BNS INC. v. Koppers Co., Inc.

OPINION

BNS Inc. (“BNS”) brings this action against Koppers Company, Inc. (“Kop-pers”), the Attorney General of the State of Delaware, Charles M. Oberly, III, and the Secretary of State of the State of Delaware, Michael E. Harkins, seeking an order declaring unconstitutional the newly-enacted Delaware Business Combinations statute, Del.Code Ann. tit. 8, § 203 (1988) 1 (the “Delaware Act” or “section 203”). BNS also requests that the Court either declare Kopper’s stock purchase rights plan (the “rights plan”) invalid or order Koppers to redeem the stock purchase rights. 2

BNS urges the Delaware Act frustrates the purposes of the Williams Act, 15 U.S.C. §§ 78m(d)-(e), 78n(d)-(f) (1982), and is thus preempted by operation of the supremacy clause. Additionally, BNS argues the Delaware Act impermissibly burdens interstate commerce and accordingly is void on commerce clause grounds. BNS bases its attack on the rights plan on the assertion that the refusal of Kopper’s Board of Directors to redeem the stock purchase rights violates the directors’ fiduciary obligations to the stockholders.

The defendants insist BNS’s assault on the Delaware Act must fail, contending that (i) the state statute does not conflict with the Williams Act because the Williams Act covers only tender offers, and not the transactions regulated by section 203; (ii) section 28(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78bb(a) (1982), indicates that Congress intended federal regulation of securities to coexist with state regulation of state-created corporations; (iii) the plaintiff mischaracterizes the purposes of the Williams Act and a truer characterization reveals that the Delaware statute is consistent with Williams Act concerns; and (iv) a proper application of commerce clause analysis demonstrates that the Delaware statute survives commerce clause scrutiny. Koppers takes issue as well with the plaintiff’s arguments regarding the rights plan.

*461 For the reasons below I find the Delaware Act regulating post-tender offer business combinations most likely constitutional. The plaintiff thus has failed to demonstrate probable success on the merits and the preliminary injunction based on the alleged unconstitutionality of the statute will be denied. Because the plaintiff additionally has failed to demonstrate that the rights plan most probably will immediately, irreparably injure BNS, the Court also will deny the motion for a preliminary injunction on the basis of the alleged invalidity of Kop-pers’s rights plan.

I. FACTS

A. The Offer

BNS is a Delaware corporation owned by three entities: Bright Aggregates Inc., a Delaware corporation and wholly-owned subsidiary of Beazer PLC (“Beazer”), an English public limited company, SL-Merger, Inc., a Delaware corporation and wholly-owned indirect subsidiary of Shearson Lehman Brothers Holdings Inc. (“Shearson Lehman”), also a Delaware corporation, and Speedward Limited, an English company and wholly-owned indirect subsidiary of NatWest Investment Bank (“NatWest”), an English company. BNS’s owners incorporated BNS for the purpose of making a tender offer for Koppers’s shares.

Koppers is a Delaware corporation with its principal executive offices in Pittsburgh. Koppers’s business consists primarily of construction materials and services work. Approximately forty percent of Koppers’s business involves chemicals and allied products activity.

Beazer is a general construction company active in the construction and sale of residential housing, the development and management of commercial property, general contracting and consulting with respect to construction and engineering, and the production of cement, concrete, and concrete products.

On March 3, 1988, BNS commenced its tender offer for all of the more than 28,-000,000 outstanding shares of Koppers common stock and all of the more than 150,000 outstanding shares of cumulative preferred stock four percent series of Kop-pers. Having been extended twice, the offer is scheduled to expire at midnight on April 7, 1988. BNS initially offered to purchase the common stock for $45 per share and the cumulative preferred stock for $107.75 per share. For the first several days following the announcement of BNS’s offer, Koppers’s stock traded at levels significantly above BNS’s offer price. 3 Kop-pers’s board recommended rejection of the $45 offer. On March 20 BNS raised its offer for the common stock to $56 per share. The stock continued to trade at levels slightly above BNS’s offer price, but the disparity was less dramatic. Koppers again rejected the offer as inadequate. On March 25, BNS again raised its offer — this time to $60. The stock is now trading below this figure. Koppers’s board has not yet acted on this further sweetened offer.

