MILLS v. ELECTRIC AUTO-LITE
Legal provision: Securities Act of 1933, the Securities and Exchange Act of 1934, or the Williams Act
Argument of Arnold I. Shure
Chief Justice Warren E. Burger: Number 64, Mills and others against the Electric Auto-Lite Company.
Mr. Arnold I. Shure: Mr. Chief Justice --
Chief Justice Warren E. Burger: Mr. Shure?
Mr. 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.
When petitioners filed a petition, the respondents resisted our petition, filed no cross petition, and we believe that that matter is therefore not pending before this Court.
Now, this Court requested the Government to file a brief as amicus and the Government in its brief as will be noted aggress with petitioners' view as to what issues are pending on this certiorari hearing and theirs are essentially the same as our.
That was the Government.
The respondents of course attempt to seek a review and a weighing of the evidence by this Court and a great length in their brief, they argue what evidence it was before the other Courts.
We have not answered that because we have felt governed by the rules of this Court and we've adhered to the question only that on which this Court granted certiorari.
The -- now in a separate portion of the opinion, the Court of Appeals deals with the question of causation.
And here it rules that the District Court was an error.
Although agreeing that the proxy statement caused the merger in the sense that those essential to the merger were procured through the unlawful proxy statement, the Court of Appeals laid down a different test of causation asking whether the misleading statement and omission caused the submission of sufficient proxies to change the result of the vote as the Court of Appeals said more exact question is whether that particular misrepresentation and are wrongful -- material wrongful omission actually resulted in the votes.
The cracks of the Court of Appeals' opinion, lies at this point toward the end.
It's within the last two pages of the opinion.
The material offered by defendants on the merits of the terms of merger suggest that it may be possible for them to satisfy the Court by preponderance of probabilities that the merger would have received a sufficient even if the proxy statement had not been misleading in the respect found.
The petitioners take the position that this kind of speculation or guesswork attempt to unscramble the minds of the 5400 minority shareholders who voted for the merger is essentially going to be a guesswork proposition.
The type of undertaking that courts do not undertake.
There are many decisions fully won by Justice Cardozo long ago in which at common law, he said that we can't get in to these nice speculations as to which particular bit of information in a series -- complicated series of facts affected the person's mind.
But the Court of Appeals was really talked about here.
They speak of a footnote when they say the Court's finding question common law is reliance.
Now, there's nothing in the Borak case, there's nothing in the Exchange Act of 1934 which is before this Court.
There's nothing in the rules and regulations of the Securities and Exchange Commission that says anything about reliance.
The -- we get down to the question of what is the purpose of this legislation.
Our text must be Borak because we think Borak inclusively disposes in this case.
The test is what was the purpose?
And the purpose was to have an honest suffrage.
This -- the Rule 14 in Section 14 (a) do not say that all under fair mergers are barred.
This is a disclosure statute.
It says you must make full disclosure so that there may be a fully informed voting on the question that is presented in the proxy statement.
If the proponents of a merger want to set out all of the horrible things and assuming a plan is just terribly untrue and they want to set the whole thing out, and they tell everything fully, there's no violation of the statute.
But the Court of Appeals in interpreting a federal statute has gone the common law standards and creates this impracticable standard as to how you resolve what went on in people's minds and this assumes of course that the stockholders would have voted for any fair merger.
They don't discuss whether it may be just fair, a little bit fair, a whole light fair, overwhelming of what.
The assumption is that the shareholders in guessing what went on their minds and guessing and speculating what they would do would vote for a fair merger.
Well, that is not consistent with known facts.
People have many reasons for voting.
Here, there were many facts disclosed as to market value, the book value -- the book value here was $88.00 a share and the people were getting less than 75% of book on this merger.
And when one analyze that the figures in the proxy statement would realize they weren't even getting the market value of their Auto-Lite shares because the preferred shares of Mergenthaler that would be giving an exchange if converting into common immediately would bring something like $6.00 to $9.00 less on the market than they would've had for their shares of Auto-Lite.
But the reason that the whole plan was unfair was that the -- they were taking less at less than 75% of book of value.
Now, with all of these, it is true --
Justice Potter Stewart: I perhaps have missed the point in this case.
I thought there was no attack here on the fairness of the terms of the merger itself?
Mr. Arnold I. Shure: The complaint --
Justice Potter Stewart: Am I mistaken about that?
