Gustave Gerstle, (Cross-Appellants) v. Gamble-Skogmo, Inc., (Cross-Appellee)

This appeal and cross-appeal in a class action by minority stockholders of General Outdoor Advertising Co. (GOA), attacking its merger into defendant Gamble-Skogmo, Inc. (Skogmo), raise a variety of new and difficult questions with respect to the SEC's Proxy Rules, adopted under Sec. 14(a) of the Securities Exchange Act, and the remedy for their violation. Three comprehensive opinions by Judge Bartels, 298 F.Supp. 66 (E.D. N.Y.1969), 332 F.Supp. 644 (E.D.N.Y. 1971), and 348 F.Supp. 979 (E.D.N.Y. 1972), along with two elaborate reports by the special master, Arthur H. Schwartz, Esq., on the amount of damages, attest to the problems which the recognition of a private right of action for violation of Sec. 14(a) in J. I. Case Co. v. Borak, 377 U.S. 426, 84 S.Ct. 1555, 12 L.Ed.2d 423 (1964), have thrust upon the federal courts, and also the assiduity with which the judge and the special master tackled them.

The facts are stated in such detail in Judge Bartels' first opinion, 298 F.Supp. at 74-89, that we can limit ourselves to those that are vital for understanding the issues on appeal. In order to make the following summary more enlightening, it will be well to state at the outset that the gravamen of plaintiffs' complaint concerning the Proxy Statement sent to GOA's stockholders was that its disclosure that Skogmo expected to realize large profits from the disposition of such of GOA's advertising plants as had not been sold at the date of the merger was inadequate.

GOA had been the largest company in the outdoor advertising business in the United States. It had also acquired over 96% of the stock of Claude Neon Advertising, Limited, the largest outdoor advertising company in Canada, and all the stock of Vendor, S.A., the largest such company in Mexico. Skogmo was a company engaged in wholesale and retail merchandising of durable and soft goods through subsidiaries, franchised dealers, and discount centers in the United States and Canada, and related activities.

Between April, 1961 and March, 1962, Skogmo acquired 50.12% of GOA's common stock. Bertin C. Gamble, chairman of the board of directors and controlling stockholder of Skogmo, was elected to GOA's board in October, 1961. He was followed by Roy N. Gesme, a former consultant to Skogmo, who was to act as liaison between the two companies. Two Skogmo vice presidents were added to the GOA board in April, 1962. In the same month Gamble engaged Donald E. Ryan, who had no previous experience in the outdoor advertising business, as an officer of GOA, primarily in charge of the sale of plants, and had him elected as a member of the board and executive vice president of GOA; the district court found, 298 F.Supp. at 75, that "Ryan was indisputably Skogmo's man at General and was expected to evaluate General's prospects and make recommendations to Skogmo for the future." There were seven other directors. Four, including Burr L. Robbins, the president of GOA, had been associated with GOA before Skogmo's acquisition of control; three were outsiders. Despite the fact that only five of the twelve directors were Skogmo men, Skogmo does not dispute that it had effective control of GOA.

Beginning in 1961 the outdoor advertising business began to encounter serious difficulties. Disappointing reports, indicating that income from advertising plants had fallen off substantially during 1961 and that the expected rate of return in the business was declining, were made to Gesme by the management in the early months of 1962. Upon assuming his duties in May 1962, Ryan, after an intensive study, reported to Gamble that GOA's advertising plants could not be operated profitably and should be sold. A strong impulse in that direction had been furnished by the sale, in January 1962, of GOA's St. Louis plant to a competitor at a price described as "fantastic".1 After this sale, Gesme had prepared a detailed report on the property and earnings of each of GOA's plants, referred to as the "Green Book", which listed sales prices for the plants, apparently calculated on the basis of the St. Louis sale, that were generally well in excess of their book values.

