Resnik v. Swartz
| Decision Date | 06 September 2002 |
| Docket Number | Docket No. 01-7140. |
| Citation | 303 F.3d 147 |
| Parties | Herbert RESNIK, Plaintiff-Appellant, v. Jerome SWARTZ, Harvey P. Mallement, Raymond R. Martino, George Bugliarello, Charles B. Wang, Tomo Razmilovic, Leo A. Guthart, James Simons and Symbol Technologies, Inc., Defendants-Appellees. |
| Court | U.S. Court of Appeals — Second Circuit |
A. Arnold Gershon, New York, NY, (Irving Bizar, Ballon Stoll Bader & Nadler, P.C., of counsel), for Plaintiff-Appellant.
Eric J. Lobenfeld, New York, NY, (Clifford Chance Rogers & Wells LLP on the brief), for Defendants-Appellees.
Before CALABRESI, CABRANES, Circuit Judges, and AMON, District Judge.*
Plaintiff-appellant Herbert Resnik appeals from a final judgment of the United States District Court for the Southern District of New York (McKenna, J.) granting defendants-appellees' motion to dismiss the complaint for failure to state a claim upon which relief can be granted. Resnik, a shareholder of defendant Symbol Technologies, Inc. ("Symbol"), brought this action against Symbol and its directors, asserting claims under section 14(a) of the Securities Exchange Act of 1934 ("the Exchange Act"), 15 U.S.C. § 78n(a), and Rule 14a-9 promulgated thereunder, 17 C.F.R. § 240.14a-9. Resnik alleged that Symbol's proxy statement of March 15, 2000 ("the proxy statement") was materially misleading because it did not disclose the grant-date value of stock options proposed to be awarded to Symbol's non-employee directors. The district court granted defendants' motion to dismiss, concluding that defendants were not obligated to disclose the grant-date value of the options. For the reasons set forth below, we affirm.
Symbol is a Delaware corporation whose stock is traded on the New York Stock Exchange. Individual defendants other than James Simons were Symbol's directors at all relevant times, whereas James Simons was elected to Symbol's board of directors on May 8, 2000. Appellant Herbert Resnik was a Symbol shareholder throughout the time period relevant to this action.
On February 14, 2000, Symbol's board of directors adopted, subject to shareholder approval, the 2000 Directors' Stock Option Plan for non-employee directors ("the Plan"), awarding each non-employee director an option to purchase 50,000 shares of Symbol common stock. Under the terms of the Plan, each current non-employee director would have the right to exercise his options at the higher of two prices, Symbol stock's closing price on February 14, 2000 and Symbol stock's closing price on the date of shareholder approval of the Plan. The Plan further provided that any subsequently elected non-employee director would be granted the options on the date when he or she became a Symbol director and would have the right to exercise them at Symbol stock's closing price on the date of the grant. The options granted to each non-employee director would become exercisable over a four-year period, with an additional twenty-five percent of the options becoming exercisable on each of the first four anniversaries of the grant date. The Plan also imposed substantial restrictions on option transfers, required that the grantees serve as non-employee directors continuously between the grant date and the exercise date, and specified a ten-year life span for the awarded options.
On March 15, 2000, Symbol issued a proxy statement, soliciting shareholders' proxies to vote at Symbol's annual shareholder meeting on May 8, 2000. Among the items proposed for shareholders' consideration were election of directors and approval of the Plan. The proxy statement summarized the key terms of the Plan in a section entitled "Management Remuneration and Transactions" and was accompanied by an Annex containing the full terms of the Plan. The "Management Remuneration and Transactions" section of the proxy statement also stated that non-employee directors received an annual retainer of $15,000 and a fee of $2,500 for each board of directors or committee meeting they attended. Additionally, the proxy statement made detailed disclosures about compensation of Symbol's executive officers and contained a table summarizing quantitative information about stock options granted to the five most highly paid executives, including the potential realizable value of options granted to each executive. A footnote to the table stated:
The actual value, if any, an executive will realize will depend on the excess of the market price over the exercise price on the date the option is actually exercised. The value actually realized by an executive or any shareholder may not be at or near the values estimated in this table.
