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WALSH v. PEORIA & E. RY. CO.

October 9, 1963.

Walsh et al.
v.
The Peoria and Eastern Railway Company, et al.



The opinion of the court was delivered by: TYLER

TYLER, District Judge: On defendants' motions to dismiss the complaint for lack of jurisdiction and failure to state a claim upon which relief can be granted, the facts recited are as appear from the complaint.

The plaintiff in this action is a law partnership which holds common stock of defendant Peoria and Eastern Railway Company ("Peoria"). Peoria common stock is traded on the New York Stock Exchange. Defendant New York Central Railroad Company ("Central") controls Peoria through direct ownership of stock and through another Central controlled corporation, the Cleveland, Cincinnati, Chicago and St. Louis Railway Company ("St. Louis"), the third defendant.

Early in 1963 plaintiff organized an insurgent "Stockholders Protective Committee", which hoped to elect one of Peoria's five directors through use of Peoria's system of cumulative voting. Peoria was to hold its annual stockholders' meeting on April 12, 1963, at which directors were to be elected for the ensuing year. The committee obtained a list of Peoria's stockholders from that company's transfer agent, which list was certified to be correct as of March 19, 1963. On that same date the committee mailed one set of documents to each of the some 225 names and addresses with which it had been supplied, soliciting their proxies for the election of Robert L. Levine, a partner in plaintiff firm, as director.

 About 50 of the names given were "street names", i.e. , stockbrokerage houses. Plaintiff had no way of knowing to what extent, if any, these houses were the beneficial owners of the stock listed in their names; if the houses held to the use of others, plaintiff had no way of knowing how many beneficial holders each "street name" stood for.

 Plaintiff, therefore, did not immediately furnish the brokers with sufficient numbers of proxy solicitations; instead, it sent just one set to each record holder. It did this because it alleges that it is the custom and practice in the brokerage community for each broker holding stock to the use of others, upon receipt of one set of solicitation materials, to inform the solicitor of how many sets will be required to transmit one to each of those for whose benefit he holds. This "custom", if indeed it is such, obviates the need for proxy solicitors to initially send large numbers of expensive solicitation materials to each brokerage firm, on the mere chance that they might be required for transmittal to possible beneficial owners, and, indeed, with the possibility still remaining that there will not be enough to go around.

 Some of the 50-odd houses promptly requested additional copies. Twenty-one houses made no such request; four others did, but only so very shortly before the meeting as to be of no value in the contest, to either the beneficial owners or the plaintiff. The complaint further alleges that plaintiff has since learned that all of the houses in these latter groups held to the use of undisclosed principals.

 The complaint also alleges that 18 of these same houses voted some or all of the stock held in their names for the management's candidates, either without the beneficial owners' permission, or with such permission given only on the basis of management's solicitation, or with such permission from those who received the insurgents' solicitation too late for reasonable action.

 At the April 12th meeting the insurgent candidate explained these circumstances, and moved for an adjournment to allow the delinquent houses "to perform their duty". This motion was defeated in a vote in which the challenged proxies were permitted to vote, over objection. The five management candidates were then elected.

 Even if the challenged proxies had not been voted, the motion to adjourn would not have carried, and it would seem that the complete management slate would still have been elected. If, however, a substantial number of the contested proxies had been voted for the insurgents, their candidates would have won.

 Plaintiff asks the court, subject to proof of this state of facts, to declare that the proxies given to management by the 18 houses were invalid, and further to declare the election to be of no force and effect.

 If plaintiff had supplied the brokers with enough sets of proxy solicitation material, the brokers would have owed plaintiff a duty, upon payment of costs and expenses, to transmit such material to each of the beneficial holders. This duty arises from Section 14 of the Securities Exchange Act of 1934 (15 U.S.C. § 78(n) ), and the Securities and Exchange Commission ("S.E.C.") regulations adopted pursuant thereto.

 Section 14(a) provides that it is unlawful for any person to solicit proxies in contravention of S.E.C. rules. S.E.C. Rule 14a-2 (17 C.F.R. § 240.14a-2, Supp. 1963) provides, inter alia , that the S.E.C. rules, including a requirement in Rule 14a-11 that proxy solicitors file a statement of identification and interest in the contest:

 "apply to every solicitation of a proxy with respect to securities listed and registered on a national securities ...


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