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August 17, 1992


The opinion of the court was delivered by: CHARLES L. BRIEANT

Memorandum Decision

 Brieant, Chief Judge

 By motions fully submitted on June 4, 1992, plaintiff United Paperworkers International Union and defendant International Paper Company ("the Company") each have moved for summary judgment pursuant to Fed.R.Civ.P. 56(c). Jurisdiction is based on the Securities Exchange Act of 1934, 15 U.S.C. § 78aa (Supp. 1992), and on 28 U.S.C. § 1331 (Supp. 1992). There is no genuine disputed issue of material fact.

 On April 23, 1992, plaintiff brought an Order To Show Cause and a Temporary Restraining Order, seeking to enjoin further solicitation and voting of proxies in connection with defendant International Paper's Annual Meeting. That meeting was scheduled to take place on May 12, 1992. Specifically, the plaintiff alleged that the defendant's Board of Directors, in response to a shareholders' proposal, authorized and included in its proxy materials a statement which contained false and misleading representations, intended to procure the defeat of the proposal, as well as material omissions. Though the plaintiff was not a sponsor of the shareholders' proposal, it was and is the beneficial owner of twenty-five shares of International Paper's stock.

 After a conference with counsel, this Court, sitting in Part I in Foley Square, signed a Consent Order withdrawing the proposed Order to Show Cause. The Order to Show Cause was withdrawn because it appeared that, under Local Rule 21, the case should have been assigned to White Plains. Plaintiff then refiled in White Plains, and the case was assigned by random selection to this Court. On May 5, 1992, the Court held an expedited hearing on the plaintiff's motion for a preliminary injunction, pursuant to Fed.R.Civ.P. 65(a). The Court denied the motion for a preliminary injunction at that time. Essentially, the Court concluded that the plaintiff had raised colorable claims, but that the balance of equities weighed heavily in favor of the defendant, primarily because of the disruption of the Company's Annual Meeting attendant to the entry of an injunction.

 After directing the parties to notify the sponsors of the shareholders' proposal of the pendency of this action, the Court, with the consent of counsel, converted the motion into cross-motions for summary judgment. The following represent the Court's statement of material facts and conclusions of law.

 Defendant International Paper is a New York corporation whose shares are publicly traded on the New York Stock Exchange. *fn1" On March 31, 1992, the Company sent its shareholders a Notice of Annual Meeting and a Proxy Statement. Included in the proxy materials was a "Shareholder Proposal Concerning the Valdez Principles". This proposal, denominated as Item No. 6, had been submitted to the Company by the Presbyterian Church (USA) pursuant to Rule 14a-8 of the Securities Exchange Act of 1934. 17 C.F.R. § 240.14a-8 (1992). *fn2" This rule was promulgated by the Securities and Exchange Commission under its rulemaking authority, 15 U.S.C. § 78n(a) (1981). It permits shareholders who have owned either 1% of the Company's equity securities or $ 1,000 worth of its stock for a specified period of time to submit proposals for a vote of the Company's shareholders. 17 C.F.R. § 240.14a-B(a)(1) (1992).

 The text of proposal #6 was as follows:

 "RESOLVED, that the shareholders request our company to:

 1. sign and implement the Valdez Principles; and

 2. engage with shareholders, CERES, and affected communities in a continuing process to achieve a genuine and publicly trusted measure of public environmental accountability". Ex. A to April 27 Agee Affidavit at 20.

 The sponsors of this proposal also appended a statement in support of their resolution. The statement outlines the Valdez Principles, *fn3" which were developed by CERES, *fn4" and recommends inter alia that the Company report its compliance with these principles to the CERES group.

