Court Opinion

ID: 9468856
Source: CourtListenerOpinion
Date Created: 2023-08-05 02:25:28.486409+00
Date Added: 2024-06-11T17:41:05.386234
License: Public Domain

FLETCHER, Circuit Judge,
dissenting:
Appellant shareholders and directors contend that the SAVI proxy materials misled shareholders by disclosing only the historical cost of S A Vi’s realty and omitting the board’s own estimates of the present market value of the SAVI properties. As noted in the majority opinion, the district court rejected this contention on the basis of its understanding of SEC policy with regard to appraisal information and its assessment of the estimates’ reliability. The district court’s analysis was incomplete, however, for it failed to take the necessary first step of determining materiality.
Generally speaking, rule 14a-9 is violated if a proxy statement fails to disclose a material fact. In TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 96 S.Ct. 2126, 48 L.Ed.2d 757 (1976), the Supreme Court posited the following test for materiality:
An omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote. . . . What the standard does contemplate is a showing of a substantial likelihood that, under all the circumstances, the omitted fact would have assumed actual significance in the deliberations of the reasonable shareholder. Put another way, there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the “total mix” of information made available.
Id. at 449, 96 S.Ct. at 2132. In viewing the sale of SAVI’s assets within the framework of this standard of materiality, numerous factors persuade me that a reasonable shareholder would have considered the valuations placed on the assets by the board important in deciding how to vote. SAVI was a company whose value was principally in the liquidation value of its real property assets, which had appreciated dramatically from acquisition costs.1 SAVI’s attractiveness to potential purchasers lay in the liquidation value of its real property assets. Noting that the SAVI board disclosed the valuations in question to both Investors and Shaped, the value of the realty assets must have figured prominently in negotiations and was of material importance. The SAVI shareholders as sellers had just as much need for the information to aid in making informed decisions.
Most of the SAVI stock was in the hands of financially unsophisticated shareholders who, under the terms of the sale, were surrendering forever their interest in the SAVI assets. There was no public market for SAVI stock to serve as an indicator of the current value of these greatly appreciated assets. In these circumstances the board’s estimates of the assets’ current value would be precisely the kind of information that a reasonable shareholder would need and want to inform his decision and, therefore, the board’s failure to disclose the valuations constituted a material omission within the meaning of rule 14a-9.
Having determined that the omitted asset valuations were material, it then becomes necessary to assess the majority’s argument that their disclosure would have misled the SAVI shareholders. To adequately address this issue, the court must confront and evaluate the once widely held view that appraisals and estimates are, in effect, per se unreliable and misleading information.
*1275The majority’s analysis of the problem starts from, the premise that the SEC disfavors inclusion of appraisal information in proxy materials.
To support its characterization of SEC policy the majority relies on Gerstle v. Gamble-Skogmo, Inc., 478 F.2d 1281 (2d Cir. 1973), a case involving a merger between General Outdoor Advertising Company (GOA) and Gamble-Skogmo. In Gerstle the plaintiffs alleged that the proxy materials seeking approval of the merger were inadequate because, inter alia, they failed to include GOA management’s valuations of its advertising plants. For additional enlightenment on the asset appraisal issue the district court had asked the SEC to submit an amicus curiae brief. This brief stated in pertinent part:
When a balance sheet in a proxy statement for a merger reflects assets at an amount that is substantially lower than their current liquidating value, and liquidation of those assets is intended or can reasonably be anticipated, the textual or narrative portion of the proxy statement must contain whatever available material information about their current liquidating value is necessary to make the proxy statement not misleading.
478 F.2d at 1291. Further, the brief recognized that appraisals generally may be misleading but stated that appraisals of current liquidating value must be disclosed if they have been made by a qualified expert and have a sufficient basis in fact. The lower court apparently adopted the am/cus brief as an accurate statement of the governing principle on disclosure of appraisal information and held that the failure to disclose the management’s valuations of assets violated rule 14a-9. On appeal, Judge Friendly, speaking for the Second Circuit, concluded that the SEC brief did not reflect SEC policy as understood by securities lawyers and accountants in 1963, the year in which the challenged proxy materials were distributed. To the contrary, Judge Friendly observed, it had long been an “article of faith” that appraisals of assets could not be included in proxy statements. Id. at 1293. He noted that the considerations underlying this policy against disclosure were distrust of reliability, concern of unwarranted reliance by investors, and the impracticability of the SEC’s determining reliability in each instance. While acknowledging that “[t]he SEC may well determine that its policy . . . may have deprived those who must decide whether or not to sell their securities ... of valuable information,” id. at 1294, the court refused to impose liability on Gamble-Skog-mo on the basis of a shift in SEC policy since 1963.2
