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May 12, 1986


The opinion of the court was delivered by: CARTER



Plaintiff The New York City Employees' Retirement System ("NYCERS") has moved by an Order to Show Cause for a preliminary injunction requiring American Brands, Inc. ("Brands") to include in management's proxy solicitation materials for the May 23, 1986 annual meeting of shareholders, plaintiff shareholder's proposed implementation of the MacBride Principles: guidelines for equal employment practices by Brands' Northern Ireland subsidiary. Plaintiff seeks to bar Brands from soliciting proxies at the annual meeting unless it makes a supplemental mailing to solicit proxies for plaintiff's proposal that the MacBride Principles be adopted by its Northern Ireland subsidiary. *fn1"

 At the May 2, 1986 hearing on the motion, Brands appeared and argued that certain portions of the shareholder proposal violated Northern Ireland law, and hence were properly excludable under The Security Exchange Commission ("SEC") Rule 14a-8(c)(2), 17 C.F.R. § 240.14a-8(c)(2). That rule permits an issuer of securities to omit from its proxy materials any shareholder proposal which, "if implemented would require the issuer to violate . . . any law of any foreign jurisdiction to which the issuer is subject . . . . "

 Furthermore, Brands argued that NYCERS would suffer no irreparable harm since the court could order a new solicitation of the shareholders on the MacBride issue at a special meeting called for that purpose and that no private right of action should be implied under § 14(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78n(a), for alleged violations of SEC Rule 14a-8 where plaintiff has not exhausted its administrative remedies.

 NYCERS is a pension system organized and existing under the laws of the State and City of New York for the benefit of city employees, which holds equity securities of defendant. On april 11, 1985, the NYCERS Board of Trustees adopted a policy of ensuring that companies in which NYCERS holds equity securities follow fair employment practices in Northern Ireland. This policy instructs Harrison J. Goldin, Comptroller of the City of New York, as custodian of NYCERS' assets, to present shareholder proposals to companies operating in Northern Ireland in which NYCERS invests, requesting that these companies conform to certain fair employment principles. *fn2" Defendant is a Delaware corporation whose wholly-owned subsidiary, Gallaher Limited ("Gallaher") has tobacco factories in Northern Ireland.

 In November 1985, plaintiff and two other shareholders - not parties here - requested that the instant shareholder proposal be included in defendant's proxy solicitation materials for its May 23, 1986 meeting. Defendant, on the advice of its counsel in the United Kingdom that certain of the MacBride Principles would violate United Kingdom law, decided to omit NYCERS' proposal from its proxy materials, citing Rule 14a-8(c)(2), 17 C.F.R. § 240.14a-8(c)(2). Defendant notified the SEC of its decision to exclude NYCERS' proposal from its proxy materials and provided the SEC with a copy of its counsel's opinion, as required by 17 C.F.R. § 240.14a-8(d).

 Although the SEC staff informed Brands on January 30, 1986, that it did not concur in Brand's position that it was entitled to omit NYCERS' proposal from its proxy materials under Rule 14a-8(c)(2), the SEC staff later reversed itself and issued a "no action" letter indicating that it would not recommend any enforcement action to the full commission if defendant omitted NYCERS' proposal from its proxy materials. Goldin Affidavit In Support of Motion for Preliminary Injunction, Exhibit 1.

 The parties failed to reach a settlement, and on April 3, 1986, Brands commenced the mailing of its proxy materials, which excluded NYCERS' proposal. Thereupon, NYCERS instituted this action.

 Plaintiff argues that the SEC's no-action letter does not represent an adjudication of the dispute between NYCERS and defendant and that plaintiff is entitled to bring a private right of action to enforce its shareholder proposal rights under Rule 14a-8 before this court. Secondly, plaintiff asserts that the wrongful exclusion of NYCERS' proposal from defendant's proxy statement would result in irreparable harm to plaintiff, as it would deprive plaintiff of any meaningful opportunity to inform other shareholders about the content of, and reasons for, the shareholder proposal. Lastly, plaintiff argues that its proposal is legal under the law of Northern Ireland, and hence cannot be omitted from defendant's proxy statement on the basis of Rule 14a-8(c)(2).

 The threshold inquiry is whether a private right of action may be instituted for alleged violations of Rule 14a-8. Defendant argues that no such private right of action exists. Although defendant concedes that the United States Supreme Court in J.I. Case Co. v. Borak, 377 U.S. 426, 12 L. Ed. 2d 423, 84 S. Ct. 1555 (1964), recognized an implied private right of action against management under § 14a when the claim involved a misleading statement or omission in proxy materials in violation of rule 14a-9(a), 17 C.F.R. § 240.14a-9, *fn3" defendant posits that an implied right of action under Rule 14a-8 is unnecessary to effectuate Congress' purpose in enacting § 14. I disagree.

