Royal Business Group, Inc. v. Realist, Inc.

• Decision Date: 03 April 1991
• Docket Number: No. 90-2228,90-2228
• Citation: 933 F.2d 1056
• Parties: , Fed. Sec. L. Rep. P 96,022 ROYAL BUSINESS GROUP, INC., et al., Plaintiffs, Appellants, v. REALIST, INC., et al., Defendants, Appellees. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 1056

933 F.2d 1056

59 USLW 2739, Fed. Sec. L. Rep. P 96,022

ROYAL BUSINESS GROUP, INC., et al., Plaintiffs, Appellants, v. REALIST, INC., et al., Defendants, Appellees.

No. 90-2228.

United States Court of Appeals, First Circuit.

Heard April 3, 1991.

Decided May 22, 1991.

Edward P. Leibensperger, with whom Virginia A. Bonesteel, Julie A. Trachten, and Nutter, McClennen & Fish, Boston, Mass., were on brief, for plaintiffs, appellants.

Maureen A. McGinnity, with whom Michael Fischer, Foley & Lardner, Milwaukee, Wis., David L. Kelston, and Friedman & Atherton, Boston, Mass., were on brief, for defendants, appellees.

Before CAMPBELL and SELYA, Circuit Judges, and BOWNES, Senior Circuit Judge.

SELYA, Circuit Judge.

This case requires us to consider whether a proxy contestant has standing to sue under Section 14(a) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78n(a), for allegedly false and misleading statements contained in management's proxy materials. Because we are convinced that Congress did not intend proxy contestants to have a private right of action as such under Section 14(a), and because the complaint before us does not state a cognizable claim for common law fraud, we affirm the district court's dismissal of plaintiffs' suit.

I. BACKGROUND

The proxy contest at issue involved Realist, Inc., a Delaware corporation having its principal place of business in Wisconsin. ¹ The plaintiffs, Royal Business Group, Inc. (Royal) and its wholly owned subsidiary, American Business Group, Inc. (ABG), New Hampshire corporations headquartered in Massachusetts, contend that, but for Realist's failure to disclose certain material information in the course of soliciting proxies, they would never have waged the proxy war, thus saving hundreds of thousands of dollars. We limn the relevant circumstances in accordance with the protocol which Fed.R.Civ.P. 12(b)(6) demands. See, e.g., Correa-Martinez v. Arrillaga-Belendez, 903 F.2d 49, 51 (1st Cir.1990) (on motion to dismiss, reviewing court must accept all well-pleaded facts as they appear in the complaint and indulge all reasonable inferences in the plaintiffs' favor); Dartmouth Review v. Dartmouth College, 889 F.2d 13, 16 (1st Cir.1989) (same).

In March 1988, ABG began to acquire Realist stock, ultimately buying 55,010 shares (8% of the issued and outstanding voting stock). In May of that year, Royal sent Realist the first of a series of letters declaring its intention to acquire all Realist's outstanding shares at an above-market premium. Realist repulsed the plaintiffs' serial overtures, reaffirming its intention to remain independent and essaying a variety of defensive actions to thwart a hostile takeover. The directors reduced the size of the board. ² They also began wooing a Swiss-based company, Ammann Laser Technik AG (Ammann). Although negotiations with Ammann were already well underway by the spring of 1989, Realist's proxy solicitation materials for the annual meeting, mailed on April 27, 1989, made no mention of them. ³

Meanwhile, rebuffed by management and unaware of Realist's negotiations with Ammann, Royal instituted a proxy contest seeking, indirectly, a shareholder referendum on its offer to acquire Realist. As part of the battle plan, ABG notified the defendant of the plaintiffs' intention to nominate candidates for the two directorships to be filled at the June 6, 1989 annual meeting. The plaintiffs' proxy materials emphasized that their nominees, if elected, would actively pursue the sale of Realist to Royal. Five days before the annual meeting, two Realist directors purchased 26,000 shares of Realist stock. Although the seller had theretofore signed a proxy in favor of the plaintiffs' nominees, that proxy was revoked at the time of the sale and replaced by a proxy favoring the incumbent slate.

To make a tedious tale tolerably terse, the annual meeting took place as scheduled. The insurgents prevailed. The defeated incumbents challenged the election results in the Delaware Chancery Court. On June 30, 1989, Realist announced its acquisition of Ammann. In response to the announcement, Royal immediately withdrew its offer to acquire Realist. ⁴

Invoking both federal question and diversity jurisdiction, 28 U.S.C. Secs. 1331, 1332, the plaintiffs filed this civil action in the United States District Court for the District of Massachusetts. In their complaint, they alleged that Realist, in the proxy materials sent to shareholders prior to the annual meeting, had failed to disclose important matters (e.g., the negotiations to acquire Ammann; the planned acquisition of the 26,000-share block of stock) and that this failure constituted both a violation of Section 14(a) (count 1) and common law fraud (count 2). The complaint sought money damages of $350,000, more or less, representing the expenses incurred in connection with the proxy contest, election, and ensuing Delaware litigation. The gravamen of the suit lay in the idea that, had Realist complied with its disclosure obligations, the plaintiffs would have withdrawn their acquisition offer and eschewed the costly proxy contest.