 Applicable regulations, specifically 17 C.F.R. § 240.14a-8(e), permit the Company's Board of Directors to offer a written response to such shareholder proposals. Thus, immediately following the sponsors' statement in support of Item No. 6 is a statement describing the position of the Company's Board on this proposal. That statement, which is the focal point of this litigation, states in full:

 "Position of the Company's Board of Directors"

 "Your Board of Directors recommends that the shareholders vote AGAINST the proposal for the reasons set forth below:"

 "The Board, at the recommendation of Company management, has adopted a comprehensive statement of Environmental, Health and Safety Principles and implementing guidelines (set forth in Appendix B). This statement of Principles is the most recent articulation of the Company's longstanding commitment to the protection of the environment, which has been an explicit Company policy for many years. We believe that the Company's environmental conduct code in fact is both more stringent and more industry specific than the Valdez Principles. In the areas of waste disposal, air emissions and groundwater, the Company has invested hundreds of millions of dollars ($ 110 million in 1991 alone) in technology, equipment, facilities and personnel to be at the forefront in the enhancement and protection of the environment. An environmental staff was formed by the Company many years ago to maintain compliance with environmental laws and regulations as well as Company policy. The Company regularly audits each operating unit for compliance with the letter and spirit of those rules. A committee of the Board, the Environment, Health & Technology Committee, meets regularly to review environmental, safety and health policies and programs throughout the Company, and advise the Board of the effectiveness of these policies and programs."

 "The Board believes the Valdez principles, though well-intentioned, are in many respects ambiguous and certain of them may not be applicable to the Company. The Board does not believe, for example, that the Company and its shareholders should be burdened with duplicative independent audit requirements and costs associated with additional reports, as called for by the Principles. Moreover, the Board believes that the Principles calling as they do for the selection of one director "qualified to represent environmental interests" are inappropriate since there are many and varied interests which shareholders have that should be the concern of all directors. Finally, the Board believes that implementation of the proposal would not provide any greater environmental protection than now exists and could -- be significantly more costly."

 "In summary, the Board believes that protection of the environment is critical to any business today, but that the environmental affairs of the Company and the interests of our shareholders are already being addressed in an appropriate and timely manner."

 "Approval of Item No. 6 requires the affirmative vote of the holders of a majority of the shares voting on this proposal." Ex. A to April 27 Agee Affidavit at 22-23.

 The "Statement of Principles" adopted by defendant and referred to in this text was annexed as Appendix B to the proxy materials. This statement is as follows:

 "Environmental, Health and Safety Principles"

 "Environmental stewardship has always been an important part of International Paper's business. The company has an obligation to the communities where it does business to ensure that its actions protect both the people who live there and the surrounding environment. While the company must obey all laws, it must also have a set of values that guides decision-making and actions".

 "The principles are consistent with International Paper's longstanding policies on the environment, health and safety. Combined with a strong environmental compliance program, they serve as a challenge and mandate for every manager, supervisor and employee of International Paper:

 * To make environmental, health and safety considerations priorities in operating existing facilities; as well as in planning new operations.

 * To recognize, in developing and designing products to meet customer needs, the environmental, health and safety effects of product manufacture, distribution, use and disposal.

 * To monitor its environmental, health and safety performance and to report regularly on these matters to the Board of Directors, as well as to confirm its adherence to these principles annually to the American Paper Institute.

 * To train employees in their environmental, health and safety responsibilities, and to promote awareness and accountability on these matters.

 * To improve environmental, health and safety performance through support of research and development that advance the frontiers of knowledge.

 * To communicate with employees, customers, suppliers, the community, public officials and shareholders to build greater understanding on environmental, health and safety matters.

 * To participate constructively in the development of public policies on environmental, health and safety matters.

 * To continue to pursue energy conservation, increased energy efficiency, greater utilization of alternatives to fossil fuels and opportunities for cogeneration of electricity." Ex. A to April 21 Agee Affidavit at B-1.

 Each of these principles is followed by "Implementing Guidelines". These guidelines are far too lengthy and long-winded to be reproduced here in full. *fn5" Their flavor is conveyed adequately by the following excerpts:

 "International Paper is dedicated to safe and environmentally sound products, packaging and operations".

 * * *

 "International Paper recognizes the importance of operating in a manner that is safe for both mankind and the environment".

 * * *

 "International Paper will continue its decades-long involvement in supporting innovations and creativity in seeking solutions to environmental, health and safety concerns".

 International Paper's Board had, as required by applicable regulations, submitted this response to proposal #6 to the proposal's sponsors, the Presbyterian Church (USA) and the Sisters of Saint Dominic, for their review. Neither sponsor objected to it, so it was included in the proxy materials sent to all shareholders on March 31, 1992.

