Virginia Bankshares Inc. v. Sandberg/Concurrence Kennedy
Justice KENNEDY, with whom Justice MARSHALL, Justice BLACKMUN, and Justice STEVENS join, concurring in part and dissenting in part.
I am in general agreement with Parts I and II of the majority opinion, but do not agree with the views expressed in Part III regarding the proof of causation required to establish a violation of § 14(a). With respect, I dissent from Part III of the Court's opinion.
* Review of the jury's finding on causation is complicated because the distinction between reliance and causation was not addressed in explicit terms in the earlier stages of this litigation. Petitioners, in effect, though, recognized the distinction when they accepted the District Court's essential link instruction as to reliance but not as to causation. So I agree with the Court that the issue has been preserved for our review here. #fn-s [1]
The Court of Appeals considered the essential link presumption in rejecting petitioners' argument that Sandberg must show reliance by demonstrating that she read the proxy and then voted in favor of the proposal or took some other specific action in reliance upon it. In the Court of Appeals, the parties did not brief, nor did the panel address, the possibility that nonvoting causation theories would suffice to allow for recovery.
Before this Court petitioners do not argue that Sandberg must demonstrate reliance on her part or on the part of other shareholders. The matter of causation, however, must be addressed.
The severe limits the Court places upon possible proof of nonvoting causation in a § 14(a) private action are justified neither by our precedents nor any case in the courts of appeals. These limits are said to flow from a shift in our approach to implied causes of action that has occurred since we recognized the § 14(a) implied private action in J.I. Case Co. v. Borak, 377 U.S. 426, 84 S.Ct. 1555, 12 L.Ed.2d 423 (1964). Ante, at 1102-1105.
I acknowledge that we should exercise caution in creating implied private rights of action and that we must respect the primacy of congressional intent in that inquiry. See ante, at ----. Where an implied cause of action is well accepted by our own cases and has become an established part of the securities laws, however, we should enforce it as a meaningful remedy unless we are to eliminate it altogether. As the Court phrases it, we must consider the causation question in light of the underlying "policy reasons for deciding where the outer limits of the right should lie." Ante, at 1104-1105; see Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 737, 95 S.Ct. 1917, 1926, 44 L.Ed.2d 539 (1975).
According to the Court, acceptance of non-voting causation theories would "extend the scope of Borak actions beyond the ambit of Mills." Ante, at 1102. But Mills v. Electric Auto-Lite Co., 396 U.S. 375, 90 S.Ct. 616, 24 L.Ed.2d 593 (1970), did not purport to limit the scope of Borak actions, and as footnote 7 of Mills indicates, some courts have applied nonvoting causation theories to Borak actions for at least the past 25 years. See also L. Loss, Fundamentals of Securities Regulation 1119, n. 59 (1983).
To the extent the Court's analysis considers the purposes underlying § 14(a), it does so with the avowed aim to limit the cause of action and with undue emphasis upon fears of "speculative claims and procedural intractability." Ante, at 1105. The result is a sort of guerrilla warfare to restrict a well-established implied right of action. If the analysis adopted by the Court today is any guide, Congress and those charged with enforcement of the securities laws stand forewarned that unresolved questions concerning the scope of those causes of action are likely to be answered by the Court in favor of defendants.
The Court seems to assume, based upon the footnote in Mills reserving the question, that Sandberg bears a special burden to demonstrate causation because the public shareholders held only 15 percent of the Bank's stock. Justice STEVENS is right to reject this theory. Here, First American Bankshares, Inc. (FABI) and Virginia Bankshares, Inc. (VBI) retained the option to back out of the transaction if dissatisfied with the reaction of the minority shareholders, or if concerned that the merger would result in liability for violation of duties to the minority shareholders. The merger agreement was conditioned upon approval by two-thirds of the shareholders, App. 463, and VBI could have voted its shares against the merger if it so decided. To this extent, the Court's distinction between cases where the "minority" shareholders could have voted down the transaction and those where causation must be proved by nonvoting theories is suspect. Minority shareholders are identified only by a post hoc inquiry. The real question ought to be whether an injury was shown by the effect the nondisclosure had on the entire merger process, including the period before votes are cast.
The Court's distinction presumes that a majority shareholder will vote in favor of management's proposal even if proxy disclosure suggests that the transaction is unfair to minority shareholders or that the board of directors or majority shareholder are in breach of fiduciary duties to the minority. If the majority shareholder votes against the transaction in order to comply with its state law duties, or out of fear of liability, or upon concluding that the transaction will injure the reputation of the business, this ought not to be characterized as nonvoting causation. Of course, when the majority shareholder dominates the voting process, as was the case here, it may prefer to avoid the embarrassment of voting against its own proposal and so may cancel the meeting of shareholders at which the vote was to have been taken. For practical purposes, the result is the same: because of full disclosure the transaction does not go forward and the resulting injury to minority shareholders is avoided. The Court's distinction between voting and nonvoting causation does not create clear legal categories.