In July 1962, Gamble publicly announced GOA's intention to sell its "less profitable" and "competing plants," and expounded at a meeting of GOA executives his policy of "corporate mobility" and diversification, to be accomplished by selling the less profitable plants and investing the proceeds in new projects. Robbins had at this time prepared a list of what he considered GOA's most profitable plants, and urged that they be retained to form the nucleus of a profitable outdoor advertising operation. Nevertheless, Ryan continued to solicit offers for the sales of all the plants. He made available to prospective purchasers five-year operating statements, supplemented, in September 1962, by eight-year earnings projections for each plant. These indicated that, if 29% of the asking price were paid in cash, the balance could be paid out of eight-year earnings.2 Through October 1, 1962, GOA had sold 13 of its 36 plants, including two of those on Robbins' list, and had almost fully negotiated several more sales. All this represented somewhat of a victory for Ryan over Robbins.

The sales program was temporarily interrupted in October 1962, when counsel raised a question whether the receipt of the large volume of purchasers' notes and a substantial investment by GOA in the stock of Allegheny Corporation might not have caused GOA to become an investment company within the purview of the Investment Company Act of 1940. Gamble took two important steps designed to avoid this result. First, he and Walter Davies, Skogmo's treasurer, negotiated an agreement with The First National Bank of Chicago and three other banks for the sale of $14,000,000 of the 6% purchasers' notes then held by GOA, at their face value, with the banks to collect the interest, retain 5%, and hold the additional 1% in escrow to be paid to GOA upon full payment of the notes. With the proceeds of the sales of the plants and notes, Gamble then caused GOA to invest $22,459,391 in the purchase of approximately 98% of the stock of Stedman Brothers, Limited, a Canadian corporation operating a chain of small wares stores.

Accordingly, in the latter part of December, Ryan and others announced that plant sales were being resumed and that all plants save that at Minneapolis were available for sale. Many more plants were sold in that month. The result was that by the end of 1962, GOA had sold 23 of its 36 plants, including 7 of the 11 listed by Robbins as the top earners, for a total price of $29,832,260, of which $5,247,506 was in cash and $24,584,754 was in notes. At the same time, preparations were made for future sales. Toward the end of December 1962, the agreement with the banks was revised so that the syndicate would buy up to $55,000,000 of purchasers' notes-a sum sufficient to take care of the sale of all GOA's remaining plants. A memorandum showing an up-to-date valuation of the remaining plants was prepared in late November by William H. Dolan, GOA's controller, on the basis of the prior sales and offers made by Curtis L. Carlson for eleven plants sold in December.

In December, 1962, the SEC instituted an investigation to determine whether Skogmo was an investment company. General's officers were subpoenaed, and extensive hearings were held in January. Apparently this led to a slowing up of the sales program. The sale of the Kansas City plant, which had been fully negotiated in October 1962, was closed in January 1963, but in the same month Ryan wrote prospective purchasers that all sales were being suspended. This did not mean, however, that GOA had altered its objective. On March 5, 1963, Allan Kander, a business broker, made an offer of $4,000,000 for the Philadelphia and Harrisburg plants on behalf of Wayne Rollins, president of Rollins Broadcasting Company, and advised Ryan that Rollins had authorized him to negotiate, on an all-cash basis, for all the unsold GOA plants except those in the greater New York City area. Ryan rejected the $4,000,000 bid as too low, but indicated a desire for a further meeting after March 21, which was never held. In March, also, Gesme prepared and submitted to Skogmo a report showing the "Green Book Value," "Probable Sales Value," "Cost on General's Books," and "Net Profit after Tax" for each of the unsold plants; the total "Net Profit after Tax" after projected sales of all plants was $19,925,000. Offers were received for small plants at Hartford, Connecticut, and Binghamton, New York, but were not accepted. During this period, John W. Kluge, president of Metromedia, Inc., continually made known to Ryan his company's interest in acquiring the large Chicago plant.

On April 11, 1963, GOA's Board of Directors adopted a resolution included in its quarterly report to stockholders, that for the present "GOA will continue to operate the plants operated by it excepting Oklahoma City where negotiations for sale are now pending." On May 31, 1963, the Oklahoma City plant was sold for $1,000,000, the price that had been offered before the temporary suspension of sales in October 1962. No other plant sales were made until late in 1963, after the merger.

