Opinion ID: 311063
Heading Depth: 2
Heading Rank: 3

Heading: Was the Inadequacy in the Proxy Statement Material?

Text: 59 The first of the two Supreme Court cases dealing with civil liability under Rule 14a-9(a), J. I. Case Co. v. Borak, supra, 377 U.S. 426, 84 S.Ct. 1555, 12 L. Ed.2d 423 raised no question with respect to materiality. However, the second, Mills v. Electric Auto-Lite Co., supra, 396 U.S. 375, 90 S.Ct. 616, 24 L.Ed. 2d 593 has often been regarded as setting forth a clear definition of materiality for purposes of damage suits under Rule 14a-9(a) in Mr. Justice Harlan's statement, 396 U.S. at 384, 90 S.Ct. at 621, that: 60 Where the misstatement or omission in a proxy statement has been shown to be material, as it was found to be here, that determination itself indubitably embodies a conclusion that the defect was of such a character that it might have been considered important by a reasonable shareholder who was in the process of deciding how to vote. 61 This statement, however, was not in fact intended to establish a definition of materiality. Certiorari was granted in Mills to resolve the basic issue raised by the holding of the court of appeals that it must be shown that the false or misleading statements in the proxy materials actually caused the shareholders to approve a merger, and that if the merger were shown to be fair, it would be conclusively presumed that a sufficient number of the stockholders would have approved it regardless of the defect in the proxy statement and thus there would be no liability. No issue as to the materiality of the misstatements or omissions was presented in the petition for certiorari, and the Court specifically noted that it would not consider respondents' argument that the proxy statement was not materially misleading, 396 U.S. at 381, n.4, 90 S.Ct. 616. Justice Harlan's statement must thus be read as a characterization of the minimum that all would agree was embodied in the district court's conclusion that the defect was material, beyond which the Justice found he need not go in order to support his holding that this showing of materiality was sufficient evidence of causal relationship between the violation and the injury to dispense with a further showing of causation in fact, rather than a determination of the proper test of materiality. See Jennings & Marsh, supra, at 1354-55. 62 Moreover, Justice Harlan cited with apparent approval two decisions of this court which set out a somewhat higher standard of materiality, 396 U.S. at 384 n.6, 90 S.Ct. 616. Thus, he cited Judge Waterman's opinion in List v. Fashion Park, Inc., 340 F.2d 457, 462 (2 Cir.), cert. denied, 382 U.S. 811, 86 S.Ct. 23, 15 L.Ed.2d 60 (1965), a face-to-face 10b-5 case, where it was held, quoting from the Restatement of Torts Sec. 538(2)(a) (1938), that the basic test of materiality is whether a reasonable man would attach importance [to the fact misrepresented] in determining his choice of action in the transaction in question (emphasis supplied). See also SEC v. Texas Gulf Sulphur Co., supra, 401 F.2d at 849. The Justice also cited the writer's statement in General Time Corp. v. Talley Industries, Inc., 403 F.2d 159, 162 (2 Cir. 1968), cert. denied, 393 U.S. 1026, 89 S.Ct. 631, 21 L.Ed.2d 570 (1969), that the test was whether taking a properly realistic view, there is a substantial likelihood that the misstatement or omission may have led a stockholder to grant a proxy to the solicitor or to withhold one from the other side, whereas in the absence of this he would have taken a contrary course (emphasis supplied). 21 63 We think that, in a context such as this, the might have been standard mentioned by Mr. Justice Harlan sets somewhat too low a threshold; the very fact that negligence suffices to invoke liability argues for a realistic standard of materiality. Justice Harlan's next sentence in Mills, that the defect must have a significant opensity to affect the voting process, 396 U.S. at 384, 90 S.Ct. at 621 (emphasis in original), comes closer to the right flavor. While the difference between might and would may seem gossamer, the former is too suggestive of mere possibility, however unlikely. 22 When account is taken of the heavy damages that may be imposed, a standard tending toward probability rather than toward mere possibility is more appropriate. We therefore adhere to this court's formulations of the test of materiality quoted above. 64 We hold, however, that the deficiency in the Proxy Statement was material under this slightly higher standard, even though we do not join in the district judge's condemnation of it for failure to disclose appraisals. At the time of the merger, the minority shareholders of GOA were required to make an investment choice between retaining their shares in GOA, a firm with poor earnings prospects if it remained in the outdoor advertising field but also with the possibility of substantial extraordinary profits from liquidation of that business, or exchanging them for a small premium for the Skogmo convertible preferred, a security involving much less risk but with a correspondingly reduced interest in the profits potentially available through sales of advertising plants. Certainly the intent of those in control of GOA would be a significant factor in a reasonable shareholder's decision whether or not to vote for the merger. If Skogmo in fact intended to continue the outdoor advertising business of GOA despite the poor earnings picture, as the Proxy Statement indicated, a reasonable GOA stockholder might well have opted for the down-side protection of the Skogmo convertible preferred stock and been willing to give up some of his interest in the potential plant sales profits, which, it may have appeared, might never be realized. On the other hand, if the Proxy Statement had adequately disclosed Skogmo's true intention to seek to dispose of all the remaining outdoor advertising plants as soon as possible, and its expectation that it could do this on favorable terms, the same stockholder would have realized that there was substantially less risk involved in retaining his GOA stock and would have been more likely to focus on the profits available from the sales of plants. In view of the magnitude of these potential profits-sales of the remaining outdoor advertising plants yielded an after-tax profit of $11,740,875, representing a 26% addition to GOA's net worth as of May 31, 1963-a reasonable stockholder, even one who recognized the benefits of the merger, would probably have considered whether the merger should not at least be postponed until this uncertainty was resolved or demanded an upward revision of the terms, 23 failing which he would have voted against the merger and exercised his appraisal rights under New Jersey law. 24 The potential increase in book value had seemed important to Skogmo's investment advisor, aware of Skogmo's intention to liquidate GOA, in March 1963; it would have seemed equally so to a reasonable GOA stockholder, apprised of that intention, in September. 65 We thus hold that the district court correctly held Skogmo liable for damages for violating Rule 14a-9(a). We therefore need not consider plaintiffs' claim that the merger was a breach of fiduciary obligation under state law, since plaintiffs do not seriously contend that predicating liability on the latter theory would result in a higher measure of damages.