BNS states in its offer materials that following a successful takeover of Kop-pers, and provided certain conditions are met, BNS will seek a merger or other business combination with Koppers, after which BNS plans to sell Koppers’s chemicals and related business. The merger or other similar business combination would be accomplished by converting the remaining shares of Koppers common stock into the right to receive the same cash price paid pursuant to the tender offer. The planned merger accords similar treatment to the holders of Koppers preferred stock.

Among other conditions, BNS hinges its offer on a finding by this Court that the Delaware Act is unconstitutional or that the Act does not apply to the transaction contemplated by BNS, unless the eventual course of events operates to render the Act otherwise inapplicable.

Governor Castle signed the Delaware Act on February 2, 1988. The Act applies *462 to all Delaware corporations, with certain limited exceptions. The provisions of the Act are summarized below. 4

B. The Rights Plan

In addition to avoiding section 203, BNS conditions its offer on the redemption of the rights issued pursuant to Koppers’s rights plan, or on BNS otherwise escaping from the prospective resulting dilution of its ownership.

In February of 1986, Koppers adopted a stock purchase rights plan in the form of a dividend to stockholders. The dividend consisted of one right per share of common stock to purchase l/100th of a share of Junior participating preferred stock. The exercise price of the right is $75. The rights plan was amended to provide that, unless a “triggering event” occurs, (1) the rights cannot be exercised, (2) the rights do not trade separately from the common stock, and (3) the rights are not represented by separate certificates. The plan defines a triggering event as the earlier of

(1) ten days following the date of a public announcement that a person (or group) has acquired 20% or more of Kop-pers’s outstanding common (the “stock acquisition date”), or

(2) ten business days following the commencement of a tender offer or at such later date as may be determined by the board.

Under the plan as amended on March 15, 1988, the rights are redeemable by Kop-pers’s board at any time until ten days following the stock acquisition date, “or at such later date as the Directors may determine.” The effect of this amendment is to extend the date on which the rights would have detached from March 17, ten business days following the commencement of the offer, until ten business days following BNS’s purchase of the tendered stock — or earlier, if the board so decides. Cyert Affidavit, ¶¶ 7, 26 (D.I. 29). The redemption price is five cents per right.

If Koppers is acquired in a merger or other business combination after the rights become exercisable, each right entitles its holder to buy Koppers common stock at a value double the exercise price of $75 (the “flip-in”). The plan voids rights owned by the acquiror. The flip-in provision becomes operative when any person acquires more than 30% of the outstanding common of Koppers. The flip-in becomes inoperative if Koppers’s board approves the terms of the acquisition, and if the acquisition is then carried out in accordance with the approved terms. Another provision, the “flip-over,” allows each rights holder to buy $150 worth of stock in the acquiring company for $75. As with the flip-in provision, board approval exempts acquirors from the flip-over.

BNS challenges the reasonableness of the board’s refusal to redeem the rights.

II. ANALYSIS

In order to succeed on its motion for a preliminary injunction, BNS must establish:

(1) a reasonable probability of eventual success in the litigation, and (2) that irreparable injury will ensue if relief is not granted. In addition, the court may consider (3) the possibility of harm to other interested persons from the grant or denial of relief, and (4) the public interest. Constructors Ass’n of Western Penna. v. Kreps, 573 F.2d 811, 815 (3d Cir.1978); Delaware River Port Auth. v. Transamerica Trailer Transp., Inc., 501 F.2d 917, 919-20 (3d Cir.1974).

Kennecott Corp. v. Smith, 637 F.2d 181, 187 (3rd Cir.1980). If BNS can demonstrate a reasonable probability of success on the merits with respect to either of its constitutional claims, it appears that the remaining elements would weigh toward granting an injunction in BNS’s favor. The injury threatened by the effect of the statute, i.e., possible defeat of the offer, “is precisely the harm sought to be avoided by the Williams Act.” 5 Kennecott, 637 F.2d *463 at 188. In this instance, therefore, the elements of probability of success and irreparable injury stand or fall together.

The second shot in BNS’s salvo, aimed primarily at the poison pill, will find its mark if the plaintiff shows both probable success on the merits and that irreparable injury will result from permitting Koppers to retain the power to trigger the pill. Initially the Court will review the constitutional challenges, turning afterward to the validity of the directors’ actions.

