Respondent, stockholder of petitioner company, brought a civil
action in federal court for deprivation of his and other
stockholders' preemptive rights by reason of a merger involving the
company, allegedly effected through use of a false and misleading
proxy statement. The complaint has two counts, one based on
diversity and claiming a breach of directors' fiduciary duty to
stockholders and the other alleging a violation of § 14(a) of the
Securities Exchange Act of 1934. The District Court held that, in a
private suit, it could grant only declaratory relief under § 27 of
the Act as to the second count, and that a state statute requiring
security for expenses in derivative actions applied to everything
but that part of Count 2 seeking a declaratory judgment. The Court
of Appeals reversed, holding that the state law was inapplicable
and that the District Court had power to grant remedial relief.
Held:
1. Private suits are permissible under § 27 for violation of
§14(a) for both derivative and direct causes. Pp.
377 U. S.
430-431.
2. Federal courts will provide the remedies required to carry
out the congressional purpose of protecting federal rights. Pp.
377 U. S.
433-435.
(a) Remedies are not limited to prospective or declaratory
relief, but the overriding federal law controls the measure of
redress. P.
377 U. S.
434.
(b) The character of the right remains federal, although state
law questions must also be decided. P.
377 U. S.
434.
(c) The determination of a remedy in this case must await trial
on the merits. P.
377 U. S.
435.
317 F.2d 838, affirmed.
Page 377 U. S. 427
MR. JUSTICE CLARK delivered the opinion of the Court.
This is a civil action brought by respondent, a stockholder of
petitioner J. I. Case Company, charging deprivation of the
preemptive rights of respondent and other shareholders by reason by
a merger between Case and the American Tractor Corporation. It is
alleged that the merger was effected through the circulation of a
false and misleading proxy statement by those proposing the merger.
The complaint was in two counts, the first based on diversity and
claiming a breach of the directors' fiduciary duty to the
stockholders. The second count alleged a violation of § 14(a)
[
Footnote 1] of the Securities
Exchange Act of 1934 with reference to the proxy solicitation
material. The trial court held that as to this court it had no
power to redress the alleged violations of the Act, but was limited
solely to the granting of declaratory
Page 377 U. S. 428
relief thereon under § 27 of the Act. [
Footnote 2] The Court held Wis.Stat., 1961, §
180.405(4), which requires posting security for expenses in
derivative actions, applicable to both counts, except that portion
of Count 2 requesting declaratory relief. It ordered the respondent
to furnish a bond in the amount of $75,000 thereunder and, upon his
failure to do so, dismissed the complaint, save that part of Count
2 seeking a declaratory judgment. On interlocutory appeal, the
Court of Appeals reversed on both counts, holding that the District
Court had the power to grant remedial relief and that the Wisconsin
statute was not applicable. 317 F.2d 838. We granted certiorari.
375 U.S. 901. We consider only the question of whether § 27 of the
Act authorizes a federal cause of action for rescission or damages
to a corporate stockholder with respect to a consummated merger
which was authorized pursuant to the use of a proxy statement
alleged to contain false and misleading statements violative of §
14(a) of the Act. This being the sole question raised by
petitioners in their petition for certiorari, we will not consider
other questions subsequently presented.
Page 377 U. S. 429
See Supreme Court Rule 40(1)(d)(2); [
Footnote 3]
Local 1976, United
Brotherhood of Carpenters v. Labor Board, 357 U. S.
93,
357 U. S. 96
(1958);
Irvine v. California, 347 U.
S. 128,
347 U. S.
129-130 (1954).
I
Respondent, the owner of 2,000 shares of common stock of Case
acquired prior to the merger, brought this suit based on diversity
jurisdiction seeking the enjoin a proposed merger between Case and
the American Tractor Corporation (ATC) on various grounds,
including breach of the fiduciary duties of the Case directors,
self-dealing among the management of Case and ATC and
misrepresentations contained in the material circulated to obtain
proxies. The injunction was denied, and the merger was thereafter
consummated. Subsequently, successive amended complaints were
filed, and the case was heard on the aforesaid two-count complaint.
The claims pertinent to the asserted violation of the Securities
Exchange Act were predicated on diversity jurisdiction as well as
on § 27 of the Act. They alleged: that petitioners, or their
predecessors, solicited or permitted their names to be used in the
solicitation of proxies of Case stockholders for use at a special
stockholders' meeting at which the proposed merger with ATC was to
be voted upon; that the proxy solicitation material so circulated
was false and misleading in violation of § 14(a) of the Act and
Rule 14a-9 which the Commission had promulgated thereunder;
[
Footnote 4]
Page 377 U. S. 430
that the merger was approved at the meeting by a small margin of
votes, and was thereafter consummated; that the merger would not
have been approved but for the false and misleading statements in
the proxy solicitation material; and that Case stockholders were
damaged thereby. The respondent sought judgment holding the merger
void and damages for himself and all other stockholders similarly
situated, as well as such further relief "as equity shall require."
The District Court ruled that the Wisconsin security for expenses
statute did not apply to Count 2, since it arose under federal law.
