Schiller v. Tower Semiconductor Ltd.

• Decision Date: 01 June 2006
• Docket Number: Docket No. 04-5295-cv.
• Citation: 449 F.3d 286
• Parties: Gregory Schiller, Plaintiff-Appellant, Philippe DE VRIES, Julia Francis De Vries, Trust, Heather Faye Dunbar De Vries, Trust, on behalf of themselves and all others similarly situated, De Vries Family Trust, Trust, on behalf of themselves and all others similarly situated, Plaintiffs, v. TOWER SEMICONDUCTOR LTD., Idan Ofer, Ehud Hillman, Eli Harari, N.D. Reddy, Miin Wu, Israel Corp., Israel Corporation Technologies Ltd., Sandisk Corporation, Macronix International, Alliance Semiconductor Corporation, Quicklogic Corporation, Challenge Fund-Etgar II, Defendants-Appellees.
• Court: U.S. Court of Appeals — Second Circuit

Page 286

449 F.3d 286

Gregory Schiller, Plaintiff-Appellant, Philippe DE VRIES, Julia Francis De Vries, Trust, Heather Faye Dunbar De Vries, Trust, on behalf of themselves and all others similarly situated, De Vries Family Trust, Trust, on behalf of themselves and all others similarly situated, Plaintiffs, v. TOWER SEMICONDUCTOR LTD., Idan Ofer, Ehud Hillman, Eli Harari, N.D. Reddy, Miin Wu, Israel Corp., Israel Corporation Technologies Ltd., Sandisk Corporation, Macronix International, Alliance Semiconductor Corporation, Quicklogic Corporation, Challenge Fund-Etgar II, Defendants-Appellees.

Docket No. 04-5295-cv.

United States Court of Appeals, Second Circuit.

Argued: September 15, 2005.

Last Papers Submitted: February 3, 2006.

Decided: June 1, 2006.

COPYRIGHT MATERIAL OMITTED

Lawrence D. Levit (Jeffrey S. Abraham, on the brief), Abraham, Fruchter & Twersky, LLP, New York, NY; Mark D. Stern, P.C. Somerville, MA, for Plaintiff-Appellant.

Scott Musoff (Jay B. Kasner, Scott D. Musoff, on the brief), Skadden, Arps, Slate, Meagher & Flom LLP, New York, NY, for Defendants-Appellees Tower Semiconductor Ltd., Idan Ofer, Ehud Hillman, Eli Harari, N.D. Reddy, and Miin Wu.

Daniel L. Cantor (Michael R. Patrick, on the brief), O'Melveny & Myers LLP, New York, NY, for Defendants-Appellees Israel Corporation, Israel Corporation, Technologies Ltd., SanDisk Corporation and Alliance Semiconductor Corporation.

Douglas Clark, Wilson, Sonsini Goodrich & Rosati, P.C., Palo Alto, CA, for Defendant-Appellee QuickLogic Corporation.

Before: MINER, WESLEY, Circuit Judges, and RAKOFF, District Judge.¹

WESLEY, Circuit Judge.

This case pits an old law against a "novel" argument.² Gregory Schiller ("Schiller") individually appeals the dismissal of a shareholder class action complaint filed against Tower Semiconductor Ltd. ("Tower"), its directors, and certain Tower investors. The complaint alleges that a Tower proxy statement issued by defendants was materially misleading and therefore violated §§ 14(a) and 20(a) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. §§ 78n(a), 78t, and certain regulations, including Rule 14a-9, 17 C.F.R. § 240.14a-9 (2004) ("Rule 14a-9"). The United States District Court for the Southern District of New York (Wood, J.) dismissed the complaint on the ground that Tower, an Israeli corporation, was a foreign private issuer and therefore exempt from the strictures of § 14(a) by virtue of Exchange Act Rule 3a12-3, 17 C.F.R. § 240.3a12-3 (2004) ("Rule 3a12-3"). In so doing, the district court rejected the plaintiffs' claim that the Securities Exchange Commission ("SEC" or "the Commission") exceeded its authority in promulgating Rule 3a12-3. We affirm.

Background

As the facts of this case are not particularly relevant to the disposition of this appeal, we offer only those necessary to provide context to Schiller's claims. In the year 2000, Tower began to secure financing for the construction of a semiconductor fabrication facility ("Fab 2") in Israel. To this end, Tower entered into agreements with two sets of companies (collectively "Fab 2 Investors"), which agreed to provide Tower with approximately $305 million in financing in exchange for stock and credits toward the purchase of semiconductors. The agreements divided the total promised financing into installments and conditioned the payment of each installment upon the attainment of a different construction milestone. At the beginning of 2001, Tower further contracted with two Israeli banks to borrow $550 million for the construction project. This loan was conditioned on Tower's ability to comply with a timeline for raising $103 million in additional financing.

