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VIRGINIA BANKSHARES, INC., ET AL., PETITIONERS v. DORIS I. SANDBERG, ET AL.

No. 89-1448

SUPREME COURT OF THE UNITED STATES

501 U.S. 1083; 111 S. Ct. 2749; 1991 U.S. LEXIS 3819; 115 L. Ed. 2d 929; 59 U.S.L.W. 4887; Fed. Sec. L. Rep. (CCH) P96,036; 91 Cal. Daily Op. Service 5072; 91 Daily Journal DAR 7687

  
October 9, 1990, Argued   
June 27, 1991, Decided

PRIOR HISTORY:  [***1] 
 
ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT.

DISPOSITION: 891 F.2d 1112, reversed.

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DECISION: Knowingly false statements of reasons, opinions, or beliefs contained in proxy solicitation held not per se inactionable under 14(a) of Securities Exchange Act of 1934 (15 USCS 78n(a)).

SUMMARY: Section 14(a) of the Securities Exchange Act of 1934 (15 USCS 78n(a)) authorizes the Securities and Exchange Commission (SEC) to promulgate rules for the solicitation of proxies, and prohibits violations of such rules. SEC Rule 14a-9 (17 CFR 240.14a-9) prohibits the solicitation of proxies by means of materially false or misleading statements. A bank holding company began a "freeze-out" merger in which a target bank was to be merged into a wholly owned subsidiary of the holding company. The subsidiary owned 85 percent of the shares of the target bank, the remaining 15 percent being held by minority shareholders who were to lose their interests in the target bank as a result of the merger. The target bank was advised by an investment banking firm that $ 42 a share would be a fair price for the minority stock, and the target bank's executive committee and board approved the merger proposal at that price. Although state law required only that such a merger proposal be submitted to a vote at a shareholders' meeting and that the meeting be preceded by circulation of a statement of information to the shareholders, the target bank's directors solicited proxies for voting on the proposal at the annual meeting. The solicitation urged adoption of the proposal and stated that the proposed merger had been approved by the board of directors because it provided for minority shareholders to receive a "high" value for their stock. Although most minority shareholders gave their proxies, after approval of the merger one minority shareholder who had refused to give her proxy filed suit in the United States District Court for the Eastern District of Virginia against the holding company, the wholly owned subsidiary, and the directors of the target bank. The suit included two counts, one for soliciting proxies in violation of 14(a) and Rule 14a-9, and the other for breaching fiduciary duties owed to the minority shareholders under state law. With respect to the first count, the shareholder alleged that the directors had not believed that the price offered for the minority shares was high or that the terms of the merger were fair, but had recommended the merger only because the directors had believed that they had no alternative if they wished to remain on the board of directors. A jury returned verdicts for the shareholder on both counts and awarded her damages of $ 18 a share, having found that she would have received $ 60 a share if her stock had been valued adequately. During the pendency of the case, a separate action, brought by other minority shareholders and based on similar allegations, had been brought in the United States District Court for the District of Columbia and had been transferred to the Eastern District of Virginia. After the trial of the first suit, the shareholders in the second suit obtained a summary judgment on the issue of liability by pleading collateral estoppel. On appeal of both cases, the United States Court of Appeals for the Fourth Circuit, in affirming in pertinent part, expressed the view that (1) certain statements in the proxy solicitation, including the statement regarding the value of the stock, were materially misleading for the purposes of Rule 14a-9; and (2) the minority shareholders could maintain their actions even though their votes had not been needed to effectuate the merger (891 F2d 1112).

On certiorari, the United States Supreme Court reversed. In an opinion by Souter, J., joined by Rehnquist, Ch. J., and White, Marshall, Blackmun, O'Connor, Kennedy, and Stevens, JJ., with respect to holding 1 below, and joined by Rehnquist, Ch. J., and White, O'Connor, and Scalia, JJ., with respect to holding 2 below, it was held that (1) corporate directors' knowingly false statements of reasons, opinions, or beliefs may be actionable under Rule 14a-9 as misstatements of material fact; but (2) causation of damages compensable through a private action under 14(a) cannot be demonstrated by a member of a class of minority shareholders whose votes are not required by law or corporate bylaw to authorize the transaction giving rise to the 14(a) claim.

Scalia, J., concurred in part and concurred in the judgment, expressing the view that (1) the statement at issue in the proxy solicitation was most fairly read as affirming separately both (a) the fact of the directors' opinion that the merger plan provided for the minority shareholders to receive a high value for their shares, and (b) the accuracy of the facts upon which the opinion was assertedly based; and (2) if the case were to proceed, the normal 14(a) principles governing misrepresentation of fact would apply.

Stevens, J., joined by Marshall, J., concurred in part and dissented in part, expressing the view that (1) shareholders may bring an action for damages under 14(a) whenever materially false or misleading statements are made in proxy solicitations; and (2) the fact that the solicitation of proxies is not required by law or by the bylaws of a corporation does not authorize corporate officers, once they have decided for whatever reason to solicit proxies, to avoid the constraints of the statute.

Kennedy, J., joined by Marshall, Blackmun, and Stevens, JJ., concurred in part and dissented in part, expressing the view that the limits placed by the court upon possible proof of causation for the purposes of a 14(a) action were not justified by Supreme Court precedent nor any case in the Courts of Appeals.