This traditional view against disclosure of appraisal information has found expression in a number of other cases. See, e.g., Kohn v. American Metal Climax, Inc., 458 F.2d 255 (3d Cir.), cert. denied, 409 U.S. 874, 93 S.Ct. 120, 34 L.Ed.2d 126 (1972); Sunray DX Oil Co. v. Helmerich & Payne, Inc., 398 F.2d 447 (10th Cir. 1968); Denison Mines, Ltd. v. Fibreboard Corp., 388 F.Supp. 812 (D.Del.1974); Madonick v. Denison Mines, Ltd., Fed.Sec.L.Rep. (CCH) ¶ 94,550 (S.D.N.Y.1974). The policy, reflecting a solicitous regard for shareholders who might place indiscriminate trust in estimates of questionable reliability, had its genesis in the Commission’s early efforts under the Securities Exchange Act of 1934 to protect investors from certain companies’ practices of luring the unsuspecting with overstatement of assets in registration statements. See 2 A. Bromberg, Securities Law: Fraud § 6.5 (449) (1977). The Commission’s mandate “to stem the speculative tide whenever necessary,” S.Rep.No.792, 73d Cong., 2d Sess. 4 (1934), called for measures and policies designed to correct certain abuses thought to have initiated the stock market collapse of 1929 and the ensuing economic depression, but ill-suited to fulfillment of other aspects of the Act’s remedial purposes. Attainment of one of those goals, to promote fair corporate suffrage, is inhibited by a policy that counsels withholding material informa*1276tion from shareholders voting on a merger proposal. I agree with the drafters of the SEC’s amicus curiae brief submitted in the Gerstle case that in those instances in which the historical cost at which assets are carried in a balance sheet is substantially lower than their current market value, a proxy statement should disclose current appraisals if made by a qualified expert and sufficiently based in fact. In my judgment, this policy is consonant with the purpose underlying the 1934 Act.
The proper frame of reference within which to analyze appellants’ contentions is the statutory purpose underlying the proxy rule allegedly violated. Legislative history reveals that by passing section 14(a) of the Securities Exchange Act of 1934 Congress intended to protect investors from making ill-informed decisions to buy or sell securities. Expressing a belief that “[fjair corporate suffrage is an important right that should attach to every equity security bought on a public exchange,” H.R.Rep.No. 1383, 73d Cong., 2d Sess. 13 (1934), Congress noted that “[t]oo often proxies are solicited without explanation to the stockholder of the real nature of the questions for which authority to cast his vote is sought.” S.Rep.No.792, 73d Cong., 2d Sess. 12 (1934). See also TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 444, 96 S.Ct. 2126, 2130, 48 L.Ed.2d 757 (1976); Mills v. Electric Auto-Lite, 396 U.S. 375, 381, 90 S.Ct. 616, 620, 24 L.Ed.2d 593 (1970); J. I. Case Co. v. Borak, 377 U.S. 426, 431, 84 S.Ct. 1555, 1559, 12 L.Ed.2d 423 (1964). Moreover, it reflects a proper regard for the considerations of materiality critical to analysis under the rule 14a-9.3
Laboring under the constraining assumption that appraisal information must in most instances be excluded in deference to a blanket SEC prohibition against its disclosure, the district court found that the SAVI board members were not professional appraisers, not uniformly qualified to value real property, and made their valuations based on unascertained assumptions. These considerations alone, however, are insufficient to support the conclusion that the appraisals were potentially so misleading as to justify their exclusion from the proxy materials.
Although the board members were not professional appraisers and arrived at their estimates of value by an undocumented procedure, their appraisals bear certain indicia of reliability overlooked by the court below. Although some members of the board possessed greater expertise in the field than others, all were experienced in real estate matters. They had intimate knowledge of the SAVI properties and were well acquainted with the factors influencing value in the southern California real estate market. Further, the SAVI board treated the appraisals as reliable when they gave them to two potential purchasers without any disclaimer as to reliability. Most significant, they held themselves out to the shareholders as possessing sufficient expertise to value most of the properties themselves and dispense with a professional appraisal. Thus appellees’ contentions that the board lacked the expertise to make a reliable appraisal have a hollow ring to them. The board either had no business marketing the property without securing expert appraisals or they had the requisite expertise to evaluate the properties and should share their opinions with their shareholders.
The final step in an analysis of SAVI’s alleged liability for failure to disclose the board appraisals is to weigh the factors bearing on materiality against the likelihood that the estimates would mislead the shareholders. The information is unquestionably material within the meaning of rule 14a-9. However, appraisals by their very nature are susceptible to varying interpretation and even manipulation and the SAVI board estimates, while arguably expert, are not the work of a professional appraiser. Yet when these competing concerns are balanced, it is clear to me that the SAVI shareholders’ need for the information outweighs the risk of their being mis*1277led. The SAVI board could have alleviated any concern that the shareholders might be misled or that the intent of the disclosure provisions of the securities laws might be subverted simply by qualifying disclosure of the board estimates with the same sort of language of disclaimer used to dissuade the shareholders from placing undue reliance on the Harrison appraisals. It must be noted also that furnishing some appraisals and not others as was done in this case could be misleading in itself by raising the implication in the minds of some that the value of other properties was unchanged. Reliance on the supposed SEC policy in this case to justify withholding appraisals from shareholders indeed has an ironic twist. The selling shareholders need protection against selling too cheaply. The appraisal information would have helped guard against that. The SAVI shareholders were denied that safeguard. The purchasers, on the other hand, were furnished the information. Thus, I conclude, contrary to the majority, that appellees’ omission of the board’s valuations rendered the proxy statement materially misleading in violation of rule 14a-9.
