Indiana Law Review


Developments in Business Association Law

Paul J. Galanti*

I. Foreign Limited Partnerships

The Indiana Uniform Limited Partnership Act (ULPA)' is the original

version of the ULPA promulgated in 1916. One of the great weaknesses
of the ULPA was that it did not deal with limited partnerships with
multistate operations. This is not surprising considering that the drafters

of the act contemplated that limited partnerships would be small, local

enterprises. Times change, and limited partnerships with multistate op-

erations have become common. Consequently, one of the great advances
of the Revised Uniform Limited Partnership Act (1976) (RULPA)^ and
its successor, the Uniform Limited Partnership Act (1985) (ULPA 1985),^
is that they clarify the status of foreign limited partnerships.^ A few
states had enacted procedures for recognizing foreign limited partnerships

before RULPA,^ and some courts recognized such enterprises by applying
choice of law rules. ^ This practice, however, was not universal. This

presented the risk of a court holding that a certificate of limited part-

nership filed in another state was not "substantial compliance" with the

formahties of forming a limited partnership under ULPA.^ The venture
would then be considered a general partnership, subjecting the limited

partners to unlimited Hability.^ Consequently, a cautious attorney rep-

resenting a limited partnership formed under the laws of another state

that wishes to transact business in Indiana would qualify it as an Indiana

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

'IND. Code §§ 23-4-2-1 to -31 (1982).
^Revised Uniform Limited PARXNERsmp Act, 6 U.L.A. 215 (Supp. 1986).
^Uniform Limited Partnersidp Act, 6 U.L.A. 285 (Supp. 1986).

*See generally Sell, An Examination of Articles 3, 4 and 9 of the Revised Uniform
Limited Partnership Act, 9 St. Mary's L.J. 459, 471-77 (1978).

'See, e.g., Cal. Corp. Code § 15700 (Deering Supp. 1974); Tex. Rev. Civ. Stat.
Ann., art. 6132a, § 32 (Vernon Supp. 1986).

"See, e.g., Cheyenne Oil Corp. v. Oil & Gas Ventures, Inc., 42 Del. Ch. 100, 105,
204 A.2d 743, 746 (1964); Oilman Paint & Varnish Co. v. Legum, 197 Md. 665, 668,
80 A.2d 906, 907-08 (1951); King v. Sarria, 69 N.Y. 24, 30-31 (1877); see also Plaza

Realty Investors v. Bailey, 484 F. Supp. 335 (S.D.N.Y. 1979) (New York federal court

applied Indiana law to an Indiana limited partnership in a diversity action); Partnership

Equities, Inc. v. Marten, 15 Mass. App. 42, 443 N.E.2d 134 (1982). See generally J.

Crane & A. Bromberg, Law^ of PARTNERSfflP § 26 n.30 (1968).
'Ind. Code § 23-4-2-2(2) (1982). See generally J. Crane & A. Bromberg, supra

note 6, § 26(b); H. Henn & J. Alexander, Lav^s of Corporations § 29 (3d ed. 1983).
'See Arrow Petroleum Co. v. Ames, 128 Ind. App. 10, 142 N.E.2d 479 (1957).

19



20 INDIANA LAW REVIEW [Vol. 2D: 19

limited partnership under the ULPA—at least, that is, until Indiana
adopts the ULPA 1985.

The only Indiana decision involving the limited liability of a foreign

limited partnership is the recent decision in Radio Picture Show Part-

nership V. Exclusive International Pictures.'^ Perhaps a more accurate

statement would be that Radio Picture Show might have involved the

limited liability status of a foreign limited partnership. A purported
Texas limited partnership, 3622 Limited, was one of the entities found

liable in the case.*° In turn, 3622 Limited was the purported limited

partner in Radio Picture Show Partnership, which was a purported

Cahfornia limited partnership. The court refused to limit 3622 Limited's

Hability, pointing out that not only had the venture not filed a certificate

of limited partnership in Indiana but also that defendants had not

presented evidence they were properly formed limited partnerships in

their respective states of organization.^' The only evidence presented by

defendants was the bare characterization by one of the parties that 3622

Limited was a limited partnership. This assertion was not sufficient to

meet defendants' burden of proof on the issue. '^

It might be possible for a foreign limited partnership planning to

transact business in Indiana simply to file a copy of the certificate of

limited partnership prepared and filed in its state of organization. How-
ever, because ULPA requires the certificate to specify the location of
the principal place of business in Indiana in order to determine where

the certificate should be filed, '^ the only safe procedure is to prepare

and file a certificate specifically drafted to comply with the Indiana

ULPA. This is a very cumbersome procedure if a limited partnership
does business in many states because the provisions for organizing Hmited
partnerships in ULPA jurisdictions are not completely uniform. The
problem is compounded by the frequent need to amend limited part-
nership certificates.'"^ The multiple fihng requirements for multistate lim-

ited partnerships were simplified significantly in the RULPA and the
ULPA 1985. '5

M82 N.E.2d 1159 (Ind. Ct. App. 1985).
'°Id. at 1168.

^^Id. at 1168-69. The limitation on liability of limited partners is a matter of defense.

See Howard v. Gray's Warehouses, Inc., 242 Ky. 501, 46 S.W.2d 787 (1932).
The Radio Picture Show court stated that "a limited partnership [sic] is not a proper

party in a proceeding against the partnership" under Ind. Code § 23-4-2-26. 482 N.E.2d
at 1168. The reference should have been to a "limited partner," but the error is under-

standable because the purported limited partner, 3622 Limited, was itself a limited part-

nership.

'^IND. Code § 23-4-2-2(1) (1982).
''Id. § 23-4-2-24.

'^Revised Uniform Limited PARXNERsmp Act § 902, 6 U.L.A. 267 (Supp. 1986);
Uniform Limited Partnership Act § 902, 6 U.L.A. 296-97 (Supp. 1986).



1987] BUSINESS ASSOCIATIONS 21

There is no Indiana authority on point, '^ but it is clear that a foreign

corporation that is the general partner of a foreign limited partnership

doing business in Indiana must qualify to transact business as a foreign

corporation under the Indiana General Corporation Act (IGCA).'^ This

is not necessary if a foreign corporation is a limited partner of a foreign,

or even an Indiana, limited partnership. The requirement that limited
partners not partake in control of the business to maintain limited liability

status'^ in effect precludes a corporation that is a limited partner from

transacting business in the state. Presumably a foreign corporation that

is a limited partner partaking in control of the business of a limited

partnership would be subject to sanctions for failing to qualify to do

business in Indiana under the IGCA'^ and would be liable to creditors
of the limited partnership under the ULPA.^^

II. Corporate Management and Shareholder Suits

A rather unusual case decided during the survey period is Scott v.
Anderson Newspapers, Inc}^ In Scott, the court affirmed in part, re-

versed in part, and remanded with instructions certain holdings of the
Hancock Superior Court in a declaratory judgment action. ^^ In reaching
this result, the Scott court appeared to follow traditional corporate law

maxims to some degree while doing violence to other maxims.
The dispute was between two factions in Anderson Newspapers, Inc.

(ANI), which publishes the two newspapers in Anderson, Indiana, the

Bulletin and the Herald. The plaintiffs represented the Herald group
and the defendants represented the Bulletin group. The two newspapers
were owned and operated by separate corporations before 1949, but
were consolidated in that year. ANI was the corporation resulting from

"The issue was not discussed in Radio Picture Show, although the general partner

in the partnership was a California corporation. 482 N.E.2d at 1162. The structure of

the Radio Picture Show enterprise was rather complex, which could explain why the court
observed that "no argument . . . [was] made concerning knotty problems of what law
would govern." Id. at 1168.

^^See Ind. Code § 23-1-11-1 (1982). See generally Note, The Corporation as Managing
Partner in a Limited Partnership, 55 N.D.L. Rev. 271 (1979). This also will be true under

the new Indiana Business Corporation Law, Ind. Code § 23-1-49-1 (Supp. 1986).
•«Ind. Code § 23-4-2-7 (1982). See Port Arthur Trust Co. v. Muldrow, 155 Tex.

612, 291 S.W.2d 312 (1956).

'^Ind. Code § 23-1-11-14 (1982).

^°Cf. Mursor Builders, Inc. v. Crown Mountain Apartment Ass'n, 467 F. Supp.
1316 (D.V.I. 1978).

^'477 N.E.2d 553 (Ind. Ct. App. 1985).

"M at 556. Perhaps the result is not too surprising considering the somewhat
convoluted nature of the parties. Defendants in the action had filed a counter claim and

both parties appealed from the lower court decision. Thus there were plaintiffs, counter-

defendants, appellants, and cross-appellees on one side and defendants, counter-claimants,

appellees, and cross-appellants on the other. Id.



22 INDIANA LAW REVIEW [Vol. 20:19

the consolidation.23 The former Herald interests became minority share^

holders and directors of ANI following the consolidation. ^-^ Each group

nominated its own directors although they were elected by all ANI
shareholders. In turn, the president and secretary were elected from the

Bulletin group and the vice president from the Herald group. Each group

appointed the editor of its own newspaper. ^^ Satisfactory relations between

the two groups apparently ended in 1981 when the founder of the

Herald, who was the ANI vice president, died. His son voluntarily
assumed the editorship of the Herald without any action by the ANI
board.

At this point, the Bulletin group, armed with a legal opinion,

attempted to gain complete control of ANI's affairs including the selection

of the vice president, who had traditionally come from the Herald group;

the right to nominate and elect the three Herald directors; and the right

to name the Herald's editor. They offered amendments to ANI's ** articles

of consolidation" and bylaws to provide that all corporate business and

affairs could be transacted by a simple majority vote of the shareholders

or directors. The declaratory judgment suit followed because these amend-

ments would have effectively ended the rights of the Herald group in

ANI.26

The Scott court, in discussing the issues in the case, consistently

referred to the "Herald group's preemptive right to pubhsh the Herald. "^^

This terminology is unfortunate. It is not clear from the opinion whether

ANI shareholders had "preemptive rights" as authorized by the IGCA.^^
The term preemptive rights refers to the right of shareholders to subscribe

to or purchase additional shares of a corporation under certain circum-

stances. ^^ It would not be surprising if ANI shareholders had preemptive
rights because they are quite common in closely held corporations. ^^

Perhaps the parties in Scott referred to the right of each group to publish

its own newspaper as a "preemptive right," but the court should have
refrained from using a term of art of corporation law in such an

inaccurate fashion.

''Scott, All N.E.2d at 557. See Ind. Code §§ 23-1-5-1, -3 (1982). See generally H.

Henn & J. Alexander, supra note 7, § 346.
'^Scott, All N.E.2d at 557. Initially there were five ANI directors, three from the

Bulletin group and two from the Herald group. The number of directors was raised to

seven, with four from the Bulletin group and three from the Herald group. Id.

''Id.

'"Id.

''Id.

2«lND. Code § 23-l-2-6(i) (1982).
'"^See generally H. Henn & J. Alexander, supra note 7, §§ 127, 175.
^°Under the IGCA, shareholders do not have preemptive rights except to the extent

that such rights are provided for in the articles of incorporation or a resolution of the

board of directors. Ind. Code § 23-1-2-6(1) (1982).



1987] BUSINESS ASSOCIATIONS 23

The Scott court had to examine the original consolidation of the

two newspapers to determine the rights of the two groups. The court

started with the truism that corporations "can be created and exist only

by virtue of statutory authority, and by that authority alone, "^' and

that while "there may be a contract among individuals to enter into a
corporation; . . . when the contemplated corporations [sic] comes into

existence, the charter, not the contract, determines their rights. Its pro-

visions are supreme. "^^

The latter observation is overbroad. Certainly corporations are crea-

tures of statutes, but many courts have long departed from the strict
corporate norm. They now clearly recognize and enforce contracts among
the parties to closely held corporations as to how the corporation is to
be governed if the interests of third parties are not adversely affected."

This contemporary view of the corporate norm clearly has been accepted

in Indiana by decisions recognizing the highly fiduciary nature of the

so called incorporated partnership.^"^ The Scott court recognized that the

relationship between a corporation and its shareholders is a "contract

in which the articles of incorporation, bylaws, provisions of the stock

certificate, and the pertinent statutes are embodied, "^^ but it failed to

acknowledge that the contract is in fact more inclusive. This narrow

view did not have any impact on the result in Scott, but it is unfortunate

that the court intentionally or inadvertently seems to be retreating from

the view of the contemporary cases.

The Scott court correctly characterized the articles of consolidation

as ANI's articles of incorporation.^^ Thus, it was appropriate to look

to the articles of consoUdation to determine the rights of the two disputing

groups with respect to the Herald. The court was satisfied that the

provisions of the articles made it clear that the two newspapers were

to be controlled by their respective groups. This arrangement included

''Scott, 477 N.E.2d at 558. See Ohio Ins. Co. v. Nunnemacher, 15 Ind. 294 (1860);
Indiana Bond Co. v. Ogle, 22 Ind. App. 593, 54 N.E. 407 (1899). See generally H.
Henn & J. Alexander, supra note 7, § 78.

''Scott, All N.E.2d at 558.

''See, e.g., Galler v. Caller, 32 111. 2d 16, 203 N.E.2d 577 (1964); McQuade v.
Stoneham, 263 N.Y. 323, 189 N.E. 234 (1934).

"See Dotlich v. Dotlich, 475 N.E.2d 331 (Ind. Ct. App. 1985), discussed in Galanti,

Business Law, 1985 Survey of Recent Developments in Indiana Law, 19 Ind. L. Rev.

