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

Heading: What Is the Standard of Culpability in Suits for Damages

Text: 51 for Violation of Rule 14a-9? 52 In contrast to the large quantity of ink that has been spilled on the issue whether a plaintiff seeking damages under Rule 10b-5 must make some showing of scienter and, if so, what, there has been little discussion of what a plaintiff alleging damage because of a violation of Rule 14a-9(a) must show in the way of culpability on the part of a defendant. 16 Neither of the Supreme Court decisions concerning private actions under section 14(a), J. I. Case Co. v. Borak, supra, 377 U.S. 426, 84 S.Ct. 1555, 12 L.Ed.2d 423, or Mills v. Electric Auto-Lite Co., 396 U.S. 375, 90 S.Ct. 616, 24 L.Ed.2d 593 (1970), casts light on the problem. 53 Judge Bartels held, 298 F.Supp. at 97, that the basis for incorporating scienter into a Rule 10b-5 action does not exist in a Rule 14a-9 suit, and that Negligence alone either in making a misrepresentation or in failing to disclose a material fact in connection with proxy solicitation is sufficient to warrant recovery. The judge agreed in substance with Judge Mansfield's analysis in Richland v. Crandall, supra, 262 F.Supp. at 553 n.12, to the effect that one strong ground for holding that Rule 10b-5 requires a showing of something more than negligence in an action for damages is that the statutory authority for the Rule, section 10(b) of the Securities Exchange Act, 15 U.S.C. Sec. 78j, is addressed to any manipulative or deceptive device or contrivance, a point later stressed in the writer's concurring opinion in SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 868 (2 Cir. 1968), cert. denied, 394 U.S. 976, 89 S.Ct. 1454, 22 L. Ed.2d 756 (1969), whereas section 14(a) contains no such evil-sounding language. 54 We think there is much force in this. See Gould v. American Hawaiian S. S. Co., 351 F.Supp. 853, 861-863 (D.Del. 1972); 5 Loss, Securities Regulation 2864-65 (2d ed. supp.1969). Although the language of Rule 14a-9(a) closely parallels that of Rule 10b-5, and neither says in so many words that scienter should be a requirement, one of the primary reasons that this court has held that this is required in a private action under Rule 10b-5, Shemtob v. Shearson, Hammill & Co., 448 F.2d 442, 445 (2 Cir. 1971); Lanza v. Drexel & Co., 479 F.2d 1277, 1304, 1305 (2 Cir. 1973), is a concern that without some such requirement the Rule might be invalid as exceeding the Commission's authority under section 10(b) to regulate manipulative or deceptive devices. See SEC v. Texas Gulf Sulphur Co., supra, 401 F.2d at 868 (Friendly, J., concurring); Lanza v. Drexel & Co., supra, 479 F.2d at 1305; 3 Loss, supra, at 1766 (2d ed. 1962); 6 id. at 3883-85 (Supp.1969). In contrast, the scope of the rulemaking authority granted under section 14(a) is broad, extending to all proxy regulation necessary or appropriate in the public interest or for the protection of investors and not limited by any words connoting fraud or deception. This language suggests that rather than emphasizing the prohibition of fraudulent conduct on the part of insiders to a securities transaction, as we think section 10(b) does, in section 14(a) Congress was somewhat more concerned with protection of the outsider whose proxy is being solicited. Indeed, it was this aspect of the statute that the Supreme Court emphasized in recognizing a private right of action for violation of section 14(a) in Borak, 377 U.S. at 431-432, 84 S.Ct. 1555. 17 We note also that while an open-ended reading of Rule 10b-5 would render the express civil liability provisions of the securities acts largely superfluous, and be inconsistent with the limitations Congress built into these sections, see SEC v. Texas Gulf Sulphur Co., supra, 401 F.2d at 867-868; 3 Loss, supra, at 1785, a reading of Rule 14a-9 as imposing liability without scienter in a case like the present is completely compatible with the statutory scheme. 18 55 Although this does not mean that scienter should never be required in an action under Rule 14a-9, a number of considerations persuade us that it would be inappropriate to require plaintiffs to prove it in the circumstances of this case. First, many 10b-5 cases relate to statements issued by corporations, without legal obligation to do so, as a result of what the SEC has properly called a commendable and growing recognition on the part of industry and the investment community of the importance of informing security holders and the public generally with respect to important business and financial developments. Securities Act Release No. 3844 (Oct. 8, 1957). Imposition of too liberal a standard with respect to culpability would deter this, particularly in light of the almost unlimited liability that may result. See SEC v. Texas Gulf Sulphur Co., supra, 401 F.2d at 867. Such considerations do not apply to a proxy statement required by the Proxy Rules, especially to one, like that in the present case, which serves many of the same functions as a registration statement, compare Gould v. American Hawaiian S. S. Co., supra, 351 F.Supp. at 863 n.12. Rather, a broad standard of culpability here will serve to reinforce the high duty of care owed by a controlling corporation to minority shareholders in the preparation of a proxy statement seeking their acquiescence in this sort of transaction, a consideration which is particularly relevant since liability in this case is limited to the stockholders whose proxies were solicited. 19 While privity is not required for most actions under the securities laws, its existence may bear heavily on the appropriate standard of culpability. See Ruder, Texas Gulf Sulphur-The Second Round: Privity and State of Mind in Rule 10b-5 Purchase and Sale Cases, 63 Nw.U.L.Rev. 423, 437 (1968). 56 Furthermore, the common law itself finds negligence sufficient for tort liability where a person supplies false information to another with the intent to influence a transaction in which he has a pecuniary interest. Restatement (Second) of Torts Sec. 552 (Tent. Draft No. 12, 1966); Prosser, Torts Sec. 107, at 706-09 (4th ed. 1971); Gediman v. Anheuser Busch, Inc., 299 F.2d 537, 543-546 (2 Cir. 1962). This is particularly so when the transaction redounded directly to the benefit of the defendant, in which case the common law would provide the remedies of rescission and restitution without proof of scienter. See Prosser, supra, Sec. 105, at 687-89; 3 Loss, supra, at 1626-27. It is unlikely that section 14(a) and Rule 14a-9 contemplated less. 57 We thus hold that in a case like this, where the plaintiffs represent the very class who were asked to approve a merger on the basis of a misleading proxy statement and are seeking compensation from the beneficiary who is responsible for the preparation of the statement, they are not required to establish any evil motive or even reckless disregard of the facts. 20 Whether in situations other than that here presented the liability of the corporation issuing a materially false or misleading proxy statement is virtually absolute, as under Section 11 of the 1933 Act with respect to a registration statement, Jennings & Marsh, Securities Regulation: Cases and Materials 1358 (3d ed. 1972), we leave to another day. 58