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Studebaker Corp. v. Gittlin

decided: April 5, 1966.


Lumbard, Chief Judge, and Friendly and Anderson, Circuit Judges.

Author: Friendly

FRIENDLY, Circuit Judge:

Richard Gittlin, a stockholder of Studebaker Corporation, a Michigan corporation, appeals from an order of the District Court for the Southern District of New York, in an action brought against him by the corporation. The order enjoined the use of other stockholders' authorizations in a New York state court proceeding to obtain inspection of Studebaker's shareholders list, N.Y. Business Corporation Law, McKinney's Consol. Laws, c. 4, § 1315, save after compliance with the Proxy Rules of the Securities and Exchange Commission issued under § 14(a) of the Securities Exchange Act.

Because of the exigencies of time usual in contests for corporate control, both the district court and this court have considered the matter on an expedited basis. The initial paper in the action was an order to show cause, supported by an extensive affidavit of Studebaker's counsel, signed on March 22 before the filing of a complaint. A hearing was held on March 23, at which Gittlin waived any objection as to lack of personal service but not as to the absence of a complaint, and the injunction issued on March 25. Meanwhile, on March 24 a complaint had been filed. Although it would have been better to file a complaint along with the affidavit and order to show cause, we hold that under the circumstances the court could properly treat the affidavit as a complaint and the order to show cause as requiring an early answer, F.R.Civ.P. 12(a). Hadden v. Rumsey Prods., Inc., 196 F.2d 92, 95 (2 Cir.1952).

Studebaker's resort to the district court was occasioned by the service upon it on March 21 of papers in a proceeding begun by Gittlin in the Supreme Court of New York to inspect the record of the company's shareholders. Gittlin's application to the New York court recited that he was the record owner of 5,000 shares of Studebaker stock and that he was acting on behalf of himself and on written authorization from 42 other shareholders owning in excess of 145,000 shares which constituted more than 5% of the company's stock; that he and his associates had been endeavoring to get the Studebaker management to agree to certain changes in its board of directors and had announced their intention to solicit proxies for the forthcoming annual meeting if the request was not met; and that when these talks had broken down, he had requested access to the stockholders list and had been refused.

Studebaker's affidavit and subsequent complaint allege that Gittlin obtained the authorization from the 42 other stockholders in violation of the Proxy Rules issued by the SEC under § 14(a) of the Securities Exchange Act. Specifically the company contends that Gittlin claimed to be holding the authorizations as early as March 14, and that at that time he had made no filing of proxy material with the SEC. Consequently, Studebaker claims, the authorizations were necessarily obtained in violation of Rules 14a-3 and 14a-6, the former prohibiting solicitation in the absence of a proxy statement containing specified information and the latter requiring that preliminary copies of the proxy material be filed with the SEC at least ten days prior to the date definitive copies of such material are first sent or given to security holders unless the Commission authorizes a shorter period. Finding these allegations to be sustained, Judge Cannella enjoined use of the authorizations in the state court proceeding.

Gittlin attacks the injunction on a number of grounds, in addition to the one on which we have already passed. He challenges Studebaker's standing to enjoin violation of the Proxy Rules by a stockholder, contends that the Rules do not include authorizations for the limited purpose of exercising a right of inspection provided by state law, argues that the order violated the anti-injunction statute, 28 U.S.C. § 2283, and urges finally that Studebaker's application was wanting in equity because no showing had been made of irreparable harm.

The first point rests on the statement in Howard v. Furst, 238 F.2d 790, 793 (2 Cir.1956), cert. denied, 353 U.S. 937, 77 S. Ct. 814, 1 L. Ed. 2d 759 (1957):

"We find nothing in the language of Section 14(a) or in the legislative history of the Securities Exchange Act of 1934 to warrant an inference that it was the intention of the Congress to create any rights whatever in a corporation whose stockholders may be solicited by proxy statements prepared in contravention of the statutory mandate."

