Beatty v. Bright, Civ. No. 8-2313-C-1.

• Decision Date: 24 September 1970
• Docket Number: Civ. No. 8-2313-C-1.
• Citation: 318 F. Supp. 169
• Parties: Richard H. BEATTY et al., Plaintiffs, v. H. Dale BRIGHT et al., Defendants.
• Court: U.S. District Court — Southern District of Iowa

318 F. Supp. 169

Richard H. BEATTY et al., Plaintiffs, v. H. Dale BRIGHT et al., Defendants.

Civ. No. 8-2313-C-1.

United States District Court, S. D. Iowa, C. D.

September 24, 1970.

Eugene Davis, Ralph R. Randall and D. J. Fairgrave, Des Moines, Iowa, for plaintiffs.

Ross H. Sidney, John G. Black and William B. McDonald, Des Moines, Iowa, for defendants Ronald L. Jensen, Parnell E. Proctor, and defendants Life Investors.

MEMORANDUM AND ORDER

STEPHENSON, Chief Judge.

This matter is before the Court on motion of plaintiffs for summary judgment. Pursuant to Order on Pretrial Conference of date June 23, 1970, the sole issue now to be determined is the legality of certain proxy literature of date September 30, 1968, as amended October 22, 1968, under the laws, rules, and regulations of the Securities and Exchange Commission. The Court expressly delimits its present determination to the legality of such literature under Section 14(a) of the Securities Exchange Act of 1934, as amended 15 U.S.C.A. § 78n(a) and implementing Rule 14a-9(a) (17 C.F.R., § 240.14a-9 (a)). The Court heard oral arguments on this matter September 3, 1970.

This matter is part of an action which seeks recission and damages with respect to a consummated merger authorized pursuant to use of proxy literature allegedly containing false and misleading statements violative of the Securities Exchange Act of 1934.

Section 14(a) of the 1934 Act provides in part that it shall be unlawful for any person, by use of the mails or by any means of interstate commerce, "to solicit any proxy or consent or authorization in respect of any security * * * registered on any national Securities Exchange in contravention of such rules and regulations as the Commission may prescribe as necessary." The Commission has implemented this statute by various rules prescribing the conduct of those seeking proxies, consents or authorizations. 17 C.F.R., § 240.14a-1-11. Rule 14a-a(a), 17 C.F.R., § 240.14a-a(a) prohibits the use of false and misleading statements with respect to any material fact or the omission of material facts which would render any statement contained in a proxy solicitation false or misleading. The purpose of Section 14(a) and its implementing rules is to provide full and honest disclosure by those who are seeking to maintain or gain control of a corporation through solicitation of the corporate voting rights of the shareholders. Greater Iowa Corporation v. McLendon, 378 F.2d 783, 795 (8th Cir. 1967).

The proxy literature about which plaintiffs complain was prepared and mailed to shareholders of Gains Guaranty Corporation, an Iowa corporation, by the officers and directors of Gains with respect to shares of Gains registered pursuant to Section 12 of the 1934 Act, as amended by Act of August 20, 1964, § 3(a), 78 Stat. 569. As a part thereof, a Proxy Statement solicited votes in favor of the then proposed sale of Gains to Life Investors, Inc., also an Iowa corporation. The sale was approved by Gains shareholders at a special meeting conducted by Gains management November 12, 1968, and finalized November 26, 1968.¹

Plaintiffs ask the Court to hold as a matter of law that the proxy literature is illegal because it omitted to state certain material facts necessary in order to make the statements therein not false or misleading.

Plaintiffs contend that the solicitation herein at issue was materially misleading in two principal respects. They first contend that the proxy material failed to adequately describe two lawsuits which had been filed in the Polk County, Iowa District Court as derivative actions on behalf of Gains and its shareholders, which actions were valuable assets of Gains and which would be appropriated by defendant Life Investors, Inc., without payment to Gains and its shareholders. Plaintiffs next contend that the proxy literature is deficient in that it instructed Gains shareholders that their management recommended approval of the sale without also informing them that their officers and directors had collectively a very keen self-interest in securing approval of the sale.

Plaintiffs assert the right to complain of these alleged violations both derivatively on behalf of Gains and as representatives of the class of certain of its shareholders. Jurisdiction is founded on Section 27 of the Securities Exchange Act of 1934, 15 U.S.C. § 78aa.

THE LAWSUITS

The plaintiffs in the State Court lawsuits are the plaintiffs in the present action now before this Court. The proxy literature herein at issue contains five paragraphs relating to the state court actions. (Plaintiffs' Exhibit B, pp. 32-33, 76.) These are as follows:

p. 32

Litigation

On April 7, 1967, three stockholders of Gains filed in Polk County District Court, Des Moines, Iowa, a petition in equity as a derivative action against certain officers and directors of Gains claiming that payments by Gains for property acquisition fees, insurance commissions and property management fees were made in excess of the amount due for the fair and reasonable value thereof. On April 19, 1968, the same stockholders filed a similar action in Polk County District Court attacking the transaction wherein Gains acquired the Doctors Park property located in Des Moines, Iowa and the management of the consumer finance subsidiaries of Gains.

p. 33

The Agreement specifically provides causes of action are included in the definition of the assets being purchased by Life Investors. Accordingly should Gains derive any benefits from these actions, such benefits would become the property of Life Investors.

Gains is named as a defendant in the above suits, but has no financial liability in these actions except to the extent that it may be required to compensate officers and directors who defend the actions for their expenses. In the opinion of counsel, there are meritorious defenses to these actions.

p. 76

LAWSUITS

On April 7, 1967, three stockholders of the company filed in Polk County District Court, Des Moines, Iowa, a petition in equity as a derivative action against certain officers and directors of the company claiming that payments by the company for property acquisition fees, insurance commissions and property management fees were made in excess of the amount due for the fair and reasonable value thereof. On April 19, 1968, the same stockholders filed a similar action in Polk County District Court attacking the transaction wherein Gains acquired the Doctors Park property located in Des Moines, Iowa and the management of the consumer finance subsidiaries of the company.

The company is named as a defendant in both suits, but has no financial liability in these actions except to the extent that it may be required to compensate officers and directors who defend the actions for their expenses. In the opinion of counsel, there are meritorious defenses to these actions.

Plaintiffs contend that this proxy literature is materially misleading because it omits to state certain additional facts in connection with the state court actions necessary in order to make the statements therein not false or misleading. Defendants argue that the proxy material states all material facts concerning these actions. Defendants urge that the laws, rules and regulations of the Securities and Exchange Commission pertinent to proxy material are grounded upon two conflicting policies. These are, say the defendants, the policy requiring full disclosure of all material facts and the general policy against prolix proxy material. It is the position of the defendants that these conflicting policies do not find balance in the level of specificity in disclosure demanded by plaintiffs. The Court also notes that defendants make much of the fact that the proxy statement herein was filed with the Securities and Exchange Commission and examined by its staff. In connection with this last point, the Court considers the following language of the United States Supreme Court in J. I. Case Co. v. Borak, 377 U.S. 426, 432, 84 S.Ct. 1555, 1560, 12 L.Ed.2d 423 (1964) dispositive:

The Securities and Exchange Commission advises that it examines over 2,000 proxy statements annually and each of them must necessarily be expedited. Time does not permit an independent examination of the facts set out in the proxy material and this results in the Commission's acceptance of the representations contained therein at their face value, unless contrary to other material on file with it.

The foregoing principle seems even more applicable in the case of an omission as opposed to a false statement. In the latter case the Commission might have opportunity to discover the inaccuracy of an affirmative statement, while in the former case it is nearly...