Mills v. ELECTRIC AUTO-LITE COMPANY

• Decision Date: 26 September 1967
• Docket Number: No. 63 C 1138.,63 C 1138.
• Citation: 281 F. Supp. 826
• Parties: Elmer E. MILLS and Louis Susman, Plaintiffs, v. The ELECTRIC AUTO-LITE COMPANY, Mergenthaler Linotype Company and American Manufacturing Company, Inc., Defendants.
• Court: U.S. District Court — Northern District of Illinois

281 F. Supp. 826

Elmer E. MILLS and Louis Susman, Plaintiffs, v. The ELECTRIC AUTO-LITE COMPANY, Mergenthaler Linotype Company and American Manufacturing Company, Inc., Defendants.

No. 63 C 1138.

United States District Court N. D. Illinois, E. D.

September 26, 1967.

Arnold I. Shure, Frank J. McGarr, Moses, McGarr, Gibbons, Abramson & Fox, Robert A. Sprecher, Crowley, Sprecher, Barrett & Karaba, Chicago, Ill., for plaintiffs.

Jerold S. Solovy, Raymond, Mayer, Jenner & Block, Chicago, Ill., for defendants.

MEMORANDUM OPINION AND ORDER

PARSONS, District Judge.

I am again called upon to contribute an increment to the Federal Common Law of Corporations as derived from judicial exegesis of the Securities and Exchange Acts. This cause involves Section 14 of the 1934 Act and Rule 14a-9 as affecting omissions in Proxy Statements with regard to a corporate merger. The issue before me is the existence of a causal connection of the omissions and the merger.

The case involves a derivative class action brought on behalf of minority stockholders who have challenged the merger of Electric Auto-Lite Company, herein referred to as "Auto-Lite", with Mergenthaler Linotype Company, herein referred to as "Mergenthaler", by alleging that the Proxy Statement contained certain omissions.

The complaint alleges that the Proxy Statement failed to reveal, in soliciting a two-thirds stockholders' vote for the merger, that the directors of both Mergenthaler and Auto-Lite were controlled by a third company, American Manufacturing Company. The defendants' answer failed to deny these allegations and the plaintiffs moved for summary judgment pursuant to Rule 56. I had granted the motion for summary judgment and the remaining issue is whether there was a causal connection between the omissions in the Proxy Statement and the merger.

In the hearing which I conducted, and considering the facts as revealed from the record before me, I find that this case involves a merger between Electric Auto-Lite Company and Mergenthaler Linotype Company.

Auto-Lite, though its principal place of business is in Ohio, has plants in over a score of states, including Illinois, Indiana and Michigan. In 1963, it had approximately 29 plants throughout the United States and Canada. Auto-Lite and its subsidiaries are principally engaged in manufacturing automotive electrical equipment, light helicopters, industrial batteries and instruments. Also, through its wholly owned subsidiaries, it is engaged in leasing industrial and business equipment. In 1962, the total net sales were $180,863,539. It had engaged in a policy of constantly acquiring smaller corporations and consolidating and expanding its activities.

Mergenthaler and its subsidiaries are engaged in the production and distribution of linotype machines and parts, Linofilm systems, and other printing equipment, and in the design and manufacture of military equipment. In 1962, it had net sales of $240,092,891, and distributes its products through sales offices in Atlanta, Boston, Chicago, Dallas, Los Angeles, New York and San Francisco. Distribution outside the United States is handled by foreign subsidiaries and a worldwide network of 57 distributors with offices in 11 countries.

Eltra Corporation, the merged entity, exists as a holding company to control the two, and thus both, presumably, would be engaged in the activity of determining major policy matters relating to automobile batteries, helicopters, the leasing of industrial equipment, the leasing of business machine equipment, the manufacture, distribution and maintenance of linotype and other printing machines and equipment, and the planning, manufacturing and distribution of various types of equipment used by our armed services in the United States and throughout much of the rest of the world. The merged entity has evolved into a leviathan which consumes smaller corporate giants and has thus attained the power to substantially affect the course of the national economy.

