Pavlidis v. New England Patriots Football Club, Inc.

• Decision Date: 22 June 1984
• Docket Number: No. 83-1637,83-1637
• Parties: Fed. Sec. L. Rep. P 91,537 Helen H. PAVLIDIS, et al., Plaintiffs, Appellants, v. NEW ENGLAND PATRIOTS FOOTBALL CLUB, INC., et al., Defendants, Appellees.
• Court: U.S. Court of Appeals — First Circuit

Page 1227

737 F.2d 1227

Fed. Sec. L. Rep. P 91,537

Helen H. PAVLIDIS, et al., Plaintiffs, Appellants, v. NEW ENGLAND PATRIOTS FOOTBALL CLUB, INC., et al.,

Defendants, Appellees.

No. 83-1637.

United States Court of Appeals, First Circuit.

Argued March 9, 1984.

Decided June 22, 1984.

Rehearing Denied June 22, 1984.

Anthony Tarricone, Boston, Mass., with whom Camille F. Sarrouf, Sarrouf, Tarricone & Flemming, Boston, Mass., and Nathaniel S. Weiner, Norwood, Mass., were on brief, for plaintiffs, appellants.

James H. Carter, Jr., New York City, with whom Howard D. Burnett, Sullivan & Cromwell, New York City, George T. Finnegan, John D. Donovan, and Ropes & Gray, Boston, Mass., were on brief, for New England Patriots Football Club, Inc.

Richard E. Bachman, Boston, Mass., with whom Hale, Sanderson, Byrnes & Morton, Boston, Mass., were on brief, for William H. Sullivan, Jr., and Mary H. Sullivan.

Before COFFIN, BOWNES and BREYER, Circuit Judges.

COFFIN, Circuit Judge.

This suit arises out of a securities transaction in which William H. Sullivan, Jr., gained control of the New England Patriots Football Club (Patriots) by forming a separate corporation (New Patriots) and merging it with the old corporation. Plaintiffs are a class of stockholders who voted to accept the New Patriots' offer of $15.00 per share for their common stock in the Patriots corporation. They now claim that they were induced to accept this offer by a misleading proxy statement drafted under the direction of Mr. Sullivan, who owned a controlling share in the voting stock of Patriots at the time of the merger. The proxy statement, plaintiffs claim, contained various misrepresentations designed to paint a gloomy picture of the financial position and prospects of Patriots, so that the shareholders undervalued their stock. They seek to rescind the merger or to receive a higher price per share for the stock they sold. The district court entered a judgment in favor of defendants after a bench trial. We affirm in part, vacate in part, and remand.

I. Facts

Defendant Sullivan and nine others organized Patriots in 1960 with 100,000 shares of voting common stock issued to the ten promoters at a price of $2.50 per share and with 120,000 shares of non-voting common stock issued to the public at a price of $5.00 per share. The voting stock was privately held; the non-voting stock was traded publicly in the over-the-counter market. In 1975, Sullivan, who owned 23,718 shares of the voting stock, gained control of the corporation by buying the remaining voting shares at prices in excess of $100 per share. He borrowed approximately $5,348,000 from several banks to finance this purchase. When he had completed his purchase of the voting shares, Sullivan gave Patriots a new board of directors that included himself, his son, and his cousin Mary H. Sullivan as members. He then created New Patriots, a separate corporation with the same board of directors.

On November 5, 1976, Patriots issued a proxy statement calling for a special meeting to vote on the proposed merger of Patriots with New Patriots. The proxy statement disclosed that New Patriots offered a price of $15.00 per share for the non-voting stock, whose bid price had reached a high of $9.50 per share in the months before the merger was announced. In addition, the proxy statement contained sixty pages of information on the financial status of the corporation, the reasons for the merger, the interest of William Sullivan in the merger, and other matters pertinent to the shareholders' decision whether or not to vote in favor of the merger.

Patriots held the special meeting on December 8, 1976. At this time, Mass.Gen.Laws Ann. ch. 156B, Sec. 78(c), required that a merger be approved by a majority vote of each class of shareholders, including those who held shares designated "non-voting" for ordinary purposes. ¹ The holders of non-voting common stock in Patriots voted 82,474 shares, or approximately 59%, in favor of the merger. All shareholders except those who had perfected their appraisal rights under Mass.Gen.Laws Ann. ch. 156B, Secs. 86 & 89, were required to surrender their shares for the offered price of $15.00 per share. Those shareholders who had perfected their appraisal rights by objecting to the merger and filing a written demand for payment are now awaiting a determination by the Norfolk Superior Court of the fair value of their shares.

