Opinion ID: 471332
Heading Depth: 2
Heading Rank: 1

Heading: Deception: the Proxy Statement.

Text: 29 Plaintiffs appeal the district court's determination that the proxy statement issued in connection with the Armco-Ladish merger was not deceptive. They assert that the proxy either misstated or omitted certain information in violation of the securities laws. The trial court had found that these items were either actually disclosed, not required to be disclosed or immaterial. They fall into two general classes of information, that concerning events preceding the merger and that concerning Ladish's finances. 30 1. Events Preceding the Merger. Before the district court plaintiffs argued that the proxy statement should have disclosed the market freeze perpetrated by Braun and his self-interest in controlling Ladish prices and keeping them artificially low. The district court correctly noted that [t]he defendants' failure to describe, in terms as dramatic as those chosen by the plaintiffs, Braun and Ladish's interests in protecting the charitable foundations which they managed and in their control over the company does not state a claim under the securities laws. 597 F.Supp. at 29. Without more, such an omission is simply a failure to reveal a breach of fiduciary duty, and this court has already held, in Panter v. Marshall Field & Co., 646 F.2d 271 (7th Cir.), cert. denied, 454 U.S. 1092, 102 S.Ct. 658, 70 L.Ed.2d 631 (1981), that a plaintiff may not bootstrap a state law claim into a federal case by alleging that the disclosure philosophy of the statute obligates defendants to reveal either the culpability of their activities, or their impure motives for entering the allegedly improper transaction. Id. at 288. Accord Atchley v. Qonaar, 704 F.2d 355, 358 (7th Cir.1983); Biesenbach v. Guenther, 588 F.2d 400, 402 (3d Cir.1978); Golub v. PPD Corp., 576 F.2d 759, 765 (8th Cir.1978); Issen v. GSC Enterprises, Inc., 508 F.Supp. 1278, 1290 (N.D.Ill.1981); Hundahl v. United Benefit Life Insurance Co., 465 F.Supp. 1349, 1365-66 (N.D.Tex.1979); Bucher v. Shumway, [1979-1980 Transfer Binder] Fed.Sec.L.Rptr. (CCH) p 97,142 at 96,301 (S.D.N.Y.1979), aff'd without opinion, 622 F.2d 572 (2d Cir.), cert. denied, 449 U.S. 841, 101 S.Ct. 120, 66 L.Ed.2d 48 (1980). 31 Rather, we explained in Panter, the critical issue is whether the conduct complained of includes the omission or misrepresentation of a material fact. 646 F.2d at 288; see also, e.g., Data Probe Acquisition Corp. v. Datatab, Inc., 722 F.2d 1, 5 (2d Cir.1983), cert. denied, 465 U.S. 1052 (1984), (examining only objective factual material). Heeding this, plaintiffs have stressed on appeal those factors in the history of this merger that they assert would have significantly altered the 'total mix' of information made available. TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449, 96 S.Ct. 2126, 2132, 48 L.Ed.2d 757 (1976). See Appellant's Brief at 32 ([T]he allegations of deception in this case, although most certainly perpetrated within the larger context [of] Victor Braun's fiduciary breach, also state sufficient claims of material omission and half-truth misrepresentation....). They argue that the following information would have affected their decision-making process when confronted with the vote on the merger: (1) Braun's premerger manipulation of Ladish stock, which kept the price at about $125 a share; (2) the true reason for merging with Armco, which was to allow Braun to cover up his previous fiduciary breaches; and (3) the fact that ACF approached Ladish with a merger offer before Armco came on the scene. 32 We do not find this statement of the proxy's deficiencies any more persuasive. The plaintiffs' insistence on their ignorance that Ladish stock was highly undervalued is disingenuous in view of the $2,000 bid from Armco and subsequent ACF bids of $2500, $3000, and $3500 per share recorded in the proxy. As the district court noted, once ACF came on the scene, the market was blown wide open. 597 F.Supp. at 31. Further, the proxy recorded internal valuation studies, commissioned by Braun, which alluded to even higher per share valuations. Materiality of an omission depends on whether there is a substantial likelihood that, under all the circumstances, the omitted fact would have assumed actual significance in the deliberations of the reasonable shareholder. TSC Industries, 426 U.S. at 449, 96 S.Ct. at 2132 (emphasis added). This is an objective standard but one that requires an examination of the total mix of information available to the shareholders in a given case. Michaels v. Michaels, 767 F.2d 1185, 1196 (7th Cir.1985), cert. denied, --- U.S. ----, 106 S.Ct. 797, 88 L.Ed.2d 774 (1986). Given the numbers that were disclosed in the proxy there is not a substantial likelihood that the fact that the $125 price was artificially low would have been news to the Ladish shareholders. 