Opinion ID: 589636
Heading Depth: 2
Heading Rank: 3

Heading: The Alleged Securities Violations

Text: 56 The district court granted summary judgment for all the defendants (except MBank) on plaintiffs' alleged violations of § 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. 9 These claims focus on alleged material misrepresentations and omissions from a prospectus and proxy statement dated February 14, 1986, which defendants mailed to all CNB shareholders before the merger vote. 57 As noted by the district court, plaintiffs' amended complaint enumerates twenty-nine allegations of misrepresentation and omission pertaining to the proxy statement. See XI R. (Pleadings) Doc. 245, at 15. Respecting the numerous averments, the court held that plaintiffs failed to demonstrate the causation element of a claim under section 10(b) and Rule 10b-5 because they could not show loss causation,--that the misrepresentations and omissions caused the economic injuries plaintiffs allegedly suffered. Id. at 17-18. 10 58 Since the district court's opinion, however, the Supreme Court has spoken more directly to the issue of causation for implicit causes of action like the one presented here. In Virginia Bancshares, Inc. v. Sandberg, --- U.S. ----, 111 S.Ct. 2749, 115 L.Ed.2d 929 (1991), a majority stockholder froze out the minority stockholders by way of a merger. Under Virginia law, the approval of the minority voting shares was unnecessary for the merger. Certain minority stockholders brought a securities action pursuant to § 14(a) of the 1934 Act, complaining that the proxy statement describing the merger contained material misstatements and omissions. The Fourth Circuit subsequently affirmed a judgment in favor of the plaintiffs on various causation theories. 59 In reversing, the Supreme Court cautioned that in cases involving implied rights of action, courts must ensure that the breadth of the right once recognized should not, as a general matter, grow beyond the scope congressionally intended. Id. --- U.S. at ----, 111 S.Ct. at 2763. In the absence of  'conclusive guidance' from Congress on the scope of the implied right, the Court stated that the policy concerns expressed in Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975), should control. There, the Court expressed concerns about the practical consequences of allowing recovery, under § 10(b) of the Act and Rule 10b-5, on evidence of what a merely hypothetical buyer or seller might have done on a set of facts that never occurred. --- U.S. at ----, 111 S.Ct. at 2765. 60 Accordingly, Virginia Bancshares expressed reluctance to recognize speculative claims where liability would turn on 'hazy' issues inviting self-serving testimony, strike suits, and protracted discovery, with little chance of reasonable resolution by pretrial process. Id. --- U.S. at ----, 111 S.Ct. at 2765 (citing Blue Chip Stamps 421 U.S. at 742-43, 95 S.Ct. at 1929). The Court generally rejected theories of causation presented by shareholders whose participation was not needed for corporate action, see id. --- U.S. at ---- n. 12, 111 S.Ct. at 2765 n. 12, and held that in most instances where the votes of majority shareholders were sufficient to effect a merger without minority approval, a minority shareholder could not prove causation under § 14(a), despite the receipt of a misleading proxy statement. See id. --- U.S. at ----, 111 S.Ct. at 2762-66. 61 Although Virginia Bancshares addressed only § 14(a) claims, the opinion extensively relied on Blue Chip Stamps, a § 10(b) case. After reviewing both cases, we are persuaded that the reasoning of Virginia Bancshares applies to § 10(b) claims in connection with mergers like the reverse triangular one at bar. See Scattergood v. Perelman, 945 F.2d 618, 625 (3rd Cir.1991) (applying Virginia Bancshares to a § 10(b) claim). 62 Applying Virginia Bancshares here, we uphold the district court's conclusion that plaintiffs are unable to satisfy the causation requirement for their § 10(b) and Rule 10b-5 claims. Plaintiffs concede that the defendants controlled approximately 71% of CNB's voting stock, well in excess of the two-thirds needed to approve the merger without the minority shareholders' proxies. Although plaintiffs insist that principles of corporate law applicable to management buyouts require that the self-dealing defendants prove the entire fairness of the merger, Opening Brief at 32-25, the Court in Virginia Bancshares imposed no such requirement on the defendants. We find no reason to do so here, and we reject any theory of causation plaintiffs present based solely on allegations of a breach of corporate fiduciary duty under state law. See, e.g., Santa Fe Indus. Inc. v. Green, 430 U.S. 462, 479, 97 S.Ct. 1292, 1304, 51 L.Ed.2d 480 (1977) ([a]bsent a clear indication of congressional intent, we are reluctant to federalize the substantial portion of the law of corporations that deal with transactions in securities). 