Royal Business Group, Inc. v. Realist, Inc.

This case requires us to consider whether a proxy contestant has standing to sue under Section 14(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78n(a), for allegedly false and misleading statements contained in management’s proxy materials. Because we are convinced that Congress did not intend proxy contestants to have a private right of action as such under Section 14(a), and because the complaint before us does not state a cognizable claim for common law fraud, we affirm the district court’s dismissal of plaintiffs’ suit.

I. BACKGROUND

The proxy contest at issue involved Realist, Inc., a Delaware corporation having its principal place of business in Wisconsin. 1 *1058 The plaintiffs, Royal Business Group, Inc. (Royal) and its wholly owned subsidiary, American Business Group, Inc. (ABG), New Hampshire corporations headquartered in Massachusetts, contend that, but for Realist’s failure to disclose certain material information in the course of soliciting proxies, they would never have waged the proxy war, thus saving hundreds of thousands of dollars. We limn the relevant circumstances in accordance with the protocol which Fed.R.Civ.P. 12(b)(6) demands. See, e.g., Correa-Martinez v. Arrillaga-Belendez, 903 F.2d 49, 51 (1st Cir.1990) (on motion to dismiss, reviewing court must accept all well-pleaded facts as they appear in the complaint and indulge all reasonable inferences in the plaintiffs’ favor); Dartmouth Review v. Dartmouth College, 889 F.2d 13, 16 (1st Cir.1989) (same).

In March 1988, ABG began to acquire Realist stock, ultimately buying 55,010 shares (8% of the issued and outstanding voting stock). In May of that year, Royal sent Realist the first of a series of letters declaring its intention to acquire all Realist’s outstanding shares at an above-market premium. Realist repulsed the plaintiffs’ serial overtures, reaffirming its intention to remain independent and essaying a variety of defensive actions to thwart a hostile takeover. The directors reduced the size of the board. 2 They also began wooing a Swiss-based company, Ammann Laser Technik AG (Ammann). Although negotiations with Ammann were already well underway by the spring of 1989, Realist’s proxy solicitation materials for the annual meeting, mailed on April 27, 1989, made no mention of them. 3

Meanwhile, rebuffed by management and unaware of Realist’s negotiations with Ammann, Royal instituted a proxy contest seeking, indirectly, a shareholder referendum on its offer to acquire Realist. As part of the battle plan, ABG notified the defendant of the plaintiffs’ intention to nominate candidates for the two directorships to be filled at the June 6, 1989 annual meeting. The plaintiffs’ proxy materials emphasized that their nominees, if elected, would actively pursue the sale of Realist to Royal. Five days before the annual meeting, two Realist directors purchased 26,000 shares of Realist stock. Although the seller had theretofore signed a proxy in favor of the plaintiffs’ nominees, that proxy was revoked at the time of the sale and replaced by a proxy favoring the incumbent slate.

To make a tedious tale tolerably terse, the annual meeting took place as scheduled. The insurgents prevailed. The defeated incumbents challenged the election results in the Delaware Chancery Court. On June 30, 1989, Realist announced its acquisition of Ammann. In response to the announcement, Royal immediately withdrew its offer to acquire Realist. 4

Invoking both federal question and diversity jurisdiction, 28 U.S.C. §§ 1331, 1332, the plaintiffs filed this civil action in the United States District Court for the District of Massachusetts. In their complaint, they alleged that Realist, in the proxy materials sent to shareholders prior to the annual meeting, had failed to disclose im *1059 portant matters (e.g., the negotiations to acquire Ammann; the planned acquisition of the 26,000-share block of stock) and that this failure constituted both a violation of Section 14(a) (count 1) and common law fraud (count 2). The complaint sought money damages of $350,000, more or less, representing the expenses incurred in connection with the proxy contest, election, and ensuing Delaware litigation. The gravamen of the suit lay in the idea that, had Realist complied with its disclosure obligations, the plaintiffs would have withdrawn their acquisition offer and eschewed the costly proxy contest.

