Northway, Inc. v. TSC Industries, Inc.

• Decision Date: 21 May 1973
• Docket Number: No. 69 C 2513.,69 C 2513.
• Citation: 361 F. Supp. 108
• Parties: NORTHWAY, INC., a Delaware corporation, Plaintiff, et al., Intervening Plaintiffs, v. TSC INDUSTRIES, INC., a Delaware corporation, et al., Defendants.
• Court: U.S. District Court — Northern District of Illinois

361 F. Supp. 108

NORTHWAY, INC., a Delaware corporation, Plaintiff, et al., Intervening Plaintiffs, v. TSC INDUSTRIES, INC., a Delaware corporation, et al., Defendants.

No. 69 C 2513.

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

May 21, 1973.

COPYRIGHT MATERIAL OMITTED

Arnold I. Shure, Stanley B. Block, Vedder, Price, Kaufman & Kammholz, Alex Elson, Elson, Lassers & Wolff, Professor Harry B. Reese, Northwestern Law School, Chicago, for Northway.

Edwin Rothschild, Rothschild, Barry & Myers, Joseph N. Morency, Jr., Price, Cushman, Keck, Mahin & Cate, Chicago, Ill., for National Industries and TSC.

Robert B. Fiske, Jr., Davis, Polk & Wardwell, New York City, Max E. Wildman, Wildman, Harrold, Allen & Dixon, Chicago, Ill., for Charles Schmidt, and others.

Barry B. Nekritz, Chicago, Ill., for Burton Abrams, and others.

MEMORANDUM OPINION AND ORDER

McLAREN, District Judge.

This matter arises upon plaintiff's motion for partial summary judgment of liability against the corporate defendants¹ (referred to as "defendants" in Part I below) and the Schmidt defendants' motion for certification pursuant to Fed.R.Civ.P. 54(b) of the order of September 28, 1972,² granting summary judgment on Count III of the amended, restated and supplemented complaint.

I.

There is no substantial factual dispute as to the following background. In early 1969, defendant National purchased the Schmidt defendants' interest in TSC, comprising approximately 34% of its outstanding equity securities. After consideration by the TSC board, a proxy statement dated November 12, 1969, (hereinafter referred to as "the joint proxy statement") was sent to the TSC shareholders proposing that TSC sell its assets to National, and be liquidated (referred to below as "the transaction"). Sufficient proxies were received for the approval of the proposal.

Plaintiff's instant motion is confined, without waiver of the other charges of the complaint, to alleged violations of § 14(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78n(a), and the rules promulgated thereunder, in the joint proxy statement. The alleged violations for which plaintiff seeks partial summary judgment as to liability fall into three categories:

A. The inadequacy of disclosure of National's relationship to TSC's management and directors.

B. The misrepresentation of the TSC directors' approval of the transaction.

C. The non-disclosure of facts which would have made the emphasis on market quotations not misleading.

A.

1. Plaintiff first contends that the failure to disclose the change in control of TSC, which had previously been reported to the Securities & Exchange Commission ("SEC"), "constituted a per se violation of Rule 14a-3," 17 C.F.R. § 240.14a-3.

Rule 14a-3(a) provides that:

"No solicitation subject to this regulation shall be made unless each person solicited is concurrently furnished or has previously been furnished with a written proxy statement containing the information specified in Schedule 14A."

Schedule 14A, Item 5, requires:

"(e). If to the knowledge of the persons on whose behalf the solicitation is made a change in control of the issuer has occurred since the beginning of the last fiscal year, state the name of the person or persons who acquired such control, the basis of such control, the date and a description of the transaction or transactions in which control was acquired and the percentage of voting securities of the issuer now owned by such person or persons."

Plaintiff contends that the joint proxy statement should have stated the conclusion of change of control. As evidence that National was in control of TSC, plaintiff points to one document sent by National and two sent by TSC to the SEC stating that National could be "deemed to be a `parent' of TSC as that term is defined in the Rules and Regulations under the Securities Act of 1933." Rule 405(n), 17 C.F.R. § 230.405(n), under the 1933 Act, defines a parent as an affiliate "controlling" a person.

Defendants assert that National was not, in fact, in control of TSC within the meaning of Item 5(e), notwithstanding the statements to the contrary in the SEC filings. Rule 12b-2(F), 17 C.F.R. § 240.12b-2(F), under the 1934 Act, and therefore relating to Item 5(e), defines control as "the possession . . . of the power to direct or cause the direction of the management of a person. . . ." Defendants point to the affidavit of Richard Shaefer, the president of TSC, and certain deposition testimony by him and by Stanley Yarmuth, who was chairman of the board of TSC and president of National at the time of merger, as evidence that National lacked the power to direct or cause the direction of TSC's management. The affidavit and deposition testimony show that Shaefer managed TSC without consulting with or answering to National. This creates an inference, to which defendants are entitled in opposing a motion for summary judgment, that National was not in control of TSC.