 However, the plaintiff Union, which owns twenty-five shares of International Paper's stock, did object to the Board's response to the proposal. It contends that the statement contains false and misleading representations and omissions, in violation of both section 14(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78n(a) (1981), and Rule 14a-9 of the Securities and Exchange Commission, 17 C.F.R. § 240.14a-9 (1992). *fn6"

 Specifically, the plaintiff claims that the following undisputed facts about the Company's environmental record belie the breezy assertions found in its response to the shareholder proposal:

 * On July 3, 1991, the Company pled guilty to five felonies, relating both to violations of hazardous waste laws and falsification of required environmental reports, in the United Stated District Court for the District of Maine. The company agreed to pay a criminal fine of $ 2.2 million, the second largest fine ever assessed for violations of the hazardous waste laws.

 * In February 1992, the Environmental Protection Agency initiated proceedings to debar International Paper from doing business with the federal government for a period of three years.

 * In April 1991, the Company settled a civil suit brought by the State of Maine and the Maine Board of Environmental Protection for violations of state environmental laws and regulations. In October 1991, the State returned to Superior Court in Maine to seek $ 700,000 in stipulated penalties for the Company's alleged failure to comply with this settlement. On April 21, 1992, a Superior Court judge assessed penalties against International Paper in the amount of $ 85,000.

 * In 1990, the State of Missouri notified International Paper that it was preparing an enforcement action against the Company for violations of hazardous waste regulations at a Company facility in Joplin, Missouri. Settlement negotiations are proceeding in this dispute.

 * On August 9, 1991, the Company entered into a consent decree with the State of New York. This settlement requires the Company to remedy air, water and soil pollution at a Company facility in Binghamton, New York.

 * In December 1991, the EPA requested information from the Company relating to air pollution at a Company facility in Ukiah, California. The Company has stated that it anticipates the EPA will seek penalties in excess of $ 100,000 in this action.

 * The Company has also stated that the EPA will likely seek penalties in excess of $ 100,000 in an anticipated action relating to 104 PCB facilitators in Longview, Washington.

 * The Company is currently a party to approximately fifty administrative proceedings, brought under the Comprehensive Environmental Response, Compensation and Liability Act, which relate to the cleanup of hazardous wastes at commercial landfills.

 * As of January 31, 1992, the Company is a defendant in 43 civil actions, involving 4,565 plaintiffs, relating to the pollution of three rivers in Mississippi. A co-defendant in two of these cases, the Georgia-Pacific Corporation has already suffered substantial jury verdicts in similar actions.

 The totality of this environmental record, the Union contends, renders false and misleading numerous statements in the Board's response to shareholder proposal #6. It also contends that the Board's failure to mention these matters in its response to the proposal constituted omission of material facts, which is, of course, unlawful under the statute and rules promulgated thereunder.

 Rule 14a-9, promulgated by the Securities and Exchange Commission pursuant to section 14(a) of the Securities Exchange Act of 1934, *fn7" states:

 "No solicitation subject to this regulation shall be made by means of any proxy statement, form of proxy, notice of meeting or other communication, written or oral, containing any statement which, at the time and 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". 17 C.F.R. § 240.14a-9 (1992).

 In order to establish liability under this Rule, a plaintiff must establish 1) that the proxy materials contain a false or misleading statement of a material fact, or omit to state a material fact necessary in order to make the statement made not false or misleading; 2) that the misstatement or omission of a material fact was the result of knowing, reckless or negligent conduct; and 3) that the proxy solicitation was an essential link in effecting the proposed corporate action. E.g., Gerstle v. Gamble-Skogmo, Inc., 478 F.2d 1281, 1298-1301 (2d Cir. 1973). A fact is "material" if there is "a substantial likelihood 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". TSC Industries, Inc. v Northway, Inc., 426 U.S. 438, 449, 48 L. Ed. 2d 757, 96 S. Ct. 2126 (1976).