7 33 Plaintiffs also contend that defendants unlawfully failed to disclose the true reason for merging with Armco, which allegedly was to allow Victor Braun to avoid exposure of the previous manipulation designed to minimize Ladish's worth by which he had maintained control of the company. Appellant's Brief at 50. The proxy statement lists six reasons why the Board of Directors favored the Armco merger over ACF's proposal: (1) the greater liquidity and price stability of Armco shares in the market; (2) Armco's lower debt-equity ratio; (3) Armco's greater business compatibility with Ladish; (4) Ladish's historic management relationship with Armco; (5) ACF's relative inferiority in modern steel manufacturing; and (6) the low likelihood of an ACF/Ladish merger being consummated in view of the 52.6% of Ladish shares that Armco had already locked up. Proxy at 14-15. This recitation of reasons to prefer a merger with Armco is, according to plaintiffs, what distinguishes their case from Panter and other cases in which courts have found no duty to disclose impure motives. Panter, 646 F.2d at 288 (failure to disclose management policy of maintaining control at all costs); see also, e.g., Data Probe, 722 F.2d at 5 (failure to disclose that favored tender offer contained employment guarantees for management); Rodman v. Grant Foundation, 608 F.2d 64, 71 (2d Cir.1979) (failure to disclose that stock buy-back was motivated by desire to maintain control). 34 Plaintiffs argue that Panter stands for the proposition that Defendants need not have made any statement at all about this egregious conduct if they had remained totally silent on the subject.... Appellant's Brief at 50 (emphasis in original). This distinction finds no support in Panter or the other cases. In Panter, shareholders brought a class action against Marshall Field & Company alleging securities law violations in connection with a tender offer that was opposed by Field's management and subsequently withdrawn. In response to the tender offer, Field's issued several press releases explaining its opposition to the merger. In these communications it explained that continued independence was in the best interests of the shareholders and the company in view of Field's momentum and growth plans. 646 F.2d at 280. In holding that Field's did not violate the securities laws by failing to disclose that it actually objected to the merger because of a management policy of independence at all costs, the court was not concerned that Field's had made a statement that, if the plaintiffs were correct, was misleading since it was not the true reason management opposed the tender offer. See also, e.g., Biesenbach, 588 F.2d at 402 (stating that transaction was in shareholders' interest when allegedly it was not states no federal claim); see generally Ferrara, et al., Disclosure of Information Bearing on Management Integrity and Competency, 76 Nw.U.L.Rev. 555, 576-80 (1981) (reviewing cases in which [m]anagement ... has no obligation under the federal securities laws to disclose its 'true purpose' or 'motivation.' ). 35 Here the proxy statement contained a list of reasons why the company supported the merger. If plaintiffs are correct, they are misleading because they are not the true reasons the majority wants the merger. The only factual distinction is that Ladish was a bit more detailed in its proffered reasons than was Field's. But, especially as there has been no allegation that the factual matter involved is false (e.g., the assertions about relative debt/equity ratios and steel-making capacity), 8 we can think of no reason to distinguish these two cases or create an exception to the Panter rule. 36 Lastly, plaintiffs allege that the proxy statement's version of pre-merger events was misleading because it cast the impression that ACF was a last-minute interloper rather than a serious suitor. This, it is alleged, had the effect of covering up Braun's true motivations for pushing through the Armco merger: Since ACF's actions forced Braun to seek out Armco to cover up his previous price manipulations, this information warned shareholders that the prior values for Ladish stock reflected artificially depressed prices. This in turn signalled that Armco's offer might not actually reflect the company's worth. Appellant's Brief at 