As part of a proposed "freeze-out" merger, in which First
American Bank of Virginia (Bank) would be merged into petitioner
Virginia Bankshares, Inc. (VBI), a wholly owned subsidiary of
petitioner First American Bankshares, Inc. (FABI), the Bank's
executive committee and board approved a price of $42 a share for
the minority stockholders, who would lose their interests in the
Bank after the merger. Although Virginia law required only that the
merger proposal be submitted to a vote at a shareholders' meeting,
preceded by a circulation of an informational statement to the
shareholders, petitioner Bank directors nevertheless solicited
proxies for voting on the proposal. Their solicitation urged the
proposal's adoption and stated that the plan had been approved
because of its opportunity for the minority shareholders to receive
a "high" value for their stock. Respondent Sandberg did not give
her proxy and filed suit in District Court after the merger was
approved, seeking damages from petitioners for,
inter
alia, soliciting proxies by means of materially false or
misleading statements in violation of § 14(a) of the Securities
Exchange Act of 1934 and the Security and Exchange Commission's
Rule 14(a)-9. Among other things, she alleged that the directors
believed they had no alternative but to recommend the merger if
they wished to remain on the board. At trial, she obtained a jury
instruction, based on language in
Mills v. Electric Auto-Lite
Co., 396 U. S. 375,
396 U. S. 385,
that she could prevail without showing her own reliance on the
alleged misstatements, so long as they were material and the proxy
solicitation was an "essential link" in the merger process. She was
awarded an amount equal to the difference between the offered price
and her stock's true value. The remaining respondents prevailed in
a separate action raising similar claims. The Court of Appeals
affirmed, holding that certain statements in the proxy
solicitation, including the one regarding the stock's value, were
materially misleading, and that respondents could maintain the
action even though their votes had not been needed to effectuate
the merger.
Held:
1. Knowingly false statements of reasons, opinion, or belief,
even though conclusory in form, may be actionable under § 14(a) as
misstatements of material fact within the meaning of Rule 14(a)-9.
Pp.
501 U. S.
1090-1098.
Page 501 U. S. 1084
(a) Such statements are not
per se inactionable under §
14(a). A statement of belief by corporate directors about a
recommended course of action, or an explanation of their reasons
for recommending it, may be materially significant, since there is
a substantial likelihood that a reasonable shareholder would
consider it important in deciding how to vote.
See TSC
Industries, Inc. v. Northway, Inc., 426 U.
S. 438,
426 U. S. 449.
Pp.
501 U. S.
1090-1091.
(b) Statements of reasons, opinions, or beliefs are statements
"with respect to . . . material fact[s]" within the meaning of the
Rule.
Blue Chip Stamps v. Manor Drug Stores, 421 U.
S. 723, does not support petitioners' position that such
statements should be placed outside the Rule's scope on policy
grounds. There, the right to bring suit under § 10(b) of the Act
was limited to actual stock buyers and sellers because of the risk
of nuisance litigation, in which would-be sellers and buyers would
manufacture claims of hypothetical action, unconstrained by
independent evidence. In contrast, reasons for directors'
recommendations or statements of belief are factual as statements
that the directors do act for the reasons given or hold the belief
stated and as statements about the subject matter of the reason or
belief expressed. Thus, they are matters of corporate record
subject to documentation, which can be supported or attacked by
objective evidence outside a plaintiff's control. Conclusory terms
in a commercial context are also reasonably understood to rest on a
factual basis. Provable facts either furnish good reasons to make
the conclusory judgment or count against it. And expressions of
such judgments can be stated with knowledge of truth or falsity
just like more definite statements and defended or attacked through
the orthodox evidentiary process. Here, respondents presented facts
about the Bank's assets and its actual and potential level of
operation to prove that the directors' statement was misleading
about the stock's value and a false explanation of the directors'
beliefs. However, a director's disbelief or undisclosed motivation,
standing alone, is an insufficient basis to sustain a § 14(a)
action. Pp. 1091-1096.
(c) The fact that proxy material discloses an offending
statement's factual basis limits liability for misstatements only
if the inconsistency is so obvious that it neutralizes the
misleading conclusion's capacity to influence the reasonable
shareholder. The evidence here fell short of compelling the jury to
find the misleading statement's facial materiality neutralized. Pp.
501 U. S.
1096-1098.
2. Respondents cannot show causation of damages compensable
under § 14(a). Pp.
501 U. S.
1099-1108.
(a) Allowing shareholders whose votes are not required by law or
corporate bylaw to authorize a corporate action subject to a proxy
solicitation to bring an implied private action pursuant to
J.
I. Case Co. v. Borak, 377 U. S. 426,
would extend the scope of
Borak actions beyond
Page 501 U. S. 1085
the ambit of
Mills v. Electric Auto-Lite Co., supra,
which held that a proxy solicitation is an "essential link" to a
transaction when it links a directors' proposal with the votes
legally required to authorize the action proposed. And it is a
serious obstacle to the expansion of the
Borak right that
there is no manifestation, in either the Act or its legislative
history, of congressional intent to recognize a cause of action as
broad as that proposed by respondents. Any private right of action
for violating a federal statute must ultimately rest on
congressional intent to provide a private remedy,
Touche Ross
& Co. v. Redington, 442 U. S. 560,
442 U. S. 575,
and the breadth of the right once recognized should not, as a
general matter, grow beyond the scope congressionally intended.
Nonetheless, when faced with a claim for equality in rounding out
the scope of an implied private action, this Court should look to
policy reasons for deciding where the outer limits of the right
should lie.
See Blue Chip Stamps v. Manor Drug Stores,
supra. Pp.
501 U. S.
1099-1105.
(b) Respondents' theory is rejected that a link existed and was
essential because VBI and FABI, in order to avoid the minority
stockholders' ill will, would have been unwilling to proceed with
the merger without the approval manifested by the proxies. As was
the case in
Blue Chip Stamps v. Manor Drug Stores, supra,
threats of speculative claims and procedural intractability are
inherent in a theory linked through the directors' desire for a
cosmetic vote. Causation would turn on inferences about what the
directors would have thought and done without the minority
shareholder approval. The issues would be hazy, their litigation
protracted, and their resolution unreliable. Pp.
501 U. S.
1105-1106.
(c) Respondents cannot rely on the theory that the proxy
statement was an essential link in this case because it was part of
a means to avoid suit under a Virginia state law that bars a
shareholder from seeking to avoid a transaction tainted by a
director's conflict of interest, if,
inter alia, the
minority shareholders ratified the transaction after disclosure of
the material facts of the transaction and the conflict. Because
there is no indication in the law or facts of this case that the
proxy solicitation resulted in any such loss, this Court need not
resolve the question whether § 14(a) provides a federal remedy when
a false or misleading proxy statement results in a shareholder's
loss of a state remedy. Pp.
501 U. S.
1106-1108.
891 F.2d 1112, reversed.
SOUTER, J., delivered the opinion of the Court, in Part I of
which REHNQUIST, C.J., and WHITE, MARSHALL, BLACKMUN, O'CONNOR,
SCALIA, and KENNEDY, JJ., joined, in Part II of which REHNQUIST,
C.J., and WHITE, MARSHALL, BLACKMUN, O'CONNOR, and KENNEDY, JJ.,
joined, and in Parts III and IV of which REHNQUIST, C.J., and
WHITE, O'CONNOR,
Page 501 U. S. 1086
and SCALIA, JJ., joined. SCALIA, J., filed an opinion concurring
in part and concurring in the judgment,
post, p.
501 U. S.
1108. STEVENS, J., filed an opinion concurring in part
and dissenting in part, in which MARSHALL, J., joined,
post, p.
501 U. S.
1110. KENNEDY, J., filed an opinion concurring in part
and dissenting in part, in which MARSHALL, BLACKMUN, and STEVENS,
JJ., joined,
post, p.
501 U. S.
1112.
JUSTICE SOUTER delivered the opinion of the Court.
Section 14(a) of the Securities Exchange Act of 1934, 48 Stat.
895, 15 U.S.C. § 78n(a), authorizes the Securities and Exchange
Commission (SEC) to adopt rules for the solicitation of proxies,
and prohibits their violation. [
Footnote 1] In
J. I. Case Co. v. Borak,
377 U. S. 426
(1964), we first recognized an
Page 501 U. S. 1087
implied private right of action for the breach of § 14(a) as
implemented by SEC Rule 14a-9, which prohibits the solicitation of
proxies by means of materially false or misleading statements.
[
Footnote 2]
The questions before us are whether a statement couched in
conclusory or qualitative terms purporting to explain directors'
reasons for recommending certain corporate action can be materially
misleading within the meaning of Rule 14a-9, and whether causation
of damages compensable under § 14(a) can be shown by a member of a
class of minority shareholders whose votes are not required by law
or corporate bylaw to authorize the corporate action subject to the
proxy solicitation. We hold that knowingly false statements of
reasons may be actionable even though conclusory in form, but that
respondents have failed to demonstrate the equitable basis required
to extend the § 14(a) private action to such shareholders when any
indication of congressional intent to do so is lacking.
