or other communication, written or oral, containing 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 or necessary to correct any statement in any earlier communication with respect to the solicitation of a proxy for the same meeting or subject matter which has become false or misleading.
The amended complaint claims that both the original proxy statement and the supplemental proxy, issued after plaintiff filed this suit, violates the securities laws. Plaintiff objects to the content of the first mailing which was sent to solicit proxies for the election of four directors of the Progressive Bank on the grounds that this proxy failed to disclose the terms of the Retirement Agreement executed in favor of E. Hale Mayer and its business purpose. A letter supplementing the information in the proxy and containing the terms of the Retirement Agreement was mailed on April 15, 1991, after the filing of this suit, with a new proxy form to be completed by the shareholder. This mailing did not disclose a business purpose for the Agreement either. Plaintiff contends that the second mailing is deficient for failing to disclose a business purpose for this "transaction".
It is well-settled that an omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote. TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449, 96 S. Ct. 2126, 48 L. Ed. 2d 757 (1976); Mendell v. Greenberg, 927 F.2d 667, 673 (2d Cir. 1990), modified, 938 F.2d 1528 (2d Cir. 1991). See also Virginia Bankshares, Inc. v. Sandberg, U.S. , 111 S. Ct. 2749, 2760, 115 L. Ed. 2d 929 (1991). Two proposals were submitted for the Progressive shareholders' consideration; only one, the election of the four directors, has any relationship to the missing information. It is plaintiff's position that the shareholders needed to know the directors' reasons for executing the Retirement Agreement so that in casting their votes, the shareholders understood the directors' view of their fiduciary obligations.
There is no requirement that directors reveal the rationale for a business transaction described in a proxy. "A proxy statement need not disclose the underlying motivations of a director or major shareholder so long as all objective material facts relating to the transaction are disclosed." Mendell, 927 F.2d at 674 (emphasis in original); see Rodman v. Grant Found., 608 F.2d 64, 70-71 (2d Cir. 1979); Lewis v. Potlatch, 716 F. Supp. 807, 809 (S.D.N.Y. 1989). Progressive's Annual Report for 1990 which was mailed to the shareholders along with the original proxy described a bank in precarious financial condition. The supplemental letter revealed all of the important terms of the Retirement Agreement in addition to the terms of Mr. Mayer's Employment Agreement so that comparisons could be made.
Other than revealing their reasons for entering into this agreement, there was nothing more to disclose about the transaction. Any negative inferences regarding the wisdom of this "golden parachute" could easily be drawn by the shareholder from the available information. See Mesh v. Bennett, 481 F. Supp. 904, 905 (S.D.N.Y. 1979) (no violation of § 14(a) because cost of modification to stock purchase plan could have been obtained by the plaintiff by making computation based on information stated in proxy). See also Glazer v. Formica Corp., 964 F.2d 149 (2d Cir. 1992) (failure to disclose initial proceedings in management-led leveraged buyout does not violate Rule 10b-5 where company had previously announced its intent to consider any legitimate proposal to acquire company). If the shareholder believed that the execution of the Retirement Agreement was a business decision which reflected poorly on a particular director, he or she could vote against that director's election. But, the directors were under no duty to disclose their motives, either pure or unclean, so long as all of the information concerning the deal was revealed in the supplemental proxy. "To recognize liability on mere disbelief or undisclosed motive without any demonstration that the proxy statement was false or misleading about its subject would authorize § 14(a) litigation confined solely to . . . the 'impurities' of a director's 'unclean heart'." Virginia Bankshares, 111 S. Ct. at 2759 (citing Stedman v. Storer, 308 F. Supp. 881, 887 (S.D.N.Y. 1969)). "But it is bemusing, and ultimately pointless, to charge that directors perpetrated a 'material omission' when they failed to (a) discover and adjudge faithless motives for their actions and (b) announce such a discovery in reporting the products of their managerial efforts and judgment." Stedman v. Storer, 308 F. Supp. at 887.
