RESPONDENT: Electric Auto-Lite Company
LOCATION: Holmes County Board of Education
DOCKET NO.: 64
DECIDED BY: Burger Court (1969-1970)
LOWER COURT: United States Court of Appeals for the Seventh Circuit
CITATION: 396 US 375 (1970)
ARGUED: Nov 13, 1969
DECIDED: Jan 20, 1970
Facts of the case
Media for Mills v. Electric Auto-Lite Company
Audio Transcription for Oral Argument - November 13, 1969 in Mills v. Electric Auto-Lite Company
Warren E. Burger:
Number 64, Mills and others against the Electric Auto-Lite Company.
Arnold I. Shure:
Mr. Chief Justice --
Warren E. Burger:
Arnold I. Shure:
-- and may it please the Court.
This case is here on certiorari to the Seventh Circuit Court of Appeals.
Petitioners are minority shareholders of the Electric Auto-Lite Company and they sued derivatively and as a class action on behalf of all other minority shareholders with respect to a merger proxy statement which was mailed to the shareholders of Electric Auto-Lite in 1963.
The action is brought against Electric Auto-Lite for whose benefit is sought against Mergenthaler, the majority shareholder which own 54% of Auto-Lite stock and against American Manufacturing Company, the parent of Mergenthaler and owner of 1/3 of its stock.
The story begins about two years earlier when American Manufacturing Company at the top of the pyramid found itself in a legal situation where presumptively, all of the transactions between its affiliates Mergenthaler and Auto-Lite and itself or any of them had to be subject possibly to investment company act scrutiny and regulation.
This regulation is substantive termed post some very serious problems and to avoid the risks of this kind of regulation, an application was made to the Corporate Regulation Division of the Securities and Exchange Commission for an exemption.
Under a provision which permits such an exception of it can be shown at the business of the parent is not that of an investing company but it is primarily engaged in a business other than that of owning stocks through controlled subsidiaries.
To show that American was primarily engaged in the operation of Auto-Lite and its business on a day-today basis, respondents offered evidence of the fact that Mergenthaler actually dominated the day-to-day business of Auto-Lite and that this was done in cooperation with American and that this domination occurred through the fact that all of the directors -- all of the directors of Auto-Lite had been handpicked.
Seven of them were handpicked by Mergenthaler and seven of them were direct nominees and four of them had been retained at sufferance and as the testimony went there for the benefit of Mergenthaler.
Not for the benefit of Auto-Lite as they bought it and thus showing the append exemption order.
And hard on the heels of this exemption order, they issued the proxy statement with regard to the proposed merger between Mergenthaler and Auto-Lite.
The proxy statement was completely silent about this domination of the Board of Directors.
In fact, it was completely silent as to any relationship between the Board of Directors of Auto-Lite and Mergenthaler and American.
And although conscious with the fact that it was necessary to disclose such relationships, they did disclose that there were four directors of Auto-Lite who were common to Mergenthaler.
And when I'm to make the post of representation that no director has any other interest direct or indirect in the proposed merger.
In the complaint, the plaintiffs have claimed that this was an outcome of misrepresentation which is certainly a major nondisclosure.
The proxy statement did say that the Board of Directors has carefully considered and approved the terms of the merger and recommends that the shareholders vote to approve the plan of merger.
Respondents despite the fact that the suit was pending proceeded to consummate the merger and this puts our situation here in exactly the same context as the situation in Borak versus J. I. case which this Court decided in 1964 and which we say is determinative of the issues here because there too when the merger was consummated, the people took the risk, decided they go ahead knowing there was a lawsuit pending but nevertheless went ahead with the knowledge of what the claims of the plaintiffs were.
The -- since the facts were undisputed because we have there sworn statements with other case, the District Court took the view that the shareholders were entitled to be informed of these interrelationships between the Board of Directors making the recommendation and the adversary in the merger negotiations and entered judgment -- a summary judgment under rule 56 (c) of the Federal Rules of several procedure which is appropriate where there are no genuine issues of fact that there have been a violation through nondisclosure of a material fact or facts.
The Court reserved however brought up the question of cause or relationship and after hearings were held on the cause of relationship and it was demonstrated to the Court that this merger was consummated through the use of proxies procured through the unlawful proxy statement.
The Court then made a further finding and entered a supplemental summary judgment holding that the issue of liability had been established and that there was a violation of the Act.
The Court of Appeals agreed with the District Court on the fact that there was this material nondisclosure.
Both Courts has little difficulty in coming with the conclusion that the failure to disclose this conflict of interest, the relationship with the adversary was so material that a violation had occurred so the Court of Appeals in a very carefully considered opinion rule that there had been this violation of the Section 14 and Rule 14 (a) and Rule 14 of the regulations promulgated by the SEC.
The District Court reserved all questions of relief for further hearing.
This under the summary of judgment proceedings of permissible to have a judgment on liability first and then after that is disposed out.
The appeal by the appellants of course came immediately after the District Court's ruling and finding.
Since the Court of Appeals found that there had been a violation and that the facts not disclosed were material, the respondents here filed no petition for certiorari and did not seek to save that question for review by this Court.