicious at times. Id.

at 1058-59.

»''^260 Ind. 249, 297 N.E.2d 425 (1973).
"«413 N.E.2d at 1060.

"The Indiana Workers Compensation Act, Ind. Code § 22-3-2-15 (1976), was the
statutory basis for Frampton.

"'See Martin v. Piatt, 386 N.E.2d 1026 (Ind. Ct. App. 1979).

"Townsend, Secured Transactions, 1979 Survey of Recent Developments in In-
diana Law, 13 Ind. L. Rev. 369, 381 (1980).

"'See Percival v. General Motors Corp., 539 F.2d 1126, 1130 (8th Cir. 1976).

"*See, e.g., Petermann v. International Bd. of Teamsters, 174 Cal. App. 2d 184,
344'P.2d 25 (1959); Pierce v. Ortho Pharmaceutical Corp., 84 N.J. 58, 417 A.2d 505

(1980); Harless v. First Nat'l Bank, 246 S.E.2d 270 (W. Va. 1978).
"''413 N.E.2d at 1063-68 (Ratliff, J., dissenting).

"'Id. at 1066. See Martin v. Piatt. 386 N.E.2d 1026, 1028 (Ind. Ct. App. 1979).



56 INDIANA LAWREVIEW [Vol. 15:31

court in the true common law tradition to depart from the general
rule where strict adherence to "nineteenth century legal formalism
and laissez faire labor policies which are not always valid in modern
society"^^^ creates harsh and unjust results. ^^^

Judge Ratliff appears willing to protect an employee discharged

for acting in compliance with judicially created public policy, but he

would not go so far as to require only good faith discharges of at

will employees/^^ He clearly would extend the cause of action recog-
nized in Frampton to cases in which a statute does not give a right
or remedy to a discharged employee but does establish a public
policy that has been breached by the employer/*" He considered
Campbell as falling in this category because he alleged that his

discharge was for reporting violations of the Food, Drug, and Cos-
metics Act.^*^ Ostensibly, at least, he was a responsible whistle-
blower entitled to protection for responding to his public duty.

Judge Ratliff would limit the remedy for retaliatory discharge
to damages and would not order reinstatement of the discharged
employee. ^^^ Damages would be sufficient to deter such discharges
and promote the public policy the discharge would violate. Of
course, only responsible whistle-blowers could recover. One dis-
advantage of departing from the common law rule is that a discharg-
ed employee might contrive a "whistle-blowing" defense and at least

get into court in a retaliatory discharge action. Judge Ratliff would
extend the public policy exception to the at will rule, but he concur-

red in the result because the depositions and affidavits submitted in

support of the motions for summary judgment show that Campbell
was not a victim of a retaliatory discharge. ^^^

Although Judge Ratliffs view may be becoming more acceptable
in other jurisdictions, it clearly does not prevail in Indiana. Thus,

the at will employee who wishes to blow the whistle does so at the
risk of having to find new employment with no protection available
under Indiana law.

'^M13 N.E.2d at 1063.

"«M at 1066.
'''Id. at 1066-67. See Fortune v. National Cash Register Co., 373 Mass. 96, 364

N.E.2d 1251 (1977).
18045^3 N.E.2d at 1067. See generally Comment, Protecting the Private Sector at

Will Employee Who "Blows the Whistle": A Cause of Action Based Upon Deter-
minants of Public Policy, 1977 Wis. L. Rev. 777, 787-88.

'«'21 U.S.C. §§ 301-392 (1976).

•«M13 N.E.2d at 1067 n.5.

^*^M at 1067-68. In fact, Campbell's complaint smacked of the irresponsible whis-

tle blower whom no court or commentator feels should be protected. He repeatedly
suggested that he was entitled to a reward of $200,000,000. Id. at 1068 n.6.



1982] SURVEY-BUSINESS ASSOCIATIONS 57

G. Intercorporate Relations

In Ross V. Tavel,^^^ an officer-shareholder's involvement in wind-
ing up the affairs of two corporations precluded his attack on the
transactions as a minority shareholder. Ross affirmed a judgment of
the Marion County Superior Court denying the plaintiffs claim for
profits of the enterprise and in funds transferred from one corpora-

tion to another where the ownership interests in the two corpora-
tions were the same.

