Mills v. Electric Autolite Company

• Decision Date: 25 November 1968
• Docket Number: 16614.,No. 16613,16613
• Citation: 403 F.2d 429
• Parties: Elmer E. MILLS and Louis Susman, Plaintiffs-Appellees and Appellants, v. The ELECTRIC AUTOLITE COMPANY; Mergenthaler Linotype Company; American Mfg. Co., Inc., Defendants-Appellants and Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

403 F.2d 429 (1968)

Elmer E. MILLS and Louis Susman, Plaintiffs-Appellees and Appellants, v. The ELECTRIC AUTOLITE COMPANY; Mergenthaler Linotype Company; American Mfg. Co., Inc., Defendants-Appellants and Appellees.

Nos. 16613, 16614.

United States Court of Appeals Seventh Circuit.

November 25, 1968.

COPYRIGHT MATERIAL OMITTED

Arnold I. Shure, Robert A. Sprecher, Harry B. Reese, Frank J. McGarr, Chicago, Ill., for Mills-Susman.

Albert E. Jenner, Jr., Samuel W. Block, Jerold S. Solovy, Howard R. Barron, John G. Stifler, Ronald J. Clark, Chicago, Ill., Raymond, Mayer, Jenner & Block, Chicago, Ill., of counsel, for Electric Autolite Co.

Before SWYGERT, FAIRCHILD and KERNER, Circuit Judges.

FAIRCHILD, Circuit Judge.

This is an appeal from an interlocutory summary judgment, determining liability alone, under one of three counts of a complaint. The question of appropriate relief was reserved. The judgment was entered September 26, 1967, an opinion, 281 F.Supp. 826, and findings of fact and conclusions of law, having been filed the same day. Defendants obtained leave to appeal under 28 U.S.C. sec. 1292(b). Plaintiffs, with similar leave, cross appealed from an order entered September 28, 1967 deleting one of the conclusions of law.

The posture of the action.

Plaintiffs attacked a corporate merger whereby The Electric Autolite Company (an Ohio corporation) was to be merged with and into Mergenthaler Linotype Company. The name of the surviving corporation was changed to Eltra Corporation. The merger was approved at a stockholders' meeting of Autolite on June 27, 1963 and has been treated as effective.

Plaintiffs held stock in Autolite. They assert that this is a derivative action on behalf of Autolite, and also that it is a class action on behalf of themselves and all other minority stockholders.

Plaintiffs filed their original complaint June 26, 1963, the day before the meeting. Their amended complaint, filed February 4, 1964, set out three counts. In each they sought a declaration that the proxies solicited by management were void, orders setting aside the merger and causing the return of assets to Autolite, and an accounting to Autolite for damages. No application was made for a restraining order or temporary injunction to prevent use of the proxies or to delay consummation of the merger.

Count II predicated jurisdiction on sec. 27 of the securities exchange act of 1934.¹ It alleged that the proxy statement sent out by management violated sec. 14(a) of the 1934 act² and rule 14a-9, issued under the act,³ by misrepresentation and nondisclosure; that the proxies obtained were void, and that accordingly the merger had failed to receive valid votes representing the required two-thirds of the Autolite shares.

On November 15, 1965, after a motion by plaintiffs for summary judgment as to count II, the district court filed a memorandum concluding as a matter of law the failure to disclose certain facts was a material omission. The court indicated doubt as to the consequences which must flow from that conclusion. On November 29, the court filed a memorandum opinion and order concluding that there should be a reference to a master under Rule 53(b), F.R.Civ.P. On February 14, 1966, the court filed a memorandum concluding that it would be necessary for the court to determine whether there was a causal connection between the violation of the disclosure requirements and the alleged injury to the plaintiffs before a master should look into appropriate remedial action.

At the time of entering the interlocutory summary judgment appealed from, the court found again that the proxy statement was false and misleading as a result of certain statements and omissions, found that the proxy statement was a cause of the merger, and directed that the master, previously designated, should proceed.

Plaintiffs argue that our present review is limited to the finding of causation, suggesting that the district court's 1965 order or ruling finding a violation of the disclosure rule has passed beyond review. We disagree. Just as defendants could have waited until final judgment and then have attacked on appeal all intermediate orders which involve the merits and necessarily affect the final judgment, so now, upon appeal from the interlocutory judgment they may have review of all prior orders which bear the same relationship to the interlocutory judgment.

