US SUPREME COURT DECISIONS

Petitioners, minority shareholders of respondent Electric Auto-Lite Co., brought this action derivatively and on behalf of minority shareholders as a class to set aside a merger of Auto-Lite and the Mergenthaler Linotype Co. (which, before the merger, owned over half of Auto-Lite's stock). Petitioners charged that the proxy solicitation for the merger by Auto-Lite's management was materially misleading, and violated § 14(a) of the Securities Exchange Act of 1934 and Rule 14a-9 thereunder in that the merger was recommended to Auto-Lite's shareholders by that company's directors without their disclosing that they were all nominees of and controlled by Mergenthaler. The District Court, on petitioners' motion for summary judgment, ruled that the claimed defect in the proxy statement was a material omission, and, after a hearing, concluded that, without the votes of minority stockholders, approval of the merger could not have been achieved, and that a causal relationship had thus been shown between the finding of a § 14(a) violation and the alleged injury to petitioners. The court referred the case to a master to consider appropriate relief. On interlocutory appeal, the Court of Appeals affirmed the conclusion that the proxy statement was materially deficient, but held that the granting of summary judgment with respect to causation was erroneous, and that it was necessary to resolve at trial whether there was a causal relationship between the deficiency in the proxy statement and the merger. Finding that causation could not be directly established because of the impracticalities of determining how many votes were affected, the court ruled that the issue was to be determined by proof of fairness of the merger, and, if the respondents could prove fairness, it could be concluded that a sufficient number of shareholders would have approved the merger regardless of the misrepresentation.

Held:

1. Fairness of the merger terms does not constitute a defense to a private action for violation of § 14(a) of the Act complaining of materially misleading solicitation of proxies that authorized a corporate merger. Pp. 396 U. S. 381-385. chanrobles.com-red

Page 396 U. S. 376

(a) Permitting liability to be foreclosed on the basis of a finding that the merger was fair would contravene the purpose of § 14(a) by bypassing the stockholders. Pp. 396 U. S. 381-382.

(b) Imposing on small shareholders the burden of rebutting the corporation's evidence of fairness would discourage them from the private enforcement of proxy rules that "provides a necessary supplement to Commission action." J. I. Case Co. v. Borak, 377 U. S. 426, 377 U. S. 432. Pp. 396 U. S. 382-383.

(c) The evidence submitted at the hearing as to the causal relationship between the proxy material and the merger was sufficient to establish petitioners' cause of action. P. 396 U. S. 383.

(d) Where, as here, there was proof that the misstatement or omission in the proxy statement was material, this showing that the defect might have been considered important in shaping the shareholders' vote is sufficient without proof, which the Court of Appeals erroneously held was necessary, that its effect was decisive. Pp. 396 U. S. 384-385.

2. In devising retrospective relief for violation of the proxy rules, the federal courts should be guided by the principles of equity. Pp. 396 U. S. 386-389.

(a) The fairness of the merger may be a relevant consideration in determining the appropriate relief, and the merger should be set aside only if a court of equity concludes from all the circumstances that it would be equitable to do so. Pp. 396 U. S. 386-388.

(b) Damages should be recoverable here only to the extent that they can be proved. Pp. 396 U. S. 388-389.

3. Petitioners, who have established a violation of the securities laws by their corporation and its officials, are entitled to an interim award of litigation expenses and reasonable attorneys' fees incurred in proving the violation, since the expenses petitioners incurred were for the benefit of the corporation and the other stockholders. The Court does not decide the further question of reimbursement for litigation expenses incurred in any ensuing proceedings. Pp. 396 U. S. 389-397.

403 F.2d 429, vacated and remanded. chanrobles.com-red

Page 396 U. S. 377