As was the case in Kincaid v. Lazar,^^^ the business arrange-
ments were not well thought out although at least there was an
agreement. As a consequence, Ross found himself with only a
twenty percent share interest and the right to one-third of the pro-
fits of one corporation and only a twenty percent share interest in

the second. He then unwisely agreed to change the arrangement to
acquire one-third of the shares of both corporations. Unwisely

because he gave up his right to one-third of the profits and now was
attempting to recover profits earned while the business was finan-
cially healthy. ^®^ He was now unhappy, but unfortunately for him he
had agreed to the changed relationship and so really could not com-
plain when it turned out to his disadvantage.

Ross attacked the new arrangement for lack of consideration,
alleging that neither the corporation nor one of the individual defen-

dants had the authority to transfer shares that had been issued in

his childrens' names. This argument fell before the provision of the
Indiana Uniform Gifts to Minors Act which permitted the individual

defendant as the custodian to transfer, sell, or dispose of the

shares. ^*^ Only the children would have standing to complain if

they were wrongfully divested of their shares.^*® He also argued that
the transfer of the childrens' shares was not valid because the
shares were not endorsed as required by the corporate bylaws. This
attack was rejected because the shares were transferred to him
upon delivery, and he had a right to have the necessary endorse-

ment supplied under the Indiana Uniform Commercial Code.^^®
Ross also complained, as a minority shareholder, that the con-

trolling shareholders' diversion of the assets of one corporation to

the other, and subsequently to a third corporation they controlled

which had lent funds to the enterprise, was fraudulent and in

'^MIS N.E.2d 297 (Ind. Ct. App. 1981).
^**405 N.E.2d 615 (Ind. Ct. App. 1980) discussed in text accompanying note 145

supra.

^«M18 N.E.2d at 300-01.

'«lND. Code § 30-2-8-4(f) (1976 & Supp. 1981).
»««418 N.E.2d at 302.

'''Id.; Ind. Code § 26-1-8-307 (1976).



58 INDIANA LAW REVIEW [Vol. 15:31

derogation of their fiduciary duties of good faith and fair dealing.^®"

This attack also failed. Even if the transfer of funds was a sham
designed to channel funds to the third corporation, the court con-

cluded that Ross had been president of the two corporations and
privy to the arrangement which had been designed to maximize tax

benefits. Again he could not rightly complain.^®^

It is well settled that improper manipulation of funds or

wrongful diversion of corporate assets by controlling shareholders

creates a cause of action in favor of the corporation which can be en-

forced in a derivative suit.^^^ It is also well settled that Indiana

recognizes the principle of "incorporated partnerships" imposing on

shareholders of closely held corporations fiduciary duties akin to

those of partners.^^^ Ross' complaint would have to sound in equity^^^

and if he participated in the wrongful transfer, equity would not

permit him to recover in a shareholder derivative action.^*^ Of
course, all this was much ado about nothing because the court con-
cluded that the transfer of funds was proper.^^^

H. Statutory Developments

The first statutory development during the survey period of
particular interest to corporate officers and directors is Public Law
211^^' which amended the provisions in the Indiana General Corpora-
tion Act^*® and the Indiana Not-For-Profit Corporation Act^*® relating

to the indemnification of corporate personnel against expenses in-

curred in defending liability claims. The new language authorizes for
profit and not-for-profit corporations to advance the litigation ex-

^«<'418 N.E.2d at 303-04.

'''Id. at 304.

"^^13 W. Fletcher, Cyclopedia of the Law of Private Corporations § 5924 (rev.
perm. ed. 1980); Henn, supra note 152 §§ 358, 360; Hornstein, supra note 153, §§ 711,
716.

"'Cressy v. Shannon Continental Corp., 378 N.E.2d 941, 945 (Ind. Ct. App. 1978);
Hartung v. Architects Hartung/Odle/Burke, Inc., 157 Ind. App. 546, 552, 301 N.E.2d

240, 243 (1973). See generally 1979 Survey, supra note 62, at 150-55; Galanti, Business

Associations, 1974 Survey of Recent Developments in Indiana Law, 8 Ind. L. Rev. 24,
42-46 (1974) [hereinafter cited as 1974 Survey].

'»*418 N.E.2d at 304.

'''Id. Epperly v. E & P Brake Bonding, Inc., 169 Ind. App. 224, 236, 348 N.E.2d 75,
82 (1976). Even the corporation would be barred from suit if all the shareholders par-
ticipated in the wrong. Gabhart v. Gabhart, 267 Ind. 370, 391, 370 N.E.2d 345, 357

(1977).

*'*418 N.E.2d at 303. The court also refused to let Ross reassert claims that had
been satisfied and settled when the parties wound up the affairs of the corporations.
Id. at 305.

'"Act of April 15, 1981, Pub. L. No. 211, 1981 Ind. Acts 1610.

