Mills v. Electric Auto 8212 Lite Company

• Citation: 396 U.S. 375,90 S.Ct. 616,24 L.Ed.2d 593
• Decision Date: 20 January 1970
• Docket Number: No. 64,64
• Parties: Elmer E. MILLS and Louis Susman, Petitioners, v. The ELECTRIC AUTO—LITE COMPANY et al
• Court: United States Supreme Court

396 U.S. 375

90 S.Ct. 616

24 L.Ed.2d 593

Elmer E. MILLS and Louis Susman, Petitioners,

v The ELECTRIC AUTO—LITE COMPANY et al.

No. 64.

Argued Nov. 13, 1969.

Decided Jan. 20, 1970.

[Syllabus from pages 375-376 intentionally omitted] Arnold I. Shure, Chicago, Ill., for petitioners. Robert A. Sprecher, Chicago, Edward N. Gadsby, Boston, Mozart G. Ratner, Washington, D.C., on the brief.

Albert E. Jenner, Jr., Chicago, Ill., for respondents.

Mr. Justice HARLAN delivered the opinion of the Court.

This case requires us to consider a basic aspect of the implied private right of action for violation of § 14(a) of the Securities Exchange Act of 1934,¹ recognized by this Court in J. I. Case Co. v. Borak, 377 U.S. 426, 84 S.Ct. 1555, 12 L.Ed.2d 423 (1964). As in Borak the asserted wrong is that a corporate merger was accomplished through the use of a proxy statement that was materially false or misleading. The question with which we deal is what causal relationship must be shown between such a statement and the merger to establish a cause of action based on the violation of the Act.

I

Petitioners were shareholders of the Electric Auto-Lite Company until 1963, when it was merged into Mergenthaler Linotype Company. They brought suit on the day before the shareholders' meeting at which the vote was to take place on the merger against Auto-Lite, Mergenthaler, and a third company, American Manufacturing Company, Inc. The complaint sought an injunction against the voting by Auto-Lite's management of all proxies obtained by means of an allegedly misleading proxy solicitation; however, it did not seek a temporary restraining order, and the voting went ahead as scheduled the following day. Several months later petitioners filed an amended complaint, seeking to have the merger set aside and to obtain such other relief as might be proper.

In Count II of the amended complaint, which is the only count before us,² petitioners predicated jurisdiction on § 27 of the 1934 Act, 15 U.S.C. § 78aa. They alleged that the proxy statement sent out by the Auto-Lite management to solicit shareholders' votes in favor of the merger was misleading, in violation of § 14(a) of the Act and SEC Rule 14a—9 thereunder. (17 CFR § 240.14a 9.) Petitioners recited that before the merger Mergenthaler owned over 50% of the outstanding shares of Auto-Lite common stock, and had been in control of Auto-Lite for two years. American Manufacturing in turn owned about one-third of the outstanding shares of Mergenthaler, and for two years had been in voting control of Mergenthaler and, through it, of Auto-Lite. Petitioners charged that in light of these circumstances the proxy statement was misleading in that it told Auto-Lite shareholders that their board of directors recommended approval of the merger without also informing them that all 11 of Auto-Lite's directors were nominees of Mergenthaler and were under the 'control and domination of Mergenthaler.' Petitioners asserted the right to complain of this alleged violation both derivatively on behalf of Auto-Lite and as representatives of the class of all its minority shareholders.

On petitioners' motion for summary judgment with respect to Count II, the District Court for the Northern District of Illinois ruled as a matter of law that the claimed defect in the proxy statement was, in light of the circumstances in which the statement was made, a material omission. The District Court concluded, from its reading of the Borak opinion, that it had to hold a hear- ing on the issue whether there was 'a causal connection between the finding that there has been a violation of the disclosure requirements of § 14(a) and the alleged injury to the plaintiffs' before it could consider what remedies would be appropriate. (Unreported opinion dated February 14, 1966.)

After holding such a hearing, the court found that under the terms of the merger agreement, an affirmative vote of two-thirds of the Auto-Lite shares was required for approval of the merger, and that the respondent companies owned and controlled about 54% of the outstanding shares. Therefore, to obtain authorization of the merger, respondents had to secure the approval of a substantial number of the minority shareholders. At the stockholders' meeting, approximately 950,000 shares, out of 1,160,000 shares outstanding, were voted in favor of the merger. This included 317,000 votes obtained by proxy from the minority shareholders, votes that were 'necessary and indispensable to the approval of the merger.' The District Court concluded that a causal relationship had thus been shown, and it granted an interlocutory judgment in favor of petitioners on the issue of liability, referring the case to a master for consideration of appropriate relief. (Unreported findings and conclusions dated Sept. 26, 1967; opinion reported at 281 F.Supp. 826 (1967)).

