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Gould v. American-Hawaiian S. S. Co, 535 F.2d 761 | Casetext
535 F.2d 761 (3d Cir. 1976)
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Gouldv.American-Hawaiian S. S. Co.
United States Court of Appeals, Third CircuitApr 8, 1976
Felice R. Cutler, Cutler Cutler, Los Angeles, Cal., for Joseph T. Casey.
This is a consolidated class action for damages brought in the United States District Court for the District of Delaware. Originally, two actions were instituted, one by J. Donald Rogasner (Civil Action No. 3707) and the other by I. David Pincus (Civil Action No. 3722), both of them on behalf of the plaintiffs and all others similarly situated. In the Rogasner action, Mary S. McCord and Charles T. McCord, Jr. subsequently intervened as plaintiffs. On February 27, 1970, the district court ordered that the Rogasner case be maintained as a class action. On July 20, 1970, the two actions were consolidated by the district court for all purposes. The actions were brought, and the consolidated action proceeded, against American-Hawaiian Steamship Company (herein American-Hawaiian), National Bulk Carriers, Inc. (herein National Bulk), Litton Industries, Inc. (herein Litton) and Monroe International Corporation Retirement Plan Trust (herein Monroe), McLean Industries, Inc. (herein McLean Industries) and R. J. Reynolds Tobacco Company (herein Reynolds), and Malcolm P. McLean, Clara L. McLean, Joseph T. Casey, Disque D. Deane, Edward A. Hirs, Hal A. Kroeger, Daniel K. Ludwig, James K. McLean, James T. Murff and Beverly R. Wilson, Jr., all of the individual defendants being directors of McLean Industries. The actions were based upon the alleged violation of sections 10(b) and 14(a) of the Securities Exchange Act of 1934, 15 U.S.C.A. §§ 78j(b) and 78n(a) and Rules 10b-5 and 14a-9 promulgated by the Securities and Exchange Commission thereunder, respectively, 17 C.F.R. §§ 240.10b-5 and 240.14a-9, as well as alleged breaches of fiduciary duties, primarily in connection with the solicitation of proxies by McLean Industries for shareholders' approval of its merger into Reynolds, a merger which was consummated on May 13, 1969 or shortly thereafter. The district court fully discussed the facts of the case and the legal questions involved in a series of opinions filed, respectively, on November 10, 1970, 319 F. Supp. 795; September 17, 1971, 331 F. Supp. 981; June 20, 1972, 55 F.R.D. 475; December 6, 1972, 351 F. Supp. 853; August 17, 1973, 362 F. Supp. 771; June 28, 1974; and December 19, 1974, 387 F. Supp. 163. We need merely to summarize, therefore, in this opinion the facts relevant to the determination of the issues presented on appeal.
Rogasner subsequently died and his executor, Marvyn Gould, was substituted as plaintiff.
American-Hawaiian 1,000,000 9.4% National Bulk 250,000 2.4% Litton 965,000 9.1% Monroe 85,000 0.8% Hal A. Kroeger 4,000 Malcolm P. McLean 3,609,473 33.9% Clara L. McLean 150,000 1.4% Disque D. Deane 500 Edward A. Hirs 113,203 1.1% James K. McLean 539,920 5.0% James T. Murff 40,550 0.4% Beverly R. Wilson, Jr. 6,000 _________ _____ 6,763,646 63.5% [4] Casey and Ludwig, although directors of McLean Industries, held no stock in the corporation. Casey was a senior vice-president of Litton and a member of the Investment Committee of Monroe. Ludwig was the principal owner of National Bulk, which owned Berkshire Industries, Inc., which in turn owned 90% of the stock of American-Hawaiian. Kroeger was chairman of the board of directors of American-Hawaiian. Deane was a partner in Lazard Freres Co. (herein Lazard), McLean Industries' financial advisor. Malcolm McLean was president and chief executive officer of McLean Industries. James McLean and Clara McLean were brother and sister, respectively, of Malcolm McLean.
The proxy statement, 74 pages in length, was issued on April 10, 1969 and mailed to the McLean Industries shareholders on April 15th, accompanied by a two-page covering letter by Malcolm McLean. The statement and letter described the proposal for the merger, stating that the Litton and National Bulk interests were to receive $50 per share in cash and that those interests as well as the McLean family interests — all together representing 64% of the McLean Industries common stock outstanding (slightly less than the necessary two-thirds) — had agreed to vote for the merger. The statement included market prices of Reynolds and McLean Industries stock from 1964 through the first quarter of 1969 and other relevant information. Attached to the statement was the Plan and Agreement of Merger.
The market price of Reynolds common stock had declined to $40.125 by April 8, 1969. On May 12th Lazard issued an updated opinion to McLean Industries valuing, as of that date, the new Reynolds preferred stock at $45 per share, but also stating that Lazard continued to consider the terms of the merger fair. This updated Lazard report was reviewed by the board of directors of McLean Industries at a special meeting, which Ludwig, Kroeger and Casey did not attend, on May 13th immediately prior to the shareholders' meeting. The seven directors present voted to reaffirm their approval of the merger. At the meeting which followed, the merger was approved by the shareholders by the following vote: First Cumulative Common Preferred Preferred
The holders of 223,136 shares of common stock demanded appraisal of their shares.
Voting in favor of merger 8,332,239 90,877 3,130 Voting against merger 185,230 3,712 94 Not voting 2,114,531 52,336 1,341 [11] The stock held by Litton, Monroe, National Bulk, American-Hawaiian and Kroeger was voted in favor of the merger. Thereafter the merger was consummated. The shareholders who demanded appraisal of their shares later accepted $45 per share for their holdings. On May 15, 1969, following commencement of trading on the New York Stock Exchange, the market price of the new Reynolds preferred stock was $41.75 per share.
