Petitioners, minority shareholders of respondent Electric
Auto-Lite Co., brought this action derivatively and on behalf of
minority shareholders as a class to set aside a merger of Auto-Lite
and the Mergenthaler Linotype Co. (which, before the merger, owned
over half of Auto-Lite's stock). Petitioners charged that the proxy
solicitation for the merger by Auto-Lite's management was
materially misleading, and violated § 14(a) of the Securities
Exchange Act of 1934 and Rule 14a-9 thereunder in that the merger
was recommended to Auto-Lite's shareholders by that company's
directors without their disclosing that they were all nominees of
and controlled by Mergenthaler. The District Court, on petitioners'
motion for summary judgment, ruled that the claimed defect in the
proxy statement was a material omission, and, after a hearing,
concluded that, without the votes of minority stockholders,
approval of the merger could not have been achieved, and that a
causal relationship had thus been shown between the finding of a §
14(a) violation and the alleged injury to petitioners. The court
referred the case to a master to consider appropriate relief. On
interlocutory appeal, the Court of Appeals affirmed the conclusion
that the proxy statement was materially deficient, but held that
the granting of summary judgment with respect to causation was
erroneous, and that it was necessary to resolve at trial whether
there was a causal relationship between the deficiency in the proxy
statement and the merger. Finding that causation could not be
directly established because of the impracticalities of determining
how many votes were affected, the court ruled that the issue was to
be determined by proof of fairness of the merger, and, if the
respondents could prove fairness, it could be concluded that a
sufficient number of shareholders would have approved the merger
regardless of the misrepresentation.
Held:
1. Fairness of the merger terms does not constitute a defense to
a private action for violation of § 14(a) of the Act complaining of
materially misleading solicitation of proxies that authorized a
corporate merger. Pp.
396 U. S.
381-385.
Page 396 U. S. 376
(a) Permitting liability to be foreclosed on the basis of a
finding that the merger was fair would contravene the purpose of §
14(a) by bypassing the stockholders. Pp.
396 U. S.
381-382.
(b) Imposing on small shareholders the burden of rebutting the
corporation's evidence of fairness would discourage them from the
private enforcement of proxy rules that "provides a necessary
supplement to Commission action."
J. I. Case Co. v. Borak,
377 U. S. 426,
377 U. S. 432.
Pp.
396 U. S.
382-383.
(c) The evidence submitted at the hearing as to the causal
relationship between the proxy material and the merger was
sufficient to establish petitioners' cause of action. P.
396 U. S.
383.
(d) Where, as here, there was proof that the misstatement or
omission in the proxy statement was material, this showing that the
defect might have been considered important in shaping the
shareholders' vote is sufficient without proof, which the Court of
Appeals erroneously held was necessary, that its effect was
decisive. Pp.
396 U. S.
384-385.
2. In devising retrospective relief for violation of the proxy
rules, the federal courts should be guided by the principles of
equity. Pp.
396 U. S.
386-389.
(a) The fairness of the merger may be a relevant consideration
in determining the appropriate relief, and the merger should be set
aside only if a court of equity concludes from all the
circumstances that it would be equitable to do so. Pp.
396 U. S.
386-388.
(b) Damages should be recoverable here only to the extent that
they can be proved. Pp.
396 U. S.
388-389.
3. Petitioners, who have established a violation of the
securities laws by their corporation and its officials, are
entitled to an interim award of litigation expenses and reasonable
attorneys' fees incurred in proving the violation, since the
expenses petitioners incurred were for the benefit of the
corporation and the other stockholders. The Court does not decide
the further question of reimbursement for litigation expenses
incurred in any ensuing proceedings. Pp.
396 U. S.
389-397.
403 F.2d 429, vacated and remanded.
Page 396 U. S. 377
MR. JUSTICE HARLAN delivered the opinion of the Court.
This case requires us to consider a basic aspect of the implied
private right of action for violation of § 14(a) of the Securities
Exchange Act of 1934, [
Footnote
1] recognized by this Court in
J. I. Case Co. v.
Borak, 377 U. S. 426
(1964). As in
Borak, the asserted wrong is that a
corporate merger was accomplished through the use of a proxy
statement that was materially false or misleading. The question
with which we deal is what causal relationship must be shown
between such a statement and the merger to establish a cause of
action based on the violation of the Act.
I
Petitioners were shareholders of the Electric Autolite Company
until 1963, when it was merged into Mergenthaler Linotype Company.
They brought suit on the day before the shareholders' meeting at
which the vote was to take place on the merger, against Auto-Lite,
Mergenthaler, and a third company, American Manufacturing Company,
Inc. The complaint sought an injunction against the voting by
Auto-Lite's management of all proxies obtained by means of an
allegedly misleading proxy solicitation; however, it did not seek a
temporary restraining order, and the voting went ahead as scheduled
the following day. Several months later,
Page 396 U. S. 378
petitioners filed an amended complaint, seeking to have the
merger set aside and to obtain such other relief as might be
proper.