The defendants moved to dismiss the complaint for failure to state a claim upon which relief could be granted. Fed.R. Civ.P. 12(b)(6). The district court obliged. Royal Business Group, Inc. v. Realist, Inc., 751 F.Supp. 311 (D.Mass.1990) (RBG I). This appeal followed. 5

II. THE SECURITIES CLAIM

Section 14(a) of the Securities Exchange Act prohibits any person from soliciting proxies “in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for protection of investors.” 15 U.S.C. § 78n(a). The SEC promulgated Rule 14a-9 thereunder, which provides:

No solicitation subject to this regulation shall be made by means of any proxy statement, form of proxy, notice of meeting or other communication, written or oral, containing any statement which, at the time and in the 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 correct any statement therein not false or misleading or necessary to correct any statement in any earlier communication with respect to the solicitation of a proxy for the same meeting or subject matter which has become false or misleading.

17 C.F.R. § 240.14a-9 (1990).

It is well established that shareholders have a private right of action under Section 14(a) and Rule 14a-9 against issuers of allegedly false or misleading proxy materials. See J.I. Case Co. v. Borak, 377 U.S. 426, 84 S.Ct. 1555, 12 L.Ed.2d 423 (1964). As the Borak Court reasoned: “While [Section 14(a)’s] language makes no specific reference to a private right of action, among its chief purposes is the ‘protection of investors,’ which certainly implies the availability of judicial relief to achieve that result.” Id. at 432, 84 S.Ct. at 1559-60.

To say that shareholders have a private right of action under Section 14(a) is not necessarily to say that shareholders may unleash Section 14(a) even without a meaningful link between the claimed proxy violation and the shareholder’s role qua shareholder. This case, then, tests the margins of the Borak doctrine. Plaintiffs claim that their status as shareholders of Realist gives them carte blanche under Section 14(a) to seek damages for the expenses they incurred in a materially different capacity: as proxy contestants. 6 Thus, the *1060 issue before us is not whether there is a private remedy, or even who may invoke that remedy, cf. Piper v. Chris-Craft Industries, Inc., 430 U.S. 1, 55 n. 4, 97 S.Ct. 926, 956 n. 4, 51 L.Ed.2d 124 (1977) (Stevens, J. dissenting), but when or, put another way, under what circumstances, that remedy may be invoked.

A.

Standing

A formidable obstacle confronts litigants who attempt to assert implied rights of action. See Arroyo-Torres v. Ponce Federal Bank, 918 F.2d 276, 278 (1st Cir.1990). That obstacle does not loom only where the issue is whether a private right of action exists at all; it is equally forbidding in cases where an implied right of action exists but its scope is uncertain. In either event, unless congressional intent to allow the private right of action “can be inferred from the language of the statute, the statutory structure, or some other source, the essential predicate for implication of a private remedy simply does not exist.” Thompson v. Thompson, 484 U.S. 174, 179, 108 S.Ct. 513, 516, 98 L.Ed.2d 512 (1988) (quoting Northwest Airlines, Inc. v. Transport Workers Union, 451 U.S. 77, 94, 101 S.Ct. 1571, 67 L.Ed.2d 750 (1981)). Hence, our determination of the remedial reach must focus on Congress’ intent in enacting the statute. See id.; see also Arroyo-Torres, 918 F.2d at 278; Kwatcher v. Massachusetts Service Employees Pension Fund, 879 F.2d 957, 965 (1st Cir.1989).

This said, we turn to Borak. There, the Court, having examined the legislative history of Section 14(a), concluded that Congress’ primary purpose in enacting the statute was to promote and protect shareholder democracy. See, e.g., Borak, 377 U.S. at 431, 84 S.Ct. at 1559 (“The section stemmed from the congressional belief that ‘[f]air corporate suffrage is an important right that should attach to every equity security bought on a public exchange.’ ”) (quoting H.R.Rep. No. 1383, 73d Cong., 2d Sess. 13 (1934)). As the Court later explained, Section 14(a) “was intended to promote ‘the free exercise of the voting rights of stockholders’ by ensuring that proxies would be solicited with an ‘explanation to the stockholder of the real nature of the questions for which authority to cast his vote is sought.’ ” Mills v. Electric Auto-Lite Co., 396 U.S. 375, 381, 90 S.Ct. 616, 620, 24 L.Ed.2d 593 (1970) (quoting H.R. Rep. No. 1383, supra, and S.Rep. No. 792, 73d Cong., 2d Sess. 12 (1934)). Thus, the existence of a private right of action under Section 14(a) was inferred from the legislative history evidencing congressional concern to vindicate the voting rights of shareholders.