Our decision in Mills v. Electric Auto-Lite Co., supra, at 385, 90 S.Ct., at 622, rested upon the impracticality of attempting to determine the extent of reliance by thousands of shareholders on alleged misrepresentations or omissions. A misstatement or an omission in a proxy statement does not violate § 14(a) unless "there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote." TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449, 96 S.Ct. 2126, 2132, 48 L.Ed.2d 757 (1976). If minority shareholders hold sufficient votes to defeat a management proposal and if the misstatement or omission is likely to be considered important in deciding how to vote, then there exists a likely causal link between the proxy violation and the enactment of the proposal; and one can justify recovery by minority shareholders for damages resulting from enactment of management's proposal.
If, for sake of argument, we accept a distinction between voting and nonvoting causation, we must determine whether the Mills essential link theory applies where a majority shareholder holds sufficient votes to force adoption of a proposal. The merit of the essential link formulation is that it rests upon the likelihood of causation and eliminates the difficulty of proof. Even where a minority lacks votes to defeat a proposal, both these factors weigh in favor of finding causation so long as the solicitation of proxies is an essential link in the transaction.
The Court argues that a nonvoting causation theory would "turn on 'hazy' issues inviting self-serving testimony, strike suits, and protracted discovery, with little chance of reasonable resolution by pretrial process." Ante, at 1105 (citing Blue Chip Stamps, 421 U.S., at 742-743, 95 S.Ct., at 1928-1929 (1975)). The Court's description does not fit this case and is not a sound objection in any event. Any causation inquiry under § 14(a) requires a court to consider a hypothetical universe in which adequate disclosure is made. Indeed, the analysis is inevitable in almost any suit when we are invited to compare what was with what ought to have been. The causation inquiry is not intractable. On balance, I am convinced that the likelihood that causation exists supports elimination of any requirement that the plaintiff prove the material misstatement or omission caused the transaction to go forward when it otherwise would have been halted or voted down. This is the usual rule under Mills, and the difficulties of proving or disproving causation are, if anything, greater where the minority lacks sufficient votes to defeat the proposal. A presumption will assist courts in managing a circumstance in which direct proof is rendered difficult. See Basic Inc. v. Levinson, 485 U.S. 224, 245, 108 S.Ct. 978, 990-991, 99 L.Ed.2d 194 (1988) (discussing presumptions in securities law).
There is no authority whatsoever for limiting § 14(a) to protecting those minority shareholders whose numerical strength could permit them to vote down a proposal. One of Section 14(a)'s "chief purposes is 'the protection of investors.' " J.I. Case Co., v. Borak, 377 U.S., at 432, 1559-1560. Those who lack the strength to vote down a proposal have all the more need of disclosure. The voting process involves not only casting ballots but also the formulation and withdrawal of proposals, the minority's right to block a vote through court action or the threat of adverse consequences, or the negotiation of an increase in price. The proxy rules support this deliberative process. These practicalities can result in causation sufficient to support recovery.
The facts in the case before us prove this point. Sandberg argues that had all the material facts been disclosed, FABI or the Bank likely would have withdrawn or revised the merger proposal. The evidence in the record, and more that might be available upon remand, see infra, at 1120, meets any reasonable requirement of specific and nonspeculative proof.
FABI wanted a "friendly transaction" with a price viewed as "so high that any reasonable shareholder will accept it." App. 99. Management expressed concern that the transaction result in "no loss of support for the bank out in the community, which was important." Id., at 109. Although FABI had the votes to push through any proposal, it wanted a favorable response from the minority shareholders. Id., at 192. Because of the "human element involved in a transaction of this nature," FABI attempted to "show those minority shareholders that [it was] being fair." Id., at 347.
The theory that FABI would not have pursued the transaction if full disclosure had been provided and the shareholders had realized the inadequacy of the price is supported not only by the trial testimony but also by notes of the meeting of the Bank's board which approved the merger. The inquiry into causation can proceed not by "opposing claims of hypothetical diffidence and hypothetical boldness," ante, at 1105, but through an examination of evidence of the same type the Court finds acceptable in its determination that directors' statements of reasons can lead to liability. Discussion at the board meeting focused upon matters such as "how to keep PR afloat" and "how to prevent adverse reac[tion]/ perception," App. 454, demonstrating the directors' concern that an unpopular merger proposal could injure the Bank.