Mr. Arnold I. Shure: That is not pending before the Court Your Honor at this time.
The question of fairness we say is petitioners that the issue of fairness has nothing to do with the remedy and restitution.
Justice Potter Stewart: Yeah.
Mr. Arnold I. Shure: The attack that the trial here, the manner -- the resolution of the case below that brought the case here did not involve the question of fairness at all.
It was a showing that there was a violation of the proxy rules and plaintiffs maintain that to establish our cause of action under Borak, fairness has absolutely nothing to do with it.
Justice Potter Stewart: That's what I thought and --
Mr. Arnold I. Shure: That's right.
The Court of Appeals injected this issue of fairness and they setup a standard that is the plan is fair, we will assume that the people would've voted for it and if you, the plaintiffs -- the petitioners or plaintiffs are unable to establish that the plan was unfair or putting the bird in the other way, they said that the respondents by the burden of persuasion should demonstrate that this is fair if they can and they put in their expert witnesses and so on and then we put in ours.
And you get down to the question of whether or not at a very lengthy battle of attrition as to whether or not it's fair.
We say that has absolutely nothing to do with the violation and on that, we must stand or fall.
Either Borak means what it says or it doesn't mean anything.
And to borrow a common law test of constructive fraud which the Borak decision says that the Court is trying to get away from it and Congress was trying to get away from.
And to inject it in to a disclosure statute which involves a public interest and fair -- and fair disclosure to shareholder so they may vote and know what they're voting on without having all the evils that came prior to the Securities Act.
We're arguing this case exactly 40 years and two days -- and two weeks to the day after the stock market price of 1929 and all of these investigations, the preambles to the Securities Act all talk about what they're trying to cure.
They're trying to cure the secrecy.
They're trying to cure the nondisclosures.
They're not trying to say let's have fair plan or commander to make this plan fair.
You are commanded to make disclosure in a full and honest disclosure and that's all that's involved.
Justice Byron R. White: Do you think it's irrelevant whether or not these misrepresentations or these omissions affected any votes?
Mr. Arnold I. Shure: I believe that it is irrelevant because Congress in passing its statute did not inject any element of reliance.
If we are going to get into questions of reliance and causation, then we get into the area speculation of what affects people's minds.
And this is something that is almost impossible to unscramble.
How can we got back now years later or if the defendants had gone back immediately when they were served with the complaint and they know what the facts where they knew about this other proceeding, they knew about the evidence, they could've gone back and resubmit then we would've have a very easy disposition of the case.
Justice Byron R. White: Do you rely on Borak?
Mr. Arnold I. Shure: I certainly do.
Justice Byron R. White: Well, didn't Borak say cause or connection will be tried out in the District Court?
Mr. Arnold I. Shure: Borak does not say that that cause or relationship must be tried.
It msut be remembered that Borak was here.
I was in this case.
Borak was my case.
Justice Byron R. White: Yeah.
Mr. Arnold I. Shure: In Borak, the case came to this Court on the pleadings and it was not after a resolution.
There was no evidence --
Justice Byron R. White: And what did Borak say?
Mr. Arnold I. Shure: Borak said that cause or relationship is a matter for the trial court.
Now, in order to understand what the Court meant by that, you must recognize the Supreme Court ahs laid down rules of Federal procedure.
And in the rules of Federal procedure, you have provisions for summary judgment where all the facts were admitted.
We say here the facts are admitted.
The cause or relationship is not some vague and indefinite thing that goes into the question of fairness.
We can have restitution which will never be over in the case and completely destroyed the remedy for any small shareholder.
And after all these laws are here to help the small shareholder who has not been able to carry on this kind of fight.
Justice Byron R. White: You speak of remedy.
Do you want damages?
Mr. Arnold I. Shure: As far as remedy is concerned, the --
Justice Byron R. White: But do you want damages?
Mr. Arnold I. Shure: We have the alternative.
What we want here now, we want restitution.
Restitution may come in two ways.
Either in kind or it may come in damages.
The Law of Restitution goes back to the 16th Century.
It started out with Slaves case --
Justice Byron R. White: Do you want your old pieces of paper?
Mr. Arnold I. Shure: No --
Justice Byron R. White: Rather than the money that you can get out of your new -- that one?
Mr. Arnold I. Shure: No Your Honor, I don't want the old pieces of paper.