 Although the Supreme Court in Borak did not consider whether an implied right of action also exists for alleged violations of 14a-8, it portrayed Congress' enactment of § 14 as breathing life into the idea of corporate democracy:

The purpose of § 14(a) is to prevent management or others from obtaining authorization for corporate action by means of deceptive or inadequate disclosure in proxy solicitation. The section stemmed from the congressional belief that "[f]air corporate suffrage is an important right that should attach to every equity security bought on a public exchange." H.R. Rep. No. 1383, 73rd Cong., 2d Sess., 13. It was intended to "control the conditions under which proxies may be solicited with a view to preventing the recurrence of abuses which . . . [had] frustrated the free exercise of the voting rights of stockholders." Id., at 14. "Too often proxies are solicited without explanation to the stockholder of the real nature of the questions for which authority to cast his vote is sought." S. Rep. No. 792, 73d Cong., 2d Sess., 12.

 J.I. Case Co. v. Borak, supra, 377 U.S. at 431.

 In implying a private right of action in Borak, the Supreme Court emphasized that the SEC examines - in an expedited fashion - over 2,000 proxy statements annually so that "[p]rivate enforcement of the proxy rules provides a necessary supplement to Commission action [since] the possibility of civil damages or injunctive relief serves as a most effective weapon in the enforcement of the proxy requirements." *fn4" J.I. Case Co. v. Borak, supra, 377 U.S. at 432.

 The court takes issue with defendant that the purpose served by Rule 14a-8's shareholder proposal provision is not akin to Rule 14a-9's requirement of full and fair corporate disclosure regarding management proxy materials. since a shareholder may present a proposal at the annual meeting regardless of whether the proposal is included in a proxy solicitation, the corporate circulation of proxy materials which fail to make reference to a shareholder's intention to present a proper proposal at the annual meeting renders the solicitation inherently misleading. Rule 14a-8's requirement that when management solicits proxies from shareholders who will not attend the meeting, it must include all resolutions proposed to it, unless certain conditions are met, is imposed to encourage shareholder democracy and to prevent management from misleading shareholders by failing to inform them of proposals on which management intends to use its proxy. See Medical Committee for Human Rights v. SEC, 139 U.S. App. D.C. 226, 432 F.2d 659, 676-77 (D.C.Cir. 1970), vacated and remanded as moot, 404 U.S. 403, 92 S. Ct. 577, 30 L. Ed. 2d 560 (1972). *fn5"

 Several private actions to enforce Rule 14a-8 have been successfully instituted in this court. Mougios v. W.R. Grace & Co., [1970-71 Decisions]Fed. Sec. L. Rep. (CCH) [P] 93,038 at 90,845-46 (S.D.N.Y. 1971) (Tenney, J.) Brooks v. Standard Oil Co., 308 F. Supp. 810 (S.D.N.Y. 1969) (Lasker, J.); Curtin v. Am. Tel. & Tel. Co., 124 F. Supp. 197 (S.D.N.Y.) (Knox, J.), aff'd per curiam (2d Cir. 1954) (unreported); Peck v. Greyhound Corp., 97 F. Supp. 679 (S.D.N.Y. 1951) (Ryan, J.)

 Although Rauchman v. Mobil Corp., 739 F.2d 205 (6th Cir. 1984), cited by defendant, voices "substantial reservations," the court assumed for the purposes of its decision that an implied private cause of action existed under § 14(a), even when it is premised upon an alleged violation of rule 14a-8, rather than Rule 14a-9, id. at 208, noting at least two other recent Supreme Court decisions which have recognized an implied right of action under § 14(a): TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 48 L. Ed. 2d 757, 96 S. Ct. 2126 (1976); Mills v. Electric AutoLite Co., 396 U.S. 375, 24 L. Ed. 2d 593, 90 S. Ct. 616 (1970).

 Further, the SEC has explicitly indicated that nothing stated in the SEC staff's informal cursory analysis of management's intention to omit shareholder proposals from its proxy materials affects a shareholder's right to institute a private right of action. SEC Release No. 34-12599 at 8 (July 7, 1976) ("the ultimate decision as to whether a shareholder proposal will be omitted from an issuer's proxy materials must made by the management, although, as previously noted, that decision is subject to review by a district court in the event appropriate enforcement action is instituted by either the Commission or the proponent [of the proposal].")

 In this case, the SEC staff attached to its no-action letter a copy of its informal procedures regarding shareholder proposals, which states that the SEC staff's discretionary determination not to recommend enforcement action to the full Commission "does not preclude the proponent from pursuing any rights he may have against the company in a district court should the management omit the proposals from the company's proxy statement." Goldin Affidavit In Support of Motion for Preliminary Injunction, Exhibit 1.

 In light of Borak, and the decisions of this court vindicating a private right of action brought to contest the exclusion of shareholder proposals, we conclude that NYCERS can seek an interpretation of Rule 14a-8 as applied to its particular proposal in this court.

 The standard for issuance of a preliminary injunction in this circuit is the showing of "(a) irreparable harm, and (b) either (1) likelihood of success on the merits or (2) sufficiently serious questions going to the merits to make them a fair ground for litigation and a balance of hardships tipping decidedly toward the party requesting the ...

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