67, 82-88 (1986); Cressy v. Shannon Continental Corp., 177 Ind. App. 224, 378 N.E.2d

941 (1978), discussed in Galanti, Business Associations, 1979 Survey of Recent Developments

in Indiana Law, 13 Ind. L. Rev. 133, 150-55 (1980); Hartung v. Architects Hartung/

Odle/Burke, Inc., 157 Ind. App. 546, 301 N.E.2d 240 (1973), discussed in Galanti, Business

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

"477 N.E.2d at 558.

"Id. at 559. See Ind. Code § 23-l-5-5(f) (1982).



24 INDIANA LAW REVIEW [Vol. 20:19

not only the right to maintain separate editorial policies but also that

the shareholders and directors of one group would not interfere with

the operation of the other newspaper. ^^ No fault can be found with this
conclusion, although the choice of the term "preemptive right" was

unfortunate.

The Scott court's treatment of ANI's bylaws was somewhat incon-

sistent with its emphasis on the primacy of the articles of consolidation.

The bylaws, adopted shortly after ANI was organized, provided in part
that provisions relating to the proportion of directors from each group

and the right of each group to fill board vacancies were not to "be

changed except by the affirmative vote of six-eighths of all outstanding

stock of this corporation."^^ The court gave effect to this bylaw, as it

should have, although under the IGCA, any provision requiring a greater
than majority vote for shareholder action must be included in the articles

of incorporation.^^ The IGCA permits the bylaws to estabhsh the quorum
of outstanding shares for a meeting of shareholders. "^^ There is nothing

wrong with giving effect to the bylaw, particularly because both groups
substantially complied with the bylaw until the present litigation, ^^ al-

though the result is inconsistent with the court's expressed understanding

of the requirements of Indiana corporation law.''^

The court next considered the contention of the Bulletin group that
a simple majority vote could amend the articles to eliminate these
provisions. The Bulletin group argued that the phrase "without limi-

''Scott, All N.E.2d at 559-60.

''Id. at 560.

^'IND. Code § 23-l-2-9(m) (Supp. 1986).
""M § 23-l-2-9(n). Presumably the bylaws were adopted by the shareholders acting

as shareholders rather than by the directors. Under the IGCA, the power to make, alter,
amend, or repeal bylaws is vested in the board of directors unless otherwise provided in

the articles of incorporation. Id. § 23-1-2-8.

Either the ANI articles of consolidation vested authority in the shareholders with
respect to the bylaws, or at least provided that with respect to the composition of the

board, any change would require shareholder approval with a high enough vote that no

change could occur unless both factions agreed. This would be permissible under Indiana

Code section 23-1-2-8 although the greater than majority voting requirement should have
appeared in the articles of incorporation.

It is possible the articles of consolidation did require a greater than majority vote

for shareholder action and this simply was not mentioned by the court. This does seem

unlikely, however, because the court substantially set out the provision in the articles of

consolidation relating to the make up of the board of directors. Scott, All N.E.2d at
559-60.

''Scott, All N.E.2d at 560.

"^There is an old Indiana decision. Green v. Felton, 42 Ind. App. 675, 84 N.E. 166

(1908), holding that a bylaw providing that bylaws could be amended by a two-thirds
vote required a vote of two-thirds shares represented at a meeting rather than a vote of

two-thirds of all shares. However, Green was decided before the IGCA was adopted.



1987] BUSINESS ASSOCIATIONS 25

tation" contained in the IGCA provision''- relating to amending articles
of incorporation meant that a simple majority could amend the articles

regardless of any other provisions in the corporate documents. This is

clearly erroneous. Certainly, the articles of consolidation could be amended

under the IGCA to give the Bulletin group total control of both papers.
However, the problem is not the possible absence of a provision in the

articles requiring a greater than majority vote of shareholders to amend

the articles, but that the operating terms of the articles prohibited either

group even from taking steps to propose an amendment to the articles.

Thus, the Scott court was right in concluding that the provisions in the

articles relating to control over each newspaper could be amended only

if the directors or shareholders of the group concurred."^

The court characterized the Bulletin group's proposal to eliminate

the rights of the Herald group as "ultra vires. '"'^ The ultra vires doctrine

is severely limited by the IGCA, but in some cases it can be raised by

a shareholder.^^ The court unfortunately misused the term "ultra vires,"

which should be limited to situations where a corporation has attempted

to do something not authorized by its purposes or powers. ANI did
not lack capacity to do what the Bulletin group wanted. Rather, the

Bulletin group was trying to do something in an improper manner.

Furthermore, characterizing the Bulletin group's efforts as ultra vires is

totally inconsistent with the court's determination that the Scott action

was a derivative rather than a direct action. An action by a shareholder
to enjoin an ultra vires act would be an action brought to enforce a

right of the shareholder rather than a right of a corporation. The latter

is the essence of a shareholder derivative action.''^

The court rejected the Bulletin group's contention that Indiana law

does not provide for separate approval of amendments by shareholder

"groups" where the corporation has a single class of shares.''^ The

court's approach to this issue is intriguing. It relied on the "import"

«lND. Code § 23-l-4-l(a) (Supp. 1986).

'^It is possible that the opinion of the Bulletin group that they could amend the

articles by a simple majority was premised on the lack of a greater than majority voting

requirement provision in the articles of consolidation. It is clear that a better drafting

job would have included such a provision in the articles. The argument of the Bulletin

group, of course, was not specious and could have been accepted by the Scott court with

its somewhat misbegotten emphasis on the controlling nature of the corporation statute

over corporate conduct.

^H77 N.E.ld at 561.

^See Ind. Code § 23-l-10-4(a) (1982). See generally W. Cary & M. Eisenberg,
Cases and Materials on Corporations 40 (5th ed. unabr. 1980); H. Henn & J. Alex-
ander, supra note 7, § 184.

"^See generally H. Henn & J. Alexander, supra note 7, § 360.
''Scott, All N.E.2d at 561-62.



26 INDIANA LAW REVIEW [Vol. 20:19

of the IGCA section authorizing provisions in articles "creating, defining,
limiting or restricting the powers . . ., of the shareholders of any class

... of shareholders.""^ The court apparently rejected the idea that

there was more than one class of shares while at the same time recognizing

the Herald interests and the Bulletin interests as separate "groups. "^°

The court concluded the statement that there was "no division" of the
shares in the printed articles of consolidation prescribed by the Indiana

Secretary of State simply meant that there was only one class of shares

so that no statement of voting rights was required because there was

only one class. The court in effect treated the two groups as separate

classes while denying that it was doing this because the arrangement

was not sanctioned in the articles of consoHdation.

There is nothing wrong with rejecting the Bulletin group's argument,

and the court reached the right result. However, if the court had been

willing to depart from its preternatural position that the "contract" to

be construed was within the four corners of the articles of consolidation

and simply gave effect to the obvious intent of the parties, as was done

in Cressy v. Shannon Continental Corp.,^^ the same result could have
been reached in a less circuitous way.

One of the most questionable aspects of the Scott decision was the
court's determination that the suit was a derivative action warranting

recovery of attorney's fees and expenses by the Herald group. ^^ The
Bulletin group argued unsuccessfully that the action was personal to the

plaintiffs because it sought to protect and defend their rights as share-

holders and did not seek relief benefiting the corporations. The court
responded that "[i]t is only in exceptional cases that stockholders will

be permitted to sue or defend a suit for and on behalf of themselves
as stockholders of such corporation."^^ This statement is absolutely

extraordinary in light of the court's own characterization of the Bulletin
group as "illegally and oppressively pursuing a course of action in the

name of the corporation calculated to destroy the Herald group's"^"*
interests. There is no simple and foolproof method for distinguishing a
derivative action from a shareholder's direct or individual action. ^^ Gen-

^'Id. at 562 (emphasis in original) (quoting Ind. Code § 23-1-3-2(12) (1982)).
^°/<i. A better way of handling this issue when ANI was organized would have been

to create two classes of shares: a Herald class and a Bulletin class. This is a very effective
way to insure that each constituent group in a corporation will have its interests protected.
See Lehrman v. Cohen, 43 Del. Ch. 222, 222 A.2d 800 (1966).

^'177 Ind. App. 224, 378 N.E.2d 941 (1978), discussed in Galanti, Business Asso-
ciations, 1979 Survey of Recent Developments in Indiana Law, 13 Ind. L. Rev. 133, 150-
55 (1980).

"477 N.E.2d at 562-64.

"M at 563.
''Id.

"H. Henn & J. Alexander, supra note 7, § 360.



1987] BUSINESS ASSOCIATIONS 27

erally speaking, however, "the breach of the shareholder's membership

contract give[s] rise to a direct or individual action while a wrong to

the incorporated group as a whole (i.e. breach of some duty to the
corporation) is the basis for derivative action. "^^ The derivative action
is appropriate to recover damages or profits where a controlling interest

is harming the corporation," but whatever harm the Bulletin group was
causing was to the Herald group and not to ANI. Furthermore, derivative
actions are constrained by the provisions of trial rule 23.1.^^ There was

no evidence that plaintiffs complied with these requirements, or at least

none was mentioned by the court.

Furthermore, the court in discussing the ultra vires issue recognized

that the action may be brought in a proceeding "against the corpora-
tion."^^ The derivative action, of course, is an action on behalf of the
corporation. The court in fact stated that suits for and on behalf of
shareholders as shareholders are permitted "where a majority of the

stockholders are illegally and oppressively pursuing a course in the name
of the corporation, which is in violation of the right of the other

stockholders, and can only be restrained by a court of equity. "^° It is

clear that if the Scott litigation can be characterized as anything, it can

be characterized as an attempt by the Bulletin group to oppress the

Herald group. Despite reaching this conclusion, the court determined

that the action was derivative. The position taken in Scott is supported

by neither Indiana nor general authority.

It is possible the court characterized the action as a derivative suit

to uphold the order that ANI pay the Herald group's costs and attorneys'
fees.^^ It is well settled that attorneys' fees and expenses can be awarded

to a successful plaintiff in a shareholder derivative suit under Indiana

law. ^2 This approach is the converse of the not uncommon situation of
a court straining to characterize an action as direct rather than derivative

^^Id. (emphasis added). Henn and Alexander have noted that among other things,
the following have been held to be direct actions by shareholders: (1) suits to protect

preemptive rights (presumably referring to the traditional preemptive right to subscribe to

shares of the corporation, rather than as the term is used in Scott); (2) suits to enforce

the right to vote; (3) suits to enjoin an ultra vires act or other threatened wrong before

its consummation; (4) suits for breach of a shareholder agreement. Id.

''Id.

5«Ind. R. Tr. p. 23.1.

'''Scott, All N.E.2d at 561 n.2.

"^Id. at 563 (citing McFarland v. Pierce, 151 Ind. 546, 45 N.E. 706 (1897), reh'g over-

ruled, 151 Ind. 549, 47 N.E. 1 (1897)).

^'M at 564. The fees and expenses awarded totaled $122,818.82. Id.
''See Neese v. Richer, 428 N.E.2d 36 (Ind. Ct. App. 1981), discussed in Galanti,

Business Associations, 1982 Survey of Recent Developments in Indiana Law, 16 Ind. L.
Rev. 25, 25-29 (1983); see also Cole Real Estate Corp. v. Peoples Bank & Trust Co.,
160 Ind. App. 88, 310 N.E.2d 275 (1974).



28 INDIANA LAW REVIEW [Vol. 20:19

where an unsuccessful shareholder in a derivative action can be liable

for the expenses of the corporation under a security for expenses statute.
^^

Still, a well intentioned motive of making a corporation bear the expenses

of litigation does not justify characterizing a direct shareholder action

as a derivative action.

The court next rejected the Bulletin group's argument that ANI
should recover the salary paid plaintiff Scott for his services as interim

editor of the Herald until he was removed from that position by court

order. ^"^ The court concluded that the trial court was justified in rejecting

the argument that Scott was an "officious intermeddler" and in con-

cluding that there was an implied contract between ANI and Scott because
someone had to be the editor of the Herald. ^^

The final issue considered in Scott was whether the Herald group's

directors had the right to name the ANI vice president. ^^ The ANI vice
president apparently had come from the Herald group from the time

ANI was organized in 1949 to the death of Scott's father in 1981. The
Herald group argued that this history impliedly amended the articles of

consolidation and the bylaws to provide in effect that the ANI vice
president would come from the Herald group. The court rejected this

argument and noted that the Herald group cited "no Indiana cases

supporting that contention, only cases from foreign jurisidictions so

stating. "^^ This too is an extraordinary statement. It is well established

that relationships, even if reflected in corporate documents, can be

impliedly amended by the conduct of the parties if the interests of third

parties are not harmed.^^ The fact that no Indiana case had so held

simply means that the issue had not previously arisen in Indiana. In-

terestingly the court did not cite any Indiana cases holding that this

cannot be done.

The court noted that the Herald group made no attempt to show
the corporation laws of the states from which the cases arose were

^^See, e.g., Reifsnyder v. Pittsburgh Outdoor Advertising Co., 405 Pa. 142, 173

A.2d 319 (1961). See generally H, Henn & J. Alexander, supra note 7, § 372.
'''Scott, All N.E.2d at 564-65.