On March 31, 2002, Tower distributed a proxy statement disclosing that it was currently negotiating with the Israeli banks to reschedule the date by which it had to meet its next financing obligation. The proxy statement sought shareholder approval of a plan under which the Fab 2 Investors would accelerate certain installments of their $305 million commitment without regard to the attainment of the corresponding construction milestones in return for seven million shares of Tower stock. The proxy statement explained that once the installments were accelerated, the banks would postpone the date by which Tower had to meet its next financing obligation until the end of July 2002. Tower believed that the plan would "permit us to better pursue our efforts to bring strategic investors and to raise other funding."

While the plan received the necessary votes for approval, not all Tower shareholders were content with the arrangement. Schiller and others voiced their objection by filing a class action in the district court. The complaint alleged that Tower's proxy statement was false and misleading in violation of § 14(a) and Rule 14a-9 and that the Fab 2 Investors and certain members of Tower's board of directors, as control persons, were liable under § 20(a) of the Exchange Act, 15 U.S.C. § 78t. In particular, the complaint alleged that there was no need for the Fab 2 Investors to accelerate the installments of its $305 million commitment because the construction of Fab 2 was on schedule, and therefore it was expected that the construction milestones, upon which the installment payments were conditioned, would be attained. Further, Schiller and his fellow plaintiffs contended that "because the Fab 2 project was proceeding on schedule, and because the [construction milestones] were going to be met in a timely manner, the advancement of the payment date had no value and was not a reason for the [b]anks to defer the dates by which additional financing needed to be obtained."

Defendants mounted a straightforward defense. They argued that Tower is a foreign private issuer and therefore that Rule 3a12-3 removes them from the reach of § 14(a). While plaintiffs contested defendants' characterization of Tower as a foreign private issuer, the district court easily dismissed this argument by pointing out that Tower's capital is located in Israel and that Tower's principal lenders are Israeli banks; the district court also relied on the fact that Tower had filed with the Commission annual reports reserved solely for foreign private issuers. As an alternative argument, plaintiffs challenged the validity of Rule 3a12-3, contending, as Schiller does on appeal, that Rule 3a12-3 exceeds the Commission's exemptive authority under the Exchange Act. The district court explained that "Congress has authorized the SEC to create certain exemptions through rules and regulations, so long as those exemptions are in the public interest and protect investors," and that it could not say that Rule 3a12-3 is "arbitrary, capricious, or manifestly contrary to the statute." We agree.

Discussion

Section 14(a) of the Exchange Act bars the dissemination of proxy statements "in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors." 15 U.S.C. § 78n(a). Rule 14a-9 provides that proxy statements are not to be "false or misleading with respect to any material fact." 17 C.F.R. § 240.14a-9(a). By its own terms, however, § 14(a) does not apply to "exempted securit[ies]." Section 3(a)(12)(A)(vii) of the Exchange Act defines "exempted securit[ies]" as including

such other securities . . . as the Commission may, by such rules and regulations as it deems consistent with the public interest and the protection of investors, either unconditionally or upon specified terms and conditions or for stated periods, exempt from the operation of any one or more provisions of this chapter which by their terms do not apply to an "exempted security" or to "exempted securities."

The rule exempting foreign private issuers from § 14(a) is nearly as old as § 14(a) itself. The Commission originally promulgated Rule 3a12-3 in 1935, one year after Congress enacted the Exchange Act.³ At that time, the only source for the SEC's authority to promulgate such a rule was the combined force of § 14(a) and § 3(a)(12)(A)(vii). Thus, when the Commission originally adopted Rule 3a12-3 in 1935, pursuant to its statutory mandate, it explicitly stated that it "deem[ed] it necessary and appropriate in the public interest and for the protection of investors" to adopt the exemption for foreign private issuers. SEC Rule AN 18, Exchange Act Release No. 412 (Nov. 6, 1935), 1935 WL 29303, at *1. It explained that at that time "there [were] relatively few stock issues of foreign issuers listed on American exchanges" and that "a realistic approach ha[d] led to the conclusion that the interests of American investors will be best served by the continuance of these exemptions." SEC Rule AN 18, Exchange Act Release No. 412 (Nov. 6, 1935), 1935 WL 29303, at *1.

In 1964, Congress amended the Exchange Act by adding § 12(g), which extended registration requirements to companies not listed on any exchange but whose assets and shareholders exceed in number certain statutory limitations. See Securities Acts Amendments of 1964, Pub.L. No. 88-467, § 2, 78 Stat. 565, 566-68 (1964) (codified at 15 U.S.C. § 78l(g)) ("1964 Amendments"). At the same time, Congress enacted § 12(h), which authorizes the SEC to create exemptions from a number of provisions of the Exchange Act, including § 14, "if the Commission finds, by reason of the number of public investors, amount of trading interest in the securities, the nature and extent of the activities of the issuer, income or assets of the issuer, or otherwise, that such action is not inconsistent with the public interest or the protection of investors." Id. at 568 (codified at 15 U.S.C. § 78l(h)).

In 1966, the SEC amended Rule 3a12-3. Although preserving much of the 1935 version of the rule, the SEC withdrew the exemption from § 14 and § 16 for securities of foreign private issuers with significant ties to the United States.⁴...