UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK
July 12, 1985
IRA L. MENDELL, on behalf of himself and others similarly situated, Plaintiff, v GEORGE E. GREENBERG, FREDERICK R. ADLER, JAMES R. SWARTZ, ANITA LOEHMANN STAFFORD, DONALD H. BALLEISEN, ALLAN S. GORDON, CHRISTOPHER D. ILLICK, CECILY C. SELBY, KENNETH J. THORNHILL, JOHN D. MACK, AEA INVESTORS INC., LHI INC., LH INVESTORS INC., LH HOLDINGS INC., LOEHMANN'S INC., and DREXEL BURNHAM LAMBERT INCORPORATED, Defendants.
The opinion of the court was delivered by: SPRIZZO
OPINION AND ORDER
SPRIZZO, D.J. :
Plaintiff Ira L. Mendell owned common stock of defendant Loehmann's Inc. ("Loehmann's") in 1981 when Loehmann's merged with a company organized and controlled by defendant AEA Investors Inc. ("AEA").
Pursuant to the merger, Loehmann's common stockholders received $31.30 in cash for each share of common stock. Plaintiff alleges in his Amended and Supplemental Complaint ("Complaint") that shareholder approval of the merger was obtained in violation of section 14(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78n(a), Rule 14a-9, 17 C.F.R. § 240.14a-9, and common law.
Defendants have moved to dismiss the complaint pursuant to Fed. R. Civ. P. 12(b)(6). The parties submitted, and the Court has considered, matters outside the pleadings, and after oral argument the Court gave plaintiff an opportunity to submit any further information he had to support the allegations of his complaint. Therefore, the motion is treated as one for summary judgment. See Fed. R. Civ. P. 12(b).
Section 14(a) proscribes, inter alia, solicitation of proxies in contravention of the rules and regulations promulgated by the Securities and Exchange Commission. Rule 14a-9 provides, inter alia :
(a) No solicitation subject to this regulation shall be made by means of any proxy statement . . . containing any statement which, at the time in the light of the circumstances under which it is made, is false or mis- leading 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 . . . .
17 C.F.R. § 240.14a-9(a). Plaintiff alleges that a proxy statement dated December 9, 1980 (the "proxy statement") and issued with respect to the merger was false and misleading due to the omission of material facts which, if disclosed, would have indicated that Loehmann's common stock was worth more than $31.30 per share.
Liability for nondisclosure under section 14(a) and Rule 14a-9 requires (1) omission of a material fact necessary in order to make the proxy statement not false or misleading; (2) omission as the result of knowing, reckless or negligent conduct; and (3) that the proxy solicitation was an essential link in effecting the proposed corporate action. See, e.g., Halpern v. Armstrong, 491 F. Supp. 365, 378 (S.D.N.Y. 1980); Berkman v. Rust Craft Greeting Cards, Inc., 454 F. Supp. 787, 791 (S.D.N.Y. 1978).
As a preliminary matter, the parties agree, and the Court will assume for purposes of this motion, that negligent conduct may be the predicate for liability. See, e.g., Gruss v. Curtis Publishing Co., 534 F.2d 1396, 1403 (2d Cir.), cert. denied, 429 U.S. 887, 50 L. Ed. 2d 168, 97 S. Ct. 240 (1976); Gerstle v. Gamble-Skogmo, Inc., 478 F.2d 1281, 1300-01 (2d Cir. 1973); Management Assistance Inc. v. Edelman, 584 F. Supp. 1021, 1028 (S.D.N.Y. 1984); Richland v. Crandall, 262 F. Supp. 538, 553 n.12 (S.D.N.Y. 1967).
The parties disagree, however, as to whether the defendants were required to disclose the omitted facts in order to make the proxy statement not false or misleading, and whether those facts were material.
The purpose of section 14(a) is to provide full and fair disclosure from which shareholders may draw their own inferences and make their decisions on how to vote. See, e.g., Mills v. Electric Auto-Lite Co., 396 U.S. 375, 381, 24 L. Ed. 2d 593, 90 S. Ct. 616 (1970); J.I. Case Co. v. Borak, 377 U.S. 426, 431, 12 L. Ed. 2d 423, 84 S. Ct. 1555 (1964); cf. TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 448, 48 L. Ed. 2d 757, 96 S. Ct. 2126 (1976). Therefore, proxy materials need not be perfect, but must simply convey a "sufficiently accurate picture so as not to mislead." See Kennecott Copper Corp. v. Curtiss-Wright Corp., 584 F.2d 1195, 1200 (2d Cir. 1978) (citing Crane Co. v. Westinghouse Air Brake Co., 419 F.2d 787, 800 (2d Cir. 1969), cert. denied, 400 U.S. 822, 27 L. Ed. 2d 50, 91 S. Ct. 41 (1970)); see also Management Assistance, supra, 584 F. Supp. at 1027.