While, as we have seen, the complaint alleged violations of sections 10(b) and 14(a) of the Securities Exchange Act of 1934, (herein the Act), 15 U.S.C.A. §§ 78j(b) and 78n(a), and Rules 10b-5 and 14a-9 of the Regulations promulgated by the Securities and Exchange Commission under the Act, (herein the Regulations), 17 C.F.R. §§ 240,10b-5 and 240.14a-9, as well as breaches of fiduciary duties, the judgment now before us on appeal involves an adjudication of the plaintiffs' claim for damages under section 14(a) of the Act and Rule 14a-9 of the Regulations only, which the district court regarded as the broadest of the claims. The court held that the plaintiffs had not sufficiently established their claims based on breach of fiduciary duties under federal law. The plaintiffs had claimed that Casey had a federal fiduciary duty to obtain for the plaintiffs the same cash payments in the merger as some of the defendants had received. The court pointed out, however, that while federal fiduciary obligations were created by the Act, these were only in the area regulated by the Act and that the claim to equal treatment was not in that area. 362 F. Supp. at 775. The plaintiffs do not question that ruling here. The court agreed that section 14(a) of the Act imposed on Casey a federal fiduciary duty not to approve a materially false or misleading proxy statement. The court correctly held, however, that since this claim was merely duplicative of the plaintiffs' contention that Casey had directly violated section 14(a) by approving such a defective statement, it need not be separately considered. We accordingly restrict our consideration to the plaintiffs' claim for damages under section 14(a) of the Act and Rule 14a-9(a) of the Regulations based upon the defective proxy materials circulated to them.
(a) It shall be unlawful for any person, by the use of the mails or by any means or instrumentality of interstate commerce or of any facility of a national securities exchange or otherwise, 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, to solicit or to permit the use of his name to solicit any proxy or consent or authorization in respect of any security (other than an exempted security) registered pursuant to section 78 l of this title." 15 U.S.C.A. § 78n(a).
(2) that full and accurate disclosure might have resulted in the plaintiffs sharing in the so-called premium received by the "favored defendants" and
The district court employed this term without derogatory intent, as do we, to refer to the five defendants, Litton, Monroe, National Bulk, American-Hawaiian and Kroeger, who were offered a consideration for their McLean holdings different from that offered the other shareholders. However, these five defendants were undoubtedly favored by having a choice of consideration at least prior to their agreements with Reynolds of March 25, 1969.
The court "under considerations of equity" accordingly held the three defendants liable for damages and assessed the damages at $2,431,083.53. A final judgment was entered for this amount in favor of the plaintiffs' class and against the three defendants Litton, Monroe and Casey. It was from this final judgment that the appeals now before us were taken.
This figure was based on the distribution to the plaintiffs of their proportionate share of the premium of $8.25 per share which the court found defendants Litton and Monroe had received. In computing the amount, the court included the shareholders who had been paid $45 on the appraisal of their shares and gave no credit for the $4,000,000 received by the plaintiffs in settlement from the other defendants.
Basic to the adjudication of the defendants' liability in this case was the determination of the district court that the proxy statement submitted to the McLean Industries shareholders prior to the vote on the merger was materially deficient in violation of section 14(a) of the Act and Rule 14a-9(a) of the Regulations. The court on motion for summary judgment found that the statement falsely stated that Litton, Monroe, National Bulk, American-Hawaiian and Kroeger had agreed to vote for the merger, that the statement failed to disclose that Litton and National Bulk had a veto power over the merger and that the statement inadequately disclosed the conflicting interests of directors Casey, Ludwig and Kroeger and the dual role of Malcolm McLean in negotiating with Reynolds for both the favored shareholders and the other shareholders. The court held that in each instance a full and accurate disclosure to the shareholders was material to their determination as to their votes on the merger. While not, except in one respect, contesting the underlying facts upon which this holding was based, as found by the court, the defendant-appellants strongly urge that the court's determination of materiality was erroneous and that, in any event, it was error to make such a determination by summary judgment before trial.
The defendant-appellants do contest the finding that the five shareholders mentioned had not agreed to vote for the merger. We are satisfied, however, that the documents and testimony in the record compelled the court's finding in this regard and we find no error in it.
"Where the misstatement or omission in a proxy statement has been shown to be `material,' as it was found to be here, that determination itself indubitably embodies a conclusion that the defect was of such a character that it might have been considered important by a reasonable shareholder who was in the process of deciding how to vote. This requirement that the defect have a significant propensity to affect the voting process is found in the express terms of Rule 14a-9, and it adequately serves the purpose of ensuring that a cause of action cannot be established by proof of a defect so trivial, or so unrelated to the transaction for which approval is sought, that correction of the defect or imposition of liability would not further the interests protected by § 14(a)."
On its face the first sentence of this statement would appear to lay down a broad standard for determining materiality, the mere possibility that a false or misleading statement might be considered by a reasonable shareholder as important to his voting decision. It seems clear, however, as Judge Friendly convincingly pointed out in Gerstle v. Gamble-Skogmo, Inc., 478 F.2d 1281, 1301-1302 (2d Cir. 1973), that this statement was not intended to establish a definition of materiality, that not being the issue before the court. Moreover, the court cited with apparent approval two opinions of the Court of Appeals for the Second Circuit, List v. Fashion Park, Inc., 340 F.2d 457, 462, cert. denied, 382 U.S. 811, 86 S.Ct. 23, 15 L.Ed.2d 60 (1965), and General Time Corp. v. Talley Industries, Inc., 403 F.2d 159, 162 (1968), cert. denied, 393 U.S. 1026, 89 S.Ct. 637, 21 L.Ed.2d 570 (1969), which set a somewhat narrower standard for determining materiality. In the Gerstle case, Judge Friendly said (p. 1302):
"We think that, in a context such as this, the `might have been' standard mentioned by Mr. Justice Harlan sets somewhat too low a threshold; the very fact that negligence suffices to invoke liability argues for a realistic standard of materiality. Justice Harlan's next sentence in Mills, that the defect must `have a significant propensity to affect the voting process,' 396 U.S. at 384, 90 S.Ct. at 621, [24 L.Ed.2d at 602] (emphasis in original), comes closer to the right flavor. While the difference between `might' and `would' may seem gossamer, the former is too suggestive of mere possibility, however unlikely. When account is taken of the heavy damages that may be imposed, a standard tending toward probability rather than toward mere possibility is more appropriate."