The Supreme Court in J. I. Case Co. v. Borak, 377 U.S. 426, 84 S.Ct. 1555, 12 L.Ed.2d 423 (1964) had established the right of private enforcement of Section 14(a), and held that such a suit may be individual or derivative. The Federal Court also is given jurisdiction to grant relief. However, Mr. Justice Clark's opinion contained the following enigmatic statement:

It appears clear that private parties have a right under § 27 to bring suit for violation of § 14(a) of the Act. Indeed, this section specifically grants the appropriate District Courts jurisdiction over "all suits in equity and actions at law brought to enforce any liability or duty created" under the Act. The petitioners make no concessions, however, emphasizing that Congress made no specific reference to a private right of action in § 14(a); that, in any event, the right would not extend to derivative suits and should be limited to prospective relief only. In addition, some of the petitioners argue that the merger can be dissolved only if it was fraudulent or non-beneficial, issues upon which the proxy material would not bear. But the causal relationship of the proxy material and the merger are questions of fact to be resolved at trial, not here. We therefore do not discuss this point further. 377 U.S. at 431, 84 S.Ct. at 1559, emphasis added.

No reference to this issue is made in the Seventh Circuit decision, Borak v. J. L. Case, 317 F.2d 838 (7th Cir. 1963), nor in the order of the District Court, Civil Action File No. 56 C 247 (E.D.Wisconsin, 1956). Indeed, the Plaintiff-Respondent's brief asserted that the causal connection problem was not present. Brief of Plaintiff-Respondent, p. 37.

The Court in Borak did find that a corporate merger could be attacked on the basis of a new Federal cause of action created by Section 14(a). However, while an action brought under Section 10(b) — wherein the plaintiff seeks a money judgment to restore him to his prior position — is a private action, a Section 14 action is for enforcement of the statute since there may be no monetary recompense. As a derivative suit the action asserts the right of the corporation when the corporation refuses to assert that right itself. Comment, Private Rights and Federal Remedies: Herein of J. L. Case v. Borak, 12 U.C.L.A. L.Rev. 1161-7 (1966).

The motivating consideration is the protection of investors with private enforcement providing a supplement to Commission action with enforcement in the individual as well as the corporation. Id. 1168. However, because Borak was a decision based upon pleadings, brought by a plaintiff whose ownership was contemporaneous with the wrong alleged, the Court was not faced with the task of formulating new Federal standards to govern controverted factual issues. One such fact issue is the question of causality. The question is left to the lower Federal Courts for determination.

A principal result of the Borak decision is that the lower Federal Courts have been given the mandate to further develop a Federal Common Law of Corporations. Since an action under Section 14 is for enforcement rather than to effectuate a private right, the Courts must be guided by overriding national policy involving considerations of the good of the economy, which may predominate over a puritanical concern for corporate honesty, as well as a concern for the protection of the investor. Since the action may be taken on behalf of the corporation, its interests may predominate over that of the individual investor. Within this context, I find that a causal connection existed in the present case between the omissions in the Proxy Statements and the merger.

Since the Borak decision, Federal Courts have had occasion to consider the issue of causality. However, a number of these cases involved the presence of intervening factors so that the omissions or misstatements did not affect the merger.

In Barnett v. Anaconda Company, 238 F.Supp. 766 (S.D.N.Y.1965), the Court held that the complaint failed to assert a causal connection between the statements in the Proxy Statement and the merger. However, the approval of the merger was a foregone conclusion, since the defendant owned more than the necessary number of shares to effectuate the merger. The Court reasoned that the merger would have been effectuated without the misleading statements. The decision, however, has been criticized in a law review note, which observes that the plaintiff was seeking not only rescission, but also damages suffered from the denial of his right to receive full value for his shares. This right is particularly in need of protection when the majority stockholder authorizing the sale is also the buyer. Delaware law, which was relevant in that case, provides that directors and majority stockholders have a fiduciary obligation to stockholders so that the defendant, as a majority stockholder would have...