I
In December, 1986, First American Bankshares, Inc. (FABI), a
bank holding company, began a "freeze-out" merger, in which the
First American Bank of Virginia (Bank) eventually merged into
Virginia Bankshares, Inc. (VBI), a
Page 501 U. S. 1088
wholly owned subsidiary of FABI. VBI owned 85% of the Bank's
shares, the remaining 15% being in the hands of some 2,000 minority
shareholders. FABI hired the investment banking firm of Keefe,
Bruyette & Woods (KBW) to give an opinion on the appropriate
price for shares of the minority holders, who would lose their
interests in the Bank as a result of the merger. Based on market
quotations and unverified information from FABI, KBW gave the
Bank's executive committee an opinion that $42 a share would be a
fair price for the minority stock. The executive committee approved
the merger proposal at that price, and the full board followed
suit.
Although Virginia law required only that such a merger proposal
be submitted to a vote at a shareholders' meeting, and that the
meeting be preceded by circulation of a statement of information to
the shareholders, the directors nevertheless solicited proxies for
voting on the proposal at the annual meeting set for April 21,
1987. [
Footnote 3] In their
solicitation, the directors urged the proposal's adoption and
stated they had approved the plan because of its opportunity for
the minority shareholders to achieve a "high" value, which they
elsewhere described as a "fair" price, for their stock.
Although most minority shareholders gave the proxies requested,
respondent Sandberg did not, and, after approval of the merger, she
sought damages in the United States District Court for the Eastern
District of Virginia from VBI, FABI, and the directors of the Bank.
She pleaded two counts, one for soliciting proxies in violation of
§ 14(a) and Rule 14a-9, and the other for breaching fiduciary
duties owed to the minority shareholders under state law. Under the
first count, Sandberg alleged, among other things, that the
directors had not believed that the price offered was high or that
the terms
Page 501 U. S. 1089
of the merger were fair, but had recommended the merger only
because they believed they had no alternative if they wished to
remain on the board. At trial, Sandberg invoked language from this
Court's opinion in
Mills v. Electric Auto-Lite Co.,
396 U. S. 375,
396 U. S. 385
(1970), to obtain an instruction that the jury could find for her
without a showing of her own reliance on the alleged misstatements,
so long as they were material and the proxy solicitation was an
"essential link" in the merger process.
The jury's verdicts were for Sandberg on both counts, after
finding violations of Rule 14a-9 by all defendants and a breach of
fiduciary duties by the Bank's directors. The jury awarded Sandberg
$18 a share, having found that she would have received $60 if her
stock had been valued adequately.
While Sandberg's case was pending, a separate action on similar
allegations was brought against petitioners in the United States
District Court for the District of Columbia by several other
minority shareholders including respondent Weinstein, who, like
Sandberg, had withheld his proxy. This case was transferred to the
Eastern District of Virginia. After Sandberg's action had been
tried, the Weinstein respondents successfully pleaded collateral
estoppel to get summary judgment on liability.
On appeal, the United States Court of Appeals for the Fourth
Circuit affirmed the judgments, holding that certain statements in
the proxy solicitation were materially misleading for purposes of
the Rule, and that respondents could maintain their action even
though their votes had not been needed to effectuate the merger.
891 F.2d 1112 (1989). [
Footnote
4] We granted certiorari because of the importance of the
issues presented. 495 U.S. 903 (1990).
Page 501 U. S. 1090
II
The Court of Appeals affirmed petitioners' liability for two
statements found to have been materially misleading in violation of
§ 14(a) of the Act, one of which was that
"The Plan of Merger has been approved by the Board of Directors
because it provides an opportunity for the Bank's public
shareholders to achieve a high value for their shares."
App. to Pet. for Cert. 53a. Petitioners argue that statements of
opinion or belief incorporating indefinite and unverifiable
expressions cannot be actionable as misstatements of material fact
within the meaning of Rule 14a-9, and that such a declaration of
opinion or belief should never be actionable when placed in a proxy
solicitation incorporating statements of fact sufficient to enable
readers to draw their own, independent conclusions.
A
We consider first the actionability
per se of
statements of reasons, opinion, or belief. Because such a
statement, by definition, purports to express what is consciously
on the speaker's mind, we interpret the jury verdict as finding
that the directors' statements of belief and opinion were made with
knowledge that the directors did not hold the beliefs or opinions
expressed, and we confine our discussion to statements so made.
[
Footnote 5] That such
statements may be materially significant raises no serious
question. The meaning of the materiality requirement for liability
under § 14(a) was discussed at some length in
TSC Industries,
Inc. v. Northway, Inc., 426 U. S. 438
(1976), where we held a fact to be material "if there is a
substantial likelihood that a reasonable shareholder would consider
it important in deciding how to vote. "
Id. at
501 U. S. 449.
We think there is no room to deny that a statement of belief by
corporate directors about a recommended course of action, or an
explanation of their reasons for recommending
Page 501 U. S. 1091
it, can take on just that importance. Shareholders know that
directors usually have knowledge and expertness far exceeding the
normal investor's resources, and the directors' perceived
superiority is magnified even further by the common knowledge that
state law customarily obliges them to exercise their judgment in
the shareholders' interest.
Cf. Day v. Avery, 179
U.S.App.D.C. 63, 71, 548 F.2d 1018, 1026 (1976) (action for
misrepresentation). Naturally, then, the share owner faced with a
proxy request will think it important to know the directors'
beliefs about the course they recommend and their specific reasons
for urging the stockholders to embrace it.
B
1
But, assuming materiality, the question remains whether
statements of reasons, opinions, or beliefs are statements "with
respect to . . . material fact[s]" so as to fall within the
strictures of the Rule. Petitioners argue that we would invite
wasteful litigation of amorphous issues outside the readily
provable realm of fact if we were to recognize liability here on
proof that the directors did not recommend the merger for the
stated reason, and they cite the authority of
Blue Chip Stamps
v. Manor Drug Stores, 421 U. S. 723
(1975), in urging us to recognize sound policy grounds for placing
such statements outside the scope of the Rule.
We agree that
Blue Chip Stamps is instructive, as
illustrating a line between what is and is not manageable in the
litigation of facts, but do not read it as supporting petitioners'
position. The issue in
Blue Chip Stamps was the scope of
the class of plaintiffs entitled to seek relief under an implied
private cause of action for violating § 10(b) of the Act,
prohibiting manipulation and deception in the purchase or sale of
certain securities, contrary to Commission rules. This Court held
against expanding the class from actual buyers and sellers to
include those who rely on deceptive sales practices by taking no
action, either to sell what they own or
Page 501 U. S. 1092
to buy what they do not. We observed that actual sellers and
buyers who sue for compensation must identify a specific number of
shares bought or sold in order to calculate and limit any ensuing
recovery.
Id. at
421 U. S. 734.
Recognizing liability to merely would-be investors, however, would
have exposed the courts to litigation unconstrained by any such
anchor in demonstrable fact, resting instead on a plaintiff's
"subjective hypothesis" about the number of shares he would have
sold or purchased.
Id. at
421 U. S.
734-735. Hindsight's natural temptation to hypothesize
boldness would have magnified the risk of nuisance litigation,
which would have been compounded both by the opportunity to prolong
discovery and by the capacity of claims resting on undocumented
personal assertion to resist any resolution short of settlement or
trial. Such were the premises of policy, added to those of textual
analysis and precedent, on which
Blue Chip Stamps
deflected the threat of vexatious litigation over "many rather hazy
issues of historical fact the proof of which depended almost
entirely on oral testimony."
Id. at
421 U. S.
743.
Attacks on the truth of directors' statements of reasons or
belief, however, need carry no such threats. Such statements are
factual in two senses: as statements that the directors do act for
the reasons given or hold the belief stated and as statements about
the subject matter of the reason or belief expressed. In neither
sense does the proof or disproof of such statements implicate the
concerns expressed in
Blue Chip Stamps. The root of those
concerns was a plaintiff's capacity to manufacture claims of
hypothetical action, unconstrained by independent evidence. Reasons
for directors' recommendations or statements of belief are, in
contrast, characteristically matters of corporate record subject to
documentation, to be supported or attacked by evidence of
historical fact outside a plaintiff's control. Such evidence would
include not only corporate minutes and other statements of the
directors themselves, but circumstantial evidence bearing on the
facts that would reasonably underlie
Page 501 U. S. 1093
the reasons claimed and the honesty of any statement that those
reasons are the basis for a recommendation or other action, a point
that becomes especially clear when the reasons or beliefs go to
valuations in dollars and cents.