That decision has been criticized both at the time and since, see 70 Harv.L.Rev. 1493 (1957); 45 Calif.L.Rev. 186 (1957); 2 Loss, Securities Regulation 949-950 (1961). In Brown v. Bullock, 294 F.2d 415, 422 (2 Cir.1961) (concurring opinion), Judge Clark expressed his expectation that "some day we shall have to disavow" it. The day for substantial disavowal came when the Supreme Court decided J. I. Case Co. v. Borak, 377 U.S. 426, 431, 84 S. Ct. 1555, 12 L. Ed. 2d 423 (1964), clearly overruling Howard on the precise point decided, the ability of a stockholder to assert in federal court a derivative claim of harm to the corporation from a transaction proposed in an allegedly misleading proxy statement. If § 27 of the Securities Exchange Act authorizes a stockholder to assert such a claim on the corporation's behalf, as held in Borak, it must also authorize the corporation to do so on its own. The only possible area left for Howard would thus be in cases such as this in which the corporation sought relief against unlawful proxy solicitation where no transaction damaging to the corporation is proposed and the struggle, at least on the surface, is simply for control. Any such principle would necessarily rest on a view of the Securities Exchange Act as contemplating that in such contests for control the corporation, as represented by its management, should maintain a posture of strict neutrality. But the legislative history shows 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), quoted in 2 Loss, supra at 950, and the Proxy Rules are shot through with provisions recognizing that in contests for control the management has a role to play as such and not merely insofar as the managers are stockholders. Moreover, it is common knowledge that a contest for control may be only the prelude to an arguably damaging transaction to be carried out by the winner with the aid of the corporate proxy machinery or even without further stockholder vote. With Howard overruled by the Supreme Court in its actual holding, we see no reason for endeavoring to maintain such peripheral existence for it.

The contention most heavily pressed is that § 14(a) of the Securities Exchange Act does not include authorizations for the limited purpose of qualifying under a state statute permitting the holders of a given percentage of shares to obtain inspection of a stockholders list.*fn1 The statute is worded about as broadly as possible, forbidding any person "to solicit any proxy or consent or authorization" in respect of any security therein specified "in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors"; the definitions in the Proxy Rules, 14a-1, exhaust the sweep of the power thus conferred. The assistant general counsel of the SEC, which responded to our request for its views with promptness and definitude, stated at the argument that the Commission believes § 14(a) should be construed, in all its literal breadth, to include authorizations to inspect stockholders lists, even in cases where obtaining the authorizations was not a step in a planned solicitation of proxies.*fn2

We need not go that far to uphold the order of the district court. In SEC v. Okin, 132 F.2d 784 (2 Cir.1943), this court ruled that a letter which did not request the giving of any authorization was subject to the Proxy Rules if it was part of "a continuous plan" intended to end in solicitation and to prepare the way for success. This was the avowed purpose of Gittlin's demand for inspection of the stockholders list and, necessarily, for his soliciting authorizations sufficient to aggregate the 5% of the stock required by § 1315 of New York's Business Corporation Law. Presumably the stockholders who gave authorizations were told something and, as Judge L. Hand said in Okin, "one need only spread the misinformation adequately before beginning to solicit, and the Commission would be powerless to protect shareholders." 132 F.2d at 786. Moreover, the very fact that a copy of the stockholders list is a valuable instrument to a person seeking to gain control, see fn. 1, is a good reason for insuring that shareholders have full information before they aid its procurement. We see no reason why, in such a case, the words of the Act should be denied their literal meaning. Cf. Halsted v. SEC, 86 U.S.App.D.C. 352, 182 F.2d 660, 664, cert. denied, 340 U.S. 834, 71 S. Ct. 68, 95 L. Ed. 612 (1950); Aranow and Einhorn, Proxy Contests for Corporate Control 70, n. 91 (1957).

