Wlr Foods, Incorporated v. Tyson Foods, Incorporated

The instant case arose from an attempt by Tyson Foods, Inc. ("Tyson"), a nationwide poultry producer, to acquire WLR Foods, Inc. ("WLR"), a chicken and turkey producer. In early 1994, Tyson engaged in extensive discussions with certain members of WLR's Board of Directors ("the WLR Board") in an attempt to arrange a merger between Tyson and WLR. The WLR Board, resistant to the idea of being acquired by Tyson, adopted various defensive measures to protect WLR against the takeover. Tyson eventually presented a tender offer directly to the stockholders of WLR, but withdrew the offer several months later, claiming that, due to actions taken by the WLR Board, Tyson's offering price was no longer reflective of the value of WLR's stock. Tyson now challenges several rulings of the district court, which found that the defensive tactics adopted by the WLR Board were a valid legal means by which to respond to the threatened takeover of WLR by Tyson.

Tyson is a large poultry producer incorporated in Delaware, with its principal office in Arkansas. Tyson conducts operations in many states, including Virginia. WLR is a Virginia corporation with a substantial turkey operation as well as a chicken business. The stocks of both companies are publicly held and traded.

In late 1993 and again on January 3, 1994, Don Tyson, Chairman of Tyson, contacted James Keeler, President and Chief Executive Officer of WLR, with a proposal to merge WLR with Tyson. Don Tyson's proposal included an offer to buy WLR stock from the shareholders at thirty dollars per share. Keeler informed Don Tyson that WLR was not for sale, but nevertheless met with Mr. Tyson on January 12, 1994 to discuss the proposal.

An informal WLR Board meeting was held on January 20, 1994 regarding the Tyson offer. No minutes were recorded at the meeting, and no votes were taken. The consensus of the Board at the meeting was that it preferred for WLR to remain independent and would reject Tyson's offer. On January 24, 1994, Keeler informed Don Tyson that he had spoken with the Board, and that WLR wished to remain independent. On that same day, Don Tyson delivered a letter to WLR's Board describing the acquisition proposal. In response, on January 25, 1994, Keeler issued a letter to WLR shareholders asserting that WLR was "not for sale," but stating:

As it must, WLR Foods Board will meet in the near future to evaluate Tyson's offer. Be assured that your Board will listen carefully to its advisors and management and make a decision it believes is in the best interest of, and appropriately protects, our shareholders, employees and producers. In this regard, the Board's historical commitment to the continued independence of WLR Foods will be keenly important.

WLR next sought advisors to provide guidance concerning the proposed merger. Keeler travelled to Washington, D.C. and with the help of WLR management and counsel, interviewed potential financial advisors. At a WLR Board meeting on January 25, 1994, the Board approved the suggestion of the management team to hire Goldman, Sachs & Co. and Wheat, First, Butcher & Singer for financial advice, as well as to retain the services of two law firms, Sullivan & Cromwell and Wharton, Aldhizer & Weaver. On January 28, 1994, the WLR Board met with its management, advisors, and counsel to discuss the implications of the merger proposal and to receive information from the advisors. The minutes of the meeting reflect that no decision was reached that day regarding the merger.

On February 4, 1994, the WLR Board reconvened to discuss the merger with its advisors. After representatives of Goldman, Sachs & Co. concluded that Tyson's offer of thirty dollars per share was inadequate, the Board considered the recommendation and voted to reject the Tyson merger proposal. The Board also adopted certain measures to defend against a possible takeover attempt. The Board amended WLR's bylaws to provide that the chairman and vice-chairman of the WLR Board were not officers of the corporation. It further amended the bylaws to establish that the record date for purposes of any vote under the Virginia Control Share Acquisitions Act would be the date on which an acquiring person requested a special shareholder's meeting for such a vote.1 In addition, four WLR directors, Charles Wampler, William Wampler, Herman Mason, and George Bryan, resigned from their positions as WLR employees, and the Board approved a package of lifetime health benefits for each of them. Finally, the WLR Board adopted a shareholder rights plan, or "poison pill," in order to provide that the acquisition by Tyson of fifteen percent or more of WLR's stock would trigger an option for all shareholders except Tyson, the acquiring shareholder, to purchase WLR stock at a favorable price, thereby diluting the value and voting rights of Tyson's stock. WLR notified Don Tyson by a letter dated February 6, 1994 that the Board had unanimously decided not to pursue merger negotiations with Tyson.

