Case Name: EDGAR v. MITE CORP. et al.
Court: Supreme Court of the United States
Jurisdiction: United States
Decision Date: 1982-06-23
Citations: 457 U.S. 624
Docket Number: No. 80-1188
Parties: EDGAR v. MITE CORP. et al.
Judges: Justice White delivered the opinion of the Court with respect to Parts I, II, and V-B, concluding that:
Reporter: United States Reports
Volume: 457
Pages: 624–667

Head Matter:
EDGAR v. MITE CORP. et al.
No. 80-1188.
Argued November 30, 1981
Decided June 23, 1982
Justice White delivered the opinion of the Court with respect to Parts I, II, and V-B, concluding that:
1. The case is not moot. Because the Secretary of State has indicated his intention to enforce the Illinois Act against MITE, a reversal of the District Court’s judgment would expose MITE to civil and criminal liability for making an offer in violation of the Act. P. 630.
2. The Illinois Act is unconstitutional under the Commerce Clause, because it imposes burdens on interstate commerce that are excessive in light of the local interests the Act purports to further. Pike v. Bruce Church, Inc., 397 U. S. 137. Illinois’ asserted interests in protecting resident security holders and regulating the internal affairs of companies incorporated under Illinois law are insufficient to outweigh such burdens. Pp. 643-646.
White, J., delivered an opinion, joined in its entirety by Burger, C. J., Parts I, II, and V-B of which are the opinion of the Court. Blackmun, J., joined Parts I, II, III, and IV. Powell, J., joined Parts I and V-B. Stevens and O’Connor, JJ., joined Parts I, II, and V. Powell, J., filed an opinion concurring in part, post, p. 646. Stevens, J., filed an opinion concurring in part and concurring in the judgment, post, p. 647. O’Con-nor, J., filed an opinion concurring in part, post, p. 655. Marshall, J., filed a dissenting opinion, in which Brennan, J., joined, post, p. 655. Rehnquist, J., filed a dissenting opinion, post, p. 664.
Russell C. Grimes, Jr., Assistant Attorney General of Illinois, argued the cause for appellant. With him on the briefs were Tyrone C. Fahner, Attorney General, and Paul J. Bargiel, Assistant Attorney General.
Richard W. Hulbert argued the cause for appellees. With him on the brief was Christopher H. Landing.
Eugene D. Berman, Assistant Attorney General, argued the cause for the State of New York as amicus curiae urging reversal. With him on the brief were Robert Abrams, Attorney General, Shirley Adelson Siegel, Solicitor General, Linda S. Martinson, Deputy Assistant Attorney General, and Elizabeth Block, Assistant Attorney General.
Stephen M. Shapiro argued the cause for the Securities and Exchange Commission as amicus curiae urging affirmance. With him on the brief were Acting Solicitor General Wallace, Assistant Attorney General Baxter, Deputy Solicitor General Geller, Ralph C. Ferrara, Paul Gonson, Daniel L. Goelzer, and James R. Farrand.
Briefs of amici curiae urging reversal were filed by William J. Brown, Attorney General, and Roger P. Sugarman, Assistant Attorney General, for the State of Ohio; by Marshall Coleman, Attorney General, Walter H. Ryland, Chief Deputy Attorney General, and Karen A. Gould, Assistant Attorney General, for the Commonwealth of Virginia; and by Orestes J. Mikaly, Stephen M. Coons, and K. Houston Matney for the North American Securities Administrators Association, Inc.

Opinion:
Justice White
delivered an opinion, Parts I, II, and V-B of which are the opinion of the Court.
The issue in this case is whether the Illinois Business TakeOver Act, Ill. Rev. Stat., ch. 12P/2, ¶ 137.51 et seq. (1979), is unconstitutional under the Supremacy and Commerce Clauses of the Federal Constitution.
HH
Appellee MITE Corp. and its wholly owned subsidiary, MITE Holdings, Inc., are corporations organized under the laws of Delaware with their principal executive offices in Connecticut. Appellant James Edgar is the Secretary of State of Illinois and is charged with the administration and enforcement of the Illinois Act. Under the Illinois Act any takeover offer for the shares of a target company must be registered with the Secretary of State. Ill. Rev. Stat., ch. 12154, 1137.54. A (1979). A target company is defined as a corporation or other issuer of securities of which shareholders located in Illinois own 10% of the class of equity securities subject to the offer, or for which any two of the following three conditions are met: the corporation has its principal executive office in Illinois, is organized under the laws of Illinois, or has at least 10% of its stated capital and paid-in surplus represented within the State. ¶ 137.52-10. An offer becomes registered 20 days after a registration statement is filed with the Secretary unless the Secretary calls a hearing. ¶ 137.54. E. The Secretary may call a hearing at any time during the 20-day waiting period to adjudicate the substantive fairness of the offer if he believes it is necessary to protect the shareholders of the target company, and a hearing must be held if requested by a majority of a target company's outside directors or by Illinois shareholders who own 10% of the class of securities subject to the offer. ¶ 137.57. A. If the Secretary does hold a hearing, he is directed by the statute to deny registration to a tender offer if he finds that it "fails to provide full and fair disclosure to the offerees of all material information concerning the take-over offer, or that the take-over offer is inequitable or would work or tend to work a fraud or deceit upon the offerees . . . ." f 137.57. E.