In February and March, 1963, Skogmo began discussing with A. G. Becker & Co., an investment banking firm, the desirability of some form of consolidation of GOA and Skogmo. A prime motivating factor was the desirability of placing the management of GOA's newly acquired Stedman Canadian retail stores, a type of business with which GOA's officers had had no experience, under the direct control of Skogmo, which, in addition to its own operation, controlled McLeod's Limited, a retail chain specializing in the sale of hard goods in Canada. A preliminary Becker memorandum, dated March 11, 1963, mentioned as one attraction for Skogmo in a proposed offer to GOA stockholders on a share for share basis-a slight premium over the then market price of GOA shares-that Skogmo would pick up approximately $37 per share in book value,3 "such book value being approximately $13 under estimated final liquidation value per share . . . providing steps with respect to the liquidation of GOA prove out as expected." The report also noted that a factor which a GOA stockholder might consider in evaluating such an offer was a "questionmark about 1963 activities of the Company; possible further enhancement of value of GOA shares through more sales of plants."

Instead of offering GOA stockholders a share-for-share exchange or, as Becker had recommended, one share of a new Skogmo $20 5% preferred convertible into a half share of Skogmo common plus a half share of the latter for each share of GOA common stock, Skogmo decided in May 1963 that the transaction should take the form of a statutory merger in which GOA stockholders would receive for each share of GOA stock a share of $40 par value preferred Skogmo stock paying dividends of $1.75 per annum and convertible into common on a share-for-share basis. Both boards informally agreed on this during June and formally approved it on July 2. Meanwhile, Becker had prepared, at the request of both companies, a detailed memorandum dated July 1, 1963, upon the "Fairness and Equitability of the Plan of Merger." Although putting primary weight on the market value of GOA stock, this recognized potential values arising out of further sales of GOA plants as a relevant factor. The report stated, however, that any GOA stockholder, either alone or with the aid of an investment adviser, could estimate the potential sale value of the plants and other assets retained by GOA and, indeed, that a judgment on this was already reflected in the market price of GOA stock.4 The memorandum concluded that the plan of merger was "fair and equitable to the shareholders of General Outdoor."

A draft of a proxy statement to stockholders of both companies seeking approval of the merger was filed with the SEC on July 19, 1963.5 On August 20, the Assistant Director of the SEC's Division of Corporate Finance sent a 15 page single-spaced letter of comment6 and asked that a revised draft be submitted for SEC review. This was transmitted in late August and accepted by the SEC without further comment. The Proxy Statement was mailed to stockholders on September 11, 1963, along with Notice of a Special Meeting of Stockholders to be held on October 11.

For purposes of this case the most important parts of the Proxy Statement are those under the heading "History, Business and Property of General Outdoor." This sketched the growth of GOA's outdoor advertising business up to the point where, in the latter half of 1961, it was operating 36 branches. The Statement recited that "During 1960 and 1961 General Outdoor continued to entertain as it had theretofore proposals by persons desiring to purchase outdoor advertising plants from it," and that "Particularly serious attention was given to offers to purchase its plants located in major cities where there was direct local poster competition and resulting low profit margins." It instanced the acceptance of the offer for the St. Louis branch.

The Statement went on to say that at about the same time Skogmo's acquisition of a majority interest brought to GOA's board a number of men with experience in other fields, primarily merchandising and finance, thereby opening the possibility of profitable diversification. "In addition the price obtained for the St. Louis branch, as well as the prices at which other outdoor advertising operations were then being bought and sold, demonstrated that the market value of a substantial portion of the company's plants was considerably in excess of book value."

As a result of these factors and with a desire to diversify into other operating fields on a more profitable basis, General Outdoor sold a number of additional operating branches during the summer and early fall of 1962. These included a large number of competitive operations with relatively low profit margins. As it became clear that there were ready buyers for a large number of non-competitive plants, at attractive prices, sales of these also began to be made. As a result, by the end of 1962 General Outdoor had sold 23 of its 36 United States outdoor advertising branches, which accounted for approximately 36% of the total 1961 consolidated operating revenues of the Company. These branches were sold at individually negotiated prices aggregating $29,682,435, resulting in a profit of $14,184,368 after provision of $5,396,000 for federal and state taxes on income. The Company received $4,931,524 in cash down-payments and a total of $24,750,911 of notes receivable. The net proceeds were used to diversify the Company's operations as set forth in the following subsection headed "Diversification".