^^Id. The court also declined to order Scott to reimburse the corporation for telephone

calls charged to and paid by ANI. The argument that the calls were personal was rejected

because the calls were related to the litigation. Although the court's determination that

the cost of the litigation should be assessed against ANI might be questionable, it certainly
follows that these expenses were properly considered costs of the litigation. If Scott had

been ordered to repay the corporation, he could then petition the court to order the

corporation to reimburse him in the same amount. Id. at 565.

''''Id, at 565.

'''Id.

"'See, e.g., Magnus v. Magnus Organ Corp., 71 N.J. Super. 363, 177 A.2d 55 (1962).
Compare Caller v. Caller, 32 111. 2d 16, 203 N.E.2d 577 (1964) witfi Soraers v. AAA
Temporary Serv., Inc., 5 111. App. 3d 931, 284 N.E.2d 462 (1972).



1987] BUSINESS ASSOCIATIONS 29

substantially the same as Indiana corporation law.^^ Although the plain-

tiffs might have been well advised to have checked those statutes, citing

such authority should not have been necessary because this is a general

principle of corporate law, which exists apart from statutes. The Scott
court also ignored the fact that Indiana courts have recognized the

estoppel doctrine. In Bossert v. Geis,^^ the court held that a corporation

was estopped by long continued conduct of its president, with its implied

knowledge and consent, from denying his authority to execute contracts

and borrow money, though not expressly authorized by articles, bylaws,

or the directors. This rationale should have applied in Scott, or at least

it should have been considered by the court.

As it is, the court concluded that because ANI's charter, meaning
the articles of consoHdation, did not spell out "a preemptive right" for

the Herald group to name the vice president, "it does not exist. ANI
officers may be nominated by any director, come from any group, and
be elected by simple majority vote of the ANI directors."^' In other
words, the Herald group could name the newspaper's editors but they
were forever a minority block on the board with very little influence

on the day to day operations of ANI as a corporation. This result is
both unfortunate and unnecessary. It is fairly certain the parties who
formed ANI contemplated that the vice president would come from the
Herald group, and it is also clear that the most effective way of insuring
that each group would have rights with respect to its own paper was
to have one of the ANI officer positions filled by the Herald group.

All in all, the opinion in Scott v. Anderson Newspapers, Inc. strikes
this author as unfortunate. This is not so much for the result, because
the Bulletin group certainly was interfering with the intended structure

of ANI. Rather, it is because of the court's unnecessary and improper
use of the term "preemptive rights," and its insistence on staying within
the four corners of the articles of consoHdation notwithstanding other

decisions of the Indiana Court of Appeals that have recognized the

highly fiduciary nature of the relationships among owners of closely
held corporations.^^ Hopefully, if a similar dispute occurs before another

district, the analysis of Scott will not be followed, and the fourth district
will reconsider the views expressed in Scott if another opportunity arises. ^^

III. Corporate Control

The attempt by Dynamics Corporation of America (DCA) to obtain
control of CTS Corporation has become a prolific source of legal issues

"'Scott, All N.E.2d at 565.
'"51 Ind. App. 384, 107 N.E. 95 (1914).

''Scott, All N.E.2d at 565.

'^See cases cited supra note 34.

^The battle between the ANI factions continues. Most recently there appears to be



30 INDIANA LAW REVIEW [Vol. 20:19

and judicial decisions. The battle took place in both state and federal

courts. DCA failed in its effort to oust the incumbent CTS management,
but the biggest loser as of this writing is the new Indiana Business

Corporation Law (IBCL) or, more specifically, the control share ac-
quisition chapter of the IBCL.^"*

All told there have been five opinions in the control battle: one in

state court, ^^ three in the United States District Court for the Northern

District of Illinois, ^^ and one in the Seventh Circuit Court of Appeals. ^^

There will be at least one more because the United States Supreme Court

will hear an appeal from the Seventh Circuit decision.^^ The Indiana

action involved the issue of DCA's right as a substantial shareholder
to obtain corporate information from CTS. The federal litigation involved

DCA's challenge to the defensive moves by CTS's management.
Anyone who opposes attempts to acquire or obtain control of Indiana

corporations will be pleased by the result in DCA I, which for all intents
and purposes blocks offerors or insurgents from access to corporate

books and records under the record keeping provisions of the Indiana

General Corporation Act (IGCA).^^ Theoretically they can still gain access

to the records as shareholders if they can persuade a local court that

they have a "proper purpose" for seeking disclosure of corporate in-

formation, and DCA I does not on its face impose on the shareholder
the burden of establishing proper purpose. ^° However, by taking an

extraordinarily narrow view of what is a proper purpose, the result of

DCA I is tantamount to putting the burden on the shareholder.
In DCA 7,^^ the Indiana Court of Appeals affirmed an order of

the Elkhart Circuit Court denying relief to DCA in its mandamus action
to compel CTS to disclose corporate information.^^ The court stated
that the trial court could infer that this information was not sought for

some question as to who owns ANI. It was reported that the two newspapers may have
been sold to a newspaper chain, but this was denied by the president of ANI. Indianapolis

Star, Oct. 31, 1986, at 35, col. 2,

'^IND. Code §§ 23-1-42-1 to -11 (Supp. 1986).
^^Dynamics Corp. of America v. CTS Corp., 479 N.E.2d 1352 (Ind. Ct. App. 1985)

[DCA I].
^^Dynamics Corp. of America v. CTS Corp., 637 F. Supp. 406 (N.D. 111. 1986)

[DCA II]; Dynamics Corp. of America v. CTS Corp., 635 F. Supp. 1174 (N.D. 111. 1986)
[DCA III]; Dynamics Corp. of America v. CTS Corp., Fed. Sec. L. Rep. (CCH) 1 92,765
(N.D. 111. May 3, 1986) [DCA IV].

"Dynamics Corp. of America v. CTS Corp., 794 F.2d 250 (7th Cir.), prob. juris,
noted, 107 S. Ct. 258 (1986) [DCA V].

'nOl S. Ct. 258 (Oct. 6, 1986) (noting probable jurisdiction for appeal).

^^IND. Code § 23-1-2-14 (1982).
^°DCA I, 479 N.E.2d at 1353. In fact it seems to take the position that the burden

is on management to prove a lack of a proper purpose. Id. n.2.
«'479 N.E.2d 1352 (Ind. Ct. App. 1985).

«Vaf. at 1353.



1987] BUSINESS ASSOCIATIONS 31

a proper purpose but rather to assist DCA in its non-derivative battle
against incumbent management for control of CTS.^^ This does not
mean, however, that steps taken to oust incumbent management were
adverse to the best interests of the corporation.

The particular litigation was instituted in 1981 after DCA had de-
manded to inspect numerous CTS records. It appears that some of the
requested information had been furnished to DCA as a result of discovery
in pending litigation or had been furnished to all CTS shareholders.
Apparently DCA filed the mandamus action before CTS had formally
responded to its request, but it is certainly disingenuous to think that

considering the hostility between DCA and CTS management, CTS would
have produced the requested records without a court order. ^"^

DCA I treated the burden of proof issue in suits to enforce a
shareholder's inspection rights in a summary fashion. Apparently the
trial court had made a preUminary ruling that the IGCA required DCA
to state its purposes in seeking to inspect CTS's books and records

before it could sue, and that it had the burden of proving that those

purposes were proper. ^^ The court of appeals indicated that it was
"inclined" to the view that Indiana authority as reflected in Charles

Hegewald Co. v. State^^ supported the position of the trial court, but
that any error was "harmless" because the court's findings clearly

imposed the burden on CTS.^^ It certainly is possible that the trial court

did impose the burden on CTS and that its preliminary rulings were
just that, but it does appear that the DCA I court gave Hegewald an
unduly narrow reading. Hegewald requires the purpose of the exami-
nation to be germane to the shareholder's interest as a shareholder, but

the Indiana Supreme Court was not clearly departing from the position
taken by other courts that impose the burden of establishing a lack of
proper purpose on the corporation.^^ Furthermore, nothing in Hegewald
actually requires a shareholder to state his purposes in seeking inspection

before fihng a mandamus action, ^^ and the IGCA is silent on this point. ^^

«Vfi?. at 1355.

^'^See id. at 1354-55. The fact that the shareholder already has available the information

being sought might be grounds for denying inspection under common law for lack of
good faith. See People ex rel. Giles v. Klauder-Weldon Dyeing Mach. Co., 180 A.D.

149, 167 N.Y.S. 429 (1917). See generally H. Henn & J. Alexander, supra note 7,
§ 199.

''DCA I, 479 N.E.2d at 1353 n.2.

8M96 Ind. 600, 149 N.E. 170 (1925).

«M79 N.E.2d at 1353 n.2.

''Hegewald, 196 Ind. at 605-06, 149 N.E. at 173. See generally H. Henn & J.
Alexander, supra note 7, § 199 n.2.

*^Failure to state the purpose might, however, go against the good faith element of

the shareholder's right to examine corporate books and records.

^IND. Code § 23-1-2-14 (1982).



32 INDIANA LAW REVIEW [Vol. 20:19

The inspection provisions of the IBCL^' require the shareholder to

disclose the purpose of the inspection before being given access to books

and records. This is true even under the comparable provisions of the

Revised Model Business Corporation Act,^^ which takes a more liberal

view in balancing the right of shareholders to inspect corporate records

and the interest of management in freedom from harassment by share-

holders.

DCA sought to inspect records and minutes of the 1981 CTS annual
meeting of shareholders, books of account reflecting expenditures for

research and development since 1978, books of account reflecting all

legal fees paid or incurred in connection with the litigation between CTS
and DCA, all fees paid or owed to an investment banking firm since
1980, and the minutes of all regular and special meetings of the board

of directors of CTS since August 1980.^3
The DCA I court also relied on S.F. Bowser & Co. v. State.^"^ Bowser

held that mandamus would not lie unless and until the corporation knew
or was given reasonable assurance that the party making a request was

really a shareholder. It is difficult to see how Bowser supported CTS's
position. CTS clearly knew DCA was a shareholder because management
and DCA had been battling for several years. The court also cited the
Illinois decision in People ex rel. Miles v. Bowen Industries, Inc.^^ This
too seems of questionable import because Miles also involved the issue

of whether the requesting party was a shareholder and entitled to inspect

the corporate records under the applicable provisions of the lUinois

Business Corporation Act.^^

The DCA I court was correct in noting that both statutory and
common law require a shareholder to have a proper purpose to be
entitled to inspect corporate books and records.^^ The problem with the

decision is that the court seemingly required that every purpose of the

shareholder be "proper." Sounder authority recognizes that a shareholder

is not entitled to corporate information for purely personal or commercial

reasons, but permits inspection where there is a proper purpose even

^'iND. Code § 23-l-52-2(c)(2) (Supp. 1986).
^H Model Bus. Corp. Act Ann. § 16.02 (3d ed. 1985). The balance of the RMBCA

is aimed at protecting management from harassment by shareholders with small holdings,

which was not the case with DCA, the largest shareholder of CTS.
^'DCA I, 479 N.E.2d at 1353. The court of appeals cryptically noted that "[w]e do

not suggest that all this information was discoverable under the Statute. The trial court
determined that some was not." Id. n.3. It appears that the court applied some of the
restrictions imposed by discovery rules to a shareholder's right to inspect corporate records,

although there does not appear to be a basis for this.
^^192 Ind. 462, 137 N.E. 57 (1922).
^^327 111. App. 362, 64 N.E.2d 213 (1945).
^^III. Rev. Stat., ch. 32, para. 157.45 (1945).

''DCA /, 479 N.E.2d at 1354.



1987] BUSINESS ASSOCIATIONS 33

though there might be some ulterior motive. '^*^ Thus, even if DCA's

purpose in wanting the information to aid "its non-derivative Htigation

and competitive goals against CTS" was improper (and this is not clearly
the case), DCA had indicated the possibility of a suit against CTS
management for waste of corporate assets in continuing counterclaims

against DCA.^^ Utilizing corporate records as the basis of possible lit-

igation against management has long been held to be a proper purpose. '°°

Even if the propriety of the possible litigation was a "close call," CTS
should have lost if the burden of proof was in fact on it rather than

on DCA.
Furthermore, even cases that narrowly construe the right of share-

holders to inspect corporate records such as State ex rel. Pillsbury v.

Honeywell, Inc.^^^ emphasize that the shareholder's purpose must be

related to his investment. Clearly DCA, which had been acquiring CTS
shares since 1980, was concerned with its "investment." Consequently

it seems that DCA's purpose was proper, and it is dubious to say that

the trial court's finding was supported by the evidence.

The DCA I court also upheld the determination that DCA lacked
a proper purpose in demanding disclosure of research and development

expenditures of CTS.'°^ The decision on th-is point appears to hinge upon

a statement by DCA's president following the 1981 CTS shareholder
meeting praising "the manner in which CTS had answered the questions
[about the reclassification of CTS's research and development expenses]

at the meeting. "^^^ The court stated that DCA had given no explanation
to CTS for "withdrawing its expressed approval of Mr. Hostetler's
response at the annual meeting. "'^"^ The court also noted that information

on CTS's research and development was contained in "work papers"

prepared by CTS accountants and not in a separate account and that

"^See, e.g.. State ex rel. Theile v. Cities Serv. Co., 31 Del. 514, 115 A. 773 (1922)

(purpose to sell list improper); General Time Corp. v. Talley Indus., Inc., 43 Del. Ch.

