Opinion ID: 311063
Heading Depth: 2
Heading Rank: 1

Heading: Was the Proxy Statement Misleading?

Text: 29 One of the plaintiffs' principal attacks on the adequacy of the Proxy Statement was that GOA was bound to disclose its appraisals of the market value of the remaining plants and the existence and amount of the firm offers to purchase the unsold plants that it had received. 8a Skogmo countered that the SEC would not have allowed this. By a stroke of luck it was able to support its position not only by materials generally available but by the SEC staff's reaction in this very case to the suggestion of Minis & Co. that market values be disclosed in the proxy statement. In an attempt to obtain assistance on this issue, the court asked the Commission to file a brief as amicus curiae. 30 The SEC's brief has been the subject of considerable comment. 9 Its first section reaffirms the Commission's longstanding position that in financial statements filed with the Commission, fixed assets should be carried at historical cost (less any depreciation) in the absence of any statute, rule, or specific Commission authorization to the contrary. A second section is headed, The narrative or textual portions of a proxy statement must contain whatever additional material is necessary under the circumstances in order to make the proxy statement not misleading. So much is hardly controversial. But the heading of the third section reads: 31 When a balance sheet in a proxy statement for a merger reflects assets at an amount that is substantially lower than their current liquidating value, and liquidation of those assets is intended or can reasonably be anticipated, the textual or narrative portion of the proxy statement must contain whatever available material information about their current liquidating value is necessary to make the proxy statement not misleading. 32 The text goes on to elaborate that while the corporation's own asking price may not be disclosed, good faith offers from unaffiliated third parties to buy corporate assets for more than their book value must be disclosed if their omission would render the proxy statement materially misleading. Similarly, the text states that, although appraisals generally cannot be disclosed because they may be misleading, existing appraisals of current liquidating value must be disclosed if they have been made by a qualified expert and have a sufficient basis in fact. The district judge seemingly adopted the Commission's statement of the governing principles, and found that Skogmo's failure to disclose its appraisals and firm offers made the proxy statement materially misleading. 298 F.Supp. at 91-92. 33 The assertion that the Commission would have permitted reference to appraisals made by GOA's own officials, 10 and the intimation that it would have required them had it known of their existence, but see note 10 supra, must have been as much a surprise to the Commission's branch chief who had refused to insist on a revision of the proxy statement to include appraisals because this was contrary to Commission policy, as it was to Skogmo's counsel. Rule 14a-9 has long carried a note giving examples of what, depending upon particular facts and circumstances, may be misleading within the meaning of the rule; the very first is (a) Predictions as to specific future market values, earnings or dividends. This note does not in terms refer to appraisals of assets at current market value and, indeed, the SEC in this case attempted to distinguish appraisals of present liquidating values from estimates of future earnings or profits in an effort to reconcile its position in favor of disclosure here with the stand it took in Sunray DX Oil Co. v. Helmerich & Payne, Inc., 398 F.2d 447 (10 Cir. 1968). The validity of this distinction is far from apparent, see Kripke, The SEC, The Accountants, Some Myths and Some Realties, 45 N.Y. U.L.Rev. 1151, 1200 (1970), particularly in the context of this case, where the appraisals hinged to no small degree on the ability of prospective purchasers to pay for the properties out of future earnings. But, more important, it is clear that the policy embodied in the note to Rule 14a-9 has consistently been enforced to bar disclosure of asset appraisals as well as future market values, earnings, or dividends. The Commission acknowledged this in its brief: 34 The Commission and its staff have traditionally looked with suspicion upon the inclusion of asset appraisals even in the text or narrative portion of proxy statements. It has been our experience that such appraisals are often unfounded or unreliable. For this reason, the Commission's staff, on a case-by-case basis, has usually requested the deletion of appraisals that have been included in proxy statements. 35 The Commission further acknowledged that its branch chief had enforced this policy in his refusal to consider disclosure of asset appraisals in the Proxy Statement here, admitting that at the meeting recounted above, a branch chief of the Commission's Division of Corporation Finance did express the staff's general policy against the inclusion of appraisals in a proxy statement. 