This was followed by a statement that in 1963 GOA had sold its Kansas City and Oklahoma City branches for $3,300,000 ($300,000 in cash and $3,000,000 in notes) for an after-tax profit of $1,523,015. The succeeding paragraph revealed that the plants sold on or before July 30, 1963, accounted for 35% of the outdoor advertising operating revenues and 37.9% of the profits in 1960, and 35.9% of the revenues and 40.6% of the profits in 1961. Then came a reference to the arrangements with the bank syndicate described above.

If the merger becomes effective, it is the intention of Gamble-Skogmo, as the surviving corporation, to continue the business of General Outdoor, including the policy of considering offers for the sale to acceptable prospective purchasers of outdoor advertising branches or subsidiaries of General Outdoor with the proceeds of any such sales, to the extent immediately available, being used to further expand and diversify operations now being conducted or which might be acquired and conducted by Gamble-Skogmo or its new, wholly-owned subsidiary, GOA, Inc. There have been expressions of interest in acquiring many of the remaining branches of General Outdoor and discussions have taken place in connection therewith, but at the present time there are no agreements, arrangements or understandings with respect to the sale of any branch and no negotiations are presently being conducted with respect to the sale of any branch.

After the Proxy Statement was disseminated, but before the stockholders' meeting, the SEC received a letter from Minis & Co., an Atlanta brokerage firm, objecting to the adequacy of the Proxy Statement. In response to this letter, Paul Judy, vice president of A. G. Becker & Co., Donald W. May, general counsel of GOA, and other representatives of Skogmo and GOA met in early October with Carl T. Bodolus, the SEC's branch chief responsible for evaluation of the Proxy Statement, and three representatives of Minis. The Minis representatives demonstrated by extrapolation from the information contained in the Proxy Statement regarding the profits obtained through previous plant sales that considerable profits might be realized on the sale of the remaining plants. They thought that this possibility should be highlighted in the Proxy Statement, which should include the fair market value of the remaining assets or projections of the anticipated profits on sales if there were to be sales. Mr. Bodolus replied, however, that such profits were subject to a variety of contingencies, that it was contrary to SEC policy to have that kind of prospective information in a Proxy Statement, and that he believed that under SEC regulations this was not permissible. In response to further questions raised by the Minis representatives, Bodolus inquired whether there had been discussions regarding future sales or whether any firm commitments had been made or were in the process of being made; the answer was that additional sales had been discussed, and that there might be future offers, but that no firm sales had been contracted or were in the process of being made.

One other meeting of significance which took place prior to the GOA stockholders' meeting should be noted. We have already referred to the interest displayed by John Kluge, president of Metromedia, in GOA's Chicago plant. On October 9, two days before the stockholders' meeting, GOA gave Metromedia updated six year statements of operations for both the profitable Chicago branch and the unprofitable New York branch. About the same time, Ryan and Kluge had a dinner meeting at which Kluge again indicated his interest in purchasing the Chicago plant. Ryan explained that he could not negotiate until "a meeting", obviously the GOA stockholders' meeting, had occurred, but that Kluge should be prepared to put up cash shortly thereafter. Ryan testified, but Kluge denied, that the discussion included the New York plant; the court credited Ryan, particularly because of other testimony that the treasurer of Metromedia had discussed with officials of the Bank of New York, on October 10, the possibility of obtaining funding for the contemplated purchase of the Chicago plant for $10,000,000 and the New York branch for $5,000,000.

The merger was approved at the October 11 stockholders' meeting and became effective on October 17. The next day, Kluge made a package offer for the New York and Chicago plants and by October 28 Skogmo had agreed to sell the Chicago and New York plants to Metromedia for $13,551,121 representing a pre-tax profit of $7,504,802. With the losing New York plant sold, there was no need to retain the other profitable plants as sweeteners, and sales proceeded apace. On December 2, Skogmo agreed to sell the Philadelphia and Washington plants to Rollins for $5,300,000, representing a pre-tax profit of $3,334,737. An agreement to sell the Mexican subsidiary to Rollins, on this occasion at a loss, was concluded in November. By July 13, 1964, GOA had contracted to sell all the United States plants which had remained at the date of the merger. Including the Mexican subsidiary, the sales prices amounted to $25,081,121 as against a book value of $10,576,418, representing a pre-tax profit of $14,504,703 and an after-tax profit of some $11,740,875-more than a 25% addition to GOA's net worth as of May 31, 1963, as shown in the balance sheet attached to the Proxy Statement.

