Grimes v. Ohio Edison Co.
| Decision Date | 03 May 1993 |
| Docket Number | D,No. 705,705 |
| Parties | , Fed. Sec. L. Rep. P 97,440 C.L. GRIMES, Plaintiff-Appellant, v. OHIO EDISON COMPANY, Defendant-Appellee. ocket 92-7812. |
| Court | U.S. Court of Appeals — Second Circuit |
Thaddeus Holt, Law Office of Thaddeus Holt, Washington, DC, for plaintiff-appellant.
Thomas F. Clauss, Jr., Winthrop, Stimson, Putnam & Roberts, New York City, for defendant-appellee.
Before: PRATT and MAHONEY, Circuit Judges, and ZAMPANO, * District Judge.
Appellant C.L. Grimes appeals from a judgment of the United States District Court for the Southern District of New York, Thomas P. Griesa, District Judge, entered June 30, 1992, dismissing his action against appellee Ohio Edison Company on the grounds that under federal securities laws: (1) Ohio Edison was not required to include Grimes' proposed amendment to the company's Articles of Incorporation in its distribution of proxy materials for its annual shareholders' meeting of April 25, 1991; and (2) Ohio Edison's failure to disclose to shareholders that Grimes would offer his amendment at the meeting did not render the proxy materials false and misleading. 1
Ohio Edison's Amended Articles of Incorporation and By-Laws vest the authority to make capital expenditures solely in the Board of Directors, except in certain circumstances not applicable here. On October 23, 1990, Grimes, a shareholder in Ohio Edison, requested that the Company enclose in the proxy materials for the next shareholders' meeting the following amendment to the Articles of Incorporation which would require stockholder approval of capital and construction expenditures in excess of a defined amount:
The Company (or in the aggregate any combination of the Company and/or its subsidiaries) shall not without the formal Securities and Exchange Commission ("SEC") Rule 14a-8 requires a registrant such as Ohio Edison to include in its proxy materials a shareholder proposal that complies with the Rule's procedural requirements unless the proposal falls within any of thirteen exemptions, one of which--exemption 7--is relevant here. 2 The pertinent parts of Rule 14a-8 provide:
prior consent of the common shareholders in each instance, expend in any calendar year any monies by way of capital or construction expenditures in excess of $300,000,000; provided, however, that the consent of such shareholders shall not be required unless the amount of such expenditures exceeds the cash amount paid to the common shareholders as dividends in the preceding calendar year.
(c) The registrant may omit a proposal and any statement in support thereof from its proxy statement ... under any of the following circumstances:
* * * * * *
(7) If the proposal deals with a matter relating to the conduct of the ordinary business operations of the registrant; ...
If the registrant corporation determines that a shareholder proposal falls within an exemption, it must file the proposal with the SEC, together with a written explanation of why the proposal falls within the stated exemption. SEC Rule 14a-8(d).
In response to Ohio Edison's submission, the SEC's staff issued a "no-action" letter advising that the proposal appeared to concern a matter relating to the Corporation's ordinary business operations, and that it thus would not recommend enforcement action to the Commission if the proposal were omitted from the proxy materials. 3
Thereafter, Ohio Edison distributed proxy materials for its annual shareholders' meeting which omitted any reference to Grimes' proposal.
Grimes then filed suit for a declaratory judgment and for damages against Ohio Edison claiming that it was required by SEC Rule 14a-8 to include his proposal in its proxy materials and that its failure to do so violated the Rule. The complaint further alleged that Ohio Edison should have informed its shareholders that Grimes would offer an amendment to its Articles of Incorporation at the shareholders' meeting and that the failure to do so rendered the proxy materials misleading in violation of SEC Rule 14a-9.
Ohio Edison moved to dismiss the complaint under Fed.R.Civ.P. 12(b)(6), arguing that it failed to state a claim upon which relief could be granted. The district court granted the motion. It held that: (1) the proposal dealt with a matter relating to the conduct of the ordinary business operations of Ohio Edison within the meaning of Rule 14a-8(c)(7); and (2) the failure to mention the proposal did not render the proxy materials misleading within the meaning of Rule 14a-9. Grimes now appeals.
We review the district court's grant of a motion to dismiss de novo. Citibank, N.A. v. K-H Corp., 968 F.2d 1489, 1494 (2d Cir.1992); Austern v. Chicago Board Options Exchange, Inc., 898 F.2d 882, 885 (2d Cir.), cert. denied, 498 U.S. 850, 111 S.Ct. 141, 112 L.Ed.2d 107 (1990).
At the outset we note that this is not the first lawsuit involving a shareholder proposal made by Grimes with respect to capital expenditures by a utility company. In October 1988, Grimes submitted a proposal that Centerior Energy Corporation, another Ohio utilities holding company, amend its Articles of Incorporation to provide that the Company would not, without prior consent of the shareholders, expend in any year any funds for capital or construction projects in excess of the amount paid as common stock dividends in the prior year. When Centerior declined to include the proposal in its proxy materials, Grimes brought suit in the United States District Court for the District of Columbia, claiming violations of SEC Rules 14a-8 and 14a-9. The district court dismissed the action, and the court of appeals affirmed, holding that the proposal fell within the ordinary business operations exemption in Rule 14a-8(c)(7) and that the proxy materials were not misleading in violation of Rule 14a-9 by omitting reference to Grimes' proposal. Grimes v. Centerior Energy Corp., 909 F.2d 529 (D.C.Cir.1990), cert. denied, 498 U.S. 1073, 111 S.Ct. 799, 112 L.Ed.2d 860 (1991).
Grimes' proposal in the instant case is somewhat different from his proposal in Centerior. 4 Under Grimes' proposal in Centerior, whether shareholder approval is required for the current year's capital expenditures depends on the level of the previous year's dividends. In the present case, Grimes has inserted in his proposal a $300 million minimum threshold before shareholder approval is required for the current year's capital expenditures. Nevertheless, the basic issue is the same in both cases: Does a proposal that would require shareholder approval of all capital expenditures once a specified threshold is reached fall within the meaning of the "ordinary business operations" exemption of Rule 14a-8(c)(7)?
In adopting Rule 14a-8(c)(7) in its present form, the SEC stated that:
the term "ordinary business operations" has been deemed on occasion to include certain matters which have significant policy, economic or other implications inherent in them. For instance, a proposal that a utility company not construct a proposed nuclear power plant retrospect, however, it seems apparent that the economic and safety considerations attendant to nuclear power plants are of such magnitude that a determination whether to construct one is not an "ordinary" business matter. Accordingly, proposals of that nature, as well as others that have major implications, will in the future be considered beyond the realm of an issuer's ordinary business operations....
Adoption of Amendments Relating to Proposals by Security Holders, 41 Fed.Reg. 52,994, 52,998 (1976). Accordingly, only "business matters that are mundane in nature and do not involve any substantial policy" considerations may be omitted under exemption 7. Id.
As the court of appeals noted in Centerior, the SEC staff's no-action letters typically treat proposals bearing on a company's capital expenditures as not having major implications, but rather as relating instead to ordinary business operations. 5 Centerior, 909 F.2d at 532.
Nevertheless, as recognized in Centerior, the SEC staff also has found that a proposal relating to capital expenditures may be sufficiently important to be outside the "ordinary business operations" exempti...
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