36 However, the note to Rule 14a-9 states only that disclosure of appraisals may be misleading depending upon particular facts and circumstances, and the SEC's brief attempts to capitalize upon this and clothe its longstanding policy against disclosure of appraisals with an appearance of flexibility and case-by-case analysis, as some of the foregoing quotations indicate. However desirable such a policy may be, we do not believe this is what it was in 1963. The Commission's examiners are trained to strike at appraisal values as unacceptable whenever they read them in documents filed with the Commission. Fiflis & Kripke, supra note 9, at 472. See also id. at 470; Manne, supra note 9, at 315, 323. It has long been an article of faith among lawyers specializing in the securities field that appraisals of assets could not be included in a proxy statement. 37 There is nothing in the authorities cited by the Commission in support of the position taken in its brief which casts serious doubt on this conclusion. The Commission's principal reliance in its brief here was on an amicus brief it had filed in the well-known case of Speed v. Transamerica Corp., 99 F.Supp. 808 (D.Del.1951), modified and affirmed, 235 F.2d 369 (3 Cir. 1956). While we have no doubt that Speed was correctly decided, that case dealt with an inventory of a commodity, tobacco, about to be liquidated by the buyer, which was actively traded and whose market value could be ascertained with reasonable certainty on the basis of actual sales. No appraisal of market value was required, and the dangers that the SEC has preceived in the disclosure of appraised values were not present. And, of course, Speed did not involve proxy statements or the SEC's policy of not allowing disclosure of appraisals in them. As has been correctly said, No one, the Commission included, has seriously believed that the Speed case stands for the general proposition that appraisals of assets must be disclosed to the shareholders. Manne, supra note 9, at 323. 38 The only other supporting references in the amicus brief were to two SEC litigation releases issued in the 1940's. Only one of these, SEC v. Standard Oil Co., Litigation Release No. 388 (Feb. 26, 1947), is of any relevance here. The SEC there brought an action under Rule 10b-5 to enjoin the defendants from purchasing the shares of minority shareholders or soliciting shareholders to exchange their common stock for preferred in connection with a merger without disclosing that the present value of the Company's oil reserves, as appraised by qualified outside engineers, was far greater than the value carried on the firm's balance sheet, and the litigation release reported that the defendants had agreed to entry of a consent order without admitting liability. The other litigation release reported only that the SEC had filed an action under Rule 10b-5 complaining of the failure of a brokerage firm to disclose the value of its marketable securities before repurchasing its debentures. 11 Such bits and pieces, flushed out by industrious research, cannot retroactively overcome the general understanding embodied in the note to Rule 14a-9, regularly given effect by the Commission's able staff in dealing with lawyers who specialize in SEC matters, and repeated in this very case. 12 39 The Commission's policy against disclosure of asset appraisals in proxy statements has apparently stemmed from its deep distrust of their reliability, its concern that investors would accord such appraisals in a proxy statement more weight than would be warranted, and the impracticability, with its limited staff, of examining appraisals on a case-by-case basis to determine their reliability. The Commission is now in the process of a thorough re-examination of its policy, and it appears that new rules on the permissible uses of appraisals and projections may shortly be forthcoming. See Statement by the Committee on Disclosure of Projections of Future Economic Performance, CCH Fed.Sec.L.Rep. p 79,211 (Feb. 2, 1973). The SEC may well determine that its policy, while protecting investors who are considering the purchase of a security from the overoptimistic claims of management, may have deprived those who must decide whether or not to sell their securities, as the plaintiffs effectively did here, of valuable information, as Professor Kripke has argued, Rule 10b-5 Liability and Material Facts, 46 N.Y.U.L.Rev. 1061, 1071 (1971). But we would be loath to impose a huge liability on Skogmo on the basis of what we regard as a substantial modification, if not reversal of the SEC's position on disclosure of appraisals in proxy statements, by way of its amicus brief in this case. 13 Indeed, it was to protect against this that Congress enacted section 23(a) of the Securities Exchange Act, 15 U.S. C. Sec. 78w, which provides that No provision of this chapter imposing any liability shall apply to any act done or omitted in good faith in conformity with any rule or regulation of the Commission, notwithstanding any later amendment. While defendant's reliance here was on the Commission's consistent interpretation of its own rule, rather than on the terms of the rule itself, it is hard to attach any significance to this distinction when the effect of the Commission's interpretation was to lead counsel reasonably to believe Skogmo would not be allowed to make the references to appraisals which plaintiffs now claim were required. 40 The matter of disclosing firm offers, however, may well stand differently. 