In Count II of the amended complaint, which is the only count
before us, [
Footnote 2]
petitioners predicated jurisdiction on § 27 of the 1934 Act, 15
U.S.C. § 78aa. They alleged that the proxy statement sent out by
the Autolite management to solicit shareholders' votes in favor of
the merger was misleading, in violation of § 14(a) of the Act and
SEC Rule 14a-9 thereunder. (17 CFR § 240.14a-9.) Petitioners
recited that, before the merger, Merganthaler owned over 50% of the
outstanding shares of Auto-Lite common stock, and had been in
control of Auto-Lite for two years. American Manufacturing, in
turn, owned about one-third of the outstanding shares of
Mergenthaler, and for two years had been in voting control of
Mergenthaler and, through it, of Auto-Lite. Petitioners charged
that, in light of these circumstances, the proxy statement was
misleading in that it told Autolite shareholders that their board
of directors recommended approval of the merger without also
informing them that all 11 of Auto-Lite's directors were nominees
of Mergenthaler and were under the "control and domination of
Mergenthaler." Petitioners asserted the right to complain of this
alleged violation both derivatively on behalf of Auto-Lite and as
representatives of the class of all its minority shareholders.
On petitioners' motion for summary judgment with respect to
Count II, the District Court for the Northern District of Illinois
ruled as a matter of law that the claimed defect in the proxy
statement was, in light of the circumstances in which the statement
was made, a material omission. The District Court concluded, from
its reading of the
Borak opinion, that it had to hold a
hearing
Page 396 U. S. 379
on the issue whether there was
"a causal connection between the finding that there has been a
violation of the disclosure requirements of § 14(a) and the alleged
injury to the plaintiffs"
before it could consider what remedies would be appropriate.
(Unreported opinion dated February 14, 1966.)
After holding such a hearing, the court found that, under the
terms of the merger agreement, an affirmative vote of two-thirds of
the Auto-Lite shares was required for approval of the merger, and
that the respondent companies owned and controlled about 54% of the
outstanding shares. Therefore, to obtain authorization of the
merger, respondents had to secure the approval of a substantial
number of the minority shareholders. At the stockholders' meeting,
approximately 950,000 shares, out of 1,160,000 shares outstanding,
were voted in favor of the merger. This included 317,000 votes
obtained by proxy from the minority shareholders, votes that were
"necessary and indispensable to the approval of the merger." The
District Court concluded that a causal relationship had thus been
shown, and it granted an interlocutory judgment in favor of
petitioners on the issue of liability, referring the case to a
master for consideration of appropriate relief. (Unreported
findings and conclusions dated Sept. 26, 1967; opinion reported at
281 F.
Supp. 826 (1967)).
The District Court made the certification required by 28 U.S.C.
§ 1292(b), and respondents took an interlocutory appeal to the
Court of Appeals for the Seventh Circuit. [
Footnote 3] That court affirmed the District Court's
conclusion
Page 396 U. S. 380
that the proxy statement was materially deficient, but reversed
on the question of causation. The court acknowledged that, if an
injunction had been sought a sufficient time before the
stockholders' meeting, "corrective measures would have been
appropriate." 403 F.2d 429, 435 (1968). However, since this suit
was brought too late for preventive action, the courts had to
determine "whether the misleading statement and omission caused the
submission of sufficient proxies," as a prerequisite to a
determination of liability under the Act. If the respondents could
show,
"by a preponderance of probabilities, that the merger would have
received a sufficient vote even if the proxy statement had not been
misleading in the respect found,"
petitioners would be entitled to no relief of any kind.
Id. at 436.
The Court of Appeals acknowledged that this test corresponds to
the common law fraud test of whether the injured party relied on
the misrepresentation. However, rightly concluding that "[r]eliance
by thousands of individuals, as here, can scarcely be inquired
into" (
id. at 436 n. 10), the court ruled that the issue
was to be determined by proof of the fairness of the terms of the
merger. If respondents could show that the merger had merit and was
fair to the minority shareholders, the trial court would be
justified in concluding that a sufficient number of shareholders
would have approved the merger had there been no deficiency in the
proxy statement. In that case, respondents would be entitled to a
judgment in their favor.
Claiming that the Court of Appeals has construed this Court's
decision in
Borak in a manner that frustrates the
statute's policy of enforcement through private litigation, the
petitioners then sought review in this
Page 396 U. S. 381
Court. We granted certiorari, 394 U.S. 971 (1969), believing
that resolution of this basic issue should be made at this stage of
the litigation, and not postponed until after a trial under the
Court of Appeals' decision. [
Footnote 4]
II
As we stressed in
Borak, § 14(a) stemmed from a
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.
The provision was intended to promote "the free exercise of the
voting rights of stockholders" by ensuring that proxies would be
solicited with "explanation to the stockholder of the real nature
of the questions for which authority to cast his vote is sought."
Id. at 14; S.Rep. No. 72, 73d Cong., 2d Sess., 12;
see 377 U.S. at
377 U. S. 431.
The decision below, by permitting all liability to be foreclosed on
the basis of a finding that the merger was fair, would allow the
stockholders to be bypassed, at least where the only legal
challenge to the merger is a suit for retrospective relief after
the meeting has been held. A judicial appraisal of the merger's
merits could be substituted for the actual and informed vote of the
stockholders.
Page 396 U. S. 382
The result would be to insulate from private redress an entire
category of proxy violations -- those relating to matters other
than the terms of the merger. Even outrageous misrepresentations in
a proxy solicitation, if they did not relate to the terms of the
transaction, would give rise to no cause of action under § 14(a).
Particularly if carried over to enforcement actions by the
Securities and Exchange Commission itself, such a result would
subvert the congressional purpose of ensuring full and fair
disclosure to shareholders.