531, 240 A.2d 755 (1968) (desire to solicit proxies in opposition to management directly

related to shareholder status and any secondary purpose irrelevant); Hannahan v. Puget

Sound P. & L. Co., 332 Mass. 586, 126 N.E.2d 499 (1955) (possible use of shareholder
list for commercial purposes by securities dealer no bar to inspection). See generally H.

Henn & J. Alexander, supra note 7, § 199.
DCA clearly was attempting to oust CTS management which cannot, objectively

speaking, be deemed improper harassment of management justifying denial of inspection

rights. See Sawers v. American Phenolic Corp., 404 111. 440, 89 N.E.2d 374 (1949). CTS
management obviously would disagree, but they cannot be considered "objective" on this

issue.

'^DCA I, 479 N.E.2d at 1354.

'"^See, e.g., Rochester v. Indiana County Gas Co., 246 Pa. 571, 92 A. 717 (1914).
'0'291 Minn. 322, 191 N.W.2d 406 (1971).
'°^DCA I, 479 N.E.2d at 1355.

'"^Id.



34 INDIANA LAW REVIEW [Vol. 20:19

the information was considered confidential by CTS.'^^ The use of the

term "work papers" suggests that the court appUed evidentiary rules

and doctrines to shareholder rights to information. If DCA in fact
misused any information that contained trade secrets, trade regulation

law would amply protect the interests of CTS. The main point seemed

to be DCA's "change of heart" on management's responses. It is an
extraordinarily thin reed to support a conclusion that seeking information

on expenditures for research and development is not a proper purpose

simply because the shareholder or, in this case, the president of a corporate

shareholder, praised a response to a question at a shareholder meeting.

Certainly this cannot seriously be considered an appropriate application

of the estoppel concept.

It is within the purview of a shareholder's interest to determine how
the funds of the corporation are expended and whether those expenditures

will produce the most appropriate return to investors. *°^ CTS management
of course believed that its decisions as to the appropriate directions for

CTS research and development were correct, but this view does not
preclude a shareholder from disagreeing and attempting to show that

the management's efforts were ill advised.

If CTS were threatened by DCA hiring away its employees, it could
protect itself by employment contracts containing covenants not to com-

pete. Furthermore, if employment contracts were not terminable at will,

CTS could have an action for inducing a breach of contract. ^°^ Even
in the absence of contractual obligation, the fiduciary duty owed by an

agent to a principal can act as a bar against improper conduct by a

former employee. '°^

The last item of information DCA sought related to the retention
of an investment banker and the minutes of board meetings where legal

advice received by CTS regarding litigation with DCA and tentative CTS
business plans were discussed. The court merely listed these items and

concluded that "there was a reasonable inference available to the trial

court that DCA was not seeking the requested information for a 'proper
purpose' but sought it instead to assist DCA in its non-derivative litigation
and competitive goals against CTS."^°^ Although this may be so, there
was no analysis of why this information had no impact on the investment
interests of corporate shareholders. The bald conclusion that DCA did

"^H. Henn & J. Alexander, supra note 7, § 199.
107 <
^See generally Harper, Interference with Contractual Relations, 41 Nw. U.L. Rev.

873 (1953).

'''See. e.g., Duane Jones Co. v. Burke, 281 A.D. 662, 121 N.Y.S.2d 107 (1953),

aff'd as modified, 306 N.Y. 172, 117 N.E.2d 237 (1954).

'^DCA I, 479 N.E.2d at 1355.



1987] BUSINESS ASSOCIATIONS 35

not have a proper purpose is appropriate only if the burden of proving

a proper purpose is on the shareholder. The lack of analysis of this

issue raises the possibility that both the trial court and the court of

appeals were putting the proper purpose burden on DCA.
The court cited numerous cases for the proposition that courts

reviewing inspection statutes have adopted the general rule that the

primary purpose of the inspection must not be adverse to the best interest

of the corporation. ^'° This is, of course, a truism, but interestingly in

one case cited by the court, inspection was granted.'"

It seems that under a decision such as DCA I, a "proper purpose"
to entitle a shareholder to inspect corporate records is not so much in
the eye of the beholder as it is in the eye of management. Certainly

management of corporations that are or are perceived to be likely takeover
targets will find much comfort in DCA /, particularly because the
inspection rights of shareholders under the IGCA are broader than under
the IBCL. Under the new law, a "proper purpose" is statutorily mandated
and a shareholder must disclose that purpose and indicate that the request

is directly connected with that purpose. "^ The requirement of disclosing
the purpose and the nexus between the documents and the purpose could

easily be satisfied by a shareholder in the position of DCA. However,
with the narrow view of "proper purpose" in DCA I, which will still
be good authority under the IBCL, the tender offeror or insurgent in

a proxy contest will find a less than hospitable atmosphere in Indiana

courts.

The offeror or insurgent might find the atmosphere in federal courts
more hospitable, at least if the Supreme Court upholds Judge Posner's
scholarly opinion in DCA F."^ in DCA V, the Seventh Circuit affirmed
the decision of the United States District Court for the Northern District

of lUinois in DCA IP^^ enjoining CTS's management from enforcing a
"poison pill" plan adopted by CTS during a proxy contest between
management and DCA. DCA sought injunctive relief under section 14(a)
of the Securities Exchange Act of 1934,''^ alleging an unlawful proxy

solicitation by CTS management."^

'"C. M. & M. Group, Inc. v. Carroll, 453 A.2d 788 (Del. 1982).
"^IND. Code § 23-l-52-2(c)(2) (Supp. 1986).
"'Dynamics Corp. of America v. CTS Corp., 794 F.2d 250 (7th Cir.), prob. juris,

noted, 107 S. Ct. 258 (1986).

"^Dynamics Corp. of America v. CTS Corp., 637 F. Supp. 406 (N.D. 111. 1986).
"45 U.S.C. § 78n(a) (1982).
''''DCA II, 637 F. Supp. at 407. The day DCA filed suit, it announced a tender

offer for up to one million CTS shares at $43.00 per share and that it intended to wage
a proxy contest to elect its own slate of directors to the CTS board. The offer increased
DCA's holdings in CTS to 27.7% of the outstanding shares. Id.



36 INDIANA LAW REVIEW [Vol. 20:19

DCA II involved DCA's motion for a preliminary injunction against
the shareholder rights plan adopted by the CTS board shortly after DCA
filed suit. The plan adopted by the CTS board gave CTS shareholders
a distribution of one "right*' per share. The rights had no value unless

and until certain triggering events occurred. The first, known as a "flip-

in," occurred when a person or group acquired fifteen percent or more
of CTS's common shares. At such time, the rights became nonredeemable
and entitled all CTS shareholders except the acquiror to purchase a unit
of CTS securities consisting of a fractional share of common stock and
debentures at a price equal to twenty-five percent of the pretrigger value

of the securities. The purpose of the "flip-in" was to inflict an immediate

economic loss on any hostile bidders who did not negotiate with man-
agement before making an unsolicited acquisition attempt.*'^ Perhaps it

would be more accurate to say that a flip-in plan or any other defensive

poison pill is intended to make the target so unpalatable that there
simply will not be any unsolicited acquisitions.

The CTS rights plan also contained a "flip-over" provision which
was triggered if CTS were acquired in a merger or upon the sale of all
or the majority of its assets. When the flip-over provision was triggered,
CTS shareholders could purchase common shares of the acquiring com-
pany worth $150 for $75.

The flip-in provision was in controversy in DCA II because DCA's
tender offer would have raised its holdings above the fifteen percent

trigger threshold. •'^ DCA raised numerous arguments against the CTS
poison pill. It first argued that the plan established two classes of shares

and discriminated among shareholders. DCA contended this was pro-
hibited by Indiana law. It also argued that in adopting the plan in

response to the DCA tender offer, CTS management breached its fi-
duciary duty to CTS and other shareholders."^

Judge Getzendanner rejected these arguments. Under both the IGCA
and the IBCL, a corporation can issue "rights" that trade with shares, '^°

including those owned by an acquiring corporation, even if the acquiring

"^The rights belonging to the acquirer under the plan became null and void when
the fifteen percent threshold was reached. Id.

'"^The court noted that according to CTS's calculations, the issuance of shares and

debentures to other CTS shareholders would have imposed an economic loss of approx-
imately $24 million on DCA. Id. at 408.

"^Id.

'^°See IND. Code § 23-1-2-7 (1982) (IGCA); Id. § 23-1-26-5 (Supp. 1986) (IBCL).
The court stated that it had been "advised" that Indiana courts look to Delaware decisions
in matters of corporate law. 637 F. Supp. at 408. This is somewhat of an overstatement.

Not surprisingly, CTS "opted in" to the IBCL on April 1, 1986, the earliest date
at which corporations organized under the IGCA could opt in, although the plan was
adopted before CTS was controlled by the IBCL.



1987] BUSINESS ASSOCIATIONS 37

corporation takes subsequent action that causes it to forfeit those rights.

Shareholder approval would have been necessary if the plan had created

a new class of shares, but the DCA II court appears correct in rejecting
that contention. The plan was not a pure vote altering scheme'^' since

economic consequences attached to the rights when they were triggered.

This is not to say that the law is "right." Even The Wall Street Journal

has editorialized that "[t]here is only one way to be sure that managers

and shareholders are on the same side of a takeover question—share-
holders should have to vote to approve defensive tactics." '^^ Because

DCA had not established a probability of success on its claim that the
rights plan was not authorized under Indiana law, it was not entitled

to a prehminary injunction. '^^

The court also rejected the argument that the rights plan discriminated

against DCA and any other CTS shareholders who might acquire over
fifteen percent of CTS's outstanding shares. ^^"^ The court relied on Unocal

Corp. V. Mesa Petroleum Co. ,'^^ where the Delaware Supreme Court
upheld a Unocal exchange offer for its own shares that intentionally
excluded shares owned by Mesa because Unocal was responding to a
perceived threat presented by Mesa. Unocal and Moran v. Household
International, IncJ^^ apphed the business judgment rule to the adoption

of defensive moves against hostile offerors and so basically supported

the position of DCA. However, even assuming that Unocal and Moran
did not tilt the playing field between target managers and raiders unduly

in favor of the former, the DCA II court felt that the Delaware standards
had not been met by CTS's management, which seemed more incHned

to entrench itself than to protect the interest of CTS shareholders.'^^
Even though the actions of a board are entitled to a presumption of

vaHdity where the majority of a board of directors is independent,'^^

the court felt that DCA's independent directors had not displayed "rea-

'^'5ee Unilever Acquisition Corp. v. Richardson-Vicks, Inc., 618 F. Supp. 407 (S.D.N.Y.

1985); Asarco, Inc. v. Court, 611 F. Supp. 468 (D.N.J. 1985).

'^^The Wall Street Journal, July 28, 1986, at 12, col. 1. The editorial commented

favorably on Judge Posner's decision in DCA V. Of course, the editors somewhat smugly
noted that the shareholders of Dow Jones & Company, which publishes the Journal, had
approved a defensive scheme to protect management of that company. One might well
wonder what the editorial stance would have been if someone had made a "play" for
Dow Jones before any defensive moves could be adopted.

'^'DCA II, 637 F. Supp. at 409.

'^'Id.

'"493 A.2d 946 (Del. 1985).

'2*500 A.2d 1346 (Del. 1985). Moran upheld a flip-over poison pill rights plan similar
to the CTS flip-over plan. See also Revlon, Inc. v. MacAndrews & Forbes Holdings,
Inc., 506 A.2d 173 (Del. 1986).

'^'DCA II, 637 F. Supp. at 411-18.

'''See Moran, 500 A.2d at 1356.



38 INDIANA LAW REVIEW [Vol. 20:19

sonable grounds" for believing that DCA in fact presented a danger to
CTS's corporate policies. In fact, the court recognized a reasonable

possibility that further evidence
*

'might reveal some of the board's stated

concerns to be sham."'^^ Judge Getzendanner also noted that the tes-

timony of CTS board members concerning the actual threat posed by
DCA appeared to be in conflict. '^° This could indicate that their testimony
was unreliable or that the CTS board simply had not discussed the
matter thoroughly and that individual directors had different impressions

of what was decided and resolved.'^' Even a gross negligence standard

would not guarantee success to CTS directors, although the court felt
at this junction that gross negligence had not been estabhshed because

CTS did not adopt the poison pill until it had obtained legal and
investment advice. ^^^

CTS's plan failed because, as is likely when defensive moves follow

a hostile tender offer, the conclusion that the plan was "appropriate"

apparently meant that it was appropriate to defeat the DCA offer or
that any response that eliminated the DCA threat was "reasonable"
once the board had decided the DCA offer represented a threat.^" The
court distinguished the Delaware cases ^^^ cited by CTS because they were
tailored to protect the interests of minority shareholders without specific

regard to entrenching management. CTS also was hurt by evidence
indicating that the rights plan would hamper DCA's proxy contest against

incumbent management. ^^^ It would seem that as viewed by Judge Getz-

endanner, CTS was a little too "greedy" in adopting the rights plan
which would deter not just repressive and hostile acquisitions, but all

acquisitions, and thwart a bidding contest for CTS.

Judge Getzendanner made it clear that she was not invalidating all

flip-in plans that inflict a penalty based on mere ownership, or even

ownership levels as low as the fifteen percent triggering figure in the

CTS plan. Rather, she was ruling that for purposes of a preliminary
injunction, such a plan adopted in the heat of a proxy contest with no

truly identifiable threat was unreasonable.'^^

CTS, however, did not give up its battle against DCA following
DCA II. It subsequently adopted a shareholder rights plan as part of

'''DCA II, 637 F. Supp. at 417.