A. BNS’s Constitutional Challenges 1. Background: State Takeover Statutes

Following the United States Supreme Court’s decision in Edgar v. MITE Corp., 457 U.S. 624, 102 S.Ct. 2629, 73 L.Ed.2d 269 (1982), which invalidated the Illinois Business Takeover Act on commerce clause grounds, and in effect struck down virtually every other state takeover statute, many states enacted “second generation” takeover legislation. See, Note, The Constitutionality of Second Generation Takeover Statutes, 73 Va.L.Rev. 203, 204 (1987) [hereinafter “Second Generation Statutes”]. In the portion of the MITE opinion constituting the opinion of the Court, Justice White found the Illinois statute indirectly burdened interstate commerce, and held that the burden imposed outweighed any legitimate state interests promoted by the statute. MITE, 457 U.S. at 643-46, 102 S.Ct. at 2641-43. 6

State legislatures addressed the problem of regulating tender offers in the wake of MITE by reconstructing their statutes into four forms more closely resembling traditional state corporation laws: control share acquisitions statutes, 7 fair price provision statutes, 8 right of redemption statutes, 9 and business combination statutes. 10 See Second Generation Statutes at 207-12. By reconstructing their takeover statutes in the form of traditional corporate governance regulation, states hoped to avoid the commerce clause infirmities of the Illinois legislation invalidated in MITE. See Langevoort, Comment, The Supreme Court and the Politics of Corporate Takeovers: A Comment on CTS Corp. v. Dynamics Corp. of America, 101 Harv.L.Rev. 96, 98 (1987). Several of the second generation statutes, such as those of Indiana and Maryland, 11 combine two or more types of post-MITE state takeover regulation. Because the Supreme Court’s affirmation of Indiana’s second generation statute in CTS Corp. v. Dynamics Corp., — U.S. -, 107 S.Ct. 1637, 95 L.Ed.2d 67 (1987), rests on certain features of that law in relation to the Williams Act, a brief description of Indiana’s control share acquisition statute clarifies analysis of the constitutionality of the Delaware statute.

*464 Indiana’s control share acquisition statute operates quite differently from the Delaware approach. The Indiana statute strips acquired blocks of shares of voting rights, allowing for reinstatement of voting rights following, shareholder approval. The acquiror’s voting rights resume if a majority of the disinterested — i.e., non-ac-quiror, non-management — shares vote to restore the acquiror’s voting rights at the next annual meeting or at a special shareholders meeting held within fifty days of the acquiror’s request (and paid for by the acquiror). See Ind. Code Ann. § 23-1-42-3, -7, -10(b). A separate part of Indiana’s takeover statute aims at post-transaction business combinations, resembling the fourth type of state response to MITE. See Ind. Code Ann. § 23-1-43.

The most important statutory reaction to MITE for current purposes is the business combination statute. First enacted by New York, and most recently by Delaware, this type of statute prohibits certain business combinations between an “interested shareholder” and the target corporation for an extended period of time — five years in the case of New York’s statute, and three years in Delaware’s section 203. 12 Business combination statutes typically contain exceptions allowing for friendly offerors to consummate post-takeover transactions. Common examples include board approval, 13 or board approval plus a vote of a supermajority of the stockholders. 14 Business combination restrictions shield shareholders from the coerciveness of front-end loaded, two-tier offers by preventing the offeror from effecting the second step of the offer unless the target’s board of directors and, in some instances, the target’s shareholders, approve the transaction.

any person (other than the corporation and any direct or indirect majority-owned subsidiary of the corporation) that (i) is the owner of 15% or more of the outstanding voting stock of the corporation, or (ii) is an affiliate or associate of the corporation and was the owner of 15% or more of the outstanding voting stock of the corporation at any time within the 3-year period immediately prior to the date on which it is sought to be determined whether such person is an interested stockholder; and the affiliates and associates of such person; provided, however, that the term ‘interested stockholder' shall not include (x) any person who (A) owned shares in excess of the 15% limitation set forth herein as of, or acquired such shares pursuant to a tender offer commenced prior to, December 23, 1987 or pursuant to an exchange offer announced prior to the aforesaid date and commenced within 90 days thereafter and continued to own shares in excess of such 15% limitation or would have but for action by the corporation or (B) acquired said shares from a person described in (A) above by gift, inheritance or in a transaction in which no consideration was exchanged; or (y) any person whose ownership of shares in excess of the 15% limitation set forth herein is the result of action taken solely by the corporation provided that such person shall be an interested stockholder if thereafter he ac *465 quires additional shares of voting stock of the corporation, except as a result of further corporate action not caused, directly or indirectly, by such person. For the purpose of determining whether a person is an interested stockholder, the voting stock of the corporation deemed to be outstanding shall include stock deemed to be owned by the person through application of paragraph (8) of this subsection but shall not include any other unissued stock of such corporation which may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise,