"«lND. Code § 23-l-2-2(b)(9) (Supp. 1981).
'''Id. § 23-7-l.l-4(b)(9).



1982] SURVEY-BUSINESS ASSOCIATIONS 59

penses of corporate personnel before an action, suit, or proceeding is

disposed of upon receipt of an undertaking by or on behalf of the

defendant to repay the amount advanced if it is subsequently deter-

mined that he is not entitled to indemnification.^""

It can be argued that broad corporate power to idemnify cor-
porate personnel and to purchase director and officer insurance may
reduce care in the exercise of the corporate office. However, when
suits against corporate officers and directors are becoming more
common, the areas of potential liability are expanding, and the costs
of such litigation are escalating, most would agree that corporate

personnel should have some protection against personal risk.^"^ This

need is emphasized by the now almost conventional wisdom that
publicly held corporations should have broad-based boards of direc-

tors that include persons representing a variety of viewpoints.^"^

The most interesting thing about Public Law 211 is that once again
the General Assembly apparently did not look beyond the immediate
statutes involved to see if any other statute should be similarly

amended. The General Assembly seems to have done the exact op-
posite of what was done in 1973 and 1974 when the indemnification
of corporate personnel was last considered. In 1973, the General
Assembly expanded the authority of Indiana general corporations
and Indiana insurance companies to indemnify corporate personnel

and authorized them to purchase and maintain liability insurance for
their employees.^"^ The General Assembly, however, did not grant an
indemnification power to Indiana not-for-profit corporations until
1974.^"* Presumably this was just an oversight because if corporate
personnel of general or insurance corporations are entitled to indem-

nification and liability insurance, so are their counterparts in not-for-

profit corporations. In 1981, the General Assembly amended the In-
diana General Corporation Act and the Indiana Not-For-Profit Cor-
poration Act but not the Indiana insurance law. Certainly, if it is

^""Unfortunately the general assembly did not specify who will make the ultimate
determination. A court presumably could make the determination, but a decision by
directors not a party to the actions, a litigation committee of the board of directors,

special legal counsel or the shareholders would probably suffice. See, e.g.. Model Act,
supra note 153, § 5.

^^See generally ABA Committee of Corporate Laws, Changes in the Model
Business Corporation Act Affecting Indemnification of Corporate Personnel, 36 Bus.
Law. 99, 101-02 (1980).

'°'M at 102.

^"^IND. Code §§ 23-l-2-2(bK9) to -2(bKlO) (1976) (General Corporation Act); id. §§
27-l-7-2(b)(8) to -2(b)(9) (Insurance Law). See generally Galanti, Corporations, 1973
Survey of Recent Developments in Indiana Law, 7 Ind. L. Rev. 77, 103-09 (1973)
[hereinafter cited as 1973 Survey].

'""Ind. Code §§ 23-7-1. l-4(b)(9) to -4(b)(10) (1976). See generally 1974 Survey, supra
note 193, at 54-59.



60 INDIANA LAWREVIEW [Vol. 15:31

appropriate to advance the expenses of corporate personnel of

general or not-for-profit corporations, it is equally appropriate to ad-

vance the expenses of corporate personnel of insurance companies.

Presumably, this oversight will be remedied in the next session of

the General Assembly.

Surprisingly, the General Assembly does not seem to have con-
sidered the new indemnification provision contained in section 5 of
the Model Business Corporation Act.^°^ Substantial changes to this
provision of the Model Act were adopted by the American Bar
Association Committee on Corporate Laws on June 20, 1980.^^® The
new Model Act provision appears very workable. It provides ap-
propriate protection to corporate personnel in meritorious cases

while limiting the potential for abuse. Thus, the 1981 session of the

General Assembly would have been an appropriate time to consider
a major revision of the three indemnification provisions in the In-

diana Code.

Public Law 212^°^ is of interest to persons who practice as or
who represent one-person professional corporations. The Act
established procedures to be followed when the sole professional
dies or is no longer qualified to be a shareholder. It added new sec-
tions to the four Indiana Professional Corporation Acts that provide

that when a shareholder dies or becomes disqualified, "the dis-
qualified shareholder or the personal representative of the deceased

shareholder may: (1) exercise voting rights of the outstanding

shares; (2) serve as a director of the corporation; and (3) serve as an

officer of the corporation as appropriate for the sole purpose of

dissolving the corporation . . . ."^°® This power probably could have

been implied under the Acts, but it is sensible to specify clearly that

steps can be taken by an unqualified shareholder or a personal

representative to dissolve a professional corporation. The alter-
native is for the corporation to cease filing annual reports and wait

for the inevitable revocation of the articles of incorporation by the

Secretary of State's office after the lapse of two years. This ''infor-
mal dissolution" is certainly not a procedure to be encouraged.^"*

^°^Model Act, supra note 153, § 5.

