VIRGINIA BANKSHARES, INC. v. SANDBERG
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?
Legal provision: Securities Act of 1933, the Securities and Exchange Act of 1934, or the Williams Act
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.
Argument of Stephen M. Shapiro
Chief Justice Rehnquist: We'll hear argument first this morning in No. 89-1448, Virginia Bankshares v. Doris I. Sandberg.
Mr. Shapiro: Thank you, Mr. Chief Justice, and may it please the Court:
As this Court has explained on a number of occasions, expansive interpretation of implied securities law remedies carries with it a danger, a danger of vexatious litigation and erosion of basic principles of federalism.
This is a case which raises those same fundamental concerns.
This is a merger case in which minority shareholders received 30 percent more for their shares than those shares ever traded for, but they nonetheless filed suit in State court demanding more money.
Plaintiffs were denied an appraisal remedy and an injunction remedy in the State court, and the State supreme court ultimately denied review.
So they decided to bring their complaint to Federal court.
This shift in forums resulted in a remarkable improvement in plaintiffs' fortunes.
Under the Fourth Circuit's ruling in this case, more than $13 million may change hands, based on two alleged defects in the proxy statement that was used in the merger, even though the majority shareholder owned enough shares to complete the merger without the votes of any minority shareholders.
These alleged misleading passages in the proxy statement were held to be the cause of those millions of dollars in damages.
It is no coincidence that plaintiffs have used these rulings from the court of appeals to obtain indirectly the appraisal remedy which the Commonwealth of Virginia has determined should not be available in bank merger cases of this kind.
I'd like to mention at the outset an important point of agreement between ourselves and the SEC, something which is a rarity in securities litigation before this Court.
I can't think of another case in which the SEC has told this Court that a judgment in favor of securities law plaintiffs was, quote, "in error".
But that is what the SEC has advised the Court here, and on this point the SEC is surely right.
In simple terms, the jury never found that the millions of dollars in damages that were awarded here were in any way caused or brought about by the alleged defects in the proxy statement.
And that is because of the jury charge.
The jury charge described the requirement of causation, but it then proceeded to instruct the jury that causation was, quote, "sufficiently shown" if the allegedly misleading proxy statement was an essential link in the transaction, that is if it was necessary under State law for the defendants to solicit proxies.
The jury also was instructed that it was no defense that the votes of the minority shareholders were not needed to approve the transaction.
Now the SEC has explained why these causation instructions are erroneous.
There is no basis for finding that millions of dollars in damages have been caused simply because the challenged proxy statement was required by State law.
In a case like Mills against Electric Auto-Lite, where the plaintiff shareholders had enough votes to make a difference in the outcome of the shareholder election, a materially misleading proxy statement disseminated to all of the shareholders logically supported a finding of causation.
But in this case any alleged errors in the proxy statement were completely irrelevant to the outcome of the shareholders' vote--
Unknown Speaker: Well, in the Mills case--
Mr. Shapiro: --a vote which was never in doubt.
Unknown Speaker: --In the Mills case, counsel, we said that causation would be shown, didn't we, if the defect had a significant propensity to mislead?
Mr. Shapiro: Yes, Your Honor, and of course the Court left open the question of whether causation could be shown in a situation where the minority shareholders had no voting power.
And that, of course, is this case which is before the Court today.
Unknown Speaker: Leaving it open sort of indicated it might be a moot question.
I mean, arguable at least.
Mr. Shapiro: Arguable at least, but I... now that the SEC, I believe, has sided with us on this proposition, I... as I understand my brother's arguments, they--
Unknown Speaker: But they have never decided it in an adjudication, have they?
Mr. Shapiro: --That is correct.
Unknown Speaker: So this might just be appellate counsel's view of it?
Mr. Shapiro: This may be appellate counsel's view of it, that's correct.
Unknown Speaker: But still right?
Mr. Shapiro: But still correct.
Notice my brother has attempted to jettison this essential link theory that he relied on exclusively in the courts below, and in this Court he is now arguing for the first time that actual causation was established here because the minority shareholder votes were necessary under a conflict of interest statute that's on the books in the State of Virginia.
Unknown Speaker: Were those theories argued to the jury?
Mr. Shapiro: Those theories were not argued to the jury, Your Honor, and that's a critical point.
No such causation claim was ever presented to the jury, to the district court, or to the court of appeals.
This is an after thought that has been raised in an attempt to buttress this judgment.
Unknown Speaker: Mr. Shapiro, I didn't understand... I didn't understand the SEC to have taken the position in this case that there can't possibly be the requisite causality if the votes of the minority shareholders are not needed.
Is that the position you said they have taken?
I... they have taken the position that causality was not established here, but I do not understand them to have taken the position that in order to establish causality you must show that the votes of the minority shareholders were needed.
Mr. Shapiro: Your Honor, you're correct.
What they have said is that the instructions here are not defensible, and that the rationale of the court of appeals is in error.
Now this afterthought that plaintiffs have offered to defend the rulings below, after they set aside the essential link theory, in addition to being a point that wasn't raised below, is a hopelessly speculative theory.
Although plaintiffs are now arguing in this Court that they could have set aside this merger under Virginia conflict of interest law, they haven't cited a single Virginia authority that suggests that this is so, that a minority shareholder could upset a merger in this situation.
And there is actual litigation experience in Virginia that directly refutes their theory.
In State court, plaintiffs alleged that the majority shareholder dominated the bank and had an interlocking director with a conflict of interest.
But they were denied an injunction or an appraisal on two separate occasions, and the State supreme court denied review.
Unknown Speaker: Mr. Shapiro, how do you think a proper instruction on causation should read?
Mr. Shapiro: A proper instruction, Your Honor, would direct the jury to consider the issue of proximate cause and cause in fact without telling the jury that causation is established simply because there is an essential link.
That was the mistake here, giving that preemptive instruction that told the jury that causation was established simply if the proxy solicitation was required.
Unknown Speaker: Well, now, does the Government, the Solicitor General, take the position of... that something... that for instance, if the practicalities are such that the company wants to get a favorable vote from the stockholders, whether or not they have the power to stop it, that that could be causation?
Mr. Shapiro: Yes, Your Honor.
They take the position that if there has been a commitment by the majority shareholder to abide by a vote of a majority of the minority shareholders, then you would arguably have Mills causation.
Unknown Speaker: Of if for some reason the shareholders' rights under State law would be affected.
Mr. Shapiro: That is the position that they have taken.
That is correct.
Unknown Speaker: And do you disagree with that?
Mr. Shapiro: Well, we think that those issues need not be reached here, because causation wasn't decided--
Unknown Speaker: Well, do you disagree with that?
We have to be concerned here with the standard.
Mr. Shapiro: --Of course.
