The opinion of the court was delivered by: LEVAL
This is a motion by the defendants J. P. Stevens & Co., Inc. ("Stevens") and thirteen of its directors to dismiss the complaint for failure to state a claim upon which relief may be granted, Rule 12(b)(6), F.R.Civ.P.
Stevens, a Delaware corporation with its principal place of business in New York, is registered with the Securities and Exchange Commission pursuant to § 12 of the Securities and Exchange Act of 1934, 15 U.S.C. § 78L. The thirteen individual defendants have all served as Stevens' directors from at least 1976 to the time of the filing of plaintiffs' amended complaints in April of 1978, with the exception of defendant Mitchell whose directorship terminated in March, 1978.
Plaintiff Amalgamated Clothing and Textile Workers Union, AFL-CIO ("ACTWU") and intervenor Seafarers International Union of North America, Atlantic, Gulf Lakes and Inland Waters District, AFL-CIO ("Seafarers"), are holders of 12 and 200 shares, respectively, of the common stock of Stevens.
Alleging violations of § 14(a) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78n(a) and Rule 14a-9, 17 C.F.R. § 240.14a-9, plaintiffs seek a broad variety of relief, including setting aside the most recent election of directors, invalidating shareholders' votes on six shareholder proposals, enjoining the filing and dissemination of annual reports, other reports and proxy materials without court approval, enjoining the omission of material facts concerning Stevens' labor policies from its proxy materials, and enjoining violation of the federal labor laws.
The central allegation of the lengthy complaints is the claim that the elections of Stevens' directors from 1972 through 1978 are invalid and that the recent election should be set aside because the company's proxy solicitations falsely stated "that all nominees for the Board of Directors were qualified to serve as fiduciaries" and omitted to state that the nominees "either knowingly and willfully participated in a concerted effort to thwart the labor laws of this country . . . or failed to perform their responsibilities as fiduciaries by insuring that management did not engage in such practices," and that as a result "these directors have caused the Company needlessly to expend large sums of money, have harmed the goodwill and reputation of the Company, and have placed the Company in a position where it stands to suffer continuing significant economic harm in the future" (ACTWU Amended Complaint PP 64, 65, 71, 72, 88, 89; Seafarers Amended Complaint PP 54, 55, 70, 71).
Additionally, plaintiffs allege that the 1978 election was tainted because the proxy materials failed to disclose the pendency of this lawsuit and because the proxy materials stated that two of the nominees, James D. Finley and David W. Mitchell, were directors of Manufacturers Hanover Trust Company without adding that they "would not be continuing as directors thereof as a result of Stevens' labor policies and practices" (ACTWU Amended Complaint PP 89(c), 89(d); Seafarers Amended Complaint PP 71(c), 71(d)).
The unions also allege proxy rule violations in statements made by Stevens in response to shareholder proposals submitted at the 1976, 1977 and 1978 annual meetings. The 1976 shareholder proposal recommended that the Stevens Board appoint a committee of outside directors to study and report to shareholders on the costs of Stevens' then current labor disputes. The 1977 proposal requested the Board to report to shareholders on Stevens' labor policies and practices. Three 1978 proposals requested a Board report to shareholders on the company's labor policies and practices, the impact of the company's labor-management policies on the economic performance of the company's stock, and on employee occupational safety and health. A fourth 1978 proposal asked the Board to establish a review committee to advise on management-employee relations. Each of these proposals was overwhelmingly defeated. The complaint alleges that management's statements addressed to these proposals were misleading essentially for failure to include the same kinds of information which plaintiffs contend should have been included in the proxy statements.
Section 14(a) of the 1934 Act prohibits solicitation of proxies "in contravention of such rules and regulations as the Commission may prescribe . . . ." Rule 14a-9 prohibits solicitation by means of a proxy statement which contains "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 make the statements therein not false or misleading. . . . " Under the Supreme Court's decision in TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 96 S. Ct. 2126, 48 L. Ed. 2d 757 (1976), "an omitted fact (or a misrepresentation) is material if there is substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote." 426 U.S. at 449, 96 S. Ct. at 2132.
Plaintiffs contend that the proxy rule requires in connection with the election of directors the disclosure of Stevens' alleged corporate policy to "thwart", "resist", and "abuse" the federal labor laws as well as alleged expenses (primarily legal fees) resulting from such policies. Plaintiffs do not dispute that Stevens has disclosed the various labor litigation in which it has been involved and the specific findings of labor law violations. Rather, disclosure is sought of the corporate Policy to Thwart the labor laws in substance the aims and intentions of the Stevens board with respect to a body of law.
I conclude for at least two reasons that the proxy rule does not require disclosures of this type.
The first reason turns on a distinction recently emphasized by the Court of Appeals in Maldonado v. Flynn, 597 F.2d 789 (2d Cir. 1979). There, finding that the pleadings stated an actionable omission from proxy statements, the Second Circuit underlined that the omissions pertained to alleged breaches of the officer-directors' fiduciary duties to the corporation rather than challenges to their judgment, or even integrity, in making decisions for the benefit of the corporation. The decision explicitly distinguishes matters impugning the loyalty and honesty of directors "in their dealings with the corporation to which they owe a fiduciary duty", Id. at 796, as to which disclosure is required because of the stockholders' special interest in the loyalty of their directors, from transactions "intended for the corporation's benefit", including "illegal foreign payments" and questions as to the "legality of transactions approved by the board." Claims of the latter type were characterized as of the type which courts "have consistently . . . rejected" when litigants sought "to dress (them) up . . . in a § 14(a) suit of clothes . . . ."
I do not read Maldonado v. Flynn as meaning that instances of illegal or immoral conduct are never required to be included in proxy materials unless they relate to self-dealing; nor do I mean to imply so rigid a rule. There are clearly instances of illegal conduct by director-nominees, unrelated to self-dealing, which would have to be disclosed, especially where they involved criminal convictions. See Item 3(f) of Regulation S-K, 17 C.F.R. § 229.20; SEC v. Freeman, (1978) Fed.Sec.L.Rep. (CCH) P 96,361 at 93,244 (N.D.Ill.1978); Chris-Craft Industries, Inc. v. Independent Stockholders Committee, 354 F. Supp. ...