Further, recognition of the fairness of the merger as a complete
defense would confront small shareholders with an additional
obstacle to making a successful challenge to a proposal recommended
through a defective proxy statement. The risk that they would be
unable to rebut the corporation's evidence of the fairness of the
proposal, and thus to establish their cause of action, would be
bound to discourage such shareholders from the private enforcement
of the proxy rules that "provides a necessary supplement to
Commission action."
J. I. Case Co. v. Borak, 377 U.S. at
377 U. S. 432.
[
Footnote 5]
Page 396 U. S. 383
Such a frustration of the congressional policy is not required
by anything in the wording of the statute or in our opinion in the
Borak case. Section 14(a) declares it "unlawful" to
solicit proxies in contravention of Commission rules, and SEC Rule
14a-9 prohibits solicitations
"containing any statement which . . . 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. . . ."
Use of a solicitation that is materially misleading is itself a
violation of law, as the Court of Appeals recognized in stating
that injunctive relief would be available to remedy such a defect
if sought prior to the stockholders' meeting. In
Borak,
which came to this Court on a dismissal of the complaint, the Court
limited its inquiry to whether a violation of § 14(a) gives rise to
"a federal cause of action for rescission or damages," 377 U.S. at
377 U. S. 428.
Referring to the argument made by petitioners there "that the
merger can be dissolved only if it was fraudulent or nonbeneficial,
issues upon which the proxy material would not bear," the Court
stated:
"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."
Id. at
377 U. S. 431.
In the present case, there has been a hearing specifically directed
to the causation problem. The question before the Court is whether
the facts found on the basis of that hearing are sufficient in law
to establish petitioners' cause of action, and we conclude that
they are.
Page 396 U. S. 384
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. [
Footnote
6] This requirement that the defect have a significant
propensity to affect the voting process is found in the express
terms of Rule 14a-9, and it adequately serves the purpose of
ensuring that a cause of action cannot be established by proof of a
defect so trivial, or so unrelated to the transaction for which
approval is ought, that correction of the defect or imposition of
liability would not further the interests protected by § 14(a).
There is no need to supplement this requirement, as did the
Court of Appeals, with a requirement of proof
Page 396 U. S. 385
of whether the defect actually had a decisive effect on the
voting. Where there has been a finding of materiality, a
shareholder has made a sufficient showing of causal relationship
between the violation and the injury for which he seeks redress if,
as here, he proves that the proxy solicitation itself, rather than
the particular defect in the solicitation materials, was an
essential link in the accomplishment of the transaction. This
objective test will avoid the impracticalities of determining how
many votes were affected, and, by resolving doubts in favor of
those the statute is designed to protect, will effectuate the
congressional policy of ensuring that the shareholders are able to
make an informed choice when they are consulted on corporate
transactions.
Cf. Union Pac. R. Co. v. Chicago & N.W. R.
Co., 226 F.
Supp. 400, 411 (D.C.N.D. Ill. 1364); 2 L. Loss, Securities
Regulation 962 n. 411 (2d ed.1961); 5
id. at 2929-2930
(Supp. 1969). [
Footnote 7]
Page 396 U. S. 386
III
Our conclusion that petitioners have established their case by
showing that proxies necessary to approval of the merger were
obtained by means of a materially misleading solicitation implies
nothing about the form of relief to which they may be entitled. We
held in
Borak that, upon finding a violation, the courts
were "to be alert to provide such remedies as are necessary to make
effective the congressional purpose," noting specifically that such
remedies are not to be limited to prospective relief. 377 U.S. at
377 U. S. 433,
434. In devising retrospective relief for violation of the proxy
rules, the federal courts should consider the same factors that
would govern the relief granted for any similar illegality or
fraud. One important factor may be the fairness of the terms of the
merger. Possible forms of relief will include setting aside the
merger or granting other equitable relief, but, as the Court of
Appeals below noted, nothing in the statutory policy "requires the
court to unscramble a corporate transaction merely because a
violation occurred." 403 F.2d at 436. In selecting a remedy, the
lower courts should exercise "
the sound discretion which guides
the determinations of courts of equity,'" keeping in mind the role
of equity as
"the instrument for nice adjustment and reconciliation between
the public interest and private needs as well as between competing
private claims."
Hecht Co. v. Bowles, 321 U. S. 321,
321 U. S.
329-330 (1944), quoting from
Meredith v. Winter
Haven, 320 U. S. 228,
320 U. S. 235
(1943).
We do not read § 29(b) of the Act, [
Footnote 8] which declares contracts made in violation of
the Act or a rule thereunder
Page 396 U. S. 387
"void . . . as regards the rights of" the violator and knowing
successors in interest, as requiring that the merger be set aside
simply because the merger agreement is a "void" contract. This
language establishes that the guilty party is precluded from
enforcing the contract against an unwilling innocent party,
[
Footnote 9] but it does not
compel the conclusion that the contract is a nullity, creating no
enforceable rights even in a party innocent of the violation. The
lower federal courts have read § 29(b), which has counterparts in
the Holding Company Act, the Investment Company Act, and the
Investment Advisers Act, [
Footnote 10] as rendering the contract merely voidable at
the option of the innocent party.
See, e.g., Greater Iowa Corp.
v. McLendon, 378 F.2d 783, 792 (C.A. 8th Cir.1967);
Royal
Air Properties, Inc. v. Smith, 312 F.2d 210, 213 (C.A. 9th
Cir.1962);
Bankers Life & Cas. Co. v. Bellanca Corp.,
288 F.2d 784, 787 (C.A. 7th Cir.1961);
Kaminsky v.