In determining whether the reach of the private remedy under Section 14(a) encompasses the claims asserted by Royal, we deem it appropriate to seek guidance in Cort v. Ash, 422 U.S. 66, 95 S.Ct. 2080, 45 L.Ed.2d 26 (1975). The Cort approach contemplates that we will ask four questions: Is the plaintiff a member of the class for whose “especial benefit” the statute was passed? Is there any cogent indication of legislative intent to create or deny the remedy sought? Would recognition of the remedy be “consistent with the underlying purposes” of the statutory scheme? Would it be inappropriate to infer a federal remedy because “the cause of action [is] one traditionally relegated to state law ...”? Id. at 78, 95 S.Ct. at 2088. These questions, although clearly subordinate to the “central inquiry” into congressional intent, see Touche Ross & Co. v. Redington, 442 U.S. 560, 574-76, 99 S.Ct. 2479, 2488-89, 61 L.Ed.2d 82 (1979), remain useful “[a]s guides to discerning that intent,” Thompson, 484 U.S. at 179, 108 S.Ct. at 516; and in this case, we find them to be especially well adapted to mapping the perimeter of an established private right of action.

Here, the claim of standing produces less than satisfactory answers to at least three of the four Cort questions. In the first place, it is crystal clear that, although ap *1061 pellants were shareholders of Realist, they did not initiate suit in that capacity. They do not complain that they (or any other Realist stockholders, for that matter) were denied the right to vote their shares knowledgeably. They sue instead in their role as disappointed proxy contestants. As such, they do not come within the class for whose particular benefit Section 14(a) was enacted. In the second place, there is absolutely no hint in the language or structure of the statute, or in the legislative history, that Congress was concerned with the rights of proxy contestants as opposed to the rights of shareholders. See, e.g., Klaus v. Hi-Shear Corp., 528 F.2d 225, 232 (9th Cir.1975) (“In enacting section 14(a), Congress intended to guarantee the integrity of the processes of corporate democracy.”). In the third place, the remedy sought—reimbursement of the expenses Royal incurred in the abortive proxy contest—does not dovetail in any discernible way with Section 14(a)’s underlying purpose. We are utterly at a loss to see how, under these circumstances, the voting rights of shareholders would be furthered by implying a private right of action under Section 14(a) in favor of regretful proxy contestants. We think that the Court’s elision of Cort and Borak is peculiarly apt in describing the result we must reach: “[W]hile ‘it is the duty of the courts to be alert to provide such remedies as are necessary to make effective the congressional purpose,’ in this instance the remedy sought would not aid the primary congressional goal.” Cort, 422 U.S. at 84, 95 S.Ct. at 2090 (quoting Borak, 377 U.S. at 433, 84 S.Ct. at 1560).

Let us be perfectly clear: our holding is not that a shareholder who also happens to be a proxy contestant might never have an actionable claim under Section 14(a). Rather, we hold that where, as here, a plaintiff’s specific claim arises from its role as a proxy contestant, not from its role as a shareholder, the relief sought would not serve the statutory purpose of safeguarding the corporate voting process; and therefore, implying a private right of action would in no way promote Congress’ intent. Hence, because the plaintiffs’ role in the contest and the remedy they seek do not further the objectives which Section 14(a) was designed to achieve, they cannot clear the “high hurdle,” Arroyo-Torres, 918 F.2d at 278, which must be vaulted.

The appellants have done their best to fashion a silken purse from a sow's ear. They place their utmost reliance on Haas v. Wieboldt Stores, Inc., 725 F.2d 71 (7th Cir.1984). Haas, however, is distinguishable. Seeking a seat on the defendant’s board, Haas duly delivered his proxy materials to the company for mailing. Id. at 72. The same day and without any notice, the company changed the date of the stockholders’ meeting and subsequently refused to mail Haas’ statement because it contained misinformation, i.e., the wrong meeting date. Id. Thus, the violation alleged by Haas, unlike the alleged violation in this case, was one that directly implicated shareholder voting rights. The action complained of clearly could have deprived shareholders of the ability to exercise their electoral franchise had Haas not prepared new proxy materials. Second, the remedy Haas sought—reimbursement for the expenses of preparing the discarded proxy materials—was one that furthered the purpose of Section 14(a) by assuring that a company could not deprive its shareholders of the opportunity to vote knowledgeably by loading heavy costs on insurgents. Third, the Haas case involved Rule 14a-7, see id., a rule that imposes a specific duty on corporations to mail insurgents’ proxy materials, whereas Rule 14a-9, at issue here, imposes no comparable duty upon a corporation vis-a-vis an unsuccessful proxy contestant.