48-49. We agree with the trial court that this information was not material in that it did not change the total mix of information available to the Ladish shareholders. As we have already noted, the shareholders were adequately apprised that $125 was not the market value of their shares in the context of a merger. Although we have held that merger negotiations and other indications of a going price are more important in the case of closely-held corporations, where there is no public market for the company's stock, Michaels, 767 F.2d at 1196 (preliminary merger negotiations material in small family corporation), here any information about price that a more detailed description of the merger's background might have provided was already disclosed. Despite any alleged Ladish machinations, a small bidding contest had broken out. All the history of the merger negotiations might have added was further evidence of a state law infraction. 37 2. Ladish Finances. Plaintiffs make several arguments about disclosure in the proxy statement addressed to the state of Ladish's finances. As noted above, the proxy statement contained the results of two internal valuation studies conducted by Ladish shortly before the merger. The proxy described the studies and their results as follows: 38 These two documents had been prepared in late June 1981 for possible use in any negotiation involving the acquisition of Ladish. Each of these documents contains a list of items such as net worth of Ladish, market value of Oremet stock, the LIFO reserve, etc., which when added together produced adjusted book values of Ladish Common Shares of $3,738 and $3,468 per share. These figures were developed by Ladish for use as negotiating tools and not with a view to dissemination to the public. While these figures were not, in the opinion of Ladish management, intended to reflect the value of Ladish Common Shares, but rather to comprise a list of considerations for use in negotiating exchange values, they are included in this Proxy Statement because of their possible interest to shareholders in considering their vote on the Merger. 39 Proxy at 13. Plaintiffs find this passage deceptive for two reasons. First, they argue that had Ladish disclosed the basis for the two calculations given, such information might well have added legitimacy to the barebone figures which the proxy statement characterized only as a 'negotiating figure.'  Appellant's Brief at 38. Second, they claim that this passage is misleading for its failure to disclose a third internal valuation study, which put Ladish's per share value at approximately $4,074, as well as Braun's oral assessment to Armco Chairman Verity that, with good will factored in, Ladish was worth $700,000,000--or over $6,000 per share. 40 Plaintiffs do not appear to dispute the general proposition that there is no duty to disclose internal valuations under the federal securities laws. See, e.g., Panter, 646 F.2d at 293 ([B]ecause the projections of the five-year plan were tentative estimates prepared for the enlightenment of management with no expectation that they be made public, there was no duty to reveal them.). Nor, apparently do they dispute that these were indeed purely internal valuations computed for use in negotiation. Rather they argue that since Ladish disclosed the $3,738 and $3,468 figures, it consequently was bound to disclose the third study and Braun's statement to Verity. 41 Aside from the fact that these latter two valuations are as suspect of being speculative as the first two, 9 their omission is not material. Plaintiffs assert that this information would have told them that Ladish management valued the company at a figure higher than $3,000. Shareholders were told that Ladish management favored an exchange with Armco worth $2,100 per share, although another eager suitor was willing to pay substantially more. A reasonable shareholder could either conclude that the internal figures were inflated and that there was a valid business reason for favoring the Armco merger, or it could conclude that something shady was going on. Since the Armco deal was struck at a figure $1,000 lower than any of the internal studies, it is difficult to see how knowledge of two more speculative figures would change the total mix of information available. 