WLR initiated the instant action in the United States District Court for the Western District of Virginia on February 6, 1994, seeking declaratory relief regarding the constitutionality of certain Virginia statutes as well as the validity of the shareholder rights plan adopted at the February 4, 1994 WLR Board meeting. Tyson answered WLR's complaint on February 25, 1994 and asserted counterclaims against WLR. Tyson sought a declaration that the Virginia statutes which allow companies to adopt defensive measures against takeover attempts were unconstitutional, as well as an injunction against defensive actions taken by the WLR Board under those statutes.

On March 9, 1994, Tyson presented its thirty dollars per share cash tender offer directly to WLR's stockholders. The offer was launched through Tyson's wholly-owned subsidiary, WLR Acquisition Corp., a company that was created to effectuate the merger with WLR. On April 14, 1994, Tyson submitted a control share statement to WLR. April 14 thus became the Control Share Acquisitions Act record date under WLR's amended bylaws, and a special shareholders meeting and control share referendum were set for May 21, 1994. At the shareholders meeting, the WLR directors urged the shareholders to vote against the referendum, which would have permitted Tyson to vote its shares in favor of a takeover. Tyson was not able to secure a majority of the shares eligible to vote, and the referendum was, therefore, defeated.

On July 27, 1994, WLR entered into an agreement with Cuddy Farms, Inc. and Cuddy International Corp. (collectively, "Cuddy") to acquire Cuddy's assets in exchange for cash and a percentage of WLR's common stock. As part of the transaction, WLR and Cuddy came to an agreement which provided that Cuddy would vote the approximately ten percent of WLR's stock that it had acquired in the transaction in accordance with the directions of the WLR Board for a four-year period. The Cuddy transaction further diluted the voting power of Tyson's WLR stock. Tyson terminated its tender offer on August 4, 1994, feeling that its offer of thirty dollars per share was no longer an accurate reflection of the worth of WLR's stock.

On December 6, 1994, the district court in the instant case entered a final order denying relief to Tyson on its claims. On appeal, Tyson both renews the claims raised in the district court against WLR, and challenges a district court ruling denying Tyson access during discovery to the substantive financial and legal advice given to the WLR Board regarding the merger. Tyson contends that it remains prepared to renew its tender offer if the district court's orders are modified or reversed. For the reasons stated below, however, we affirm.

II. Constitutionality of the Virginia Statutes

We address first Tyson's challenge to the constitutionality of four Virginia statutes: the Control Share Acquisitions Act ("Control Share Act"), Va.Code Ann. Secs. 13.1-728.1 to -728.9; the Affiliated Transactions Act, Va.Code Ann. Secs. 13.1-725 to -727.1; the "Poison Pill Statute," Va.Code Ann. Sec. 13.1-646; and the "Business Judgment Statute," Va.Code Ann. Sec. 13.1-690. Tyson claims that the four statutes, considered in concert, impermissibly restrict the ability of a bidder to effect a takeover of a Virginia corporation. According to Tyson, the statutes thereby controvert the purposes of the Williams Act, 15 U.S.C. Secs. 78m(d)-(e) and 78n(d)-(f), and are preempted by virtue of the Supremacy Clause of the United States Constitution, U.S. Const. art. VI, cl. 2. Further, Tyson claims that because they render hostile takeovers impossible in practice, the Virginia statutes violate the Commerce Clause of the United States Constitution, U.S. Const. art. I, Sec. 8, cl. 3. The district court held that the statutory scheme was not preempted by the Williams Act and did not violate the Commerce Clause. The district court's analysis of the statutes in the instant case presents questions of law which we review de novo. See Johnson v. Hugo's Skateway, 949 F.2d 1338, 1349 (4th Cir.1991).2

The first statute at issue, the Control Share Act, Va.Code Ann. Secs. 13.1-728.1 to -728.9, provides that when an acquiror holds a certain percentage of the voting shares of a company, those shares do not carry any voting rights unless the shares are granted such rights, in a shareholder referendum, by a majority of all disinterested shares entitled to vote. Id. Sec. 13.1-728.3. Disinterested shares consist of all shares with voting power, excluding those that are owned by the acquiring person, an officer of the target corporation, or an employee of the target corporation who is also a director. Id. Sec. 13.1-728.1. The target corporation may set a record date on which it is determined which shares are interested and which are entitled to vote in the control share referendum. See id. Sec. 13.1-660.