What I am saying is this that is the Court after a trial and hearing all the relevant facts decides this merger should be set aside.
I don't want that avenue foreclosed.
We have never said regardless of what the defendants have in their brief and unfortunately we did apparently didn't make our self that clear.
When we talk about restitution and that the statute says that it shall be void as to the right, we're not saying that that means automatic divestiture.
What we are saying is that that -- the Congress set the stage for restitutionary remedies.
Now, I'll give one example to why this is so important.
In Sterling versus May Flower, it was held that when there is a merger, the only damage that the shareholder can get is the merger of value.
And they decide that this state court case is a merger -- the merger of value is the market value so all you can get is the market value of which your shares would've sold on that day.
Now, we say that when the assets of our company are sold by the majority shareholder to himself, Mergenthaler sold these assets to itself because they control the Board of Directors.
But we say we're entitled to a restitutionary measure of damages which says we will look at this.
The Court is going to look at this as though the merger hadn't gone through.
We're not going to make you take your merger proceeds.
We're not going to look at this in the way of an expectancy as though the merger had gone through.
We're going to look at this as though the transaction never had taken place.
Justice Byron R. White: Well don't you get right to the fairness of the merger then?
Mr. Arnold I. Shure: No.That has nothing to do with fairness Your Honor because --
Justice Byron R. White: Well, I would say it would if your stock is worth more than now than it would've been if the merger hadn't taken place, what about your restitutionary --
Mr. Arnold I. Shure: No one can speculate what the stock would be worth.
Now, if the merger hadn't taken place, that's pure guesswork.
The measure of value -- one measure of value is right there on the books.
The Mergenthaler people say “Oh, book value doesn't mean anything.”
That's what the respondents say in their brief.
But they themselves used book value.
They went out in the market and bought hundreds of thousands of share and they set up the excess over market as an asset on their books.
And it took $800,000.00 a year of that excess value and treated it as earnings and then in triggering out these fantastic merger ratio, they said, “Look at how much more earnings Mergenthaler has.”
Now, Auto-Lite can't give nay consideration whatsoever to the value -- to any such values that Mergenthaler's value and earnings are appreciated.
They had some $30 million or some huge sum and they put that in.
They were writing it off on their books as additional income earned by Mergenthaler and it was nothing more than the difference between what they picked up the share for the market and the excess of book value over.
All that we are saying is we are not asking for divestiture other than the fact that we put the prayer in our complaint.
We are asking for restitutionary measures of damages as stated in Borak.
Borak cites that the departures, the independent shares under the 33 Act.
It says “the language here of jurisdiction is virtually identical with that in the 33 Securities Act and there you can get restitution.
We want the restitutionary measure.
We want it as of the moment before the merger with all the transaction that never occurred, then you'll look at the book value, you look at the liquidating value, you'd look at all these values because if these assets, the position of the minority was sold those majority shareholder for less than it was worth, then we are entitled to get what was really worth it because all it was, was a liquidation of the company.
And they sold out our share and they sold all the assets to themselves and they're giving us what they want to give us.
We think we're entitled to get what they were really worth.
Now, that has nothing to do with the fairness of the plan whatsoever.
That plan never existed if we're going to follow the mandate of the Congress.
I reserve the rest of my time for rebuttal.
Chief Justice Warren E. Burger: You have about seven minutes -- about seven minutes remaining.
Argument of Albert E. Jenner, Jr.
Mr. Albert E. Jenner, Jr.: Mr. Chief Justice, members of the Court.
I unfortunately caught a cold yesterday and I think it has affected my hearing a little bit but not otherwise.
If Your Honors please, it may be unusual and perhaps it's unusual that Securities and Exchange Commission case be as living as a case as this one involving uses of summary judgment procedures so that the respondent in this case has never had a trial.
The limitation of various issues arguments now in this Court that under a splendid benefit of statute as this one is that what the Congress intended and what the Securities and Exchange Commission intended at adopting a rule under Section 14 (a) was to cut off -- to cut off a consideration of any Court including this one at some early stage of the game if there is say let us say a technical any kind of alleged violation of the rule which I'm about to read to Your Honors that at that moment further judicial inquiry seizes.
And as Mr. Shure has argue to Your Honors, there comes a situation in which that Trial Court must then say to itself as of the time of the consummation of this merger that have molded to a purchase by the surviving company of the company merged into that surviving company and so you must judge its value on pure asset value as a way of a liquidation.