42 Finally, shareholders point to a number of techniques employed by Ladish in preparing (with Arthur Andersen, an independent accountant) the financial statement appended to the proxy; they assert that these techniques had the effect of vastly understating Ladish's net worth. Their first example is Ladish's use of last-in, first out (LIFO) to account for the bulk of their inventory. Had they used first-in, first-out (FIFO), reported earnings would have been higher. As the district court noted, the proxy disclosed that [h]ad the FIFO method of inventory valuation been used exclusively inventories would have been $134,516,000, $94,590,000 and $61,637,000 higher than reported at December 31, 1980, 1979 and 1978. Proxy at 48. There is no duty, as plaintiffs suggest, to rework the figures with alternative accounting methods. 43 Plaintiffs also argue that the proxy put the book value of plant and equipment at cost rather than market value and used accelerated depreciation techniques to retire some equipment so that it was not valued in the financials. They assert that Ladish expensed rather than capitalized certain durable assets, shortened the periods over which the cost of unfunded employee benefits were amortized and chose an unrealistically low rate of return on unfunded employee pension liabilities. Ladish does not deny that it did these things; all are accepted accounting techniques and each is disclosed in the footnotes to the financial statement. What Ladish did not disclose, argue plaintiffs, is that each of these methods understated the company's true worth. This was not necessary. Rule 10b-5 imposes a duty to disclose, not a duty to become enmeshed in labelling disclosed information. Hundahl, 465 F.Supp. at 1364. In Hundahl, plaintiffs alleged that Mutual failed to disclose the degree to which United's 'very conservative' book value conversions understated United's worth and earnings. Id. The court noted that such an allegation seek[s] a disclosure of management's motive; plaintiffs' allegation ... would require management to label its decisions. Id. at 1365. We agree. Requiring a company to append a disclaimer, explaining why it chose each accounting practice and reciting the effects of all alternative methods, is tantamount to mandating a confession of motive. This, as we have already noted, the securities laws do not require. 44 Plaintiffs' heavy reliance on this court's decision in Atchley v. Qonaar Corp., 704 F.2d 355 (7th Cir.1983), is misplaced. In that case, it was alleged that defendants embarked upon a scheme to depress the earnings of Qonaar so that they could acquire its stock at an artificially low price. The court found a securities law violation on the ground that the defendants had misrepresented facts about Qonaar's financial health. The eight actions that the defendants were alleged to have taken either reduced the firm's actual revenues (e.g., negotiating large contracts so that payment would come due after the tender offer and making substantial charitable donations which departed from prior practice) or were false accounting practices (e.g., taking false write-offs and falsely designating certain debts bad). The statements in Atchley were deceptive because false numbers were plugged into the accounting process. Defendants were actively engaged in depressing the firm's outlook for the purpose of the tender offer. Further, Qonaar was a publicly-held corporation, traded over the counter. The alleged activities of defendants depressed Qonaar's market price, the most reliable indicator of the firm's value. In terms of both deception and materiality, this is a different case. Here there is no allegation that the company's finances were being fraudulently manipulated but rather that conservative accounting was used without disclosing the motive for using it. 10 Also, there was an indication of market value in the prices being bid for control, and these numbers were disclosed.B. Manipulative Conduct. 45 Plaintiffs also claim that the district court erred in ruling that they did not show illegal manipulation of the market in Ladish stock when (1) Braun allegedly controlled the market for Ladish stock (the market freeze) and (2) Armco entered into lock-up agreements with the majority shareholders of Ladish. First, they argue that 10b-5 manipulation does not require an allegation of deception, relying on Mobil Corp. v. Marathon Oil Co., 669 F.2d 366 (6th Cir.1981), a case in which a fully disclosed lock-up (the grant of an option to sell the target's crown jewel asset to one suitor) was found actionable under section 14(e) of the Williams Act. That court's rationale was that the option artificially and significantly discouraged competitive bidding for the Marathon stock, id. at 376, even though the arrangement was fully disclosed. But see Feldbaum v. Avon Products, Inc., 741 F.2d 234 (8th Cir.1984); Data Probe, supra; Buffalo Forge Co. v. Ogden Corp., 717 F.2d 757 (2d Cir.), cert. denied, 464 U.S. 1018, 104 S.Ct. 550, 78 L.Ed.2d 724 (1983). 