Opinion ID: 6986345
Heading Depth: 2
Heading Rank: 1

Heading: Allegation One: Misrepresentation Of “Profit”

Text: Desaigoudar argues that the proxy statements the Appellees issued in June and July of 1995 misled shareholders because they described CMD’s quarterly performance as “profitable.” In her view, the shareholders should have been told that CMD’s quarterly performance was a loss. She asserts that Appellees engineered the profit, in part, when they caused CMD to cancel monthly funding for CellAccess and thereby abandoned CMD’s 56 percent interest in the venture. De-saigoudar reasons from FORE Systems’ November 1995 purchase of CellAccess that the cancellation and abandonment of the venture caused CMD to forego 56 percent of a $60 million opportunity, or $36 million. She then alleges that the Appel-lees knowingly and intentionally failed to inform shareholders that CMD had forfeited an asset worth many millions of dollars in order to generate a portion of the profit that they claimed. Her argument is flawed. Rule 14a-9 requires a complainant to demonstrate why a challenged proxy statement was misleading “at the time ... made.” 17 C.F.R. § 240.14a-9. Thus, the issue here is whether the Appellees could have known how much CellAccess was worth to CMD when it ceased funding for CellAccess. If there was no way to know, it is impossible to fault the Appellees. Failure to disclose information that does not yet exist cannot be the predicate for Rule 14a-9 liability. See 17 C.F.R. § 240.14a-9. Obviously Desaigoudar has suspicions, but that is not enough. We can therefore eliminate FORE Systems’ purchase of CellAccess as a possible source for knowledge of the company’s value. That transaction, which appears to be the only exchange that actually involved CellAccess, took place several months after the proxy statements were issued in the summer of 1995. Desaigoudar relies on three other reasons why the Appellees would have known CellAccess’ value at the time they posted the proxy statements. They are that: (1) Appellee Jordan performed a due diligence investigation of CellAccess in 1994; (2) an unidentified “high technology publication” mentioned CellAccess as a “promising new company” in March 1995; and (3) sometime just prior to that favorable mention CISCO Systems paid $120 million for a company that, like CellAccess, was developing asynchronous transfer mode technology. We think these reasons are not enough to substantiate Desaigoudar’s claim. Not one of the described events occurred contemporaneously with the proxy solicitations or CMD’s cessation of the CellAccess project. There is also no indication that the Appellees knew about the “recognition” CellAccess received or about CISCO Systems’ purchase of a Cel-lAccess “competitor.” Ultimately, the greatest flaw in Desaig-oudar’s case is the fact that any estimate that the Appellees could have fabricated based on these events would have been utterly unreliable. The SEC has historically disfavored forecasts and value estimates in proxy statements. See South Coast Services Corp. v. Santa Ana Valley Irrigation Co., 669 F.2d 1265, 1270 (9th Cir.1982). An exception to this treatment has existed for estimates based on “objective, reasonably certain data, such as commodity prices prevailing in an active market.” See id. at 1270-71. Here, the events upon which the complaint relies do not comprise the “objective, reasonably certain data” spoken of in the exception. Nothing in the complaint demonstrates that CellAccess was akin to a “commodity” traded in an “active market.” Thus, we cannot fault the Appellees for omitting from the proxy statements an estimate based on those facts presented in the complaint. . No reasonable shareholder would have considered such an estimate honestly presented important in deciding how to vote. Consequently, we agree with the district court that Desaigoudar failed to plead a material omission and that the Appellees are not liable under Section 14(a) and Rule 14a-9. See TSC Industries, Inc. v. Northway, Inc., 426 U.S. at 449, 96 S.Ct. 2126 (noting that “[a]n omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote”); Stahl v. Gibraltar Financial Corp., 967 F.2d 335, 337 (1992) (noting that materiality is the “touchstone of a[S]ection 14(a) violation”). Broadly read, Desaigoudar’s complaint would require corporate officials to speculate about the value of potentially foregone opportunities and disclose the results whenever they might dissuade shareholders from adopting by proxy the officials’ recommendations. However, Section 14(a) and Rule 14a-9 do not require corporate officials to predict such distant misfortunes. See South Coast Services Corp., 669 F.2d at 1270. In a note appending Rule 14a-9, the SEC identifies “[predictions as to specific market values” as, depending on the facts of a particular case, possible examples of the very wrong that Rule 14a-9 was designed to prevent. 17 CFR § 240.14a-9. Since we conclude that a prediction based on the facts in the complaint would have been unreliable, we cannot conclude that omitting it from the proxy statements violated the law. Section 14(a) and Rule 14a-9 do not obligate corporate officials to present, no matter how unlikely, every conceivable argument against their own recommendations. They instead require that officials divulge all known material facts so that shareholders can make informed choices. See J.I. Case Co. v. Borak, 377 U.S. 426, 431, 84 S.Ct. 1555, 12 L.Ed.2d 423 (1964) (noting that Section 14(a) was designed to “prevent management or others from obtaining authorization for corporate action by means of deceptive or inadequate disclosure in proxy solicitation”). That is what the Appellees appear to have done. Desaigoudar protests that the gravamen of the complaint was “self-dealing” by the Appellees and their “concealed mismanagement” of CMD, not their failure to provide an estimate of CellAccess’ resale value. Appellant’s Opening Br. at 23. We find this interpretation unconvincing in light of the clear language of her complaint, which states: “The press release and proxy solicitation material were materially misleading as to the true general nature and terms of the quarterly profit, and as to whether Defendants merited stock options. Neither document disclosed that the modest quarterly profit ... meant a $36 million loss.... ” Second Amended Complaint at 8 (¶ 48). Moreover, the complaint makes no cognizable claim under Section 14(a) and Rule 14a-9 to the extent that it might allege something other than a material misstatement or omission in connection with a proxy statement. See, e.g., Maher v. Zapata Corp., 714 F.2d 436, 444 n. 16 (5th Cir.1983) (noting inapplicability of Section 14(a) to claims of alleged mismanagement or breach of fiduciary duty). Desaigoudar also contends that the Ap-pellees failed to alert CMD shareholders that the heralded quarterly profit was not entirely from “operations,” as the investors would likely presume. In her view, what was fatally absent from the proxy solicitations was an explanation that the Appel-lees generated a part of the quarterly profit by eliminating CMD’s ties with CellAecess. That is, they should have disclosed that some portion of the quarterly profits came from abandoning CellAecess, collecting the termination fee, and not having to pay $90,000 per month to maintain CMD’s interest in CellAecess. 6 We are unable to agree. Desaigoudar cites no authority for the proposition that the Appellees misused the word “profit.” Profit may be understood properly as “gain” or “[t]he excess of revenues over expenses in a business transaction.” BLACK’S LAW DICTIONARY 1227 (7th ed.1999). There is no dispute that CMD’s revenue exceeded its expenses during the relevant fiscal quarter. Thus, it was not misleading to say that CMD turned a profit, and Appellees were entitled to disclose that favorable information to shareholders. Desaigoudar’s theory that the ordinary CMD investor would think “profit” related only to “operations” does not provide the cause of action her complaint is otherwise lacking.