Mendell v. Greenberg

• Decision Date: 11 July 1985
• Docket Number: No. 81 Civ. 3483 (JES).,81 Civ. 3483 (JES).
• Parties: Ira L. MENDELL, on behalf of himself and others similarly situated, Plaintiff, v. George E. GREENBERG, Frederick R. Adler, James R. Swartz, Anita Loehmann Stafford, Donald H. Balleisen, Allan S. Gordon, Christopher D. Illick, Cecily C. Selby, Kenneth J. Thornhill, John D. Mack, AEA Investors Inc., LHI Inc., LH Investors Inc., LH Holdings Inc., Loehmann's Inc., and Drexel Burnham Lambert Incorporated, Defendants.
• Court: U.S. District Court — Southern District of New York

612 F. Supp. 1543

Ira L. MENDELL, on behalf of himself and others similarly situated, Plaintiff, v. George E. GREENBERG, Frederick R. Adler, James R. Swartz, Anita Loehmann Stafford, Donald H. Balleisen, Allan S. Gordon, Christopher D. Illick, Cecily C. Selby, Kenneth J. Thornhill, John D. Mack, AEA Investors Inc., LHI Inc., LH Investors Inc., LH Holdings Inc., Loehmann's Inc., and Drexel Burnham Lambert Incorporated, Defendants.

No. 81 Civ. 3483 (JES).

United States District Court, S.D. New York.

July 11, 1985.

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Kaufman Malchman & Kirby, P.C., New York City, for plaintiff; Stanley L. Kaufman, Irving Malchman, New York City, of counsel.

Kelley Drye & Warren, New York City, for defendants AEA Investors Inc., LH Investors Inc. and Loehmann's, Inc.; Robert Ehrenbard, Arnold S. Klein, New York City, of counsel.

Cahill Gordon & Reindel, New York City, for defendant Drexel Burnham Lambert, Inc.; Michael P. Tierney, Charles A. Gilman, David S. Smith, New York City, of counsel.

Reavis & McGrath, New York City, for defendants George J. Greenberg, Frederick R. Adler, James R. Swartz, Allan S. Gordon, Christopher D. Illick and Cecily C. Selby; David C. Birdollf, Judith B. Yaeger, New York City, of counsel.

Sage Gray Todd & Sims, New York City, for defendants Anita Loehmann Stafford and John D. Mack; Robert W. Brundige, Jr., Stuart A. Krause, New York City, of counsel.

OPINION & ORDER

SPRIZZO, District Judge.

Plaintiff Ira L. Mendell owned common stock of defendant Loehmann's Inc. ("Loehmann's") in 1981 when Loehmann's merged with a company organized and controlled by defendant AEA Investors Inc. ("AEA").¹ Pursuant to the merger, Loehmann's common stockholders received $31.30 in cash for each share of common stock. Plaintiff alleges in his Amended and Supplemental Complaint ("Complaint") that shareholder approval of the merger was obtained in violation of section 14(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78n(a), Rule 14a-9, 17 C.F.R. § 240.14a-9, and common law.

Defendants have moved to dismiss the complaint pursuant to Fed.R.Civ.P. 12(b)(6). The parties submitted, and the Court has considered, matters outside the pleadings, and after oral argument the Court gave plaintiff an opportunity to submit any further information he had to support the allegations of his complaint. Therefore, the motion is treated as one for summary judgment. See Fed.R.Civ.P. 12(b).

Section 14(a) proscribes, inter alia, solicitation of proxies in contravention of the rules and regulations promulgated by the Securities and Exchange Commission. Rule 14a-9 provides, inter alia:

(a) No solicitation subject to this regulation shall be made by means of any 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....

17 C.F.R. § 240.14a-9(a). Plaintiff alleges that a proxy statement dated December 9, 1980 (the "proxy statement") and issued with respect to the merger was false and misleading due to the omission of material facts which, if disclosed, would have indicated that Loehmann's common stock was worth more than $31.30 per share.

Liability for nondisclosure under section 14(a) and Rule 14a-9 requires (1) omission of a material fact necessary in order to make the proxy statement not false or misleading; (2) omission as the result of knowing, reckless or negligent conduct; and (3) that the proxy solicitation was an essential link in effecting the proposed corporate action. See, e.g., Halpern v. Armstrong, 491 F.Supp. 365, 378 (S.D.N. Y.1980); Berkman v. Rust Craft Greeting Cards, Inc., 454 F.Supp. 787, 791 (S.D.N.Y. 1978).²

As a preliminary matter, the parties agree, and the Court will assume for purposes of this motion, that negligent conduct may be the predicate for liability. See, e.g., Gruss v. Curtis Publishing Co., 534 F.2d 1396, 1403 (2d Cir.), cert. denied, 429 U.S. 887, 97 S.Ct. 240, 50 L.Ed.2d 168 (1976); Gerstle v. Gamble-Skogmo, Inc., 478 F.2d 1281, 1300-01 (2d Cir.1973); Management Assistance Inc. v. Edelman, 584 F.Supp. 1021, 1028 (S.D.N.Y.1984); Richland v. Crandall, 262 F.Supp. 538, 553 n. 12 (S.D.N.Y.1967).³ The parties disagree, however, as to whether the defendants were required to disclose the omitted facts in order to make the proxy statement not false or misleading, and whether those facts were material.