It is no answer to argue, as petitioners do, that the quoted
statement on which liability was predicated did not express a
reason in dollars and cents, but focused instead on the "indefinite
and unverifiable" term, "high" value, much like the similar claim
that the merger's terms were "fair" to shareholders. [
Footnote 6] The objection ignores the fact
that such conclusory terms in a commercial context are reasonably
understood to rest on a factual basis that justifies them as
accurate, the absence of which renders them misleading. Provable
facts either furnish good reasons to make a conclusory commercial
judgment, or they count against it, and expressions of such
judgments can be uttered with knowledge of truth or falsity just
like more definite statements, and defended or attacked through the
orthodox evidentiary process that either substantiates their
underlying justifications or tends to disprove their existence. In
addressing the analogous issue in an action for misrepresentation,
the court in
Day v. Avery, 179 U.S.App.D.C. 63, 548 F.2d
1018 (1976),
Page 501 U. S. 1094
for example, held that a statement by the executive committee of
a law firm that no partner would be any "worse off" solely because
of an impending merger could be found to be a material
misrepresentation.
Id. at 70-72, 548 F.2d at 1025-1027.
Cf. Vulcan Metals Co. v. Simmons Mfg. Co., 248 F. 853, 856
(CA2 1918) (L. Hand, J.) ("An opinion is a fact. . . . When the
parties are so situated that the buyer may reasonably rely upon the
expression of the seller's opinion, it is no excuse to give a false
one"); W. Keeton, D. Dobbs, R. Keeton, & D. Owen, Prosser and
Keeton on Law of Torts § 109, pp. 760-762 (5th ed.1984). In this
case, whether $42 was "high," and the proposal "fair" to the
minority shareholders, depended on whether provable facts about the
Bank's assets, and about actual and potential levels of operation,
substantiated a value that was above, below, or more or less at the
$42 figure, when assessed in accordance with recognized methods of
valuation.
Respondents adduced evidence for just such facts in proving that
the statement was misleading about its subject matter and a false
expression of the directors' reasons. Whereas the proxy statement
described the $42 price as offering a premium above both book value
and market price, the evidence indicated that a calculation of the
book figure based on the appreciated value of the Bank's real
estate holdings eliminated any such premium. The evidence on the
significance of market price showed that KBW had conceded that the
market was closed, thin, and dominated by FABI, facts omitted from
the statement. There was, indeed, evidence of a "going concern"
value for the Bank in excess of $60 per share of common stock,
another fact never disclosed. However conclusory the directors'
statement may have been, then, it was open to attack by
garden-variety evidence, subject neither to a plaintiff's control
nor ready manufacture, and there was no undue risk of open-ended
liability or uncontrollable litigation in allowing respondents the
opportunity
Page 501 U. S. 1095
for recovery on the allegation that it was misleading to call
$42 "high."
This analysis comports with the holding that marked our nearest
prior approach to the issue faced here, in
TSC Industries,
426 U.S. at
426 U. S.
454-455. There, to be sure, we reversed summary judgment
for a
Borak plaintiff who had sued on a description of
proposed compensation for minority shareholders as offering a
"substantial premium over current market values." But we held only
that on the case's undisputed facts the conclusory adjective
"substantial" was not materially misleading as a necessary matter
of law, and our remand for trial assumed that such a description
could be both materially misleading within the meaning of Rule
14a-9 and actionable under § 14(a).
See TSC Industries,
supra at
426 U. S.
458-460,
426 U. S.
463-464.
2
Under § 14(a), then, a plaintiff is permitted to prove a
specific statement of reason knowingly false or misleadingly
incomplete, even when stated in conclusory terms. In reaching this
conclusion, we have considered statements of reasons of the sort
exemplified here, which misstate the speaker's reasons and also
mislead about the stated subject matter (
e.g., the value
of the shares). A statement of belief may be open to objection only
in the former respect, however, solely as a misstatement of the
psychological fact of the speaker's belief in what he says. In this
case, for example, the Court of Appeals alluded to just such
limited falsity in observing that
"the jury was certainly justified in believing that the
directors did not believe a merger at $42 per share was in the
minority stockholders' interest but, rather, that they voted as
they did for other reasons,
e.g., retaining their seats on
the board."
891 F.2d at 1121.
The question arises, then, whether disbelief, or undisclosed
belief or motivation, standing alone, should be a sufficient basis
to sustain an action under § 14(a), absent proof by the sort of
objective evidence described above that the
Page 501 U. S. 1096
statement also expressly or impliedly asserted something false
or misleading about its subject matter. We think that proof of mere
disbelief or belief undisclosed should not suffice for liability
under § 14(a), and if nothing more had been required or proven in
this case, we would reverse for that reason.
On the one hand, it would be rare to find a case with evidence
solely of disbelief or undisclosed motivation without further proof
that the statement was defective as to its subject matter. While we
certainly would not hold a director's naked admission of disbelief
incompetent evidence of a proxy statement's false or misleading
character, such an unusual admission will not very often stand
alone, and we do not substantially narrow the cause of action by
requiring a plaintiff to demonstrate something false or misleading
in what the statement expressly or impliedly declared about its
subject.
On the other hand, to recognize liability on mere disbelief or
undisclosed motive without any demonstration that the proxy
statement was false or misleading about its subject would authorize
§ 14(a) litigation confined solely to what one skeptical court
spoke of as the "impurities" of a director's "unclean heart."
Stedman v. Storer, 308 F.
Supp. 881, 887 (SDNY 1969) (dealing with § 10(b)). This, we
think, would cross the line that
Blue Chip Stamps sought
to draw. While it is true that the liability, if recognized, would
rest on an actual, not hypothetical, psychological fact, the
temptation to rest an otherwise nonexistent § 14(a) action on
psychological enquiry alone would threaten just the sort of strike
suits and attrition by discovery that
Blue Chip Stamps
sought to discourage. We therefore hold disbelief or undisclosed
motivation, standing alone, insufficient to satisfy the element of
fact that must be established under § 14(a).
C
Petitioners' fall-back position assumes the same relationship
between a conclusory judgment and its underlying facts
Page 501 U. S. 1097
that we described in
501 U. S.
supra. Thus, citing
Radol v.
Thomas, 534 F.
Supp. 1302, 1315, 1316 (SD Ohio 1982), petitioners argue that,
even if conclusory statements of reason or belief can be actionable
under § 14(a), we should confine liability to instances where the
proxy material fails to disclose the offending statement's factual
basis. There would be no justification for holding the shareholders
entitled to judicial relief, that is, when they were given evidence
that a stated reason for a proxy recommendation was misleading and
an opportunity to draw that conclusion themselves.
The answer to this argument rests on the difference between a
merely misleading statement and one that is materially so. While a
misleading statement will not always lose its deceptive edge simply
by joinder with others that are true, the true statements may
discredit the other one so obviously that the risk of real
deception drops to nil. Since liability under § 14(a) must rest not
only on deceptiveness but materiality as well (
i.e., it
has to be significant enough to be important to a reasonable
investor deciding how to vote,
see TSC Industries, 426
U.S. at
426 U. S.
449), petitioners are on perfectly firm ground insofar
as they argue that publishing accurate facts in a proxy statement
can render a misleading proposition too unimportant to ground
liability.
But not every mixture with the true will neutralize the
deceptive. If it would take a financial analyst to spot the tension
between the one and the other, whatever is misleading will remain
materially so, and liability should follow.
Gerstle v.
Gamble-Skogmo, Inc., 478 F.2d 1281, 1297 (CA2 1973) ("[I]t is
not sufficient that overtones might have been picked up by the
sensitive antennae of investment analysts").
Cf. Milkovich v.
Lorain Journal Co., 497 U. S. 1,
497 U. S. 18-19
(1990) (a defamatory assessment of facts can be actionable even if
the facts underlying the assessment are accurately presented). The
point of a proxy statement, after all, should be to inform, not to
challenge the reader's critical wits. Only when the inconsistency
would exhaust the misleading conclusion's
Page 501 U. S. 1098
capacity to influence the reasonable shareholder would a § 14(a)
action fail on the element of materiality.
Suffice it to say that the evidence invoked by petitioners in
the instant case fell short of compelling the jury to find the
facial materiality of the misleading statement neutralized. The
directors claim, for example, to have made an explanatory
disclosure of further reasons for their recommendation when they
said they would keep their seats following the merger, but they
failed to mention what at least one of them admitted in testimony,
that they would have had no expectation of doing so without
supporting the proposal, App. 281-282. [
Footnote 7] And although the proxy statement did speak
factually about the merger price in describing it as higher than
share prices in recent sales, it failed even to mention the closed
market dominated by FABI. None of these disclosures that the
directors point to was, then, anything more than a half-truth, and
the record shows that another fact statement they invoke was
arguably even worse. The claim that the merger price exceeded book
value was controverted, as we have seen already, by evidence of a
higher book value than the directors conceded, reflecting
appreciation in the Bank's real estate portfolio. Finally, the
solicitation omitted any mention of the Bank's value as a going
concern at more than $60 a share, as against the merger price of
$42. There was, in sum, no more of a compelling case for the
statement's immateriality than for its accuracy.