An omitted fact is material when there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote, see e.g., TSC Industries, supra, 426 U.S. at 449, which requires a showing of "a substantial likelihood that, under all the circumstances, the omitted fact would have assumed actual significance in the deliberations of the reasonable shareholder . . . [or] that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the 'total mix' of information made available." Id. (footnote omitted). Materiality is a mixed question of law and fact as to which summary judgment may be granted only where reasonable minds could not differ on the issue. Id. at 450; see also GAF Corp. v. Heyman, 724 F.2d 727, 737 (2d Cir. 1983); Seibert v. Sperry Rand Corp., 586 F.2d 949, 951, 952 (2d Cir. 1978).
Most of the allegations of the complaint are legally insufficient because they concern information which defendants were not legally required to disclose. With respect to a few claims, however, the Court cannot say as a matter of law either that the facts alleged were not required to be disclosed or that the omissions were not material.
1. Loehman's store leases
Plaintiff claims that store leases held by Loehmann's, which were listed on the company's balance sheets as liabilities in the aggregate amount of rent due, were actually valuable assets worth millions of dollars, and that since the "value" of these leases was not reflected in book value, defendants' failure to list them as assets or to note that they were undervalued was a misleading and material omission.
Plaintiff's argument that the proxy statement failed to disclose adequate information with respect to the value of the leases is incorrect. The proxy statement described the leases and disclosed all of the information which plaintiff claims made them valuable.
Shareholders could decide from those facts whether or not the offered price adequately reflected the "value" of the leases, especially since Loehmann's stock was traded on a reliable national market and the value of the company's assets was adequately reflected in the market value. See, e.g., In re New York, New Haven and Hartford Railroad Co. v. Smith, 632 F.2d 955, 962-63 (2d Cir.), cert. denied, 449 U.S. 1062, 101 S. Ct. 786, 66 L. Ed. 2d 605 (1980); Seaboard World Airlines, Inc. v. Tiger International, Inc., 600 F.2d 355, 361-62 (2d Cir. 1979); Pavlidis v. New England Patriots Football Club, Inc., 737 F.2d 1227, 1234 (1st Cir. 1984); South Coast Services Corp. v. Santa Ana Valley Irrigation Co., 669 F.2d 1265, 1271 (9th Cir. 1982); Gerrity v. Chapin, [1979-80 Transfer Binder]Fed. Sec. L. Rep. (CCH) [P] 97,241, at 96,717 (S.D.N.Y. Jan. 9, 1980); Jones v. National Distillers & Chemical Corp., 484 F. Supp. 679, 683 (S.D.N.Y. 1979); see also Gerstle, supra, 478 F.2d 1281.
Plaintiff also has cited no authority for his argument that some type of assessment of the commercial value of the leases or a general statement that the leases were undervalued was required. The fact that defendants may have told AEA that Loehmann's held "valuable" leases does not create a legal obligation to make the same statement to shareholders. See, e.g., Flynn v. Bass Brothers Enterprises, Inc., 744 F.2d 978, 986 n.12 (3d Cir. 1984); South Coast Services, supra, 669 F.2d at 1272 n.4; In re Brown Company Securities Litigation, 355 F. Supp. 574, 584 (S.D.N.Y. 1973); cf. Kohn v. American Metal Climax, Inc., 458 F.2d 255, 265 (3d Cir.), cert. denied, 409 U.S. 874, 93 S. Ct. 120, 34 L. Ed. 2d 126 (1972).
It follows that since the investors were not misled as to the general nature and terms of the leases, no further disclosure or opinion as to their value was necessary.
2. Loehmann's future prospects and financial projections
Plaintiff's claim that it was a material and misleading omission to fail to disclose certain information regarding Loehmann's projected sales figures and its position in the retail industry,
is likewise legally insufficient.
Neither the SEC nor the Second Circuit have required that financial projections be included in proxy materials. See, e.g., Gerstle, supra, 478 F.2d at 1292; Flum Partners v. Child World Inc., 557 F. Supp. 492, 499 (S.D.N.Y. 1983); Lewis v. Oppenheimer & Co., 481 F. Supp. 1199, 1208 (S.D.N.Y. 1979); cf. Rodman v. Grant Foundation, 608 F.2d 64, 72 (2d Cir. 1979); Billard v. Rockwell International Corp., 526 F. Supp. 218, 221 (S.D.N.Y. 1981), aff'd, 683 F.2d 51 (2d Cir. 1982); Straus v. Holiday Inns, Inc., 460 F. Supp. 729, 734 (S.D.N.Y. 1978).