^"^ABA Committee on Corporate Laws, Changes in the Model Business Corporor

tion Act Affecting Indemnification of Corporate Personnel, 36 Bus. Law. 99-118 (1980).

The initial revision to section 5 was proposed in 1979. ABA Committee of Corporate
Laws, Changes in the Model Business Corporation Act Affecting Indemnification of
Corporate Personnel, 34 Bus. Law. 1595 (1979).

^^Act of May 5, 1981, Pub. L. No. 212, 1981 Ind. Acts 1615.
'"'IND. Code § 23-1-13-12 (Supp. 1981) (General Professional Corporation Act); id. §

23-1-13.5-7 (Professional Accounting Corporation Act); id. § 23-1-14-22 (Professional

Medical Corporation Act); id. § 23-1-15-22 (Professional Dental Corporation Act).

^The Secretary of State probably is authorized to certify such a corporation to
the Attorney General for appropriate action to dissolve. Ind. Code §§ 23-1-13-11, -14-17,
-15-17 (1976).



1982] SURVEY-BUSINESS ASSOCIATIONS 61

Public Law 212 also expanded the scope of the Indiana Medical
Professional Corporation Act^^° by authorizing optometrists, den-

tists, podiatrists, and pharmacists as well as licensed physicians to

organize such corporations. Because dentists have the statutory

authority to form professional dental corporations under the Indiana

Professional Dental Corporation Act,^" and the other health care

professionals could form separate professional corporations under

the Indiana General Professional Corporation Act,^^^ the General

Assembly apparently intended that members of the different profes-
sions can incorporate and operate as one facility.

Another change effected by Public Law 212, and one of ques-
tionable wisdom, was the amendment of section 23-1-2-3 of the Indi-
ana General Corporation Act^^^ which authorizes a corporation to

purchase or otherwise acquire its own shares. Before it was amended,
section 23-1-2-3 was identical to the pre-1979 version of section 6 of
the Model Business Corporation Act.^^^ The provision permits the ac-
quisition of shares only to the extent of unreserved and unrestricted

earned surplus or, under some circumstances, unreserved and unre-
stricted capital surplus.^^^ The purpose of these and other restric-
tions such as the last sentence of section 23-1-2-3 which provides

that "no purchase of or payment for its own shares shall be made at
a time when the corporation is insolvent or when such purchase or
payment would make it insolvent" are generally intended to protect
the interests of creditors. The final proviso is, in fact, inherent in
the corporate form itself: The owner of a corporation should not
prefer himself to the disadvantage of corporate creditors.^^®

The protection afforded by this provision has been undercut by
the amendment which added a new provision that nothing in the
General Corporation Act shall ''invalidate or otherwise affect a note,

debenture or other obligation of a corporation" issued by it for a

^^^IND. Code §§ 23-1-14-1 to -22 (1976 & Supp. 1981).
"7d §§ 23-1-15-1 to -22.
'''Id. §§ 23-1-13-1 to -12.

'''Id. § 23-1-2-3.

"^Model Act, supra note 153, § 6.

^^'Shares can be purchased from capital surplus if permitted in the articles of in-

corporation or approved by a vote of at least a majority of the corporation's shares.

''^See generally Model Act, supra note 153, § 6, t 2 at 253. The drafters of the
Model Act apparently have now decided that creditors do not need any statutory pro-
tection and should fend for themselves. The current version of section 45 of the Model
Act specifically provides that: "Indebtedness of a corporation incurred or issued to a
shareholder in a distribution . . . [including a redemption] shall be on a parity with in-

debtedness of the corporation to its general unsecured creditors except to the extent

subordinated by agreement." See ABA Committee on Corporate Laws, Changes in the
Model Business Corporation Act—Amendments to Financial Provisions, 34 Bus. Law.
1867, 1872, 1886 (1979).