The view thus taken by the Court of Appeals for the Second Circuit has been approved and followed in the Fifth Circuit, Smallwood v. Pearl Brewing Co., 489 F.2d 579, 603-604, cert. denied, 419 U.S. 873, 95 S.Ct. 134, 42 L.Ed.2d 113 (1974) and we are constrained to follow it in this case. See Rochez Brothers, Inc. v. Rhoades, 491 F.2d 402, 408 (3d Cir. 1974). We, accordingly, hold that the basic test of materiality in a section 14(a) setting is whether it is probable that a reasonable shareholder would attach importance to the fact falsified, misstated or omitted in determining how to cast his vote on the question involved. Or, as Judge Friendly put it in the General Time case, p. 162, whether "taking a properly realistic view, there is a substantial likelihood that the misstatement or omission may have led a stockholder to grant a proxy to the solicitor or to withhold one from the other side, whereas in the absence of this he would have taken a contrary course."
For the contrary view that materiality exists if a reasonable shareholder might consider the misstatement or omission important to his voting decision see Northway Inc. v. TSC Industries, Inc., 512 F.2d 324, 329-332 (7th Cir. 1975), cert. granted, 423 U.S. 820, 96 S.Ct. 33, 46 L.Ed.2d 37 (1975), rev'd, (1976). ___ U.S. ___, 96 S.Ct. 2126, 48 L.Ed.2d 757.
The issue of materiality, resting as it does upon what is believed would be the reaction of a "reasonable shareholder", is a mixed question of law and fact and the subsidiary fact issues cannot ordinarily be decided by summary judgment. But if the facts falsified, misrepresented or withheld are so obviously important to the shareholder's decision that reasonable minds cannot differ on the question of materiality and the underlying facts and the inferences to be drawn from those facts are free from controversy, the question becomes one of law which may appropriately be decided by summary judgment. Johns Hopkins University v. Hutton, 422 F.2d 1124, 1129 (4th Cir. 1970), cert. denied, 416 U.S. 916, 94 S.Ct. 1622, 40 L.Ed.2d 118 (1974). Here the district court decided four of the six issues of materiality by summary judgment upholding materiality in all four instances. One of the remaining issues was decided after trial not to be a material defect and the other appears not to have been pressed at trial and was not decided by the court. We turn then to consider the action of the court on these issues in the light of the applicable rules as we have stated them.
It is suggested that the evidence before the district court indicated that the urgency of the need of McLean Industries for additional capital and borrowing capacity in order to maintain its competitive position in the shipping industry was so great and the need for the merger was accordingly so imperative that no reasonable shareholder could have believed that the favored shareholder would not vote for it even if they were not bound by agreement to do so. Therefore, runs the argument, the court erred in deciding on summary judgment that the false statement in the proxy materials that the favored shareholders had agreed to vote for the merger, was a material misstatement in violation of section 14(a) of the Act and Rule 14a-9(a) of the Regulations.
We turn to the next matter relied on by the plaintiffs, the omission from the proxy materials of any reference to the veto power which was held by Litton and National Bulk over merger plans of McLean Industries. As we have seen, agreements to which McLean Industries had subscribed in 1964 and 1967 provided that McLean Industries could not enter into any merger or consolidation with another corporation without the prior written consent of Litton and National Bulk. On March 25, 1969, prior to the issuance of the proxy statement, such written consents were given, clearing the way for the merger However, the fact that Litton and National Bulk had a veto power over the merger prior to March 25, 1969 was not disclosed in the proxy materials and this, the court found on summary judgment, was a material omission which violated section 14(a) of the Act and Rule 14a-9(a) of the Regulations. In so holding by summary judgment, we think the district court erred. When the proxy material was issued the veto power of Litton and National Bulk over this particular merger no longer existed, having been given up by the consents executed on March 25, 1969. It was, therefore, then of historical interest only. Nonetheless, the fact that it had been given up by these two shareholders might have been considered as an additional reason in support of the fairness of the special treatment accorded them and their affiliates in the merger. It may well be that a reasonable shareholder might have regarded knowledge of it as material to his consideration of the fairness of the merger. But, if anything, it would merely have provided an additional reason to consider the treatment of the favored shareholders fair and as such we cannot say that it was so obviously important that reasonable minds could not differ on the question of its materiality. It was, therefore, not an issue which could be determined by summary judgment.
The plaintiffs assert and the district court found on summary judgment that the proxy statement failed adequately to disclose the conflicting interests of three of the McLean Industries directors, Casey, Ludwig and Kroeger. The facts which were disclosed at various places in the proxy statement and covering letter are that American-Hawaiian, National Bulk, Litton, Monroe and Kroeger were receiving $50 in cash per share for their McLean Industries stock, while the other common shareholders were receiving Reynolds preferred stock, that Kroeger was a director of American-Hawaiian and himself a shareholder who would receive cash rather than stock, that Ludwig was president and principal shareholder of National Bulk, that Casey was a senior vice-president of Litton and all three were directors of McLean Industries, and that the McLean Industries board of directors unanimously approved the merger and recommended that the shareholders also approve it. It is quite clear that if a reasonable shareholder had all these facts in mind he would have had to conclude that Kroeger, Ludwig and Casey had, as directors of McLean Industries, interests which conflicted with those of the shareholders of that corporation other than Litton, Monroe, National Bulk, American-Hawaiian and Kroeger. This fact of conflicting interests on their part was obviously of material interest to the other shareholders in considering their votes on the merger and it was nowhere expressly stated in the proxy statement or letter. The court held on summary judgment that the facts giving rise to the conflicting interests were so buried in the documents as not to constitute an adequate disclosure to the shareholders and that failure adequately to disclose the conflicts constituted a material defect in the proxy statements.
See Mills v. Electric Auto-Lite Co., 403 F.2d 429, 435 (7th Cir. 1968), vacated on other grounds and remanded, 396 U.S. 375, 90 S.Ct. 616, 24 L.Ed.2d 593 (1970); Beatty v. Bright, 318 F. Supp. 169, 174-175 (S.D.Iowa 1970).
