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United States District Court, S.D. New York

February 11, 2004.


The opinion of the court was delivered by: RICHARD HOLWELL, District Judge


Plaintiff; The MONY Group, Inc. ("MONY" or `the Company"), seeks a preliminary injunction against defendants Highfields Capital Management L.P. ("Highfields"), Longleaf Partners Small-Cap Fund ("Longleaf "), and Southeastern Asset Management Inc. ("Southeastern"),*fn1 enjoining defendants from mailing to other shareholders proxy solicitation materials that include a duplicate of the proxy card previously sent to shareholders by plaintiff. Plaintiff argues that, as a result of the inclusion of this proxy card, defendants are required to comply with Securities and Exchange Commission ("SEC") proxy rules, 17 C.F.R. § 240.14a-2 et seq., that require those who solicit proxies to file a proxy statement with the SEC and provide shareholders with a copy of that statement. Defendants contend that under Rule 14a-2(b)(1) they are exempt from compliance and, further, that mere inclusion of a duplicate copy of the Company's proxy card with their solicitation materials does not operate to remove them Page 2 from the exemption. Plaintiff, having learned of defendants9 intention to include the proxy card in a shareholder mailing, came before the court on February 3, 2004, to apply for a temporary restraining order ("TRO"). At the conclusion of a hearing, the court (Preska, J.) granted a TRO to the extent of restraining defendants from including proxy cards in any mailing to shareholders, including any copy of MONY's original proxy card. A hearing on plaintiff's motion for a preliminary injunction was held on February 6, 2004, at which time the court extended the TRO until February 11, 2004, pending a ruling on the preliminary injunction motion.

The sole issue now before the court is whether defendant Highfields may include a copy of the MONY proxy card in its mailing to shareholders and remain within the exemption provided by Rule 14a-2(b)(1).*fn2 The court has original jurisdiction over the action pursuant to the Securities and Exchange Act of 1934 as amended, 15 U.S.C. § 78n(a).


  The instant dispute arises out of MONY's negotiation with AXA Financial Inc. ("AXA") culminating in a deal whereby AXA agreed to acquire MONY in a $1.5 billion all-cash transaction. Pl's Mem. of Law in Supp. of Pl's Req. for a T.R.O. ("Pl. Mem"), 2. Under the agreement, stockholders would receive $31 per share of MONY common stock. Id. at 3. The agreement was approved by MONY's Board of Directors and was publicly announced on September 17, 2003, after which only the approval of holders of Page 3 the majority of shares entitled to vote was required for AXA's acquisition of MONY to go forward. Id. MONY mailed a proxy statement and a proxy voting card to its shareholders on January 8, 2004, and announced a special meeting of MONY stockholders to be held February 24, 2004, at which time the agreement would be considered and voted upon. Id.: Reply Affirmation of John F. Collins ("Collins Reply Aff."), Ex. 2.

  Following the announcement of the proposed sale, Highfields publicly raised objections to and criticisms of the terms of the agreement On January 29, 2004, Highfields publicly released but did not mail the complete text of a letter to MONY shareholders. That letter urged shareholders to vote against the sale of MONY to AXA, on the grounds that the proposed sale is ill-timed; that the per-share price is too low; that the solution to MONY's underperformance is replacing poor management, rather than putting itself up for sale; and that management self-interest, rather than shareholders' best interests, is driving the proposed sale. The letter further states that Highfields is exercising its right of appraisal by informing MONY of its appraisal demand and voting against the agreement, and encourages shareholders to do the same. Ex. to Order to Show Cause for a TRO & Prelim. Inj.

  Prior to preparing the letter, counsel for Highfields contacted the Office of Mergers and Acquisitions in the Division of Corporation Finance of the SEC to informally inquire whether that office had a position on whether Highfields could include a copy of MONY's proxy card in the solicitation materials to be sent by Highfields to the MONY shareholders. Johnson Aff. 2-3. Counsel was advised that the Office of Mergers and Acquisitions had adopted a "nonpublished position" to the effect that a soliciting Page 4 party could provide a copy of a company's proxy card in a mailing to shareholders provided that certain conditions (discussed below) were met. Id. Thereafter, Highfields prepared a mailing to MONY shareholders consisting of its letter of January 29, 2004; a copy of the proxy card MONY had previously sent to shareholders; and a separate page referencing the enclosed proxy card and encouraging shareholders to use the card to vote against the merger and to return the card to a third party, Corporation Election Services, that had been retained by MONY to process the proxy cards. It is the enclosure of this page and proxy card that is the subject of plaintiff's motion for preliminary injunction.