The second statute in question is the Affiliated Transactions Act, Va.Code Ann. Secs. 13.1-725 to -727.1, which prohibits certain transactions (such as mergers, share exchanges, sales of assets, and dissolution) between a corporation and an interested shareholder for a period of three years following the date on which the interested shareholder becomes an interested shareholder, unless the transaction is approved by a majority of the disinterested directors and by two-thirds of the voting shares other than those beneficially held by the interested shareholder. Id. Secs. 13.1-725.1, 13.1-726. The statute contains further restrictions on affiliated transactions occurring after the three-year point. See id. Sec. 13.1-725.1.

The third statute at issue, the Poison Pill Statute, Va.Code Ann. Sec. 13.1-646, allows a corporation to give shareholders certain rights or options to purchase, on favorable terms, shares in the corporation. The rights take effect upon the occurrence of a specified event, such as the acquisition by one shareholder of a certain percentage of the company's stock. Such rights may be issued discriminatorily, i.e., may be withheld from designated shareholders or groups of shareholders. The directors of the corporation are required to exercise their good faith business judgment when granting such rights.

Finally, the fourth statute, the Business Judgment Statute, Va.Code Ann. Sec. 13.1-690, establishes a standard of care for directors in fulfilling their duties to the corporation. The statute provides that "[a] director shall discharge his duties as a director ... in accordance with his good faith business judgment of the best interests of the corporation." Id. Sec. 13.1-690(A). The director is entitled to rely on information presented to him or her by specified individuals when the director believes in good faith that the information is competent and reliable, and as long as the director does not have knowledge of information that would make reliance unwarranted. Id. Sec. 13.1-690(B).A. Williams Act Preemption

There is a strong presumption against federal preemption of state law. See Jimenez v. BP Oil, Inc., 853 F.2d 268, 271 (4th Cir.1988), cert. denied, 490 U.S. 1011, 109 S.Ct. 1654, 104 L.Ed.2d 168 (1989) (quoting Tousley v. North Am. Van Lines, Inc., 752 F.2d 96, 101 (4th Cir.1985)). A state law is preempted by a federal statute only if (1) Congress clearly expresses an intention to do so, (2) it is impossible to comply with both the federal and the state laws, or (3) the state law "stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress." CTS Corp. v. Dynamics Corp. of Am., 481 U.S. 69, 78-79, 107 S.Ct. 1637, 1644, 95 L.Ed.2d 67 (1987) (quoting Hines v. Davidowitz, 312 U.S. 52, 67, 61 S.Ct. 399, 404, 85 L.Ed. 581 (1941)). Because Congress did not clearly express its intent to preempt state law in the Williams Act, see Edgar v. MITE Corp., 457 U.S. 624, 631, 102 S.Ct. 2629, 2634, 73 L.Ed.2d 269 (1982) (plurality op.), and Tyson does not attempt to argue that it would be impossible to comply with both the Williams Act and any or all of the Virginia statutes, we will find the statutes at issue to be preempted only if the Virginia laws serve as an obstacle to the objectives of Congress embodied in the Williams Act.

The Williams Act, 15 U.S.C. Secs. 78m(d)-(e) and 78n(d)-(f), was passed in 1968 as an amendment to the Securities Exchange Act of 1934, in response to an increase in the frequency of hostile tender offers. CTS, 481 U.S. at 79, 107 S.Ct. at 1644. The Act requires an entity which has acquired more than five percent of a class of securities to disclose certain information, including its plans for the target company, within ten days of the acquisition. 15 U.S.C. Sec. 78m(d)(1); see also CTS, 481 U.S. at 79-80, 107 S.Ct. at 1644-45. In addition, the Williams Act establishes a set of procedural rules intended to regulate the process of tender offers. The Williams Act is meant to protect investors by placing them "on an equal footing with the takeover bidder." CTS, 481 U.S. at 82, 107 S.Ct. at 1645-46 (quoting Piper v. Chris-Craft Indus., Inc., 430 U.S. 1, 30, 97 S.Ct. 926, 943, 51 L.Ed.2d 124 (1977)); see also IU Int'l Corp. v. NX Acquisition Corp., 840 F.2d 220, 222 (4th Cir.1988), adopted en banc, 840 F.2d 229 (4th Cir.1988) (per curiam). While the Williams Act governs the process of tender offers, it leaves to the states the power to regulate substantive matters of corporate governance. See CTS, 481 U.S. at 85-86, 107 S.Ct. at 1647-48.