46 The Mobil rationale was recently rejected by the Supreme Court. In Schreiber v. Burlington Northern, Inc., --- U.S. ----, 105 S.Ct. 2458, 86 L.Ed.2d 1 (1985), the Court held that a claim of manipulation under section 14(e) requires a showing of deception: The use of the term 'manipulative' provides emphasis and guidance to those who must determine which types of acts are reached by the statute; it does not suggest a deviation from the section's facial and primary concern with disclosure.... Id. at 2462. Applying this rationale to Rule 10b-5, we find that the district court did not err in holding that plaintiffs had stated no claim of unlawful manipulation. The lock-up agreements were fully disclosed in the proxy. As we concluded above, the effects of any market freeze perpetrated by Braun were also adequately disclosed in the proxy. 47 Plaintiffs also contend that the trial judge erred in viewing the market freeze and the lock-up as two separate schemes of manipulation. They view these two events as a unified scheme by which the merger was consummated (for all practical purposes, since a vote against it would not change the outcome) before any disclosure was made that would have suggested that the reported price of Ladish stock was grossly inaccurate. If the plaintiffs' allegations are true, there may well be a violation of state corporation law, but it does not follow from that fact that a federal securities violation occurred. Plaintiffs seek to satisfy the deception element of a 10b-5 action with the market freeze. But failure to disclose the market freeze was not actionable deception, and combining it with the fully disclosed lock-up cannot bootstrap it into a securities violation. 48 C. The Vice-Presidents' Claims. 49 The vice-president plaintiffs have raised additional federal claims distinct from those concerning the merger. They argue that Braun and Ladish violated Sec. 10(b) and Rule 10b-5 by historically misrepresenting Ladish's true value and by manipulating the market for Ladish stock so that it sold at artificially low prices. These practices, they allege, deceived them and resulted in their bargaining in the dark when they sold stock to ACF. Since it was these sales that precipitated the merger, neither the proxy statement nor the limited bidding for control enlightened them as to Ladish's per share value. 50 Deception, as alleged in a 10b-5 claim, must, however, cause the loss incurred and in a situation like this, causation and reliance are closely related, see, e.g., Chasins v. Smith, Barney & Co., 438 F.2d 1167, 1172 (2d Cir.1970) (test of reliance is properly one of tort causation). These related concepts defeat the vice-presidents' claim. They admit that they sold their stock because they did not believe what they had been told about the value of Ladish stock. See Janes Complaint at p 32 (vice-presidents approached representatives of ACF Industries and others and expressed their concern and belief that their shares of Ladish Co. were substantially undervalued); Appellants' Brief at 12 ([E]ach understood generally that the worth of their stock holdings must have been substantially greater than what Braun consistently reported.). Neither the financial reports nor the alleged market freeze caused the securities transaction in which the vice-presidents sold their stock. What caused the vice-presidents to sell, according to their theory of the case, was their frustration at being trapped as minority shareholders in a corporation whose majority was systematically undervaluing its holdings. 11 51 The vice-presidents also apparently wish us to view this as a case of omission to give correct financial statements: they were bargaining in the dark because they could furnish ACF only the understated financials, not more accurate information which showed Ladish worth as much as $4,074 a share and perhaps $6,000 a share. Appellant's Brief at 53. Although privity is not necessary to raise a duty to disclose, see Shapiro v. Merrill, Lynch, Pierce, Fenner & Smith, 495 F.2d 228, 236-37 (2d Cir.1974), the defendant must at least be buying or selling securities (or involved in a scheme to buy or sell securities 12 ) for a duty to disclose to arise. Gert v. Elgin National Industries, Inc., 773 F.2d 154, 158-59 (7th Cir.1985). Braun may have had a state law fiduciary duty to keep the vice-presidents apprised of the stock's value, but this does not, without more, translate into a federal law duty to disclose. See Santa Fe Industries, supra.