A number of the shareholders who had voted in favor of the merger subsequently concluded that the proxy statement had been materially false and misleading. They brought suit in the United States District Court for the District of Massachusetts, claiming that the proxy statement violated the federal securities laws and various provisions of state law. The district court found that the proxy statement was "an artful attempt to minimize the future profitability of the Patriots and to put a wash of corporate respectability over Sullivan's diversion of the corporation's income for his own use", and that it represented "the deliberate design of Sullivan and the Patriots' attorneys [to be misleading] in the face of requests from counsel for the banks ... that the Proxy Statement be more boldly forthright". Nevertheless, the court found that "the reader who followed through the whole document was given sufficient information to form his own judgment" about the Patriots' prospects, and it entered a judgment for defendants on all counts.

II. Standard of Review

Appellants argue that the district court "applied an improper concept of materiality to the omissions and misleading statements" in the proxy statement. They suggest that the standard of materiality should be less stringent in cases involving insiders. See Cook v. Avien, Inc., 573 F.2d 685, 694 n. 19 (1st Cir.1978) (observing that "[t]he securities acts place a special burden [of disclosure] on insiders"). In addition, they argue that a lower standard of materiality should apply to uncontested mergers such as this one, where the management of the target company is identical with the management of the offeror. See Blanchette v. Providence & Worcester Co., 428 F.Supp. 347, 354 (D.Del.1977); Broder v. Dane, 384 F.Supp. 1312, 1318-19 (S.D.N.Y.1974).

Section 14(a) of the Securities Exchange Act and Rule 14a-9 promulgated thereunder make it unlawful for a corporation to issue a 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 ...." The Supreme Court has held that "[a]n omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote". TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449, 96 S.Ct. 2126, 2132, 48 L.Ed.2d 757 (1976). The fact that a proxy statement is drafted by insiders acting in their own interest does not change the standard of materiality. A fact does not become more material to the shareholder's decision because it is withheld by an insider, or because the insider might profit by withholding it.

This is not to say, however, that court must ignore the interests of the parties who drafted the proxy statement in deciding whether they have met their obligation to disclose material facts. Certain facts might be material in the context of a one-sided transaction that would not be material in the context of an adversarial transaction. Therefore, although the same standard of materiality would apply to both kinds of transaction, the standard might identify different facts as material in each transaction. In addition, when the interests of the management conflict with those of the shareholders (and we note that this may happen in a hostile takeover, where the management seeks to preserve its endangered jobs, as well as in an uncontested merger), the court is entitled to regard the management's disclosures with a certain skepticism, and to resolve doubts in favor of the shareholders. Thus, although Sec. 14(a) requires any party soliciting proxies, regardless of his status or interest in the transaction, to disclose all material information, a self-dealing insider may have a "heavier burden of disclosure" in the sense that he will find it more difficult to convince the court that he has met the requirements of Sec. 14(a).

In this case, the district court applied the standard of materiality set forth by the Supreme Court in TSC Industries. It found that the proxy statement had met the requirements of Sec. 14(a) of the Securities Exchange Act, "even given the burden of disclosure in a nonadversarial setting". We find that the court applied the proper standard of materiality and properly took account of the nature of the transaction in deciding whether the proxy statement disclosed all material information. The materiality issue is "a mixed question of law and fact" whose determination "requires delicate assessments ... [that] are peculiarly ones for the trier of fact". TSC Industries, 426 U.S. at 450, 96 S.Ct. at 2133. In this circuit, a mixed question of law and fact is reviewable only for clear error in the absence of some showing that the court applied the wrong legal standard. See Sweeney v. Board of Trustees of Keene State College, 604 F.2d 106, 109 n. 2 (1st Cir.1979) (collecting cases); see also Nash v. Farmers New World Life Insurance Co., 570 F.2d 558, 561 n. 7 (6th Cir.1978) (holding that, even though the court does not usually apply the "clearly erroneous" standard to mixed questions of fact and law, this standard is properly applied to the materiality issue).

In their complaint, the Patriots stockholders identified a large number of facts that they regarded as having been misstated or omitted in the proxy statement in violation of Sec. 14(a). After a lengthy trial, ...