If plaintiff had alleged that the directors had abrogated their duty of loyalty to the shareholders because of self-interest,
see Mendell v. Greenberg, 927 F.2d at 674 (substantial estate tax liability of controlling shareholders may be important to shareholders determining whether to endorse sale of the company), or illegal conduct, see Weisberg v. Coastal States Gas Corp., 609 F.2d 650, 654 (2d Cir. 1979) (information concerning bribes and cover-up by management committee may be material to shareholder, requiring inclusion in proxy statement), then a statement of motive might "significantly alter the 'total mix' of information made available" to the shareholder, TSC Indus., 426 U.S. at 449. But the amended complaint contains no such allegations nor has plaintiff come up with anything more than the directors were "buddies" with Mayer. There is no duty to disclose mere mismanagement. In re Meridian Sec. Litig., 772 F. Supp. 223, 228 (E.D. Pa. 1991).
In holding that the plaintiff does not have a claim actionable under § 14(a), we are not passing on the merits of his claims for breach of fiduciary duty or corporate waste. However, a breach of the duties imposed by state corporate law does not give rise to a federal claim so long as the full disclosure as required by Rule 14a-9 has been made. Rodman v. Grant Found., 608 F.2d at 70. See Santa Fe Indus., Inc. v. Green, 430 U.S. 462, 474-80, 97 S. Ct. 1292, 51 L. Ed. 2d 480 (1977) (breach of corporate fiduciary duty does not create a cause of action under Rule 10b-5).
Summary judgment is granted in favor of the defendants on counts 1 and 4 of the complaint.
Under 28 U.S.C. § 1367(c)(3) (1990), the "district courts may decline to exercise supplemental jurisdiction over a [state] claim if the district court has dismissed all claims over which it has original jurisdiction." As a result of our granting summary judgment to the defendant on the § 14(a) claim, there no longer exists a federal question in this suit. Whether to continue hearing the state claims is conferred to our broad discretion. Id.; see Maybee v. Town of Newfield, 789 F. Supp. 86 (N.D.N.Y. 1992).
Under the judge-made doctrine of pendent jurisdiction which was codified in § 1367, the federal courts had the authority to hear state claims which derived from a nucleus of operative fact common to the federal claims. United Mine Workers v. Gibbs, 383 U.S. 715, 725, 16 L. Ed. 2d 218, 86 S. Ct. 1130, (1966). However, when the federal claims were dismissed before trial, it was generally accepted that the state claims must be dismissed as well. Id. at 726; Town of Hartford v. Operation Rescue, 915 F.2d 92, 104 (2d Cir. 1990); Iroquois Indus., Inc. v. Syracuse China Corp., 417 F.2d 963, 970 (2d Cir. 1969). As under § 1367, taking jurisdiction of pendent state claims was vested in the sound discretion of the trial court. Falls Riverway Realty, Inc. v. City of Niagara Falls, 732 F.2d 38, 42 (2d Cir. 1984). Thus, for guidance, we may turn to the body of law governing the retention of jurisdiction over state claims when the federal claim providing the basis for original jurisdiction has been dismissed.
This case was filed fourteen months ago and extensive discovery has been completed. Although there was a federal claim asserted, state law has tended to predominate.
Indeed, at oral argument, on May 29, 1992, the plaintiff acknowledged that the state claims of waste and breach of fiduciary duty have taken precedence over the federal claims. Moreover, the documents appended to the two separate summary judgment motions submitted reveals that the focus of discovery was primarily on the state claims concerning breach of fiduciary duty and corporate waste. The summary judgment motions themselves emphasized the state claims.
The content and extent of fiduciary duties, corporate waste and the business judgment rule are fundamental issues of state law. In addition, there is no overlap with the content of the alleged § 14(a) violations. While we have had several conferences with the parties, have decided three motions, and are familiar with the issues in this litigation, we do not believe that we should reach out our jurisdictional arm to embrace issues of a state character thereby depriving the state courts of the opportunity to develop and apply state law in this area particularly when there are no federal claims requiring a trial.
Plaintiff suffers no prejudice by this dismissal. He may refile his state law claims within six months of this decision, see N.Y.C.P.L.R. § 205; 28 U.S.C. § 1367(d), and, in any case, these claims are not time-barred, see id. at § 213 (six year statute of limitations for shareholder derivative suits). The discovery conducted in this suit can be used in the state suit and will reduce extensively the need for discovery in the state action, hastening that case to trial.
Summary judgment is granted in favor of the defendants on counts 1 and 4. Counts 2, 3, and 5 are dismissed for lack of subject matter jurisdiction.
Dated: White Plains, N.Y.
June 10, 1992
GERARD L. GOETTEL