On January 19,1979, MITE initiated a cash tender offer for all outstanding shares of Chicago Rivet & Machine Co., a publicly held Illinois corporation, by filing a Schedule 14D-1 with the Securities and Exchange Commission in order to comply with the Williams Act. The Schedule 14D-1 indi cated that MITE was willing to pay $28 per share for any and all outstanding shares of Chicago Rivet, a premium of approximately $4 over the then-prevailing market price. MITE did not comply with the Illinois Act, however, and commenced this litigation on the same day by filing an action in the United States District Court for the Northern District of Illinois. The complaint asked for a declaratory judgment that the Illinois Act was pre-empted by the Williams Act and violated the Commerce Clause. In addition, MITE sought a temporary restraining order and preliminary and permanent injunctions prohibiting the Illinois Secretary of State from enforcing the Illinois Act.
Chicago Rivet responded three days later by bringing suit in Pennsylvania, where it conducted most of its business, seeking to enjoin MITE from proceeding with its proposed tender offer on the ground that the offer violated the Pennsylvania Takeover Disclosure Law, Pa. Stat. Ann., Tit. 70, § 71 et seq. (Purdon Supp. 1982-1983). After Chicago Rivet's efforts to obtain relief in Pennsylvania proved unsuccessful, both Chicago Rivet and the Illinois Secretary of State took steps to invoke the Illinois Act. On February 1, 1979, the Secretary of State notified MITE that he intended to issue an order requiring it to cease and desist further efforts to make a tender offer for Chicago Rivet. On February 2, 1979, Chicago Rivet notified MITE by letter that it would file suit in Illinois state court to enjoin the proposed tender offer. MITE renewed its request for injunctive relief in the District Court and on February 2 the District Court issued a preliminary injunction prohibiting the Secretary of State from enforcing the Illinois Act against MITE's tender offer for Chicago Rivet.
MITE then published its tender offer in the February 5 edition of the Wall Street Journal. The offer was made to all shareholders of Chicago Rivet residing throughout the United States. The outstanding stock was worth over $23 million at the offering price. On the same day Chicago Rivet made an offer for approximately 40% of its own shares at $30 per share. The District Court entered final judgment on February 9, declaring that the Illinois Act was pre-empted by the Williams Act and that it violated the Commerce Clause. Accordingly, the District Court permanently enjoined enforcement of the Illinois statute against MITE. Shortly after final judgment was entered, MITE and Chicago Rivet entered into an agreement whereby both tender offers were withdrawn and MITE was given 30 days to examine the books and records of Chicago Rivet. Under the agreement MITE was either to make a tender offer of $31 per share be fore March 12, 1979, which Chicago Rivet agreed not' to oppose, or decide not to acquire Chicago Rivet's shares or assets. App. to Brief for Appellees la-4a. On March 2, 1979, MITE announced its decision not to make a tender offer.
The United States Court of Appeals for the Seventh Circuit affirmed sub nom. MITE Corp. v. Dixon, 633 F. 2d 486 (1980). It agreed with the District Court that several provisions of the Illinois Act are pre-empted by the Williams Act and that the Illinois Act unduly burdens interstate commerce in violation of the Commerce Clause. We noted probable jurisdiction, 451 U. S. 968 (1981), and now affirm.
I — I h — 1
The Court of Appeals specifically found that this case was not moot, 633 F. 2d, at 490, reasoning that because the Secretary has indicated he intends to enforce the Act against MITE, a reversal of the judgment of the District Court would expose MITE to civil and criminal liability for making the February 5, 1979, offer in violation of the Illinois Act. We agree. It is urged that the preliminary injunction issued by the District Court is a complete defense to civil or criminal penalties. While, as Justice Stevens' concurrence indicates, that is not a frivolous question by any means; it is an issue to be decided when and if the Secretary of State initiates an action. That action would be foreclosed if we agree with the Court of Appeals that the Illinois Act is unconstitutional. Accordingly, the case is not moot.
HH I — I
We first address the holding that the Illinois Take-Over Act is unconstitutional under the Supremacy Clause. We note at the outset that in passing the Williams Act, which is an amendment to the Securities Exchange Act of 1934, Congress did not also amend § 28(a) of the 1934 Act, 15 U. S. C. § 78bb(a). In pertinent part, § 28(a) provides as follows:
"Nothing in this title shall affect the jurisdiction of the securities commission (or any agency or officer performing like functions) of any State over any security or any person insofar as it does not conflict with the provisions of this title or the rules and regulations thereunder." 48 Stat. 903.
