396 U.S. 375 (1970), 64, Mills v. Electric Auto-Lite Co.

Docket Nº:No. 64
Citation:396 U.S. 375, 90 S.Ct. 616, 24 L.Ed.2d 593
Party Name:Mills v. Electric Auto-Lite Co.
Case Date:January 20, 1970
Court:United States Supreme Court
 
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Page 375

396 U.S. 375 (1970)

90 S.Ct. 616, 24 L.Ed.2d 593

Mills

v.

Electric Auto-Lite Co.

No. 64

United States Supreme Court

Jan. 20, 1970

Argued November 13, 1969

CERTIORARI TO THE UNITED STATES COURT OF APPEALS

FOR THE SEVENTH CIRCUIT

Syllabus

Petitioners, minority shareholders of respondent Electric Auto-Lite Co., brought this action derivatively and on behalf of minority shareholders as a class to set aside a merger of Auto-Lite and the Mergenthaler Linotype Co. (which, before the merger, owned over half of Auto-Lite's stock). Petitioners charged that the proxy solicitation for the merger by Auto-Lite's management was materially misleading, and violated § 14(a) of the Securities Exchange Act of 1934 and Rule 14a-9 thereunder in that the merger was recommended to Auto-Lite's shareholders by that company's directors without their disclosing that they were all nominees of and controlled by Mergenthaler. The District Court, on petitioners' motion for summary judgment, ruled that the claimed defect in the proxy statement was a material omission, and, after a hearing, concluded that, without the votes of minority stockholders, approval of the merger could not have been achieved, and that a causal relationship had thus been shown between the finding of a § 14(a) violation and the alleged injury to petitioners. The court referred the case to a master to consider appropriate relief. On interlocutory appeal, the Court of Appeals affirmed the conclusion that the proxy statement was materially deficient, but held that the granting of summary judgment with respect to causation was erroneous, and that it was necessary to resolve at trial whether there was a causal relationship between the deficiency in the proxy statement and the merger. Finding that causation could not be directly established because of the impracticalities of determining how many votes were affected, the court ruled that the issue was to be determined by proof of fairness of the merger, and, if the respondents could prove fairness, it could be concluded that a sufficient number of shareholders would have approved the merger regardless of the misrepresentation.

Held:

1. Fairness of the merger terms does not constitute a defense to a private action for violation of § 14(a) of the Act complaining of materially misleading solicitation of proxies that authorized a corporate merger. Pp. 381-385.

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(a) Permitting liability to be foreclosed on the basis of a finding that the merger was fair would contravene the purpose of § 14(a) by bypassing the stockholders. Pp. 381-382.

(b) Imposing on small shareholders the burden of rebutting the corporation's evidence of fairness would discourage them from the private enforcement of proxy rules that "provides a necessary supplement to Commission action." J. I. Case Co. v. Borak, 377 U.S. 426, 432. Pp. 382-383.

(c) The evidence submitted at the hearing as to the causal relationship between the proxy material and the merger was sufficient to establish petitioners' cause of action. P. 383.

(d) Where, as here, there was proof that the misstatement or omission in the proxy statement was material, this showing that the defect might have been considered important in shaping the shareholders' vote is sufficient without proof, which the Court of Appeals erroneously held was necessary, that its effect was decisive. Pp. 384-385.

2. In devising retrospective relief for violation of the proxy rules, the federal courts should be guided by the principles of equity. Pp. 386-389.

(a) The fairness of the merger may be a relevant consideration in determining the appropriate relief, and the merger should be set aside only if a court of equity concludes from all the circumstances that it would be equitable to do so. Pp. 386-388.

(b) Damages should be recoverable here only to the extent that they can be proved. Pp. 388-389.

3. Petitioners, who have established a violation of the securities laws by their corporation and its officials, are entitled to an interim award of litigation expenses and reasonable attorneys' fees incurred in proving the violation, since the expenses petitioners incurred were for the benefit of the corporation and the other stockholders. The Court does not decide the further question of reimbursement for litigation expenses incurred in any ensuing proceedings. Pp. 389-397.

403 F.2d 429, vacated and remanded.

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HARLAN, J., lead opinion

MR. JUSTICE HARLAN delivered the opinion of the Court.