Tyson contends that the Williams Act has as an additional purpose the maintenance of a level playing field between a bidder and its target in the tender offer situation. Tyson argues that by providing target management with an advantage in takeovers, the Virginia statutes controvert the purpose of the Williams Act and are thus preempted. See Edgar, 457 U.S. at 633-34, 102 S.Ct. at 2636 (plurality op.) (finding that an Illinois statute was preempted by the Williams Act, largely because the state statute favored management over bidders to the shareholders' detriment).

However, while we have pointed out that "the Williams Act is designed to maintain neutrality between bidder and target," IU Int'l, 840 F.2d at 222, Tyson's argument focusses on an ancillary purpose of the federal statute. Neutrality between bidders and target management is but an incidental result of the broader purpose of the Williams Act to protect investors. See, e.g., Hyde Park Partners, L.P. v. Connolly, 839 F.2d 837, 849-50 (1st Cir.1988) ("[N]eutrality between management and bidder is the means to the end of investor protection, rather than the objective itself....[P]rotection of management that is incidental to protection of investors does not per se conflict with the purpose or purposes of the Williams Act." (discussing CTS, 481 U.S. 69, 107 S.Ct. at 1639)). The Supreme Court has stated that the Williams Act's "policy of evenhandedness does not go ... to the purpose of the legislation.... Neutrality is, rather, but one characteristic of legislation directed toward a different purpose--the protection of investors," Piper, 430 U.S. at 29, 97 S.Ct. at 943; "[T]he sole purpose of the Williams Act was the protection of investors who are confronted with a tender offer," id. at 35, 97 S.Ct. at 946.

In addition, although Congress "expressly disclaimed an intention [in the Williams Act] to provide a weapon for management to discourage takeover bids.... ," IU Int'l, 840 F.2d at 222 (quoting Rondeau v. Mosinee Paper Corp., 422 U.S. 49, 58, 95 S.Ct. 2069, 2076, 45 L.Ed.2d 12 (1975)), Congress did not forbid the result that Virginia has achieved with the statutory scheme in the instant case. The fact that Congress, when it enacted the Williams Act, did not intend to create an advantage for target management in the takeover situation, does not necessarily mean that Congress meant to prevent the states from allowing management an advantage which is not unfair to investors. As the Seventh Circuit stated in Amanda Acquisition Corp. v. Universal Foods Corp., 877 F.2d 496 (7th Cir.), cert. denied, 493 U.S. 955, 110 S.Ct. 367, 107 L.Ed.2d 353 (1989),

There is a big difference between what Congress enacts and what it supposes will ensue. Expectations about the consequences of a law are not themselves law. To say that Congress wanted to be neutral between bidder and target--a conclusion reached in many of the Court's opinions--is not to say that it also forbade the states to favor one of these sides.... Nothing in the Williams Act says that the federal compromise among bidders, targets' managers, and investors is the only permissible one.

Id. at 503 (citation omitted).

The means by which the Williams Act achieves its purpose of protecting investors is by requiring disclosure of information in order to allow shareholders to make an informed decision and to prevent coercion in the tender offer context; Tyson has not shown that the Virginia statutes controvert the purpose of the Williams Act by removing protection from investors, for example by keeping information from the shareholders. In fact, Tyson has not shown that the shareholders in this case were deprived of any relevant information. The goal of neutrality between bidder and target, emphasized by Tyson, is not in itself so central to the purpose of the Williams Act that the Act should be held to preempt a group of state statutes that regulate the balance between a target and a bidder, but do not disadvantage the shareholders or prevent them from gaining access to pertinent information.