14 Such offers, emanating from outside sources, do not have the potential of overstatement of prospects at the instance of management that has so alarmed the SEC about appraisals. Perhaps more important, there has not been a general understanding within the legal and accounting professions that reference to such offers in a proxy statement would not be permitted, as has existed with respect to appraisals. On the contrary, one of the Commission's earliest and best known decisions on purchases of stock by insiders, Ward La France Truck Corp., 13 S.E.C. 373 (1943), had held that a controlling shareholder violated Rule 10b-5 when he caused the corporation to repurchase the shares of some minority stockholders at $3 to $6 per share without disclosing that he had entered into an agreement to sell his shares at $45 per share and for the corporation thereafter to be liquidated with the remaining stockholders to receive $25 per share. The question has also arisen in cases of offers for stock purchasers or mergers by an outsider, and there is precedent that management, when endorsing one offer, must inform stockholders of any better ones. Indeed, the court in United States Smelting, Refining & Mining Co. v. Clevite Corp., CCH Fed.Sec.L.Rep. p 92,691 (N.D.Ohio 1968), held that a management proxy statement which solicited shareholder support for a merger proposal violated Rule 14a-9 by failing to disclose a second merger offer at a higher price. Id. at 99,051-54. See also SEC v. Fruit of the Loom, Inc., Civ.No. 61-640 (S.D.N.Y.1961), reported in SEC 27th Annual Report 92-93 (1962) (consent order enjoining management violation of Rule 10b-5 by transmitting to shareholders and endorsing one tender offer without disclosing higher offer). And we have very recently held that failure by the maker of a tender offer of its securities to disclose serious and active negotiations to sell a significant asset substantially below book value violated Sec. 14(e), Chris-Craft Industries, Inc. v. Piper Aircraft Corp., 480 F.2d 341, 367 (2 Cir. 1973). We see no significant difference between this and a failure to include the receipt of offers well in excess of book value in a proxy statement seeking approval of a merger, provided that the omission was material. 41 However, we need not determine the question of materiality of the omission of any reference to the firm offers, see note 14, supra. We rest our decision on the point that, quite apart from the SEC's amicus brief, the Proxy Statement must be faulted, on traditional grounds going back to the Speed case, supra, as failing adequately to disclose that, upon completion of the merger, Skogmo intended to pursue aggressively the policy of selling GOA's plants, which had already yielded such a substantial excess of receipts over book value. 42 The adequacy of the disclosure in the Proxy Statement, especially in what we have called the fateful paragraph, must be weighed against Judge Bartels' basic factual finding, 298 F.Supp. at 93, 43 that Skogmo as the controlling stockholder and surviving corporation intended at least by and probably before July 19, 1963, to sell all the remaining outdoor advertising plants of General immediately after the merger. 44 The judge supported this by the following subsidiary findings: 45 The intention to sell appears as an inescapable inference from the following facts: (i) General's earnings produced a mere 3% return on the estimated value of its outdoor advertising assets; (ii) after the sale of the St. Louis branch in early 1962, exceedingly high purchase prices were offered for outdoor advertising plants; (iii) the preparation in March, 1962 of the Green Book, a reference book, showing the valuation of each branch substantially in excess of the cost; (iv) the adoption in July, 1962 by Bertin C. Gamble of the philosophy of corporate mobility, meaning the sale of General's plants not earning a sufficient return and diversification by new investments; (v) the dismal appraisal of the outdoor advertising prospects of General by Ryan in June and July, 1962; (vi) the circulation by Ryan of historical earnings, projections and values on all plants to prospective purchasers from time to time between August, 1962 to the date of merger; (vii) agreements entered into by General in November and December, 1962, with The First National Bank of Chicago syndicate for the ultimate sale of a maximum of $55,000,000 of General's notes, at a time when General had received only $24,584,754 in plant notes; (viii) the sale by General by the end of 1962 of 7 of the 11 plants which Burr Robbins considered as top earners and necessary to form an operating nucleus, and General's willingness to sell Philadelphia, Washington and/or Chicago in a package deal with New York; (ix) statements to Walter Davies contained in Paul Judy's analysis of March 11, 1963, to the effect that upon an exchange of Skogmo stock for General stock on a share-for-share basis Gamble would pick up approximately $37 in book value per Gamble share issued, such book value being approximately $13 under estimated final liquidation value per share; (x) the purchase of advertising plants by Robbins on his own account in April, 1963, suggesting the discontinuance of this business by General; (xi) the poor operating figures of General in the summer of 1963, causing Robbins to remark that they made you sick to your stomach; (xii) Skogmo's knowledge at the time the proxy statement was prepared of the existence of many prospective purchasers for all the remaining plants, with the exception of Claude Neon and possibly New York, at gross sales prices far in excess of the book value; (xiii) the expressions of serious interest before the merger by the purchasers after the merger of all the remaining plants; (xiv) the immediate sale after the merger of New York and Chicago to Metromedia, and the discussions between the parties with respect thereto immediately prior to the merger; and (xv) negotiation efforts between Rollins Broadcasting Company and General from April, 1963 to the merger date, which resulted in completed agreements immediately after the merger on December 2, 1963. 