Abrams, 281 F.
Supp. 501,
507
(D.C.S.D.N.Y.1968);
Maher v. J. R. Williston & Beane,
Inc., 280 F.
Supp. 133, 138-139 (D.C.S.D.N.Y.1967);
cf. Green v.
Brown, 276 F.
Supp. 753, 757 (D.C.S.D.N.Y.1967),
remanded on other
grounds, 98 F.2d 1006 (C.A.2d Cir.1968) (Investment Company
Act).
See also 5 Loss,
supra,
Page 396 U. S. 388
at 2925-2926 (Supp. 1969); 6
id. at 3866. This
interpretation is eminently sensible. The interests of the victim
are sufficiently protected by giving him the right to rescind; to
regard the contract as void where he has not invoked that right
would only create the possibility of hardships to him or others
without necessarily advancing the statutory policy of
disclosure.
The United States, as
amicus curiae, points out that,
as representatives of the minority shareholders, petitioners are
not parties to the merger agreement, and thus do not enjoy a
statutory right under § 29(b) to set it aside. [
Footnote 11] Furthermore, while they do
have a derivative right to invoke Auto-Lite's status as a party to
the agreement, a determination of what relief should be granted in
Auto-Lite's name must hinge on whether setting aside the merger
would be in the best interests of the shareholders as a whole. In
short, in the context of a suit such as this one, § 29(b) leaves
the matter of relief where it would be under
Borak without
specific statutory language -- the merger should be set aside only
if a court of equity concludes, from all the circumstances, that it
would be equitable to do so.
Cf. SEC v. National Securities,
Inc., 393 U. S. 453,
393 U. S. 456,
393 U. S.
463-464 (1969).
Monetary relief will, of course, also be a possibility. Where
the defect in the proxy solicitation relates to the specific terms
of the merger, the district court might appropriately order an
accounting to ensure that the shareholders receive the value that
was represented as coming to them. On the other hand, where, as
here, the
Page 396 U. S. 389
misleading aspect of the solicitation did not relate to terms of
the merger, monetary relief might be afforded to the shareholders
only if the merger resulted in a reduction of the earnings or
earnings potential of their holdings. In short, damages should be
recoverable only to the extent that they can be shown. If
commingling of the assets and operations of the merged companies
makes it impossible to establish direct injury from the merger,
relief might be predicated on a determination of the fairness of
the terms of the merger at the time it was approved. These
questions, of course, are for decision in the first instance by the
District Court on remand, and our singling out of some of the
possibilities is not intended to exclude others.
IV
Although the question of relief must await further proceedings
in the District Court, our conclusion that petitioners have
established their cause of action indicates that the Court of
Appeals should have affirmed the partial summary judgment on the
issue of liability. [
Footnote
12] The result would have been not only that respondents,
rather than petitioners, would have borne the costs of the appeal,
but also, we think, that petitioners would have been entitled to an
interim award of litigation expenses and reasonable attorneys'
fees.
Cf. Highway Truck Drivers Local 107 v.
Cohen, 220 F.
Supp. 735 (D.C.E.D.Pa.1963). We agree with the position taken
by petitioners, and by the United States as
amicus, that
petitioners, who have established a violation of the securities
laws by their corporation and its officials,
Page 396 U. S. 390
should be reimbursed by the corporation or its survivor for the
costs of establishing the violation. [
Footnote 13]
The absence of express statutory authorization for an award of
attorneys' fees in a suit under § 14(a) does not preclude such an
award in cases of this type. In a suit by stockholders to recover
short-swing profits for their corporation under § 16(b) of the 1934
Act, the Court of Appeals for the Second Circuit has awarded
attorneys' fees despite the lack of any provision for them in §
16(b), "on the theory that the corporation which has received the
benefit of the attorney's services should pay the reasonable value
thereof."
Smolowe v. Delendo Corp., 136 F.2d 231, 241
(C.A.2d Cir.1943). The court held that Congress' inclusion in §§
9(e) and 18(a) of the Act of express provisions for recovery of
attorneys' fees in certain other types of suits [
Footnote 14]
"does not impinge [upon] the result we reach in the absence of
statute, for those sections merely enforce an additional penalty
against the wrongdoer."
Ibid.
We agree with the Second Circuit that the specific provisions in
§§ 9(e) and 18(a) should not be read as denying to the courts the
power to award counsel fees
Page 396 U. S. 391
in suits under other sections of the Act when circumstances make
such an award appropriate, any more than the express creation by
those sections of private liabilities negates the possibility of an
implied right of action under § 14(a). The remedial provisions of
the 1934 Act are far different from those of the Lanham Act, § 35,
60 Stat. 439, 15 U.S.C. § 1117, which have been held to preclude an
award of attorneys' fees in a suit for trademark infringement.
Fleischmann Corp. v. Maier Brewing Co., 386 U.
S. 714 (1967). Since Congress, in the Lanham Act, had
"meticulously detailed the remedies available to a plaintiff who
proves that his valid trademark has been infringed," the Court in
Fleischmann concluded that the express remedial provisions
were intended "to mark the boundaries of the power to award
monetary relief in cases arising under the Act." 386 U.S. at
386 U. S. 719,
386 U. S. 721.
By contrast, we cannot fairly infer from the Securities Exchange
Act of 1934 a purpose to circumscribe the courts' power to grant
appropriate remedies.