*464 2. The Delaware Statute

Delaware’s statute, which may qualify as a “third generation” statute, having been passed after CTS, is modeled after the kind of second generation statute pioneered in New York. 15 Section 203 encompasses a variety of transactions between a stockholder and the corporation of whose outstanding voting stock the stockholder owns at least 15%. The full statute is reproduced in the appendix to this opinion, but, put simply, it prevents “business combinations,” broadly defined, 16 between an “interested stockholder” 17 and the target cor *465 poration 18 for a three-year period, unless one of the exceptions to the statute applies.

Subsection (a) of section 203 19 sets forth three ways an interested stockholder otherwise subject to the section may escape its moratorium on business combinations. Subsection (b) lists circumstances in which the section will not apply at all. Subsection (a) allows a tender offeror to consummate a second step merger or other business combination where: (1) the board approves the combination prior to the date the offeror becomes an interested stockholder; (2) the transaction which transforms the stockholder into an interested stockholder results in the interested stockholder owning at least 85% of the outstanding voting stock, excluding for the purposes of calculating that percentage shares owned by officers who are also directors and certain employee stock plans; (3) the board of directors approves the business combination after the person becomes an interested stockholder and the proposed combination is authorized by 66% of the outstanding voting stock not owned by the interested stockholder.

Subsection (b) lists six circumstances in which section 203 will not apply. 20 Subsec *466 tion (b)(1) permits newly-organized corporations to exempt themselves from the statute. Subsection (b)(2) gives the board of directors of a Delaware corporation until May 3, 1988, 21 to amend the corporation’s bylaws to “opt-out” of the coverage of the statute. Because the terms of the directors on Koppers’s board are staggered, BNS cannot avail itself of this provision of the statute.

The third subparagraph, (b)(3), gives stockholders the power to amend the corporation’s bylaws or certificate of incorporation in order to place the corporation outside the statute. Such an amendment will not be effective for twelve months, however. Further, a successful offeror is forbidden from using a stockholder amendment opt-out. Only persons who become interested stockholders after the amendment may take advantage of it.

Subsection (b)(4) exempts certain small companies not listed on a national exchange, quoted through a national securities association, or with fewer than 2,000 stockholders. The fifth subsection provides that persons who become interested stockholders inadvertently, e.g., through gift or inheritance, are not bound by section 203.

The sixth subsection of 203(b) releases a bidder from combination restrictions when management — or a third party approved by management — proposes a merger, sale of substantial assets, or tender or exchange offer for more than 50% of the outstanding voting stock. In that event, the bidder may devise a competing proposal within twenty days of the announcement of the management-endorsed proposal. This exception allows stockholders an opportunity to consider competing bids.

3. Preemption

Before examining the Delaware Act’s viability in the face of the Williams Act’s purposes, a look at what those purposes are is necessary.

*467 a. The Purposes of the Williams Act

Congress added the Williams Act, Pub.L. No. 90-439, 82 Stat. 454 (codified as amended at 15 U.S.C. §§ 78m(dHe), 78n(d)-(f) (1982)), to the system of federal securities regulation to fill a gap in the disclosure scheme set up by the 1933 and 1934 securities laws. See Piper v. Chris-Craft Industries, 430 U.S. 1, 22, 97 S.Ct. 926, 939, 51 L.Ed.2d 124 (1977); 113 Cong. Rec. 854-55, 24,664 (1967). In the familiar words of the bill’s sponsor, Senator Williams:

Every effort has been made to avoid tipping the balance of regulatory burden in favor of management or in favor of the offeror. The purpose of this bill is to require full and fair disclosure for the benefit of stockholders while at the same time providing the offeror and management equal opportunity to fairly present their case.

