564 F.2d 1319 (9th Cir. 1977), 76-1069, Yamamoto v. Omiya

Docket Nº:76-1069.
Citation:564 F.2d 1319
Party Name:Frank S. YAMAMOTO, Individually and, derivatively, on behalf of Investors Finance, Inc., Appellant, v. Kazuo OMIYA et al., Appellees.
Case Date:November 28, 1977
Court:United States Courts of Appeals, Court of Appeals for the Ninth Circuit

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564 F.2d 1319 (9th Cir. 1977)

Frank S. YAMAMOTO, Individually and, derivatively, on behalf

of Investors Finance, Inc., Appellant,


Kazuo OMIYA et al., Appellees.

No. 76-1069.

United States Court of Appeals, Ninth Circuit

November 28, 1977

Page 1320

[Copyrighted Material Omitted]

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Edward A. Jaffe (argued), Honolulu, Hawaii, for appellant.

Ton Seek Pai (argued), R. Patrick Jaress (argued), Jack C. Morse (argued), Honolulu, Hawaii, for appellees.

Appeal from the United States District Court for the District of Hawaii.

Before ELY, HUFSTEDLER and WRIGHT, Circuit Judges.

ELY, Circuit Judge:

This interlocutory appeal presents three questions 1 relating to orders entered by the District Court in a suit arising out of an allegedly deceptive proxy solicitation. We affirm the District Court's order striking the prayer for injunctive and other equitable relief, and also the court's order granting summary judgment in favor of Dr. Lee. We vacate the order denying class certification.


The controversy centers on the affairs of Investors Finance Inc. (Investors). Investors is a publicly held company with 1601 shareholders in 24 states and is required to register its stock with the Securities and Exchange Commission. All solicitations of Investors stockholders are subject to the proxy regulations under section 14(a) of the Securities Exchange Act, 15 U.S.C. § 78n (1971).

The directors 2 of Investors decided, in September of 1971, that they should consider selling the principal asset of the company, the Investors Finance Building. The asserted reason for this decision was to increase the rate of return of the company by freeing additional funds for industrial loans, claimed to be the company's primary business. At the September 16, 1971 meeting of the Board of Directors, the directors agreed that any amount from $1,650,000 to $1,800,000 would be an acceptable price for the building. 3

At a following meeting, on November 8th, the Board directed its Business Development Committee to study and subsequently report to the Board whether the proposed sales price in the $1,650,000 to $1,800,000 range would be within the limits of market value, and if not, to recommend an appropriate price.

A special meeting of the Board was held on December 2d to discuss in part the selling price of the building. The Business Development Committee reported to the Board, and the Board agreed to a selling price of $1,600,000. The Board also agreed at the meeting to list the building for sale with a firm called Charles Kimura Realty (Kimura). Directors Omiya and Takehara were licensed as real estate dealers, and their principal broker was Kimura. Takehara and Omiya abstained from the vote on the listing with Kimura.

A listing for the building was made at the Real Estate Broker's meeting in Honolulu,

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from which three written offers were received by Omiya. One of these offers was made by Dr. Lee. Eventually Dr. Lee raised his initial offer of $1,300,000 to $1,400,000 (the best of the three offers). A special meeting of the Investors' Board was held on December 20th to consider Dr. Lee's offer. The Board voted to accept the offer conditioned, among other things, upon approval of the stockholders and of Hawaii's bank examiner. 4

As a result of the vote taken on December 20th, Dr. Lee submitted a second offer of $1,400,000, this time subject to the terms and conditions previously fixed by the Investors Board. The directors determined that approval of the stockholders of Investors should be a prerequisite for the sale. 5

Director Tashima, an attorney, prepared the proxy solicitation statement. Defendant Alexander Grant & Co. was retained to prepare the financial statements for inclusion in the proxy materials. The proposed proxy statement was eventually accepted by the Securities and Exchange Commission and then distributed to the shareholders.