Cf. Bakery Workers Union v. Ratner,
118 U.S.App.D.C. 269, 274-275, 335 F.2d 691, 696-697 (1964). The
Act makes no provision for private recovery for a violation of §
14(a), other than the declaration of "voidness" in § 29(b), leaving
the courts with the task, faced by this Court in
Borak, of
deciding whether a private right of action should be implied. The
courts must similarly determine whether the special circumstances
exist that would justify an award of attorneys' fees, including
reasonable expenses of litigation other than statutory costs.
[
Footnote 15]
While the general American rule is that attorneys' fees are not
ordinarily recoverable as costs, both the courts and Congress have
developed exceptions to this rule for situations in which
overriding considerations
Page 396 U. S. 392
indicate the need for such a recovery. [
Footnote 16] A primary judge-created exception
has been to award expenses where a plaintiff has successfully
maintained a suit, usually on behalf of a class, that benefits a
group of others in the same manner as himself.
See Fleischmann
Corp. v. Maier Brewing Co., 386 U.S. at
386 U. S.
718-719. To allow the others to obtain full benefit from
the plaintiff's efforts without contributing equally to the
litigation expenses would be to enrich the others unjustly at the
plaintiff's expense. This suit presents such a situation. The
dissemination of misleading proxy solicitations was a "deceit
practiced on the stockholders as a group,"
J. I. Case Co. v.
Borak, 377 U.S. at
377 U. S. 432,
and the expenses of petitioners' lawsuit have been incurred for the
benefit of the corporation and the other shareholders.
The fact that this suit has not yet produced, and may never
produce, a monetary recovery from which the fees could be paid does
not preclude an award based on this rationale. Although the
earliest cases recognizing a right to reimbursement involved
litigation that had produced or preserved a "common fund" for the
benefit of a group, nothing in these cases indicates that the suit
must actually bring money into the court as a prerequisite to the
court's power to order reimbursement of expenses. [
Footnote 17]
"[T]he foundation for the historic
Page 396 U. S. 393
practice of granting reimbursement for the costs of litigation
other than the conventional taxable costs is part of the original
authority of the chancellor to do equity in a particular
situation."
Sprague v. Ticonic Nat. Bank, 307 U.
S. 161,
307 U. S. 166
(1939). This Court, in
Sprague, upheld the District
Court's power to grant reimbursement for a plaintiff's litigation
expenses even though she had sued only on her own behalf and not
for a class, because her success would have a
stare
decisis effect entitling others to recover out of specific
assets of the same defendant. Although those others were not
parties before the court, they could be forced to contribute to the
costs of the suit by an order reimbursing the plaintiff from the
defendant's assets out of which their recoveries later would have
to come. The Court observed that
"the absence of an avowed class suit or the creation of a fund,
as it were, through
stare decisis, rather than through a
decree -- hardly touch[es] the power of equity in doing justice as
between a party and the beneficiaries of his litigation."
Id. at
307 U. S.
167.
Other cases have departed further from the traditional metes and
bounds of the doctrine, to permit reimbursement in cases where the
litigation has conferred a substantial
Page 396 U. S. 394
benefit on the members of an ascertainable class, and where the
court' jurisdiction over the subject matter of the suit makes
possible an award that will operate to spread the costs
proportionately among them. This development has been most
pronounced in shareholders' derivative actions, where the courts
increasingly have recognized that the expenses incurred by one
shareholder in the vindication of a corporate right of action can
be spread among all shareholders through an award against the
corporation, regardless of whether an actual money recovery has
been obtained in the corporation's favor. [
Footnote 18] For example, awards have been
sustained in suits by stockholders complaining that shares of their
corporation had been issued wrongfully for an inadequate
consideration. [
Footnote 19]
A successful suit of this type, resulting in cancellation of the
shares, does not bring a fund into court or add to the assets of
the corporation, but it does benefit the holders of the remaining
shares by enhancing their value. Similarly, holders of voting trust
certificates have been allowed reimbursement of their expenses from
the corporation where they succeeded in terminating the voting
trust and obtaining for all certificate holders the right to vote
their shares. [
Footnote 20]
In these cases, there
Page 396 U. S. 395
was a "common fund" only in the sense that the court's
jurisdiction over the corporation as nominal defendant made it
possible to assess fees against all of the shareholders through an
award against the corporation. [
Footnote 21]
In many of these instances, the benefit conferred is capable of
expression in monetary terms, if only by estimating the increase in
market value of the shares attributable to the successful
litigation. However, an increasing number of lower courts have
acknowledged that a corporation may receive a "substantial benefit"
from a derivative suit, justifying an award of counsel fee,
regardless of whether the benefit is pecuniary in nature. [
Footnote 22] A leading case is
Bosch v. Meeker Cooperative Light & Power Assn., 257
Minn. 362, 101 N.W.2d 423 (1960), in which a stockholder was
reimbursed for his expenses in obtaining a judicial declaration
that the
Page 396 U. S. 396
election of certain of the corporation's directors was invalid.
The Supreme Court of Minnesota stated:
"Where an action by a stockholder results in a substantial
benefit to a corporation, he should recover his costs and expenses.
. . . [A] substantial benefit must be something more than technical
in its consequence, and be one that accomplishes a result which
corrects or prevents an abuse which would be prejudicial to the
rights and interests of the corporation or affect the enjoyment or
protection of an essential right to the stockholder's
interest."