The defendant-appellants argue, on the other hand, that the facts which were stated in various parts of the documents did constitute an adequate disclosure of the conflicting interests of the three directors in question. While we find ourselves in general accord with Judge Mansfield's statement in Richland v. Crandall, 262 F. Supp. 538, 554 (S.D.N.Y. 1967), that "corporations are not required to address their stockholders as if they were children in kindergarten", we also bear in mind Judge Friendly's admonition in Gerstle v. Gamble-Skogmo, Inc., 478 F.2d 1281, 1297 (2d Cir. 1973), who, after quoting Judge Mansfield's statement, said that "it is not sufficient that overtones might have been picked up by the sensitive antennae of investment analysts". In the present case many of the statements upon which the defendant-appellants rely are scattered through and rather buried in the lengthy proxy statement. There is nowhere a statement giving emphasis to the conflicts of interest similar to that given to the board's approval of the merger agreement. We conclude that the district court did not err in holding on summary judgment that the proxy materials were materially deficient in this respect.
Swanson v. American Consumer Industries, Inc., 415 F.2d 1326, 1330 (7th Cir. 1969); Mills v. Electric Auto-Lite Co., 403 F.2d 429, 433 (7th Cir. 1968); vacated on other grounds and remanded, 396 U.S. 375, 90 S.Ct. 616, 24 L.Ed.2d 593 (1970); Beatty v. Bright, 318 F. Supp. 169, 174 (S.D.Iowa 1970).
Contrary to the contention of the plaintiffs, the proxy statement made no reference to any estimated or probable value for the Reynolds securities. Pointing out that valuation predictions are generally not permitted and are frequently considered to be themselves examples of misleading statements the district court held that inclusion of an admonition that shares of stock as yet unissued might not be worth $50 would not be necessary and could not have been material to a reasonable shareholder. 362 F. Supp. 771, 776 (1973). With this conclusion we agree.
See Kohn v. American Metal Climax, Inc., 458 F.2d 255, 265 (3d Cir.); cert. denied, 409 U.S. 874, 93 S.Ct. 120, 34 L.Ed.2d 126 (1972); In re Brown Company Securities Litigation, 355 F. Supp. 574, 584 (S.D.N.Y. 1973); Union Pacific R.R. v. Chicago North Western Ry., 226 F. Supp. 400, 408-409 (N.D.Ill. 1964); 17 C.F.R. § 240.14a-9, note (a).
The determination by the district court on summary judgment, which we have upheld, that the proxy statement and covering letter were materially deficient in two respects, is sufficient to support its conclusion that those documents were "false or misleading with respect to any material fact" within the meaning of Rule 14a-9(a) of the Regulations and, therefore, in violation of section 14(a) of the Act, regardless of whether the alleged deficiencies in the proxy statement in the three other respects which we have held to be subject to factfinding were also material deficiencies which violated the statute. However, since the case must, in any event, be remanded for further proceedings in the district court for reasons stated later in this opinion, the plaintiffs, if so advised, will be free to pursue to final adjudication the alleged defects which we have held were not ripe for summary judgment. On the issue of liability, the question remains, however, as to whether the district court erred in holding defendants Casey, Litton and Monroe responsible in damages under section 14(a) for the use of the materially deficient proxy statement and letter in soliciting proxies from the McLean Industries shareholders. To this question we now turn. We consider first the liability of defendant Casey.
Casey, as we have seen, was one of the directors of McLean Industries. He was a senior vice-president of Litton and a member of the Investment Committee of Monroe and he sat on the McLean Industries board representing their interests as shareholders. This does not mean, of course, that he was not responsible as a director to act in the interests of all the shareholders. On the contrary, he was responsible with his fellow directors for the actions of the board in which he participated as well as for his own acts or failures to act. At the board meeting at which he voted to approve the merger Casey saw and approved a draft of the proxy statement subsequently issued. He knew that the statement therein that Litton and Monroe had agreed to vote for the merger was false. In fact he specifically testified in a deposition filed January 13, 1970 that neither he, Litton nor Monroe had ever made such an agreement. Of course, he knew of his own conflict of interest. He denied that he saw the proxy statement in its final form or Malcolm McLean's covering letter, but it does not appear that he made any effort to see that the deficiencies in the draft which he did see or, at least, which he approved, were corrected. The court held that in any event he would have known that the proxy statement in its final form was false if he had read it, which it was his duty to do as a member of the board of directors which was issuing the document to solicit the shareholders' proxies. The court concluded that under these circumstances Casey was liable for the materially false and misleading proxy statement, as also were Kroeger and Ludwig. The court's conclusion was based upon its application of the law of negligence as the standard for determining liability under section 14(a) of the Act.
Chris-Craft Industries, Inc. v. Piper Aircraft Corp., 480 F.2d 341, 364 (2d Cir.), cert. denied, Bangor Punta Corp. v. Chris-Craft Industries, Inc., 414 U.S. 910, 94 S.Ct. 231, 38 L.Ed.2d 148 (1973); Guth v. Loft, Inc., 23 Del. Ch. 255, 5 A.2d 503 (Sup.Ct. 1939).
Defendant Casey strongly argues that the proper standard of liability to be applied to an outside nonmanagement director, such as he was, is a lack of good faith or, at least, scienter rather than negligence. As we have seen, the district court held negligence to be the appropriate standard under section 14(a) and we agree. The defendant urged in the district court that section 10(b) of the Act, 15 U.S.C.A. § 78j(b), provides an analogy and that under that section the courts have held that scienter must be shown. That section and Rule 10b-5 of the Regulations, 17 C.F.R. § 240.10b-5, which implements it make unlawful manipulative and deceptive devices or practices in connection with the purchase and sale of securities. It would seem clearly more appropriate to apply the standard of actual knowledge in determining liability for such fraudulent practices many of which might well appear innocent on their face.