63 Plaintiffs, however, also argue that the omissions and misrepresentations by the defendants caused them to delay seeking a state court injunction of the merger. In Virginia Bancshares, the Court reserved its decision on whether  § 14(a) provides a cause of action for lost state remedies. Id. --- U.S. at ----, 111 S.Ct. at 2766. But see Healey v. Catalyst Recovery of Pennsylvania, Inc., 616 F.2d 641, 645-47 (3d Cir.1980) (holding that a cause of action under Rule 10b-5 exists if a misrepresentation or omission by the defendant prevents the plaintiff from enjoining the merger). Here, however, the district court observed that plaintiffs failed to identify any evidence in the record that supports this claim. XI R. (Pleadings) Doc. 245, at 16. None of the plaintiffs entered statements in the record reflecting that they would have tried to enjoin the merger had they known of specific information which was withheld or obscured by the defendants. 11 Even so, for purposes of summary judgment, the court assume[d] that plaintiffs have produced evidence that they would have sought an injunction to block the merger if the Proxy Statement had not contained omissions. Id. at n. 8. The court then went on to hold, however, that the misrepresentations and omissions were not material under Northway. 64 We believe the district court was overly generous in assuming that plaintiffs had produced sufficient evidence to support an allegation of a lost state remedy in the face of a summary judgment motion. Thus, we will affirm on the narrow ground that plaintiffs have not presented evidentiary materials sufficient to establish a factual issue on causation stemming from an allegedly lost state remedy. 12 65 We recognize that reasonable inferences favorable to the nonmovants must be drawn on a summary judgment motion. Nevertheless, courts are not required to assume that plaintiffs have produced evidence necessary to rebut a motion for summary judgment. See Anderson v. Liberty Lobby, 477 U.S. 242, 249, 106 S.Ct. 2505, 2511, 91 L.Ed.2d 202 (1986) (there is no issue for trial unless there is sufficient evidence favoring the nonmoving party). Indeed, to do so undermines the main purpose of the summary judgment mechanism. See Catrett, 477 U.S. at 323-24, 106 S.Ct. at 2553 (One of the principal purposes of the summary judgment rule is to isolate and dispose of factually unsupported claims or defenses). Thus, in response to defendants' motion for summary judgment, plaintiffs must demonstrate more than a mere possibility that a state remedy was lost. 66 As the district court noted, the strongest evidence presented on this issue was plaintiff Zora Evans' sworn declaration that without the omissions, I might have been very interested in trying to stop the holding company and let the bank remain as it was. Deposition of Zora Evans at 188 (emphasis added). We do not believe this qualified assertion of interest in stopping the holding company is sufficient to show that plaintiffs would have tried to enjoin the merger had they learned of any information that the defendants allegedly kept from them. After two years of pretrial litigation, plaintiffs did not produce an affidavit or deposition declaring that had they known the truth, they would have tried to block this merger. 67 Plaintiffs were apprised several times throughout the proxy statement that the merger terms drafted by CNB's management are not the result of arm's-length negotiations[,] specifically, because there exist direct conflicts of interest in the negotiation and approval of the Merger by the officers and directors of the Bank and the Corporation. Proxy Statement at 12, Attach. to Renfrow Aff. (emphasis added). The proxy statement also made clear that the merger involved certain inequities and uncertainties and that management believed the dissenters' remedy lay in the appraisal rights of § 215. See id. at 10, 13, 15, 22 (noting negotiations not at arms' length; minority and majority benefits might not be substantial equivalents; no guarantee that bank earnings could cover assumed debt service). Moreover, plaintiffs were told that the immediate benefit from the transaction would accrue to the defendants, which may result in substantial financial risks to the Bank and the Minority Shareholders. Id. at 12. 68 The plaintiffs did not seek to enjoin the merger although the proxy statement contains several references to the financial jeopardy attaching to minority shares after the merger and states that minority shareholders would have no say in future management decisions. Thus it would be mere speculation to assume that plaintiffs would have sought an injunction. Despite repeated amendments to their complaint and the taking of numerous depositions, plaintiffs failed to affirmatively declare that certain withheld or misstated information would (or even probably would) have caused them to seek a state court injunction. Nonetheless, plaintiffs ask us to infer causation because they lost a state remedy. 69 Under these circumstances, the reasoning of Virginia Bancshares convinces us to refrain from recognizing this speculative claim, id. --- U.S. at ----, 111 S.Ct. at 2765, and we hold that plaintiffs have failed to satisfy their burden of presenting affirmative evidence in order to defeat a properly supported motion for summary judgment. Liberty Lobby, 477 U.S. at 256, 106 S.Ct. at 2514.