In addition to the offer from Investors, the SAVI board received inquiries from four other companies interested in a merger or a purchase of assets. One company, Shaped Industries, signaled the intensity of its interest by suggesting a purchase price of $1,300 per share, $350 more than the Investors offer, if certain contingencies could be met. The board elected not to pursue these so-called “promises in the sky” but rather to accept the firm offer from Investors. Appellants challenge the board’s failure to divulge the information regarding other proposals to shareholders who were faced with the same decision whether or not to accept the terms of a proposed sale. Additionally, appellants contend that the information was necessary in order to clarify the reference in the proxy statement to “other recent proposals.”
Employing the same mode of analysis used to address appellants’ objections to the omission of the board appraisals, my initial inquiry is whether, under the circumstances, there is a substantial likelihood that a reasonable shareholder would have considered information about the other companies’ inquiries important in deciding how to vote. TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449, 96 S.Ct. 2126, 2132, 48 L.Ed.2d 757 (1976). Again significance attaches to the fact that the proposed transaction involved the sale of assets undervalued in the proxy materials. What in another setting might have been a trivial omission becomes important in light of the fact that the SAVI shareholders had a dearth of information to aid their evaluation of the attractiveness of the recommended offer. Disclosure of information about the interest of three other companies and the conditional offer of a fourth might have provided some insight into the intensity of demand for SAVI’s assets, their potential value, and the adequacy of the offer under consideration.
The majority finds, however, that the inquiries were properly not disclosed because the companies were merely sending out preliminary feelers. It relies on Scott v. Multi-Amp Corp., 386 F.Supp. 44 (D.N.J. 1974), wherein the court held that such casual inquiries need not be revealed in proxy statements.
Consideration of the Shaped Industries conditional offer of $1,300 per share, however, compels the opposite conclusion. Although the majority states that the offer, conditioned on a contingency perhaps impossible of fulfillment, was not firm, the Shaped proposal’s specificity indicated that negotiations had progressed to the serious stage, warranting disclosure to the shareholders. Logic dictates that “management, when endorsing one offer, must inform stockholders of any better ones.” Gerstle v. Gamble-Skogmo, Inc., 478 F.2d 1281, 1295 (2d Cir. 1973) (dictum). See also United States Smelting, Refining & Mining Co. v. Clevite Corp., Fed.Sec.L.Rep. (CCH) ¶ 92,-691 (N.D.Ohio 1968). The information that the SAVI assets had attracted a conditional offer of $1,300 per share would have been of material importance to a shareholder in deciding how to cast his vote on the board’s recommendation to accept a $950 per share offer.
Because third-party offers generally reflect an objective assessment of a compa*1278ny’s worth and do not have the potential for overstatement of value that taints appraisals, see Gerstle v. Gamble-Skogmo, 478 F.2d at 1294-95, there is less danger that shareholders will be misled by the disclosure of material but possibly unreliable information.4 The fact that the Shapell offer was conditional, however, counsels caution. Reliance on the figure advanced by Shapell might give the shareholders a false sense of S A Vi’s worth.
However, while there was a risk that the dollar amount attached to the Shapell offer might have sparked a gleam in a shareholder’s eye and blinded him to the realities of the SAVI properties’ development potential, I am convinced that the undisclosed offer’s materiality outweighed the danger of misplaced reliance. A sentence or two of admonishment in the proxy statement would have served to alert shareholders to the dangers of jumping to unwarranted conclusions.

. The balance sheet prepared by SAVI’s accounting firm listed total assets of $5,416,-001. The SAVI realty was carried at acquisition costs totalling $3,396,605. The statement incorporated the board’s estimates of the fair market value of the realty, ranging from $8,150,000 low to $12,950,000 high.

. The court ultimately found liability on the basis of the proxy statement’s failure to disclose the fact that Gamble-Skogmo intended vigorously to pursue a plan to dispose of the advertising plants once the merger was effected.

. Recalling that the SAVI proxy materials included the appraisals of two parcels of property, this court is not confronted with the problem troubling the second circuit in Gerstle, for appellees’ own behavior attests to the fact that by 1977 it was no longer an article of faith that SEC policy barred disclosure of appraisals.

. The danger is further reduced when the shareholders to whom the information is disclosed are selling shareholders.