See Ernst Ernst v. Hochfelder, ___ U.S. ___, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976), in which the Supreme Court held that in an action for damages brought under section 10(b), scienter in the sense of an intent to deceive was the appropriate standard of liability; see also Judge Adams, concurring in Kohn v. American Metal Climax, Inc., 458 F.2d 255, 280, 290 (3d Cir.), cert. denied, 409 U.S. 874, 93 S.Ct. 120, 34 L.Ed.2d 126 (1972).
All of the courts which have discussed the question, so far as the reported decisions indicate, have favored applying the rule of negligence as the criterion for determining liability under section 14(a). Gerstle v. Gamble-Skogmo, Inc., 478 F.2d 1281, 1300-1301 (2d Cir. 1973); Berman v. Thomson, 403 F. Supp. 695, 699 (N.D.Ill. 1975); Norte Co. v. Huffines, 304 F. Supp. 1096, 1109-1110 (S.D.N.Y. 1968), aff'd in pertinent part, 416 F.2d 1189 (2d Cir. 1969), cert. denied, Muscat v. Norte Co., 397 U.S. 989, 90 S.Ct. 1121, 25 L.Ed.2d 396 (1970); Richland v. Crandall, 262 F. Supp. 538, 553 (S.D.N.Y. 1967). The language of section 14(a) and Rule 14a-9(a) contains no suggestion of a scienter requirement, merely establishing a quality standard for proxy material. The importance of the proxy provisions to informed voting by shareholders has been stressed by the Supreme Court, which has emphasized the broad remedial purpose of the section, implying the need to impose a high standard of care on the individuals involved. And, unlike sections 10(b) and 18 of the Act, which encompass activity in numerous and diverse areas of securities markets and corporate management, section 14(a) is specially limited to materials used in soliciting proxies. Given all of these factors the imposition of a standard of due diligence as opposed to actual knowledge or gross negligence is quite appropriate. We are confirmed in this view by the very recent case of Ernst Ernst v. Hochfelder, ___ U.S. ___, fn. 28, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976), in which the Supreme Court pointed out that the "operative language and purpose" of each particular section of the Acts of 1933 and 1934 are important considerations in determining the standard of liability for violations of the section in question. We, therefore, conclude that the district court did not err in applying the standard of due diligence to determine Casey's liability in this case.
J. I. Case Co. v. Borak, 377 U.S. 426, 431-432, 84 S.Ct. 1555, 1559, 12 L.Ed.2d 423, 427-28 (1964); Mills v. Electric Auto-Lite Co., 396 U.S. 375, 381-383, 90 S.Ct. 616, 620, 621, 24 L.Ed.2d 593, 600, 601 (1970).
Casey points out that he received no part of the premium received by the favored defendants in the merger and he contends that it was error to hold him liable to the plaintiffs for their share of the premium which Litton and Monroe received. This is, however, not an action for an accounting for premium received but rather a suit to recover the damages suffered by the plaintiffs as the result of the defendants' wrongful acts. The fact that the plaintiffs' damages may be measured by a proportion of the premium received by the favored defendants does not make the judgment recovered any the less an award to compensate the plaintiffs for the loss which they suffered from the wrongful conduct of Casey and any other defendants who may be found liable. Casey and the other McLean Industries directors owed a duty to the plaintiffs under section 14(a) of the Act fully and fairly to disclose the material facts in the proxy materials they issued to them. This duty they negligently failed to perform. Where two or more persons fail to perform a common duty each is liable for the entire harm resulting from the breach. Restatement of Torts § 878 (1939). As joint tortfeasors they are jointly and severally liable for the plaintiffs' entire damage which they have inflicted. Bigelow v. Old Dominion Copper Mining Smelting Co., 225 U.S. 111, 132, 32 S.Ct. 641, 644, 56 L.Ed. 1009, 1023 (1912); Prosser, Law of Torts, 314-315 (4th ed. 1971), and this is true even though one of the tortfeasors held liable has received no benefit from his wrongdoing. Myzel v. Fields, 386 F.2d 718, 750 (8th Cir. 1967), cert. denied, 390 U.S. 951, 88 S.Ct. 1043, 19 L.Ed.2d 1143 (1968). It follows that Casey is liable in damages, both severally and jointly with any other defendants held liable, for the loss suffered by the plaintiffs.
The district court entered judgment against Litton and Monroe based on its determination that they were absolutely liable as principals for the acts of Casey whom the court held to be their agent on the McLean Industries board of directors for purposes of the merger of McLean Industries into Reynolds and the approval and dissemination of the proxy statement to the McLean Industries shareholders. On appeal Litton and Monroe argue that the court's conclusion that Casey in his capacity as director of McLean Industries was their agent is without support in the evidence. They urge that even if Casey may be considered to be their agent, the district court erred in denying them the opportunity to establish the good faith defense permitted them under section 20(a) of the Act, 15 U.S.C.A. § 78t(a). This court has recently held that ordinary agency principles are not applicable in determining secondary liability in securities violation case. Rochez Brothers, Inc. v. Rhoades (Rochez II), 527 F.2d 880, 886 (1975). The court observed that Congress in enacting section 20(a) intended to limit secondary liability to those persons culpably participating in the wrongdoing creating the liability. The liability of Litton and Monroe for the acts of Casey accordingly cannot be upheld on the agency theory utilized by the district court.
Zweig v. Hearst Corp., 521 F.2d 1129, 1132 (9th Cir. 1975), cert. denied, 423 U.S. 1025, 96 S.Ct. 469, 46 L.Ed.2d 399 (1975), and Gordon v. Burr, 366 F. Supp. 156, 168 (S.D.N.Y. 1973), modified on other grounds, 506 F.2d 1080 (2d Cir. 1974), are in accordance with our Rochez II holding.
The plaintiffs alternatively contend that Litton and Monroe are liable for Casey's section 14(a) violation as "controlling persons" under section 20(a) of the Act or as his aiders and abettors. Congress has not defined "control" as it is used in section 20(a). The Securities and Exchange Commission has defined it broadly as "the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a person . . ." 17 C.F.R. § 240.12b-2(f). The courts have gone so far as to define "control" as "influence short of actual direction." Myzel v. Fields, 386 F.2d 718, 738 (8th Cir. 1967), cert. denied, 390 U.S. 951, 88 S.Ct. 1043, 19 L.Ed.2d 1143 (1968); quoted with approval in Richardson v. MacArthur, 451 F.2d 35, 41-42 (10th Cir. 1971).