Thus Congress did not explicitly prohibit States from regulating takeovers; it left the determination whether the Illinois statute conflicts with the Williams Act to the courts. Of course, a state statute is void to the extent that it actually conflicts with a valid federal statute; and
"[a] conflict will be found 'where compliance with both federal and state regulations is a physical impossibility . . . ,' Florida Lime & Avocado Growers, Inc. v. Paul, 373 U. S. 132, 142-143 (1963), or where the state flaw stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.' Hines v. Davidowitz, 312 U. S. 52, 67 (1941); Jones v. Rath Packing Co., [430 U. S. 519,] 526, 540-541 [(1977)]. Accord, De Canas v. Bica, 424 U. S. 351, 363 (1976)." Ray v. Atlantic Richfield Co., 435 U. S. 151, 158 (1978).
Our inquiry is further narrowed in this case since there is no contention that it would be impossible to comply with both the provisions of the Williams Act and the more burdensome requirements of the Illinois law. The issue thus is, as it was in the Court of Appeals, whether the Illinois Act frustrates the objectives of the Williams Act in some substantial way.
The Williams Act, passed in 1968, was the congressional response to the increased use of cash tender offers in corporate acquisitions, a device that had "removed a substantial number of corporate control contests from the reach of existing disclosure requirements of the federal securities laws." Piper v. Chris-Craft Industries, Inc., 430 U. S. 1, 22 (1977). The Williams Act filled this regulatory gap. The Act imposes several requirements. First, it requires that upon the commencement of the tender offer, the offeror file with the SEC, publish or send to the shareholders of the target company, and furnish to the target company detailed information about the offer. 15 U. S. C. § 78n(d)(l); 17 CFR § 240.24d-3 (1981). The offeror must disclose information about its background and identity; the source of the funds to be used in making the purchase; the purpose of the purchase, including any plans to liquidate the company or make major changes in its corporate structure; and the extent of the offeror's holdings in the target company. 15 U. S. C. §78m(d)(l) (1976 ed., Supp. IV); 17 CFR §240.13d-l (1981). See also n. 2, supra. Second, stockholders who tender their shares may withdraw them during the first 7 days of a tender offer and if the offeror has not yet purchased their shares, at any time after 60 days from thé commencement of the offer. 15 U. S. C. §78n(d)(5). Third, all shares tendered must be purchased for the same price; if an offering price is increased, those who have already tendered receive the benefit of the increase. 15 U. S. C. § 78n(d)(7).
There is no question that in imposing these requirements, Congress intended to protect investors. Piper v. Chris-Craft Industries, Inc., supra, at 35; Rondeau v. Mosinee Paper Corp., 422 U. S. 49, 58 (1975); S. Rep. No. 550, 90th Cong., 1st Sess., 3-4 (1967) (Senate Report). But it is also crystal clear that a major aspect of the effort to protect the investor was to avoid favoring either management or the takeover bidder. As we noted in Piper, the disclosure provisions originally embodied in S. 2731 "were avowedly pro-management in the target company's efforts to defeat takeover bids." 430 U. S., at 30. But Congress became convinced "that takeover bids should not be discouraged because they serve a useful purpose in providing a check on entrenched but inefficient management." Senate Report, at 3. It also became apparent that entrenched management was often successful in defeating takeover attempts. As the legislation evolved, therefore, Congress disclaimed any "intention to provide a weapon for management to discourage takeover bids," Rondeau v. Mosinee Paper Corp., supra, at 58, and expressly embraced a policy of neutrality. As Senator Williams explained: "We have taken extreme care to avoid tipping the scales either in favor of management or in favor of the person making the takeover bids." 113 Cong. Rec. 24664 (1967). This policy of "evenhandedness," Piper v. Chris-Craft Industries, Inc., supra, at 31, represented a conviction that neither side in the contest should be extended additional advantages vis-á-vis the investor, who if furnished with adequate information would be in a position to make his own informed choice. We, therefore, agree with the Court of Appeals that Congress sought to protect the investor not only by furnishing him with the necessary information but also by withholding from management or the bidder any undue advantage that could frustrate the exercise of an informed choice. 633 F. 2d, at 496.
To implement this policy of investor protection while maintaining the balance between management and the bidder, Congress required the latter to file with the Commission and furnish the company and the investor with all information adequate to the occasion. With that filing, the offer could go forward, stock could be tendered and purchased, but a stockholder was free within a specified time to withdraw his tendered shares. He was also protected if the offer was increased. Looking at this history as a whole, it appears to us, as it did to the Court of Appeals, that Congress intended to strike a balance between the investor, management, and the takeover bidder. The bidder was to furnish the investor and the target company with adequate information but there was no "intension] to do . . . more than give incumbent management an opportunity to express and explain its position." Rondeau v. Mosinee Paper Corp., supra, at 58. Once that opportunity was extended, Congress anticipated that the investor, if he so chose, and the takeover bidder should be free to move forward within the time frame provided by Congress.