In his first opinion, 298 F.Supp. 66, Judge Bartels found that the Proxy Statement was materially false or misleading in violation of SEC Rule 14a-9(a), on grounds we shall discuss below, and therefore held the defendant liable under section 14(a) of the Securities Exchange Act. He also held that Skogmo had breached its fiduciary obligations to the minority shareholders of GOA under applicable New Jersey law by its inadequate disclosures in the Proxy Statement and by accomplishing the merger through a plan which was unfair to the minority. Since restoring the parties to the pre-merger status quo was obviously impossible, the district judge held that the plaintiffs were entitled to restitution and that Skogmo must account for the profits it received from the sale of GOA assets. He also prescribed that:

After proper deduction for Skogmo's proportionate interest in General's assets as of the date of the merger, plaintiffs are entitled to the highest value since the date of the merger of all the assets transferred to Skogmo by General including post-merger appreciation of said assets less (i) Skogmo's proportionate share thereof, and (ii) the value of Skogmo stock as of the date of the merger received by those shareholders who have exchanged their shares or to be received by those who have not yet exchanged their shares.7

Arthur H. Schwartz, a distinguished member of the New York bar, was appointed as special master to hear and report on Skogmo's accounting. Extensive hearings were held. The two most sharply controverted issues were the value of GOA's two principal assets remaining after the sale of the plants, its 97.8% interest in Stedman and its 97.7% interest in Claude Neon, and when these values attained their maxima. The special master found the fall of 1968 to be the highest valuation date for Stedman and late 1969 to be such date for Claude Neon, and fixed values accordingly. He also allowed interest at 6 1/2% on the minority shareholders' percentage of the proceeds of the plant sales from the date of the sales, and recommended that interest at the variable legal rate be allowed on the value of Stedman and Claude Neon from their valuation dates. From this he deducted the value of the convertible preferred stock, the dividends paid, and 5% interest thereon.8 Subject to various adjustments, this resulted in an award to the plaintiffs, as of January 31, 1970, of $4,232,828.

Both sides excepted to the report. In his second opinion, 332 F.Supp. 644, the district judge reconsidered his ruling that damages should be computed on the basis of the highest intermediate value of Stedman and Claude Neon between the merger and the date of judgment. He now thought that, in addition to the the plants, the stockholders should be credited with their share of the actual value of Stedman and Claude Neon at the time of the merger. To this, he would add interest from the date of the merger at the rates set from time to time by the New York State Banking Board. There would then be deducted the value of the Skogmo convertible preferred stock received by the GOA minority stockholders plus dividends on the preferred stock and interest thereon at 5%, see note 8 supra. The matter was returned to the special master for further hearings.

Skogmo's apparent victory on the highest intermediate value issue proved to be somewhat pyrrhic in nature. The special master's second report found a balance of $12,062,416 in favor of plaintiffs as of December 31, 1971. While the figures in the two reports are not directly comparable, since the first report had recommended but not computed the interest on the share of the minority stockholders in the value of Stedman and Claude Neon, from the respective valuation dates in 1968 and 1969, the primary reason for the higher figure in the second report was that the reduction of $1,968,389 in their share of the valuation of Stedman and Claude Neon was more than counterbalanced by the addition of interest at the New York State Banking Board rate for the long period between the merger and the award, as against the 4 1/2% dividends (plus 5% interest thereon) with which defendant was credited. Both parties again excepted, but the judge adopted the report with only minor modifications, 348 F.Supp. 979.