Page 501 U. S. 1099
III
The second issue before us, left open in
Mills v. Electric
Auto-Lite Co., 396 U.S. at
396 U. S. 385,
n. 7, is whether causation of damages compensable through the
implied private right of action under § 14(a) can be demonstrated
by a member of a class of minority shareholders whose votes are not
required by law or corporate bylaw to authorize the transaction
giving rise to the claim. [
Footnote
8]
J. I. Case Co. v. Borak, 377 U.
S. 426 (1964), did not itself address the requisites of
causation, as such, or define the class of plaintiffs eligible to
sue under § 14(a). But its general holding, that a private cause of
action was available to some shareholder class, acquired greater
clarity with a more definite concept of causation in
Mills, where we addressed the sufficiency of proof that
misstatements in a proxy solicitation were responsible for damages
claimed from the merger subject to complaint.
Although a majority stockholder in
Mills controlled
just over half the corporation's shares, a two-thirds vote was
needed to approve the merger proposal. After proxies had been
obtained, and the merger had carried, minority shareholders brought
a
Borak action.
Mills, 396 U.S. at
396 U. S. 379.
The question arose whether the plaintiffs' burden to demonstrate
causation of their damages traceable to the § 14(a) violation
required proof that the defect in the proxy solicitation had had "a
decisive effect on the voting."
Id. at
396 U. S. 385.
The
Mills Court avoided the evidentiary morass that would
have
Page 501 U. S. 1100
followed from requiring individualized proof that enough
minority shareholders had relied upon the misstatements to swing
the vote. Instead, it held that causation of damages by a material
proxy misstatement could be established by showing that minority
proxies necessary and sufficient to authorize the corporate acts
had been given in accordance with the tenor of the solicitation,
and the Court described such a causal relationship by calling the
proxy solicitation an "essential link in the accomplishment of the
transaction."
Ibid. In the case before it, the Court found
the solicitation essential, as contrasted with one addressed to a
class of minority shareholders without votes required by law or
bylaw to authorize the action proposed, and left it for another day
to decide whether such a minority shareholder could demonstrate
causation.
Id. at
396 U. S. 385, n. 7.
In this case, respondents address
Mills' open question
by proffering two theories that the proxy solicitation addressed to
them was an "essential link" under the Mills causation test.
[
Footnote 9] They argue, first,
that a link existed and was essential simply because VBI and FABI
would have been unwilling to proceed with the merger without the
approval manifested by the minority shareholders' proxies, which
would not have been obtained without the solicitation's express
misstatements
Page 501 U. S. 1101
and misleading omissions. On this reasoning, the causal
connection would depend on a desire to avoid bad shareholder or
public relations, and the essential character of the causal link
would stem not from the enforceable terms of the parties' corporate
relationship, but from one party's apprehension of the ill will of
the other.
In the alternative, respondents argue that the proxy statement
was an essential link between the directors' proposal and the
merger because it was the means to satisfy a state statutory
requirement of minority shareholder approval, as a condition for
saving the merger from voidability resulting from a conflict of
interest on the part of one of the Bank's directors, Jack Beddow,
who voted in favor of the merger while also serving as a director
of FABI. Brief for Respondents 43-44, 45-46. Under the terms of
Va.Code Ann. § 13. 1-691(A) (1989), minority approval after
disclosure of the material facts about the transaction and the
director's interest was one of three avenues to insulate the merger
from later attack for conflict, the two others being ratification
by the Bank's directors after like disclosure and proof that the
merger was fair to the corporation. On this theory, causation would
depend on the use of the proxy statement for the purpose of
obtaining votes sufficient to bar a minority shareholder from
commencing proceedings to declare the merger void. [
Footnote 10]
Page 501 U. S. 1102
Although respondents have proffered each of these theories as
establishing a chain of causal connection in which the proxy
statement is claimed to have been an "essential link," neither
theory presents the proxy solicitation as essential in the sense of
Mills' causal sequence, in which the solicitation links a
directors' proposal with the votes legally required to authorize
the action proposed. As a consequence, each theory would, if
adopted, extend the scope of
Borak actions beyond the
ambit of
Mills and expand the class of plaintiffs entitled
to bring
Borak actions to include shareholders whose
initial authorization of the transaction prompting the proxy
solicitation is unnecessary.
Assessing the legitimacy of any such extension or expansion
calls for the application of some fundamental principles governing
recognition of a right of action implied by a federal statute, the
first of which was not, in fact, the considered focus of the
Borak opinion. The rule that has emerged in the years
since
Borak and
Mills came down is that
recognition of any private right of action for violating a federal
statute must ultimately rest on congressional intent to provide a
private remedy,
Touche Ross & Co. v. Redington,
442 U. S. 560,
442 U. S. 575
(1979). From this the corollary follows that the breadth of the
right once recognized should not, as a general matter, grow beyond
the scope congressionally intended.
This rule and corollary present respondents with a serious
obstacle, for we can find no manifestation of intent to recognize a
cause of action (or class of plaintiffs) as broad as respondents'
theory of causation would entail. At first blush, it might seem
otherwise, for the
Borak Court certainly did not ignore
the matter of intent. Its opinion adverted to the statutory object
of "protection of investors" as animating Congress' intent to
provide judicial relief where "necessary," 377 U.S. at
377 U. S. 432,
and it quoted evidence for that intent from House and Senate
Committee Reports,
id. at
377 U. S.
431-432.
Page 501 U. S. 1103
Borak's probe of the congressional mind, however, never
focused squarely on private rights of action, as distinct from the
substantive objects of the legislation, and one member of the
Borak Court later characterized the "implication" of the
private right of action as resting modestly on the Act's
"
exclusively procedural provision' affording access to a
federal forum." Bivens v. Six Unknown Fed. Narcotics
Agents, 403 U. S. 388,
403 U. S. 403,
n. 4 (1971) (Harlan, J., concurring in judgment) (internal
quotation marks omitted). See generally L. Loss,
Fundamentals of Securities Regulation 929 (2d ed.1988). See
also Touche Ross, supra at 442 U. S. 568,
442 U. S. 578.
In fact, the importance of enquiring specifically into intent to
authorize a private cause of action became clear only later,
see Cort v. Ash, 422 U.S. at 422 U. S. 78,
and only later still, in Touche Ross, was this intent
accorded primacy among the considerations that might be thought to
bear on any decision to recognize a private remedy. There, in
dealing with a claimed private right under § 17(a) of the Act, we
explained that the "central inquiry remains whether Congress
intended to create, either expressly or by implication, a private
cause of action." 442 U.S. at 442 U. S.
575-576.
Looking to the Act's text and legislative history mindful of
this heightened concern reveals little that would help toward
understanding the intended scope of any private right. According to
the House Report, Congress meant to promote the "free exercise" of
stockholders' voting rights, H.R.Rep. No. 1383, 73d Cong., 2d
Sess., 14 (1934), and protect "[f]air corporate suffrage,"
id. at 13, from abuses exemplified by proxy solicitations
that concealed what the Senate Report called the "real nature" of
the issues to be settled by the subsequent votes, S.Rep. No. 792,
73d Cong., 2d Sess., 12 (1934). While it is true that these
Reports, like the language of the Act itself, carry the clear
message that Congress meant to protect investors from
misinformation that rendered them unwitting agents of
self-inflicted damage, it is just as true that Congress was
reticent with indications of
Page 501 U. S. 1104
how far this protection might depend on self-help by private
action. The response to this reticence may be, of course, to claim
that § 14(a) cannot be enforced effectively for the sake of its
intended beneficiaries without their participation as private
litigants.
Borak, supra at
377 U. S. 432.
But the force of this argument for inferred congressional intent
depends on the degree of need perceived by Congress, and we would
have trouble inferring any congressional urgency to depend on
implied private actions to deter violations of § 14(a), when
Congress expressly provided private rights of action in §§ 9(e),
16(b), and 18(a) of the same Act.
See 15 U.S.C. §§ 78i(e),
78p(b), and 78r(a). [
Footnote
11]
The congressional silence that is thus a serious obstacle to the
expansion of cognizable
Borak causation is not, however, a
necessarily insurmountable barrier. This is not the first effort in
recent years to expand the scope of an action originally inferred
from the Act without "conclusive guidance" from Congress,
see
Blue Chip Stamps v. Manor Drug Stores, 421 U.S. at
421 U. S. 737,
and we may look to that earlier case for the proper response to
such a plea for expansion. There, we accepted the proposition that
where a legal structure of private statutory rights has developed
without clear indications of congressional intent, the contours of
that structure need not be frozen absolutely when the result would
be demonstrably inequitable to a class of would-be plaintiffs with
claims comparable to those previously recognized. Faced in that
case with such a claim for equality in rounding out the scope of an
implied private statutory right of action, we looked to policy
reasons for deciding where the outer limits of
Page 501 U. S. 1105
the right should lie. We may do no less here, in the face of
respondents' pleas for a private remedy to place them on the same
footing as shareholders with votes necessary for initial corporate
action.