Your Honor, we do disagree with these broad theories that are referred to as sue-fact theories or shame-fact theories.
We think that in addition to being not presented here, that they are far removed from Congress' concern in passing section 14(a), and we have argued in our brief that this Court's implied right of action decisions don't encompass extraneous injuries of that sort, that are far removed from Congress' core concern.
But you need not agree with us--
Unknown Speaker: Then why do you say the proxy was circulated to all the shareholders in this case, proxy statement?
Mr. Shapiro: --In this instance the SEC is right.
It didn't have to be circulated.
It was circulated because corporate counsel believed that, at this annual meeting where directors were being elected, that proxy should be solicited under Virginia law.
But it wasn't necessary to approve the merger.
Unknown Speaker: It was a mistake of Virginia law that led to the solicitation?
Mr. Shapiro: It was a permissible act under Virginia law, but it wasn't required under Virginia law.
But the SEC is absolutely right about that.
Unknown Speaker: What if a company board had minority stockholders but wanted to obtain their consent nonetheless to a merger and might have hesitated to go ahead with the merger absent that consent?
Mr. Shapiro: Well, that strikes us on a record of this kind as being utterly speculative.
The majority here made clear that it intended to go ahead with the merger and exercise its statutory rights under Virginia law.
There may be other cases where the majority has committed itself in the merger agreement to abide by the vote of the minority.
Now that would present a different case, and we don't quarrel with the SEC about that.
Unknown Speaker: What about the theory that the bank would not want to have offended its minority shareholders, some of whom were customers, and that the same thing in fact had happened in Maryland?
Was all this developed in the record below at the trial?
Mr. Shapiro: None of this was developed.
No such causation theory was ever presented to the jury.
But the reason I say that that is impermissibly speculative, even if it had been presented, is that we know to a certainty that the majority shareholder did not blink.
It went ahead with this transaction despite all of the accusations, despite the litigation, the onslaught of protest.
We know to a factual certainty that the majority shareholder was determined to exercise its statutory rights here.
Now it... even if this Court in some future case may take an interest and resolve favorably to the SEC some of these expansive causation theories that we have been discussing, it's important to emphasize that, as the SEC recognizes here, causation wasn't found in this case on any of these theories.
And even in this Court it is quite telling that no causation theory is asserted on this record that is anything more than sheer speculation.
As I previously mentioned, these plaintiffs were totally unable to block this merger in State court or in the State supreme court.
And although they say that the majority shareholder might have abandoned this merger under an onslaught of pressure from the minority, they don't cite any evidence in support of that either.
As I mentioned to Justice Kennedy, despite vehement protest before the State corporation commission, before the State courts, before the Federal courts, the majority shareholder here has insisted on its statutory rights.
Unknown Speaker: Mr. Shapiro, will you just clear up one thing for me?
They claim you didn't preserve your... this point well.
You objected to the instruction?
Mr. Shapiro: Yes, Justice.
Unknown Speaker: And did you tender your own instruction on this issue that should have been given?
Mr. Shapiro: We objected to the essential links construction, and we did tender our own proximate cause instruction.
Yes, we did object.
Unknown Speaker: Which was not given.
Mr. Shapiro: And we tendered our own, we moved for summary judgment on this ground.
We reincorporated our summary judgment papers at the directed verdict stage.
Unknown Speaker: And the instruction you tendered is in the record?
Mr. Shapiro: Yes, it is.
Unknown Speaker: And it's what you still say is the proper instruction?
Mr. Shapiro: Yes.
It's the proximate cause instruction.
And of course we saw JNOV on this very line of argument after trial.
Unknown Speaker: Mr. Shapiro, what was your objection to the... was and is your objection to the so-called essential link instruction?
Mr. Shapiro: That it improperly presumes causation simply because a proxy statement was alleged to be required under State law.
And our view is that you can't simply assume that millions of dollars in damages have been caused because State law may require--
Unknown Speaker: Or even $5.
Mr. Shapiro: --Or even $5.
Unknown Speaker: So you say it should be left as a question of fact to the jury?
Mr. Shapiro: Yes, Your Honor, under the proximate cause instruction, without this preemptive instruction the trial court gave that literally removed the causation issue from the jury's domain.
Unknown Speaker: Well, I thought you really think it's a question of law as to what the essential link definition is.
Mr. Shapiro: We do, Your Honor.
But we think as a matter of... under correct instructions we would have been entitled to a directed verdict here.
Unknown Speaker: Right.
Well, what was your... what instruction did you tender?
Mr. Shapiro: We tendered a proximate cause instruction.
Unknown Speaker: What?
What did it say?
Mr. Shapiro: It said that the violation has to be a substantial factor and a direct cause of the injury alleged by the plaintiffs.
And of course we sought summary judgment and directed verdict that would have removed this from the jury's domain, but we also, assuming that the judge had tendered--
Unknown Speaker: Well, isn't your argument here that because the minority could not block this merger, that there couldn't be causation?
Mr. Shapiro: --Yes, Your Honor.
Unknown Speaker: Well, that isn't what... that's a question of law, then, isn't it?
Mr. Shapiro: --That is, Your Honor.
Unknown Speaker: Well, why wouldn't you have... why didn't you tender an instruction to that effect?
Mr. Shapiro: --We sought directed verdict and summary judgment on that very ground, and when the trial court insisted on submitting the case to the jury we then submitted, of course, that instruction.
Unknown Speaker: I see.
Mr. Shapiro: Before leaving this interesting issue of causation, I should mention briefly one additional defect in plaintiffs' new causation theories, and Justice O'Connor has adverted to this already.
That is, these theories really have no relationship at all to Congress' purpose in enacting section 14(a).
Unknown Speaker: Let me ask you once more, Mr. Shapiro, about the instruction.
You really have two objections to the causation, to the essential link?
One is that it is not a proper statement of the law because it takes something away from the jury generally.
And the second is, in your case you don't think that issue should have been submitted to the jury.
Is that right?
Mr. Shapiro: That's correct, Mr. Chief Justice.
That is exactly right.
One can read the legislative history of this provision again and again without finding the slightest suggestion that Congress meant Federal proxy regulation to be used as a device to facilitate State court litigation, as my brother has argued, or to serve any purpose other than implementing the actual voting rights of shareholders.
In these circumstances we submit that an award of damages is simply unnecessary to achieve any of Congress' purposes in enacting this provision.
Unknown Speaker: Mr. Shapiro, just so I understand what your position is, as I understand it you think these cases would never get to the jury, taking your pure theory that when minority shareholder approval is not legally needed, there is no cause of action.
It would be always a question of law.
Mr. Shapiro: --That's a correct--
Unknown Speaker: The court would look at it and see whether minority shareholder approval is needed.