Id. at 366-367, 101 N.W.2d at 426-427.
In many suits under § 14(a), particularly where the violation
does not relate to the terms of the transaction for which proxies
are solicited, it may be impossible to assign monetary value to the
benefit. Nevertheless, the stress placed by Congress on the
importance of fair and informed corporate suffrage leads to the
conclusion that, in vindicating the statutory policy, petitioners
have rendered a substantial service to the corporation and its
shareholders.
Cf. Bakery Workers Union v. Ratner, 118
U.S.App.D.C. 269, 274, 335 F.2d 691, 696 (1964). Whether
petitioners are successful in showing a need for significant relief
may be a factor in determining whether a further award should later
be made. But regardless of the relief granted, private
stockholders' actions of this sort "involve corporate
therapeutics," [
Footnote 23]
and furnish a benefit to all shareholders by providing an important
means of enforcement of the proxy statute. [
Footnote 24] To award attorneys' fees in such a
suit to a plaintiff who has succeeded in establishing a cause of
action is not to saddle the unsuccessful party with the expenses,
but to impose
Page 396 U. S. 397
them on the class that has benefited from them and that would
have had to pay them had it brought the suit.
For the foregoing reasons, we conclude that the judgment of the
Court of Appeals should be vacated and the case remanded to that
court for further proceedings consistent with this opinion.
It is so ordered.
[
Footnote 1]
48 Stat. 895, as amended, 15 U.S.C. § 78n(a).
[
Footnote 2]
In the other two counts, petitioners alleged common law fraud
and that the merger was
ultra vires under Ohio law.
[
Footnote 3]
Petitioners cross-appealed from an order entered by the District
Court two days after its summary judgment in their favor, deleting
from that judgment a conclusion of law that,
"[u]nder the provisions of Section 29(b) of the Securities
Exchange Act of 1934, the merger effectuated through a violation of
Section 14 of the Act is void."
This deletion was apparently made for the purpose of avoiding
any prejudice on the question of relief, which remained open for
consideration by the master. In light of its disposition of
respondent's appeal, the Court of Appeals had no need to consider
the cross-appeal.
[
Footnote 4]
Respondents ask this Court to review the conclusion of the lower
courts that the proxy statement was misleading in a material
respect. Petitioners naturally did not raise this question in their
petition for certiorari, and respondents filed no cross-petition.
Since reversal of the Court of Appeals' ruling on this question
would not dictate affirmance of that court's judgment, which
remanded the case for proceedings to determine causation, but
rather elimination of petitioners' rights thereunder, we will not
consider the question in these circumstances.
United States v.
American Ry. Exp. Co., 265 U. S. 425,
265 U. S. 435
(1924);
Langnes v. Green, 282 U.
S. 531,
282 U. S.
535-539 (1931);
Morley Constr. Co. v. Maryland Cas.
Co., 300 U. S. 185,
300 U. S.
191-192 (1937); R. Stern & E. Gressman, Supreme
Court Practice 314, 315 (4th ed.1969).
[
Footnote 5]
The Court of Appeals' ruling that "causation" may be negated by
proof of the fairness of the merger also rests on a dubious
behavioral assumption. There is no justification for presuming that
the shareholders of every corporation are willing to accept any and
every fair merger offer put before them; yet such a presumption is
implicit in the opinion of the Court of Appeals. That court gave no
indication of what evidence petitioners might adduce, once
respondents had established that the merger proposal was equitable,
in order to show that the shareholders would nevertheless have
rejected it if the solicitation had not been misleading. Proof of
actual reliance by thousands of individuals would, as the court
acknowledged, not be feasible,
see R. Jennings & H.
Marsh, Securities Regulation, Cases and Materials 1001 (2d
ed.1968), and reliance on the nondisclosure of a fact is a
particularly difficult matter to define or prove,
see 3 L.
Loss, Securities Regulation 1766 (2d ed.1961). In practice,
therefore, the objective fairness of the proposal would seemingly
be determinative of liability. But, in view of the many other
factors that might lead shareholders to prefer their current
position to that of owners of a larger, combined enterprise, it is
pure conjecture to assume that the fairness of the proposal will
always be determinative of their vote.
Cf. Wirtz v. Hotel,
Motel & Club Employees Union, 391 U.
S. 492,
391 U. S. 508
(1968).
[
Footnote 6]
Cf. List v. Fashion Park, Inc., 340 F.2d 467, 462
(C.A.2d Cir.1965);
General Time Corp. v. Talley Industries,
Inc., 403 F.2d 159, 162 (C.A.2d Cir.1968); Restatement
(Second) of Torts § 538(2)(a) (Tent.Draft No. 10, 1964); 2 L. Loss,
Securities Regulation 917 (2d ed.1961); 6
id. at 3534
(Supp. 1969).
In this case, where the misleading aspect of the solicitation
involved failure to reveal a serious conflict of interest on the
part of the directors, the Court of Appeals concluded that the
crucial question in determining materiality was "whether the
minority shareholders were sufficiently alerted to the board's
relationship to their adversary to be on their guard." 403 F.2d at
434. An adequate disclosure of this relationship would have warned
the stockholders to give more careful scrutiny to the terms of the
merger than they might to one recommended by an entirely
disinterested board. Thus, the failure to make such a disclosure
was found to be a material defect "as a matter of law," thwarting
the informed decision at which the statute aims, regardless of
whether the terms of the merger were such that a reasonable
stockholder would have approved the transaction after more careful
analysis.