IV
The Court of Appeals identified three provisions of the Illinois Act that upset the careful balance struck by Congress and which therefore stand as obstacles to the accomplishment and execution of the full purposes and objectives of Congress. We agree with the Court of Appeals in all essential respects.
A
The Illinois Act requires a tender offeror to notify the Secretary of State and the target company of its intent to make a tender offer and the material terms of the offer 20 business days before the offer becomes effective. Ill. Rev. Stat., ch. 12r/2, U1U37.54.E, 137.54.B (1979). During that time, the offeror may not communicate its offer to the shareholders. ¶ 137.54. A. Meanwhile, the target company is free to disseminate information to its shareholders concerning the impending offer. The contrast with the Williams Act is apparent. Under that Act, there is no precommencement notification requirement; the critical date is the date a tender offer is "first published or sent or given to security holders." 15 U. S. C. § 78n(d)(l). See also 17 CFR § 240.14d-2 (1981).
We agree with the Court of Appeals that by providing the target company with additional time within which to take steps to combat the offer, the precommencement notification provisions furnish incumbent management with a powerful tool to combat tender offers, perhaps to the detriment of the stockholders who will not have an offer before them during this period. These consequences are precisely what Congress determined should be avoided, and for this reason, the precommencement notification provision frustrates the objectives of the Williams Act.
It is important to note in this respect that in the course of events leading to the adoption of the Williams Act, Congress several times refused to impose a precommencement disclosure requirement. In October 1965, Senator Williams introduced S. 2731, a bill which would have required a bidder to notify the target company and file a public statement with the Securities and Exchange Commission at least 20 days before commencement of a cash tender offer for more than 5% of a class of the target company's securities. Ill Cong. Rec. 28259 (1965). The Commission commented on the bill and stated that "the requirement of a 20-day advance notice to the issuer and the Commission is unnecessary for the protection of security holders . . . ." 112 Cong. Rec. 19005 (1966). Senator Williams introduced a new bill in 1967, S. 510, which provided for a confidential filing by the tender offeror with the Commission five days prior to the commencement of the offer. S. 510 was enacted as the Williams Act after elimination of the advance disclosure requirement. As the Senate Report explained:
"At the hearings it was urged that this prior review was not necessary and in some cases might delay the offer when time was of the essence. In view of the authority and responsibility of the Securities and Exchange Commission to take appropriate, action in the event that inadequate or misleading information is disseminated to the public to solicit acceptance of a tender offer, the bill as approved by the committee requires only that the statement be on file with the Securities and Exchange Commission at the time the tender offer is first made to the public." Senate Report, at 4.
Congress rejected another precommencement notification proposal during deliberations on the 1970 amendments to the Williams Act.
B
For similar reasons, we agree with the Court of Appeals that the hearing provisions of the Illinois Act frustrate the congressional purpose by introducing extended delay into the tender offer process. The Illinois Act allows the Secretary of State to call a hearing with respect to any tender offer subject to the Act, and the offer may not proceed until the hearing is completed. Ill. Rev. Stat., ch. 12114, ¶ 137.57.A and B (1979). The Secretary may call a hearing at any time prior to the commencement of the offer, and there is no deadline for the completion of the hearing. ¶ 137.57.C and D. Although the Secretary is to render a decision within 15 days after the conclusion of the hearing, that period may be extended without limitation. Not only does the Secretary of State have the power to delay a tender offer indefinitely, but incumbent management may also use the hearing provisions of the Illinois Act to delay a tender offer. The Secretary is required to call a hearing if requested to do so by, among other persons, those who are located in Illinois "as determined by post office address as shown on the records of the target company and who hold of record or beneficially, or both, at least 10% of the outstanding shares of any class of equity securities which is the subject of the take-over offer." ¶ 137.57.A. Since incumbent management in many cases will control, either directly or indirectly, 10% of the target company's shares, this provision allows management to delay the commencement of an offer by insisting on a hearing. As the Court of Appeals observed, these provisions potentially afford management a "powerful weapon to stymie indefinitely a takeover." 633 F. 2d, at 494. In enacting the Williams Act, Congress itself "recognized that delay can seriously impede a tender offer" and sought to avoid it. Great Western United Corp. v. Kidwell, 577 F. 2d 1256, 1277 (CA5 1978); Senate Report, at 4.
Congress reemphasized the consequences of delay when it enacted the Hart-Scott-Rodino Antitrust Improvements Act of 1976, Pub. L. 94-435, 90 Stat. 1397,15 U. S. C. § 12 et seq.
"[I]t is clear that this short waiting period [the 10-day period for proration provided for by § 14(d)(6) of the Securities Exchange Act, which applies only after a tender offer is commenced] was founded on congressional concern that a longer delay might unduly favor the target firm's incumbent management, and permit them to frustrate many pro-competitive cash tenders. This ten-day waiting period thus underscores the basic purpose of the Williams Act — to maintain a neutral policy towards cash tender offers, by avoiding lengthy delays that might discourage their chances for success." H. R. Rep. No. 94-1373, p. 12 (1976).