 However, as the Supreme Court has held in the related context of actions under Rule 10b-5, the federal securities laws do not reach ordinary instances of corporate mismanagement or breaches of fiduciary duty, leaving those issues to be resolved under applicable state laws. Santa Fe Industries v. Green, 430 U.S. 462, 476-78, 51 L. Ed. 2d 480, 97 S. Ct. 1292 (1977); Rodman v. Grant Foundation, 608 F.2d 64, 70 (2d Cir. 1979). A contrary holding would have allowed the SEC, with its numerous rules and regulations, to interfere unduly in the governance of state-chartered corporations -- a serious affront to federalism the Court was not prepared to countenance. As Justice White, speaking for the Court in Santa Fe, stated:

 ". . .this extension of the federal securities laws would overlap and quite possibly interfere with state corporate law. Federal courts applying a "federal fiduciary principle" under Rule 10b-5 could be expected to depart from state fiduciary standards at least to to the extent necessary to ensure uniformity within the federal system. Absent a clear indication of congressional intent, we are reluctant to federalize the substantial portion of the law of corporations that deals with transactions in securities, particularly where established state policies of corporate regulation would be overridden. As the Court stated in Cort v. Ash, supra: 'Corporations are creatures of state law, and investors commit their funds to corporate directors on the understanding that, except where federal law expressly requires certain responsibilities of directors with respect to stockholders, state law will govern the internal affairs of the corporation.' 422 U.S. at 84 (emphasis added)." Santa Fe, 430 U.S. at 479 (footnote omitted).

 Our analysis of whether the defendant's Board made material misstatements or omissions must begin with the recent case of Virginia Bankshares v. Sandberg, 115 L. Ed. 2d 929, 111 S. Ct. 2749 (1991). The Bankshares case involved a challenge by minority shareholders of the defendant Bank to representations made by the defendant's Board about the fairness of proposed merger. Rejecting the Board's arguments that misrepresentations about "soft" information were never actionable, the Supreme Court held that conclusory statements that the merger was "fair", or that it created a "high value", were actionable if the plaintiff could prove, as it had in Bankshares, that the Board knowingly offered false reasons in support of its conclusions: "Under § 14(a), then, a plaintiff is permitted to prove a specific statement of reason knowingly false or misleadingly incomplete, even when stated in conclusory terms". Id. at 2759 (per Souter, J.). In this case, the plaintiff contends, International Paper's Board knowingly misrepresented the Company's environmental record, with the aim of defeating shareholder proposal #6.

 Defendant replies first that the Board's response to shareholder proposal #6, even viewed in isolation, is not misleading. This argument is palpably without merit. Specific statements in both the Board's response to the proposal, such as the representation that the Company has "a longstanding commitment to the protection of the environment", and in the Company's "Environmental, Health and Safety Principles", such as the representation that the Company has "a strong environmental compliance program", are, to put it charitably, inconsistent with the serious and ongoing environmental challenges the Company has endured. See Cooke v. Teleprompter Corp., 334 F. Supp. 467, 470 (S.D.N.Y. 1971) (granting relief to plaintiff when proxy statement "incomplete, slanted and misleading").

 More substantial is the defendant's argument that the Court should consider the Proxy Statement's accuracy in light of its Annual Report and media coverage of the Company's environmental difficulties. The defendant avers that details of its environmental record had been disclosed adequately in its Annual Report, which was mailed to all holders prior to the Annual Meeting, and that several articles and news reports had likewise focused attention on the Company's environmental record. Thus, in the defendant's view, its failure to mention in its Proxy Statement proceedings pending against it cannot, as a matter of law, constitute a material omission. See Seibert v. Sperry Rand Corp., 586 F.2d 949, 952 (2d Cir. 1978) (no duty to disclose information when plaintiff reasonably should have been aware of information due to massive contemporaneous publicity); Frigitemp Corp. v. Financial Dynamics Fund, 524 F.2d 275, 281 (2d Cir. 1975) (defendant's reasonable belief that the other party already has access to the facts should excuse him from new disclosures which reasonably appear to be repetitive"); Koplin v. Labe Federal Savings & Loan Assn., 748 F. Supp. 1336, 1342 (N.D. Ill. 1990) ("Since the investment strategy information had already been disclosed [in a previous annual report], its inclusion in the 1990 proxy statement was not necessary"). But see Wenzel v. Patrick Petroleum Co., 745 F. Supp. 211, 217-220 (D. Del. 1990) (disclosures in prospectus, press releases and annual report insufficient to impute constructive knowledge to plaintiff); Fisher v. Plessey Corp., 559 F. Supp. 442, 445-448 (S.D.N.Y. 1983) (presence of information in public domain did not relieve defendant of duty to disclose); Bertoglio v. Texas International Co., 488 F. Supp. 630, 642-44 (D. Del. 1980) (same).

