LOCATION:Clark County Jail
DOCKET NO.: 89-1448
DECIDED BY: Rehnquist Court (1990-1991)
LOWER COURT: United States Court of Appeals for the Fourth Circuit
CITATION: 501 US 1083 (1991)
ARGUED: Oct 09, 1990
DECIDED: Jun 27, 1991
Joseph M. Hassett – Argued the cause for the respondents
Michael R. Dreeben – Argued the cause for the Securities and Exchange Commission et al. as amici curiae urging affirmance
Stephen M. Shapiro – Argued the cause for the petitioners
Facts of the case
First American Bankshares, Inc. (FABI) began a “freeze-out” merger in which the First American Bank of Virginia (Bank) merged into Virginia Bankshares, Inc. (VBI), a wholly owned subsidiary of FABI. VBI already owned 85% of the Bank’s shares, and would acquire the remaining 15% from the Bank’s minority shareholders. The Bank’s executive committee and full board approved the merger at $42 a share. The directors then solicited proxies for voting on the proposed merger at the next annual meeting. In their solicitation, the directors stated that they approved the plan because the price allowed the minority shareholders to achieve a “high” value for their stock. Sandberg did not give her approval of the merger and brought suit, the federal ground for which was soliciting proxies in violation of SEC Rule 14a-9, which prohibits the solicitation of proxies by means of materially false or misleading statements. The trial court instructed the jury that it could find for Sandberg as long as the proxy solicitation involved material misstatements, and the proxy solicitation was an “essential link” in the merger process. The jury found for Sandberg, awarding her $18 a share, finding that she would have received that much more if the stock had been valued adequately.
First, can a proxy statement couched in conclusory or qualitative terms, such as “high value,” purporting to explain the directors’ reasons for recommending a corporate action, be materially misleading within the meaning of Rule 14a-9? Second, can causation of damages compensable under Section 14(a) of the Securities Exchange Act of 1934, 15 U.S.C. Section 78n(a), be shown by members 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?
Media for Virginia Bankshares, Inc. v. Sandberg
Audio Transcription for Opinion Announcement – June 27, 1991 in Virginia Bankshares, Inc. v. Sandberg
William H. Rehnquist:
The opinion of the Court in No. 89-1448 Virginia Bankshares versus Sandberg will be announced by Justice Souter.
David H. Souter:
This case comes to us by writ of certiorari to the United States Court of Appeals for the Fourth Circuit.
The directors of the First American Bank of Virginia approved to proposal for a freeze-out merger under which its minority shareholders will be paid $42 a share for their stock by a holding company, Virginia Bankshares Incorporated, following which, the minority shareholders would loose their interest in the bank.
Although the holding company owned enough First American stock to approve the merger without the votes of the minority shareholders.
First American’s directors, nonetheless, circulated a proxy solicitation to the minority shareholders in which the directors urged support for the merger and stated that they had approved the plan because it provided an opportunity for the minority shareholders to receive a high value for their stock.
After the merger, the respondent, Dora Sandberg a former minority shareholder of the bank, brought suit against the holding companies and the directors of the bank for soliciting proxies by means of materially false or misleading statements in violation of Section 14(a) of the Securities Exchange Act of 1934 and the Securities and Exchange Commission rule 14(a)(9).
Sandberg argued that the statement by the directors, that they had approved the merger because minority shareholders would receive a high value for their shares was false and that even though her vote was not necessary to authorize the merger.
She should be permitted to bring a private action for damages under Section 14(a) because the proxy solicitation had for other reasons formed a link in the chain of causation ultimately resulting in damage to her.
Her suit was successful in the District Court, and the Court of Appeals affirmed.
In an opinion filed with the Clerk today, we hold the directors’ statement actionable under Section 14(a), but we hold further that Sandberg has not satisfied her burden to demonstrate causation between the proxy solicitation in her damages and we accordingly reverse the lower court’s judgment.
A knowingly false statement of reasons, opinions, and beliefs by a corporate director contained in a proxy solicitation maybe actionable under rule 14(a)(9), that is because it satisfies two conditions.
First, the reasonable shareholder would consider it important in deciding how to vote.
Second, such statement is subject to proof or disproof as a factual assertion that the directors’ act for the reason that was given or hold to belief statement, and the independent facts justify acting for such reasons or holding such a belief.
In this case, for example, Sandberg and others presented evidence about the bank’s assets and its actual and potential level of operation to prove with the directors’ statement was misleading about the stock’s value and a false explanation of the directors’ reasons for approving the merger.
We, nonetheless, reverse the judgment because we hold that Sandberg has not demonstrated causation of damages.
One theory of causation she advances is that the proxy statement was a means of obtaining minority approval without which the parties to the merger would have been unwilling to proceed regardless of the fact that minority approval was not legally required.
We reject this theory because it would predicate liability on speculation about the state of mind of corporate directors in a hypothetical situation.
We reject respondent’s further theory of causation that the proxy statement was used to obtain votes of the minority shareholders that bar the subsequent action in State Court to avoid the merger because there was no showing that such a state law remedy is no longer available.
Justice Scalia has filed an opinion concurring in part and concurring in the judgment.
Justice Stevens has filed an opinion concurring in part and dissenting in part in which Justice Marshall has joined.
Justice Kennedy has filed an opinion concurring in part and dissenting in part in which Justices Marshall, Blackmun, and Stevens have joined.