62 INDIANA LAWREVIEW [Vol. 15:31

share reacquisition if at the time the obligation was delivered the
corporation's unreserved and unrestricted earned surplus, or the

unreserved and unrestricted capital surplus as the case may be,
equalled or exceeded "the amount of such note, debenture or obliga-
tion."^^^

It is possible that the new language may prevent the subordina-
tion of claims of former shareholders to the legitimate claims of

creditors. This will be unfortunate because unsecured corporate cre-

ditors who do not have subordination agreements have little enough
protection as it is.^^* Courts have been reluctant to favor former

shareholders over creditors^^^ particularly if there has been fraud or

overreaching. On its face, the new provision that a note to a former
shareholder is not invalidated by a subsequent bankruptcy would

seem to favor a dishonest former shareholder over innocent credi-
ters. It is to be hoped that Indiana courts in construing amended
section 23-1-2-3 will not reach such an unjust result and would still

subordinate claims when there is evidence of fraud or overreaching.
Admittedly, the new provision will make it easier for small cor-

porations to repurchase shares on an installment basis if share-

holders no longer need fear inferior status. Of course, creditors

might well become frustrated and either insist on subordination
agreements or simply decline to extend extra credit.^^"

There is something commendable about efforts to simplify cor-
porate procedures, particularly as to notices and other documents

that must be filed with the Secretary of State, but Public Law 213^^^
probably went too far. Among other things it amended numerous
sections of the Indiana General Corporation Act and the Indiana

Not-For-Profit Corporation Act by substituting the requirement that

notices and other documents be "signed by any current officer of the

corporation and verified and affirmed subject to penalties for

injury," for the previous requirement that notices or documents be

"signed and verified under oath by its president or a vice president

and its secretary or an assistant secretary."

The traditional two signature requirement has the advantage of
reducing the chance that an officer will exceed his or her authority.

"iND. Code § 23-1-2-3 (Supp. 1981). See also Conn. Gen. Stat. Ann. § 33-358

(West Supp. 1981); Del. Code Ann. tit. 8, §§ 610, 612 (1974).
^''See generally 10 LOY. L.A.L. Rev. 254 (1976).

^'^See, e.g., Robinson v. Wangemann, 75 F.2d 756, 757 (5th Cir. 1935); but see
Williams v. Nevelow, 513 S.W.2d 535, 537-38 (Tex. 1974).

''°See In re National Tile & Terrazzo Co., 537 F.2d 329, 333 (9th Cir. 1976) (Good-
win, J., dissenting).

'''^'Act of April 16, 1981, Pub. L. No. 213, 1981 Ind. Acts 1620. Certain minor

housekeeping amendments were made by Public Law 213. See, e.g., Ind. Code §
23-1-11-6 (Supp. 1981).



1982] SURVEY-BUSINESS ASSOCIATIONS 63

However, because it is now possible to have an Indiana corporation
with one director regardless of the number of shareholders,^^^ there
is probably no reason for requiring the president and the secretary

of a corporation to execute such routine forms as, for example, a cer-

tificate changing the resident agent or principal office of a corpora-

tion^^^ or even articles of amendment or amended articles of incor-
porations.^^^

It appears that the General Assembly got carried away with its
simplifying bent. Even assuming that articles of merger or con-
solidation are routine documents that do not need two signatures as

a practical matter,^^^ one may well question the wisdom of permit-
ting any corporate officer to execute the agreement of merger or
consolidation which is the document setting out the terms of the
transaction. This is now permitted under the General Corporation
and Not-For-Profit Corporation Acts as amended by Public Law
213.^^® In fact it is no longer necessary to affix the corporate seals of

the merging or consolidating corporations to the agreement.

This newly authorized procedure may not cause any problems
with mergers or consolidations of Indiana corporations. It is con-

ceivable, however, that officials in other jurisdictions where a copy
of the agreement has to be filed might question the validity of an
agreement of merger or consolidation which bears the signature of
only one officer and no corporate seal. Cautious corporate attorneys

will probably avoid potential problems by having merger or con-
solidation agreements attested to by the secretary or an assistant

secretary and by affixing the corporate seal.

It is possible that the General Assembly did not really intend to
change the long established procedure for executing corporate

agreements but inadvertently amended the provisions because the
language was similar to the language pertaining to executing forms
filed with the Secretary of State. If the change was simply a case of
legislative momentum, the relevant sections of the Acts^^^ should be
amended again during the next session.

Public Law 213 made other changes to Indiana corporation
statutes. Annual reports of all corporations, general or not-for-profit,
domestic or foreign, must now contain "a statement of whether the

^''^'IND. Code § 23-l-2-ll(b) (Supp. 1981).
""'Id. § 23-1-2-5.

^Vd § 23-1-4-5. Delaware still requires two signatures. Del. Code Ann. tit. 8, §
103(a)(2) (1974).