However, the court found that its jurisdiction was limited to
declaratory relief in a private, as opposed to a government, suit
alleging violation of § 14(a) of the Act. Since the additional
equitable relief and damages prayed for by the respondent would
therefore be available only under state law, it ruled those claims
subject to the security for expenses statute. After setting the
amount of security at $75,000, and upon the representation of
counsel that the security would not be posted, the court dismissed
the complaint, save that portion of Count 2 seeking a declaration
that the proxy solicitation material was false and misleading and
that the proxies and, hence, the merger were void.
II
It appears clear that private parties have a right under § 27 to
bring suit for violation of § 14(a) of the
Page 377 U. S. 431
Act. Indeed, this section specifically grants the appropriate
District Courts jurisdiction over "all suits in equity and actions
at law brought to enforce any liability or duty created" under the
Act. The petitioners make no concessions, however, emphasizing that
Congress made no specific reference to a private right of action in
§ 14(a); that, in any event, the right would not extend to
derivative suits, and should be limited to prospective relief only.
In addition, some of the petitioners argue that the merger can be
dissolved only if it was fraudulent or nonbeneficial, issues upon
which the proxy material would not bear. But the causal
relationship of the proxy material and the merger are questions of
fact to be resolved at trial, not here. We therefore do not discuss
this point further.
III
While the respondent contends that his Count 2 claim is not a
derivative one, we need not embrace that view, for we believe that
a right of action exists as to both derivative and direct
causes.
The purpose of § 14(a) is to prevent management or others from
obtaining authorization for corporate action by means of deceptive
or inadequate disclosure in proxy solicitation. The section stemmed
from the congressional belief that "[f]air 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.
It was intended to
"control the conditions under which proxies may be solicited
with a view to preventing the recurrence of abuses which . . .
[had] frustrated the free exercise of the voting rights of
stockholders."
Id. at 14.
"Too 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. These broad remedial
purposes are evidenced in the language of
Page 377 U. S. 432
the section, which makes it
"unlawful for any person . . . to solicit or to permit the use
of his name to solicit any proxy or consent or authorization in
respect of any security . . . registered on any national securities
exchange in contravention of such rules and regulations as the
Commission may prescribe as necessary or appropriate in the public
interest
or for the protection of investors."
(Italics supplied.) While this language makes no specific
reference to a private right of action, among its chief purposes is
"the protection of investors," which certainly implies the
availability of judicial relief where necessary to achieve that
result.
The injury which a stockholder suffers from corporate action
pursuant to a deceptive proxy solicitation ordinarily flows from
the damage done the corporation, rather than from the damage
inflicted directly upon the stockholder. The damage suffered
results not from the deceit practiced on him alone, but rather from
the deceit practiced on the stockholders as a group. To hold that
derivative actions are not within the sweep of the section would
therefore be tantamount to a denial of private relief. Private
enforcement of the proxy rules provides a necessary supplement to
Commission action. As in antitrust treble damage litigation, the
possibility of civil damages or injunctive relief serves as a most
effective weapon in the enforcement of the proxy requirements. The
Commission advises that it examines over 2,000 proxy statements
annually, and each of them must necessarily be expedited. Time does
not permit an independent examination of the facts set out in the
proxy material, and this results in the Commission's acceptance of
the representations contained therein at their face value unless
contrary to other material on file with it. Indeed, on the
allegations of respondent's complaint, the proxy material failed to
disclose alleged unlawful market manipulation of the stock of ATC,
and this unlawful manipulation
Page 377 U. S. 433
would not have been apparent to the Commission until after the
merger.
We therefore believe that, under the circumstances here, it is
the duty of the courts to be alert to provide such remedies as are
necessary to make effective the congressional purpose. As was said
in
Sola Electric Co. v. Jefferson Electric Co.,
317 U. S. 173,
317 U. S. 176
(1942):
"When a federal statute condemns an act as unlawful, the extent
and nature of the legal consequences of the condemnation, though
left by the statute to judicial determination, are nevertheless
federal questions, the answers to which are to be derived from the
statute and the federal policy which it has adopted."
See also Tunstall v. Brotherhood of Locomotive Firemen &
Enginemen, 323 U. S. 210,
323 U. S. 213
(1944);
Deitrick v. Greaney, 309 U.
S. 190,
309 U. S. 201
(1940). It is for the federal courts "to adjust their remedies so
as to grant the necessary relief" where federally secured rights
are invaded.
"And it is also well settled that, where legal rights have been
invaded, and a federal statute provides for a general right to sue
for such invasion, federal courts may use any available remedy to
make good the wrong done."
Bell v. Hood, 327 U. S. 678,
327 U. S. 684
(1946). Section 27 grants the District Courts jurisdiction "of all
suits in equity and actions at law brought to enforce any liability
or duty created by this title. . . ." In passing on almost
identical language found in the Securities Act of 1933, the Court
found the words entirely sufficient to fashion a remedy to rescind
a fraudulent sale, secure restitution and even to enforce the right
to restitution against a third party holding assets of the vendor.