The next weapon in plaintiffs’ poorly stocked armamentarium is Studebaker Corp. v. Gittlin, 360 F.2d 692 (2d Cir.1966). There, Judge Friendly analyzed Section 14(a)’s legislative history and found that:

Congress anticipated protection from “irresponsible outsiders seeking to wrest control of a corporation away from honest and conscientious corporation officials,” S.Rep. No. 1455, 73d Cong., 2d Sess. 77 (1934), and the Proxy Rules are shot through with provisions recognizing *1062 that in contests for control the management has a role to play as such and not merely insofar as the managers are stockholders.

Id. at 695. Seizing on this passage, the plaintiffs argue that, since the same legislative history shows that Congress also intended Section 14(a) to protect shareholders from “unscrupulous corporate officials seeking to retain control of the management by concealing and distorting facts,” S.Rep. No. 1455, supra, a proxy contestant must have a complementary role to play in policing such violations. We find the asseveration to be at best a heuristic, if not a non sequitur. Studebaker makes it clear that standing, whether claimed by a target company or a proxy contestant, exists only in those circumstances where the putative plaintiff is acting in a capacity consistent with the purposes of Section 14(a). 360 F.2d at 694-95. As demonstrated above, that proposition does not assist Royal’s cause.

To summarize, under Borak and Thompson, any role to be played by proxy contestants must be limited to circumstances consistent with Section 14(a)’s underlying purpose of “promot[ing] the free exercise of the voting rights of shareholders.” Mills, 396 U.S. at 381, 90 S.Ct. at 620. Although in some situations standing for proxy contestants might help to promote the efficacy of shareholder democracy, cf. Ameribanc Investors Group v. Zwart, 706 F.Supp. 1248, 1253 (E.D.Va.1989) (discussing standing for target companies as a means of guaranteeing shareholder rights), this is hardly one of them. Given plaintiffs’ own statement of their claims, it would be poppycock to infer that this suit was brought in the interest of ensuring other shareholders a fairer, better informed proxy contest. To imply a private right of action in favor of a disappointed proxy contestant seeking to recover damages for an election contest that, in retrospect, it would have preferred not to wage would stretch Section 14(a) beyond any reasonable limit. We find the statute’s language not to be so elastic and Congress’ intent not to be so unfocused. 7

There is little more that can constructively be said. Shareholders, like other folk, routinely wear a multitude of hats. The fact that a proxy contestant is also a shareholder does not mean that every action it undertakes falls within its capacity as a shareholder. Cf. Sheinkopf v. Stone, 927 F.2d 1259, 1265. (1st Cir.1991) (“The fact that a person is a lawyer ... does not mean that every relationship he undertakes is, or reasonably can be perceived as being, in his professional capacity.”). Whether or not a proxy contestant who also happens to be a shareholder should be able to sue in the latter capacity depends on an analysis, under the particular circumstances of each case, of the rights being asserted. Here, the plaintiffs’ posture is that of proxy contestants — nothing more. The rights being asserted and the damages being sought have nothing to do with the purposes which animate Section 14(a). Mindful of these realities, we do not believe that standing can be conferred, without more, by the mere coincidence that a proxy contestant also enjoys shareholder status. 8

*1063 B.

Transactional Nexus

Apart from standing, the plaintiffs face still another insuperable obstacle in their attempt to construct a claim under Section 14(a): their complaint fails to establish a causal nexus between their alleged injury and some corporate transaction authorized (or defeated) as a result of the allegedly false and misleading proxy statements.