113 Cong.Rec. 854-55 (1967) (statement of Sen. Williams). The Securities Act of 1933 and the Exchange Act of 1934 provided for disclosure to investors in every area of securities transfers but that to which the Williams Act addresses itself: tender offers and the stock acquisitions which typically precede them. Hence, prior to 1968, shareholders were privy to information about issuers, the financial condition of issuers, plans for the funds raised from the issue, information relevant to securities bought or sold in the secondary markets, and a variety of other facts, see T. Hazen, The Law of Securities Regulation §§ 1.1, 1.2 (Lawyers’ ed. 1985 & Supp. 1987), but were not provided with similar information regarding the tender offeror.

Between the 1930’s and the 1960’s, cash tender offers grew in popularity as a mode of corporate acquisition. See Edgar v. MITE, 457 U.S. 624, 632, 102 S.Ct. 2629, 2635, 73 L.Ed.2d 269 (1982). Responding to the increasing number of corporate transactions beyond the scope of the regulatory framework, Congress constructed a statute imposing several disclosure requirements on tender offerors and their targets. The rationale for requiring disclosure was (and is) shareholder protection. Shareholders were at a disadvantage compared to a potential acquiror in terms of information relevant to making a decision on the merits of the offer. In mandating disclosure, Congress deliberately contemplated requirements that would have a neutral effect on the balance of power between target management and the acquiror. See Piper v. Chris-Craft Industries, 430 U.S. 1, 30, 97 S.Ct. 926, 943, 51 L.Ed.2d 124 (1977).

This “careful balance,” CTS, 107 S.Ct. at 1645, is not an end in itself. It is rather Congress’s judgment regarding the means for achieving shareholder protection. See CTS, 107 S.Ct. at 1645-46; Hyde Park Partners, L.P. v. Connolly, 839 F.2d 837, 849-50 (1st Cir.1988). Consequently, as the CTS Court points out, incidental effects on the relative positions of offerors and target managements caused by legislation intended to promote shareholder welfare do not contravene the purposes of the Williams Act.

Of course, by regulating tender offers, the Act makes them more expensive and thus deters them somewhat, but this type of reasonable regulation does not alter the balance between management and offeror in any significant way. The principal result of the Act is to grant shareholders the power to deliberate collectively about the merits of tender offers. This result is fully in accord with the purposes of the Williams Act.

107 S.Ct. at 1646 n. 7. And as Judge Coffin reasoned in Hyde Park,

[the Court’s] task is to identify the principal result of [the state law], and to distinguish between that effect and any consequences that are merely secondary or incidental. One probative test is to determine if the regulation alters the balance between management and offeror in any significant way, but this is not in itself dispositive. [The Court’s] focus should remain on determining whether the disclosure provisions are beneficial to the investors caught between management and offerors.

Hyde Park Partners, L.P. v. Connolly, 839 F.2d 837, 850-51 (1st Cir.1988) (emphasis in original).

*468 b. The Delaware Act

In examining the application of the preemption doctrine to the Delaware act, the threshold inquiry is the reach of the state legislation. If the state law does not intrude upon the federally regulated field, the state law is not endangered by the supremacy clause and further preemption analysis is unnecessary. Delaware argues here that because literal compliance with both the Williáms Act and Section 203 is possible, and because section 203 does not affect the tender offer process itself, the preemption analysis ends. This argument rests on a too narrow view of the scope of the Williams Act. As the CTS Court recognized, statutes which regulate the ability of a successful offeror to control the target, whether through voting rights restrictions or otherwise, plainly implicate Williams Act policies. See CTS, 107 S.Ct. at 1645-46.