Deckert v. Independence Shares Corp., 311 U.
S. 282 (1940). This significant language was used:
"The power to enforce implies the power to make effective the
right of recovery afforded by the Act.
Page 377 U. S. 434
And the power to make the right of recovery effective implies
the power to utilize any of the procedures or actions normally
available to the litigant according to the exigencies of the
particular case."
At
311 U. S. 288.
See also Porter v. Warner Holding Co., 328 U.
S. 395 (1946);
Mitchell v. Robert DeMario Jewelry,
Inc., 361 U. S. 288
(1960);
Schine Chain Theatres, Inc., v. United States,
334 U. S. 110
(1948).
Nor do we find merit in the contention that such remedies are
limited to prospective relief. This was the position taken in
Dann v. Studebaker-Packard Corp., 288 F.2d 201, where it
was held that the
"preponderance of questions of state law which would have to be
interpreted and applied in order to grant the relief sought. . . .
is so great that the federal question involved . . . is really
negligible in comparison."
At 214. But we believe that the overriding federal law
applicable here would, where the facts required, control the
appropriateness of redress despite the provisions of state
corporation law, for it "is not uncommon for federal courts to
fashion federal law where federal rights are concerned."
Textile Workers v. Lincoln Mills, 353 U.
S. 448,
353 U. S. 457
(1957). In addition, the fact that questions of state law must be
decided does not change the character of the right; it remains
federal. As Chief Justice Marshall said in
Osborn v.
Bank of United States, 9 Wheat. 738 (1824):
"If this were sufficient to withdraw a case from the
jurisdiction of the federal Courts, almost every case, although
involving the construction of a law, would be withdrawn. . . ."
At
22 U. S.
819-820.
Moreover, if federal jurisdiction were limited to the granting
of declaratory relief, victims of deceptive proxy statements would
be obliged to go into state courts for remedial relief. And if the
law of the State happened
Page 377 U. S. 435
to attach no responsibility to the use of misleading proxy
statements, the whole purpose of the section might be frustrated.
Furthermore, the hurdles that the victim might face (such as
separate suits, as contemplated by
Dann v. Studebaker-Packard
Corp., supra, security for expenses statutes, bringing in all
parties necessary for complete relief, etc.) might well prove
insuperable to effective relief.
IV
Our finding that federal courts have the power to grant all
necessary remedial relief is not to be construed as any indication
of what we believe to be the necessary and appropriate relief in
this case. We are concerned here only with a determination that
federal jurisdiction for this purpose does exist. Whatever remedy
is necessary must await the trial on the merits.
The other contentions of the petitioners are denied.
Affirmed.
[
Footnote 1]
Section 14(a) of the Securities Exchange Act of 1934, 48 Stat.
895, 15 U.S.C. § 78n(a), provides:
"It shall be unlawful for any person, by the use of the mails or
by any means or instrumentality of interstate commerce or of any
facility of any national securities exchange or otherwise to
solicit or to permit the use of his name to solicit any proxy or
consent or authorization in respect of any security (other than an
exempted security) registered on any national securities exchange
in contravention of such rules and regulations as the [Securities
and Exchange] Commission may prescribe as necessary or appropriate
in the public interest or for the protection of investors."
[
Footnote 2]
Section 27 of the Act, 48 Stat. 902 903, 15 U.S.C. § 78aa,
provides in part:
"The district courts of the United States, the Supreme Court of
the District of Columbia, and the United States courts of any
Territory or other place subject to the jurisdiction of the United
States shall have exclusive jurisdiction of violations of this
title or the rules and regulations thereunder, and of all suits in
equity and actions at law brought to enforce any liability or duty
created by this title or the rules and regulations thereunder. Any
criminal proceeding may be brought in the district wherein any act
or transaction constituting the violation occurred. Any suit or
action to enforce any liability or duty created by this title or
rules and regulations thereunder, or to enjoin any violation of
such title or rules and regulations, may be brought in any such
district or in the district wherein the defendant is found or is an
inhabitant or transacts business, and process in such cases may be
served in any other district of which the defendant is an
inhabitant or wherever the defendant may be found."
[
Footnote 3]
"The phrasing of the questions presented need not be identical
with that set forth in the jurisdictional statement or the petition
for certiorari, but the brief may not raise additional questions or
change the substance of the questions already presented in those
documents. Questions not presented according to this paragraph will
be disregarded, save as the court, at its option, may notice a
plain error not presented."
[
Footnote 4]
17 CFR § 240.14a-9 provides:
"
False or misleading statements. No solicitation
subject to §§ 240.14a-1 to 240.14a-10 shall be made by means of any
proxy statement, form of proxy, notice of meeting, or other
communication written or oral containing any statement which, at
the time and in the light of the circumstances under which it is
made, is false or misleading with respect to any material fact, or
which omits to state any material fact necessary in order to make
the statements therein not false or misleading or necessary to
correct an statement in any earlier communication with respect to
the solicitation of a proxy for the same meeting or subject matter
which has become false or misleading."