If it is needed, then under Mills it has to send it.
If it isn't needed, then under your assertion it can't send it to the jury.
So it's always going to be a question of law.
Mr. Shapiro: --Yes.
Where there is no allegation of voting rights injury, then as a matter of law the case should be dismissed or summary judgment granted.
Unknown Speaker: And when there is, then causation is automatically established.
Mr. Shapiro: If there's a material misstatement and--
Unknown Speaker: Right.
So causation is out of the case on your pure theory.
And then your fallback theory is even if that isn't right, at least you have to establish genuine causation and not mere necessity of going through a State procedure.
Mr. Shapiro: --And on this fallback point we argue not only was it not presented to the jury, but in addition it couldn't have been presented to the jury because there is no nonspeculative, nonvoting causation theory that has been argued in this case.
This causation theory is a sufficient ground for reversal here, but there is an additional ground, of course.
The two claims of misrepresentation that are relied on by the court of appeals are both defective, we submit, as a matter of law.
And with the Court's permission, I'd like to speak briefly to the misrepresentation issue.
The first claim of misrepresentation is that the proxy statement falsely describes--
Unknown Speaker: Before you get to that, Mr. Shapiro, let me ask you one question.
In your view, what purpose does the proxy statement serve in a case like this?
Mr. Shapiro: --In a case like this it wasn't necessary under State law.
It was simply a piece of information, such as an annual report, given to the shareholders.
It wasn't a required document.
Unknown Speaker: So your answer is none.
Mr. Shapiro: Well, it serves a general informative purpose, but it doesn't serve the purpose--
Unknown Speaker: But no legally necessary purpose.
Mr. Shapiro: --that section 14(a) is aimed at.
Now, the first claim of misrepresentation is that this proxy statement falsely reported that the directors approved this merger because they believed that the buyout price was a high price.
The court of appeals held that the jury might find that the directors were not really motivated by this $10 premium, 30 percent premium over prior market price, and it claimed that they may have been secretly motivated by a desire to retain their seats on the board of directors.
This claim illustrates as clearly as possible the need for judicial supervision of speculative securities fraud claims, which depend not on objective and verifiable facts, but rather on excursions into the subjective state of mind of a multi-member board of directors.
We have here a 22-member board of directors, including the president of George Mason University, a former distinguished congressman, local government officials, securities professionals, an accountant, lawyers, and a group of businessmen.
These directors met on four occasions over a month's period of time to discuss the buy-out, and they questioned the investment banker for over 2 hours on the issue of fair price.
There are contemporaneous meeting notes which show that the directors focused on
"the high premium, 30 percent. "
That's joint appendix page 455.
There is simply no rational objective basis for inferring that these directors didn't really believe that this $10 premium was a high price.
Unknown Speaker: Mr. Shapiro, are you arguing that as a matter of law that statement could never be actionable or never misleading, or are you arguing that on this record the facts don't support the finding that it was misleading?
Mr. Shapiro: We are presenting these as alternative points, Your Honor.
There is a line of cases--
Unknown Speaker: But on the first point is it not clear that if they all had secret notes that said we think $60 is a fair price and then the proxy statement said they thought $42 would be a fair price, that that would be misleading?
Mr. Shapiro: --What the cases have said, Your Honor, is if there is indeed objective support for a claim of insincerity, that's another matter.
But when it is merely a speculative hypothesis--
Unknown Speaker: But that's a question of fact.
That's a question of fact and question of evidence, isn't it?
Mr. Shapiro: --Well, the courts have uniformly refused to tender these claims to juries.
Even the cases the plaintiffs cite, the Berg case in the court of appeals--
Unknown Speaker: This Court hasn't uniformly done that.
And I am just interested in why a statement that Mr. X believes $42 is a fair price could not be a misleading statement of fact if he in fact thought the price ought to be $90.
Mr. Shapiro: --The danger, Your Honor--
Unknown Speaker: I know the dangers, but you're saying that as a matter of law that can never be a misleading statement?
Mr. Shapiro: --Unless there is an objectively verifiable basis for that assertion of securities fraud.
Unknown Speaker: Unless there is evidence to show it's a false statement.
Mr. Shapiro: If there is a document, if there is testimonial evidence.
But here it is simply an excursion into the state of mind of these 22 individuals.
Unknown Speaker: You don't think, then, that we should take the word of the SEC on this point?
Mr. Shapiro: No, Your Honor, I don't.
I don't at all.
Unknown Speaker: I don't understand what your position is on this.
I mean, I... there is a general rule of common law.
We don't need some special SEC rule that if there's no evidence to support it, of course the court has to throw it out.
But what is it that you require beyond this?
I mean, let's assume that he can put the directors on the stand, and they admit that indeed they thought that... they didn't think it was a fair price.
Is that enough evidence?
Mr. Shapiro: That would be enough evidence.
The cases recognize that if you do have direct evidence of insincerity, then a case of this sort could go to a jury.
Unknown Speaker: Well, what kind of evidence is not direct evidence, that would satisfy the normal rule that you can't let it go to the jury without evidence, but will not satisfy the rule you are urging on us?
Mr. Shapiro: --This is close to being the normal rule, but with special emphasis on the Blue Chip Stamps policy analysis of the dangers of vexatious litigation in this category of case, where the Court has been particularly cautious about speculative inferences on subjective issues.
Unknown Speaker: Such as what?
Give me an example of evidence that would not suffice, or that would suffice under the common law rule and would not suffice under what you urge upon us?
Mr. Shapiro: Well, I think under a correct application of the common law rule, or the antitrust rule in Matsushida, that speculative inferences are forbidden across the board.
It is just there is a special need for that kind of judicial scrutiny which was not given--
Unknown Speaker: Is that all you're saying?
Be really strict about applying... be careful about applying the common law rule in this case?
Mr. Shapiro: --The traditional rule, the same rule, Your Honor, that the Court applies in the antitrust proceedings, and indeed in the Galloway case the plaintiff cited.
The rule against speculation, where there is no objectively demonstrable basis for inferring insincerity.
Unknown Speaker: The common law, though, is full of what you call excursions into people's minds when you are dealing with fraud.
Mr. Shapiro: --That is one matter, Your Honor, when you are talking about the state of mind of an individual broker or an accountant, but we are talking about a 22-member board of directors here.
You are alleging that they are insincere in stating that a price is a fair price.
Then you are truly entering into the domain of psychoanalysis and not into inferences of fact.
Unknown Speaker: So you say although they could have entered into this what you regard as speculative if they were talking only about one person, they can't do it the same way if you are talking about a multi-member board?
Mr. Shapiro: This is an additional reason for caution, as the courts have held.
And I think this is right.