A far more difficult question is raised by the anti-injunction statute, 28 U.S.C. § 2283, which forbids a federal court to grant "an injunction to stay proceedings in a State court except as expressly authorized by Act of Congress, or where necessary in aid of its jurisdiction, or to protect or effectuate its judgments." Judge Cannella dealt quite summarily with this, saying only that his "decision is not violative of 28 U.S.C. § 2283, and does not restrict the state court in any manner." If this implies that the statutory bar is avoided by directing the injunction solely to a party as distinguished from the state court, it runs counter to settled doctrine. Oklahoma Packing Co. v. Oklahoma Gas & Elec. Co., 309 U.S. 4, 9, 60 S. Ct. 215, 84 L. Ed. 537 (1940); H. J. Heinz Co. v. Owens, 189 F.2d 505, 507 (9 Cir.1951), cert. denied, 342 U.S. 905, 72 S. Ct. 294, 96 L. Ed. 677 (1952); Furnish v. Board of Medical Examiners, 257 F.2d 520, 523 (9 Cir.), cert. denied, 358 U.S. 882, 79 S. Ct. 123, 3 L. Ed. 2d 111 (1958). Studebaker's position before us was rather that the order was not within the prohibition since it merely enjoined use of the authorizations, leaving Gittlin free to prosecute his New York action on other grounds.*fn3 We do not find this persuasive; § 2283 forbids any federal injunction substantially interfering with the prosecution of a pending state proceeding unless an exception applies. See Hill v. Martin, 296 U.S. 393, 403, 56 S. Ct. 278, 80 L. Ed. 293 (1935); Sperry Rand Corp. v. Rothlein, 288 F.2d 245, 247-248 (2 Cir.1961); cf. Stefanelli v. Minard, 342 U.S. 117, 72 S. Ct. 118, 96 L. Ed. 138 (1951); Pugach v. Dollinger, 277 F.2d 739, 742-743 (2 Cir.1960), aff'd, 365, U.S. 458, 365 U.S. 458, 81 S. Ct. 650, 5 L. Ed. 2d 678 (1961). The question thus becomes whether the injunction issued by the district court came within one of the exceptions recognized by the statute.

The phrase "except as expressly authorized by Act of Congress" was, according to the Reviser's Note accompanying § 2283, intended "to cover all exceptions" derived from federal statutes. In Amalgamated Clothing Workers v. Richman Bros. Co., 348 U.S. 511, 516, 75 S. Ct. 452, 99 L. Ed. 600 (1955), the Supreme Court declared that "no prescribed formula is required; an authorization need not expressly refer to § 2283." Beyond this, exactly what is required by the statutory term is unclear; the courts are left to bear the burden of uncertainty in construing language widely recognized to be "unfortunate" to say the least. See Wright, Federal Courts 154-156 (1963); Note, 74 Harv.L.Rev. 726, 737 (1961). A case does not fall within the statutory exception merely because another federal statute permits injunctive relief in general terms. See Baines v. City of Danville, 337 F.2d 579 (4 Cir.1964), cert. denied, 381 U.S. 939, 85 S. Ct. 1772, 14 L. Ed. 2d 702 (1965) (Civil Rights Act, 42 U.S.C. § 1983).*fn4 On the other hand, in holding that § 2283 was not intended to restrict relief available to the United States itself, the Supreme Court has recognized that the policy of the anti-injunction statute "is much more compelling when it is the litigation of private parties which threatens to draw the two judicial systems into conflict than when it is the United States which seeks a stay to prevent threatened irreparable injury to a national interest," Leiter Minerals, Inc. v. United States, 352 U.S. 220, 225-226, 77 S. Ct. 287, 291, 1 L. Ed. 2d 267 (1957). In Bowles v. Willingham, 321 U.S. 503, 510, 64 S. Ct. 641, 88 L. Ed. 892 (1944), the Supreme Court held the predecessor of § 2283 to have been impliedly amended by § 205(a) of the Emergency Price Control Act of 1942, 56 Stat. 33, authorizing the Price Administrator to seek injunctive relief against acts or practices in violation of the statute. That the decision rested on the grant of broad injunctive power to a federal agency rather than simply the exclusive federal jurisdiction of the subject there in question was underlined in a subsequent case where the Court declared that, although jurisdiction in ...

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