The purpose of the Delaware legislation, as presented in the synopsis to the act and in certain testimony during the hearings, 22 is to protect shareholders from the coercive aspects of some tender offers. Given this plain statement of legislative purpose, the argument that the act does not affect Williams Act goals seems disingenuous. Admittedly, the Williams Act confines its provisions to disclosure requirements and procedural guidelines for the actual tender offer, and does not address the rights of a successful offeror once the tender is completed. The point of requiring disclosure, however, is to give stockholders sufficient, balanced information upon which to choose whether to tender their shares. The Delaware Act operates to restrict the choice of stockholders, albeit for the shareholders' own welfare. The legislature has determined that restricting stockholder choice merely corrects for the coerciveness inherent in many tender offers by eliminating the possibility of second-step freezeouts at a lower price. 23 This Court need not disturb that legislative judgment, but the fact remains that the law restricts shareholder choice in the hostile tender offer context. Preventing states from unduly interfering with the tender offer itself but allowing them to deprive the tender offeror of perhaps the most important fruit of gaining control, i.e., a business combination, would permit a de facto frustration of the goals of the Williams Act. 24

Having passed through the threshold inquiry concerning the statutes’ overlap, preemption scrutiny of the Delaware Act must begin with the proposition that the power of the states to regulate tender offers does not extend to complete eradication of hostile offers. Delaware contests this proposition. Delaware’s argument assumes that any advantage given to management in the name of shareholder protection, however significant, is in keeping with the Williams Act. This contention stretches CTS’s reasoning too far. A statute that favors management to an extreme degree in effect will foreclose hostile tender offers entirely.

CTS unmistakably teaches that states have a legitimate interest in regulat *469 ing tender offers, despite the significant influence such regulation has over the transfer of securities and the so-called market for corporate control. See CTS, 107 S.Ct. at 1647-48, 1651-52. Notwithstanding this well-established interest, the proposition that states may so heavily regulate hostile tender offers as to eliminate them altogether is untenable given the Supreme Court’s interpretation of the goals of the Williams Act. As the Piper Court noted in its examination of the legislative history of the Williams Act, Congress did not intend the Williams Act to favor either target management or offerors, but rather to protect the individual investor. Piper, 430 U.S. at 30, 97 S.Ct. at 943. In devising a scheme of investor protection, Congress recognized that “takeover bids could often serve a useful function,” and that “entrenched management, equipped with considerable weapons in battles for control, tended to be successful in fending off possibly beneficial takeover attempts.” Id. The original bill introduced by Senator Williams was strongly pro-management, id., but Congress revised the bill to achieve a “policy of evenhandedness,” id. at 31, 97 S.Ct. at 944, and through this policy to further the ultimate goal of investor protection by leaving room for hostile bids to succeed.

From the premise that the state cannot eliminate hostile tender offers comes the hoary question to what extent a state may limit them. CTS contemplates some degree of limitation, but does not set forth a pellucid test. Therefore, this Court must infer from Piper v. Chris-Craft, 430 U.S. 1, 97 S.Ct. 926, 51 L.Ed.2d 124 (1977), Edgar v. MITE, 457 U.S. 624, 102 S.Ct. 2629, 73 L.Ed.2d 269 (1982), and CTS Corp. v. Dynamics Corp., — U.S. -, 107 S.Ct. 1637, 95 L.Ed.2d 67 (1987), what degree of restriction of tender offers is constitutional. The plaintiff argues that a substantial alteration of the balance between management and the offeror conflicts with the Williams Act. The fair import of the cases, however, is that even statutes with substantial deterrent effects on tender offers do not circumvent Williams Act goals, so long as hostile offers which are beneficial to target shareholders have a meaningful opportunity for success. Applying the analysis of CTS to section 203 and assessing the effects of 203’s exceptions shows that the statute and the Williams Act can co-exist.

In CTS, as here, the state statute will be preempted only if it “frustrates the full purposes and objectives of Congress.” Hines v. Davidowitz, 312 U.S. 52, 67, 61 S.Ct. 399, 404, 85 L.Ed. 581 (1941). Following the analysis of Justice Powell, whether the Delaware statute frustrates the purposes of the Williams Act may be determined by asking four questions. CTS, 107 S.Ct. at 1646. First, does the statute protect independent shareholders from coercion? Second, does the statute give either management or the offeror an advantage in communicating with stockholders? This question may be reformulated to fit the circumstances of the present case by phrasing it as whether the statute gives either management or the offeror an advantage in consummating or defeating an offer. Third, does the statute impose an indefinite or unreasonable delay on offers? And fourth, does the statute allow the state government to interpose its views of fairness between willing buyers and sellers? The answers to these questions indicate that, although the issue is not an easy one, on this preliminary injunction record, the Delaware statute does not conflict with the purposes of the Williams Act to an impermissible degree.