Fairness is immaterial.
Did Congress intend by the adoption of this benefition statute and the SEC adopting the rule under it that fairness should be excluded.
Now, may I turn to Borak Mr. Justice White has imparted Mr. Shure on that subject matter.
On this issue, Mr. Justice White and Mr. Chief Justice and gentlemen, what this Court said, first, that case as Your Honors will clearly recall of course was a holding that Section 14 (a) created a federal right.
It did not have the mercy of the ship.
It did not have to sue under a common law or fraud.
You had a federal cause of action.
And when there was oppressing in recourse to that case as to the consequences of a violation, great, small and deferred or horrendous as the case might be, what was the consequence?
Mr. Justice Clark before the Court said, “The causal relationship--” and I'm quoting from that case, “The causal relationship for the proxy material and the merger are questions of fact to be resolved at the trial not here.”
Now, may I respectfully suggest that to me means that if a violation is determined upon by the trial court after considering all the circumstances, then the Court goes on to determine what the consequences are cause of relationships have resulted and that one of those factors as far as the Securities and Exchange Commission says in this amicus curiae brief submitted to Your Honors.
Now, what is the statute or rule as presented here?
It is simply this, no solicitation subject to this regulation shall be made by means of any proxy statement, form of proxy, notice of meeting or other communication written or oral containing any statement which at that time and in the light of the circumstances under which it is made.
May I repeat that if Your Honors please, at that time and in the light of the circumstances under which it is made is false or misleading with respect to any material of fact or which shall omit the State any material fact necessary in order to make the statements they're in not faults or misleading.
Now, what happened in this particular case?
A proxy statement of 108 pages set forth in Volume 1 of the transcript annex of this case was sent to the shareholder three weeks before a proposed merger meeting of the shareholders, received by Mr. Shure's clients.
And here they turned -- one client turned over the proxy statement to him, the other client I know was that Mr. Mill's assessment to Mr. Norman Nasher of the Chicago bar, most distinguished lawyers.
They expressed their views that is, the clients that they understood the proxy statement, they were opposed to the merger and they voted against the merger.
And they appear here as plaintiffs who have voted against the merger.
On behalf of all shareholders including those who voted for it, over 5000 who voted for it seeking to set this aside.
Now, I can never been quite able to comprehend Mr. Shure's argument either at the trial Court or in the Court of Appeals or in this Court as to what he means by restitution.
May I suggest Your Honors that although I can resort to Mr. Shure's brief in which he says as follows as to what consequence he wants to flow from what the Court of Appeals held in this case if Your Honors please was a misemphasis.
Not a horrendous omission, a misemphasis with respect to the relationship of directors in the several corporations.
Mr. Shure says at page 69 of his brief so I don't misinterpret it this is what he says, “Here, the petitioners have repudiated the merger asking for “appropriate orders setting it aside” and for an order directing respondents to accounts of the corporation for the damages sustained by reason of the invalid transfer of corporate essence.
They do not ask to enforce the merger agreement but to be put in the position they would've occupied if no unlawful merger had been affected.
The right to that relief undistracted by any inquiry into fairness.”
This Court is not to go under the fairness and no one is to go in the question of fairness.
Is Court necessary to make effective the congressional purpose?
Now, what is this perspective?
What is in the time and in the light of the circumstances under which these supposed omissions or misemphasis in this proxy statement occur?
In dollar terms if Your Honors please, the minority of shareholders here have benefited enormously.
Now, if they have not benefited, I'm sure that Mr. Shure would be here urging that upon the Court.
But they have benefited enormously.
On the day of merger, the Electric Auto-Lite shares were selling at $59.00.
The shares of the surviving corporation as of yesterday's market on the conversion of substance, all of these shares have been converted, very, very few I think in less than 500 shares not converted with $127.00 a share and at one time were up as high as $200.00 a share.
So in separate terms, this is --
Justice Byron R. White: That is one to one?
Mr. Albert E. Jenner, Jr.: 1.88 of the shares of the surviving of the surviving corporation for each share of electro Auto-Lite.
And then there was in the meantime if Your Honors please is that introversion, there was a stock split two for one and then there was a percentage given out.
Justice Byron R. White: So for every dollar that a man in stocks would worth at Electric Auto-Lite, what's that dollar worth?