The District Court made the certification required by 28 U.S.C. § 1292(b), and respondents took an interlocutory appeal to the Court of Appeals for the Seventh Circuit.³ That court affirmed the District Court's con- clusion that the proxy statement was materially deficient, but reversed on the question of causation. The court acknowledged that, if an injunction had been sought a sufficient time before the stockholders' meeting, 'corrective measures would have been appropriate.' 403 F.2d 429, 435 (1968). However, since this suit was brought too late for preventive action, the courts had to determine 'whether the misleading statement and omission caused the submission of sufficient proxies,' as a prerequisite to a determination of liability under the Act. If the respondents could show, 'by a preponderance of probabilities, that the merger would have received a sufficient vote even if the proxy statement had not been misleading in the respect found,' petitioners would be entitled to no relief of any kind. Id., at 436.

The Court of Appeals acknowledged that this test corresponds to the common-law fraud test of whether the injured party relied on the misrepresentation. However, rightly concluding that '(r)eliance by thousands of individuals, as here, can scarcely be inquired into' (id., at 436 n. 10), the court ruled that the issue was to be determined by proof of the fairness of the terms of the merger. If respondents could show that the merger had merit and was fair to the minority shareholders, the trial court would be justified in concluding that a sufficient number of shareholders would have approved the merger had there been no deficiency in the proxy statement. In that case respondents would be entitled to a judgment in their favor.

Claiming that the Court of Appeals has construed this Court's decision in Borak in a manner that frustrates the statute's policy of enforcement through private litigation, the petitioners then sought review in this Court. We granted certiorari, 394 U.S. 971, 89 S.Ct. 1470, 22 L.Ed.2d 752 (1969), believing that resolution of this basic issue should be made at this stage of the litigation and not postponed until after a trial under the Court of Appeals' decision.⁴

II

As we stressed in Borak, § 14(a) stemmed from a congressional belief that '(f) air corporate suffrage is an important right that should attach to every equity security bought on a public exchange.' H.R.Rep.No.1383, 73d Cong., 2d Sess., 13. The provision was intended to promote 'the free exercise of the voting rights of stockholders' by ensuring that proxies would be solicited with 'explanation to the stockholder of the real nature of the questions for which authority to cast his vote is sought.' Id. at 14; S.Rep.No.792, 73d Cong., 2d Sess., 12; see 377 U.S., at 431, 84 S.Ct. 1555, 1559. The decision below, by permitting all liability to be foreclosed on the basis of a finding that the merger was fair, would allow the stockholders to be by-passed, at least where the only legal challenge to the merger is a suit for retrospective relief after the meeting has been held. A judicial appraisal of the merger's merits could be substituted for the actual and informed vote of the stockholders.

The result would be to insulate from private redress an entire category of proxy violations—those relating to matters other than the terms of the merger. Even outrageous misrepresentations in a proxy solicitation, if they did not relate to the terms of the transaction, would give rise to no cause of action under § 14(a). Particularly if carried over to enforcement actions by the Securities and Exchange Commission itself, such a result would subvert the congressional purpose of ensuring full and fair disclosure to shareholders.

Further, recognition of the fairness of the merger as a complete defense would confront small shareholders with an additional obstacle to making a successful challenge to a proposal recommended through a defective proxy statement. The risk that they would be unable to rebut the corporation's evidence of the fairness of the proposal, and thus to establish their cause of action, would be bound to discourage such shareholders from the private enforcement of the proxy rules that 'provides a necessary supplement to Commission action.' J. I. Case Co. v. Borak, 377 U.S., at 432, 84 S.Ct. at 1560.⁵

Such a frustration of the congressional policy is not required by anything in the wording of the statute or in our opinion in the Borak case. Section 14(a) declares it 'unlawful' to solicit proxies in contravention of Commission rules, and SEC Rule 14a—9 prohibits solicitations 'containing any statement which * * * 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 * * *.' Use of a solicitation that is materially misleading is itself a violation of law, as the Court of Appeals recognized in stating that injunctive relief would be available to remedy such a defect if sought prior to the stockholders' meeting. In...