A
Blue Chip Stamps set an example worth recalling as a
preface to specific policy analysis of the consequences of
recognizing respondents' first theory, that a desire to avoid
minority shareholders' ill will should suffice to justify
recognizing the requisite causality of a proxy statement needed to
garner that minority support. It will be recalled that, in
Blue
Chip Stamps we raised concerns about the practical
consequences of allowing recovery, under § 10(b) of the Act and
Rule 10b-5, on evidence of what a merely hypothetical buyer or
seller might have done on a set of facts that never occurred, and
foresaw that any such expanded liability would turn on "hazy"
issues inviting self-serving testimony, strike suits, and
protracted discovery, with little chance of reasonable resolution
by pretrial process.
Id. at
424 U. S.
742-743. These were good reasons to deny recognition to
such claims in the absence of any apparent contrary congressional
intent.
The same threats of speculative claims and procedural
intractability are inherent in respondents' theory of causation
linked through the directors' desire for a cosmetic vote. Causation
would turn on inferences about what the corporate directors would
have thought and done without the minority shareholder approval
unneeded to authorize action. A subsequently dissatisfied minority
shareholder would have virtual license to allege that managerial
timidity would have doomed corporate action but for the ostensible
approval induced by a misleading statement, and opposing claims of
hypothetical diffidence and hypothetical boldness on the part of
directors would probably provide enough depositions in the usual
case to preclude any judicial resolution short of the credibility
judgments that can only come after trial. Reliable evidence would
seldom exist. Directors would understand
Page 501 U. S. 1106
the prudence of making a few statements about plans to proceed
even without minority endorsement, and discovery would be a quest
for recollections of oral conversations at odds with the official
pronouncements, in hopes of finding support for
ex post
facto guesses about how much heat the directors would have
stood in the absence of minority approval. The issues would be
hazy, their litigation protracted, and their resolution unreliable.
Given a choice, we would reject any theory of causation that raised
such prospects, and we reject this one. [
Footnote 12]
B
The theory of causal necessity derived from the requirements of
Virginia law dealing with post-merger ratification seeks to
identify the essential character of the proxy solicitation from its
function in obtaining the minority approval that would preclude a
minority suit attacking the merger. Since the link is said to be a
step in the process of barring a class of shareholders from resort
to a state remedy otherwise available, this theory of causation
rests upon the proposition of policy that § 14(a) should provide a
federal remedy whenever a false or misleading proxy statement
results in the loss under state law of a shareholder plaintiff's
state remedy for
Page 501 U. S. 1107
the enforcement of a state right. Respondents agree with the
suggestions of counsel for the SEC and FDIC that causation be
recognized, for example, when a minority shareholder has been
induced by a misleading proxy statement to forfeit a state law
right to an appraisal remedy by voting to approve a transaction,
cf. Swanson v. American Consumers Industries, Inc., 475
F.2d 516, 520-521 (CA7 1973), or when such a shareholder has been
deterred from obtaining an order enjoining a damaging transaction
by a proxy solicitation that misrepresents the facts on which an
injunction could properly have been issued.
Cf. Healey v.
Catalyst Recovery of Pennsylvania, Inc., 616 F.2d 641, 647-648
(CA3 1980);
Alabama Farm Bureau Mutual Casualty Co. v. American
Fidelity Life Ins. Co., 606 F.2d 602, 614 (CA5 1979),
cert. denied, 449 U.S. 820 (1980). Respondents claim that
in this case a predicate for recognizing just such a causal link
exists in Va.Code Ann.§ 13.1-691(A)(2) (1989), which sets the
conditions under which the merger may be insulated from suit by a
minority shareholder seeking to void it on account of Beddow's
conflict.
This case does not, however, require us to decide whether §
14(a) provides a cause of action for lost state remedies, since
there is no indication in the law or facts before us that the proxy
solicitation resulted in any such loss. The contrary appears to be
the case. Assuming the soundness of respondents' characterization
of the proxy statement as materially misleading, the very terms of
the Virginia statute indicate that a favorable minority vote
induced by the solicitation would not suffice to render the merger
invulnerable to later attack on the ground of the conflict. The
statute bars a shareholder from seeking to avoid a transaction
tainted by a director's conflict if,
inter alia, the
minority shareholders ratified the transaction following disclosure
of the material facts of the transaction and the conflict. Va.Code
Ann.
Page 501 U. S. 1108
§ 13.1-691(A)(2) (1989). Assuming that the material facts about
the merger and Beddow's interests were not accurately disclosed,
the minority votes were inadequate to ratify the merger under state
law, and there was no loss of state remedy to connect the proxy
solicitation with harm to minority shareholders irredressable under
state law. [
Footnote 13] Nor
is there a claim here that the statement misled respondents into
entertaining a false belief that they had no chance to upset the
merger until the time for bringing suit had run out. [
Footnote 14]
IV
The judgment of the Court of Appeals is reversed.
It is so ordered.
[
Footnote 1]
Section 14(a) provides in full that:
"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 a national securities exchange or otherwise, 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, 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 pursuant
to section 781 of this title."
15 U.S.C. § 78n(a).
[
Footnote 2]
This Rule provides in relevant part that:
"No solicitation subject to this regulation shall be made by
means of any proxy statement . . . 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. . . ."
17 CFR § 240.14a-9 (1990).
The Federal Deposit Insurance Corporation (FDIC) administers and
enforces the securities laws with respect to the activities of
federally insured and regulated banks.
See § 12(i) of the
Securities Exchange Act of 1934, 15 U.S.C. § 781(i). An FDIC rule
also prohibits materially misleading statements in the solicitation
of proxies, 12 CFR § 335.206 (1991), and is essentially identical
to Rule 14a-9.
See generally Brief for SEC
et al.
as
Amici Curiae 4, n. 5.
[
Footnote 3]
Had the directors chosen to issue a statement instead of a proxy
solicitation, they would have been subject to an SEC antifraud
provision analogous to Rule 14a-9.
See 17 CFR § 240.14c-6
(1990).
See also 15 U.S.C. § 78n(c).
[
Footnote 4]
The Court of Appeals reversed the District Court, however, on
its refusal to certify a class of all minority shareholders in
Sandberg's action. Consequently, it ruled that petitioners were
liable to all of the Bank's former minority shareholders for $18
per share. 891 F.2d at 1119.
[
Footnote 5]
In
TSC Industries, Inc. v. Northway, Inc., 426 U.
S. 438,
426 U. S. 444,
n. 7 (1976), we reserved the question whether scienter was
necessary for liability generally under § 14(a). We reserve it
still.
[
Footnote 6]
Petitioners are also wrong to argue that construing the statute
to allow recovery for a misleading statement that the merger was
"fair" to the minority shareholders is tantamount to assuming
federal authority to bar corporate transactions thought to be
unfair to some group of shareholders. It is, of course, true that
we said in
Santa Fe Industries, Inc. v. Green,
430 U. S. 462,
430 U. S. 479
(1977), that
"'[c]orporations are creatures of state law, and investors
commit their funds to corporate directors on the understanding
that, except where federal law
expressly requires certain
responsibilities of directors with respect to stockholders, state
law will govern the internal affairs of the corporation,'"
quoting
Cort v. Ash, 422 U. S. 66,
422 U. S. 84
(1975). But § 14(a) does impose responsibility for false and
misleading proxy statements. Although a corporate transaction's
"fairness" is not, as such, a federal concern, a proxy statement's
claim of fairness presupposes a factual integrity that federal law
is expressly concerned to preserve.
Cf. Craftmatic Securities
Litigation v. Kraftsow, 890 F.2d 628, 639 (CA3 1989).
[
Footnote 7]
Petitioners fail to dissuade us from recognizing the
significance of omissions such as this by arguing that we
effectively require them to accuse themselves of breach of
fiduciary duty. Subjection to liability for misleading others does
not raise a duty of self-accusation; it enforces a duty to refrain
from misleading. We have no occasion to decide whether the
directors were obligated to state the reasons for their support of
the merger proposal here, but there can be no question that the
statement they did make carried with it no option to deceive.
Cf. Berg v. First American Bankshares, Inc., 254
U.S.App.D.C.198, 205, 796 F.2d 489, 496 (1986) ("Once the proxy
statement purported to disclose the factors considered . . . ,
there was an obligation to portray them accurately").
[
Footnote 8]
Respondents argue that this issue was not raised below. The
Appeals Court, however, addressed the availability of a right of
action to minority shareholders in respondents' circumstances and
concluded that respondents were entitled to sue. 891 F.2d 1112,
1120-1121 (CA4 1989). It suffices for our purposes that the court
below passed on the issue presented,
Steven v. Department of
Treasury, 500 U. S. 1,
500 U. S. 8
(1991);
cf. Cohen v. Cowles Media Co., ante at
501 U. S.
667-668, particularly where the issue is, we believe,
"
in a state of evolving definition and uncertainty,'" St.
Louis v. Praprotnik, 485 U. S. 112,
485 U. S. 120
(1988) (plurality opinion), quoting Newport v. Fact Concerts,
Inc., 453 U. S. 247,
453 U. S. 256
(1981), and one of importance to the administration of federal law.
Praprotnik, supra, at 485 U. S.
120-121.