Moreover, plaintiff must do more than simply state generally that SEC requirements establish a minimum standard for disclosure which is not necessarily exhaustive in every case, without indicating why future prospects or projections had to be contained in order to render this particular proxy statement not misleading. Similarly, as noted above with respect to the leases, it is also insufficient to merely allege that projections were given to AEA in connection with merger negotiations. Cf. Flynn, supra, 744 F.2d at 986 n.12; South Coast Services, supra, 669 F.2d at 1272 n.4; Kohn, supra, 458 F.2d at 265; In re Brown, supra, 355 F. Supp. at 584.
The Court also rejects plaintiff's claim that defendants were required to point out, in addition to all the information contained in the proxy statement, that Loehmann's was in an "attractive" or "rapid growth segment" of the industry. It is well settled that a proxy statement need not characterize disclosed information. See, e.g., Gulf & Western Industries, Inc. v. Great Atlantic & Pacific Tea Co., 476 F.2d 687, 697 (2d Cir. 1973) (quoting SEC v. Texas Gulf Superior Co., 401 F.2d 833, 848-49 (2d Cir. 1968) (en banc), cert. denied, 394 U.S. 976, 89 S. Ct. 1454, 22 L. Ed. 2d 756 (1969)); Koppel v. Wien, 575 F. Supp. 960, 968 (S.D.N.Y. 1983), rev'd on other grounds 743 F.2d 129 (2d Cir. 1984); cf. Goldberg v. Meridor, 567 F.2d 209, 218 n.8 (2d Cir. 1977), cert. denied, 434 U.S. 1069, 55 L. Ed. 2d 771, 98 S. Ct. 1249 (1978). Nor does the law require inclusion of statements which are implicit or self-evident, see, e.g., Management Assistance, supra, 584 F. Supp. at 1027; Klamberg v. Roth, 473 F. Supp. 544, 551 (S.D.N.Y. 1979), or information as to which shareholders have access equal to that of defendants, or of which shareholders should already be aware. See, e.g., Rodman, supra, 608 F.2d at 70; Seibert, supra, 586 F.2d at 952; Klamberg, supra, 473 F. Supp. at 552.
Finally, it is clear that in order to not be misleading the proxy materials were not required to state that five unrelated retailers had been sold for premiums over the market price in unrelated transactions. See, e.g., Flum Partners, supra, 557 F. Supp. at 498-99; cf. Koppel, supra, 575 F. Supp. at 968-69. The fact that other transactions might have been negotiated on terms plaintiff may have found more favorable is irrelevant. See, e.g., Koppel, supra, 575 F. Supp. at 968-69; cf. South Coast Services, supra, 669 F.2d at 1273-74; Halpern, supra, 491 F. Supp. at 380.
3. Fees paid to AEA
The proxy statement disclosed that after the merger it was anticipated that Loehmann's would engage AEA to provide management services for an annual fee of $300,000. See Proxy Statement at 11. Plaintiff alleges that this statement was misleading because it omitted the material fact that these fees were in an amount never before expended and were for "unnecessary services" which Loehmann's had never used in the past. See Complaint at [P] 64.
As noted above, the law does not require that defendants characterize or state conclusions about disclosed facts. See, e.g., Gulf & Western, supra, 476 F.2d at 697; Koppel, supra, 575 F. Supp. at 968; Stein v. Aldrich, [1981-82 Transfer Binder]Fed. Sec. L. Rep. (CCH) [P] 98,778-79 (S.D.N.Y. July 18, 1980); cf. Goldberg, supra, 567 F.2d at 218 n.8; Billard supra, 526 F. Supp. at 221. Nor were defendants required to compare the proposal to past Loehmann's practices. See, e.g., Rodman, supra, 608 F.2d at 72; cf. Goldberger v. Baker, 442 F. Supp. 659, 664-65 (S.D.N.Y. 1977).
Plaintiff also alleges that it was a misleading omission not to state that AEA would obtain a substantial interest in Loehmann's for little or no consideration, and that this fact, combined with the management fees, a finder's fee to be paid to AEA, and fees paid to Drexel, "substantially reduced" the price paid to shareholders. See Complaint at [P][P] 65-66. The underlying facts of the transaction including consideration, AEA's interests, and all the anticipated fees, were fully disclosed. Each shareholder could come to his own conclusions regarding fairness and the effect on price. The securities laws require no more. See, e.g., Gulf & Western, supra, 476 F.2d at 697; Management Assistance, supra, 584 F. Supp. at 1027; Koppel, supra, 575 F. Supp. at 968; Klamberg, supra, 473 F. Supp. at 551-52; Nemo v. Allen, 466 F. Supp. 192, 195 (S.D.N.Y 1979).