Unknown Speaker: Well, can't you... I suppose the board's responsible for the proxy statement, isn't it?
Mr. Shapiro: The board is, here it was signed by the chief executive officer and the chairman of the board, who was responsible for it, yes.
And the claim is that the board, 22 members, didn't sincerely believe that this was a high price.
And our proposition is that there is no objective foundation for that assertion.
Unknown Speaker: I'm not sure that their claim is that it's not sincerely believed.
Their claim is that this was not the basis for the board of directors' action.
The board of directors act for reasons, and their discussion is that this was not the reason that was given in the board room.
Mr. Shapiro: Unhappily for that theory, this is the reason that was given in the board room.
This was the reason that was discussed--
Unknown Speaker: Well, but that's a question of fact.
You're saying that this cannot be actionable.
Mr. Shapiro: --The lower courts--
Unknown Speaker: And their theory is that the board acts for a reason, and that this reason was not the reason that prompted the board to act.
It's not subjective.
Mr. Shapiro: --It's completely subjective, Your Honor.
There is no objective evidence that these people didn't believe--
Unknown Speaker: Well, do boards of directors always act for subjective reasons?
They never give a stated purpose for board action?
Mr. Shapiro: --Often there is an objective memorial of reasons.
Here there was, in fact, a memorandum prepared by the general counsel which said that they did focus on the high premium, 30 percent.
They all testified that that was their conviction and their basis for making this decision.
Now, it's important in assessing this claim to keep in mind that now the SEC requires directors to state their opinion on the issue of fairness in every merger of this kind.
And if claims of director insincerity or ulterior motivation could be brought into Federal court without the kind of objective supporting evidence that I'm talking about, every State appraisal grievance would be brought into Federal court in disregard of this Court's decision in Green v. Santa Fe, and in disregard of the principles that this Court articulated in Blue Chip Stamps.
The Court warned in Blue Chip Stamps against conjectural and speculative inquiries into subjective issues, as opposed to, quote, "objectively demonstrable fact".
And the lower Federal courts, as I have mentioned, consistently have held... there isn't a single case that we were able to find where a claim like this of director insincerity that didn't have specific supporting objective evidence was permitted to go to a jury.
If the Court affirms here, this will be the first case, and it will truly open up a Pandora's box where appraisal remedies are brought into Federal court simply by pleading that they didn't really believe, or they didn't sincerely believe that this price was high.
That would overrule Green v. Santa Fe effectively and truly burden the Federal courts with an outpouring of new, and I believe vexatious, litigation.
Now, the last claim of misrepresentation is, I must say, almost impossible for me to understand.
The sin here apparently was that the proxy statement described one of the Nation's top investment banking firms as being independent, and said that it passed on financial fairness.
Well, it was independent.
It was an outside, unaffiliated, autonomous investment banking firm.
And as the SEC explains in its brief, liability cannot be predicated on the theory that it wasn't independent.
And in addition, this investment banker did pass on financial fairness.
It reviewed a variety of financial data, and it applied a variety of analytical techniques.
And of course at the end of the process it issued an opinion on the issue of financial fairness.
Now, plaintiffs may disagree with that opinion, and plaintiffs may dislike its methodology, but they can't deny that this opinion was actually rendered on the issue of financial fairness.
Unknown Speaker: But this group did not propose that price, did it?
They passed on the price which had been suggested by someone else.
Mr. Shapiro: They originated the $42 price.
Unknown Speaker: They originated the $42 price?
Mr. Shapiro: The investment banking firm did.
Unknown Speaker: Does your opponent agree with that construction of the evidence?
Mr. Shapiro: Opponent doesn't agree with that.
Our point is, Your Honor, that the proxy statement made no representation about who originated--
Unknown Speaker: So your position would be the same even if they did not originate the price?
Mr. Shapiro: --That is quite right.
If the Court please, we would reserve the balance of our time for rebuttal.
Unknown Speaker: Very well, Mr. Shapiro.
Argument of Joseph M. Hassett
Mr. Hassett: Mr. Chief Justice, and may it please the Court:
Your Honor, if I may, first let me clear up a couple of points.
One, counsel says this morning that the reason the bank engaged in the solicitation was a mistake.
But there was no evidence to the jury that that was the reason for the solicitation.
In fact, as recently as the reply brief, on page 4 at note 5, the petitioners were representing that the reason for the solicitation was that State law in fact required it.
There was plenty of evidence on the other hand, Your Honor, as to the reason for the solicitation before the jury.
We've summarized it in our brief, and I don't want to dwell on it here, but there was plenty of evidence as to the reason... the reasons that have been adverted to in some of the questions.
And in any event, petitioners made no motion for a directed verdict on grounds it lacked sufficient proof to prove causation.
Now also, counsel now says that the petitioners did tender a different instruction of their own on causation, and that they did object to the pertinent causation instructions.
But that is not so.
The proximate cause instruction that counsel refers to was one that was tendered by both sides, and one that Judge Bryan gave at the trial.
Petitioners, at page 81 and 82 and page 92 of the joint appendix, you will see where petitioners submitted their own instruction to the jury, telling Judge Bryan here is how it should be instructed.
And that instruction provides that if the jury finds that the... it was phrased in this way: that there is no requirement that the plaintiff prove reliance if she proves that the proxy solicitation was an essential link in accomplishing the transaction.
And so, Your Honor, the very instruction that petitioners say now was error is exactly the instruction that they asked Judge Bryan--
Unknown Speaker: But prior to that time didn't they move for summary judgment on the ground that there was no essential link?
Mr. Hassett: --Well, Your Honor, both... there are two--
Unknown Speaker: Can't you answer that yes or no?
Mr. Hassett: --I believe no, Your Honor, and let me explain why.
There were two sets of separately represented parties in the district court.
One were the directors.
The directors don't claim to have made any such motion.
The other separately represented party was Bankshares, the holding company.
They say, and it's at around page 79, I think, of the appendix, but it's in the appendix, they say that an argument that they made there in two pages of a long, long brief constituted raising this essential link transaction.
Unknown Speaker: Was it a brief on a question... on a motion for summary judgment?
Mr. Hassett: Yes it was, Your Honor.
And, but the argument heading is that the plaintiff can't recover because there was no reliance.
And there is a reference to Mills footnote 7 in the argument, but there is... the argument is that there was no reliance.
Unknown Speaker: Did they raise this issue in the court of appeals?
Mr. Hassett: No, Your Honor, they didn't.
There was not one word about it, and they don't contest the representation in our brief that there was not one word about it in their fore briefs in the court of appeals.
They never even cited--
Unknown Speaker: So you think below they conceded this was an essential link?
Mr. Hassett: --I think, Your Honor, that they conceded that the correct instructions on which the case was to be submitted to the jury was that the test was essential link.