 1. Applicability of Rule 14a-2(b)(1)

  The heart of the instant dispute is the scope of the exemption provided under Rule 14a-2(b)(1) to the filing and disclosure requirements contained in Rules 14a-3 to 14a-6, all of which were promulgated under section 14(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78n(a). Those rules require any party who would solicit a proxy from a holder of a security to file with the SEC detailed information about the solicitation, and about the party making the solicitation. That information — the substance of which is specified in SEC Schedule 14A — must then be delivered to the security holders in a proxy statement that has been previously filed with the SEC. The presentation of the information in the proxy statement, and the form and contents of any proxy voting card included with a proxy solicitation, are governed by the rules. These rules apply whether Page 5 the proxy is solicited on behalf of the board of directors of the registrant of the security, or on behalf of some other party.*fn3

  In 1992, the SEC adopted several amendments to its proxy rules, among which was the exemption to the proxy solicitation disclosure requirements embodied in Rule 14a-2(b)(1). According to the SEC Release accompanying the amendments, the changes "reflect a Commission determination that the federal proxy rules have created unnecessary regulatory impediments to communication among shareholders and others and to the effective use of shareholder voting rights." Regulation of Communication Among Shareholders, Exchange Act Rel. No. 31326, 1992 SEC LEXIS 2470, *8 (October 16, 1992). The exemption was meant to address concerns expressed to the SEC that "it is generally not possible for a shareholder to know with certainty that a communication will or will not be deemed to constitute a solicitation" subject to the disclosure rules, id. at *21 (compliance with which, the SEC notes, is costly, id. at *15), and that "the scope of the definition of solicitation under the proxy rules does have a chilling effect on discussions of management performance, out of fear that the communication could after the fact be found to have triggered disclosure and filing obligations under the federal proxy rules." Id. at *22. Ultimately, "[i]n most instances management . . . would be the only party willing to assume the regulatory costs, resulting in a one-sided discussion of the merits of the matters put to a vote." Id. at *23. The SEC received proposals from the public of ways that the rules could minimize "the potential for abuse both by. insurgents and by management" when a proxy fight arises, and Page 6 "weighed the benefits" of those proposals in adopting a provision that exempts from the proxy solicitation disclosure rules:

Any solicitation by or on behalf of any person who does not, at any time during such solicitation, seek directly or indirectly, either on its own or another's behalf; the power to act as proxy for a security holder and does not furnish or otherwise request, or act on behalf of a person who furnishes or requests, a form of revocation, abstention, consent or authorization. . . .
17 C.F.R. § 240.14a-2(b)(1). The provision goes on to make ten categories of "interested persons" ineligible for the exemption, none of which is relevant to the instant dispute.

  The parties agree that the mailing at issue in this matter constitutes solicitation materials under Rule 14a-1, which defines solicitation to include a "request to execute or not to execute, or to revoke, a proxy" and "the furnishing of a form of proxy or other communication to security holders under circumstances reasonably calculated to result in the procurement, withholding or revocation of a proxy." 17 C.F.R. § 240.14a-1 (l)(1). The parties disagree as to whether the exemption in Rule 14a-2(b)(1) applies. Plaintiff asserts that it does not apply to defendants' proposed solicitation, because the inclusion of a copy of MONY's proxy card constitutes the "furnish[ing of] a form of revocation" that makes the mailing a non-exempt solicitation. Defendants counter that the exemption applies, arguing that (1) the duplicate proxy card is not a "form of revocation" and (2) even if it were a "form of revocation," the mailing would still be exempt because defendant does not seek the power to act as proxy, which is the necessary condition for taking a solicitation outside the exemption. The instant case is apparently the first to present a federal court with this precise question. Page 7

 2. Applicable Legal Standard

  "To obtain a preliminary injunction, a plaintiff must show a threat of irreparable injury and either (1) a probability of success on the merits or (2) sufficiently serious questions going to the merits of the claims to make them a fair ground of litigation, and a balance of hardships tipping decidedly in favor of the moving party." Motorola Credit Corp. v. Uzan, 322 F.3d 130, 135 (2d Cir. 2003) (citing Time Warner Cable v. Bloomberg L.P., 118 F.3d 917, 923 (2d Cir. 1997) (internal punctuation omitted). See also Fisher-Price, Inc. v. Well-Made Toy Mfg. Corp., 25 F.3d 119, 122 (2d Cir. 1994) (same); Jackson Dairy, Inc. v. H.P. Hood & Sons, Inc., 596 F.2d 70, 72 (2d Cir. 1979) (per curiam) (same). The court begins by analyzing plaintiff's showing on the "merits" prong of the test.