[
Footnote 9]
Citing the decision in
Schlick v. Penn-Dixie Cement
Corp., 507 F.2d 374, 382-383 (CA2 1974), petitioners
characterize respondents' proffered theories as examples of
so-called "sue facts" and "shame facts" theories. Brief for
Petitioners 41; Reply Brief for Petitioners 8.
"A 'sue fact' is, in general, a fact which is material to a sue
decision. A 'sue decision' is a decision by a shareholder whether
or not to institute a representative or derivative suit alleging a
state law cause of action."
Gelb, Rule 10b-5 and Santa Fe -- Herein of Sue Facts, Shame
Facts, and Other Matters, 87 W.Va.L.Rev. 189, 198, and n. 52
(1985), quoting Borden, "Sue Fact" Rule Mandates Disclosure to
Avoid Litigation in State Courts, 10 SEC '82, pp. 201, 204-205
(1982).
See also Note, Causation and Liability in Private
Actions for Proxy Violations, 80 Yale L.J. 107, 116 (1970)
(discussing theories of causation). "Shame facts" are said to be
facts which, had they been disclosed, would have "shamed"
management into abandoning a proposed transaction.
See Schlick,
supra at 384.
See also Gelb,
supra at
197.
[
Footnote 10]
The District Court and Court of Appeals have grounded causation
on a further theory, that Virginia law required a solicitation of
proxies even from minority shareholders as a condition of
consummating the merger.
See 891 F.2d at 1120, n. 1; App.
426. While the provisions of Va.Code Ann. §§ 13. 1-718(A), (D), and
(E) (1989) are said to have required the Bank to solicit minority
proxies, they actually compelled no more than submission of the
merger to a vote at a shareholders' meeting, § 13.1-718(E),
preceded by issuance of an informational statement, § 13.1-718(D).
There was thus no need under this statute to solicit proxies,
although it is undisputed that the proxy solicitation sufficed to
satisfy the statutory obligation to provide a statement of relevant
information. On this theory, causation would depend on the use of
the proxy statement to satisfy a statutory obligation, even though
a proxy solicitation was not, as such, required. In this Court,
respondents have disclaimed reliance on any such theory.
[
Footnote 11]
The object of our enquiry does not extend further to question
the holding of either
J. I. Case Co. v. Borak,
377 U. S. 426
(1964), or
Mills v. Electric Auto-Lite Co., 396 U.
S. 375 (1970), at this date, any more than we have done
so in the past,
see Touche Ross & Co. v. Redington,
442 U. S. 560,
442 U. S. 577
(1979). Our point is simply to recognize the hurdle facing any
litigant who urges us to enlarge the scope of the action beyond the
point reached in
Mills.
[
Footnote 12]
In parting company from us on this point, JUSTICE KENNEDY
emphasizes that respondents in this particular case substantiated a
plausible claim that petitioners would not have proceeded without
minority approval. FABI's attempted freeze-out merger of a Maryland
subsidiary had failed a year before the events in question when the
subsidiary's directors rejected the proposal because of inadequate
share price, and there was evidence of FABI's desire to avoid any
renewal of adverse comment. The issue before us, however, is
whether to recognize a theory of causation generally, and our
decision against doing so rests on our apprehension that the
ensuing litigation would be exemplified by cases far less tractable
than this. Respondents' burden to justify recognition of causation
beyond the scope of Mills must be addressed not by emphasizing the
instant case, but by confronting the risk inherent in the cases
that could be expected to be characteristic if the causal theory
were adopted.
[
Footnote 13]
In his opinion dissenting on this point, JUSTICE KENNEDY
suggests that materiality under Virginia law might be defined
differently from the materiality standard of our own cases,
resulting in a denial of state remedy even when a solicitation was
materially misleading under federal law. Respondents, however,
present nothing to suggest that this might be so.
[
Footnote 14]
Respondents do not claim that any other application of a theory
of lost state remedies would avail them here. It is clear, for
example, that no state appraisal remedy was lost through a § 14(a)
violation in this case. Respondent Weinstein and others did seek
appraisal under Virginia law in the Virginia courts; their claims
were rejected on the explicit grounds that although "[s]tatutory
appraisal is now considered the exclusive remedy for stockholders
opposing a merger,"App. to Pet. for Cert. 32a;
see Adams v.
United States Distributing Corp., 184 Va. 134, 34 S.E.2d 244
(1945),
cert. denied, 327 U.S. 788 (1946), "dissenting
stockholders in bank mergers do not even have this solitary remedy
available to them," because "Va.Code § 6.1-43 specifically excludes
bank mergers from application of § 13.1-730 [the Virginia appraisal
statute]." App. to Pet. for Cert. 31a, 32a. Weinstein does not
claim that the Virginia court was wrong and does not rely on this
claim in any way. Thus, the § 14(a) violation could have had no
effect on the availability of an appraisal remedy, for there never
was one.
JUSTICE SCALIA, concurring in part and concurring in the
judgment.
I
As I understand the Court's opinion, the statement "In the
opinion of the Directors, this is a high value for the shares"
Page 501 U. S. 1109
would produce liability if in fact it was not a high value and
the directors knew that. It would not produce liability if, in
fact, it was not a high value but the directors honestly believed
otherwise. The statement "The directors voted to accept the
proposal because they believe it offers a high value" would not
produce liability if, in fact, the directors' genuine motive was
quite different -- except that it would produce liability if the
proposal, in fact, did not offer a high value, and the directors
knew that.
I agree with all of this. However, not every sentence that has
the word "opinion" in it, or that refers to motivation for
directors' actions, leads us into this psychic thicket. Sometimes
such a sentence actually represents facts as facts, rather than
opinions -- and, in that event, no more need be done than apply the
normal rules for § 14(a) liability. I think that is the situation
here. In my view, the statement at issue in this case is most
fairly read as affirming separately both the fact of the directors'
opinion and the accuracy of the facts upon which the opinion was
assertedly based. It reads as follows:
"The Plan of Merger has been approved by the Board of Directors
because it provides an opportunity for the Bank's public
shareholders to achieve a high value for their shares."
App. to Pet. for Cert. 53a. Had it read "because, in their
estimation, it provides an opportunity, etc.," it would have set
forth nothing but an opinion. As written, however, it asserts both
that the board of directors acted for a particular reason, and that
that reason is correct. This interpretation is made clear by what
immediately follows:
"The price to be paid is about 30% higher than the [last traded
price immediately before announcement of the proposal]. . . . [T]he
$42 per share that will be paid to public holders of the common
stock represents a premium of approximately 26% over the book
value. . . . [T]he bank earned $24,767,000 in the year ended
December 31, 1986. . . ."
Id. at 53a-54a. These are all facts that support
Page 501 U. S. 1110
-- and that are obviously introduced for the purpose of
supporting -- the factual truth of the "because" clause,
i.e., that the proposal gives shareholders a "high
value."
If the present case were to proceed, therefore, I think the
normal § 14(a) principles governing misrepresentation of fact would
apply.
II
I recognize that the Court's disallowance (in Part II-B-2) of an
action for misrepresentation of belief is entirely contrary to the
modern law of torts, as authorities cited by the Court make plain.
See Vulcan Metals Co. v. Simmons Mfg. Co., 248 F. 853, 856
(CA2 1918); W. Keeton, D. Dobbs, R. Keeton, & D. Owen, Prosser
and Keeton on Law of Torts § 109 (5th ed.1984), cited
ante
at
501 U. S.
1094. I have no problem with departing from modern tort
law in this regard, because I think the federal cause of action at
issue here was never enacted by Congress,
see Thompson v.
Thompson, 484 U. S. 174,
484 U. S.
190-192 (1988) (SCALIA, J., concurring in judgment), and
hence, the more narrow we make it (within the bounds of
rationality), the more faithful we are to our task.
* * * *
I concur in the judgment of the Court, and join all of its
opinion except
501 U.
S.
JUSTICE STEVENS, with whom JUSTICE MARSHALL joins, concurring in
part and dissenting in part.
While I agree in substance with Parts I and II of the Court's
opinion, I do not agree with the reasoning in
501
U. S.
In
Mills v. Electric Auto-Lite Co., 396 U.
S. 375 (1970), the Court held that a finding that the
terms of a merger were fair could not constitute a defense by the
corporation to a shareholder action alleging that the merger had
been accomplished by using a misleading proxy statement. The
fairness of the transaction was, according to
Mills, a
matter to be considered at the remedy stage of the litigation.
Page 501 U. S. 1111
On the question of the causal connection between the proxy
solicitation and the harm to the plaintiff shareholders, the Court
had this to say:
"There is no need to supplement this requirement, as did the
Court of Appeals, with a requirement of proof 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.1964); 2 L. Loss, Securities
Regulation 962 n. 411 (2d ed.1961); 5
id. at 2929-2930
(Supp. 1969)."
Id. at
396 U. S.
384-385. Justice Harlan writing for the Court then
appended this footnote:
"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
Page 501 U. S. 1112
Laurenzano v. Einbender, 264 F.
Supp. 356 (D.C. E.D.N.Y. 1966). . . ."