Mr. Albert E. Jenner, Jr.: As I guess with today's market, $2.00.
Secondly, now although petitioners' lose claims on the contrary on their brief, the fact is there's absolutely if Your Honors please no question or fraud in this case.
No question or fraud in this case at all and no intentional wrong doing.
There isn't a word in the briefs of the petitioners here and there isn't a word in the Securities and Exchange Commission amicus curiae our brief to Your Honors suggest any intents on wrong doing whatsoever in this case.
We're not evil doers.
A technicality is being urged upon the Court.
Here is a living case in which the petitioner is asking the Court having found a misemphasis in a proxy statement, you must not close your eyes to the statute and the effect of this action.
Now, are there any common sense view of this case, any common sense view?
This alleged deficiency that is our failure to emphasize as strongly as Mr. Shure's client thought should be emphasized and as the Court of Appeals and the pendum by Mr. Justice Carol felt should've been emphasized a little bit more that is that directors of electro Auto-Lite were nominated by Mergenthaler, that directors of Mergenthaler were nominated by American Manufacturing should've been brought out more firmly to show an alleged conflict.
But, if Your Honors please in the very proxy statement itself five lines if I may seek Your Honors permission in five lines in the proxy statement itself page 30 of the first volume of the abstract, “Mergenthaler which owns approximately 54% of the outstanding shares of electric Auto-Lite intends to vote in a favor of approval of the agreement of merger.”
Justice Byron R. White: Mr.Jenner, haven't both Courts have found the material omission here or --
Mr. Albert E. Jenner, Jr.: Would you forgive Your Honor and repeat that?
Justice Byron R. White: Haven't both Courts have found the material omission here?
Do we have to reargue that question of --
Mr. Albert E. Jenner, Jr.: No.
Justice Byron R. White: Is that a question of fact or what?
Mr. Albert E. Jenner, Jr.: We think it's a question of fact and we believe because the Trial Court followed so called summary judgment procedure that we have never received a full trial on the issue or whether this difference and emphasis was in fact a material omission.
Justice Byron R. White: Well that question isn't here.
You didn't cross petition and appeared.
Mr. Albert E. Jenner, Jr.: No, we didn't cross petition if Your Honor please and we do think it's here.
Your Honors granted cert.
Your Honors did not limit the grant of cert and in our opinion that in (Voice Overlap) -- excuse me Your Honor?
Justice Byron R. White: Arguments are usually limited to questions raised in the cert petition aren't they Mr. Jenner?
Mr. Albert E. Jenner, Jr.: Well yes they are and they certainly should be.
Justice Byron R. White: Well, are you arguing something not in a question decision?
Mr. Albert E. Jenner, Jr.: I think not if Your Honor pleases.
It is my position that the issue of materiality is in as carefully bound into the question of causation of fairness and the fact of this on the shareholders.
But, I must say to all Your Honors in great sincerity and candid that my clients can live and live well with the opinion on judgment of the Court of Appeals in the Seventh Circuit because the Court of Appeals in the Seventh Circuit remanded this case to the trial court to afford us a trial on the issue of whether it's stated in 14 (a) sub 9 of the Securities and Exchange Commission.
They rule that at the time and on the light of the circumstances under which it was made, the statement violated the rule to have a consequential effect upon as this Court said should be determined in Borak upon this merger rather than as Mr. Shure suggest yet the entry quickly of an order.
On summary judgment or otherwise which says there's a technical violation of this rule and then you don't have to go into fairness.
Fairness is immaterial.
Justice John M. Harlan: Mr Jenner--
Mr. Albert E. Jenner, Jr.: Yes.
Justice John M. Harlan: What is the difference between your position and the Government's position?
Mr. Albert E. Jenner, Jr.: The Government's position as I understand its position have very well stated in its brief.
I may stand and I wish to compliment the SEC Council and the Solicitor General Griswold in a well written brief.
The Government is concerned as I view their brief about what is called corporate suffrage.
Since they have a rule that certain materials -- matters shall be reported in a proxy statement that there should be encouragement of minority show as in others to make compliant promptly in the event that they see oversights or other violations of 14 (a) (9).
And in order to encourage that, there should at the outset as quickly as possible be a -- some kind of a technical finding of liability.