'^''^IND. Code §§ 23-l-5-2(f), -3(3), -7-l.l-42(e) (Supp. 1981).
^^Id. This procedure might make more sense for short form mergers where a

parent can merge a ninety-five percent owned subsidiary into itself without share-
holder approval. Id. § 23-1-5-8.

""Id. §§ 23-l-5-2(f). -3(e), -8, -7-l.l-42(e) (Supp. 1981).



64 INDIANA LAWREVIEW [Vol. 15:31

corporation is the holder of any funds or other property, tangible or

intangible, which may be presumed abandoned pursuant to the pro-
visions . . . ."^^® of the Indiana Uniform Disposition of Unclaimed Pro-

fits Act.''^

Public Law 213 also clarified the procedures for forfeiting the
articles of incorporation of domestic and certificates of admission of

foreign corporations that have not filed annual reports for two con-
secutive years by requiring the Attorney General to proceed against

them '*upon certification of such fact by the Secretary of State."^^°
The procedures for the Secretary of State's administrative revoca-
tion of the rights and privileges of domestic^^^ and foreign^^^ corpora-

tions failing to file annual reports were also revised.
Finally, Public Law 213 made some changes in the Indiana Medi-

cal Professional Corporation and Dental Professional Corporation

Acts by requiring the incorporators to obtain a certificate of regis-

tration from the applicable regulatory board and to present it to the

Secretary of State before he can issue the certificate of incorpora-

tion.^*^ Unfortunately, the amendments to section 23-1-14-8 of the
Medical Professional Corporation Act do not reflect the changes ef-

fected by Public Law 212 permitting optometrists, dentists, podia-

"»M §§ 23-1-8-1(7), -11-7(14), -3-4-l(a)(7), -7-l.l-36(m).
'^M §§ 32-9-1-1 to -45.
'''Id. § 23-l-10-l(b).

^*/d. § 23-3-4-l(c)(l). For domestic corporations the Secretary of State must give

30 days notice by first class mail addressed to the resident agent at his last address on

file, or to the last known address of the corporation if no address of the resident agent
is on file. If the required filings are not made within 30 days, the Secretary of State
must publish notice in a newspaper of general circulation in the county in which the

corporation's principal office is located. The Secretary of State is required to revoke
the rights and privileges and declare forfeited the articles of incorporation of a

domestic corporation which fails to file the reports within the 30 days following the re-

quired publication. Id.

^Hd. § 23-3-4-l(c)(2). For foreign corporations, the Secretary of State must give 30

days notice by first class mail addressed to the resident agent at his last address on

file, or at the last known address of the corporation outside the state if no address of
the resident agent is on file. If the required filings are not made within 30 days, a
second notice must be sent by first class mail to the last known address of the corpora-
tion outside the state. If the required filings are not made within 30 days of the second
mail notice then the Secretary of State is required to revoke the rights and privileges

and declare forfeited the certificate of admission of the non-complying foreign corpora-

tion. Id.

^'Id. § 23-1-14-8 (Medical Professional Corporations Act), § 23-1-15-8 (Dental Pro-

fessional Corporations Act). A medical professional corporation must now file certified
copies of its articles of incorporation, amendments to articles of incorporation, and all
articles of mergers with the regulating board. Id. § 23-1-14-20. For some reason section
23-1-15-20 pertaining to dental professional corporations was not similarly amended. Id.

§ 23-1-15-20.



1982] SURVEY-BUSINESS ASSOCIATIONS 65

trists, and pharmacists to organize as medical professional corpora-

tions.
^^^

The General Assembly in Public Law 214^^^ deleted as an excep-
tion from the definition of sales and purchases in the Indiana

Securities Act "any act incident to a class vote by stockholders, pur-

suant to the articles of incorporation or the applicable corporation

statute, on recapitalization or reclassification of securities . . . ."^^^

At the same time it added a new exemption from the registration
requirements of the Act that covers basically the same type of
transactions.^^^ The effect of this amendment is that instead of total-
ly exempting such transactions from the Act because they are not

within the definition of a sale or purchase, they are now subjected
to the antifraud provisions and to the registration provision if the

Securities Commissioner decides registration is appropriate. This

was a worthwhile change.
The Indiana Business Takeover Offers Act^^* adopted in 1979

was amended in several respects by Public Law 215.^^^ Most of the
changes seem aimed at insulating the Act from constitutional chal-
lenge. The success of this tactic depends entirely on the Supreme
Court's resolution of the challenge to the Illinois Takeover Act in