Tyson further asserts that the Williams Act preempts the Virginia statutes because the Virginia statutory scheme does not provide a bidder with a "meaningful opportunity for success" in effecting a hostile takeover. The "meaningful opportunity for success test" has been used by several district courts to assess whether state statutes are preempted by the Williams Act. See, e.g., BNS, Inc. v. Koppers Co., Inc., 683 F.Supp. 458, 469 (D.Del.1988) ("[E]ven 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."); West Point-Pepperell, Inc. v. Farley, Inc., 711 F.Supp. 1096, 1102 (N.D.Ga.1989); RP Acquisition Corp. v. Staley Continental, Inc., 686 F.Supp. 476, 482 (D.Del.1988). Tyson argues that if the Virginia statutes do not allow for a meaningful opportunity of Tyson's success, they frustrate the purposes of the Williams Act.

We, like the district court, reject the meaningful opportunity for success test. As we stated above, the purpose of the Williams Act is to protect independent investors from bidders and management by ensuring that the investors have access to information. The statute does not, however, have as an independent purpose the creation of an environment for bidders that is conducive to takeovers. Tyson attempts to use the "meaningful opportunity for success" test to shift the focus of the Williams Act from protection of investors to protection of bidders. However, the Williams Act is simply not designed to protect a company in Tyson's position; "the Williams Act does not create a right to profit from the business of making tender offers." Amanda, 877 F.2d at 504-05.

The four Virginia statutes may work to give target management an advantage in the tender offer context. The preemption question we address here, however, is whether Virginia's decision to allow management access to a set of defensive mechanisms in the takeover situation frustrates the Williams Act's goal of investor protection. We hold that it does not.

We now turn to Tyson's Commerce Clause argument. Tyson claims that the Virginia statutory scheme violates the Commerce Clause both because (1) it discriminates against interstate commerce and is not justified by a valid state purpose other than economic protectionism, and (2) it imposes a burden on interstate commerce that is excessive in relation to the local benefits served by the regulation.

In CTS, the Supreme Court held that an Indiana statute very similar to the Control Share Act in the instant case did not discriminate against interstate commerce, because "[i]t has the same effects on tender offers whether or not the offeror is a domiciliary or resident of Indiana. Thus, it 'visits its effects equally upon both interstate and local business.' " CTS, 481 U.S. at 87, 107 S.Ct. at 1649 (quoting Lewis v. BT Inv. Managers, Inc., 447 U.S. 27, 36, 100 S.Ct. 2009, 64 L.Ed.2d 702 (1980)). Since both residents and nonresidents had access to the commodities defined by Indiana state law, there was no discrimination, CTS, 481 U.S. at 87, 107 S.Ct. at 1648, even though many tender offers might be launched by out-of-state businesses, and the burden of the state law might fall on those companies, id. at 88, 107 S.Ct. at 1649. In addition, the Supreme Court pointed out that the fact that the Indiana Act might limit the number of successful tender offers did not change the Commerce Clause analysis in any substantial way. Id. at 93, 107 S.Ct. at 1651.

Similarly, in Amanda, the Seventh Circuit held that an affiliated transactions statute even more restrictive than the one in the instant case did not violate the Commerce Clause, because it did not regulate or forbid interstate transactions and did not make distinctions based on the domicile of the bidder. 877 F.2d at 506. The court stated that although the Wisconsin law might make a buyer less willing to buy, or might lower the bid, other corporate laws also had that effect, and such a result did not necessarily lead to a Commerce Clause violation. Id.

The group of statutes at issue here regulates only Virginia corporations, and treats in-state and out-of-state tender offerors exactly the same. Anyone can attempt the takeover of a Virginia corporation, and a Virginia bidder confronts the same difficulties as an out-of-state bidder. There is simply no evidence of discrimination among bidders. Tyson nevertheless contends that, even if the statutes are not facially discriminatory, they discriminate against interstate commerce by making it extremely difficult to gain control of a Virginia corporation and thereby "hoarding" a local resource. See, e.g., C & A Carbone, Inc. v. Town of Clarkstown, N.Y., --- U.S. ----, 114 S.Ct. 1677, 128 L.Ed.2d 399 (1994) (discrimination against interstate commerce found where a flow control ordinance required all nonhazardous solid waste within a town to be processed at a local processing facility, thus hoarding waste for that facility). However, in the instant case, no commodity is being hoarded by Virginia. Although they increase the difficulty or expense of gaining control of a Virginia corporation, the statutes in the instant case do not erect a complete ban on the control of such corporations. Tyson has simply not established that the statute at issue discriminate against interstate commerce.