The statute offers protection to independent shareholders by preventing certain dealings between a successful offeror and the target corporation. In so doing, the statute eliminates most unsanctioned (by the target’s board with or without the shareholders) freezeouts, or post-tender offer mergers between the offeror and the company whereby remaining shareholders are forced to sell their stock for cash or securities. Preventing unapproved mergers also effectively eliminates many leveraged buyouts, in which the assets of the target company provide resources for servicing the debt incurred by the bidder in taking control.

*470 While the statute does give target management an advantage in fighting an unwanted takeover, CTS suggests that incidentally pro-management measures undertaken to benefit shareholders do not offend Williams Act policies. See CTS, 107 S.Ct. at 1646 n. 7. The CTS Court found the Indiana statute’s main advantage to management, the delay beyond the twenty-day SEC minimum for holding offers open, a reasonable delay that did not conflict with the Williams Act. The Indiana statute, however, also was one about which Justice Powell could state: “the statute now before the Court protects the independent shareholder against both of the contending parties.” Id. at 1645. Section 203 does not lend itself to such a characterization. This Court is unable, though, to divine the full extent of the advantage bestowed on incumbent management by the law, and on this record cannot find that the advantage outweighs the benefits conferred on shareholders.

As to the delay caused by the statute, it imposes none on the actual purchase of shares. And although the statute delays the acquisition of full control following purchase for three years if no exception applies, a staggered board delays shifts of control for two years. The additional theoretical one-year delay is not troublesome for preemption purposes. See CTS, 107 S.Ct. at 1647.

Finally, the Delaware statute does not interpose the state government’s views of fairness between willing buyers and sellers. Instead, section 203 permits incumbent management and a minority of the stockholders to impose their views of fairness on willing but sometimes overreaching buyers and willing but sometimes coerced sellers. Legislative judgment that management may be trusted to act in the best interests of shareholders is subject to criticism. See, e.g., Fischel, The “Race to the Bottom”Revisited: Reflections on Recent Developments in Delaware’s Corporation Law, 76 Nw. U.L. Rev. 913 (1982) (summarizing former SEC Chairman William Cary’s position on the pro-management bias of state corporation law and how this bias allegedly hurts shareholders). Nevertheless, entrusting management to protect shareholders is the norm in current corporate law. Moreover, the heightened judicial scrutiny of management imposed by Delaware law in the takeover context, see Unocal Corp. v. Mesa Petroleum, 493 A.2d 946 (Del.1985), no doubt also will apply to the decisions of boards with respect to proposed business combinations. Therefore, notwithstanding the pro-management tilt of the Delaware statute, Delaware’s section 203 more probably than not is within the sphere of constitutional state regulation of tender offers.

Section 203 alters the balance between target management and the offeror, perhaps significantly. Yet the section will be constitutional notwithstanding its pro-management slant, so long as it does not prevent an appreciable number of hostile bidders from navigating the statutory exceptions.

Leaving aside for the moment the exceptions specified in subsection (b), there are three major “outs” or escapes of subsection (a). The first, board approval, however, will necessarily be absent in the hostile takeover context, 25 leaving the bidder with just two escape routes. These two outs work in favor of target management, and accordingly to the detriment of the offeror. But on this record, the statute appears to offer hostile bidders the necessary degree of opportunity to effect a business combination.

The second escape route relieves the of-feror from the statute’s strictures if eighty-five percent of-the stockholders (excluding shares held by officer-directors and certain employee stock ownership plans (“ESOPs”)), 26 tender their shares. This es *471 cape may place a heavy burden on the offeror hoping to consummate the transaction despite the opposition of management, but the evidence is conflicting.

According to Commissioner Grundfest, an investigation by the SEC revealed “no example in the history of hostile takeovers ... where a hostile bidder obtained 90% of a target’s shares if management was hostile through to the end.” Hearings at 24. Apparently in response to this concern, the recommended bill lowered the percentage exemption from 90% to 85%, and excluded some management and ESOP shares from the calculation. See State’s Br. at 15. Whether this relaxation will permit a sufficient number of hostile-to-the-end offers remains to be seen. Commissioner Grund-fest suggested a threshold figure of 75%, “or some other realistic figure.” Affidavit of Michael Houghton, D.I. 20, Exh. 5 (Letter of Dec. 10, 1987, from Joseph Grund-fest to David Brown)