4. Claims against Drexel
Plaintiff contends that (1) Drexel violated section 14(a) by permitting the use of its name to solicit proxies, and (2) Drexel's opinion with respect to the fairness of the merger price from a financial point of view was materially false and misleading.
Plaintiff does not claim that Drexel actually solicited any proxies, but only that it permitted the use of its name to solicit proxies. To establish liability where there is no active participation in the solicitation effort, there must be a substantial connection between the use of Drexel's name and the solicitation effort. See, e.g., SEC v. Falstaff Brewing Corp., 203 U.S. App. D.C. 28, 629 F.2d 62, 68 (D.C. Cir.), cert. denied, 449 U.S. 1012, 101 S. Ct. 569, 66 L. Ed. 2d 471 (1980); Yamamoto v. Omiya, 564 F.2d 1319, 1323 (9th Cir. 1977); Lewis v. Byrnes, 538 F. Supp. 1221, 1224 (S.D.N.Y. 1982). The cases cited by plaintiff finding liability with respect to those who did not actively solicit but who permitted use of their name to solicit proxies all involved a party to the transaction who would directly benefit by the shareholders' favorable vote, for example by taking control of the corporation or becoming a director. See, e.g., Falstaff, supra, 629 F.2d at 69; Lewis, supra, 538 F. Supp. at 1224. This is not the case with respect to Drexel.
Moreover, the fact that Drexel may have participated in drafting the proxy statement, as plaintiff alleges, is insufficient to constitute a solicitation. See, e.g., Browning Debenture Holders' Committee v. Dasa Corp., 72 Civ. 1332, slip op. at 4 (S.D.N.Y April 18, 1975), aff'd, 560 F.2d 1078 (2d Cir. 1977); Gould v. American Hawaiian Steamship Co., 351 F. Supp. 853, 865 (D.Del. 1972). Therefore, the Court sees no basis for finding Drexel liable under section 14(a) for permitting use of its name to solicit proxies. Since plaintiff does not allege that Drexel directly solicited any proxies or was a party to such solicitations, any claim of liability as a principal against Drexel is legally insufficient. See, e.g., Iroquois Industries, Inc. v. Syracuse China Corp., 417 F.2d 963, 970 (2d Cir. 1969), cert. denied, 399 U.S. 909, 26 L. Ed. 2d 561, 90 S. Ct. 2199 (1970); Robbins v. Banner Industries, Inc., 285 F. Supp. 758, 761-62 (S.D.N.Y. 1966); Osofsky v. Zipf, 78 Civ. 0071 (JMC), slip op. at 10 (S.D.N.Y. May 24, 1983).
Drexel also cannot be sued as an aider and abettor, because plaintiff has failed to allege the requisite scienter. See, e.g., Armstrong v. McAlpin, 699 F.2d 79, 91 (2d Cir. 1983); IIT, An International Investment Trust v. Cornfeld, 619 F.2d 909, 922, 925-27 (2d Cir. 1980); Gould v. American-Hawaiian Steamship Co., 535 F.2d 761, 779-80 (3d Cir. 1976). In fact, plaintiff has expressly stated that he does not charge Drexel with fraudulent or intentional misconduct. See, e.g., Plaintiff's Memorandum of Law in Opposition to Defendants' Motion to Dismiss the Amended and Supplemental Complaint at 33-34; cf. Mendell Disposition at 325-31.
Finally, plaintiff contends that Drexel's fairness opinion was false and misleading because, since Drexel knew all the information allegedly omitted from the proxy statement, it also knew the merger price was inadequate. The Court has already determined that Drexel can not be liable pursuant to section 14(a). Plaintiff has not sued under any other provision, such as section 10(b) of the Securities Exchange Act, 15 U.S.C. § 78j(b), or Rule 10b-5, 17 C.F.R. § 240.10b-5. Indeed, as noted above, plaintiff has expressly stated that he does not charge Drexel with fraud or intentional misconduct, and therefore a claim pursuant to section 10(b) could not stand. See, e.g., Ernst & Ernst v. Hochfelder, 425 U.S. 185, 47 L. Ed. 2d 668, 96 S. Ct. 1375 (1976); Billard v. Rockwell International Corp., 683 F.2d 51, 56-57 (2d Cir. 1982). It follows, therefore, that Drexel is entitled to dismissal of all claims against it.