Plaintiff cites Mills v. Electric Auto-Lite Co., 403 F.2d 429, 434 (7th Cir. 1968), rev'd on other grounds, 396 U.S. 375, 90 S.Ct. 616, 24 L.Ed.2d 593 (1970), for the proposition that evidence such as that presented by defendants does not preclude summary judgment. The Seventh Circuit held that evidence of the independence of management did not "meet the point presented." The point there was whether the proxy statement was otherwise materially misleading in violation of Rule 14a-9, 17 C.F.R. § 240.14a-9. The situation here is different; such evidence does meet the issue of control presented here by plaintiff's 14a-3 theory.

Thus, viewing the evidence and the inferences therefrom in the light most favorable to defendants, the Court holds that plaintiff has failed to establish the absence of a genuine question of fact as to the material issue of whether National was in control of TSC. Plaintiff's motion for partial summary judgment of liability is accordingly denied as to the Rule 14a-3 ground.³

2. Plaintiff also seeks summary judgment of liability on the ground that the joint proxy statement failed, in violation of Rule 14a-9, to adequately disclose the relationship between National and TSC. To establish a violation, plaintiff must prove (a) that the joint proxy statement falsely or misleadingly described the relationship or omitted facts necessary to make the description not false or misleading and (b) that the misstatement or omissions were material in the sense that they "might have been considered important by a reasonable shareholder who was in the process of deciding how to vote." Mills, 396 U.S. at 374, 90 S.Ct. at 621. To establish liability plaintiff must show the additional element of causation. Causation is not disputed here because defendants have admitted in their answer and in response to a request to admit that proxies necessary to the approval of the transaction were obtained from TSC shareholders by the joint proxy statement. Id. at 384, 90 S.Ct. 616, 621.

The pivotal question as to plaintiff's motion for summary judgment on this ground is thus whether certain facts relating to the relationship between TSC and National which were omitted from the joint proxy statement were, as a matter of law, material. To meet its burden, plaintiff must show that the facts withheld were so obviously important to TSC shareholders that reasonable minds could not differ on the question of whether the shareholders might have considered them important. Gould v. American Hawaiian S. S. Co., 331 F.Supp. 981, 986 (D.Del.1971); Beatty v. Bright, 318 F.Supp. 169, 173 (S.D.Iowa 1970); Berman v. Thompson, 312 F.Supp. 1031, 1034 (N.D.Ill.1970).

Of course, insofar as plaintiff seeks to impose liability for the joint proxy statement's failure to specify that National was in control of TSC, its motion must be denied because of its failure to show the absence of a question of fact as to control.

3. Plaintiff also seeks partial summary judgment on the grounds that the previous claims of control made to the SEC should have been disclosed to make the recommendations of the transaction by the TSC management and board of directors not misleading.

Pages six and seven of the joint proxy statement set forth under separate headings the approval and recommendations of the National and TSC boards of directors, National's equity interest in TSC and how it was acquired, and National's nominees on TSC's board.

Plaintiff argues that, despite the disclosure of National's equity interest and nominees, the previous claims of control made to the SEC might have been considered important by TSC shareholders faced with the TSC board's recommendation because all except one of the directors who were stated not to be affiliated with National were employees of TSC and thus subject to National's claimed power to direct or cause the direction of TSC's management.

Plaintiff also attacks on the same theory the statement in the covering letter to the shareholders that "management urges you to mark your proxy FOR this purchase of TSC assets. . . ." The allegedly misleading effect of the failure to disclose the prior claims of National's power to direct TSC's management is claimed to have been aggravated by the failure to state that Stanley Yarmuth, the chief executive officer of National, was TSC's chief executive officer as chairman of its board and that Charles Simonelli, executive vice-president of National, was chairman of TSC's executive committee.

Plaintiff relies principally upon the Seventh Circuit's Mills decision, supra; Swanson v. American Consumer Industries, Inc., 415 F.2d 1326 (7th Cir. 1969); and Colonial Realty Corp. v. Baldwin-Montrose Chem. Co., 312 F. Supp. 1296 (E.D.Pa.1970), in support of its claim that the disclosure of National's relationship to TSC was inadequate under Rule 14a-9.

The Mills opinion (403 F.2d at 434) and Swanson (415 F.2d at 1330) which relied upon it, establish that the TSC board and management were not free to state their...