Plaintiffs also contend we can not at this time review the order of reference with respect to the determination of relief. They apparently consider that the reference was made November 29, 1965, though suspended thereafter. Although it is true that the judgment entered September 26, 1967 does not expressly direct a reference, the accompanying memorandum makes it plain that the directions given November 29, 1965 were then revived. We consider that the appropriateness of a reference is also before us.

The deficiency in the proxy statement.

Before the merger, Mergenthaler owned 54% of the shares of Autolite outstanding. 46% of the shares were held by 8,987 other shareholders. Under the terms of the merger, the shares owned by Mergenthaler would be canceled. The shares held by others would become preferred stock of Eltra (Mergenthaler), at the ratio of 1.88 shares of preferred stock for each share of Autolite stock. The preferred stock had a par value of $34.50 per share, and would be convertible into common stock of Eltra, at the shareholder's option, share for share for two years, and at less favorable rates thereafter until the end of five years.

Thus in substance, Mergenthaler was offering that if a sufficient number of the minority shareholders of Autolite would vote to approve the merger, all minority common stock interests in Autolite would be transformed into preferred stock interests in the merged companies, with the right of each shareholder, for a time, to transform his preferred stock into Eltra common.

Because Mergenthaler owned 54% of the Autolite shares, it needed the votes of an additional 13% of the shares in order to have the merger approved by a two-thirds vote. The Autolite management solicited proxies, using the proxy statement which is under attack. The merger was approved by votes representing 82% of all the shares, 28% being owned by shareholders other than Mergenthaler.

Although the proxy statement was, in form, addressed to all shareholders, it was, in realistic terms, intended for the minority shareholders. The board of directors recommended a favorable vote, giving emphasis to the recommendation by setting it in larger and bolder type. The question considered by the district court, and decided adversely to defendants as a matter of law, was whether the relationship of the members of the Autolite board to Mergenthaler (and to a third corporation, defendant American Manufacturing Company, Inc.), was sufficiently disclosed.

The key finding was as follows:

"8. The proxy statement was false and misleading, at the time and in the light of the circumstances under which it was made, in its statement of material facts and in its omission to state material facts necessary to make the statements therein not false or misleading, in its misrepresentation of the supposed independence of the Auto-Lite board and in its failure to inform the shareholders of the interrelationships between the Auto-Lite board and the defendants Mergenthaler and American. These misleading statements and omissions were material in the sense that an average prudent investor ought to be informed of those relationships, in order to bring his own informed and independent judgment to the question of how much weight to give to the Auto-Lite board\'s endorsement of the merger proposal."

The proxy statement, including financial statements and appendices, was a pamphlet of 108 pages. Statements on pages 2 and 3 indicated that the Autolite board endorsed the merger.

One of these stands out in type which is blacker and larger than the surrounding text. It says: "The Board of Directors has carefully considered and approved the terms of the merger and recommends that the shareholders vote to approve the plan of merger." Elsewhere on page 2 it is said in body type, under "Reasons for Merger": "After a thorough review of all factors involved, both Boards of Directors are of the opinion that the merger would be mutually beneficial to the Constituent Corporations and their respective shareholders." On page 3, under "Basis of Merger", there appears in body type: "The Board of Directors of Electric Autolite believes the plan of merger to be fair and equitable to the shareholders of Electric Autolite; the Board of Directors of Mergenthaler believes the plan of merger to be fair and equitable to the stockholders of Mergenthaler."

Several facts pertinent to the relationship between the eleven members of the Autolite board and Mergenthaler do appear in portions of the proxy statement.

On page 23, it is said that Mergenthaler owns 54% of the outstanding shares, and reference is also made to this fact on page 2, in a statement disclosing Mergenthaler's intention to vote its shares in favor of the merger. On page 23 it appears that four of the eleven Autolite directors are directors of Mergenthaler. One of the four, Mr. Wattles, is chairman of the board of Mergenthaler and chairman of the executive committee of Autolite. Another of the four is an officer of Mergenthaler, receiving substantial remuneration, and will continue to be an officer. Two other Autolite directors are officers of Autolite, receiving substantial remuneration, and will be officers of Eltra. On page 21, it appears that the Eltra board will be expanded to include the seven Autolite directors not on the Mergenthaler board before the merger.

Page 23 also discloses that Mr. Wattles is president and a director of American and owns about one-third of American's stock. American and Wattles together own about one-third of the pre-merger...