ELR Citation: ELR 20581
No(s). 92 Civ. 2941 (CLB) (S.D.N.Y. Aug 17, 1992)

The court holds that a company violated §14(a) of the Securities Exchange Act of 1934 and Securities and Exchange Commission (SEC) Rule 14a-9 when its board of directors published, in the proxy statement for an annual stockholders meeting, a statement containing material misstatements and omissions in response to a shareholder proposal that the company adopt the "Valdez principles" on corporate environmental responsibilities. The board's statement recommended that the company's stockholders vote against the proposal, stating that a company policy on environmental protection, allegedly more stringent that the Valdez principles, already existed and that the company had a long-standing commitment to environmental protection. The statement failed to state that the company had pleaded guilty to felonies relating to violations of hazardous waste laws, that the U.S. Environmental Protection Agency had initiated proceedings to debar the company from doing business with the federal government for three years, and that the company was subject to over 50 suits, administrative proceedings, and settlement agreements relating to multiple alleged environmental violations.

The court first holds that the board's statement was misleading because specific statements in it were inconsistent with serious environmental compliance problems the company had faced. The court holds that information on the company's environmental record contained in the company's Form 10-K filing with the SEC and in press reports cannot be considered part of the "mix" of information available to company stockholders because the Form 10-K, though publicly available, is not mailed to stockholders and not within the constructive knowledge of the typical stockholder, and the press reports were not the type of thorough and intensive news reporting that is required for media coverage to be included in the "mix" of available information. The court holds that the proxy statement and the annual report did not accurately portray the company's environmental record because the board's statement and the company principles attached to the proxy statement made no mention of the recent or pending proceedings against the company, and did not refer to the section of the company's annual report discussing the company's environmental record. The court further holds that the discussion of environmental issues in the annual report does not disclose information sufficient to enable a shareholder to make a reasoned judgment on whether the stockholder proposal merited support. Even considering the proceedings that the annual report does discuss, the board's statement withheld critical facts from the stockholders.

The court next adopts scienter as the appropriate standard of culpability. The court holds that plaintiff satisfied its burden of proving scienter, because the board's statement was a calculated attempt to mislead the stockholders and induce them to case a negative vote. With respect to the element of transaction causation in Rule 14a-9 actions, the court rules that a Rule 14a-9 plaintiff challenging the accuracy of a board's response to a shareholder proposal need only establish that the board knowingly made misleading misstatements or omissions and that such misstatements or omissions had a significant propensity to affect the voting process. To require that a plaintiff demonstrate that the proxy solicitation was an essential link in accomplishing any transaction, or that the proxy solicitation was a source of the plaintiff's injury, would deny a stockholder plaintiff any remedy under Rule 14a-9 for misleading statements or omissions made by a board in response to a stockholder proposal that has no direct economic effect. Such a result—the effective denial of a federal statutory remedy to a stockholder plaintiff—would undermine the purposes ofboth the statute and the stockholder proposal rule. The court notes that administrative review under Rule 14a-8(e) of alleged board misstatements or omissions has not and will not deter the type of unlawful conduct revealed by this case.

The court holds that the case is not moot although the company offered to treat the 5.937 percent stockholder vote in favor of the stockholder proposal as the 6 percent vote required by the SEC for resubmission of the proposal to the stockholders. The plaintiff is entitled to a judgment as to the validity of the vote on the proposal and the company's offer to resubmit the proposal to the stockholders is not equivalent to a court order to that effect, particularly because the offer is not compelled by applicable regulations. The court vacates the stockholders' vote on the proposal and directs the board to resubmit the proposal to a vote of the stockholders at the company's next annual meeting.

Counsel for Plaintiff
Bruce Simon
Cohen, Weiss & Simon
330 W. 42d St., New York NY 10036
(212) 563-4100

Counsel for Defendant
Henry King, Gary G. Lynch
Davis, Polk & Wardwell
450 Lexington Ave., New York NY 10017
(212) 450-4000