46 Skogmo does not seriously maintain that these findings are clearly erroneous, F. R.Civ.P. 52(a). The only reasonable quarrel would be with the word immediately in the finding first quoted, see note 12 supra, but the result would not be different if this were changed to read as soon as possible. 47 In contrast to the court's finding of intention, the affirmative statement in the first sentence of the key paragraph in the Proxy Statement is that Skogmo intended to continue the business of General Outdoor. The Statement had earlier described this to be just what its name implied, and most stockholders must have understood this sentence to mean that Skogmo intended to remain in the outdoor advertising business. True, earlier portions of the Proxy Statement had noted that part of the business consisted of selling plants, and the paragraph under scrutiny did say that the business that would be continued included the policy of considering offers for the sale to acceptable prospective purchasers of outdoor advertising branches (emphasis supplied) and using the proceeds for further diversification. But, particularly with the disclaimer in the final sentence, that at the present time there are no agreements, arrangements or understandings . . . and no negotiations are presently being conducted with respect to the sale of any branch, 15 only the most sophisticated reader would conclude that Skogmo had the firm intention, which the Judge reasonably found, not simply to consider offers but actively to solicit them. While corporations are not required to address their stockholders as if they were children in kindergarten, Richland v. Crandall, 262 F.Supp. 538, 554 (S.D.N.Y. 1967), it is not sufficient that overtones might have been picked up by the sensitive antennae of investment analysts. 48 Moreover, there were other facts that made the fateful paragraph even more likely to mislead the minority stockholders into believing that Skogmo was not planning to sell all the remaining outdoor advertising plants. Earlier the Statement had explained that the drop in profitability of the remaining outdoor advertising branches in the first five months of 1963 as compared to the first five months of 1962 was the result of three non-recurring events. Two of these were a decline in employee morale [a]s a result of uncertainty as to the future of the remaining branches and inability to cut general and administrative expenses as rapidly as branches were sold. The fair inference was that management expected the profitability of the outdoor advertising business to pick up after the merger because the cause of these non-recurring events, the plant sales, would not recur, whereas in fact Skogmo intended they should-to the point of extinction. Again, it was stated that Robbins, who has been with General Outdoor since 1925 and has been President since 1951, was expected to take office as president of the Skogmo subsidiary which will carry on the business now conducted by General Outdoor; Robbins was an outdoor advertising man, not a real estate salesman. Indeed, at a later point the Statement explicitly noted that General Outdoor would transfer to this Skogmo subsidiary its entire outdoor advertising business, which would continue to be managed by the same officers and substantially the same directors as General Outdoor. Moreover, many, probably most, of the GOA stockholders receiving the Proxy Statement of September 11, 1963, had received, only five months earlier, GOA's quarterly letter of April 11, 1963, quoting the resolution, adopted by its directors on that day, announcing that GOA would continue to operate its outdoor advertising plants with the sole exception of Oklahoma City. While, according to Robbins, this resolution was passed to improve employee morale, the combination of it with the lack of further plant sales (save the closing of the Oklahoma City sale) contributed to the misleading character of the statement of intention in the Proxy Statement. 49 We recognize that, in thus branding the Proxy Statement as misleading, the district judge and we possess an advantage of hindsight that was not available to the draftsman. It would not have been proper to say that Skogmo was going to sell all the remaining plants, when, even with the encouragement that had been received, there was no assurance that it could do this on satisfactory terms. But the English language has sufficient resources that the draftsman could have done better than he did and more accurately expressed Skogmo's true intention to the stockholders. If only the first sentence of the fateful paragraph had said something like including a policy of aggressively seeking to dispose of the remaining outdoor advertising branches or subsidiaries of General Outdoor through sales to acceptable prospective purchasers on advantageous terms in the range of those that have been achieved in the past, we would at least have had a very different case. 50