Id. at
396 U. S. 385,
n. 7.
The case before us today involves a merger that has been found
by a jury to be unfair, not fair. The interest in providing a
remedy to the injured minority shareholders therefore is stronger,
not weaker, than in
Mills. The interest in avoiding
speculative controversy about the actual importance of the proxy
solicitation is the same as in
Mills. Moreover, as in
Mills, these matters can be taken into account at the
remedy stage in appropriate cases. Accordingly, I do not believe
that it constitutes an unwarranted extension of the rationale of
Mills to conclude that, because management found it
necessary -- whether for "legal or practical reasons" -- to solicit
proxies from minority shareholders to obtain their approval of the
merger, that solicitation "was an essential link in the
accomplishment of the transaction."
Id. at
396 U. S. 385,
and n. 7. In my opinion, shareholders may bring an action for
damages under § 14(a) of the Securities Exchange Act of 1934, 48
Stat. 895, 15 U.S.C. § 78n(a), whenever materially false or
misleading statements are made in proxy statements. That the
solicitation of proxies is not required by law or by the bylaws of
a corporation does not authorize corporate officers, once they have
decided for whatever reason to solicit proxies, to avoid the
constraints of the statute. I would therefore affirm the judgment
of the Court of Appeals.
JUSTICE KENNEDY, with whom JUSTICE MARSHALL, JUSTICE BLACKMUN,
and JUSTICE STEVENS join, concurring in part and dissenting in
part.
I am in general agreement with Parts I and II of the majority
opinion, but do not agree with the views expressed in
501
U. S. With respect, I dissent from Part III of the
Court's opinion.
Page 501 U. S. 1113
I
Review of the jury's finding on causation is complicated because
the distinction between reliance and causation was not addressed in
explicit terms in the earlier stages of this litigation.
Petitioners, in effect, though, recognized the distinction when
they accepted the District Court's essential link instruction as to
reliance but not as to causation. So I agree with the Court that
the issue has been preserved for our review here.
*
Page 501 U. S. 1114
The Court of Appeals considered the essential link presumption
in rejecting petitioners' argument that Sandberg must show reliance
by demonstrating that she read the proxy and then voted in favor of
the proposal or took some other specific action in reliance upon
it. In the Court of Appeals, the parties did not brief, nor did the
panel address, the possibility that nonvoting causation theories
would suffice to allow for recovery.
Before this Court petitioners do not argue that Sandberg must
demonstrate reliance on her part or on the part of other
shareholders. The matter of causation, however, must be
addressed.
II
A
The severe limits the Court places upon possible proof of
nonvoting causation in a § 14(a) private action are justified
neither by our precedents nor by any case in the courts of appeals.
These limits are said to flow from a shift in our approach to
implied causes of action that has occurred since we recognized the
§ 14(a) implied private action in
J. I. Case Co. v. Borak,
377 U. S. 426
(1964).
Ante at
501 U. S.
1102-1105.
I acknowledge that we should exercise caution in creating
implied private rights of action and that we must respect the
primacy of congressional intent in that inquiry.
See ante
at
501 U. S.
1102. Where an implied cause of action is well accepted
by our own cases and has become an established part of the
securities laws, however, we should enforce it as a meaningful
remedy unless we are to eliminate it altogether. As the
Page 501 U. S. 1115
Court phrases it, we must consider the causation question in
light of the underlying "policy reasons for deciding where the
outer limits of the right should lie."
Ante at
501 U. S.
1104-1105;
see Blue Chip Stamps v. Manor Drug
Stores, 421 U. S. 723,
421 U. S. 737
(1975)
According to the Court, acceptance of nonvoting causation
theories would "extend the scope of
Borak actions beyond
the ambit of
Mills."
Ante at
501 U. S.
1102. But
Mills v. Electric Auto-Lite Co.,
396 U. S. 375
(1970), did not purport to limit the scope of
Borak
actions, and, as footnote 7 of
Mills indicates, some
courts have applied nonvoting causation theories to
Borak
actions for at least the past 25 years.
See also L. Loss,
Fundamentals of Securities Regulation 948, n. 81 (2d ed.1988).
To the extent the Court's analysis considers the purposes
underlying § 14(a), it does so with the avowed aim to limit the
cause of action and with undue emphasis upon fears of "speculative
claims and procedural intractability."
Ante at
501 U. S.
1105. The result is a sort of guerrilla warfare to
restrict a well established implied right of action. If the
analysis adopted by the Court today is any guide, Congress and
those charged with enforcement of the securities laws stand
forewarned that unresolved questions concerning the scope of those
causes of action are likely to be answered by the Court in favor of
defendants.
B
The Court seems to assume, based upon the footnote in
Mills reserving the question, that Sandberg bears a
special burden to demonstrate causation because the public
shareholders held only 15 percent of the stock of First American
Bank of Virginia (Bank). JUSTICE STEVENS is right to reject this
theory. Here, First American Bankshares, Inc. (FABI), and Virginia
Bankshares, Inc. (VBI), retained the option to back out of the
transaction if dissatisfied with the reaction of the minority
shareholders, or if concerned that the merger would result in
liability for violation of duties to the minority shareholders. The
merger agreement was conditioned
Page 501 U. S. 1116
upon approval by two-thirds of the shareholders, App. 463, and
VBI could have voted its shares against the merger if it so
decided. To this extent, the Court's distinction between cases
where the "minority" shareholders could have voted down the
transaction and those where causation must be proved by nonvoting
theories is suspect. Minority shareholders are identified only by a
post hoc inquiry. The real question ought to be whether an
injury was shown by the effect the nondisclosure had on the entire
merger process, including the period before votes are cast.
The Court's distinction presumes that a majority shareholder
will vote in favor of management's proposal even if proxy
disclosure suggests that the transaction is unfair to minority
shareholders or that the board of directors or majority shareholder
is in breach of fiduciary duties to the minority. If the majority
shareholder votes against the transaction in order to comply with
its state law duties, or out of fear of liability, or upon
concluding that the transaction will injure the reputation of the
business, this ought not to be characterized as nonvoting
causation. Of course, when the majority shareholder dominates the
voting process, as was the case here, it may prefer to avoid the
embarrassment of voting against its own proposal and so may cancel
the meeting of shareholders at which the vote was to have been
taken. For practical purposes, the result is the same: because of
full disclosure, the transaction does not go forward, and the
resulting injury to minority shareholders is avoided. The Court's
distinction between voting and nonvoting causation does not create
clear legal categories.
III
Our decision in
Mills v. Electric Auto-Lite Co., supra
at
396 U. S. 385,
rested upon the impracticality of attempting to determine the
extent of reliance by thousands of shareholders on alleged
misrepresentations or omissions. A misstatement or an omission in a
proxy statement does not violate § 14(a) unless
Page 501 U. S. 1117
"there is a substantial likelihood that a reasonable shareholder
would consider it important in deciding how to vote."
TSC
Industries, Inc. v. Northway, Inc., 426 U.
S. 438,
426 U. S. 449
(1976). If minority shareholders hold sufficient votes to defeat a
management proposal and if the misstatement or omission is likely
to be considered important in deciding how to vote, then there
exists a likely causal link between the proxy violation and the
enactment of the proposal; and one can justify recovery by minority
shareholders for damages resulting from enactment of management's
proposal.
If, for sake of argument, we accept a distinction between voting
and nonvoting causation, we must determine whether the
Mills essential link theory applies where a majority
shareholder holds sufficient votes to force adoption of a proposal.
The merit of the essential link formulation is that it rests upon
the likelihood of causation and eliminates the difficulty of proof.
Even where a minority lacks votes to defeat a proposal, both these
factors weigh in favor of finding causation so long as the
solicitation of proxies is an essential link in the
transaction.
A
The Court argues that a nonvoting causation theory would
"turn on 'hazy' issues inviting self-serving testimony, strike
suits, and protracted discovery, with little chance of reasonable
resolution by pretrial process."
Ante at
501 U. S.
1105 (citing
Blue Chip Stamps, 421 U.S. at
421 U. S.
742-743). The Court's description does not fit this
case, and is not a sound objection in any event. Any causation
inquiry under § 14(a) requires a court to consider a hypothetical
universe in which adequate disclosure is made. Indeed, the analysis
is inevitable in almost any suit when we are invited to compare
what was with what ought to have been. The causation inquiry is not
intractable. On balance, I am convinced that the likelihood that
causation exists supports elimination of any requirement that the
plaintiff prove the material misstatement or omission caused the
transaction to go forward when it otherwise would
Page 501 U. S. 1118
have been halted or voted down. This is the usual rule under
Mills, and the difficulties of proving or disproving
causation are, if anything, greater where the minority lacks
sufficient votes to defeat the proposal. A presumption will assist
courts in managing a circumstance in which direct proof is rendered
difficult.
See Basic Inc. v. Levinson, 485 U.
S. 224,
485 U. S. 245
(1988) (discussing presumptions in securities law).