Second, Tyson claims that the Virginia scheme is unconstitutional under the Commerce Clause, because the statutes impose a burden on interstate commerce which exceeds their putative local benefits. See Pike v. Bruce Church, Inc., 397 U.S. 137, 142, 90 S.Ct. 844, 847, 25 L.Ed.2d 174 (1970). There has been some controversy since the Supreme Court's decision in CTS as to whether the balancing test described in Pike is to be used in a situation such as the instant one. See Amanda, 877 F.2d at 505; see also CTS, 481 U.S. at 95-96, 107 S.Ct. at 1652-53 (Scalia, J., concurring). However, even assuming that the Virginia statutes impose some incidental burden on interstate commerce, we find the burden to be outweighed by the interest of Virginia in regulating its corporations. As the district court pointed out, Virginia is permitted to determine that hostile takeovers can be detrimental to Virginia corporations, and it may regulate takeovers accordingly. In addition, it is significant for the Commerce Clause analysis that Virginia's "regulation of corporate governance is regulation of entities whose very existence and attributes are a product of state law." CTS, 481 U.S. at 89, 107 S.Ct. at 1649. Although the laws that states enact to regulate their corporations necessarily affect interstate commerce,

[i]t ... is an accepted part of the business landscape in this country for States to create corporations, to prescribe their powers, and to define the rights that are acquired by purchasing their shares. A State has an interest in promoting stable relationships among parties involved in the corporations it charters, as well as in ensuring that investors in such corporations have an effective voice in corporate affairs.

Id. at 91, 107 S.Ct. at 1650-51. We do not find that the burden imposed on interstate commerce by Virginia's statutes is "clearly excessive," see Pike, 397 U.S. at 142, 90 S.Ct. at 847, to the potential local benefits of the statutory scheme.

Virginia has provided both residents and nonresidents with equal access to takeovers. The Commonwealth has a clear interest in regulating the relationships that affect the corporations that are located within its territory and are a product of its own laws. We conclude that the Virginia statutes at issue do not violate the Commerce Clause, because they do not discriminate against interstate commerce, and to the extent that they burden interstate commerce, the burden is justified by the legitimate interest of the Commonwealth in regulating its corporations.

In its next assignment of error, Tyson challenges the district court's finding that the Virginia Business Judgment Statute, Va.Code Ann. Sec. 13.1-690 (" Sec. 690"), allows an inquiry only into the processes employed by corporate directors in making their decisions regarding a takeover, and not into the substance of those decisions. Pursuant to that interpretation, the district court denied Tyson access during discovery to the substantive content of the materials used by the WLR Board in responding to Tyson's takeover attempt.

Tyson first challenges the district court's finding that Sec. 690 applies to Tyson's claims against the directors on the WLR Board. Tyson argues that in certain situations, the statutory standard for judging director activity in Virginia embodied in Sec. 690 should be abandoned in favor of the Virginia common law standard of duty of loyalty. Tyson claims that two such situations existed in the instant case: (1) a conflict of interest was present on the target board of directors, and (2) the directors were sued for an injunction rather than for damages. The district judge rejected Tyson's arguments, finding that Sec. 690 provides the exclusive standard by which director actions are measured in Virginia in a case such as the instant one. We agree.

The Virginia Code contains a statutory standard of care for directors, which applies to all aspects of a Board's actions in responding to a tender offer. For example, the Code expressly provides that actions of directors with respect to issuing rights or options for the purchase of shares of a corporation are subject to review under the standard articulated in Sec. 690. See Va.Code Ann. Sec. 13.1-646(B). Similarly, the Code provides that conduct concerning affiliated transactions, see id. Sec. 13.1-727.1, as well as transactions involved in control share acquisitions, see id. Sec. 13.1-728.9, are subject to Sec. 690. In other words, actions taken by directors in responding to tender offers are explicitly made subject to Sec. 690 standards by the Virginia Code, thereby foreclosing reliance on common law. See Higgins v. Bowdoin,