The determination by the district court, which we have upheld, that Casey negligently failed to perform his duty under section 14(a) establishes the wrongful act. The required knowledge of the act has been defined as a "general awareness [on the part of the aider and abettor] that his role was part of an overall activity that is improper . . ." SEC v. Coffey, 493 F.2d 1304, 1316 (6th Cir. 1974), cert. denied, 420 U.S. 908, 95 S.Ct. 826, 42 L.Ed.2d 837 (1975). This court in its opinion in Landy v. FDIC, 486 F.2d 139, 162 (1973), cert. denied, 416 U.S. 960, 94 S.Ct. 1979, 40 L.Ed.2d 312 (1974), suggests that allegations of knowledge that fall short of stating facts indicating actual knowledge are insufficient. The requirement of knowledge may be less strict where the alleged aider and abettor derives benefits from the wrongdoing but even in this situation the proof offered must establish conscious involvement in impropriety or constructive notice of intended impropriety. Northway, Inc. v. TSC Industries, Inc., 512 F.2d 324, 339 (7th Cir. 1975).
Assuming that an individual's negligent failure to act may be so aided and abetted by another as to make that other equally liable for it, it might be argued that Casey's knowledge or duty to know and negligent failure to act were the knowledge or duty to know and failure to act of Litton and Monroe since he was a senior officer of Litton and an investment committee member of Monroe. It is true, of course, that a corporation's knowledge and action can only be that of its directors, officers and employees. But Casey's knowledge or duty to know and his failure to act as a director of McLean Industries and his knowledge or duty to know and failure to act as an officer of Litton and Monroe must be distinguished.
See Restatement of Torts § 876, Comment on Clause (b) at 436-437 (1939); 74 Am.Jur.2d Torts § 66 (1974).
19 C.J.S. Corporations § 1078, pp. 613-615 (1940).
Section 28(a) of the Act, 15 U.S.C.A. § 78bb, provides that "no person permitted to maintain a suit for damages under the provisions of this title shall recover . . . a total amount in excess of his actual damages on account of the act complained of." This limitation applies to suits brought to recover damages for the violation of section 14(a) of the Act, since they are provided for by implication by that section. But while the Act speaks in terms of "actual" damages the dichotomy is between actual and punitive damages and recovery is not limited to out of pocket loss, a diminution in the value of one's investment, but may include loss of a possible profit or benefit, an addition to the value of one's investment, unless the loss is wholly speculative. In J. I. Case Co. v. Borak, 377 U.S. 426, 435, 84 S.Ct. 1555, 1561, 12 L.Ed.2d 423, 429 (1964), the Supreme Court made it clear that in a civil suit, such as the one before us, which is brought to redress a violation of section 14(a) of the Act the "federal courts have the power to grant all necessary remedial relief . . ." The defendants urge that the subsequent decision of the Court in Mills v. Electric Auto-Lite Co., 396 U.S. 375, 90 S.Ct. 616, 24 L.Ed.2d 593 (1970), limited the ruling in the Borak case. We do not agree. As Judge Friendly pointed out in Gerstle v. Gamble-Skogmo, Inc., 478 F.2d 1281, 1304 (2d Cir. 1973), the Mills decision should be read "as commanding the lower courts to do their best to achieve fair compensation for injured plaintiffs without being too draconian on defendants, at least in a situation where the inadequacy of a proxy statement may lie more in a failure of articulation than in an outright desire to deceive."
J. I. Case Co. v. Borak, 377 U.S. 426, 432, 84 S.Ct. 1555, 1559-60, 12 L.Ed.2d 423, 427 (1964).
deHaas v. Empire Petroleum Co., 435 F.2d 1223, 1229-1232 (10th Cir. 1970); Green v. Wolf Corp., 406 F.2d 291, 302-303 (2d Cir. 1968), cert. denied, Troster Singer Co. v. Green, 395 U.S. 977, 89 S.Ct. 2131, 23 L.Ed.2d 766 (1969); Myzel v. Fields, 386 F.2d 718, 748 (8th Cir. 1967), cert. denied, 390 U.S. 951, 88 S.Ct. 1043, 19 L.Ed.2d 1143 (1968).
See Affiliated Ute Citizens v. United States, 406 U.S. 128, 155, 92 S.Ct. 1456, 1473, 31 L.Ed.2d 741, 762 (1972); Thomas v. Duralite Co., Inc., 524 F.2d 577, 586 (3d Cir. 1975); Gerstle v. Gamble-Skogmo, Inc., 478 F.2d 1281, 1306 (2d Cir. 1973); Myzel v. Fields, 386 F.2d 718, 748-749 (8th Cir. 1967), cert. denied, 390 U.S. 951, 88 S.Ct. 1043, 19 L.Ed.2d 1143 (1968); Janigan v. Taylor, 344 F.2d 781, 786 (1st Cir.), cert. denied, 382 U.S. 879, 86 S.Ct. 163, 15 L.Ed.2d 120 (1965); Abrahamson v. Fleschner, 392 F. Supp. 740, 746 (S.D.N.Y. 1975).
Rochez Brothers, Inc. v. Rhoades (Rochez III), 527 F.2d 891, 895 (3d Cir. 1975); Wolf v. Frank, 477 F.2d 467, 478 (5th Cir.), cert. denied, 414 U.S. 975, 94 S.Ct. 287, 38 L.Ed.2d 218 (1973); Abrahamson v. Fleschner, 392 F. Supp. 740, 746 (S.D.N.Y. 1975); Schaefer v. First National Bank of Lincolnwood, 326 F. Supp. 1186, 1193 (N.D.Ill. 1970), appeal dismissed, 465 F.2d 234 (7th Cir. 1972).