The purpose of section 14(a) is to provide full and fair disclosure from which shareholders may draw their own inferences and make their decisions on how to vote. See, e.g., Mills v. Electric Auto-Lite Co., 396 U.S. 375, 381, 90 S.Ct. 616, 620, 24 L.Ed.2d 593 (1970); J.I. Case Co. v. Borak, 377 U.S. 426, 431, 84 S.Ct. 1555, 1559, 12 L.Ed.2d 423 (1964); cf. TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 448, 96 S.Ct. 2126, 2131, 48 L.Ed.2d 757 (1976). Therefore, proxy materials need not be perfect, but must simply convey a "sufficiently accurate picture so as not to mislead." See Kennecott Copper Corp. v. Curtiss-Wright Corp., 584 F.2d 1195, 1200 (2d Cir. 1978) (citing Crane Co. v. Westinghouse Air Brake Co., 419 F.2d 787, 800 (2d Cir. 1969), cert. denied, 400 U.S. 822, 91 S.Ct. 41, 27 L.Ed.2d 50 (1970)); see also Management Assistance, supra, 584 F.Supp. at 1027.

An omitted fact is material when there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote, see, e.g., TSC Industries, supra, 426 U.S. at 449, 96 S.Ct. at 2132, which requires a showing of "a substantial likelihood that, under all the circumstances, the omitted fact would have assumed actual significance in the deliberations of the reasonable shareholder ... or that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the `total mix' of information made available." Id. (footnote omitted). Materiality is a mixed question of law and fact as to which summary judgment may be granted only where reasonable minds could not differ on the issue. Id. at 450, 96 S.Ct. at 2132; see also GAF Corp. v. Heyman, 724 F.2d 727, 737 (2d Cir.1983); Seibert v. Sperry Rand Corp., 586 F.2d 949, 951, 952 (2d Cir.1978).

Most of the allegations of the complaint are legally insufficient because they concern information which defendants were not legally required to disclose. With respect to a few claims, however, the Court cannot say as a matter of law either that the facts alleged were not required to be disclosed or that the omissions were not material.

1. Loehmann's store leases

Plaintiff claims that store leases held by Loehmann's, which were listed on the company's balance sheets as liabilities in the aggregate amount of rent due, were actually valuable assets worth millions of dollars, and that since the "value" of these leases was not reflected in book value, defendants' failure to list them as assets or to note that they were undervalued was a misleading and material omission.

Plaintiff's argument that the proxy statement failed to disclose adequate information with respect to the value of the leases is incorrect. The proxy statement described the leases and disclosed all of the information which plaintiff claims made them valuable.⁴ Shareholders could decide from those facts whether or not the offered price adequately reflected the "value" of the leases, especially since Loehmann's stock was traded on a reliable national market and the value of the company's assets was adequately reflected in the market value. See, e.g., In re New York, New Haven and Hartford Railroad Co. v. Smith, 632 F.2d 955, 962-63 (2d Cir.), cert. denied, 449 U.S. 1062, 101 S.Ct. 786, 66 L.Ed.2d 605 (1980); Seaboard World Airlines, Inc. v. Tiger International, Inc., 600 F.2d 355, 361-62 (2d Cir.1979); Pavlidis v. New England Patriots Football Club, Inc., 737 F.2d 1227, 1234 (1st Cir.1984); South Coast Services Corp. v. Santa Ana Valley Irrigation Co., 669 F.2d 1265, 1271 (9th Cir.1982); Gerrity v. Chapin, 1979-80 Transfer Binder Fed.Sec.L.Rep. (CCH) ¶ 97,241, at 96,717 (S.D.N.Y. Jan. 9, 1980); Jones v. National Distillers & Chemical Corp., 484 F.Supp. 679, 683 (S.D.N.Y.1979); see also Gerstle, supra, 478 F.2d 1281.⁵

Plaintiff also has cited no authority for his argument that some type of assessment of the commercial value of the leases or a general statement that the leases were undervalued was required. The fact that defendants may have told AEA that Loehmann's held "valuable" leases does not create a legal obligation to make the same statement to shareholders. See, e.g., Flynn v. Bass Brothers Enterprises, Inc., 744 F.2d 978, 986 n. 12 (3d Cir.1984); South Coast Services, supra, 669 F.2d at 1272 n. 4; In re Brown Company Securities Litigation, 355 F.Supp. 574, 584 (S.D. N.Y.1973); cf. Kohn v. American Metal Climax, Inc., 458 F.2d 255, 265 (3d Cir.), cert. denied, 409 U.S. 874, 93 S.Ct. 120, 34 L.Ed.2d 126 (1972).⁶ It follows that since the investors were not misled as to the general nature and terms of the leases, no further disclosure or opinion as to their value was necessary.

2. Loehmann's future prospects and financial projections

Plaintiff's claim that it was a material and misleading omission to fail to disclose certain information regarding Loehmann's projected sales figures and its position in the retail industry,⁷ is likewise legally insufficient.

Neither the SEC nor the Second Circuit have required that financial projections be included in proxy materials. See, e.g., Gerstle, supra, 478 F.2d at 1292; Flum Partners v. Child World Inc., 557 F.Supp. 492, 499 (S.D.N.Y.1983); Lewis v. Oppenheimer & Co., 481 F.Supp. 1199, 1208 (S.D. N.Y.1979); cf. Rodman v. Grant Foundation, 608 F.2d 64, 72 (2d Cir.1979); Billard v....