5. Motivation of Loehmann family shareholders
Plaintiff alleges that at the time of the merger the Loehmann family shareholders had to make a prompt sale of their Loehmann's stock, with price being relatively unimportant, because, inter alia, they urgently needed to raise money to pay estate taxes. See Complaint at [P] [P] 46, 47, 49.
Plaintiff contends that this plead the Loehmann family in conflict with the interests of other shareholders, and that the failure to disclose these personal motivations was a misleading and material omission.
A proxy statement need not set forth subjective motivations underlying the vote of a director or controlling shareholder as long as all the material facts regarding their personal interests are disclosed. See, e.g., Rodman, supra, 608 F.2d at 71; Crane Co. v. Westinghouse Air Brake Co., 419 F.2d 787, 803 (2d Cir. 1969), cert. denied, 400 U.S. 822, 27 L. Ed. 2d 50, 91 S. Ct. 41 (1970); Koppel, supra, 575 F. Supp. at 967; Gluck v. Agemian, 495 F. Supp. 1209, 1214-15 (S.D.N.Y. 1980); Lewis, supra, 481 F. Supp. at 1204; cf. Data Probe Acquisition Corp. v. Datatab, Inc., 722 F.2d 1, 5 (2d Cir. 1983), cert. denied, 465 U.S. 1052, 104 S. Ct. 1326, 79 L. Ed. 2d 722 (1984); SEC v. Parklane Hosiery Co., 558 F.2d 1083, 1086 (2d Cir. 1977).
It seems clear from the information contained in the proxy statement that the Loehmann family had their own interests and reasons for voting in favor of the merger. The proxy statement disclosed, inter alia, that their decision to sell coincided with the deaths of Charles Loehmann, company founder, and his wife, and explained how the family's efforts to find an opportunity to dispose of their stock led to the merger proposal. However, the Court cannot say as a matter of law that disclosure of the particular facts regarding estate tax liability was not necessary in order to make the proxy statement not misleading, or that there is no genuine issue as to whether those facts would have been material to a reasonable shareholder. Cf. SEC v. Parklane Hosiery, supra, 558 F.2d 1083. While a jury may well determine this information would not have significantly altered the total mix of information available, the issue must be left to a jury to decide.
6. AEA's alleged agreements with Greenberg and Alder
Plaintiff alleges that the proxy statement should have disclosed that AEA had an informal, "handshake" agreement with defendant Greenberg regarding an increase in his compensation after the merger, see Complaint at [P] 67, and an agreement with defendant Adler that his law firm would remain counsel to Loehmann's after the merger. See id. at [P] 63. Defendants contend that, because the proxy statement disclosed that these agreements were expected to be made after the merger, omission of the fact that they were already made, if true, would not render the proxy statement false of misleading, and would not be material.
The law provides that shareholders are entitled to disclosure of all the material facts regarding the interests of an benefits to management and directors pursuant to a proposed transaction. See, e.g., Lewis, supra, 481 F. Supp. at 1203-04; cf. Data Probe Acquisition Corp., supra, 722 F.2d at 5. The Court agrees with plaintiff that the failure to reveal an actual agreement with Greenberg or Alder might be false and misleading, and that a jury might find this omission to be material.
However, as defendants correctly note, plaintiff has failed to set forth adequate facts that the agreements he alleges actually existed, and these allegations are thus properly subject to dismissal. They may also be subject to sanctions pursuant to Fed. R. Civ. P. 11.
Were this the only issue remaining in the case, the Court would feel constrained to grant the defendants' motion. However, given that discovery will proceed on the allegations regarding estate tax liability discussed above, the Court will permit these allegations to stand as well, so that the Court can determine with finality the merits of these claims.
All claims against defendant Drexel are dismissed. With respect to the other defendants, the complaint is dismissed as legally insufficient, with the exception of (1) the allegations regarding the Loehmann family's estate tax obligations, and (2) the allegations concerning AEA's agreements with defendants Greenberg and Alder. The motions are denied with respect to those allegations as they may present issues of fact that must be determined at trial.
The parties shall complete all discovery regarding the remaining claims on or before October 31, 1985. A Pre-Trial Order shall be prepared in accordance with the Court's directions and shall be filed on or before November 30, 1985. All parties shall be ready for trial on January 1, 1986, and thereafter counsel for all parties shall be prepared to proceed to trial on twenty-fours hours' notice by the Court. A Pre-Trial Conference shall be held on November 15, 1985 at 10:00 A.M.
It is SO ORDERED.