As we have said, Congress anticipated that investors and the takeover offeror would be free to go forward without unreasonable delay. The potential for delay provided by the hearing provisions upset the balance struck by Congress by favoring management at the expense of stockholders. We therefore agree with the Court of Appeals that these hearing provisions conflict with the Williams Act.
C
The Court of Appeals also concluded that the Illinois Act is pre-empted by the Williams Act insofar as it allows the Secretary of State of Illinois to pass on the substantive fairness of a tender offer. Under H137.57.E of the Illinois law, the Secretary is required to deny registration of a takeover offer if he finds that the offer "fails to provide full and fair disclosure to the offerees . or that the take-over offer is inequitable ." (emphasis added). The Court of Appeals understood the Williams Act and its legislative history to indicate that Congress intended for investors to be free to make their own decisions. We agree. Both the House and Senate Reports observed that the Act was "designed to make the relevant facts known so that shareholders have a fair opportunity to make their decision." H. R. Rep. No. 1711, 90th Cong., 2d Sess., 4 (1968); Senate Report, at 3. Thus, as the Court of Appeals said, "[t]he state thus offers-investor protection at the expense of investor autonomy — an approach quite in conflict with that adopted by Congress." 633 F. 2d, at 494.
V
The Commerce Clause provides that "Congress shall have Power . . . [t]o regulate Commerce . . . among the several States." U. S. Const., Art. I, §8, cl. 3. "[A]t least since Cooley v. Board of Wardens, 12 How. 299 (1852), it has been clear that 'the Commerce Clause. . . . even without implementing legislation by Congress is a limitation upon the power of the States.'" Great Atlantic & Pacific Tea Co. v. Cottrell, 424 U. S. 366, 370-371 (1976), quoting Freeman v. Hewitt, 329 U. S. 249, 252 (1946). See also Lewis v. BT Investment Managers, Inc., 447 U. S. 27, 35 (1980). Not every exercise of state power with some impact on interstate commerce is invalid. A state statute must be upheld if it "regulates evenhandedly to effectuate a legitimate local public interest, and its effects on interstate commerce are only incidental. . . unless the burden imposed on such commerce is clearly excessive in relation to the putative local benefits." Pike v. Bruce Church, Inc., 397 U. S. 137, 142 (1970), citing Huron Cement Co. v. Detroit, 362 U. S. 440, 443 (1960). The Commerce Clause, however, permits only incidental regulation of interstate commerce by the States; direct regulation is prohibited. Shafer v. Farmers Grain Co., 268 U. S. 189, 199 (1925). See also Pike v. Bruce Church, Inc., supra, at 142. The Illinois Act violates these principles for two reasons. First, it directly regulates and prevents, unless its terms are satisfied, interstate tender offers which in turn would generate interstate transactions. Second, the burden the Act imposes on interstate commerce is excessive in light of the local interests the Act purports to further.
A
States have traditionally regulated intrastate securities transactions, and this Court has upheld the authority of States to enact "blue-sky" laws against Commerce Clause challenges on several occasions. Hall v. Geiger-Jones Co., 242 U. S. 539 (1917); Caldwell v. Sioux Falls Stock Yards Co., 242 U. S. 559 (1917); Merrick v. N. W. Halsey & Co., 242 U. S. 568 (1917). The Court's rationale for upholding blue-sky laws was that they only regulated transactions occurring within the regulating States. "The provisions of the law . . . apply to dispositions of securities within the State and while information of those issued in other States and foreign countries is required to be filed . . . , they are only affected, by the requirement of a license of one who deals with them within the State. . . . Such regulations affect interstate commerce in [securities] only incidentally." Hall v. Geiger-Jones Co., supra, at 557-558 (citations omitted). Congress has also recognized the validity of such laws governing intrastate securities transactions in § 28(a) of the Securities Exchange Act, 15 U. S. C. § 78bb(a), a provision "designed to save state blue-sky laws from pre-emption." Leroy v. Great Western United Corp., 443 U. S. 173, 182, n. 13 (1979).
The Illinois Act differs substantially from state blue-sky laws in that it directly regulates transactions which take place across state lines, even if wholly outside the State of Illinois. A tender offer for securities of a publicly held corporation is ordinarily communicated by the use of the mails or other means of interstate commerce to shareholders across the country and abroad. Securities are tendered and transactions closed by similar means. Thus, in this case, MITE Corp., the tender offeror, is a Delaware corporation with principal offices in Connecticut. Chicago Rivet is a publicly held Illinois corporation with shareholders scattered around the country, 27% of whom live in Illinois. MITE's offer to Chicago Rivet's shareholders, including those in Illinois, necessarily employed interstate facilities in communicating its offer, which, if accepted, would result in transactions occurring across state lines. These transactions would themselves be interstate commerce. Yet the Illinois law, unless complied with, sought to prevent MITE from making its offer and concluding interstate transactions not only with Chicago Rivet's stockholders living in Illinois, but also with those living in other States and having no connection with Illinois. Indeed, the Illinois law on its face would apply even if not a single one of Chicago Rivet's shareholders were a resident of Illinois, since the Act applies to every tender offer for a corporation meeting two of the following conditions: the corporation has its principal executive office in Illinois, is organized under Illinois laws, or has at least 10% of its stated capital and paid-in surplus represented in Illinois. Ill. Rev. Stat., ch. 12172, ¶ 137.52-10(2) (1979). Thus the Act could be applied to regulate a tender offer which would not affect a single Illinois shareholder.