Yamamoto is a stockholder of Investors who opposed the sale of the building to Dr. Lee at the agreed terms. Following the company's proxy solicitation effort and shareholders' votes, at which 79.4% of the shares were voted in favor of the sale, Yamamoto filed suit alleging that the proxy statement was misleading and deceptive in numerous respects, including the failure of the statement to reveal that director Omiya was to receive a $21,000 commission on the sale. 6


In order to simplify the issues in respect to our consideration of the District Court's denial of equitable relief, we first approach the question of the propriety of the summary judgment granted in favor of Dr. Lee. Plaintiff urged below that Dr. Lee was liable for the allegedly misleading nature of Investors' proxy materials under section 14(a) of the Securities Exchange Act which provides as follows:

(a) It shall be unlawful for any person, by the use of the mails or by any means or instrumentality of interstate commerce or of any facility of a national securities exchange or otherwise, 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, to solicit or to permit the use of his name to solicit any proxy or consent or authorization in respect of any security . . . (emphasis added).

The thrust of Yamamoto's argument is that Dr. Lee permitted the use of his name to solicit proxies in that his name and address appeared in the proxy statement as the proposed buyer of the building. 7 We are convinced that the reach of

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section 14(a) could not possibly extend so far. In order to hold a person liable for proxy violations, one must show, at the very least, a substantial connection between the use of the person's name and the solicitation effort. Lewis v. Dansker, 68 F.R.D. 184, 194 n. 2 (S.D.N.Y.1975). The mere presence of Lee's name in the materials (probably required by the SEC) did not reveal any significant control by Lee over the statement, or his adoption of it that was sufficient to justify attaching liability to him. 8 It is hardly conceivable that the mere revelation that Lee was the proposed purchaser could have been an inducing factor in the granting of a shareholder's proxy.


We next consider the trial court's order striking the appellant's prayers for injunctive and equitable relief. We assume for the purposes of this discussion that the facts are in accord with the plaintiff's allegations concerning the misleading nature of the material in the proxy statement. May a shareholder, either individually or as representative of the class, obtain a resolicitation of proxies and avoidance of the sales contract as a matter of right, merely by showing that the proxy materials are materially misleading? To put the question another way, is the sales contract voidable at the instance of a shareholder?

In the analysis of this question, we begin with Mills v. Electric Auto-Lite Co., 396 U.S. 375, 90 S.Ct. 616, 24 L.Ed.2d 593 (1969), in which the Court wrote:

Our conclusion that petitioners have established their case by showing that proxies necessary to approval of the merger were obtained by means of a materially misleading solicitation implies nothing about the form of relief to which they may be entitled. We held in (J. I. Case Co. v. Borak, 377 U.S. 426, 84 S.Ct. 1555, 12 L.Ed.2d 423) Borak that upon finding a violation the courts were "to be alert to provide such remedies as are necessary to make effective the congressional purpose," noting specifically that such remedies are not to be limited to prospective relief. 377 U.S., at 433, 434, 84 S.Ct. at 1560. In devising retrospective relief for violation of the proxy rules, the federal courts should consider the same factors that would govern the relief granted for any similar illegality or fraud. One important factor may be the fairness of the terms of the merger. Possible forms of relief will include setting aside the merger or granting other equitable relief, but, as the Court of Appeals below noted, nothing in the statutory policy "required the court to unscramble a corporate transaction merely because a violation occurred." 403 F.2d, at 436. In selecting a remedy the lower courts should exercise " 'the sound discretion which guides the determinations of courts of equity,' " keeping in mind the role of equity as "the instrument for nice adjustment and reconciliation between the public interest and private needs as well as between competing private claims." Hecht Co. v. Bowles, 321 U.S. 321, 329-330, 64 S.Ct. 587, 591-592, 88 L.Ed. 754 (1944), quoting from Meredith v. Winter Haven, 320 U.S. 228, 235, 64 S.Ct. 7, 11, 88 L.Ed. 9 (1943).

The Court went on to hold that section 29(b) of the Exchange Act did not render proxy contracts made in violation of the Act "void" but suggested that voidability at the option of the innocent party might be appropriate. We also have the guidance of Rondeau v. Mosinee Paper Corp., 422 U.S. 49, 64, 95 S.Ct. 2069, 45 L.Ed.2d 12 (1975), wherein the Supreme Court noted that relief is to...

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