See also Swanson v. American Consumer Industries,
Inc., 415 F.2d 1326 (C.A. 7th Cir.1969).
[
Footnote 7]
We need not decide in this case whether causation could be shown
where the management controls a sufficient number of shares to
approve the transaction without any votes from the minority. Even
in that situation, if the management finds it necessary for legal
or practical reasons to solicit proxies from minority shareholders,
at least one court has held that the proxy solicitation might be
sufficiently related to the merger to satisfy the causation
requirement,
see Laurenzano v. Einbender, 264 F.
Supp. 356 (D.C.E.D.N.Y.1966);
cf. Swanson v. American
Consumer Industries, Inc., 415 F.2d 1326, 1331-1332 (C.A. 7th
Cir.1969);
Eagle v. Horvath, 241 F.
Supp. 341, 344 (D.C.S.D.N.Y.1965);
Globus, Inc. v.
Jaroff, 271 F.
Supp. 378,
381
(D.C.S.D.N.Y.1967); Comment, Shareholders' Derivative Suit to
Enforce a Corporate Right of Action Against Directors Under SEC
Rule 105, 114 U.Pa.L.Rev. 578, 582 (1966).
But see Hoover v.
Allen, 241 F.
Supp. 213, 231-232 (D.C.S.D.N.Y.1965);
Barnett v. Anaconda
Co., 238 F.
Supp. 766, 770-774 (D.C.S.D.N.Y.1965);
Robbins v. Banner
Industries, Inc., 285 F.
Supp. 758, 762 763 (D.C.S.D.N.Y.1966).
See generally 5
L. Loss, Securities Regulation 2933-2938 (Supp. 1969).
[
Footnote 8]
Section 29(b) provides in pertinent part:
"Every contract made in violation of any provision of this
chapter or of any rule or regulation thereunder . . . shall be void
(1) as regards the rights of any person who, in violation of any
such provision, rule, or regulation, shall have made . . . any such
contract, and (2) as regards the rights of any person who, not
being a party to such contract, shall have acquired any right
thereunder with actual knowledge of the facts by reason of which
the making . . . of such contract was in violation of any such
provision, rule, or regulation. . . ."
15 U.S.C. § 78cc(b).
[
Footnote 9]
See Eastside Church of Christ v. National Plan, Inc.,
391 F.2d 357, 362-363 (C.A. 5th Cir.1968);
cf. Goldstein v.
Groesbeck, 142 F.2d 422, 426-427 (C.A.2d Cir.1944).
[
Footnote 10]
See Public Utility Holding Company Act of 1935, §
26(b), 49 Stat. 836, 15 U.S.C. § 79z(b); Investment Company Act of
1940, § 47(b), 54 Stat. 846, 15 U.S.C. § 80a-46(b); Investment
Advisers Act of 1940, § 215(b), 54 Stat. 856, 15 U.S.C. §
80b-15(b).
[
Footnote 11]
If petitioners had submitted their own proxies in favor of the
merger in response to the unlawful solicitation, as it does not
appear they did, the language of § 29(b) would seem to give them,
as innocent parties to that transaction, a right to rescind their
proxies. But it is clear in this case, where petitioners' combined
holdings are only 600 shares, that such rescission would not affect
the authorization of the merger.
[
Footnote 12]
The Court of Appeals might have modified the judgment of the
District Court to the extent that it referred the issue of relief
to a master under Fed.Rule Civ.Proc. 53(b). The Court of Appeals'
opinion indicates doubt whether the referral was appropriate, 403
F.2d at 436. This issue is not before us.
[
Footnote 13]
We believe that the question of reimbursement for these expenses
has a sufficiently close relationship to the determination of what
constitutes a cause of action under § 14(a) that it is appropriate
for decision at this time. The United States urges the Court to
consider also whether petitioners will be entitled to recoup
expenses reasonably incurred in further litigation on the question
of relief. We are urged to hold that such expenses should be
reimbursed regardless of whether petitioners are ultimately
successful in obtaining significant relief. However, the question
of reimbursement for future expenses should be resolved in the
first instance by the lower courts after the issue of relief has
been litigated and a record has been established concerning the
need for a further award. We express no view on the matter at this
juncture.
[
Footnote 14]
These provisions deal, respectively, with manipulation of
security prices and with misleading statements in documents filed
with the Commission.
See 15 U.S.C. §§ 78i(e), 78r(a).
[
Footnote 15]
Cf. Note, Attorney's Fees: Where Shall the Ultimate
Burden Lie?, 20 Vand.L.Rev. 1216, 1229 and n. 68 (1967).
[
Footnote 16]
Many commentators have argued for a more thoroughgoing
abandonment of the rule.
See, e.g., Ehrenzweig,
Reimbursement of Counsel Fees and the Great Society, 54
Calif.L.Rev. 792 (1966); Kuenzel, The Attorney's Fee: Why Not a
Cost of Litigation? 49 Iowa L.Rev. 75 (1963); McCormick, Counsel
Fees and Other Expenses of Litigation as an Element of Damages, 15
Minn.L.Rev. 619 (1931); Stoebuck, Counsel Fees Included in Cost: A
Logical Development, 38 U.Colo.L.Rev. 202 (1966); Note,
supra, n 15.
[
Footnote 17]
See Trustees v. Greenough, 105 U.