It is therefore apparent that the Illinois statute is a direct restraint on interstate commerce and that it has a sweeping extraterritorial effect. Furthermore, if Illinois may impose such regulations, so may other States; and interstate commerce in securities transactions generated by tender offers would be thoroughly stifled. In Shafer v. Farmers Grain Co., supra, at 199, the Court held that "a state statute which by its necessary operation directly interferes with or burdens [interstate] commerce is a prohibited regulation and invalid, regardless of the purpose with which it was enacted." See also Hughes v. Alexandria Scrap Corp., 426 U. S. 794, 806 (1976). The Commerce Clause also precludes the application of a state statute to commerce that takes place wholly outside of the State's borders, whether or not the commerce has ef fects within the State. In Southern Pacific Co. v. Arizona, 325 U. S. 761, 775 (1945), the Court struck down on Commerce Clause grounds a state law where the "practical effect of such regulation is to control [conduct] beyond the boundaries of the state . . . The limits on a State's power to enact substantive legislation are similar to the limits on the jurisdiction of state courts. In either case, "any attempt 'directly' to assert extraterritorial jurisdiction over persons or property would offend sister States and exceed the inherent limits of the State's power." Shaffer v. Heitner, 433 U. S. 186, 197 (1977).
Because the Illinois Act purports to regulate directly and to interdict interstate commerce, including commerce wholly outside the State, it must be held invalid as were the laws at issue in Shafer v. Farmers Grain Co. and Southern Pacific.
B
The Illinois Act is also unconstitutional under the test of Pike v. Bruce Church, Inc., 397 U. S., at 142, for even when a state statute regulates interstate commerce indirectly, the burden imposed on that commerce must not be excessive in relation to the local interests served by the statute. The most obvious burden the Illinois Act imposes on interstate commerce arises from the statute's previously described nationwide reach which purports to give Illinois the power to determine whether a tender offer may proceed anywhere.
The effects of allowing the Illinois Secretary of State to block a nationwide tender offer are substantial. Shareholders are deprived of the opportunity to sell their shares at a premium. The reallocation of economic resources to their highest valued use, a process which can improve efficiency and competition, is hindered. The incentive the tender offer mechanism provides incumbent management to perform well so that stock prices remain-high is reduced. See Easter-brook & Fischel, The Proper Role of a Target's Management in Responding to a Tender Offer, 94 Harv. L. Rev. 1161,1173-1174 (1981); Fischel, Efficient Capital Market Theory, the Market for Corporate Control, and the Regulation of Cash Tender Offers, 57 Texas L. Rev. 1, 5, 27-28, 45 (1978); H. R. Rep. No. 94-1373, p. 12 (1976).
Appellant claims the Illinois Act furthers two legitimate local interests. He argues that Illinois seeks to protect resident security holders and that the Act merely regulates the internal affairs of companies incorporated under Illinois law. We agree with the Court of Appeals that these asserted interests are insufficient to outweigh the burdens Illinois imposes on interstate commerce.
While protecting local investors is plainly a legitimate state objective, the State has no legitimate interest in protecting nonresident shareholders. Insofar as the Illinois law burdens out-of-state transactions, there is nothing to be weighed in the balance to sustain the law. We note, furthermore, that the Act completely exempts from coverage a corporation's acquisition of its own shares. III. Rev. Stat., ch. 12114, ¶ 137.52-9(4) (1979). Thus Chicago Rivet was able to make a competing tender offer for its own stock without complying with the Illinois Act, leaving Chicago Rivet's shareholders to depend only on the protections afforded them by federal securities law, protections which Illinois views as inadequate to protect investors in other contexts. This distinction is at variance with Illinois' asserted legislative purpose, and tends to undermine appellant's justification for the burdens the statute imposes on interstate commerce.
