The Seventh Circuit and the Market for Corporate Control

Chicago-Kent Law Review Volume 65 Issue 3 Symposium on the Seventh Circuit as a Commercial Court Article 4 October 1989 The Seventh Circuit and the Market for Corporate Control Dennis Honabach Roger Dennis Follow this and additional works at: https://scholarship.kentlaw.iit.edu/cklawreview Part of the Law Commons Recommended Citation Dennis Honabach & Roger Dennis, The Seventh Circuit and the Market for Corporate Control, 65 Chi.-Kent L. Rev. 681 (1989). Available at: https://scholarship.kentlaw.iit.edu/cklawreview/vol65/iss3/4 This Article is brought to you for free and open access by Scholarly Commons @ IIT Chicago-Kent College of Law. It has been accepted for inclusion in Chicago-Kent Law Review by an authorized editor of Scholarly Commons @ IIT Chicago-Kent College of Law. For more information, please contact . THE SEVENTH CIRCUIT AND THE MARKET FOR CORPORATE CONTROL DENNIS HONABACH* ROGER DENNIS** I. INTRODUCTION Corporate America will remember the 1980s as a decade of guerilla warfare fueled by junk bonds and other financial innovations, as an era when even the largest corporate giants found themselves vulnerable to attack. The battles were fought in equal measure on the floors of the nation's securities exchanges and in the courtrooms of America, as raiders and targets alike cast about for any measure that would shift the balance of power between them. While the market determined the fiscal desirability of these new financial devices, the courts were constantly conscripted to adjudicate the legitimacy of the multitude of legal devices-both the self-help and the legislative measures-that became so central to the ongoing conflict. Not surprisingly given its major commercial centers and its Rust Belt location, the Seventh Circuit has been a frequent, important player in those courtroom skirmishes. This article explores five crucial Seventh Circuit takeover opinions: MITE Corp. v. Dixon;' Panterv. Marshall Field & Co.;2 Dynamics Corp. of America v. CTS Corp. (CTS I);3 Dynamics Corp. of America v. CTS 5 Corp. (CTS //);4 and Amanda Acquisition Corp. v. UniversalFoods Corp. As the earlier Seventh Circuit opinions demonstrate, the debate over the legitimacy of target management behavior was characterized at the outset of the 1980s by traditional constitutional and corporate doctrinal analysis. With the passage of time, however, the debate was dramatically refocused by an infusion of economic analysis. With Judges Easterbrook and Posner-two leading generals of the Law & Economics ("L&E") school-among its members, the Seventh Circuit played a pivotal role in * Professor of Law, District of Columbia School of Law. * Acting Dean and Associate Professor of Law, Rutgers University School of Law-Camden. The authors wish to thank Professor Patrick Ryan for helpful comments on earlier drafts. The normal caveats apply. 1. 633 F.2d 486 (7th Cir. 1980), aff'd sub nor. Edgar v. MITE, 457 U.S. 624 (1982). 2. 646 F.2d 271 (7th Cir.), cert. denied, 454 U.S. 1092 (1981). 3. 794 F.2d 250 (7th Cir. 1986), rev'd in part, 481 U.S. 69 (1987). 4. 805 F.2d 705 (7th Cir. 1986). 5. 877 F.2d 496 (7th Cir.), cert denied, 110 S. Ct. 367 (1989). 682 CHICAGO-KENT LAW REVIEW (Vol. 65:681 the resulting restatement of the law of hostile takeovers. For this reason alone, the Circuit's takeover opinions merit review as the decade comes to a close. The Seventh Circuit's later opinions also merit close review because their often contradictory text demonstrate the obstacles confronting the jurist who attempts to apply economic analysis to the legal issues of corporate control contests. In part, the Seventh Circuit's difficulties reflect its position in the judicial hierarchy. As an intermediate federal court of appeals, the Seventh Circuit finds its analysis of the constitutionality of state antitakeover legislation bounded by the pronouncements of the Supreme Court. At the same time, the Seventh Circuit's analysis of management's self-help measures is cabined by state court rulings. In part the court's opinions also may reflect the political realities of opinion writing. Even within the circuit court, the differing views of more traditional decision makers such as Judge Cudahy, and the economic approach of Judges Posner and Easterbrook likely played a role in the formulation of the strangely tentative blend of analysis found in these decisions. Most importantly, the court's opinions reflect turmoil and conflict within the L&E school itself. Because proponents of economic analysis generally prefer market discipline over government regulation, they tend to condemn attempts to heighten judicial review of management's decisionmaking and to applaud state attempts to compete for corporate charters by offering innovative governance rules. Suspicious of the courts' use of fiduciary duties to regulate corporate governance matters, L&E scholars defend broad application of the Business Judgment Rule, and condemn decisions like Smith v. Van Gorkom 6 as mistaken attempts to "judicialize" corporate decisionmaking. 7 Yet paradoxically, because the market for control plays so crucial a role in the market's oversight of aberrant managerial behavior, most leading L&E scholars, including both Judges Posner" and Easterbrook, 9 recognize a need for some limit on management's attempts to disarm the market for control. While a few couch their proposals to limit managerial behavior in broad per se terms, 10 most L&E scholars propose regimes which envision a limited 6. 488 A.2d 858 (Del. 1985). 7. Eg., Fischel, The Business Judgment Rule and the Trans Union Case, 40 Bus. LAW. 1437 (1985). 8. R. POSNER, ECONOMIC ANALYSIS OF THE LAW 385-88 (3d ed. 1986). 9. Easterbrook & Fischel, The Proper Role of a Target's Management in Responding to a Tender Offer, 94 HARV. L. REV. 1161 (1981); Easterbrook & Fischel, Auctions and Sunk Costs in Tender Offers, 35 STAN. L. REV. 1 (1982) (championing the passivity theory which would prohibit managerial adoption of any defensive tactics). 10. Easterbrook and Fischel's articles, supra note 9, describe their proposals to limit managerial behavior in the face of a hostile takeover. 1989] THE MARKET FOR CORPORATE CONTROL role for incumbent management in fending off raiders and which hence inevitably call for some degree of judicial review. The Seventh Circuit's opinions evidence the difficulty of formulating an appropriate test for guiding the courts in undertaking that review. The Seventh Circuit's takeover opinions also reflect the somewhat conflicting attitudes of L&E scholars toward legislation, federalism, and constitutional adjudication. L&E scholars generally view legislative interpretation and constitutional litigation from a perspective that often leads to a deferential treatment of state regulatory efforts. In particular, they applaud competition among the states, arguing that market forces will tend to drive out poor lawmaking."1 The L&E's school's general deferential tenden (...truncated)