Now, the liability that which the Government speaks is not a consequential liability but one that will afford enough anchor may I put it that way, enough anchor to allow suit expense and the attorney's fees to the minority shareholders that make their complaint.
The Government says that fairness is a factor, disagrees with Mr. Shure on that.
The Government says, SEC says this is not void.
That is a -- the fact that a crisis statement doesn't happen to fit in all the decree with 14 (a) (9).
It doesn't make the transaction void.
It doesn't make those votes void.
They're voided perhaps in the light of all the circumstances and after a full trial of the case.
But they're not void.
Mr. Shure's Your Honors will recall from the record prosecuted a cross appeal from the District Court's opinion and which the District Court had struck out of his judgment a finding that this merger was void.
He -- Mr. Shure had not argued very vigorously in this reply brief but he did argue in his opening brief and is petitioned for certain in this case that it was all void.
Now, whether this Court having before it now in the position of the SEC, Mr. Justice Harlan, to create a federal law of corporations in which the Court withhold that 14 (a) and the rule under in (14) (a) (9) does give a District Court jurisdiction to allow attorneys fees and suit expense even though the traditional duration of a fund or other benefit is not obtained but only that there has been called to the attention of the Court some deviation from (14) (a) (9) and the proxy material should be restated and their should be a re-solicitation.
In order to encourage that says the Securities and Exchange Commission, fees and expenses should be allowed.
May I suggest too Your Honors in that connection that as I have trouble going through that theory, I likened it to this as a possibility.
In your experience and of course all litigators, are will and trust construction cases in which the testator drafts his will or trusts as preferred and there's an ambiguity and it has cause, there was lawyers cause.
Then the expense of resolving that ambiguity is assessed against the estate and perhaps that maybe inevitable, whereby the Securities and Exchange Commission's suggestions to this Court may possibly be accommodated.
Now, it seems inconceivable though to us, of course I'm an advocate that it seems inconceivable to me because I'm advocating for a client.
But try to be as candid as I possibly can, I can't conceive of a situation in which fairness, the -- it's not a -- I want to say it was a defense.
It's a factor to take into consideration in the element resolution of the whole case.
As we complain in our brief, we tried -- we tried -- we tried before His Honor Judge Parsons in the District Court to have this case set for trial on all three counts not on these motions for limited findings on summary judgment and then a reference to the whole case to a master with no limitations to the master, no guidelines to the master and what he was going to decide on the causation and result.
And as the Court of Appeals holds -- the Court of Appeals held that the reference to a master here had to follow with the ordered.
But not only because of the summary judgment order but also because there were no guidelines in referring this case to a master to tell the judge -- the court what the relief was going to be.
When I may by opening to say that this was a live case pertaining to this Court, many problems I had in mind, the procedures were followed here.
We've never had a trial.
Justice Hugo L. Black: Did you object to that in the Court of Appeals?
Mr. Albert E. Jenner, Jr.: Yes we did if Your Honor pleases and we made --
Justice Hugo L. Black: We're not arguing here that the summary judgment was wrong aren't you because it was a summary judgment?
Mr. Albert E. Jenner, Jr.: No.
That isn't our position.
I don't want to be fictitious if Your Honor pleases.
It wasn't wrong because it was a summary judgment.
It was wrong because questions of fact were presented that could not be resolved by summary judgment but which were in fact resolved by summary judgment that there were considerations and factors to be taken into consideration by the Court which he did not take any consideration.
One factor being if Your Honor pleases is the question of fairness of Mr. Shure's of how you're going to determine what's in the mind of a shareholder who voted for this merger.
Justice William J. Brennan: Well, Mr. Jenner, you are getting a trial.
I don't -- and as I understood your argument earlier, you don't think there's any restriction on -- merely because the Court of Appeals has limited this to causation.
I gather you think you can bring in everything you want to bring in don't you?
Mr. Albert E. Jenner, Jr.: I certainly do if Your Honor pleases.
Justice William J. Brennan: Well, what's your complaint here?
Mr. Albert E. Jenner, Jr.: I'm not--
Justice William J. Brennan: If that's a correct view of what you're going to get your trial aren't you?
Mr. Albert E. Jenner, Jr.: Yes.
And that's did not petition this Court for cross petition for certiorari.
Justice Byron R. White: You're attempting to sustain the Court of Appeals.
Mr. Albert E. Jenner, Jr.: We're attempting to sustain the Court of Appeals in so far as the Court of Appeals granted summary judgment that we should earn title to a trial on all the issues in the case.
