Issues Commonly Arising in Proxy Contest Litigation
| Publication year | 1984 |
| Pages | 1410 |
1984, August, Pg. 1410. Issues Commonly Arising in Proxy Contest Litigation
Proxy contests are an important part of the struggle for control of a publicly held corporation.(fn1) A successful proxy contest requires careful planning, which includes consideration of such major factors as the pervasive federal regulations(fn2) of proxy solicitations and the litigation generated by those regulations. This article briefly outlines those regulations and identifies issues that are likely to arise in proxy contest litigation.
Federal proxy regulations stem from § 14(a) of the Securities Exchange Act of 1934 ("1934 Act").(fn3) Section 14(a) and the rules promulgated thereunder are enforced by the Securities and Exchange Commission ("SEC").(fn4) More importantly, there is an implied private right of action for alleged violations of § 14(a).(fn5) This right extends to both derivative and direct causes of action, giving shareholders, management and insurgents standing to sue for alleged violations.(fn6) The federal courts have exclusive jurisdiction over all actions under the 1934 Act.(fn7)
Section 14(a) of the 1934 Act prohibits the solicitation of any proxy in contravention of the rules and regulations of the SEC. Its restrictions apply to any company with securities registered under § 12 of the 1934 Act, any registered investment company, and any public utility holding company.(fn8)
The SEC proxy rules focus on the manner of proxy solicitation. "Solicitation" is defined as any request for or the furnishing of a proxy or any request to execute, not to execute, or to revoke a proxy.(fn9) These rules apply only to "participants," who are defined to include the following: the issuer; any director of the issuer; any nominee whose election as a director is solicited; any committee or group organized to solicit proxies; any member who is directly or indirectly involved in any aspect of the group's operation or financing; any person who lends credit to a participant for proxy solicitation; and any other person who solicits proxies.(fn10)
Under SEC rules, any solicitation must be accompanied by a proxy statement containing detailed information regarding, among other things, the revocability of the proxy, the identity and interests of the solicitor, the securities entitled to vote on the matter, and the principal holders thereof.(fn11) In addition, the rules set forth a specific format for the proxy and restrict the methods of presentation to the shareholders.(fn12) The proxy statement and any accompanying material must be filed with the SEC for review at least ten days prior to the solicitation.(fn13) If the SEC finds that the materials comply with the regulations, the materials may be sent to the shareholders.
In contrast to the technical requirements above, Rule 14a-9 prohibits solicitations containing any statements which, at the time and in light of the circumstances made, are false or misleading with respect to any material fact.(fn14) Unlike the relatively narrow scope of the remaining SEC proxy rules, Rule 14a-9 is very broad and somewhat amorphous in its application. Thus, not unexpectedly, most proxy contest litigation involves alleged false or misleading statements in violation of Rule 14a-9.
Litigating alleged violations of Rule 14a-9 primarily involves setting limits on an otherwise endless application of that rule. These limits include (1) restrictions on the types of statements to which the rule applies; (2) a restrictive definition of "materially misleading"; (3) requirements that there be some injury to the corporation; (4) some culpability of the declarant; and (5) a doctrine that misstatements which have been "thoroughly aired" will not be actionable.
Rule 14a-9 prohibits proxy solicitations that contain statements of material fact which are false or misleading.(fn15) Thus, similar to common law fraud where a statement is a pure expression of opinion, as distinguished from a forecast or prediction, a statement of opinion is not actionable under Rule 14a-9 even though it is false or misleading.(fn16)
This limitation does not give a free hand to influence proxy contests using factual assertions thinly veiled as statements of opinion. The courts have held that the drafter of the statement must take care to state his position in qualified terms, so that the statement is recognizable as an opinion.(fn17) In addition, while opinions are considered merely expressions of the author's...
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