It's exactly the instruction they asked for.
Unknown Speaker: Counsel, you referred us to their proposed jury charge on the second element, namely reliance materiality.
But they also, on page 83 of the joint appendix, proposed a charge on the fourth element, causation.
And that doesn't just say essential link.
"In order to satisfy this element, plaintiff need not prove that defendant's conduct was the only cause of the plaintiff's injury. "
"It is sufficient if you find that the accounts of defendants were a substantial and significant contributing cause to the injury which plaintiff suffered. "
That's a little more than essential link.
Mr. Hassett: Well, Your Honor, that is exactly the instruction that Judge Bryan gave, and it appears at page 424 of the joint appendix.
Unknown Speaker: Well, but the petitioners say that what he gave in the proximate cause instruction he later took away by saying that I instruct you that in this case it is sufficient if it was an essential link.
In other words he takes the essential link as a way to define compliance with the causation instruction.
Mr. Hassett: Well, Your Honor, I think the other instruction to which you refer, which is at 426, is one that begins with it is not necessary for plaintiff to establish a separate showing of reliance if she shows it's an essential link.
And this, having these two instructions grew out of the fact that the only contention that petitioners were making in the trial court in this regard was the contention that plaintiff was barred because she didn't rely on the proxy statement.
And in connection with that, both parties proposed an instruction... theirs I just referred to in 81-82 and 92, reliance needn't be shown if it was an essential link, and we proposed one, and Judge Bryan gave one, that said you don't have to show reliance if there is an essential link.
Now, it's quite true that in the course of giving that Judge Bryan also said that if you find it was an essential link, if you find it was necessary to solicit proxies from minority stockholders--
Unknown Speaker: We have shifted a little bit, haven't we, Mr. Hassett?
We started out talking about instructions on causation, and now we are talking about instruction on reliance.
Mr. Hassett: --Well, Your Honor, I think that the two concepts of course get murkily involved with each other.
But I think that the instructions given were quite correct.
That number one, the jury had to find that petitioners' conduct with respect to the proxy solicitation... under the proximate cause they are required to find that that conduct caused our injury, caused the respondents' injury.
In the no reliance necessary, the instruction says no reliance is necessary if the proxy solicitation was an essential link.
And that of course is exactly what the Court held in Mills.
Unknown Speaker: But did they... did the court leave it to the jury to decide whether... the essential link question?
Mr. Hassett: He instructed them in the instruction at 426, Your Honor, that if they found it was necessary to solicit proxies from minority stockholders, they may find that it was an essential link.
Unknown Speaker: Well, how did... and did he tell them that it was or wasn't necessary to solicit?
Mr. Hassett: No, he did not, Your Honor.
Unknown Speaker: Well, what evidence... how would the jury know whether it was necessary or not?
Mr. Hassett: Well, the evidence... there was evidence in two regards before the jury, Your Honor.
First was the evidence that... and petitioners admitted before the jury, that the participation of the holding company director on the board of the subsidiary bank created a conflict of interest.
Unknown Speaker: Yes.
Mr. Hassett: And petitioners themselves asked the jury to find that approval of the merger by the minority stockholders--
Unknown Speaker: What was the other reason?
Mr. Hassett: --The other reason was that there was evidence that the holding company had decided and had represented to the bank that in order to avoid the adverse consequences of forcing this down upon the minority stockholders against their will, that... and the testimony was, I think at page 202 of the joint appendix, the chairman of the bank testified that the representation was made to him by the holding company that before this could happen, this acquisition of the minority stock by the holding company, the board of the bank would have to approve it, and the chairman of the bank testified that we would have to go to the stockholders for their approval as well.
And it's our contention, Your Honor, that that representation, in conjunction with the many representations and all the emphasis by the petitioners before the jury, Your Honor--
Unknown Speaker: Is it your position that the solicitation was required by Virginia law?
Mr. Hassett: --No, not at all, Your Honor.
Unknown Speaker: And so you don't claim that if it was that would be, prove the essential link?
Mr. Hassett: No, we don't, Your Honor.
That whole... the confusion there is something of the petitioners' own making.
That is not a contention that we've made.
The evidence was there before the jury as to why it was necessary, and that... it was submitted to the jury under instructions that--
Unknown Speaker: So if the jury found for you and they had to find there was an essential link, the only evidence that there was relating to the essential link was the evidence that you just mentioned?
Mr. Hassett: --That I summarized, and it is set out in a little more detail in the brief.
That is correct, Your Honor.
Unknown Speaker: Mr. Hassett, now I know you have explained this already, but it's not clear to me.
The instruction that was given did tell the jury that it is enough for them to find material misstatements, and that that would be a sufficient showing of a causal relation?
That is the instruction on page 426 of the joint appendix.
Mr. Hassett: I think, Your Honor, does it go on and say you must find it's a material misstatement, and that the solicitation was an essential link?
Unknown Speaker: Was an essential link.
That's the shorthand in Mills.
Mr. Hassett: Yes, Your Honor.
Unknown Speaker: Now, the Solicitor General takes the position that that's not enough, that that's improper.
So you... the SEC disagrees with you on this, I take it?
Mr. Hassett: Yes, Your Honor.
In all other respects I believe the SEC's reasoning is brilliant and sound and--
Unknown Speaker: But on this point they are not so brilliant?
Mr. Hassett: As to this... well, as to this, Your Honor, actually what I think is that because of the peculiar way that this case developed, where none of these arguments were made in the district court, and it is undeniable that there was... that petitioners, who were the appellants in the court of appeals, said nothing about it in their briefs in the court of appeals--
Unknown Speaker: Well, but they did argue below that the instruction of causation that was given on page 424 was appropriate, that that was the causation instruction that ought to be given.
Mr. Hassett: --The petitioners, Your Honor... there is three paragraphs... there's two different instructions at 424.
The directors made no objection to either of them.
The holding company made an objection to the first but not the second.
And the second is one that says it is no defense that they... that the holding company had enough votes--
Unknown Speaker: Was an objection made to this instruction on page 426 about the essential link, the one that takes away the causation instruction?
Mr. Hassett: --The... there's two... on page 426, the way that--
Unknown Speaker: In the middle of the page.
Mr. Hassett: --Yes.
Starting at "It is not necessary"--
Unknown Speaker: Yes.
Mr. Hassett: --The next two paragraphs, Your Honor, were one instruction.
The parties knew it as 29.
Unknown Speaker: Yes.
Mr. Hassett: The directors did not object to 29.
The Bankshares, the holding company, did.
The next sentence, the next paragraph, "If you find", et cetera, it says there... no defense that they had enough votes to approve it themselves.
It was not objected to by either petitioner.