Mite Corp. v. Dixon.^*^ If the Illinois statute is upheld, the Indiana

Act is valid. If the Illinois Act falls, the Indiana effort will fail. This

is true notwithstanding that a self-serving "intent and purpose sec-

tion" was added to the Act.^^^ The problem with most state takeover

=^^*Act of May 5, 1981, Pub. L. No. 212. 1981 Ind. Acts 1615.
'''Act of May 6, 1981, Pub. L. No. 214, 1981 Ind. Acts 1683. Certain housekeeping

amendments were made to the Indiana Securities Act, Ind. Code §§ 23-2-1-1 to -24

(1976 & Supp. 1981), and certain filing fees were increased by Public Law 214. It also
made the failure of a corporate officer or director to send a corporation's most recent
annual financial statement to a shareholder within a reasonable time of a request for

the statement a Class B infraction. Id. § 23-l-10-3(b)(3) (Supp. 1981).
'^'IND. Code § 23-2-l-l(i)(8)(iii) (1976).
'''Id. § 23-2-l-2(b)(16) (Supp. 1981). The new language exempts:
[A]ny issuance of securities to or for the benefit of stockholders incident to a

vote by such stockholders pursuant to the articles of incorporation or ap-

plicable instrument, on a merger, consolidation, reclassification of securities,

or sale of corporate assets in consideration of the issuance of securities of the

same or another corporation or trust; if the commissioner is notified in
writing of all terms of the transaction and does not disallow the exemption

with the next five (5) full business days.

'""Id. §§ 23-2-3.1-1 to -11 (Supp. 1981). See generally 1979 Survey, supra note 62, at
161-72.

=««Act of April 24, 1981, Pub. L. No. 215, 1981 Ind. Acts 1700.
''*''633 F.2d 486 (7th Cir. 1980), prob. juris, noted sub nom. Edgar v. Mite Corp. ,

101 S.Ct. 2043 (1981).

="'IND. Code § 23-2-3.1-0.5 (Supp. 1981). The section provides:
(a) The general assembly finds that it is often difficult for corporate

shareholders to obtain sufficient information to make an informed and



66 INDIANA LAWREVIEW [Vol. 15:31

statutes is that they tend to display a pro-management tilt that con-

flicts with the balanced approach to takeovers reflected in the

Williams Act.^*^ This is not surprising because the motivating force

behind the state statutes are potential targets of tender offers, not

potential offerors. The latter group certainly does not want another
layer of regulations applied to their acquisition efforts.

In some respects the amendments reduce the pro-management
tilt of the Indiana Act. For example, a general requirement that a

tender offer is proper unless after a hearing the Securities Commis-
sioner finds '*by a preponderance of the evidence that the takeover

statement fails to provide full and fair disclosure to the offerees of

all material information concerning the takeover offer" has been

substituted for the previous language which authorized the Commis-
sioner to bar a tender offer where he found it was "unfair or inequit-
able to the holders of the securities of the target company . . . ."^*^

Thus, the Indiana Act is now a "disclosure" statute that the drafters
hope will be compatible with the disclosure philosophy of the

Williams Act. Of course, if the philosophies are the same, one might

wonder why Indiana has a Takeover Offers Act other than as a
means of harassing offerees in order to protect "Hoosier corpora-
tions."^**

To be fair, it must be noted that an antifraud provision has been
added to the Takeover Offers Act^*^ which would apply to target
company management as well as to offerees. In this respect, the Act
may be a decided improvement over the Williams Act where a
defeated tender offeree has no cause of action for damage against
the target company which has made false and misleading statements

timely decision when faced with the questions of accepting or rejecting
a takeover offer,

(b) By enacting this chapter, it is the intent and purpose of the general
assembly to provide for full and fair disclosure of all material informa-

tion concerning takeover offers to shareholders of Indiana corporations,

so that the opportunity of each shareholder to make an informed and
well-reasoned investment decision may be secured. It is the purpose of
the general assembly to provide for adequate disclosure in a manner
consistent with the constitutions of the United States and of Indiana.

'*^See Mite Corp. v. Dixon, 633 F.2d 486, 493-94 (7th Cir. 1980), prob. juris, noted

sub nom. Edgar v. Mite Corp., 101 S.Ct. 2043 (1981); Great Western United Corp. v.
Kidwell, 577 F.2d 1256, 1278-80 (5th Cir. 1978), rev'd on other grounds sub nom. Leroy

V. Great Western United Corp., 443 U.S. 173 (1979).
''^^IND. Code. § 23-2-3.1-7(a) (Supp. 1981).

"*See notes 117 & 118 supra.
''"IND. Code § 23-2-3.1-8.5 (Supp. 1981). This provision is similar to the antifraud

provision in the pre-1979 takeover act. Ind. Code § 23-2-3-4 (1976) (repealed 1979).