'''Id.

'''Id. at 417-18.

'^^Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986);
Moran v. Household Int'l, Inc., 500 A.2d 1346 (Del. 1985).

"'DCA II, 637 F. Supp. at 418.
"^Id. The court also concluded that DCA had established the other elements for

injunctive rehef. /<i. at 418-19.



1987] BUSINESS ASSOCIATIONS 39

a white knight strategy for selHng CTS. DCA challenged this strategy
and the second rights plan as a breach of the directors' fiduciary duties

in another action brought under section 14(a) of the Securities Exchange

Act of 1934.'^^ Judge Getzendanner denied the motion to enjoin the

second rights plan in DCA III.^^^
In ruling for CTS in this proceeding, Judge Getzendanner started

from the premise that Indiana law treats a board of directors adopting

defensive mechanisms in response to a takeover threat as having a conflict

of interest. '^^ This conflict mandates close judicial scrutiny of directors'

actions. In other words, the directors must show they acted in good

faith and made a reasonable investigation in determining that a danger

to corporate policy existed and that the chosen defensive mechanism

was reasonable in relation to the threat. If the directors satisfy this

burden, they are protected by the business judgment rule, and a share-

holder challenging their actions must show the primary purpose of the

defense was entrenchment rather than protection of the shareholders'

interest.

Following Judge Getzendanner' s order in DCA 11, the CTS board
realigned its defensive measures to DCA's actual rather than perceived
threat. ^"^^ In essence, the second CTS rights plan put CTS up for sale,
thus maximizing the value to shareholders other than DCA through an
orderly auction of the company.

The new shareholder rights plan gave CTS shareholders a right to
exchange CTS shares for one year notes with a principal amount of
$50.00 and a 10% interest rate. These notes became exercisable and
traded separately from CTS common shares only if someone acquired
a beneficial ownership of 28% or more of CTS common shares. '"^^ The
rights were to be postponed if the plan were triggered by a publicly

announced tender offer for all outstanding CTS shares for $50.00 or
more.

The court in DCA III was faced with two issues: (1) were the press
release and proxy statement announcing the proposed sale of CTS and
the rights plan materially misleading; and (2) should the rights plan itself

be enjoined. '"^^

DCA was unsuccessful in DCA III because the probability of suc-

•"15 U.S.C. § 78n(a) (1982).

'3«Dynamics Corp. of America v. CTS Corp., 635 F. Supp. 1174 (N.D. 111. 1986).
'''Id. at 1176.

'"•oThe CTS board formed a special committee of outside directors which explored
the possibihty of settling with DCA, but these settlement possibilities were not productive.
Id. at 1176-77.

""/c?. at 1177. This figure was slightly above the percentage of CTS which would be
owned by DCA after its tender offer.

'^^Id. The court in DCA III addressed only the second issue.



40 INDIANA LAW REVIEW [Vol. 20:19

cessfully attacking the sale of CTS and the second rights plan as a
breach of a fiduciary duty was decidedly lower than in DCA II. Also,
the balance of hardships did not weigh sufficiently in DCA's favor to
justify injunctive rehef.'"^^

Judge Getzendanner again reiterated her conclusion in DCA II that
although CTS management had not made a reasonable investigation of
DCA's partial tender offer in adopting the flip-in rights plan, such
conduct did not rise to the level of gross negligence. '"^"^ DCA contended
that the second rights plan was but a single-minded, continued effort

at stopping DCA's proxy contest, while CTS argued that the plan was
an honest attempt to correct the inadequacies of the first plan. Judge

Getzendanner was persuaded by CTS's argument because the record now
reflected a greater thoroughness of discussion and informed decision

making prior to the adoption of the second rights plan.'^^

DCA also argued that the decision to sell CTS was a breach of
fiduciary duty because nothing had changed since CTS's unequivocal

earlier view that it was an inopportune time to sell the company so as
to warrant a different conclusion. In fact, DCA was hoist by its own
petard in this respect because Judge Getzendanner was satisfied that
DCA, which now owned just under the 28% trigger of the second rights
plan, had changed the circumstances facing CTS, and that the directors
had not changed their view as to the desirability of selling CTS but rather
had concluded that a sale of CTS was "the lesser of two evils. "''^^ She
also concluded that the "generalized" threat presented by DCA as a sizable
minority shareholder to the sale of CTS to a third party was sufficient
basis to keep the court from second guessing the advice given to CTS
on the matter. '^^

The court was satisfied that the CTS board had met the reasonable
investigation standard of Moran\}^^ although Judge Getzendanner did

not accept CTS's argument in its entirety. She recognized that there
were alternatives to the plan adopted by CTS and that the plan actually
adopted was not the most reasonable response. '"^^ However, the burden
on the directors was not to show that the plan was the most reasonable
response but only that it was a reasonable response to the threat presented
by DCA.

''Hd. at 1177-78.

'''Id. at 1178.

'''Id.

"^Id. DCA had not fully disclaimed the possibility that a future merger might be
unfair to minority shareholders. Consequently the CTS board could conclude that a present
sale of CTS would maximize shareholder values.

'''Id. at 1179.

'^^Moran v. Household Int'l, Inc., 500 A.2d 1346 (Del. 1985).
"'DCA III, 635 F. Supp. at 1180.



1987] BUSINESS ASSOCIATIONS 41

DCA's argument that the plan was unreasonable in giving manage-

ment a potent weapon against unfriendly tender offers was rejected

because, as supported by dicta in Revlon,^^^ the plan could have started

orderly bidding for CTS. Also, the plan could not deter all hostile offers

because the rights expired on a tender for $50 per share or more in

cash. Whether DCA or anyone else thought that CTS was worth $50
per share is another matter.

Under Revlon, a board of directors has a duty to insure that

shareholders receive maximum value once it has decided to sell a com-
pany, even as the lesser evil. The DCA III court felt that DCA had
raised some colorable arguments against the CTS decision to sell, but
concluded that the probability of success was insufficient to justify an

injunction. •-'

The court also rejected DCA's argument that the rights plan was

adopted primarily for entrenchment purposes. Certainly the plan would

aid management in the proxy contest insofar as a white knight strategy

could garner votes from shareholders interested in cashing out of CTS.

However, because a successful auction would, or could, result in a loss

of control by the current CTS board, the plan could not be deemed a
mere ploy to be re-elected. ^^^ CTS had not adopted golden parachutes
or other items that clearly promoted entrenchment, and even an unrea-

sonable determination to stop DCA did not equal the goal of entrench-
ment. The second rights plan would not cause irreparable harm to DCA
because it neither hmited DCA to an equity position so low as to render
successful proxy contests impossible, nor did it interfere with the ongoing

tender offer as did the first rights plan.'^^

DCA evened the score with CTS in DCA IV.'''' DCA IV related to
an issue not considered in DCA III: DCA's motion for preliminary and
permanent injunctive relief with respect to the CTS press release an-
nouncing the decision to sell CTS and' the adoption of the second rights
plan. DCA alleged the press release contained material misrepresentations
and omissions in violation of the Securities Exchange Act of 1934.'^^

CTS contended that a new proxy solicitation to shareholders and ac-
companying letter mooted the disclosure issues raised by DCA.^^^

Clearly the new rights plan and the proposed sale of CTS were
intended to affect the proxy contest and to attract potential white knights.

''"Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1985).
'''DCA III, 635 F. Supp. at 1180.

'"W. at 1181.

•"M at 1182.
''^Dynamics Corp. of America v. CTS Corp., Fed. Sec. L. Rep. (CCH) 1 92,765

(N.D. 111. May 3, 1986).
'"15 U.S.C. § 78n(a) (1982).

'''DCA IV, Fed. Sec. L. Rep. at 93,747.



42 INDIANA LAW REVIEW [Vol. 20:19

The key to the success of the CTS ploy was the price that CTS could
attract. If management could sell at a high price, it would secure votes,

but if the price were low, shareholders would probably prefer DCA.
The problem with the press release was obvious on its face: it

''signaled" that CTS could be sold for $50 a share, which was sub-
stantially higher than DCA's then existing tender offer price with no
other buyers making a play for CTS. The court clearly was correct in

considering the release and mandating corrective material. The letter

accompanying the proxy statement did clarify the issue somewhat by

noting that the $50 value, which was the principal amount of the notes

to be issued under the rights plan, was the asking price for the company
and not a prediction.

There was some testimony that $50 a share was a realizable price

for CTS, but this figure was substantially discounted by Judge Getz-

endanner because it was based on management's untested expectations

and seemed contrary to CTS's actual performance.'^^ Consequently, even

the supposed corrective statement in the letter accompanying the proxy

statement was misleading because it did not disclose the basis of the

opinion by CTS's investment banker or other information about the

projections to permit shareholders to understand the hmitations on the

projected realizable value of CTS.'^^ Also the letter indicating that CTS
was for sale did not make clear management's view that it did not
believe it was an opportune time to sell CTS and that the plan was
based both upon management's fear that DCA would win the proxy
contest unless a white knight strategy were adopted and upon a general
but unspecified mistrust of DCA.'^^

The final defect in CTS's disclosure related to its ability to issue

the notes called for in the second rights plan if there were a triggering

event. The court concluded that the letter failed to explain that to the

extent CTS was unable to issue notes, shareholders would remain share-
holders of a company that might have incurred substantial debt.'^° Judge
Getzendanner felt that the disclosure could have been more specific and,

more importantly, that management had not adequately disclosed what

'''Id. Sit 93,748.

'^^/c?. There was no disclosure that the investment advisor estimated the long-term

value of CTS was $75 per share realizable in two and a half years. This omission was
deemed misleading because shareholders were in effect voting to sell CTS within twelve
months at a maximum price of $50 per share, and probably less, without being told that
CTS had received an estimated value of $75 per share if the company waited until 1988.
Fed. Sec. L. Rep. at 93,749. This conclusion is somewhat ironic: management which did
not want to sell erred by not disclosing information that would tend to dissuade shareholders

from selling.

''^Id. at 93,749.

'^Id.



1987] BUSINESS ASSOCIATIONS 43

is perhaps the most important factor—management's belief that the rights
plan would be so successful in deterring DCA or any other potential
offeror from risking a triggering event that it was highly unlikely the

$50 notes ever would be issued. At the same time, management was

signaling that a $50 price could be realized within a year. It is irrelevant

whether incumbent management or DCA could do the most for CTS
shareholders, but it cannot be doubted that management had led the

shareholders to, if not down, the "garden path" with a misleading proxy

statement. Because of the substantial impact the press release had on

the market for CTS shares, the only possible decision Judge Getzendanner
could make was to enjoin CTS from voting proxies it had received
subsequent to the issuance of the press release and to prevent contact

with shareholders until corrective material had been sent.'^'

The most significant decision in the DCA-CTS battle to date is
Judge Posner's opinion in DCA V^^^ affirming DCA II on the ground
that the control share acquisition provisions of the Indiana Business

Corporation Law'" violate the supremacy and commerce clauses of the

United State Constitution. Of course, even though Judge Posner's opinion
can be characterized as a scholarly tour de force, '^"^ the decision by the

Supreme Court either for or against the statute will be far more significant

because of its impact on takeover law and tactics in general.

The first issue considered by the court was whether a preliminary

injunction was appropriate. Judge Posner concluded that the irreparable

harm to DCA if the injunction were denied and the irreparable harm
to CTS if the injunction were granted basically offset each other. Thus
the propriety of the injunction depended upon which side was Hkely to

prevail at the trial. '^^ The court concluded that this was DCA.
The first substantive issue considered by the court was whether the

CTS poison pill violated management's fiduciary obligations to share-
holders. This question was governed by Indiana law.'^^ The function of

'"'Id. at 93,749-50.

'"Dynamics Corp. of America v. CTS Corp., 794 F.2d 250 (7th Cir.), prob. juris,
noted, 107 S. Ct. 258 (1986). The appeal to the Seventh Circuit was expedited. Id. at

252.

'"IND. Code § 23-1-42-1 to -11 (Supp. 1986). CTS had "opted into" the IBCL after
April 1, 1986, as permitted by id. § 23-l-17-3(b).

'^The opinion received favorable comment from the editors of The Wall Street

Journal. The Wall Street Journal, July 28, 1986, at 12, col. 1.

''''DCA V, 794 F.2d at 252.

'^Id. at 253. The court stated that "Indiana takes its cues in matters of corporation

law from the Delaware courts, which are more experienced in such matters since such a

large fraction of major corporations is incorporated in Delaware and such a small fraction

in Indiana." Id. This statement is not completely accurate. For example, in Gabhart v.

Gabhart, 267 Ind. 370, 370 N.E.2d 345 (1977), the Indiana Supreme Court specifically

declined to follow the Delav/are decision in Singer v. Magnavox Co., 380 A.2d 969 (Del.