 Furthermore, the defendant notes that shareholders concerned about environmental affairs could have consulted the Company's most recent Form 10-K, which did disclose fully all material facts regarding the Company's environmental record. But see Bertoglio, 488 F. Supp. at 643 (press release and Form 10-Q not type of information of which shareholders presumably aware).

 Whether disclosure of material facts in other media satisfies the duty to disclose in a proxy statement depends on the facts of each particular case, and is subject to an "overriding principle" of "reasonableness". Powell v. American Bank & Trust Co., 640 F. Supp. 1568, 1579 (N.D. Ind. 1986). The proper analysis, this Court concludes, is that articulated in somewhat tortured fashion in the Powell case: "a public disclosure of information relieves the duty to disclose if it is reasonable to conclude that the plaintiff should have been made aware of the fact as a result of that disclosure". Id.

 In this case, the Court holds as a matter of law that neither the Company's Form 10-K nor the press reports about International Paper's environmental record should be included as part of the "total mix" of information available to shareholders. The Form 10-K, though publicly available, is not mailed to shareholders, and, as the Bertoglio court noted, is not information reasonably within the constructive knowledge of the typical security holder.

 Likewise, though widespread press reports theoretically may put shareholders on constructive notice, the eight news articles cited by the Company, May 4 Defendant's Memorandum at 15 n.4, span a period of over one year; the most recent article cited appeared some four months prior to the Annual Meeting. Furthermore, the only matters mentioned in these articles are the Company's guilty plea in District Court in Maine and the Mississippi dioxin litigation. This is hardly the type of thorough and intensive news reporting that is required for media coverage to be included in the "total mix" of information available to shareholders. GAF Corp. v. Heyman, 724 F.2d 727, 729 (2d Cir. 1983) (proper to include media coverage in "total mix" when contest for corporate control generated "many news stories" and was "closely watched").

 Thus, the question that the Court must answer is whether the Proxy Statement and the Annual Report, the only items to which all shareholders manifestly had access, accurately portrayed the Company's environmental record. Ash v. LFE Corp., 525 F.2d 215, 221 (3d Cir. 1975) ("Fair accuracy, not perfection, is the appropriate standard" in judging truthfulness of proxy statement). Under all the circumstances, the Court believes that they did not, for the following reasons.

 First, there is no mention in either the statement in opposition to proposal #6 or in the annexed appendix of "Principles" of any of the recent or pending proceedings against the Company; nor is the relevant section of the Annual Report, which does discuss the Company's environmental record in a somewhat more balanced fashion, even referred to. Cf. Goldsmith v. Rawl, 755 F. Supp. 96, 96 (S.D.N.Y. 1991) (defendant's failure to disclose in proxy materials litigation related to grounding of Exxon Valdez and formation of independent litigation committee actionable under section 14(a)).

 Second, the Board's discussion of environmental issues in the Annual Report simply does not disclose information sufficient to enable a shareholder to make a reasoned judgment on whether proposal #6 merits support. Thus, defendant's argument that the Annual Report "cures" any misstatements or omissions in the Proxy Statement must fail. Bankshares, 111 S. Ct. at 2760 ("Only when the inconsistency [between conflicting statements] would exhaust the misleading conclusion's capacity to influence the reasonable shareholder would a § 14(a) action fail on the element of materiality"). For example, though the Company's guilty plea in the District Court in Maine is mentioned the fact that the crimes were felonies, two of which involved knowingly illegal conduct, is not disclosed. There is no mention of the pending EPA debarment action. *fn8" Beyond the bland statement that "International Paper is also a party to other environmental remedial actions under various federal and state laws", Ex. A to May 4 Wilderotter Affidavit at 36, there is no discussion of the actions initiated by the State of Maine and the State of Missouri, nor are the PCB enforcement action in Washington State and the fifty administrative proceedings under CERCLA disclosed.

 Furthermore, even concerning those proceedings that are discussed, the Board's statement withholds critical facts from the shareholders. For instance, with respect to the State of New York's ...

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