Unknown Speaker: How about, at the risk of repetition but this seems to be fairly critical, this last sentence on page 426 in the paragraph where it says
"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 a particular defect in the solicitation was an essential link. "
Now, that does take an element of causation away from the jury.
Mr. Hassett: Yes, Your Honor, provided that in the next... you have to read it in conjunction, we submit, Your Honor, with the next paragraph, which defines essential link.
And we submit, Your Honor, that it needs to be read in conjunction with the proximate cause instruction.
Unknown Speaker: And... but... and you say there was no objection by the... or there was objection by Bankshares to the thing I just read?
Mr. Hassett: There was by Bankshares, Your Honor, but not to the directors.
Each group were separately represented, they each submitted their own objections.
In the reply they argue, in an effort to save the directors, they say that something Judge Bryan said on the first morning of the trial, which is at JA 132, saves the directors.
During the examination on the first morning of a witness, Judge Bryan said he would assume that the two separately represented groups joined in each others' objections unless they said otherwise.
Unknown Speaker: Do you agree with that paragraph about essential link?
If you find that it was necessary... quote, necessary, unquote... if the solicitation was necessary, then it's an essential link.
Now what evidence do you say indicates that it was necessary?
Mr. Hassett: Your Honor, the evidence--
Unknown Speaker: You mean as a matter of law?
Mr. Hassett: --No.
Your Honor, the way we read that instruction is it says that it was necessary to solicit proxies from minority stockholders.
And in the context of this case, where nobody was suggesting in the district court that there was some State law requirement, and of course there isn't, that requires--
Unknown Speaker: All right, so--
Mr. Hassett: --Our view, Your Honor, was that it was necessary to solicit from minority stockholders because it was necessary to obtain their votes.
And the reason it was necessary to obtain their votes is that without them the merger was voidable because of the conflict of interest, and because without them the condition that the chairman of the bank testified to, minority stockholder approval was not satisfied.
And there was no motion made that our evidence was insufficient to prove that.
It went to the jury on that basis.
Unknown Speaker: --You argued that to the jury?
Mr. Hassett: No, Your Honor, there was no... there was no argument... there was no evidence by the other side that questioned the necessity of soliciting them to get this approval.
The petitioners in the trial court--
Unknown Speaker: Did you put in evidence that it was necessary?
Mr. Hassett: --Yes, Your Honor, because we proved that there was a conflict of interest, which they admitted before the jury.
And that's at page--
Unknown Speaker: Was the jury advised that this is why you were putting that evidence in?
Mr. Hassett: --No, Your Honor.
There was no... 1093-94 of the court of appeals' joint appendix, they admitted the conflict.
But they, Your Honor, asked the jury to find, and Judge Bryan gave the instruction that they asked for, that the conflict in the board that they admitted existed would be cured if the jury in this very case found that the minority stockholders had given their approval to this transaction.
So it, they brought home to the jury in the most graphic kind of a way that the reason they solicited minority stockholder approval was not because they made some mistake on this important transaction, where they say that $13 million is involved, which I may say is $13 million under the jury's finding that the value of the stock that belonged to the minority stockholders and which petitioner has unjustly--
Unknown Speaker: Mr. Hassett, that's... surely it's a question of law and not of fact whether the only way that this conflict of interest could be cured under Virginia law is to get the approval of the minority shareholders.
They contest that that is the case, as a matter of Virginia law.
That's not a question for the jury.
That's either so or it's not so.
Mr. Hassett: --But Your Honor, the question, I think there are underlying facts, of course, that have to be found to present that question of law.
Unknown Speaker: Like what?
I think they are giving you the conflict.
That is the only fact.
Given the conflict, do you need the votes of the minority shareholders to cure it?
That's a question of law.
Mr. Hassett: Well, I think that there's another fact there which is was the board so much of a rubber stamp, as the court of appeals held it was on another aspect of the case not submitted, but that the board couldn't cure the conflict.
The court of appeals held, and it is not being reviewed, that this board exercised no judgment independently whatever with respect to the merger, but rubber-stamped everything put in front of it.
And the jury, having that evidence and having before it that the--
Unknown Speaker: And the jury was instructed the board could have cured it, but if you find the jury... the board was a rubber stamp, it couldn't?
Mr. Hassett: --No, there was no instruction to that effect, Your Honor.
There was this instruction.
And we submit, Your Honor, that if this instruction was too broad, then the obligation was on the petitioners to object--
Unknown Speaker: Let's assume they had objected to this instruction on the definition of the essential link.
You say that the instruction is absolutely valid.
Of course, the SEC says that even if it was necessary, it was wrong.
I mean, even if the solicitation was necessary, you nevertheless lose.
Mr. Hassett: --Well, Your Honor--
Unknown Speaker: Isn't that what their position is?
Mr. Hassett: --Yes, Your Honor.
Unknown Speaker: And that, you certainly disagree with that?
Mr. Hassett: I do agree with that, Your Honor.
Unknown Speaker: And your answer is that that position was never pressed or objected to in the district court or in the court of appeals?
Mr. Hassett: That is absolutely our position, Your Honor.
There was one objection made to that instruction, and that objection was by Bankshares only, and it said that this instruction wrongly decides the issue left open--
Unknown Speaker: So we could decide this case for you by just saying that the issue that the petitioners want decided is... we just don't decide it, because it wasn't pressed below, and so we don't decide it.
Mr. Hassett: --That's exactly right.
Unknown Speaker: We leave it open.
Mr. Hassett: That's exactly right, Your Honor.
It was not pressed below.
Unknown Speaker: So we don't... no necessity to reject the SEC's position?
Mr. Hassett: --That is correct, Your Honor.
Unknown Speaker: Well, now wait, but that wouldn't dispose of the case.
I mean, you don't contest that they did raise the objection and preserve the objection as to whether you... there is any right of action if you in fact, even with the vote of the minority shareholders, could not have prevented the merger?
Mr. Hassett: Oh, we do, Your Honor.
Unknown Speaker: You say that that is not preserved either?
Mr. Hassett: --That is right, Your Honor.
Unknown Speaker: I didn't understand that.
Mr. Hassett: The directors made no such motion of any kind.
And the Bankshares, as I say, they made the motion that appears at... I don't know, page 50-something I think of the joint appendix.
Unknown Speaker: I am puzzled about this notion that just some of them made the objection, because aren't they all parties here?
Aren't they all petitioners?
Mr. Hassett: Oh, yes, they are, Your Honor, but under--
Unknown Speaker: Well, then the question's here, isn't it?
If anyone of them made the objection, then it is here in this record for us to decide, isn't it?
Mr. Hassett: --Well, except, Your Honor, that if the directors, for example, are barred from raising it, then the judgment should be affirmed as to them.
