Opinion ID: 474303
Heading Depth: 2
Heading Rank: 3

Heading: Fairness and Injury Under Sec. 14(e)

Text: 32 Plaine contends that even if collateral estoppel effect is given to the Commissioner's fairness determination, the mere fact that the merger price was determined to be fair is not fatal to her suit claiming that misstatements in the amended tender offer violated section 14(e). Defendants argue that even assuming that there was a violation of the proxy rules, the fact that the merger price was fair prevents Plaine from proving that she was injured by any misstatement or omission. Thus we must consider whether precluding Plaine from contesting the fairness of the terms of the merger in this securities litigation also precludes her from proving a cause of action under section 14(e). 33 In Mills v. Electric Auto-Lite Co., 396 U.S. 375, 90 S.Ct. 616, 24 L.Ed.2d 593 (1970), the Supreme Court considered the issue of fairness in a suit under section 14(a), 15 U.S.C. Sec. 78n(a) (1982)--a section that is similar in purpose to section 14(e). See Klaus v. Hi-Shear Corp., 528 F.2d 225, 232 (9th Cir.1975). In Mills, the Court held that a finding that the merger was fair could not be used to foreclose the plaintiff's attempt to show liability because [t]here is no justification for presuming that the shareholders of every corporation are willing to accept any and every fair merger put before them .... 396 U.S. at 382 n. 5, 90 S.Ct. at 620 n. 5. Rather, the plaintiff succeeds in proving causation once the misstatement or omission has been shown to be material. 15 Id. at 385, 90 S.Ct. at 622. Fairness may be considered, however, in determining the form of relief to which the shareholders may be entitled. Id. at 386, 90 S.Ct. at 622. Similarly, in Gerstle v. Gamble-Skogmo, Inc., 298 F.Supp. 66, 99-100 (E.D.N.Y.1969) modified on other grounds and aff'd, 478 F.2d 1281 (2d Cir.1973), the court specifically considered the relationship between fairness and proof of injury in a section 14(a) claim. There the court reasoned, When a seller is induced to sell his property by means of a statement which he subsequently learns is false, the fact that the sales price was fair at the time is irrelevant. 298 F.Supp. at 100. 34 These opinions recognize, as Plaine contends, that shareholders can be injured in ways other than by receiving an unfair price for their shares. While the issue of fairness is relevant to the issue of damages, it does not necessarily defeat a plaintiff's claim of injury. 35 The defendants rely on Shapiro v. Midwest Rubber Reclaiming Co., 626 F.2d 63 (8th Cir.1980), cert. denied, 449 U.S. 1079, 101 S.Ct. 860, 66 L.Ed.2d 802 (1981), which is factually similar to the instant case but holds that the plaintiffs had not proved injury. There the plaintiffs had alleged violations of sections 14(a) and 14(e) in connection with a tender offer and merger. Plaintiffs alleged that they suffered harm despite their own inaction because the defendants had unlawfully induced other minority shareholders to exchange their shares. Id. at 69 n. 12. The court concluded, however, that [the plaintiffs] were harmed, if at all, only when the takeover was consummated-- i.e., when they were frozen out in 1978. They do not, however, challenge the terms of the freeze-out merger or allege that they were harmed by it. Id. at 70. In holding that the Shapiros had not proved harm, the Eighth Circuit relied upon the fact that they received more in the freeze-out merger (i.e., subordinated debentures worth $40 per share) than they allege should have been offered them earlier ($15 per share). Id. at 67, 70. Here, in contrast, Plaine alleges that the $45 per share which was applicable to both the freeze-out merger and the earlier tender offer was an inadequate price. 36 Plaine's position is further strengthened by her argument that the issue of fairness in the state proceeding is not identical to the question of value to be determined in federal court. The two cases she relies upon, Graham v. Exxon Corp., 480 F.Supp. 12 (S.D.N.Y.1978), and Dofflemyer v. W.F. Hall Printing Co., 558 F.Supp. 372 (D.Del.1983), while dealing with the more limited Delaware state appraisal procedure, are instructive. In both cases, the Delaware Court of Chancery had determined the objective value of the plaintiff's shares, yet the federal district courts both held that the more restrictive method of valuation used in the state court prevented application of collateral estoppel in the federal proceeding. Graham, 480 F.Supp. at 14; Dofflemyer, 558 F.Supp. at 381. Here too, the California Corporations Commissioner merely decided that the merger price was within a range of fairness. The determination of actual damages in the federal claim may well produce a different price. 37 Because collateral estoppel effect was properly given to the Corporations Commissioner's decision, it should be considered determinative of the issue of fairness to the extent that issue is involved in the federal proceeding. The damages awarded a successful section 14(e) plaintiff, however, may go beyond a determination of a fair price. The purpose of the 1934 Act is to compensate plaintiffs injured by violations of the federal securities laws whether the measure of damages is out-of-pocket loss, benefit of the bargain, or some other appropriate standard. Osofsky v. Zipf, 645 F.2d 107, 111 (2d Cir.1981).  '[A]ctual damages' may include loss of possible profit, unless wholly speculative, from securing a merger agreement more favorable to plaintiff. Dofflemyer, 558 F.Supp. at 380. 38 The differences between the state administrative proceedings and federal court proceedings leave some questions of material fact regarding section 14(e) damages to be determined in the federal proceeding. For example, even though $45 per share is considered a fair price, plaintiff might be able to show that, had section 14(e) been fully complied with, the shareholders' negotiating position would have produced a higher amount. The existence of these disputed material facts require the reversal of the district court's summary judgment decisions. 16