Opinion ID: 2598489
Heading Depth: 4
Heading Rank: 1

Heading: Alleged misapplication of a scienter requirement

Text: The shareholders first assert that the trial court erred by applying the wrong legal standard to their proxy solicitation claims. Specifically, they claim, Judge Collins imposed a scienter requirement and refused to impose liability because she found that management did not intend to deceive the shareholders. Huna Totem does not dispute that it would be improper to require scienter in determining materiality but insists that Judge Collins applied the correct materiality standard and did not require scienter. The record supports Huna Totem's position. The shareholders base their scienter argument on several comments in the court's oral and written rulings in which Judge Collins expressed her view that the legal dispute in the present case was not the result of bad people or bad motives. In her oral decision, for example, Judge Collins prefaced a remark about the shareholders' request for declaratory and injunctive relief with the observation that there was an absence of fraud and intent to deceive. When discussing the evidence concerning false and misleading proxy materials in her subsequent written findings, Judge Collins made the same point, stressing that, [a]s stated in [the] oral findings, the court is convinced that there was no intent by the directors of Huna Totem Corporation to mislead shareholders about the Settlement Trust. But as Huna Totem correctly points out, the challenged comments concerning the corporation's lack of intent or bad faith did not address Judge Collins's application of the Brown v. Ward materiality test. Rather, when read against the background of the decision as a whole, these comments reflect little more than the court's desire to mend the relationship between Huna Totem and its shareholders, which the court described as having degenerated into finger pointing and name calling during the trial. Indeed, in her oral findings, Judge Collins expressly described her remarks on scienter as comments preliminary to her decision: Before I enter my oral findings, ... I think it's important that I make some preliminary observations about the case and about the persons involved in the case. Many disputes come before the court where the parties ... attempt to portray the opposing party as bad people with bad motives. This case is no different. Those kinds of allegations have been made. I am convinced that this case does not involve bad people or bad motives[.] And although the court returned to this theme at several points in its oral and written findings, it directed its comments not to the issue of materiality, but to the tenor of argument and discussion between the [parties]. In contrast, when addressing the issue of materiality, Judge Collins described and applied Brown v. Ward 's objective reasonable shareholder test with pinpoint accuracy, never mentioning or hinting at any consideration of motives or scienter. The shareholders nonetheless insist that the court directly link[ed] its decision against them to their failure to prove scienter. In support of this claim, they point to one particular sentence toward the end of the oral findings, in which Judge Collins observed: Given the absence of fraud and intent to deceive and the other factors I've mentioned here today, I believe it would be unfair and unjust to grant the declaratory and injunctive relief sought by the plaintiffs. But the shareholders overstate the significance of this reference to scienter. For it had nothing to do with the superior court's application of Brown v. Ward 's objective materiality test; instead, by its own terms, the comment focused exclusively on Judge Collins's alternative basis for ruling: as we have described above, the judge's alternative ruling addressed the remedies requested in the lawsuit, concluding that they would be inappropriate even if the plaintiffs had proved a material misrepresentation. As Judge Collins correctly recognized, the plaintiffs' request for equitable remedies necessarily raised equitable issues on which scienter had direct bearing. In context, then, Judge Collins's comment simply confirms her understanding and correct application of Brown v. Ward 's objective test of materiality. We thus find no merit in the shareholders' claims that Judge Collins wrongly imposed a scienter requirement in deciding the issue of materiality.