The defendants moved to dismiss the complaint for failure to state a claim upon which relief could be granted. Fed.R.Civ.P. 12(b)(6). The district court obliged. Royal Business Group, Inc. v. Realist, Inc., 751 F.Supp. 311 (D.Mass.1990) (RBG I ). This appeal followed. ⁵

II. THE SECURITIES CLAIM

Section 14(a) of the Securities Exchange Act prohibits any person from soliciting proxies "in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for protection of investors." 15 U.S.C. Sec. 78n(a). The SEC promulgated Rule 14a-9 thereunder, which provides:

No solicitation subject to this regulation shall be made by means of any proxy statement, form of proxy, notice of meeting or other communication, written or oral, 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 correct any statement therein not false or misleading or necessary to correct any statement in any earlier communication with respect to the solicitation of a proxy for the same meeting or subject matter which has become false or misleading.

17 C.F.R. Sec. 240.14a-9 (1990).

It is well established that shareholders have a private right of action under Section 14(a) and Rule 14a-9 against issuers of allegedly false or misleading proxy materials. See J.I. Case Co. v. Borak, 377 U.S. 426, 84 S.Ct. 1555, 12 L.Ed.2d 423 (1964). As the Borak Court reasoned: "While [Section 14(a)'s] language makes no specific reference to a private right of action, among its chief purposes is the 'protection of investors,' which certainly implies the availability of judicial relief to achieve that result." Id. at 432, 84 S.Ct. at 1559-60.

To say that shareholders have a private right of action under Section 14(a) is not necessarily to say that shareholders may unleash Section 14(a) even without a meaningful link between the claimed proxy violation and the shareholder's role qua shareholder. This case, then, tests the margins of the Borak doctrine. Plaintiffs claim that their status as shareholders of Realist gives them carte blanche under Section 14(a) to seek damages for the expenses they incurred in a materially different capacity: as proxy contestants. ⁶ Thus, the issue before us is not whether there is a private remedy, or even who may invoke that remedy, cf. Piper v. Chris-Craft Industries, Inc., 430 U.S. 1, 55 n. 4, 97 S.Ct. 926, 956 n. 4, 51 L.Ed.2d 124 (1977) (Stevens, J. dissenting), but when or, put another way, under what circumstances, that remedy may be invoked.

A. Standing

A formidable obstacle confronts litigants who attempt to assert implied rights of action. See Arroyo-Torres v. Ponce Federal Bank, 918 F.2d 276, 278 (1st Cir.1990). That obstacle does not loom only where the issue is whether a private right of action exists at all; it is equally forbidding in cases where an implied right of action exists but its scope is uncertain. In either event, unless congressional intent to allow the private right of action "can be inferred from the language of the statute, the statutory structure, or some other source, the essential predicate for implication of a private remedy simply does not exist." Thompson v. Thompson, 484 U.S. 174, 179, 108 S.Ct. 513, 516, 98 L.Ed.2d 512 (1988) (quoting Northwest Airlines, Inc. v. Transport Workers Union, 451 U.S. 77, 94, 101 S.Ct. 1571, 67 L.Ed.2d 750 (1981)). Hence, our determination of the remedial reach must focus on Congress' intent in enacting the statute. See id.; see also Arroyo-Torres, 918 F.2d at 278; Kwatcher v. Massachusetts Service Employees Pension Fund, 879 F.2d 957, 965 (1st Cir.1989).

This said, we turn to Borak. There, the Court, having examined the legislative history of Section 14(a), concluded that Congress' primary purpose in enacting the statute was to promote and protect shareholder democracy. See, e.g., Borak, 377 U.S. at 431, 84 S.Ct. at 1559 ("The section stemmed from the congressional belief that '[f]air corporate suffrage is an important right that should attach to every equity security bought on a public exchange.' ") (quoting H.R.Rep. No. 1383, 73d Cong., 2d Sess. 13 (1934)). As the Court later explained, Section 14(a) "was intended to promote 'the free exercise of the voting rights of stockholders' by ensuring that proxies would be solicited with an 'explanation to the stockholder of the real nature of the questions for which authority to cast his vote is sought.' " Mills v. Electric Auto-Lite Co., 396 U.S. 375, 381, 90 S.Ct. 616, 620, 24 L.Ed.2d 593 (1970) (quoting H.R.Rep. No. 1383, supra, and S.Rep. No. 792, 73d Cong., 2d Sess. 12 (1934)). Thus, the existence of a private right of action under ...