Justice William J. Brennan: Well, of course but as I read it, what they say is we conclude that there is an issue for trial as the cause of relationship --
Mr. Albert E. Jenner, Jr.: Yes Your Honor.
Justice William J. Brennan: And they precede that -- they sustained the summary judgment as a guard to the materiality of the misrepresentation.
Mr. Albert E. Jenner, Jr.: That is correct.
Justice William J. Brennan: But you still make under the -- as I understood you earlier in the trial and the cause of relationship, you're going to be entitled to contest the materiality or misrepresentation or did you say that?
Mr. Albert E. Jenner, Jr.: May I try to put it this way if Your Honor pleases.
You're very precise and I would -- I'd like and if I can answer it precisely.
It is our position that causation, effect and materiality are one ball of wax that you really can't separate them.
And when the Court separates them as was done here by way of -- particularly when a resort is lying to summary judgment and you held these major considerations had bear on materiality excise and under consideration by the judge on the issue of so called materiality, you get the case all segmented.
And a badge, a scarlet letter is placed on the bag--
Justice William J. Brennan: Well, I'll come back to what I said earlier.
Mr. Albert E. Jenner, Jr.: I beg your pardon?
Justice William J. Brennan: That you're reading the Court of Appeals order for a new trial is not limiting you to something called cause of relationship but permitting you on in litigating the fact or cause of relationship also litigate the issue of materiality aren't you?
Mr. Albert E. Jenner, Jr.: Only to the extent that the nature of that which was not included in the proxy statement or the mis-emphasis in the proxy statement has a bearing on causation.
I hope I don't sound as though I'm double talking.
It's a factor in this whole ball of wax if it be considered when it makes -- the Court makes a settlement judgment should you unscramble or as Mr. Shure where he would like to have this Court hold this is a violation of Section 14 (a) and therefore, this proxies don't mean anything, there has to be what he call as restitution that is a determination that you take this company not as a viable company earning money or trying to earn money but as a sack of assets.
And you determine -- we're now applying that formula.
As of that day, this -- if it happened in liquidation and distribution as of that day, this once would've fall money wise.
And you don't pay any tax.
And what did happen in the meantime even though it's here because of the soundness of the plan of merger and placing these two companies together that this share of this day worth twice as much as what they were when the shareholders overwhelmingly 94% voted in favor of this merger.
Mr. Shure wants to cut things off especially he wants to cut off fairness.
All we've been seeking to do is what the Court of Appeals gave us.
We did not point the way we wanted it but we can live with it at trial on all of these issues not so what we're seeking.
And we thank the Court of Appeals gave it to us and we think Mr. Shure is seeking to urge this Court to diagnose.
Do any of Your Honors have any further questions?
Chief Justice Warren E. Burger: I think not.
Thank you Mr. Jenner.
You have seven minutes, Mr. Shure?
Rebuttal of Arnold I. Shure
Mr. Arnold I. Shure: Mr. Chief Justice and Your Honors, the fairness as a matter of a fair ratio of exchange in the merger is not here.
What we seek is the value of what we gave up.
We charge unfairness in the sense that the respondents were unjustly enriched not that the ratio exchange was unfair.
It is not Mr. Shure who wrote the Act and said that the trial section shall be deemed as void, Congress said that.
We are taking the posture the Congress places and in says “the wrong doer shall not profit”.
Now, Mr. John B. Dawson who's the outstanding authority of Harvard, and the subject of unjust enrichment wrote as leading text on that in 1951 and any resort to that shows that remedies at law that the general attempted remedy -- remedy as an equity tracing of assets, equitable liens and so on are all different forms and this is what people who understand the law of restitution are talking about when they say that you shall view a transaction under the Securities Act as void.
It means that you get that not with all the consequences of the merger attached to it but with the situation as it existed before that.
We are contempt to let the Government's brief speak for itself as to what they're referring is relevant to the -- to causation.
The Court asked -- Mr. Justice Harlan Mr. Jenner as to what the differences were.
There's a very substantial difference, they don't agree at all.
The Government says that the judgment should stand the judgment of the Trial Court that we have proved everything necessary to establish a cause of action and that certain consequences flow from this.
They do say as we agree that fairness of the ratio of exchange -- and I'm talking about the Commission may be relevant to one measure of monetary recovery.