The district court held, and we agree, that while the material defects in the proxy statement and letter were not related to the terms of the merger in the strict sense of misstating what the shareholders were going to receive, they were relevant to the dichotomy between what the favored shareholders and the plaintiffs were to receive. The court accordingly held that by the circulation to them of the defective proxy materials the plaintiffs were lulled to inaction and thereby suffered the loss of an opportunity to attempt to secure a merger agreement which would be more favorable to them. The court thus found the fact of injury to be sufficiently established, a finding which we cannot say was clearly erroneous. The determination of the amount of the plaintiffs' damages involves other problems, however. For there is a clear distinction between the measure of proof necessary to establish the fact a plaintiff has sustained an injury, and the measure of proof necessary to enable the jury to fix the amount of damages resulting from that injury.
Story Parchment Co. v. Paterson Parchment Paper Co., 282 U.S. 555, 562, 51 S.Ct. 248, 250, 75 L.Ed. 544, 548 (1931).
It is always difficult to measure the damages resulting from a lost opportunity, especially one, such as we have here, which has no ascertainable market value. Many imponderables are involved. In the more common situation of a lost opportunity to win a prize the general rule in this country appears to be that damages, measured by the amount of the prize, are to be awarded, but only if it is more probable that the prize would have been won if the opportunity had been afforded than that it would not have been won. In England the amount of damages awarded in such a situation is based on the extent of the probability of winning, a comparative test. It appears that the latter rule has been followed by some American courts. It has been suggested that the majority American rule may stem from an unexpressed feeling by the courts that the award of damages in such cases is not to be favored. In a case such as the present one, however, which is brought to redress a violation of section 14(a) of the Act the policy of the law is quite the contrary. Moreover, here there is no known fixed amount, such as a prize, the opportunity to acquire which has been lost. In these cases the risk of uncertainty as to the amount of damages is cast on the wrongdoer and it is the duty of the fact finder to determine the amount of the damages as best he can from all the evidence in the case. If this were not so, section 14(a) could be violated with impunity in any situation in which the violation does not cause out of pocket loss.
6 Wayne L.Rev. 225, 246 (1960). See also 37 Saskatchewan L.Rev. 193 (1972-1973) and 18 Rutgers L.Rev. 875 (1964) in which the American majority rule and the English rule are compared.
See J. I. Case Co. v. Borak, 377 U.S. 426, 433, 84 S.Ct. 1555, 1560, 12 L.Ed.2d 423, 428 (1964).
Bigelow v. RKO Radio Pictures, Inc., 327 U.S. 251, 264-265, 66 S.Ct. 574, 579-80, 90 L.Ed. 652, 660 (1946); Simon v. New Haven Board Carton Co., Inc., 516 F.2d 303, 306 (2d Cir. 1975); Moses v. Burgin, 445 F.2d 369, 385 (1st Cir.) cert. denied, 404 U.S. 994, 92 S.Ct. 532, 30 L.Ed.2d 547 (1971).
In the present case the district court stated that while it was possible that full disclosure and correction of the defective proxy materials would not have affected the terms of the merger it was equally possible that such disclosure might have resulted in the favored defendants sharing with plaintiffs the premium of $8.25 per share which the former received. The court rightly pointed out that in these circumstances the defendants as the parties responsible for the defects should bear the risk of the uncertainty and that it would be unfair to require the plaintiffs to prove that they would have received a greater compensation. The court treated $8.25 per share as the outside limit of the damages which the plaintiffs suffered, and it ultimately found that the best and most equitable estimate which could be made as to what the plaintiffs might have obtained by renegotiation was a pro rata share in the premium of $8.25 received by defendants Litton and Monroe.
The court held that the sum of $8.25 per share, the difference between the $50 per share received by the favored shareholders and the $41.75 per share which was the market value on the first trading day after the merger of the Reynolds preferred stock received by the plaintiffs, represented a premium received by the former.
We cannot hold erroneous the district court's finding that the logical estimate of the loss which the plaintiffs suffered as the result of the circulation to them of the deficient proxy materials was a pro rata share of the premium received by the favored defendants in the merger. But we do not agree with the method which the court adopted to compute the share of the premium to be used to compensate for that loss. We bear in mind that the district court expressly found that the defendants were liable only for negligence, 351 F. Supp. at 868-869, and that the deficiencies in the proxy statement and letter, while clearly material, were more peripheral than central. Under the circumstances, we think that fairness requires that the plaintiffs' loss, and hence the damages to be awarded, should be measured by the amount of premium which the plaintiffs would have received if the total amount of premium received by all the favored shareholders, not merely Litton and Monroe, had been allotted to all the issued and outstanding common shares pro rata. On such a basis the damages to be awarded to the plaintiffs would be at the rate of $1.7878 per share.
The favored shareholders, Litton, Monroe, National Bulk, American-Hawaiian and Kroeger, held 2,304,000 shares. At $8.25 per share they received a total premium of $19,008,000. Dividing 10,632,000, the total number of outstanding shares of common stock, into $19,008,000 gives a premium of $1.7878 per outstanding share.
Since the shareholders who had their shares appraised in the merger were paid $45 per share in cash they actually received a premium of more than this, namely $3.25 per share, over the market value of $41.75 per share for the Reynolds preferred shares which the other shareholders received. Section 28(a) of the Act prohibits the recovery of more than actual damages in an action such as the one before us. Since the loss suffered by the other plaintiffs was not shared by the holders of the appraised shares we think that they must be excluded from the computation. When this is done, the number of eligible shares held by the plaintiffs is reduced to 2,798,690 and the amount of the plaintiffs' loss to $5,003,497.98. We think also that upon the amount thus determined to be the plaintiffs' loss the sum of $4,000,000 paid to them by the settling defendants should be credited. This would be in conformity with the spirit, if not the letter, of section 28 of the Act which, in addition to limiting recovery under the Act to actual, as distinguished from punitive, damages, expressly prohibits the recovery in one or more actions of a total amount in excess of the plaintiffs' actual damages. It would appear that the district court sought to achieve this result by limiting to the premium received by Litton and Monroe the amount in which the plaintiffs should share while denying credit for the settlement payment of $4,000,000. That payment, however, was obviously made in discharge of the settling defendants' obligation to the plaintiffs, an obligation which had the same basis as that of Litton, Monroe and Casey. It must, therefore, be considered as a recovery within the meaning of section 28(a). We conclude that in computing the damages it was error not to consider the whole picture instead of merely part of it. Crediting $4,000,000 upon the plaintiffs' total loss of $5,003,497, leaves $1,003,497.98 for which they are now entitled to judgment.