B
There is no authority whatsoever for limiting § 14(a) to
protecting those minority shareholders whose numerical strength
could permit them to vote down a proposal. One of § 14(a)'s "chief
purposes is
the protection of investors.'" J. I. Case Co.
v. Borak, 377 U.S. at
377 U. S. 432. Those who lack the strength to vote down
a proposal have all the more need of disclosure. The voting process
involves not only casting ballots but also the formulation and
withdrawal of proposals, the minority's right to block a vote
through court action or the threat of adverse consequences, or the
negotiation of an increase in price. The proxy rules support this
deliberative process. These practicalities can result in causation
sufficient to support recovery.
The facts in the case before us prove this point. Sandberg
argues that had all the material facts been disclosed, FABI or the
Bank likely would have withdrawn or revised the merger proposal.
The evidence in the record, and more that might be available upon
remand,
see infra at
501 U. S.
1120, meets any reasonable requirement of specific and
nonspeculative proof.
FABI wanted a "friendly transaction" with a price viewed as "so
high that any reasonable shareholder will accept it." App. 99.
Management expressed concern that the transaction result in "no
loss of support for the bank out in the community, which was
important."
Id. at 109. Although FABI had the votes to
push through any proposal, it wanted a favorable response from the
minority shareholders.
Id. at 192. Because of the "human
element involved in a transaction
Page 501 U. S. 1119
of this nature," FABI attempted to "show those minority
shareholders that [it was] being fair."
Id. at 347.
The theory that FABI would not have pursued the transaction if
full disclosure had been provided and the shareholders had realized
the inadequacy of the price is supported not only by the trial
testimony, but also by notes of the meeting of the Bank's board,
which approved the merger. The inquiry into causation can proceed
not by "opposing claims of hypothetical diffidence and hypothetical
boldness,"
ante at
501 U. S.
1105, but through an examination of evidence of the same
type the Court finds acceptable in its determination that
directors' statements of reasons can lead to liability. Discussion
at the board meeting focused upon matters such as "how to keep PR
afloat" and "how to prevent adverse reac[tion]/perception," App.
454, demonstrating the directors' concern that an unpopular merger
proposal could injure the Bank.
Only a year or so before the Virginia merger, FABI had failed in
an almost identical transaction, an attempt to freeze out the
minority shareholders of its Maryland subsidiary. FABI retained
Keefe, Bruyette & Woods (KBW) for that transaction as well, and
KBW had given an opinion that FABI's price was fair. The
subsidiary's board of directors then retained its own adviser and
concluded that the price offered by FABI was inadequate.
Id. at 297, 319. The Maryland transaction failed when the
directors of the Maryland bank refused to proceed; and this was
despite the minority's inability to outvote FABI if it had pressed
on with the deal.
In the Virginia transaction, FABI again decided to retain KBW.
Beddow, who sat on the boards of both FABI and the Bank,
discouraged the Bank from hiring its own financial adviser, out of
fear that the Maryland experience would be repeated if the Bank
received independent advice. Directors of the Bank testified they
would not have voted to approve the transaction if the price had
been demonstrated unfair to the minority. Further, approval by the
Bank's
Page 501 U. S. 1120
board of directors was facilitated by FABI's representation that
the transaction also would be approved by the minority
shareholders.
These facts alone suffice to support a finding of causation, but
here Sandberg might have had yet more evidence to link the
nondisclosure with completion of the merger. FABI executive Robert
Altman and Bank Chairman Drewer met on the day before the
shareholders meeting when the vote was taken. Notes produced by
petitioners suggested that Drewer, who had received some
shareholder objections to the $42 price, considered postponing the
meting and obtaining independent advice on valuation. Altman
persuaded him to go forward without any of these cautionary
measures. This information, which was produced in the course of
discovery, was kept from the jury on grounds of privilege. Sandberg
attacked the privilege ruling on five grounds in the Court of
Appeals. In light of its ruling in favor of Sandberg, however, the
panel had no occasion to consider the admissibility of this
evidence.
Though I would not require a shareholder to present such
evidence of causation, this case itself demonstrates that nonvoting
causation theories are quite plausible where the misstatement or
omission is material and the damages sustained by minority
shareholders is serious. As Professor Loss summarized the holdings
of a "substantial number of cases," even if the minority cannot
alone vote down a transaction,
"minority stockholders will be in a better position to protect
their interests with full disclosure and . . . an unfavorable
minority vote might influence the majority to modify or reconsider
the transaction in question. In
[Schlick v. Penn-Dixie Cement
Corp., 507 F.2d 374, 384 (CA2 1974),] where the stockholders
had no appraisal rights under state law because the stock was
listed on the New York Stock Exchange, the court advanced two
additional considerations: (1) the market would be informed; and
(2) even 'a rapacious controlling management'
Page 501 U. S. 1121
might modify the terms of a merger because it would not want to
'hang its dirty linen out on the line, and thereby expose itself to
suit or Securities Commission or other action -- in terms of
reputation and future takeovers.'"
Fundamentals of Securities Regulation at 948 (footnote
omitted).
I conclude that causation is more than plausible; it is likely,
even where the public shareholders cannot vote down management's
proposal. Causation is established where the proxy statement is an
essential link in completing the transaction, even if the minority
lacks sufficient votes to defeat a proposal of management.
IV
The majority avoids the question whether a plaintiff may prove
causation by demonstrating that the misrepresentation or omission
deprived her of a state law remedy. I do not think the question
difficult, as the whole point of federal proxy rules is to support
state law principles of corporate governance. Nor do I think that
the Court can avoid this issue if it orders judgment for
petitioners. The majority asserts that respondents show no loss of
a state law remedy, because if
"the material facts about the merger and Beddow's interests were
not accurately disclosed, the minority votes were inadequate to
ratify the merger under state law."
Ante at
501 U. S.
1108. This theory requires us to conclude that the
Virginia statute governing director conflicts of interest, Va.Code
Ann. § 13.1-691(A)(2) (1989), incorporates the same definition of
materiality as the federal proxy rules. I find no support for that
proposition. If the definitions are not the same, then Sandberg may
have lost her state law remedy. For all we know, disclosure to the
minority shareholders that the price is $42 per share may satisfy
Virginia's requirement. If that is the case, then approval by the
minority without full disclosure may have deprived Sandberg of the
ability to void the merger.
Page 501 U. S. 1122
In all events, the theory that the merger would have been
voidable absent minority shareholder approval is far more
speculative than the theory that FABI and the Bank would have
called off the transaction. Even so, this possibility would support
a remand, as the lower courts have yet to consider the question. We
are not well positioned as an institution to provide a definitive
resolution to state law questions of this kind. Here again, the
difficulty of knowing what would have happened in the hypothetical
universe of full disclosure suggests that we should "resolv[e]
doubts in favor of those the statute is designed to protect" in
order to "effectuate the congressional policy of ensuring that the
shareholders are able to make an informed choice when they are
consulted on corporate transactions."
Mills, 396 U.S. at
396 U. S.
385.
I would affirm the judgment of the Court of Appeals.
* In the District Court, petitioners asked for jury instructions
requiring respondent Sandberg to prove
causation as an
element of her cause of action. App. 83, 92. The District Court
gave an instruction close in substance to those requested:
"The fourth element under Count I that Ms. Sandberg must
establish is that the conduct of the defendants proximately caused
the damage to the plaintiff. In order for an act or omission to be
considered a proximate cause of damage, it must be a substantial
factor in causing the damage, and the damage must either have been
a direct result or a reasonably probable consequence of the act or
omission."
"In order to satisfy this element, the plaintiff need not prove
that the defendants' conduct was the only cause of the plaintiff's
damage. It is sufficient if you find that the actions of the
defendants were a substantial and significant contributing cause to
the damage which the plaintiff asserts she suffered."
Id. at 424.
The District Court also gave a jury instruction on reliance,
i.e., did Sandberg actually read the proxy statement and
rely upon the misstatements or omissions. Here, the District Court
gave Sandberg's proposed Instruction No. 29, which indicated that
it was not necessary for Sandberg to "establish a separate showing
of reliance by her on the material misstatement or omissions if any
in the proxy statement."
Id. at 426. The instruction
continued, in a manner the Court finds problematic, to provide:
"If you find that there are omissions or misstatements in the
proxy statement, and that these omissions or misstatements are
material, a shareholder such as Ms. Sandberg has made a sufficient
showing of a causal relation between the violation and the injury
for which she seeks redress if she proves that the proxy
solicitation itself, rather than the particular defect in the
solicitation material, was an essential link in the accomplishment
of the transaction."
"If you find that it was necessary for the bank to solicit
proxies from minority shareholders in order to proceed with the
merger, you may find that the proxy solicitation was an essential
link in the accomplishment of the transaction."
". . . you are instructed it is no defense that the votes of the
minority stockholders were not needed to approve the
transaction."
Id. at
377 U. S. 426-427.
Petitioners objected to the "essential link" jury instruction upon
the ground that it decided the question left open in footnote 7 of
Mills v. Electric Auto-Lite Co., 396 U.
S. 375,
396 U. S. 385
(1970), App. 435.