 3. The Merits

  The criteria for exemption from the proxy solicitation disclosure requirements under Rule 14a-2(b)(1) are twofold. First, the soliciting party may not seek the authority to act as a proxy for the solicited shareholder. In the present case, Highfields' solicitation materials make clear that it is not seeking authorization to act as any shareholder's proxy.

  The second criterion for exemption is that the soliciting party may not "furnish [to the solicited shareholder] a form of revocation, abstention, consent or authorization." Highfields' furnishing of a copy of the MONY proxy card is not a form of abstention, consent, or authorization. Plaintiff does not claim otherwise but contends, nevertheless, that it is a "form of revocation." The court disagrees. The proxy card at issue is precisely what it purports to be: a duplicate of the proxy card that was previously mailed to shareholders by MONY on January 8, 2004. It is true that the proxy card may have the Page 8 effect of a revocation in those cases where a shareholder has previously submitted a proxy, but that is not a necessary effect inherent in the card and does not transform management's proxy card into a form of revocation that places Highfields outside the ambit of the exemption.

  The court's reading of Rule 14a-2(b)(1) is consistent with the policies underlying the adoption of the rule in 1992, as well as the interpretation of the rule formulated by the SEC Division of Corporation Finance shortly after the rule was promulgated.*fn4 The changes to the SEC's proxy rules in 1992 were specifically designed to correct a power imbalance between management and dissident shareholders arising out of the regulatory burdens created by the then-existing proxy rules. As one leading treatise has noted:

The SEC created a new exemption in 1992 for solicitations by persons who are not seeking proxies, consents, or authorizations from stockholders, and who otherwise do not have a substantial economic interest in the outcome of an actual or impending regulated solicitation. In so doing, the SEC determined that the regulatory burdens imposed on this type of stockholder communication were disproportionate in comparison with the informational benefits that could be derived from free discussion, debate and learning among stockholders and interested persons. Provided no proxy authority to act on behalf of a solicitee is sought with respect to matters submitted for stockholder approval, any person who does not fall within the categories of per se ineligible persons may invoke the new exemption for any communication to and among stockholders.
Aranow & Einhorn on Proxy Contests for Corporate Control § 5.03(C)[1], at 5-41 (3d ed. 1998).*fn5 The policy underlying Rule 14a-2(b)(1) is not advanced by reading the phrase "form of revocation" to include the distribution of a copy of management's own proxy card that is to be returned, if at all, to management and not to the dissident shareholder as Page 9 some form of authorization. Indeed, effectively foreclosing the mailing of a copy of the company's proxy card can be seen as frustrating the animating spirit that lies at the core of Rule 14a-2(b)(1). The 1992 amendments sought to remove impediments to shareholder communications and the "effective use of shareholder voting rights." Exchange Act Rel. No. 31326, supra at *8.

  The manner of distribution by Highfields of the MONY proxy card has also been expressly sanctioned by the staff of the SEC.*fn6 In April 1993, the staff of the Division of Corporation Finance took the position that a soliciting party otherwise eligible for the exemption under Rule 14a-2(b)(1) could provide a solicited shareholder with a copy of management's proxy card. The staffs internal, written interpretation consistently provided in response to inquiries is as follows:

Excerpt from the Division of Corporation Finance's non-public, internal written interpretations regarding Resolved Issues Under the New Proxy Rules, as of April 15.1993.
May a person otherwise qualified to rely on the exempt communication provision provide a solicited shareholder with a copy of management's proxy card for the purpose of facilitating the shareholder's revocation of a previous card or a vote in favor of a proposal supported by the soliciting party?
  Response: Yes, so long as the card is returned directly to management and not to the soliciting party. Rule 14a-2(b)(1) disqualifies from reliance on the exemption persons who seek authority to act as a proxy or who "furnish or otherwise request, or act on behalf of a person who furnishes or requests, a form of revocation, abstention, consent or authorization." Providing management's card does not create any proxy authority in the soliciting party, particularly where the party does not retain possession of the card and therefore de facto discretion whether to present the card at the meeting. Although management's card will have the effect of a revocation of an earlier dated proxy submitted by the same Page 10 shareholder, this should not constitute a "form of revocation" envisioned by the rule.