44 INDIANA LAW REVIEW [Vol. 20:19

the court was to predict how Indiana courts would evaluate the CTS poison
pill in the context of the perennial debate over hostile takeovers: are they

detrimental because they cause managers of potential targets to worry too

much about short term financial results and promote absentee ownership
or control, or are they unequivocally beneficial to shareholders because

someone is offering a premium above the market price of the shares which

is determined by all available public information about a company. Under

the latter view, management as fiduciaries should embrace rather than

oppose a takeover. '^^

Judge Posner felt that Indiana courts would reject these polar views

and would permit some defensive moves by target company management

if they are not "insuperable barriers to hostile takeovers. "^^^ In fact,

as the court pointed out, some defensive moves are required by federal

law, such as the twenty day cooling off period between the announcement

and the consummation of a tender offer. '^^ Prohibiting short duration

tender offers may discourage some offers because the offeror may have
to compete with other offerors. The waiting period permits careful

analysis of the offer and also permits other offerors to start an auction

for the target. The court was even willing to recognize that "golden

parachutes," where generous severance payments are triggered when

managers lose their jobs because of a takeover, may benefit the share-
holders if they reduce management's resistence to takeovers making a

takeover more costly. Even a triggered "poison pill," if not lethal, could

benefit shareholders. However, a poison pill could reduce the number

of tender offers, or even the price, by making a tender offer less certain

of success and more costly, thus harming all shareholders. '^°

1977), on the issue of protecting minority shareholders in squeeze out mergers. 267 Ind.

at 388, 370 N.E.2d at 356. Of course, with the demise of Singer in Weinberger v. UOP,

Inc., 457 A.2d 701 (Del. 1983), it can be said that the Indiana Supreme Court guessed

right. However, Gabhart still shows that Indiana courts will not slavishly follow Delaware

law,

^^'' Compare, e.g., Scherer, Takeovers: Present and Future Dangers, Brookings Rev.,

Winter-Spring 1986, at 15 with, e.g., Easterbrook & Fischel, The Proper Role of a Target's
Management in Responding to a Tender Offer, 94 Harv. L. Rev. 1161 (1981). Cf. SEC
Office of Chief Economist, A Study in the Economics of Poison Pills, [1985-1986 Transfer
Binder] Fed. Sec. L. Rep. (CCH) 1 83,971 (March 5, 1986).

'^«Z)C4 V, 794 F.2d at 253-54.

'^^SEC Rule 14e-l(a), 17 C.F.R. § 240.14e-l(a) (1986).

'^""DCA V, 794 F.2d at 254-55. Of course, the ideal solution for an offeror is to

trigger a poison pill that bars anyone else from bidding for the target and then have the

pill invalidated in court. This is what occurred in the recent takeover of N.L. Industries,

Inc. See Zukosky, N.L. 's Raider Gets His Prize—Minus a Few Marbles, Business Week,

August 25, 1986, at 37.



1987] BUSINESS ASSOCIATIONS 45

Considering Judge Posner's well known inclination for economic
analysis, his reference to empirical studies on the results of tender offers

is not surprising. In particular, he noted a finding that targets that resist

offers but are later acquired do better in maximizing shareholder wealth,

at least in the short run, than targets that do not resist.'^' Of course
if defensive tactics reduce the number of tender offers, shareholders may
lose in the long run. Shareholders of a target that successfully resists

an offer are unequivocally worse off.'^^ Thus, some resistance by man-

agement might be optimal and consistent with its duty of loyalty to the

shareholders.'^^ Of course striking the optimal level will be difficult
because management with its vested self interests determines whether or

not to resist an offer.

Judge Posner acknowledged skepticism about arguments for defensive

measures because they give too little weight to the effect of "defensive"

measures in rendering shareholders defenseless against management. '^"^

He was particularly skeptical about poison pills because they tend to
be more a reflex device of a management determined to hold onto power
at all costs than a considered measure for rnaximizing shareholder wealth.

He contrasted poison pills with fair price amendments which require
offerors to pay the same price to nontendering shareholders in subsequent

mergers or cash outs. This device discourages shareholders from stamped-

ing to tender their shares.

Although expressing doubts about poison pills, the court acknowl-

edged that it was understandable why state courts would hesitate to
condemn all defensive measures as breaches of fiduciary duties on the
basis of the present incomplete evidence as to the actual effect of these

measures. '^^ Consequently Judge Posner assumed that Indiana would

follow Delaware law and would recognize defensive measures, including

poison pills, as within the power of the target's board of directors. '^^

However, there must be some nexus with the goal of maximizing return

to the shareholder, and the directors must show that they had reasonable

grounds for beUeving that the offeror presented a threat to corporate

''"See Jarrell, The Wealth Effects of Litigation by Targets: Do Interests Diverge in
a Merge?, 28 J. Law & Econ. 151 (1985).

'''DCA V, 794 F.2d at 255.

'''Id.

'''^Id. at 255-56. Of course, it is possible that state courts would be less inclined to

rely on economic analysis than Judge Posner, who always has advocated such an analysis

both as a scholar and as a jurist.

'^^See, e.g., Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A. 2d 173,
180 (Del. 1986).



46 INDIANA LAW REVIEW [Vol. 20:19

policy and effectiveness in adopting defensive measures. Admittedly, this

burden is easily satisfied by a showing of good faith and reasonable

investigation. •^^ CTS had argued that the "business judgment rule"
insulated its decision to adopt the poison pill from judicial scrutiny.

Although the Delaware court has done some backing and filling with

respect to the boundaries of the business judgment rule, there is no

question that it has departed from the preternatural deference it once

gave to directors reacting to any perceived threat to their continued

control of a corporation.'^^

Judge Posner, not surprisingly, justified the business judgment rule

in "market" terms, recognizing the penalty that competition in the market

for corporate control can impose on a management that makes business

mistakes, as well as recognizing the traditional justification that people

running a business know more about the business than do judges. '^^

However, when management interferes with the market for corporate

control, the courts are less deferential because of the conflict between

the interests of a management seeking to secure its position and share-

holders seeking to maximize their wealth. '^°

After making these "general reflections" on the role of the courts

in reviewing defensive maneuvers. Judge Posner analyzed the CTS poison
pill. Not surprisingly, he felt that CTS's act was not done in a disinterested

fashion and that the board had not evaluated in a cool, dispassionate,

and thorough manner DCA's tender offer for shares intended as part
of its proxy contest strategy. CTS's failure, in the court's eyes, was the

decision by CTS inside directors to block the DCA tender offer before
considering its ramifications for shareholder welfare.'^' For example, the

presentation of the poison pill plan by CTS's investment advisor implied

that the DCA tender offer was "unfair," although the board had not
even considered the fairness of the DCA offer price. Apparently the
"market" did analyze the DCA offer because the price of CTS shares
rose from below $36 to above $40 when the offer was announced, only
to drop when the poison pill was announced and rise again when Judge
Getzendanner invalidated the poison pill.'^^ Of course it is doubtful that
any poison pill adopted during the heat of battle, rather than beforehand,

could ever be characterized as a dispassionate act.

CTS made a rather ad hominem argument that it did not need to

'"M; see also Moran v. Household Int'l, Inc., 500 A.2d 1346 (Del. 1985); Unocal

Corp. V. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985).

'''See, e.g., Cheff v. Mathes, 41 Del. Ch. 494, 199 A.2d 548 (1964).

'"'DCA V, 794 F.2d at 256.

''"Id. at 257. Judge Posner drolly quoted from the Queen of Hearts in Alice in

Wonderland: "Judgment first, trial later." Id.

''Ud.



1987] BUSINESS ASSOCIATIONS 47

investigate the DCA offer to know that it was bad because of the
antagonism between DCA and CTS management. Apparently CTS man-
agement thought it was focusing on the long term while DCA was going
for the quick buck. However, this attitude could be discounted considering

the souring of some CTS investments that had been opposed by DCA.
Furthermore, in a comment that should be noted by all those in the
position of CTS management. Judge Posner stated that "[t]he friction
between the companies required, if anything, more than the usual amount

of care by CTS's board of directors in evaluating the proposal, to make
sure that personal feelings would not be allowed to interfere with the

board's fiduciary obligations. "'^^

Judge Posner was not particularly impressed with the poison pill as

a plausible measure for maximizing shareholder wealth. He conceded
that it was not certain that CTS shareholders, other than DCA, would
be worse off if the pill were triggered. It was, however, at least overkill

and too high a price to pay for preventing a shift in control from

incumbent CTS management to DCA. Even if the tender offer succeeded,
DCA could not squeeze out remaining shareholders because it would
not own a majority of shares. A reasonable defensive move would be
a device that would be triggered by a transaction that created a majority

shareholder or by an attempt to squeeze out minority shareholders in

an unfair transaction.'^"^

Judge Posner turned one CTS argument against itself. CTS apparently
argued that if DCA controlled the board of directors, it would "gull"
the remaining shareholders into selling their shares for too low a price. '^^

As Judge Posner again drolly observed, this argument underscores the
importance of not impeding tender offers too much because its premise
is that management cannot be trusted to protect the interests of share-
holders.'^^ Touche.

After disposing of the validity of CTS's poison pill, the court

considered the vaUdity of the control share acquisition provisions of the

IBCL. The first issue was the procedural question whether the trial court
had failed adequately to notify the Indiana Attorney General that the

constitutionality of the statute was being challenged. '^^ The court was

'"/of. at 258.

'«Vflf. at 259.

'*'/g?. It is ironic that recently DCA opposed a sale of CTS, or more accurately,
opposed a merger of CTS with AVX Corporation. Indianapolis Star, Dec. 18, 1986, at
73, col. 2. Of course the merger price was $35 per share, $8 less than what DCA offered
in its tender offer. Then again, this development proves the court was right—the $50 was
illusory, and one of the features of the AVX proposal was that AVX considered "CTS
management . . . [as] one of the positive things about the company." Id.

''"DCA V, 794 F.2d at 259.

'*V(i. Although a detailed discussion of notification would unduly lengthen this article,

the federal statute that requires notification is 28 U.S.C. § 2403(b) (1982).



48 INDIANA LAW REVIEW [Vol. 20:19

satisfied that any error in notification did not prejudice the state. '^^ It

is possible that the United States Supreme Court might reverse the Seventh

Circuit on the ground that Indiana has not had its day in court J
^^

Hopefully, however, the high court will reach the merits of the con-

stitutionality of second generation antitakeover statutes such as the In-

diana statute regardless of the outcome of preliminary issues.

The first constitutional issue considered in DCA V was the supremacy
clause issue: was the control share acquisition statute'^^ preempted by

the Williams Act.'^' The Indiana statute defines a control share acquisition

as an acquisition that with any previous acquisitions gives the acquiror

at least twenty percent of the voting shares of the covered firm.'^^ If

the acquiring firm files a statement containing specific information*^^

and requests a special shareholders' meeting to consider whether the

shares should have voting rights, management has fifty days within which

to hold a shareholders' meeting. *^^ The statute requires that a majority

of all shares and a majority of disinterested shares, which excludes shares

owned by the acquiror and shares owned by officers and inside directors,

must favor awarding voting rights. '^^

Judge Posner characterized the statute as being "cleverly drafted

... to skirt judicial holdings that forbid states to delay tender offers

beyond the period required by the Williams Act.'"^^ Of course the effect

of the statute is to impose a fifty day delay on tender offers at the

option of the target. This makes it more difficult for any tender offer

to succeed, because an offeror could not accept tendered shares until

the shareholder meeting where it will be determined if the shares will

'''DCA V, 194 F.2d at 260.

'^'C/. Leroy v. Great Western United Corp., 443 U.S. 173 (1979). The court also

dismissed two other threshold challenges to Judge Getzendanner's consitutional rulings.

The Attorney General's argument that venue was improper in the Northern District of

Illinois was deemed to have been waived by CTS. An argument that the district court
should have abstained in favor of Indiana courts was rejected in part because of the lack

of time, but more particularly because the court agreed that the statute was limited to

cases where the target was an Indiana corporation. DCA V, 794 F.2d at 260.
'^IND. Code § 23-1-42-1 to -11 (Supp. 1986).
'"15 U.S.C. §§ 78m(d)-(e), 78n(d)-(f) (1982).

'^^IND. Code § 23-1-42-1 (Supp. 1986).
•"/c?. § 23-1-42-6.

'''Id. § 23-1-42-7.

'^'Id. §§ 23-1-42-3, 23-1-42-9. Without a majority vote of all shares, and of all

disinterested shares, the acquired shares remain non-voting shares. The issue of the voting

rights will be taken up at the next regularly scheduled shareholder meeting if the acquirer

does not request a special meeting. Id. § 23-l-42-7(c). If the statement is not filed, the

corporation can redeem the shares "at the fair value thereof pursuant to the procedures

adopted by the corporation." Id. § 23-1-42-10. One might conjecture how close the "fair
value" would be to what the acquirer had paid for the shares.

'"''DCA V, 794 F.2d at 261.



1987] BUSINESS ASSOCIATIONS 49

be voting or nonvoting. Thus a tender offer would have to be kept

open for fifty days rather than the twenty business days required by

SEC Rule He-lCa),'*^^ and even then the offeror cannot be certain of a
victory because the "disinterested" shareholders must approve the vote.'^^

The key to any analysis of a supremacy clause preemption issue is

Edgar v. MITE Corp.'''^ The Seventh Circuit in MITE held that the
Illinois takeover statute violated the supremacy clause, but this view was

shared by only three Supreme Court justices. ^^ However, even though

the Supreme Court did not accept the preemption argument, it has held

that Congress intended to strike a balance between target management

and offerors in the Williams Act.^°' From this premise, courts have
reasoned that states may not upset the balance struck by Congress. ^^^

States are free to add their own penalties if Congress passes a statute
punishing some practice deemed unfair or unjust such as monopolization

or misrepresentation. ^°^ If the Williams Act is actually an antitakeover

statute, as some argue, ^^"^ then Indiana should be able to enact more

stringent antitakeover laws. However, even if Judge Posner might phil-

osophically agree with those who oppose any interference in the market
for control, the WiUiams Act does exist and it does strike a balance. ^^^

Whether or not the balance is proper, Congress probably did not want

the states to tip this so-called "balanced playing field" one way or the

other.