Section 14(a) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78n, makes it unlawful for any person to solicit any proxy "in contravention of such rules and regulations as the [Securities and Exchange] Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors." Pursuant to this grant of authority, the SEC promulgated Rule 14a-9(a), 17 C.F.R. Sec. 240.14a-9(a), prohibiting solicitation by means of a proxy statement "containing any statement which, at the time and in light of the circumstances under which it is made, is false or misleading with respect to any material fact, or which omits to state any material fact necessary in order to make the statements therein not false or misleading or necessary to correct any statement in any earlier communication . . . which has become false or misleading." Judge Bartels found the Proxy Statement disseminated by GOA to violate Rule 14a-9 by failing adequately to disclose the market value of GOA's advertising plants remaining unsold at the time of the merger and Skogmo's intent to realize the large profits available from the remaining plants by selling them shortly after the merger.

A. Was the Proxy Statement Misleading?

One of the plaintiffs' principal attacks on the adequacy of the Proxy Statement was that GOA was bound to disclose its appraisals of the market value of the remaining plants and the existence and amount of the firm offers to purchase the unsold plants that it had received.^8a Skogmo countered that the SEC would not have allowed this. By a stroke of luck it was able to support its position not only by materials generally available but by the SEC staff's reaction in this very case to the suggestion of Minis & Co. that market values be disclosed in the proxy statement. In an attempt to obtain assistance on this issue, the court asked the Commission to file a brief as amicus curiae.

The SEC's brief has been the subject of considerable comment.9 Its first section reaffirms the Commission's longstanding position that "in financial statements filed with the Commission, fixed assets should be carried at historical cost (less any depreciation) in the absence of any statute, rule, or specific Commission authorization to the contrary." A second section is headed, "The narrative or textual portions of a proxy statement must contain whatever additional material is necessary under the circumstances in order to make the proxy statement not misleading." So much is hardly controversial. But the heading of the third section reads:

When a balance sheet in a proxy statement for a merger reflects assets at an amount that is substantially lower than their current liquidating value, and liquidation of those assets is intended or can reasonably be anticipated, the textual or narrative portion of the proxy statement must contain whatever available material information about their current liquidating value is necessary to make the proxy statement not misleading.

The text goes on to elaborate that while the corporation's own asking price may not be disclosed, "good faith offers from unaffiliated third parties to buy corporate assets for more than their book value must be disclosed if their omission would render the proxy statement materially misleading." Similarly, the text states that, although appraisals generally cannot be disclosed because they may be misleading, existing appraisals of current liquidating value must be disclosed if they have been made by a qualified expert and have a sufficient basis in fact. The district judge seemingly adopted the Commission's statement of the governing principles, and found that Skogmo's failure to disclose its appraisals and firm offers made the proxy statement materially misleading. 298 F.Supp. at 91-92.

The assertion that the Commission would have permitted reference to "appraisals" made by GOA's own officials,10 and the intimation that it would have required them had it known of their existence, but see note 10 supra, must have been as much a surprise to the Commission's branch chief who had refused to insist on a revision of the proxy statement to include appraisals because this was contrary to Commission policy, as it was to Skogmo's counsel. Rule 14a-9 has long carried a note giving examples "of what, depending upon particular facts and circumstances, may be misleading within the meaning of the rule"; the very first is "(a) Predictions as to specific future market values, earnings or dividends." This note does not in terms refer to appraisals of assets at current market value and, indeed, the SEC in this case attempted to distinguish appraisals of present liquidating values from estimates of future earnings or profits in an effort to reconcile its position in favor of disclosure here with the stand it took in Sunray DX Oil Co. v. Helmerich & Payne, Inc., 398 F.2d 447 (10 Cir. 1968). The validity of this distinction is far from apparent, see Kripke, The SEC, The Accountants, Some Myths and Some Realties, 45 N.Y. U.L.Rev. 1151, 1200 (1970), particularly in the context of this case, where the appraisals hinged to no small degree on the ability of prospective purchasers to pay for the properties out of future earnings. But, more important, it is clear that the policy embodied in the note to Rule 14a-9 has consistently been enforced to bar disclosure of asset appraisals as well as future market values, earnings, or dividends. The Commission acknowledged this in its brief:

The Commission and its staff have traditionally looked with suspicion upon the inclusion of asset appraisals even in the text or narrative portion of proxy statements. It has been our experience that such appraisals are often unfounded or unreliable. For this reason, the Commission's staff, on a case-by-case basis, has usually requested the deletion of appraisals that have been included in proxy statements.

