Opinion ID: 588840
Heading Depth: 3
Heading Rank: 1

Heading: Recognition of the Loss-of-State-Law-Remedy Theory

Text: 44 We must first determine whether the Plaintiffs' loss-of-state-law-remedy theory of causation can support a § 13(e) claim. In Virginia Bankshares, four members of the Court concluded that this theory could support a § 14(a) claim. See Virginia Bankshares, 501 U.S. at ----, 111 S.Ct. at 2773, 115 L.Ed.2d at 963-64 (Kennedy, J., dissenting). The five majority justices refused to consider the theory because they found that the case did not present it. 45 This case clearly presents the question left unresolved by the majority in Virginia Bankshares. We are not, however, completely without guidance in the resolution of this question. In Virginia Bankshares, the Court indicated, as we noted supra, that we should look to policy reasons to assess the legitimacy of a theory of causation. See Virginia Bankshares, 501 U.S. at ----, 111 S.Ct. at 2764, 115 L.Ed.2d at 953. We must, therefore, look first to Mills v. Electric Auto-Lite, 396 U.S. 375, 90 S.Ct. 616, 24 L.Ed.2d 593 (1970), to determine what policy considerations motivated the Court to accept the theory of causation presented in that case. We also must look to Virginia Bankshares to determine what policy considerations motivated the Court to reject the Schlick theory of causation. 46 In Mills, in which some minority votes were needed, the Court indicated that its decision was motivated by its desire to avoid the impracticalities of determining which votes were affected by the misleading proxy solicitation and to resolve doubts in favor of those that the statute was designed to protect. The decision supports, it points out, the fair corporate suffrage that Congress sought, by § 14(a), to require. The policies recognized and relied upon by Mills support the Plaintiffs' causation theory. 47 But the Plaintiffs' causation theory differs from that accepted in Mills. In Mills, the Court effectively created a conclusive presumption that a materially misleading proxy solicitation affects the outcome of a shareholder vote on the transaction if some minority votes are needed. Such a presumption obviously defies logic when the minority shareholders lack sufficient votes to affect the outcome. In this case, because Nationwide Mutual controlled 85% of the votes, the misleading proxy solicitation could not have affected the result of the vote. The Plaintiffs, however, contend that a different inference should be made--that the misleading proxy statement was an essential link in their decisions not to pursue their appraisal remedies. 48 Virginia Bankshares provides some guidance. The Plaintiffs submit that their loss-of-state-law-remedy theory avoids the dangers of speculation, which caused the Virginia Bankshares Court to reject the Schlick theory of causation. Clearly, there is an element of speculation involved in the Plaintiffs' theory. It requires an inference that, given full and fair disclosure, members of the Plaintiff class would have (1) voted against the transaction or not voted, thus qualifying for the appraisal remedy; and (2) exercised their appraisal rights within the statutorily prescribed ten-day time limitation. See Ohio Rev.Code § 1701.85. This element of speculation, however, appears to us no greater than that involved in Mills, where the Court adopted a presumption that, given full and fair disclosure, members of the plaintiff class would have voted against the proposed transaction. 49 In Virginia Bankshares, with reference to the Schlick theory of causation that the Court rejected, the Court said: 50 Causation would turn on inferences about what the corporate directors would have thought and done without the minority shareholder approval unneeded to authorize action. A subsequently dissatisfied minority shareholder would have virtual license to allege that managerial timidity would have doomed corporate action but for the ostensible approval induced by a misleading statement, and opposing claims of hypothetical diffidence and hypothetical boldness on the part of directors would probably provide enough depositions in the usual case to preclude any judicial resolution short of the credibility judgments that can come only after trial. 51 Virginia Bankshares, 501 U.S. at ----, 111 S.Ct. at 2765, 115 L.Ed.2d at 953. The difference between the presumption required by the Schlick theory that the Court rejected in Virginia Bankshares and the presumption required by the Mills theory that the Court accepted lies in the power to act. In Mills, the Court deemed a presumption, with respect to minority shareholder action within the scope of their enforceable rights, likely enough. In Virginia Bankshares, however, the Court deemed a presumption, with respect to the possible actions of the involved directors, too speculative. Virginia Bankshares, 501 U.S. at ----, 111 S.Ct. at 2765, 115 L.Ed.2d at 950. Unlike this rejected Schlick theory, the Plaintiffs' loss-of-state-law-remedy theory derives its causal link from the enforceable terms--including the right to appraisal--of the parties' corporate relationship, not from anything so amorphous and speculative as the directors' apprehension of the ill will of the minority shareholders. 52 The Plaintiffs' loss-of-state-law-remedy theory relies on a presumption that is no more speculative than the presumption made by the Court in Mills, and less so than the one rejected by the Court in Virginia Bankshares. The presumption concerns likely action by shareholders, and the causal link arises from the enforceable terms of the corporate relationship. 53 Finally, there is another reason we favor recognition of the Plaintiffs' theory of causation. We previously have indicated our belief that Congress intended that an implied private right of action arise under § 13(e). Having found such congressional intent, we would certainly be hesitant to conclude that Congress also intended that causation could not be demonstrated in any case where the minority shareholders lack sufficient votes to block the transaction. As the Plaintiffs note, this situation arises in the archetypal going-private transaction. Such shareholders are least able to protect their own interests, and they have the greatest need for the protection provided by the private right of action. These shareholders lack even the protection of sufficient numbers to vote down the proposed transaction. We will not deprive them of the protection of § 13(e). 54 In summary, we draw support for our recognition of the Plaintiffs' theory of causation from several sources. First, three current members of the Supreme Court have indicated their support for the theory, while the remainder of the Court has not determined its merits. Second, if, as the Nationwide Defendants contend, minority shareholders without sufficient voting power to prevent a transaction were categorically unable to demonstrate causation, we believe the Court would have resolved Virginia Bankshares on that broader ground. Third, the element of speculation required by the Plaintiffs' theory is no greater than that required by the theory accepted by the Court in Mills. Finally, we would be hesitant to hold that Congress intended to provide the protection of an implied right of action, but that causation could never be established in those cases where the minority shareholders, lacking sufficient votes to block the transaction, had their greatest need for such protection. 55