But the fairness that the exchange ratio is not the only measure of damages and the fairness of the ratio is not relevant to unjust enrichment causes of action which is the basis of the remedies under the 34 Act.
Borak points that out.
This Commission said but where ends here misleading aspect of situation -- solicitation did not relate to the terms of merger.
The mislead stockholders should be entitled a monetary or other relief only if the merger resulted in a reduction to them of earnings or earnings potential.
Now what does that mean?
That means that if we were entitled to get 2.5 shares of preferred stock under the merger and we only received 1 8/10, then we ought to get it or get that in dollars.
We are the plaintiffs.
We are the ones who have been injured.
We brought the suit whose here and we are asking that all these people who were short changed on the merger in anyway you look at that proxy statement, it is inescapable.
What did they do here?
They took $23.00 a share of the book value off the bars and they gave -- we ended up with $64.00 or $65.00 a share, $64.86 and the shareholders at Mergenthaler end up with $107.00 a share of book value.
They just handed it over to the other people.
And we are told here that we just have no remedy here if the ratio of exchange.
We would get into a war here of experts.
And that's what the small shareholder is not able to do.
We can't match the great corporation with all of its assets in that kind of a war.
Congress envisioned this sort of thing and gave us a short, quick remedy of restitution and said we can have any avenue relief --
Justice John M. Harlan: Mr.Shure, where do you differ from the Government?
Mr. Arnold I. Shure: The only byway of emphasis as far as the Government is concerned, I believe that at page 18 of their brief, they did not explain what they meant by earnings potential -- laws of earnings or earnings potential.
Obviously looking at the Government's brief and looking at their other writings that is inescapable if this is unjust enrichment we're talking about, then we can get at that unjust enrichment at any way that the facts can be reached.
And we say that there is no room for any further hearing on cause of relation hold that there is this room for remedy.
They can -- if somebody wants to have a trial on the question of fairness of what we received, this is an entirely different situation from proving the fairness.
And the Government says to us “you're not entitled at getting damages if you didn't lose anything.”
But what have the Court of Appeals said?
The Court of Appeals said “if you don't get divestiture because it was a fair plan, then you don't get anything,” except of course as they gave us a bill for $9000.00 of cost for losing the appeal.
They reversed and assessed the cost against us when we vindicated the law and we won on the issue of materiality and the fact of violation but they say we lose the case and we get absolutely nothing by restitution or any other way.
The Court of Appeals seems to envision this.
It's either restitution or it's either divestiture unscrambling of merger.
And if you read their opinion, the language is very clear.
They give this as a rationale.
Not every merger should be set aside because of a nondisclosure.
And as far as I am not going to rebut to what Mr. Jenner said about whether there was fraud charge or not, that matter is not before this Court and we didn't do it in our briefs.
I don't think we should spend our time on it now.
The respondents will get a full trial of the question of what the damages should be.
We don't want this Court to foreclose us from using any of the means of securing restitution that Borak says that it should be followed.
And Borak relied on Decker versus Independent Shares which also talked of restitution.
And Borak talked of the Section 33 Act which gives a restitutionary remedy.
Now this is what we're talking about that the wrong doer gets no benefit whatsoever out of his wrong doing.
But when I say that, I don't mean you tear the thing asunder, I'm not interested in tearing apart corporate structures, I cite that as one of the things we ask for.
You go down the languages and state your prayers in a complaint, you ask for all the different things.
Every lawyer does this in drafting a complaint.
But as per accounting, ask for damages, we are not trying to be unreasonable.
We feel we've been very badly dealt with in this on the basis of the -- what we are going to get under the merger because it is -- it was so far below book value and they gave our book value the other side.
We didn't get a fair market value exchange because if we took the preferred and convert in the common, we'd immediately suffer a loss of $6.00 to $9.00 on the basis of market values.
If you don't take book and you don't take market, what do you take?
You take what your own directors who are the deputies of your adversary in the merger want to give you.
And that --
Chief Justice Warren E. Burger: Your time is up Mr. Shure but your note on the paper is covering the light.
Mr. Arnold I. Shure: Oh, I beg your pardon sir.
Chief Justice Warren E. Burger: That's all right.
Mr. Arnold I. Shure: I want to thank you very much for your --
Chief Justice Warren E. Burger: The case is submitted.
Thank you --