1982] SURVEY-BUSINESS ASSOCIA TIONS 67

during the contest.^^® This assumes, of course, that a cause of action

is implied by the courts. This may be assuming too much.
Certain transactions were excluded from the definitions of take-

over offers when the Act was adopted in 1979.^^^ These exclusions in-
cluded ordinary brokerage transactions, de minimis offers or acquisi-

tions not exceeding two percent of the class within the preceding
twelve months, acquisition of its own shares by a target company,
and transactions determined by the Securities Commissioner to be

takeover offers not having or intended to have the effect of changing

or influencing the control of the target corporation. These exclusions

were repealed by Public Law 215 and replaced, except for the
brokerage exclusion, by a new provision that exempts the transac-
tions from the substantive requirement of the Act but not the newly

adopted antifraud provision.^^® Interestingly, the brokerage exclusion

which was the basis of the Indiana Court of Appeals decision of In
re City Investing Co.^*^ was not carried over.

For a legislature that ostensibly is concerned with shareholder

interests, it is somewhat surprising to see that the number of share-
holders that will trigger the disclosure requirements of the Act has

been increased from fifty to seventy-five.^^" The antifraud provision
is the only protection these shareholders have under the amended
Act.

Tender offers for Indiana insurance companies have been dis-
couraged. Previously such takeover efforts were not subject to the
Act if the acquisition required the approval of the Insurance Com-
missioner. Now, approval by both the Insurance and the Securities
Commissioners are required.^^^ Procedures for hearings on a take-
over offer were revised by Public Law 215.^^^ The expenses of any
hearings have been placed on the offeror, who may be required to
post bond.^^^ Five days notice of the hearing on a takeover offer,

which hearing must be held within twenty business days of the filing
of a disclosure statement, is now required.^^^ However, the Commis-

'"Piper V. Chris-Craft Indus. Inc., 430 U.S. 1 (1977). Then again, it may be nothing
more than an attempt to bring offerors like City Investing and GDV under the
Takeover Offer Act. See text accompanying notes 101-14 supra.

"iND. Code § 23-2-3.1-l(i)(lM4) (Supp. 1980) (repealed 1981).
"7d. § 23-2-3.1-8.6 (Supp. 1981).

"Mil N.E.2d 420 (Ind. Ct. App. 1980). See text accompanying notes 55-114 supra
for a discussion of City Investing.

^""Compare Ind. Code § 23-2-3.1-l(j)(5) (Supp. 1980) (repealed 1981) with id. §
23-2-3.1-8.6(a)(3) (Supp. 1981).

""'Compare id. § 23-2-3.1-l(j)(l) (Supp. 1980) (repealed 1981) with id. § 23-2-3.1-7(e)

(Supp. 1981).

^"/d. §§ 23-2-3.1-7(b) to-7(e) (Supp. 1981).

^"M § 23-2-3.1-7(c).
*"/d. §§ 23-2-3.1-7(a) to-7(b).



68 INDIANA LAWREVIEW [Vol. 15:31

sioner can now issue ex parte cease and desist orders without
notice.

^^^

At least one major problem with the Takeover Offers Act was
eliminated by the repeal of section 23-2-3.1-6^^^ which prohibited

takeover offers from becoming effective for at least fifteen business

days after the filing of the offeror's statement. This provision was
probably in direct conflict with SEC Rule 14d-2(bP^ which requires a
tender offer to commence within five day of its public announce-
ment.

The last significant amendment effected by Public Law 215 was
the substitution of a new section 23-2-3. l-9(cP* which now provides
"that neither the secretary of state, nor the securities commissioner,

nor any employee of the securities division shall be liable in their in-

dividual capacity, except to the state of Indiana, for any act done or

omitted in connection with the performance of their respected

duties . . . ." under the the Takeover Offers Act. This provision will

take care of damage suits by unhappy tender offerors^^^ or Indiana
shareholders if by some chance opposition by the Securities Commis-
sioner causes an offeror to withdraw a lucrative tender offer.

''Hd. § 23-2-3.1-10(a).

^^''IND. Code § 23-2-3.1-6 (Supp. 1980) (repealed 1981).
==^'17 C.F.R. § 240.14d-2(b) (1981).

''^'IND. Code § 23-2-3.1-9(c) (Supp. 1981).
259See City Investing Co. v. Simcox, 633 F.2d 56, 59 n.7 (7th Cir. 1980).