The need to plead and prove a transactional nexus in a proxy solicitation case is not legitimately in doubt. See, e.g., Gaines v. Haughton, 645 F.2d 761, 775 (9th Cir. 1981), cert. denied, 454 U.S. 1145, 102 S.Ct. 1006, 71 L.Ed.2d 297 (1982); Schlick v. Penn-Dixie Cement Corp., 507 F.2d 374, 381-82 (2d Cir.1974), cert. denied, 421 U.S. 976, 95 S.Ct. 1976, 44 L.Ed.2d 467 (1975); Murray v. Hospital Corp. of America, 682 F.Supp. 343, 348-49 (M.D.Tenn.1988), aff'd, 873 F.2d 972 (6th Cir.1989); Leff v. CIP Corp., 540 F.Supp. 857, 866 (S.D.Ohio 1982); see also Mills, 396 U.S. at 385, 90 S.Ct. at 622 (“Where there has been a finding of materiality, a shareholder has made a sufficient showing of causal relationship between the violation and the injury for which he seeks redress if ... he proves that the proxy solicitation itself, rather than the particular defect in the solicitation materials, was an essential link in the accomplishment of the transaction.”). 9 Indeed, the requirement’s pedigree is impeccable; its lineage can be traced to the root purposes of Section 14(a), viz., “preventing] management or others from obtaining authorization for corporate action by means of deceptive or inadequate disclosure in proxy solicitation,” Borak, 377 U.S. at 431, 84 S.Ct. at 1559, and ensuring that proxies will be solicited with an “explanation to the stockholder of the real nature of the questions for which authority to cast his vote is sought,” Mills, 396 U.S. at 381, 90 S.Ct. at 620. Thus, we agree entirely with the Ninth Circuit that “[t]his ‘transactional causation’ is an essential element of a [§] 14(a) action.” Gaines, 645 F.2d at 776 (quoting In re Tenneco Secur. Litigation, 449 F.Supp. 528, 531 (S.D.Texas 1978)).

In this instance, the proxy solicitation was geared toward only one corporate transaction: the election of directors. The plaintiffs can make no viable claim that they, as shareholders, were harmed by that transaction, since the candidates they nominated achieved at least a paper victory. The only “injury” that plaintiffs suffered was caused by their involvement as combatants in an election they won — but one where, in retrospect, they would rather not have entered the lists. It is simply too much of a stretch to bring such a claim within the causative sphere required for viability under Section 14(a). The plaintiffs did not plead, and are unable on the facts as disclosed to prove, that the expense of their now lamented proxy contest resulted from any transaction that the shareholders authorized (or defeated) in consequence of management’s allegedly improper proxy materials. Accordingly, the required element of transactional causation was utterly lacking. Cf., e.g., Gaines, 645 F.2d at 779 (allegations that management failed to disclose questionable payments to foreign officials did not state cause of action under Section 14(a)); Abbey v. Control Data Corp., 603 F.2d 724, 732 (8th Cir.1979) (sim *1064 ilar), cert. denied, 444 U.S. 1017, 100 S.Ct. 670, 62 L.Ed.2d 647 (1980).

III. THE FRAUD CLAIM

The plaintiffs assert in count 2 of their complaint that omission of the selfsame information from the proxy solicitation materials (e.g., nondisclosure of the Ammann negotiations and the Realist insiders’ purchase of shares) constituted common law fraud. This claim sounds in tort, requiring that we apply state law, guided by the choice-of-law rules of the forum. See Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496, 61 S.Ct. 1020, 1021-22, 85 L.Ed. 1477 (1941). The parties disagree not only as to what state’s substantive law (Delaware or Massachusetts) should control, but as to what choice-of-law rules a Massachusetts court would employ in resolving the conflict. The court below sided with the plaintiffs on this issue, finding that, under Massachusetts’ hybrid approach to choice-of-law determinations in tort actions, Delaware law should be applied. See RBG I, 751 F.Supp. at 314 n. 4. It is unnecessary that we make a formal choice of law since, whether Delaware or Massachusetts law is used, the result will not vary. See Fashion House, Inc. v. K Mart Corp., 892 F.2d 1076, 1092 (1st Cir. 1989) (“When a choice-of-law question has been reduced to the point where nothing turns on more precise refinement, that should be the end of the matter.”).

A.