This case requires us to consider a basic aspect of the implied private right of action for violation of § 14(a) of the Securities Exchange Act of 1934,1 recognized by this Court in J. I. Case Co. v. Borak, 377 U.S. 426 (1964). As in Borak, the asserted wrong is that a corporate merger was accomplished through the use of a proxy statement that was materially false or misleading. The question with which we deal is what causal relationship must be shown between such a statement and the merger to establish a cause of action based on the violation of the Act.

I

Petitioners were shareholders of the Electric Autolite Company until 1963, when it was merged into Mergenthaler Linotype Company. They brought suit on the day before the shareholders' meeting at which the vote was to take place on the merger, against Auto-Lite, Mergenthaler, and a third company, American Manufacturing Company, Inc. The complaint sought an injunction against the voting by Auto-Lite's management of all proxies obtained by means of an allegedly misleading proxy solicitation; however, it did not seek a temporary restraining order, and the voting went ahead as scheduled the following day. Several months later,

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petitioners filed an amended complaint, seeking to have the merger set aside and to obtain such other relief as might be proper.

In Count II of the amended complaint, which is the only count before us,2 petitioners predicated jurisdiction on § 27 of the 1934 Act, 15 U.S.C. § 78aa. They alleged that the proxy statement sent out by the Autolite management to solicit shareholders' votes in favor of the merger was misleading, in violation of § 14(a) of the Act and SEC Rule 14a-9 thereunder. (17 CFR § 240.14a-9.) Petitioners recited that, before the merger, Merganthaler owned over 50% of the outstanding shares of Auto-Lite common stock, and had been in control of Auto-Lite for two years. American Manufacturing, in turn, owned about one-third of the outstanding shares of Mergenthaler, and for two years had been in voting control of Mergenthaler and, through it, of Auto-Lite. Petitioners charged that, in light of these circumstances, the proxy statement was misleading in that it told Autolite shareholders that their board of directors recommended approval of the merger without also informing them that all 11 of Auto-Lite's directors were nominees of Mergenthaler and were under the "control and domination of Mergenthaler." Petitioners asserted the right to complain of this alleged violation both derivatively on behalf of Auto-Lite and as representatives of the class of all its minority shareholders.

On petitioners' motion for summary judgment with respect to Count II, the District Court for the Northern District of Illinois ruled as a matter of law that the claimed defect in the proxy statement was, in light of the circumstances in which the statement was made, a material omission. The District Court concluded, from its reading of the Borak opinion, that it had to hold [90 S.Ct. 619] a hearing

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on the issue whether there was

a causal connection between the finding that there has been a violation of the disclosure requirements of § 14(a) and the alleged injury to the plaintiffs

before it could consider what remedies would be appropriate. (Unreported opinion dated February 14, 1966.)

After holding such a hearing, the court found that, under the terms of the merger agreement, an affirmative vote of two-thirds of the Auto-Lite shares was required for approval of the merger, and that the respondent companies owned and controlled about 54% of the outstanding shares. Therefore, to obtain authorization of the merger, respondents had to secure the approval of a substantial number of the minority shareholders. At the stockholders' meeting, approximately 950,000 shares, out of 1,160,000 shares outstanding, were voted in favor of the merger. This included 317,000 votes obtained by proxy from the minority shareholders, votes that were "necessary and indispensable to the approval of the merger." The District Court concluded that a causal relationship had thus been shown, and it granted an interlocutory judgment in favor of petitioners on the issue of liability, referring the case to a master for consideration of appropriate relief. (Unreported findings and conclusions dated Sept. 26, 1967; opinion reported at 281 F.Supp. 826 (1967)).

The District Court made the certification required by 28 U.S.C. § 1292(b), and respondents took an interlocutory appeal to the Court of Appeals for the Seventh Circuit.3 That court affirmed the District Court's conclusion

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that the proxy statement was materially deficient, but reversed on the question of causation. The court acknowledged that, if an injunction had been sought a sufficient time before the stockholders' meeting, "corrective measures would have been appropriate." 403 F.2d 429, 435 (1968). However, since this suit was brought too late for preventive action, the courts had to determine "whether the misleading statement and omission caused the submission of sufficient proxies," as a prerequisite to a determination of liability under the Act. If the respondents could show,

by a preponderance of probabilities, that the merger would have...

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