The Commission further acknowledged that its branch chief had enforced this policy in his refusal to consider disclosure of asset appraisals in the Proxy Statement here, admitting that at the meeting recounted above, "a branch chief of the Commission's Division of Corporation Finance did express the staff's general policy against the inclusion of appraisals in a proxy statement."

However, the note to Rule 14a-9 states only that disclosure of appraisals "may be misleading" "depending upon particular facts and circumstances," and the SEC's brief attempts to capitalize upon this and clothe its longstanding policy against disclosure of appraisals with an appearance of flexibility and case-by-case analysis, as some of the foregoing quotations indicate. However desirable such a policy may be, we do not believe this is what it was in 1963. The Commission's examiners "are trained to strike at appraisal values as unacceptable whenever they read them in documents filed with the Commission." Fiflis & Kripke, supra note 9, at 472. See also id. at 470; Manne, supra note 9, at 315, 323. It has long been an article of faith among lawyers specializing in the securities field that appraisals of assets could not be included in a proxy statement.

There is nothing in the authorities cited by the Commission in support of the position taken in its brief which casts serious doubt on this conclusion. The Commission's principal reliance in its brief here was on an amicus brief it had filed in the well-known case of Speed v. Transamerica Corp., 99 F.Supp. 808 (D.Del.1951), modified and affirmed, 235 F.2d 369 (3 Cir. 1956). While we have no doubt that Speed was correctly decided, that case dealt with an inventory of a commodity, tobacco, about to be liquidated by the buyer, which was actively traded and whose market value could be ascertained with reasonable certainty on the basis of actual sales. No "appraisal" of market value was required, and the dangers that the SEC has preceived in the disclosure of appraised values were not present. And, of course, Speed did not involve proxy statements or the SEC's policy of not allowing disclosure of appraisals in them. As has been correctly said, "No one, the Commission included, has seriously believed that the Speed case stands for the general proposition that appraisals of assets must be disclosed to the shareholders." Manne, supra note 9, at 323.

The only other supporting references in the amicus brief were to two SEC litigation releases issued in the 1940's. Only one of these, SEC v. Standard Oil Co., Litigation Release No. 388 (Feb. 26, 1947), is of any relevance here. The SEC there brought an action under Rule 10b-5 to enjoin the defendants from purchasing the shares of minority shareholders or soliciting shareholders to exchange their common stock for preferred in connection with a merger without disclosing that the present value of the Company's oil reserves, as appraised by qualified outside engineers, was far greater than the value carried on the firm's balance sheet, and the litigation release reported that the defendants had agreed to entry of a consent order without admitting liability. The other litigation release reported only that the SEC had filed an action under Rule 10b-5 complaining of the failure of a brokerage firm to disclose the value of its marketable securities before repurchasing its debentures.11 Such bits and pieces, flushed out by industrious research, cannot retroactively overcome the general understanding embodied in the note to Rule 14a-9, regularly given effect by the Commission's able staff in dealing with lawyers who specialize in SEC matters, and repeated in this very case.12