Although management's card states that it is solicited on behalf of the company, shareholders will not be misled, so long as the disclosure clearly indicates that the solicitation is in opposition to management and that the card is management's card to be returned to the company and is only being provided as a convenience.
The same result applies where the shareholder provides a photocopy of management's card, rather than the card itself.
Division Letter, 5. The court, of course, is not bound by the SEC staff's interpretation of Rule 14a-2(b)(1). However, the court finds the staff's interpretation persuasive and reasonable and, therefore, endorses it.

  In light of my interpretation of Rule 14a-2(b)(1), I find that plaintiff has failed to show a likelihood of success on the merits of its claim. Nor, given the purely legal grounds of the court's interpretation of Rule 14a-2(b)(1), do I find a basis for concluding that plaintiff has met its burden of showing in the alternative that it has presented sufficiently serious questions going to the merits of the claims to make them a fair ground of litigation. There are no factual issues between the parties regarding Highfields' proposed solicitation and, therefore, no serious question remaining to resolve as far as Rule 14a-2(b)(1) is concerned.*fn7

 4. The Equities

  The Second Circuit has opined that "[p]erhaps the single most important prerequisite for the issuance of a preliminary injunction is a demonstration that if it is not granted the applicant is likely to suffer irreparable harm before a decision on the merits Page 11 can be rendered" Citibank, N.A. v. Citytrust, 756 F.2d 273, 275 (2d Cir. 1985). Plaintiff attempts to establish irreparable injury by asserting that if defendants' mailing is allowed to go out with the MONY proxy card, it will mean that defendants will be able to solicit ` shareholders without submitting to the full disclosure for which the SEC proxy rules provide. If the merger proposal subsequently fails after a misinformed shareholder vote, plaintiff continues, the outcome would be "devastating": a credit ratings downgrade, a rapid decline in stock prices, and a mass exodus of MONY's sales force may ensue. PL Mem. 5. Plaintiff further argues that if the proxy cards were sent, the merger failed by a slim margin, and a determination on the merits later found the mailing unlawful, it would be impossible to remedy the tainted vote, because the offending proxy cards, "even if identified, segregated, and disregarded, would still operate as `no votes' or non-votes, preventing the tally from ever reaching the required fifty-one percent of shares outstanding." PL Reply Mem. 5.

  These assertions are for the most part too speculative and causally tenuous to support a preliminary injunction. However, there is support for plaintiff's showing that a misinformed shareholder vote may result in irreparable harm. It is well settled that when the securities laws require disclosure of information to shareholders, the withholding, inadequacy, or falsity of that information in shareholder decisionmaking contexts can constitute irreparable injury. See Trans World Airlines, Inc. v. Icahn, 609 F. Supp. 825, 830 (S.D.N.Y. 1985) ("Courts have held that a continuing failure to disclose material information on a Schedule 13D will result in irreparable harm because it precludes the shareholders from obtaining important and legally required information as to the acquiring group's intentions which may affect their judgment as to whether the stock Page 12 should be sold, bought, or held."); MAI Basic Four, Inc. v. Prime Computer, Inc., 871 F.2d 212, 218 (1st Cir. 1989) ("[T]o the extent target shareholders may be deprived of material information required to be disclosed under the Williams Act before irrevocably tendering their shares, they will be irreparably harmed."); Lone Star Steakhouse & Saloon, Inc. v. Adams, 148 F. Supp.2d 1141, 1150 (D. Kan. 2001) (because "a vote based on misleading information would irreparably harm both plaintiff and its shareholders," plaintiff had made a showing that it would suffer irreparable injury "in the absence of injunctive relief designed to remedy any false or misleading information in defendant's Proxy Statements"). Nonetheless, even this showing of irreparable injury is unavailing in light of the plaintiff's failure to show a likelihood of success on the merits, and provides insufficient support for a preliminary injunction.

  Even were plaintiff able to meet its alternative burden of showing serious questions going to the merits of its claim, this court cannot conclude that MONY has made the requisite showing that the balance of hardships tips decidedly in its favor. MONY concededly runs the risk that shareholders will vote against the merger, using the proxy cards provided by defendants that might, following a determination on the merits, be deemed to have been illegal. On the other hand, defendants too face a hardship in that, if the mailing of the proxy card were enjoined and thereafter determined to have been lawful under the proxy rules, defendants would have been prevented from exercising to the extent of the law its right to communicate with other shareholders on an issue of vital concern to them qua owners of MONY. The dire predictions of plaintiff are too speculative to constitute a hardship definitively outweighing the hardship to defendants. Page 13

  Because I find that plaintiff has failed to establish the necessary elements required for the issuance of a preliminary injunction, it is ORDERED that the motion for preliminary injunction is DENIED. SO ORDERED.

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