Unknown Speaker: As to them.
But we still have to decide it as to Bankshares, if they did make it.
I mean, I understand your point.
Mr. Hassett: At that stage I would say as to Bankshares it would be moot.
Unknown Speaker: It doesn't make a great deal of difference to us whether we're deciding as to one petitioner or both, if we have to decide the question.
Mr. Hassett: I would suggest it is moot if it's not preserved by the directors.
The judgment is joint and several, and the respondents would be satisfied... the directors are being indemnified by the holding company anyway, so that--
Unknown Speaker: Well, we don't encourage a finding of mootness.
We took this case to decide certainly questions of national importance, and we're not looking for a way to find it moot.
Mr. Hassett: --I understand that, Your Honor, but may I say on behalf of--
Unknown Speaker: Your argument really is we should dismiss it as improvidently granted, because the issue we want to decide... the SEC wants us to decide and the petitioners want to decide, just isn't before us.
Mr. Hassett: --Well, that is correct, Your Honor.
I am not sure the SEC is asking you to decide.
May I just say very quickly that--
Unknown Speaker: Your time... you're using the SEC's time.
There's no law against it.
Mr. Hassett: --I'll just say very quickly, Your Honor, that the position taken by the SEC was something that they briefed before they saw the brief of the petitioners, and I think that the SEC was saying that the instruction is faulty because--
Unknown Speaker: Well, maybe the SEC would be the best person to say that.
Mr. Hassett: --Let me just... yes, Your Honor.
Unknown Speaker: Thank you.
Argument of Michael R. Dreeben
Mr. Dreeben: Thank you, Mr. Chief Justice, and may it please the Court:
I would like to focus on the materiality aspect of the case.
The proxy antifraud rules promulgated under the Federal securities laws apply to false or misleading statements of reason or characterization, just as they do to other facts set forth in a proxy statement.
There is no zone of immunity under the proxy rules for directors who misrepresent such matters.
Unknown Speaker: Mr. Dreeben, I mean, I know you want to talk about the misleading part, but do you have a view on the causation issue as to whether all that is properly reserved for our review or not?
Mr. Dreeben: Justice Stevens, neither the SEC nor the FDIC has taken a position on the waiver issue in this case.
We have taken the position that the instructions that were given were not adequate to capture a finding of causation between the alleged violation and the injury.
But we have not taken a position as to whether that instruct... whether the objections to those instructions were made properly and preserved.
Unknown Speaker: So you really don't take a position on the ultimate question of what we should do with this judgment?
Mr. Dreeben: That's correct, Your Honor.
We do take the position that to the extent that the Court reaches the materiality issues, the Court should affirm the judgment as to them.
Unknown Speaker: You have to take the position of do not take a position, because you really did say in your brief accordingly, the judgment, to the extent that it depends on the validity of those instructions, cannot stand.
Mr. Dreeben: --That's correct, Justice Scalia.
To the extent that the judgment depends on the validity of the instructions rather than the waiver of the objection to those instructions.
Unknown Speaker: Oh, I see.
Mr. Dreeben: We take that position.
We have been careful--
Unknown Speaker: Nice, Mr. Dreeben.
Now what, Mr. Dreeben, what should the instruction have said to go to the jury on causation?
Mr. Dreeben: --Justice O'Connor, we think that the causation instruction in a case when shareholders occupy a minority position should spell out in some more detail than here what the causal theory is as to why the misleading proxy statement caused the injury.
For example, it... the instructions might say the plaintiffs contend that, absent minority approval, the holding company was not prepared to go forward with the transaction.
It had established that as a condition.
Or there might be an instruction that if accurate disclosure had been made, the plaintiffs contend they would have been able to enjoin the transaction in State court.
Something that guides the jury sufficiently so that they understand what the causal inquiry here... what the causal inquiry really is.
In this case the instruction essentially said if you find it necessary to solicit proxies, that's enough.
It is true that if votes are needed, proxy solicitation will be needed.
But the underlying predicate for why the votes were needed just simply wasn't presented to the jury.
There are three reasons why we believe that false or misleading statements of reasons or characterization do fall within the coverage of the proxy antifraud rules.
First, statements of reason may be highly significant to investors in determining--
Unknown Speaker: Mr. Dreeben, you say it wasn't presented to the jury.
Maybe the instructions didn't present those issues, but there was evidence with respect to other theories of causation.
Mr. Dreeben: --There was evidence induced in the record, Justice White.
Unknown Speaker: And if the jury had to find that that was necessary, they must have relied on that evidence.
Mr. Dreeben: It isn't precisely clear from the record--
Unknown Speaker: Well, there was some evidence about other theories of causation, wasn't there?
Mr. Dreeben: --I think there was evidence presented as to--
Unknown Speaker: Well, like the conflict of interest.
Mr. Dreeben: --There was evidence presented as to the conflict of interest because the petitioners--
Unknown Speaker: Well, and the jury followed their instructions... we assume they did... and found that the solicitation was necessary.
They must have relied on some evidence that was in the record.
And one of it, for example, was the conflict of interest.
Isn't that true?
Mr. Dreeben: --The conflict of interest was injected into the case because there was a separate breach of fiduciary duty--
Unknown Speaker: Well, what evidence do you suppose the jury relies on to find... in this record, to find that the solicitation was necessary?
Mr. Dreeben: --I'm not sure, Justice White, but there was a concession made by the plaintiff... by the defendants' attorneys during the trial that it was necessary to solicit proxies.
That was a concession that was made in open court during examination of a witness, and it was for the purpose of curtailing further discussion of that issue.
Unknown Speaker: Well, I know, but the instruction was that the jury itself had to find based on the evidence.
And this concession in open court, was that evidence?
They're supposed to rely on the evidence.
Mr. Dreeben: Justice White, I can't say whether it functioned as a stipulation in this case or whether there was other evidence.
I would like to turn to the materiality issues in the case, because those are of importance both to the Government and in private actions, since the same concept--
Unknown Speaker: Before you do that... I know you have been trying to get there, but also of importance to the Government and to private actions is whether there is a private right of action under 14(a) for any effect, any causality, unless it pertains to the vote for which the proxy was solicited, 14(a) having been adopted when the... in an era when the Court was much more ready to find implied rights of action, and later cases cutting back on that readiness.
Why shouldn't we interpret the 14(a) private right of action as narrowly as possible, and say that the only right of action you have is when as a result of the solicitation you have been misled, either you or other minority shareholders who could have stopped the merger and were unable to.
Why can't we dispose of the case on that basis?
Mr. Dreeben: --Well, I think there are several reasons, Justice Scalia, why interpreting the causation element of this recognized cause of action to cover cases like this one is appropriate.