Pleading Fraud

Choice of law aside, we start our analysis of count 2 with a hardy jurisprudential strain indigenous to both Massachusetts and Delaware: there can be no actionable claim of fraud for failure to disclose in the absence of a duty to disclose. See Metropolitan Life Ins. Co. v. Ditmore, 729 F.2d 1, 5 (1st Cir.1984) (construing Massachusetts law); Solomon v. Birger, 19 Mass.App.Ct. 634, 477 N.E.2d 137, 142, rev. denied, 395 Mass. 1103, 481 N.E.2d 198 (1985); Stephenson v. Capano Devel., Inc., 462 A.2d 1069, 1074 (Del. 1983); Lock v. Schreppler, 426 A.2d 856, 862 (Del.Super. 1981). In this case, the plaintiffs can identify no legal basis on which an affirmative duty to disclose might rest.

The plaintiffs try to fill the void in several ways. First, they argue that Realist’s directors had a fiduciary duty to provide full disclosure of the material facts with respect to all issues requiring shareholder approval. While this tenet is generally true, see, e.g., In re Anderson, Clayton Shareholders’ Litigation, 519 A.2d 680, 689-90 (Del.Ch.1986) (“one element of the fiduciary duty that directors of a Delaware corporation owe to shareholders is the duty to provide full and honest disclosure of material facts relating to any transaction that requires shareholder approval”); Smith v. Van Gorkom, 488 A.2d 858, 890 (Del.1985) (directors have fiduciary duty to shareholders “to disclose all facts germane to the transaction at issue in an atmosphere of complete candor”), it is inapposite here. For one thing, the plaintiffs charge a failure to disclose matters which do not themselves require shareholder approval and which bear no sufficient relationship to matters requiring shareholder approval. See supra Part 11(B); see generally Del.Corp.L.Ann. §§ 251, 271 (1990) (requiring shareholder approval only for extraordinary corporate transactions, such as mergers or substantial asset sales). 10 For another thing, to the extent that nondisclosure may be said to relate to the June 6 election of directors, the claim is governed by Section 14(a), under which, as discussed in Part 11(A), supra, the plaintiffs lack standing to sue. And last but not least, corporate directors owe fiduciary duties to shareholders, not to prospective bidders trying to decide whether or not to vie for *1065 corporate control. Here again, then, plaintiffs’ attempt to don their shareholders’ hat cannot disguise the bald fact that their underlying claim has nothing to do with their shareholder status.

Plaintiffs also suggest that a duty to disclose might arise from the publication of “half-truths” in Realist’s proxy materials. Both Massachusetts and Delaware recognize that, even absent an affirmative duty to disclose, a corporation that chooses to make a disclosure shoulders certain responsibilities of completeness and accuracy. See, e.g., Ditmore, 729 F.2d at 5 (partial disclosures and half-truths are, under some circumstances, tantamount to misrepresentations of fact); Kannavos v. Annino, 356 Mass. 42, 247 N.E.2d 708, 711-12 (1969) (similar); Lock, 426 A.2d at 862 (“Although there is no general duty to speak, nevertheless, if a person undertakes to speak, he then has a duty to make a full and fair disclosure as to the matters about which he assumes to speak.”).

Be that as it may, the factual allegations in the plaintiffs’ complaint, however liberally construed, do not identify any extracts from Realist’s proxy materials that can be said to be inaccurate or incomplete in any material respect. Whether scanned in reference to each of the specific matters about which the plaintiffs complain, see Complaint 111128, 33, 52, 54-55 (Ammann acquisition); 111141, 51, 56-58 (size of board); 111142, 46, 53 (directors’ acquisition of additional shares), or in reference to the defendant’s proxy materials as a whole, see Complaint 111159-63, the complaint neglects to specify with reasonable particularity a single partial or inaccurate disclosure. 11 To be sure, the complaint is lengthy — but prolixity is neither a substitute for, nor a guarantor of, specificity. We fully agree with the court below that the plaintiffs, in their complaint, failed to “point to any specific statements which, in light of th[e] undisclosed information, were false when made.” RBG I, 751 F.Supp. at 315 n. 5.

In a nutshell, the complaint here, like that found deficient in Roeder v. Alpha Indus., Inc., 814 F.2d 22 (1st Cir.1987), a Rule 10b-5 case, “d