Judge Posner characterized the application of the standard preemptive

power of the Williams Act to the Indiana statute as "straight forward. "^^^

He did not attempt to determine if the Indiana statute was more or
less hostile to takeovers than the IlHnois statute involved in MITE. In
fact, he "guessed" that the Indiana statute was less inimical to tender

offers, although it was still lethal. In particular. Judge Posner considered

the fifty day period of the Indiana statute to be "too much" when

'''SEC Rule 14e-l(a); 17 C.F.R. § 240.14e-l(a) (1986).

'''^Officers and inside directors are disenfranchised as well, but their holdings are

likely to be substantially less than the holdings of the offeror. Offerors are not prone to

put a corporation into play if it has a strongly entrenched management.
"^^57 U.S. 624 (1982), aff'g MITE Corp. v. Dixon, 633 F.2d 486 (7th Cir. 1980).
200457 u g ^^ 636-39. This portion of the opinion by White, J., was joined by Burger,

C. J., and Blackmun, J.

^°'Piper V. Chris-Craft Indus., Inc., 430 U.S. 1 (1977).

^°'See, e.g., Martin-Marietta Corp. v. Bendix Corp., 690 F.2d 558, 565-66 (6th Cir.

1982); National City Lines, Inc. v. LLC Corp., 687 F.2d 1122, 1128-33 (8th Cir. 1982).
'''DCA V, 794 F.2d at 262.

^'^See, e.g., Fischel, Efficient Capital Market Theory, the Market for Corporate

Control, and the Regulation of Cash Tender Offers, 57 Tex. L. Rev. 1 (1978).
'°'DCA V, 794 F.2d at 262.

^'^Id.



50 INDIANA LAW REVIEW [Vol. 20:19

Congress had determined that approximately a month is enough time
to keep a tender offer open.^^^

It is possible that the preemption issue raised by Judge Posner could

be resolved by shortening the time frame of the control share acquisition

statute. However, even if this occurs, Judge Posner made it clear that
in the opinion of the panel, the statute would still run afoul of the

commerce clause. ^^^ It has been a long estabhshed tenet of constitutional

law that the commerce clause will invalidate any state regulation of

interstate commerce that conflicts with the presumed purpose of the

clause to make the nation a common market, at least in areas where
Congress has not spoken.^°^ Judge Posner recognized, however, that it

was possible that the "dormant" commerce clause would no longer apply
when Congress has spoken and that the only ground for invalidating
state legislation would be the supremacy clause.^'°

However, as the DCA V court pointed out, MITE and other cases
separate the supremacy and the commerce clauses and assume that the
commerce clause retains an independent force notwithstanding the en-
actment of the Williams Act.^^^ Judge Posner, in this respect, stated

that there was no indication the Williams Act was intended to insulate

antitakeover statutes from complaints that they unduly burden interstate

commerce. ^'^

The commerce clause does not bar all state action that might impose
some burden on interstate commerce; burdens will be upheld if the local
benefits exceed the burden imposed upon interstate commerce. ^'^ Applying
this test, the court concluded that the burdens the statute inflicted on
nonresidents exceeded the benefits to Indiana residents. ^'^ Although the

court did not know the geographical distribution of the DCA or CTS
shareholders, Judge Posner was willing to assume that the vast majority

were not Indiana residents. Consequently the statute gravely impaired

DCA's ability to do business with those shareholders. As he phrased
it, "Indiana has no interest in protecting residents of Connecticut from

being stampeded to tender their shares to Dynamics at $43,"^^^ and

^°'Id. at 263.

'°'Id.

'°'Id. See Cooley v. Board of Wardens, 53 U.S. (12 How.) 299 (1852).
''°DCA V, 794 F.2d at 263.

'''See Pike v. Bruce Church, Inc., 397 U.S. 137 (1970). A majority of the Supreme
Court in MITE found that the Illinois statute violated the commerce clause as an undue,
indirect burden on interstate commerce. Edgar v. MITE Corp., 457 U.S. 624, 640-46
(1982).

^''DCA V, 794 F.2d at 264.

'''Id. at 263.



1987] BUSINESS ASSOCIATIONS 51

"[fjor the sake of trivial or even negative benefits to its residents Indiana

is depriving nonresidents of the valued opportunity to accept tender

offers from other nonresidents."^'^ This cannot be gainsaid because the

purpose of the control share acquisition statute like that of any other

state antitakeover statute is to impede transactions between residents of

other states. This, of course, is the opposite of the purpose of state

securities laws, which affect only the residents of the particular state.

Judge Posner even expressed some doubts if any appreciable number

of Indiana shareholders would benefit from the statute; the only be-

neficiaries might be the officers and directors of CTS, not all of whom
necessarily were Indiana residents.^'^ He noted that no evidence had been
presented that DCA's takeover of CTS would reduce the value of CTS
or result in a shift of assets or employment from Indiana. ^'^ More
importantly, and this point could well be fatal to all second generation

antitakeover statutes, any shift prevented by the statute would be further

grounds for condemnation because the commerce clause does not permit

states to bar corporations from moving assets and employees to other

states. ^'^ If Indiana presents a desirable environment for business, ^^° there

is no reason for erecting obstacles to shifts in corporate control. If the

environment is desirable, the business will remain in Indiana regardless

of whether management are "hometown boys" or nonresidents. For
better or worse, there is an interstate and even an international market

for corporate control. Indiana has attempted to opt out of this market,

and to the DCA V court, this effort is barred by the commerce clause.
Perhaps anticipating that this case would go to the Supreme Court,

Judge Posner was careful to distinguish the cases relied on by CTS.

For example, L.P. Acquisition Co. v. Tyson^^^ was different because

the WilUams Act did not apply to the tender offer, and the disclosures

required by the particular statute conferred greater benefits on state

residents than the disclosure required by the Indiana statute.^^^ In other

words, the court perceived Tyson as satisfying the balance required by

Pike V. Bruce Church, Inc.,^^^ which permits an indirect "burden" on

^''Id. at 264.

'''Id.

'''Id.

''^Id.

"°A recent study commended Indiana's approach to attracting new businesses to the
state. Indianapolis Star, Oct. 1, 1986, at 22, col. 2. It would be interesting to know how
many business executives who favor legislation such as the control shares acquisition statute
would favor legislation barring them from relocating or building new plants and facilities
in other states. Close to home, how many Indiana residents would have approved of
legislation that would have kept the Colts in Baltimore?

^^•772 F.2d 201 (6th Cir. 1985).

'''DCA V, 794 F.2d at 264.

^"397 U.S. 137 (1970).



52 INDIANA LAW REVIEW [Vol. 20:19

interstate commerce where local interests are paramount. The court also

distinguished Cardiff Acquisitions, Inc. v. Hatch^^"^ on the grounds that

the required disclosure was designed to furnish state residents information

relevant to the takeover's impact on the state and that any delay imposed

on takeovers was so slight as not to discourage them.^^^ The Indiana

statute, however, was perceived by the court as erecting a "barrier at

once formidable and arbitrary to tender offers whose principal effects

if they succeed will be felt outside Indiana. "^^^

The court also rejected CTS's argument that Indiana should be

permitted to control and regulate the internal affairs of Indiana cor-

porations. The court correctly recognized that Indiana has a broad latitude

in regulating internal affairs of Indiana corporations, including provisions

in corporate documents that would discourage takeovers. ^^^ However,

there are limits to this doctrine, which are exceeded when the state

regulation has an effect "on the interstate market in securities and

corporate control [that] is direct, intended and substantial .... [and]

not merely the incidental effect of a general regulation of internal

corporate governance. "^^^ As Judge Posner accurately if not elegantly

phrased it, the control share acquisition statute is an explicit regulation

of tender offers and is not immunized from the commerce clause because

"the mode of regulation involves jiggering with voting rights. . . ."^^^

^^"751 F.2d 906 (8th Cir. 1984).

^^'DCA V, 794 F.2d at 264.

'''Id.

^^'The court referred to cumulative voting, which can make it difficult to oust an

entire existing board of directors. A staggered board of directors also would be a permitted
defensive move. Id

It is possible that the Supreme Court may place more emphasis on the "internal
affairs" doctrine or at least distinguish DCA V from Edgar v. MITE Corp. because in
Edgar, it was possible for the lUinois statute to apply to a tender offer "which would

not affect a single Illinois shareholder," 465 U.S. at 465, whereas the Indiana control

share acquisition provisions apply only to publicly owned corporations with a substantial

number of Indiana shareholders or with a substantial number of shares owned by Indiana

residents. Ind. Code § 23-l-42-4(a)(3) (Supp. 1986). This position or a complete recon-
sideration of the MITE position on the "internal affairs" doctrine in effect would totally
insulate state antitakeover,statutes from commerce clause scrutiny as long as they are limited

to domestic corporations with a "substantial" number of resident shareholders even if they

are a minority of all shareholders.

It might be argued that rejection of the "internal affairs" doctrine would invalidate

any statutory provision that might hinder a hostile takeover. That, however, is basically

an in terrorem argument because a statutory provision that applies to all corporations

regardless of whether they are the target of a hostile takeover attempt is not the same

as a provision that applies only to publicly held target companies and that has as a

purpose hindering the market for corporate control.

''^DCA V, 194 F.2d at 264.

'''^Id. The court also rejected the argument that the tender offer should have been

enjoined because if successful, DCA and CTS would violate section 8 of the Clayton Act,
15 U.S.C. § 19 (1982), which prohibits interlocking boards of directors that might eliminate



1987] BUSINESS ASSOCIATIONS 53

The court also declined to reverse on the ground that DCA's tender
offer materials did not disclose its intention to oust the CTS management
if it succeeded in the proxy contest. Judge Posner agreed that this

omission, although material, had been cured because DCA's proxy ma-
terial urged shareholders to elect the DCA slate of directors and because
DCA's desire to oust the present CTS board was broadcast loudly and
widely. ^^° Even if the defect could not be cured by the proxy materials,

an issue not resolved by the court, it was not clear that enjoining the

tender offer was a proper remedy. The proper remedy was within the

district court's discretion, which had not been abused in this case. 2^'

It is of course impossible to know if the Supreme Court will uphold
the Seventh Circuit's decision in DCA V}^^ There is no question that
the statute was intended to and does interfere with takeovers. Judge

Posner' s treatment of the commerce clause issue, which was accepted

by the majority in MITE, should be persuasive. Any statute that presents
an offeror with the distinct possibility of owning a substantial block of

non-voting shares in an Indiana corporation would tend to dissuade him

from making a tender offer for that corporation. The adverse effect on

interstate commerce is clear.

It would be unfortunate if tender offers and takeovers reduced the

number of publicly held Indiana corporations. However, the answer to
this potential problem is to improve the business climate in Indiana to

attract and retain business in this state rather than to create artificial

barriers to a shift in corporate control.

Judge Posner' s supremacy clause argument also is persuasive because

for better or worse, the Williams Act does establish a uniform scheme

for the regulation of tender offers. Tender offers and takeovers have

national impact and it would seem that even in a time of deemphasis

on Washington, having one set of rules for the country is sound. If

there is a problem with particular tactics by offerors, or management
for that matter, the proper response is to seek change from Congress

or the SEC.

An Ohio control share acquisition statute which was similar to the
Indiana statute in that it required shareholder authorization for a control

competition between the two companies. Judge Posner, an eminent antitrust scholar, noted
there was no persuasive evidence that DCA and CTS were in competition, but more
importantly the argument failed for the very simple reason that DCA would just find
persons to serve on the board of CTS who were not DCA directors if there was a question
of illegality under section 8. DCA V, 794 F.2d at 264-65.

^'"DCA V, 794 F.2d at 265.

"^It is difficult to forecast how the current Court will line up on the issue. Former
Chief Justice Burger was in the plurality that deemed the Illinois statute involved in MITE
preempted by the Williams Act, 457 U.S. at 636-39, while current Chief Justice Rehnquist

dissented in MITE on the grounds of mootness. Id. at 664.



54 INDIANA LAW REVIEW [Vol. 20:19

share acquisition was struck down in Fleet Aerospace Corp. v.
Holderman^^^ because it conflicted with the supremacy clause by frus-

trating the objectives of the Williams Act and because it imposed a

substantial direct and indirect burden on interstate commerce. ^^"^

It is hard to predict the reaction of the state if DCA V is affirmed.
Presumably efforts would be made to circumvent the decision, perhaps

by a statute that applies only to corporations not subject to the Williams

Act, where the predominant number of shareholders are Indiana residents

and that are truly local businesses. This type of statute would apply to

just the kind of small corporations that always seem to be excluded

from antitakeover legislation.

IV. Statutory Developments

A. Indiana Business Corporation Law

The most significant statutory development during the survey period

was the enactment of the Indiana Business Corporation Law.^^^ By its

terms, the IBCL applies to all existing Indiana corporations as of August

1, 1987.2^^ It makes sense to have a single system of corporation law

rather than two different and overlapping systems, and normally this

approach would not cause any problems. Unfortunately this stratagem

might not be available in Indiana, at least for corporations organized

between July 1, 1978, and February 21, 1986, if the provisions of the

IBCL are not expressly and unanimously adopted by the shareholders.
This hiatus is the time in which there was no "reserved powers"

clause in the IGCA reserving to the General Assembly the right to amend
or repeal the law relating to corporations. July 1, 1978, was the effective

date of repeal of the clause that had been in the IGCA.^^^ It is distinctly

^"796 F.2d 135 (6th Cir. 1986).