S. 527,
105 U. S.
531-537 (1882);
Central R. R. & Banking Co. v.
Pettus, 113 U. S. 116
(1885); Hornstein, The Counsel Fee in Stockholder's Derivative
Suits, 39 Col.L.Rev. 784 (1939).
Even in the original "fund" case in this Court, it was
recognized that the power of equity to award fees was not
restricted to the court's ability to provide reimbursement from the
fund itself:
"It would be very hard on [the successful plaintiff] to turn him
away without any allowance. . . . It would not only be unjust to
him, but it would give to the other parties entitled to participate
in the benefits of the fund an unfair advantage. He has worked for
them as well as for himself, and if he cannot be reimbursed out of
the fund itself, they ought to contribute their due proportion of
the expenses which he has fairly incurred. To make them a charge
upon the fund is the most equitable way of securing such
contribution."
Trustees v. Greenough, 105 U.S. at
105 U. S.
532.
[
Footnote 18]
See, e.g., Holthusen v. Edward G. Budd Mfg.
Co., 55 F. Supp.
945 (D.C.E.D. Pa.1944);
Runswick v. Floor, 116 Utah
91, 208 P.2d 948 (1949); cases cited
n 22,
infra. See generally Hornstein,
Legal Therapeutics: The "salvage" Factor in Counsel Fee Awards, 69
Harv.L.Rev. 658, 669-679 (1956); Smith, Recovery of Plaintiff's
Attorney's Fees in Corporate Litigation, 40 L.A.Bar Bull. 15
(1964).
[
Footnote 19]
Hartman v. Oatman Gold Mining & Milling Co., 22
Ariz. 476, 198 P. 717 (1921);
Greenough v. Coeur D'Alenes Lead
Co., 52 Idaho 599, 18 P.2d 288 (1932);
cf. Riverside Oil
& Refining Co. v. Lynch, 114 Okla.
198, 243 P. 967 (1925).
[
Footnote 20]
Allen v. Chase Nat. Bank, 180 Misc. 259, 40 N.Y.S.2d
245 (Sup.Ct.1943), sequel to
Allen v. Chase Nat. Bank, 178
Mic. 536, 35 N.Y.S.2d 958 (Sup.Ct.1942).
[
Footnote 21]
Cf. Note, Allowance of Counsel Fees Out of a "Fund in
Court": The New Jersey Experience, 17 Rutgers L.Rev. 634, 638-643
(1963).
[
Footnote 22]
See Schechtman v. Wolfson, 244 F.2d 537, 540 (C.A.2d
Cir.1957);
Grant v. Hartman Ranch Co., 193 Cal. App.
2d 497, 14 Cal. Rptr. 531 (1961);
Treves v. Servel,
Inc., 38 Del.Ch. 483,
154 A.2d
188 (Del.Sup.Ct.1959);
Saks v. Gamble, 38 Del.Ch. 504,
154
A.2d 767 (1958);
Yap v. Wah Yen Ki Tuk Tsen Nin Hue,
43 Haw. 37, 42 (1958);
Berger v. Amana Society, 253 Iowa
378, 387,
111 N.W.2d 753,
758 (1962);
Bosch v. Meeker Cooperative Light & Power Assn., 257
Minn. 362, 101 N.W.2d 423 (1960);
Eisenberg v. Central Zone
Property Corp., 1 App.Div.2d 353, 149 N.Y.S.2d 840
(Sup.Ct.1956),
aff'd per curiam, 3 N.Y.2d 729, 143 N.E.2d
516 (1957);
Martin Foundation v. Phillip-Jones Corp., 283
App.Div. 729, 127 N.Y.S.2d 649 (Sup.Ct.1954);
Abrams v. Textile
Realty Corp., 197 Misc. 25, 93 N.Y.S.2d 808 (Sup.Ct.1949); 97
N.Y.S.2d 492 (op. of Referee);
Long Park, Inc. v. Trenton-New
Brunswick Theatres Co., 274 App.Div. 988, 84 N.Y.S.2d 482
(Sup.Ct.1948),
aff'd per curiam, 299 N.Y. 718, 87 N.E.2d
126 (1949); Smith,
supra, n 18; Shareholder Suits: Pecuniary Benefit Unnecessary
for Counsel Fee Award, 13 Stan.L.Rev. 146 (1960).
[
Footnote 23]
Murphy v. North American Light & Power
Co., 33 F. Supp.
567, 570 (D.C.S.D.N.Y.1940).
[
Footnote 24]
Cf. Hornstein,
supra, n 18, at 659, 662-663.
MR. JUSTICE BLACK, concurring in part and dissenting in
part.
I substantially agree with Parts II and III of the Court's
opinion holding that these stockholders have sufficiently proved a
violation of § 14(a) of the Securities Exchange Act of 1934 and are
thus entitled to recover whatever damages they have suffered as a
result of the misleading corporate statements, or perhaps to an
equitable setting aside of the merger itself. I do not agree,
however, to what appears to be the holding in Part IV that
stockholders who hire lawyers to prosecute their claims in such a
case can recover attorneys' fees in the absence of a valid
contractual agreement so providing or an explicit statute creating
such a right of recovery. The courts are interpreters, not
creators, of legal rights to recover, and if there is a need for
recovery of attorneys' fees to effectuate the policies of the Act
here involved, that need should, in my judgment, be met by
Congress, not by this Court.