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?
Yes and no, respectively. Terms like "high value," in a commercial context, are reasonably understood to rest on a factual basis, and so could be shown to be misleading by garden-variety evidence. Furthermore, they can be materially misleading even if other information is available in the statement upon which an expert could deduce that they are false. A proxy statement should inform, not challenge the reader's critical wits. However, the link between the statement and the merger process is too speculative and too procedurally intractable to find an implied private right of action in cases in which the minority shareholders' votes are not required by law or corporate bylaw, and where the plaintiff's theory is that the vote was cosmetic.
Decisions
Decision: 5 votes for Virginia Bankshares, Inc., 4 vote(s) against Legal provision: Securities Act of 1933, the Securities and Exchange Act of 1934, or the Williams Act
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Full Opinion by Justice David H. Souter