First of all, there can be direct injury suffered by a shareholder who relies on a proxy statement and votes in favor of a merger, even if his votes, combined with all other minority shareholders', couldn't block the transaction.
Unknown Speaker: He could have a cause of action under State law for misrepresentation, I assume.
Mr. Dreeben: Well, but this is an express Federal provision under rules promulgated by the SEC and by other agencies that prohibits false and misleading proxy statements.
Unknown Speaker: In order to protect voting rights.
Mr. Dreeben: I think more generally, Justice Scalia, to protect the State-created processes that function in the corporate governance context.
States don't only provide the requirement that certain matters be put to shareholder votes.
They provide mechanisms whereby shareholders can make those rights effective.
Those include appraisal rights if they disagree in certain circumstances.
They also include the right to get an injunction against a merger.
Unknown Speaker: And if they voted for the merger they couldn't... they didn't... couldn't have an appraisal.
Mr. Dreeben: That's correct.
In all States if you vote for a merger you are precluded from taking advantage of the State-created right.
So I think in general the proxy rules have to be read as an overlay to State policies in the field of corporate governance.
And the requirement of accurate disclosure preserves the effectiveness of those rights, which might otherwise be lost because shareholders lack the information--
Unknown Speaker: I suppose, but if I think the private right of action shouldn't have been created in the first place, is there anything that would be illogical in my saying that it, having been created, we should narrow it to... it having been wrongly created, without overruling prior decisions, we should narrow it simply to voting rights?
Mr. Dreeben: --Well, yes, I think it would be inconsistent with the right of action that was recognized itself, which required an element of causation.
The question then is how is that element satisfied.
It would also be inconsistent with the fact that this is a private right that has been woven into the fabric of the securities laws.
Congress is well aware of it, and it has touched on the area of proxy regulation since the Borak case was decided, and Congress has never disposed of that private right of action.
The proxy misrepresentations in this case went to the heart of what the proxy solicitation was all about.
The reasons why directors recommend or approve a transaction are among the most fundamental matters that shareholders consider in determining how to cast their vote.
The reasons that have been given by the petitioners for excising this area of statements from the law are not persuasive.
Essentially I think petitioners conceded today that if there is nonspeculative evidence that the stated reasons for the board's action are not the actual reasons that prompted the board to act, then a private... then an action can be brought predicated on such misstatements.
We agree with that.
We believe that objective evidence is required in order to sustain such a claim, but that such evidence need not only be a direct admission or a smoking-gun document, but can also be circumstantial evidence that is frequently used in all areas of the law to determine whether the thought process that prompted a certain statement was in fact accurately represented in a document.
This is not something new to the law.
It pervades the law of fraud, and it is applicable under other provisions of the Federal securities laws.
We do not see that there are compliance or enforcement difficulties in a regime that requires--
Thank you, I see that my time is up.
Unknown Speaker: Thank you, Mr. Dreeben.
Mr. Shapiro, you have 4 minutes remaining.
Rebuttal of Stephen M. Shapiro
Mr. Shapiro: Thank you, Mr. Chief Justice.
Unknown Speaker: Mr. Shapiro, I must say that I am troubled by the argument that the instruction that was submitted by the defendants at page 91 of the joint appendix seems to track very closely what the district court in fact instructed, and your... the submitted instructions break causality and materiality up the same way.
Did all defendants submit instruction 9?
Mr. Shapiro: A similar instruction was submitted by the other group of defendants.
The important point here, Your Honor, is that we denied that there was an essential link under Mills, that... in other words, we weren't conceding that the essential link standard had been satisfied here in the Mills sense, because our view was that before you have an essential link there has to be voting power in the minority shareholders.
So there was nothing--
Unknown Speaker: You didn't object to that essential link instruction on page 426.
Mr. Shapiro: --We did indeed.
We objected in writing.
Both defendants objected in writing specifically on the Mills point, and in addition we objected orally--
Unknown Speaker: To that specific instruction, that specific paragraph?
Mr. Shapiro: --Absolutely, Your Honor.
Both defendants, in writing, and then orally--
Unknown Speaker: Where is that in the record, Mr. Shapiro?
Mr. Shapiro: --This is cited on page 9 of, excuse me, page 3 of our reply brief, the yellow reply brief at the top, where we cite to the places where we objected to that instruction.
And we did it in written obstructions... instructions in the district court.
There was an oral objection saying that this misconceives the Mills footnote 7 issue.
That was an objection made orally by one group of defendants, but the district court had previously said that there was no need to repeat objections, that they'll be deemed to be made by both.
We previously had filed a summary judgment brief which argued extensively that there was no causation in this case under the Mills standard.
Unknown Speaker: Did you press this in the court of appeals?
Mr. Shapiro: We did indeed, Your Honor.
Unknown Speaker: You did or didn't?
Mr. Shapiro: We did.
There were two separate issues on appeal.
Issues 1 and 3.
Unknown Speaker: I suppose we could get your briefs and read what you said?
Mr. Shapiro: Absolutely.
If Your Honor will look at questions 1 and 3, you will see that there is a reliance question and then there is a causation question.
They are argued in separate portions of the brief, reliance and causation.
They are of course related points, but they are distinct and they were presented distinctly in the court of appeals here.
There isn't any serious argument of waiver in this situation.
We also raised the same arguments in our post-trial motions at some length when we saw JNOV, and of course the court of appeals decided this question.
So it's ripe for this Court's decision.
Now, the argument was made that the defendants here had conceded that it is somehow necessary to go to the shareholders and get shareholder approval.
If you look at that quotation in the appendix, all that it says is that it is necessary under State law to get two-thirds of the votes of the shareholders.
A two-third vote is necessary to approve this transaction.
There was no suggestion that the majority here thought that it was necessary to go to the minority shareholders with hat in hand and ask for their permission.
They had statutory rights here to proceed with this merger.
Now, the argument was also made that we had presented to the jury the conflict of interest statute, and that indeed we tendered that causation theory to the jury ourselves by citing that statute.
It had nothing to do with the causation issue.
That statute is a safe harbor.
It merely says that mergers such as this cannot be challenged in State court if one of three criteria are satisfied.
And we merely pointed out that the individual directors who were sued under State law couldn't be attacked because of that safe harbor.
The idea that this was somehow presented to the jury as a causation theory is fantastic.
It was never presented to the jury in any such guise.
If the Court please, unless there are further questions, that would conclude our argument.
Chief Justice Rehnquist: Thank you, Mr. Shapiro.
The case is submitted.
Argument of Speaker
Mr. Speaker: The opinion of the Court in No. 89-1448 Virginia Bankshares versus Sandberg will be announced by Justice Souter.
Argument of Justice Souter
Mr. 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.