See Zenith Radio Corp. v. Hazeltine Research, Inc., 401 U.S. 321, 348, 91 S.Ct. 795, 811, 28 L.Ed.2d 77, 97 (1971); Snowden v. D.C. Transit System, Inc., 147 U.S.App.D.C. 204, 454 F.2d 1047 (1971); Schaefer v. First National Bank of Lincolnwood, 326 F. Supp. 1186, 1192-1193 (N.D.Ill. 1970), appeal dismissed, 465 F.2d 234 (7th Cir. 1972); Restatement of Torts § 885(3) (1939); Prosser, Law of Torts 304-305 (4th ed. 1971).
The plaintiffs urge that the district court erred in denying prejudgment interest on the amount awarded, from the date of the merger to the date of judgment. The award of prejudgment interest in a suit for the violation of section 14(a) of the Act is within the discretion of the district court which is to be exercised in accordance with principles of fairness. Here the award of damages is made to redress the violation of section 14(a) of the Act by the circulation of a materially deficient proxy statement and letter. The award is not made to make the plaintiffs whole for funds to which they were legally entitled at the time of the merger. We find no abuse of the court's discretion in its denial of prejudgment interest.
See Blau v. Lehman, 368 U.S. 403, 414, 82 S.Ct. 451, 457, 7 L.Ed.2d 403, 411 (1962); Thomas v. Duralite Co., Inc., 524 F.2d 577, 589 (3d Cir. 1975); Wolf v. Frank, 477 F.2d 467, 479 (5th Cir.), cert. denied, 414 U.S. 975, 94 S.Ct. 287, 38 L.Ed.2d 218 (1973).
[85] VAN DUSEN, Circuit Judge (concurring and dissenting):
I respectfully dissent from the conclusions reached by the majority opinion under (a) at pages 771-773, (c) at pages 773-774 and (a) at pages 775-777, because they affirm the district court's holding that the individual defendant, Casey, is liable as a matter of law on summary judgment despite the uncontradicted affidavit of Malcolm McLean (80a-83a, 85a), related deposition testimony (see, for example, 694a), and exhibits (see, for example, DX-82 at 627a).
I note that the district court appears to have adopted and applied the more liberal test of materiality explicitly rejected by the majority at pages 770-771. Gould v. American-Hawaiian Steamship Co., 319 F. Supp. 795, 802 (D.Del. 1970); see General Time Corp. v. Talley Industries, 403 F.2d 159, 162 (2d Cir. 1968).
I believe that Casey was entitled to a trial, since the above evidence and reasonable inferences therefrom indicate (1) that the McLean Company needed 300 million to 500 million dollars in order to continue to compete in the container shipping business, (2) that McLean common stock would have been worth far less than $40.00 per share if Reynolds had not promptly supplied credit to this enterprise, and (3) that no other source of such credit was available. Further, Casey was entitled to show at a trial that Reynolds would have withdrawn from this venture if it had not been consummated promptly by payment of the "premium" to the large stockholders, since their favorable vote was essential to secure the two-thirds thirds stockholder vote required for approval of the merger.
In my view, the above-described evidence was sufficient to create fact issues, the resolution of which in Casey's favor at a trial could have resulted in a determination that any misrepresentations and omissions described in parts (a) and (c) of the majority opinion were not material. See Laurenzano v. Einbender, 448 F.2d 1, 5-6 (2d Cir. 1971). Casey should have the opportunity to prove that, as a practical matter, the "favored defendants" would have voted, and fully intended to vote, for the merger in any event. Even accepting the conclusion that the proxy materials were misleading because there was no legally binding obligation to vote for the merger, the disparity between the actual facts and the misstated facts may be insignificant and the misstatement therefore immaterial. See Laurenzano v. Einbender, supra. In addition, I believe reasonable men could differ on the adequacy of the disclosure of the various conflicts and that issue should not be determined as a matter of law. The relevant information is contained in the first few pages of the proxy materials and, as we stated in Kohn v. American Metal Climax, 458 F.2d 255, 267 (3d Cir. 1972), "reasonable latitude in this area is important if nit-picking is not to become the name of the game."
Where the record at a hearing on motion for summary judgment discloses issues of fact, a trial is required. See, e. g., Adickes v. Kress Co., 398 U.S. 144, 90 S.Ct. 1598, 26 L.Ed.2d 142 (1970); Smith v. Pittsburgh Gage and Supply Co., 464 F.2d 870, 874 (3d Cir. 1972); 10 Wright Miller, Federal Practice Procedure: Civil § 2716 (1973). Where a judgment of over one million dollars is involved, surely this principle should not be overlooked.
Finally, because material favorable to Casey, including the evidence described in the first sentence of this dissent and the inferences from such evidence could be very pertinent in his defense to the contention that he is liable for negligence, I do not believe Casey can be held to have been negligent as a matter of law, as determined by the majority opinion at pages 775-777. The only evidence at this stage on the negligence issue is that Casey read the proxy statement in draft form and failed to correct it. In my view, that evidence, standing alone, is not a sufficient basis for holding Casey, who is neither a lawyer nor an inside director, liable by summary procedure. I believe Casey was entitled to a decision by a fact finder after trial on the factual issues needed to determine whether a reasonable director in his position was negligent in not objecting to, or referring to Monroe's or Litton's counsel, the possible omissions, including failure adequately to reveal conflicts of interest, in the proxy materials.
In all other respects, I join in Judge Maris' characteristically excellent opinion, although, under my view stated above, it would not be necessary to reach the damage issue at pages 781-784 and the prejudgment interest issue at pages 784-785 of the majority opinion.