We are also unconvinced that the Illinois Act substantially enhances the shareholders' position. The Illinois Act seeks to protect shareholders of a company subject to a tender offer by requiring disclosures regarding the offer, assuring that shareholders have adequate time to decide whether to tender their shares, and according shareholders withdrawal, proration, and equal consideration rights. However, the Williams Act provides these same substantive protections, compare Ill. Rev. Stat., ch. 121A, ¶ 137.59.C, D, and E (1979) (with drawal, proration, and equal consideration rights), with 15 U. S. C. § 78n(d)(5), (6), and (7) and 17 CFR §240.14d-7 (1981) (same). As the Court of Appeals noted, the disclosures required by the Illinois Act which go beyond.those mandated by the Williams Act and the regulations pursuant to it may not substantially enhance the shareholders' ability to make informed decisions. 633 F. 2d, at 500. It also was of the view that the possible benefits of the potential delays required by the Act may be outweighed by the increased risk that the tender offer will fail due to defensive tactics employed by incumbent management. We are unprepared to disagree with the Court of Appeals in these respects, and conclude that the protections the Illinois Act affords resident security holders are, for the most part, speculative.
Appellant also contends that Illinois has an interest in regulating the internal affairs of a corporation incorporated under its laws. The internal affairs doctrine is a conflict of laws principle which recognizes that only one State should have the authority to regulate a corporation's internal affairs — matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders — because otherwise a corporation could be faced with conflicting demands. See Restatement (Second) of Conflict of Laws §302, Comment b, pp. 307-308 (1971). That doctrine is of little use to the State in this context. Tender offers contemplate transfers of stock by stockholders to a third party and do not themselves implicate the internal affairs of the target company. Great Western United Corp. v. Kidwell, 577 F. 2d, at 1280, n. 53; Restatement, supra, § 302, Comment e, p. 310. Furthermore, the proposed justification is somewhat incredible since the Illinois Act applies to tender offers for any corporation for which 10% of the outstanding shares are held by Illinois residents, Ill. Rev. Stat., ch. 12172, ¶ 137.52-10 (1979). The Act thus applies to corporations that are not incorporated in Illinois and have their principal place of business in other States. Illinois has no inter est in regulating the internal affairs of foreign corporations.
We conclude with the Court of Appeals that the Illinois Act imposes a substantial burden on interstate commerce which outweighs its putative local benefits. It is accordingly invalid under the Commerce Clause.
The judgment of the Court of Appeals is
Affirmed.
The Chief Justice joins the opinion in its entirety; Justice Black-mun joins Parts I, II, III, and IV; Justice Powell joins Parts I and V-B; and Justice Stevens and Justice O'Connor join Parts I, II, and V.
The Illinois Act defines "take-over offer" as "the offer to acquire or the acquisition of any equity security of a target company, pursuant to a tender offer . . . ." Ill. Rev. Stat., ch. 121'/z, ¶ 137.52-9 (1979). "A tender offer has been conventionally understood to be a publicly made invitation addressed to all shareholders of a corporation to tender their shares for sale at a specified price." Note, The Developing Meaning of "Tender Offer" Under the Securities Exchange Act of 1934, 86 Harv. L. Rev. 1250, 1251 (1973) (footnotes omitted). The terms "tender offer" and "takeover offer" are often used interchangeably.
The Williams Act, 82 Stat. 454, codified at 15 U. S. C. §78m(d)-(e) and 78n(dMf), added new § 13(d), 13(e), and 14(d)-(f) to the Securities Exchange Act of 1934. Section 14(d)(1) of the Securities Exchange Act requires an offeror seeking to acquire more than 5% of any class of equity security by means of a tender offer to first file a Schedule 14D-1 with the Securities and Exchange Commission. The Schedule requires disclosure of the source of funds used to purchase the target shares, past transactions with the target company, and other material financial information about the offeror. In addition, the offeror must disclose any antitrust or other legal problems which might result from the success of the offer. 17 CFR §240.14d-100 (1981). Section 14(d)(1) requires the offeror to publish or send a statement of the relevant facts contained in the Schedule 14D-1 to the shareholders of the target company.
In addition, § 13(d), added by the Williams Act, requires a purchaser of any equity security registered pursuant to § 12 of the Securities Exchange Act, 15 U. S. C. § 781, to file a Schedule 13D with the Commission within 10 days after its purchases have exceeded 5% of the outstanding shares of the security. Schedule 13D requires essentially the same disclosures as required by Schedule 14D-1. Compare 17 CFR §240.13d-101 (1981) with 17 CFR §240.14d-100 (1981).
In addition to filing suit in state court, Chicago Rivet filed a complaint with the Pennsylvania Securities Commission requesting the Commission to enforce the Pennsylvania Act against MITE. On January 31,1979, the Pennsylvania Securities Commission decided that it would not invoke the Pennsylvania Takeover Disclosure Law. The next day, the United States District Court for the Western District of Pennsylvania, to which MITE had removed the state-court action, denied Chicago Rivet's motion for a temporary restraining order.
Chicago Rivet's offer for its own shares was exempt from the requirements of the Illinois Act pursuant to Ill. Rev. Stat., ch. 121%, ¶ 137.52-9(4) (1979).-
The Secretary of State may bring an action for civil penalties for violations of the Illinois Act., Ill. Rev. Stat., ch. 121V2, ¶ 137.65 (1979), and a person who willfully violates the Act is subject to criminal prosecution. ¶ 137.63.