Only a year or so before the Virginia merger, FABI had failed in an almost identical transaction, an attempt to freeze out the minority shareholders of its Maryland subsidiary. FABI retained Keefe, Bruyette & Woods (KBW) for that transaction as well, and KBW had given an opinion that FABI's price was fair. The subsidiary's board of directors then retained its own adviser and concluded that the price offered by FABI was inadequate. Id., at 297, 319. The Maryland transaction failed when the directors of the Maryland bank refused to proceed; and this was despite the minority's inability to outvote FABI if it had pressed on with the deal.
In the Virginia transaction, FABI again decided to retain KBW. Beddow, who sat on the boards of both FABI and the Bank, discouraged the Bank from hiring its own financial adviser, out of fear that the Maryland experience would be repeated if the Bank received independent advice. Directors of the Bank testified they would not have voted to approve the transaction if the price had been demonstrated unfair to the minority. Further, approval by the Bank's board of directors was facilitated by FABI's representation that the transaction also would be approved by the minority shareholders.
These facts alone suffice to support a finding of causation, but here Sandberg might have had yet more evidence to link the nondisclosure with completion of the merger. FABI executive Robert Altman and Bank Chairman Drewer met on the day before the shareholders meeting when the vote was taken. Notes produced by petitioners suggested that Drewer, who had received some shareholder objections to the $42 price, considered postponing the meeting and obtaining independent advice on valuation. Altman persuaded him to go forward without any of these cautionary measures. This information, which was produced in the course of discovery, was kept from the jury on grounds of privilege. Sandberg attacked the privilege ruling on five grounds in the Court of Appeals. In light of its ruling in favor of Sandberg, however, the panel had no occasion to consider the admissibility of this evidence.
Though I would not require a shareholder to present such evidence of causation, this case itself demonstrates that nonvoting causation theories are quite plausible where the misstatement or omission is material and the damage sustained by minority shareholders is serious. As Professor Loss summarized the holdings of a "substantial number of cases," even if the minority cannot alone vote down a transaction,
"minority stockholders will be in a better position to protect their interests with full disclosure and . . . an unfavorable minority vote might influence the majority to modify or reconsider the transaction in question. In [Schlick v. Penn-Dixie Cement Corp., 507 F.2d 374, 384 (CA2 1974),] where the stockholders had no appraisal rights under state law because the stock was listed on the New York Stock Exchange, the court advanced two additional considerations: (1) the market would be informed; and (2) even 'a rapacious controlling management' might modify the terms of a merger because it would not want to 'hang its dirty linen out on the line and thereby expose itself to suit or Securities Commission or other action-in terms of reputation and future takeovers.' " L. Loss, Fundamentals of Securities Regulation at 1119-1120 (footnote omitted).
I conclude that causation is more than plausible; it is likely, even where the public shareholders cannot vote down management's proposal. Causation is established where the proxy statement is an essential link in completing the transaction, even if the minority lacks sufficient votes to defeat a proposal of management.
The majority avoids the question whether a plaintiff may prove causation by demonstrating that the misrepresentation or omission deprived her of a state law remedy. I do not think the question difficult, as the whole point of federal proxy rules is to support state law principles of corporate governance. Nor do I think that the Court can avoid this issue if it orders judgment for petitioners. The majority asserts that respondents show no loss of a state law remedy, because if "the material facts of the transaction and Beddow's interest were not accurately disclosed, then the minority votes were inadequate to ratify the merger under Virginia law." Ante, at 1108. This theory requires us to conclude that the Virginia statute governing director conflicts of interest, Va.Code § 13.1-691(A)(2) (1989), incorporates the same definition of materiality as the federal proxy rules. I find no support for that proposition. If the definitions are not the same, then Sandberg may have lost her state law remedy. For all we know, disclosure to the minority shareholders that the price is $42 per share may satisfy Virginia's requirement. If that is the case, then approval by the minority without full disclosure may have deprived Sandberg of the ability to void the merger.
In all events, the theory that the merger would have been voidable absent minority shareholder approval is far more speculative than the theory that FABI and the Bank would have called off the transaction. Even so, this possibility would support a remand, as the lower courts have yet to consider the question. We are not well positioned as an institution to provide a definitive resolution to state law questions of this kind. Here again, the difficulty of knowing what would have happened in the hypothetical universe of full disclosure suggests that we should "resolv[e] doubts in favor of those the statute is designed to protect" in order to "effectuate the congressional policy of ensuring that the shareholders are able to make an informed choice when they are consulted on corporate transactions." Mills, 396 U.S., at 385, 90 S.Ct., at 622.
I would affirm the judgment of the Court of Appeals.
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