""The Fleet court relied on DCA V in deciding against the Ohio statute. Id. at 139.
"^Act of March 26, 1986, Pub. L. No. 149-1986, §§ 1-69 (codified at Ind. Code

§§ 23-1-17-1 to -54-2 (Supp. 1986)). See Simcox, The Indiana Business Corporation Law:

Tool for Flexibility, Simplicity and Uniformity, 20 Ind. L. Rev. 119 (1987).

"^IND. Code § 23-l-17-3(a) (Supp. 1986).
"'Ind, Code § 23-1-12-5 (1972) (repealed 1978). There was no reserved powers clause

in the IGCA when it was adopted in 1929. It was added in 1949. Frederick Schortemeier,
who chaired the Indiana Corporations Survey Commission when the IGCA was adopted
later commented that it was felt the state had "inherent power" to amend the IGCA but
that it was advisable to make the power express. F. Schortemeier, Indiana Corporation

Law 206 n.ll (1952).
There is dictum in City of Indianapohs v. Navin, 151 Ind. 139, 143, 47 N.E. 525,

526-27 (1897), that the legislature has inherent power to regulate the fares of a common
carrier as specified in the organic documents of the corporation. This might be the source

of Mr. Schortemeier' s comment. However, the statement was dictum because the General

Assembly had reserved the power to regulate fares. Furthermore, the court recognized



1987] BUSINESS ASSOCIATIONS 55

possible that a court can rule that in 1978, the General Assembly

surrendered Indiana's authority to affect subsequently organized cor-

porations by altering, amending, or even repealing the IGCA. Of course,
it is also possible a court could rule that the repeal was a careless,

unintended act. The drafters of the Revised Model Business Corporation

Act took the position that the RMBCA should apply to existing as well
as new corporations. ^^^ They also intended the act to supplant existing

general incorporation statutes and recommended against retaining por-

tions of earlier statutes. ^^^ The Corporation Law Study Commission,
which drafted the IBCL, had the same intent. Unfortunately, the drafters

of the RMBCA also operated on the premise that there had been a
"universal adoption of 'reservation of power' clauses in all states for

more than a century . . . ."^'^^ This was not the case in Indiana.

The General Assembly remedied or at least attempted to remedy

this problem in 1986. On February 21, 1986, Indiana Code section 23-
1-12-5. 1(a) was added to the IGCA, retroactively reserving the right to
"alter, amend or repeal" the IGCA. 2"*^ This corrective legislation also
contained section 23-1-12-5. 1(b), which stated that

the purpose of the General Assembly in enacting this section is

to correct an error that was made in preparation of Acts 1978,
P.L. 2, SECTION 2325. The general assembly finds and declares
that the inclusion of IC 23-1-12-5 in the list of provisions to

be repealed by Acts 1978, P.L. 2 was a clerical error, and that

the general assembly did not intend to repeal IC 23-1-12-5 when
it enacted Acts 1978, P.L. 2.2^2

that it would take "clear and unmistakable language" inconsistent with the exercise of

the power over fares to surrender such power. Id. There is no clearer or more unmistakable

statement of legislative intent to surrender the reserved power than expressly repealing the

clause unless, of course, a mistake has been made.

The decision in State ex rel. Starkey v. Alaska AirHnes, Inc., 68 Wash. 2d 318, 413

P.2d 352 (1966), contrasts with the Navin dictum. In Alaska Airlines, the court held that

provisions in the Model Business Corporation Act which had been adopted in Alaska

could not be applied to a corporation organized under the previous territorial corporation

act which had not contained a reserved powers clause. Id.

^'H Model Bus. Corp. Act Ann. § 17.01 (3d ed. 1985).
"^/<i. § 17.05 (Official Comment at 1800). The practice was discouraged because it

could cause unnecessary confusion in determining applicable law and create possible internal

statutory conflicts. Id.

''°Id. § 17.01 (Official Comment at 1797).
^'"Act of February 21, 1986, Pub. L. No. 19-1986, § 39(a) (codified at Ind. Code

§ 23-1-12-5. 1(a) (Supp. 1986)). The effective date of Ind. Code § 23-1-12-5. 1(a) was July
1, 1978.

^^^Act of February 21, 1986, Pub. L. No. 19-1986, § 39(b) (codified at Ind. Code

§ 23-1-12-5. 1(b) (Supp. 1986)).

This author will not quarrel with the General Assembly's statement that including

Indiana Code section 23-1-12-5 in the list of provisions to be repealed was a "clerical



56 INDIANA LAW REVIEW [Vol. 20:19

The General Assembly also added a reserved powers clause applicable

to all general laws to the Indiana Code.^"^^ Thus the issue of reserved

powers was clearly resolved for corporations organized under the IGCA
between February 21, 1986, and the August 1, 1987, effective date of

the IBCL. The IBCL, of course, contains a reserved powers clause. ^"^"^

The problem is that it is not clear that the General Assembly can

retroactively enact a reserved powers clause, or at least the extent to

which it can. It has long been recognized in Indiana that the General

Assembly cannot amend or otherwise materially modify the charter of

a special charter corporation unless the power was expressly reserved. ^^^

It also has been recognized by Indiana courts that a statute cannot be

appHed retroactively if such application impairs vested rights. ^"^^ Even

cases such as Wencke v. City of Indianapolis, ^'^'^ which posit that the

"power to enact statutes and ordinances has as a necessary incident the

power to repeal [,]" quahfy that power by subjecting it to "constitutional

restrictions such as the prohibition against impairment of contract. "^"^^

It is very Hkely that the IBCL might have an impact on the interests
of shareholders of corporations organized during the hiatus. There is

some question whether the IBCL overruled the Indiana Supreme Court
decision in Gabhart v. Gabhart?^^ Gabhart protects the interest of mi-

error." However Indiana Code section 23-1-12-6, which was a "savings clause," also was

repealed at the same time. This would seem to indicate something more than a mere

error by a scrivener. The wisdom of repealing a savings clause is not readily apparent,

but at least corporations organized under pre-IGCA law had Hmited duration unless

reorganized under the IGCA and in 1978 had at most one year of corporate existence
left. There was no effort to reinstate Indiana Code section 23-1-12-6 in 1986.

^''^Ind. Code § 1-1-5-2 (Supp. 1986). This provision reads:

Each general law of the state is enacted subject to the right of the general

assembly to amend or repeal that law at any time, unless the general assembly

waives this right in that law. Except in the case of a law containing a covenant

that the general assembly will not amend or repeal that law, the general assembly

may not be construed to have waived its right to amend or repeal any general
law at any time.

Id. It will be interesting to see if a law containing a "covenant" that it will not be

amended or repealed in fact will be safe from amendment or repeal without more. The

courts have held on several occasions that the General Assembly cannot limit the rights

of future General Assemblies. See State ex rel. City of Terre Haute v. Kolsem, 130 Ind.

434, 29 N.E. 595 (1891); Wencke v. City of IndianapoHs, 429 N.E.2d 295 (Ind. Ct. App.

1981); Martin v. Simplimatic Eng'g Corp., 181 Ind. App. 10, 390 N.E.2d 235 (1979).

^^IND. Code § 23-1-17-2 (Supp. 1986).
^''See City of Terre Haute v. Evansville & T.H.R.R., 149 Ind. 174, 180, 46 N.E.

77, 78 (1897).

^^^Hinds V. McNair, 413 N.E.2d 586, 608-09 n.20 (Ind. Ct. App. 1980).
^"^29 N.E.2d 295 (Ind. Ct. App. 1981).

^'^Id. at 297. See Trustees of Dartmouth College v. Woodward, 17 U.S. (4 Wheat.)

518 (1819).

^^'267 Ind. 370, 370 N.E.2d 345 (1977).



1987] BUSINESS ASSOCIATIONS 57

nority shareholders subject to a squeeze out by means of a reverse share

spHt. If the IBCL does overrule Gabhart, a minority shareholder might
have a cause of action for overreaching conduct by controlling share-

holders occurring before July 31, 1987, which conduct is clearly proper

under the IBCL if it occurs on or after August 1, 1987. Thus, a right
provided by Indiana corporation law when the corporation was organized
has been taken away by the IBCL. It certainly can be argued that

shareholders of corporations organized when there was no reserved powers
clause are entitled to the protections accorded to minority shareholders

under the law existing as of the date of incorporation. This would be

the law reflected in Gabhart.

A not implausible example would be overreaching conduct directed
against one minority shareholder on July 31, 1987, and exactly the same

conduct directed against another shareholder on August 1, 1987. The

first shareholder has a cause of action which would be preserved under

the savings clause of the IBCL,^^° but the second shareholder will have

no remedy because of a change in the organic law that was part of the

"contract" the shareholder had with other shareholders and the state.

This contract created certain rights; the state cannot take away those

rights without having reserved the power to do so at the time the

corporation was organized. At least this is how the argument for the
second minority shareholder would be framed. It is far from certain

that this argument will prevail. However, any lawyer worthy of the title

"professional" would argue that when section 23-1-12-5 was repealed,
the "contract" between the state and a corporation and its shareholders

specifically excluded the right of the state to change the terms of the

contract, and that the corporation and the shareholders have a vested

interest in not having Indiana retroactively impose the "right" to alter,

amend, or repeal.

It is possible for shareholders to waive their rights, and nothing

would prohibit shareholders from unanimously subjecting themselves and

the corporation to the IBCL. Such an act would bind subsequent share-

holders because that will be part of the contract that goes with their

shares. However, unless and until that is done, there is at least the

intriguing possibility that the General Assembly's attempt to establish

retroactively a reserved powers clause was unsuccessful.

It does not make any difference that the General Assembly adopted
a new but retroactive reserved powers clause rather than repealing its

repeal of section 23-1-12-5. The Indiana Code does provide that the
repeal of an act repealing a former act can, if expressly provided, revive

"°The savings clause is not part of the IBCL as it is with the RMBCA, 4 Model
Bus. Corp. Act Ann. § 17.03 (3d ed. 1985), but was provided for separately in Act of

March 26, 1986, Pub. L. No. 149-1986, § 66(a)(b).



58 INDIANA LAW REVIEW [Vol. 20:19

the former act.^^' Generally, when a statute is repealed, it is completely

obliterated unless a vested right is impaired.^^^ If there were a vested

right in the absence of a reserved powers clause, it would survive the

repeal.

It will be interesting to see if someone challenges the apphcation of

the IBCL to corporations organized between July 1, 1978, and February
21, 1986, and if so, whether such an attack is successful.

The General Assembly continued the Corporation Law Study
Commission^" to permit it to publish Official Comments on the new
IBCL. The IBCL specifically authorizes courts to consider these Official
Comments in construing the act, so they might be characterized as after
the fact legislative history.

^^'^

B. Business Combinations

The General Assembly also added a new chapter to the Indiana
General Corporation Act relating to business combinations. ^^^ This chap-

ter is substantially the same as chapter 43 of the new IBCL^^^ and will
be superceded when the IBCL becomes effective.

C. Liability of Directors of Not-for-Profit Corporations

In 1985, the General Assembly enacted a statute limiting the civil

liability of voluntary directors of not-for-profit corporations that have

certain specified purposes.^^^ The statute limits civil liability for the
neghgent performance of duties by individuals who serve without com-
pensation as directors for the purpose of setting poHcy, controlling, or

otherwise overseeing the activities or functional responsibilities of such

corporations. ^^^ The liability is limited to the coverage provided by an
insurance poHcy issued to the particular entity. ^^^

As enacted, the provision presented the possible anomalous result
of a director of a not-for-profit corporation having limited liability if

there was an insurance poHcy but unHmited liability if there was not.

"'Ind. Code § 1-1-5-1 (1982).
^"Martin v. Simplimatic Eng'g, Inc., 181 Ind. App. 10, 11, 390 N.E.2d 235, 236

(1979).

Mnd. Code § 23-1-17-5 (Supp. 1986).

2^^Law of January 23, 1986, Pub. L. No. 151-1986, § 1 (codified at Ind. Code §§
23-3-9-1 to -22 (Supp. 1986)).

"^IND. Code §§ 23-1-43-1 to -24 (Supp. 1986).
"V^. § 34-4-11.5-1. The purposes are: religion; charity; benevolence; providing goods

or services at no charge to the general public; education; and scientific activities. Id.

'''Id. § 34-4-11.5-2.

''"Id.



1987] BUSINESS ASSOCIATIONS 59

This possibility was eliminated in 1986 when the General Assembly
amended Indiana Code section 34-4-11.5-2 to provide that if no insurance
policy issued to the entity provides liability coverage for the allegedly

negligent act or omission of the qualified director, the qualified director

is immune from civil liability for that act or omission. ^^" This amendment
eliminates the possible anomaly, but might cause not-for-profit corpo-

rations to drop insurance coverage. Hopefully, however, if insurance is

available at reasonable premiums, admittedly a big '*if," those in a

position of responsibility would resist the temptation to drop liability

insurance coverage because of their own personal immunity.

^^'Act of March 3, 1986, Pub. L. No. 197-1986, § 2 (codified at Ind. Code § 34-

4-11.5-2 (Supp. 1986)).