At the annual meeting held on May 8, 2000, Symbol's shareholders elected the nominated directors and approved the Plan.
On July 19, 2000, appellant commenced the present action against Symbol and its directors, asserting claims under section 14(a) of the Exchange Act and Rule 14a-9 promulgated thereunder. Appellant alleged that the proxy statement was materially misleading because it did not disclose the grant-date present value of the options awarded pursuant to the Plan under the option pricing model developed by Fischer Black and Myron Scholes ("the Black-Scholes model").1 According to the complaint, the Black-Scholes model estimates the grantor's cost of granting an option, commonly referred to as the Black-Scholes value of the option. The calculation is based on six input variables: the exercise price of the option, the market price of the underlying stock, the volatility of the underlying stock, the expiration date of the option, the risk-free rate of interest, and the dividend rate on the underlying stock.
Appellant alleges that the Black-Scholes value of the options granted to each non-employee director of Symbol on February 14, 2000 was $2,868,000. Appellant claims that the omission of this calculation from the proxy statement violated the Securities and Exchange Commission's ("the SEC" or "the Commission") rules on mandatory disclosure of management compensation in a proxy statement and rendered misleading the proxy statement's assertions about compensation received by non-employee directors. Appellant also claims that, in the absence of information about the Black-Scholes value of the options granted under the Plan, the quoted footnote about actual realizable value of options held by Symbol's senior executives was misleading because it conveyed the false impression that options granted under the Plan had no value until the date of their exercise.
The district court dismissed appellant's complaint, concluding that defendants had no duty to disclose the Black-Scholes value of the options proposed to be granted under the Plan. Appellant then filed this appeal.
We review de novo a district court's grant of a motion to dismiss for failure to state a claim upon which relief can be granted. Strougo v. Bassini, 282 F.3d 162, 167 (2d Cir.2002). In ruling on a motion to dismiss, a court must construe all well-pleaded factual allegations in the complaint in plaintiff's favor and may dismiss the complaint only if "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Harris v. City of New York, 186 F.3d 243, 247 (2d Cir.1999). Employing this standard here, we conclude that the complaint was properly dismissed.
Appellant asserts claims under section 14(a) of the Exchange Act and Rule 14a-9 promulgated thereunder. Section 14(a) makes it unlawful to solicit proxies "in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors." 15 U.S.C. § 78n(a). Rule 14a-9, in turn, prohibits proxy solicitation "by means of any proxy statement ... containing any statement which, at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact, or which omits to state any material fact necessary in order to make the statements therein not false or misleading." 17 C.F.R. § 240.14a-9(a). In the context of a proxy statement, a fact is material "if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote." Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083, 1090, 111 S.Ct. 2749, 115 L.Ed.2d 929 (1991) (quoting TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 96 S.Ct. 2126, 48 L.Ed.2d 757 (1976)); see also Minzer v. Keegan, 218 F.3d 144, 149 (2d Cir.2000) (citing TSC Industries, 426 U.S. at 449, 96 S.Ct. 2126).
Thus, omission of information from a proxy statement will violate these provisions if either the SEC regulations specifically require disclosure of the omitted information in a proxy statement, or the omission makes other statements in the proxy statement materially false or misleading. Here, appellant contends that defendants are liable under both theories of corporate malfeasance.
Item 8 of Schedule 14A, 17 C.F.R. 240.14a-101, provides that, when proxies are solicited for an election of directors or for certain actions related to executive and director compensation, the proxy statement must include information specified in Item 402 of Regulation S-K, which, in turn, sets forth disclosure requirements with respect to various categories of executive and director compensation, including salaries, bonuses, stock option grants, and others. See 17 C.F.R. § 229.402. Appellant argues that, by omitting the Black-Scholes value of the options granted under the Plan, Symbol's proxy statement failed to comply with subsection (g) of Item 402, which describes mandatory disclosures about director compensation as follows:
(g) Compensation of Directors —
(1) Standard arrangements. Describe any standard arrangements, stating amounts, pursuant to which directors of the registrant are compensated for...
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