The opinion of the court was delivered by: NEAHER
This civil action for injunctive relief arises out of an ongoing proxy contest for the election of directors of defendant Butler Aviation International, Inc. ("Butler") at the annual meeting of stockholders presently set for December 14, 1971.
Plaintiffs commenced the action by filing their complaint on the afternoon of November 24, 1971, and simultaneously presenting ex parte an order to show cause application to bring on an accelerated motion for a preliminary injunction. The complaint alleged that defendants were soliciting proxies for the stockholders' meeting by the use of false and misleading proxy solicitation material, and also obtaining post-dated proxies, in violation of Section 14(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78n(a), and the Security and Exchange Commission's Proxy Rules 14a-9 and 10, 17 C.F.R. 240.14a-9, 14c-10. Voluminous affidavit and exhibit material was presented in support of the motion.
The imminence of the stockholders' meeting and assurances of plaintiffs' counsel that the defendants would be served as speedily as possible over the Thanksgiving holiday prompted the court to direct a preliminary response by defendants on November 29, 1971. On that date defendants appeared specially to contest jurisdiction over them on the ground of claimed defective service. They withdrew that motion, however, on plaintiffs' agreement that the motion for a preliminary injunction and cross-motions to be made by defendants be heard on answering and replying affidavits and documentary exhibits -- liberally supplied by both sides. Following submission of these papers a lengthy oral argument was held December 6th, supplemented by submission of additional papers and memoranda, the last arriving December 9th.
As a result the court must determine under great pressure of time (1) plaintiffs' motion for a preliminary injunction for the claimed Section 14(a) violations by defendants and post-dated proxies; (2) defendants' cross-motion for the same relief for claimed similar violations by plaintiffs; and (3) defendants' cross-motion challenging the legality of plaintiffs' committee and the validity of proxies obtained by it as a result of plaintiff Dopp's admitted non-compliance with Section 13(d) of the Act, 15 U.S.C. § 78m (d). The court has been aided in this task by the parties' agreement that the documents described in the Appendix hereto, marked Court's Exhibits 1 to 11, inclusive, comprise, broadly speaking, all the respective proxy solicitation material which did or could have come to the attention of Butler's stockholders or some of them. By far the larger bulk of the voluminous documentation submitted consists of papers in other litigation involving one or more of the parties, excerpts from depositions, corporate memoranda and copies of correspondence -- all offered to support the contending claims that the other side's proxy solicitation material (Court Exhs. 1-11) requires immediate injunctive correction and rejection of proxies already obtained thereby.
Some background facts require mention at the outset for purposes of perspective. Butler is a Delaware corporation having its principal office in Englewood Cliffs, New Jersey. Its principal business is aviation sales and service operations at major airports throughout the United States and motor carrier transportation. Butler has 1,068,022 voting shares outstanding, of which 898,022 are shares of common stock. The shares are traded on the American Stock Exchange. Butler's two principal stockholders are plaintiff Paul S. Dopp (see n. 1, supra) and American Electronic Laboratories, Inc. (AEL), one of whose two controlling stockholders is defendant Leon Riebman, who became a director of Butler in 1971. Dopp claims to own beneficially 196,100 shares (18% of outstanding voting securities) and AEL owns beneficially 143,900 shares (14% of outstanding voting securities). Aside from AEL's ownership, the individual defendants (excluding C. Robert Schaeffer), as a management group, own beneficially an aggregate of 18,600 shares, less than 2% of outstanding voting securities.
The election of a board of six directors is the only question before Butler's stockholders at the December 14th meeting. It is also clear that plaintiff Dopp is the spearhead and muscle of the plaintiff "Committee for New Management of Butler Aviation" ("Committee"), composed of Dopp and the other named plaintiffs, which is seeking to unseat the defendant directors. Dopp was the moving party in bringing about the December 14th meeting (Exh. 8, Appendix). The Committee's proxy statement also acknowledges "It is presently contemplated that Mr. Dopp will pay all of the expenses of the Committee's solicitation" -- estimated to amount to approximately $70,000 -- for which reimbursement from Butler will be sought if the Committee elects its candidates. (Id.) It is not surprising, therefore, that management's proxy solicitation material describes in considerable detail and comments strongly about a series of corporate transactions management asserts Dopp initated without authorization when he was board chairman, president and chief executive officer of Butler, and for which he is being sued by Butler in the New Jersey Superior Court to recover some $600,000 of corporate funds claimed to have been wasted or misused for his own personal purposes. (Exh. 6, Appendix.) Plaintiff Committee's proxy statement also describes extensively various lawsuits brought by or against Mr. Dopp relating to Butler, including the aforementioned New Jersey Superior Court action, from which it is clear that Mr. Dopp has entered denials of liability against Butler's claims (Exh. 8, Appendix).
If, as both sides contend, material omissions of fact or false or misleading statements have been made in the proxy solicitation material of either side in violation of S.E.C. Proxy Rule 14a-9(a),
there is standing to maintain a private action for curative injunctive relief upon a proper showing. General Time Corporation v. Talley Industries, Inc., 403 F.2d 159, 161 (2 Cir. 1968).
The focus of inquiry in a case such as this is on the materiality of the claimed omission or false or misleading statements. Although, as pointed out in General Time, supra, "[the] standard of materiality is somewhat more elusive in relation to statements issued in a contested election . . . issuers of such statements should be held to fair accuracy even in the hurly-burly of election contests." 403 F.2d at 162. The same authority defines the test in these terms:
The test [of materiality], we suppose, is whether, taking a properly realistic view, there is a substantial likelihood that the misstatement or omission may have led a stockholder to grant a proxy to the solicitor or to withhold one from the other side, whereas in the absence of this he would have taken a contrary course. Id.
With these principles in mind we turn to the respective motions of the parties.
Rule 14a-9(a) Violations Claimed by Plaintiffs
Plaintiffs' complaint, as supplemented, specifies 15 instances of failures to disclose or false or misleading statements in defendants' proxy solicitation material. On the oral argument, however, plaintiffs' counsel agreed, without conceding total abandonment of the other specifications, that the principal claimed violations were:
1. Defendants' failure to disclose in Butler's proxy statement (Exh. 6, Appendix) that Mr. Dopp, as defendant, had interposed an answer in the New Jersey Superior Court action containing denials and defenses.
2. Defendants' description in Butler's proxy statement (Exh. 6, Appendix) is misleading in making it appear that the series of corporate transactions involved in the New Jersey action are multiple actions rather than a single action.
3. Defendants misrepresented in a press release of November 10, 1971 (Exh. 1, Appendix) the reasons why settlement conferences between management and Mr. Dopp broke off and in fact violated an ...