The Commission's policy against disclosure of asset appraisals in proxy statements has apparently stemmed from its deep distrust of their reliability, its concern that investors would accord such appraisals in a proxy statement more weight than would be warranted, and the impracticability, with its limited staff, of examining appraisals on a case-by-case basis to determine their reliability. The Commission is now in the process of a thorough re-examination of its policy, and it appears that new rules on the permissible uses of appraisals and projections may shortly be forthcoming. See Statement by the Committee on Disclosure of Projections of Future Economic Performance, CCH Fed.Sec.L.Rep. p 79,211 (Feb. 2, 1973). The SEC may well determine that its policy, while protecting investors who are considering the purchase of a security from the overoptimistic claims of management, may have deprived those who must decide whether or not to sell their securities, as the plaintiffs effectively did here, of valuable information, as Professor Kripke has argued, Rule 10b-5 Liability and "Material Facts", 46 N.Y.U.L.Rev. 1061, 1071 (1971). But we would be loath to impose a huge liability on Skogmo on the basis of what we regard as a substantial modification, if not reversal of the SEC's position on disclosure of appraisals in proxy statements, by way of its amicus brief in this case.13 Indeed, it was to protect against this that Congress enacted section 23(a) of the Securities Exchange Act, 15 U.S. C. Sec. 78w, which provides that "No provision of this chapter imposing any liability shall apply to any act done or omitted in good faith in conformity with any rule or regulation of the Commission," notwithstanding any later amendment. While defendant's reliance here was on the Commission's consistent interpretation of its own rule, rather than on the terms of the rule itself, it is hard to attach any significance to this distinction when the effect of the Commission's interpretation was to lead counsel reasonably to believe Skogmo would not be allowed to make the references to "appraisals" which plaintiffs now claim were required.

The matter of disclosing "firm offers," however, may well stand differently.14 Such offers, emanating from outside sources, do not have the potential of overstatement of prospects at the instance of management that has so alarmed the SEC about appraisals. Perhaps more important, there has not been a general understanding within the legal and accounting professions that reference to such offers in a proxy statement would not be permitted, as has existed with respect to appraisals. On the contrary, one of the Commission's earliest and best known decisions on purchases of stock by insiders, Ward La France Truck Corp., 13 S.E.C. 373 (1943), had held that a controlling shareholder violated Rule 10b-5 when he caused the corporation to repurchase the shares of some minority stockholders at $3 to $6 per share without disclosing that he had entered into an agreement to sell his shares at $45 per share and for the corporation thereafter to be liquidated with the remaining stockholders to receive $25 per share. The question has also arisen in cases of offers for stock purchasers or mergers by an outsider, and there is precedent that management, when endorsing one offer, must inform stockholders of any better ones. Indeed, the court in United States Smelting, Refining & Mining Co. v. Clevite Corp., CCH Fed.Sec.L.Rep. p 92,691 (N.D.Ohio 1968), held that a management proxy statement which solicited shareholder support for a merger proposal violated Rule 14a-9 by failing to disclose a second merger offer at a higher price. Id. at 99,051-54. See also SEC v. Fruit of the Loom, Inc., Civ.No. 61-640 (S.D.N.Y.1961), reported in SEC 27th Annual Report 92-93 (1962) (consent order enjoining management violation of Rule 10b-5 by transmitting to shareholders and endorsing one tender offer without disclosing higher offer). And we have very recently held that failure by the maker of a tender offer of its securities to disclose serious and active negotiations to sell a significant asset substantially below book value violated Sec. 14(e), Chris-Craft Industries, Inc. v. Piper Aircraft Corp., 480 F.2d 341, 367 (2 Cir. 1973). We see no significant difference between this and a failure to include the receipt of offers well in excess of book value in a proxy statement seeking approval of a merger, provided that the omission was material.

However, we need not determine the question of materiality of the omission of any reference to the firm offers, see note 14, supra. We rest our decision on the point that, quite apart from the SEC's amicus brief, the Proxy Statement must be faulted, on traditional grounds going back to the Speed case, supra, as failing adequately to disclose that, upon completion of the merger, Skogmo intended to pursue aggressively the policy of selling GOA's plants, which had already yielded such a substantial excess of receipts over book value.

The adequacy of the disclosure in the Proxy Statement, especially in what we have called the fateful paragraph, must be weighed against Judge Bartels' basic factual finding, 298 F.Supp. at 93,

that Skogmo as the controlling stockholder and surviving corporation intended at least by and probably before July 19, 1963, to sell all the remaining outdoor advertising plants of General immediately after the merger.

The judge supported this by the following subsidiary findings:

The intention to sell appears as an inescapable inference from the following facts: (i) General's earnings produced a mere 3% return on the estimated value of its outdoor advertising assets; (ii) after the sale of the St. Louis branch in early 1962, exceedingly high purchase prices were offered for outdoor advertising plants; (iii) the preparation in March, 1962 of the "Green Book", a reference book, showing the valuation of each branc