There is no evidence in the legislative history that Congress was aware of state takeover laws when it enacted the Williams Act. When the Williams Act was enacted in 1968, only Virginia had a takeover statute. The Virginia statute, Va. Code § 13.1-528 (1978), became effective March 5, 1968; the Williams Act was enacted several months later on July 19, 1968. Takeover statutes are now in effect in 37 States. Sargent, On the Validity of State Takeover Regulation: State Responses to MITE and Kidwell, 42 Ohio St. L. J. 689, 690, n. 7 (1981).
The 7-day withdrawal period contained in the Williams Act has been extended to 15 business days by the Commission. 17 CFR §240.14d-7(a)(l) (1981).
The Williams Act also provides that when the number of shares tendered exceeds the number of shares sought in the offer, those shares tendered during the first 10 days of the offer must be purchased on a pro rata basis. 15 U. S. C. § 78n(d)(6). The Act also contains a general antifraud provision, 15 U. S. C. § 78n(e), which has been interpreted to require disclosure of material information known to the offeror even if disclosure were not otherwise required. See, e. g., Sonesta International Hotels Corp. v. Wellington Associates, 483 F. 2d 247, 250 (CA2 1973).
Congress also did not want to deny shareholders "the opportunities which result from the competitive bidding for a block of stock of a given company," namely, the opportunity to sell shares for a premium over their market price. 113 Cong. Rec. 24666 (1967) (remarks of Sen. Javits).
See n. 11 and accompanying text, infra.
H. R. 4285, 91st Cong., 2d Sess. (1970). The bill was not reported out of the Subcommittee. Instead, the Senate amendments to the Williams Act, which did not contain precommencement notification provisions, were adopted. Pub. L. 91-567, 84 Stat. 1497.
The Securities and Exchange Commission has promulgated detailed rules governing the conduct of tender offers. Rule 14d — 2(b), 17 CFR § 240.14d-2(b) (1981), requires that a tender offeror make its offer effective within five days of publicly announcing the material terms of the offer by disseminating specified information to shareholders and filing the requisite documents with the Commission. Otherwise the offeror must announce that it is withdrawing its offer. The events in this litigation took place prior to the effective date of Rule 14d — 2(b), and because Rule 14d-2(b) operates prospectively only, see 44 Fed. Reg. 70326 (1979), it is not at issue in this case.
Delay has been characterized as "the most potent weapon in a tender-offer fight." Langevoort, State Tender-Offer Legislation: Interests, Effects, and Political Competency, 62 Cornell L. Rev. 213, 238 (1977). See also Wachtell, Special Tender Offer Litigation Tactics, 32 Bus. Law. 1433, 1437-1442 (1977); Wilner & Landy, The Tender Trap: State Takeover Statutes and Their Constitutionality, 45 Ford. L. Rev. 1, 9-10 (1976).
According to the Securities and Exchange Commission, delay enables a target company to:
"(1) repurchase its own securities;
"(2) announce dividend increases or stock splits;
"(3) issue additional shares of stock;
"(4) acquire other companies to produce an antitrust violation should the tender offer succeed;
"(5) arrange a defensive merger;
"(6) enter into restrictive loan agreements; and
"(7) institute litigation challenging the tender offer." Brief for Securities and Exchange Commission as Amicus Curiae 10, n. 8.
Representative Rodino set out the consequences of delay in greater detail when he described the relationship between the Hart-Scott-Rodino Act and the Williams Act:
"In the case of cash tender offers, more so than in other mergers, the equities include time and the danger of undue delay. This bill in no way intends to repeal or reverse the congressional purpose underlying the 1968 Williams Act, or the 1970 amendments to that act. . . . Lengthier delays will give the target firm plenty of time to defeat the offer, by abolishing cumulative voting, arranging a speedy defensive merger, quickly incorporating in a State with an antitakeover statute, or negotiating costly lifetime employment contracts for incumbent management. And the longer the waiting period, the more the target's stock may be bid up in the market, making the offer more costly — and less successful. Should this happen, it will mean that shareholders of the target firm will be effectively deprived of the choice that cash tenders give to them: Either accept the offer and thereby gain the tendered premium, or reject the offer. Generally, the courts have construed the Williams Act so as to maintain these two options for the target company's shareholders, and the House conferees contemplate that the courts will continue to do so." 122 Cong. Rec. 30877 (1976).
Appellant argues that the Illinois Act does not permit him to adjudicate the substantive fairness of a tender offer. Brief for Appellant 21-22. On this state-law issue, however, we follow the view of the Court of Appeals that ¶ 137.57. E allows the Secretary of State "to pass upon the substantive fairness of a tender offer . . . ." 633 F. 2d 486, 493 (1980).
For example, the Illinois blue-sky law, Ill. Rev. Stat., ch. 12172, ¶ 137.1 et seq. (1979 and Supp. 1980), provides that securities subject to the law must be registered "prior to sale in this State . . . ." ¶ 137.5.