The opinion of the court was delivered by: LORD, III
Plaintiff, a shareholder and since August 24, 1972 a director of the Penn Central Company ("the Company"), brings this action on his own behalf and as a representative of a class as defined by F.R.Civ.P. 23. The proposed class consists of all holders of the Company's common stock on July 7, 1972, the date of record for voting at the Annual Meeting of August 24. The Company and its Directors are defendants.
On July 17, 1972, the Board of Directors solicited proxies for approval of a Plan of Refinancing ("the New Plan") designed to satisfy a debt of which the Company has guaranteed repayment. The solicitation was accompanied by a Proxy Statement and Annual Report; a Supplement to the proxy statement was mailed to the shareholders on August 9, 1972.
Plaintiff alleges that the proxy statement and supplement contain false and misleading statements of material facts in violation of § 14(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78n(a), and of S.E.C. Rule 14a-9 adopted thereunder, 17 C.F.R. § 240.14a-9; that the proxy statement and supplement, together with defendants' prior course of conduct, constitute fraud under § 10(b) of the Act, 15 U.S.C. § 78j, and S.E.C. Rule 10b-5 adopted thereunder, 17 C.F.R. § 240.10b-5; and that the negotiation of the New Plan constitutes waste of the Company's assets under Pennsylvania law.
Plaintiff asks us to appoint a special receiver who would survey the Company's options for dealing with its indebtedness and report back to this court with recommendations for further relief.
In early 1970, Penn Central International N.V. ("International"), a wholly-owned subsidiary of the Company, borrowed approximately $59,000,000 in Swiss francs from a number of foreign financial institutions ("the Note-holders").
Repayment was unconditionally guaranteed by the Company. On February 25, 1971, the original Notes were exchanged for Extension Notes, again issued by International and guaranteed by the Company, and the Company, International and the Note-holders agreed to enter into a permanent plan of refinancing. That plan ("the Old Plan") was submitted to the stock-holders for their approval but this court held on December 3, 1971 that management's proxy material was false and misleading in violation of § 14(a) and Rule 14a-9. Robinson v. Penn Central Company, 336 F. Supp. 655 (E.D.Pa.1971).
The new Board of Directors, which now includes the plaintiff in Robinson, then proceeded to negotiate the New Plan under which New Notes will be exchanged for the principal amount of the Extension Notes plus the 10%-per-annum interest which has accrued on the Extension Notes. The shareholders, after receiving the proxy materials at issue here, approved the New Plan at the August 24 Annual Meeting by a vote of 12,123,720 shares to 1,807,599 shares.
Although, for reasons which we shall discuss shortly, we decline to rule in any way on the merits of the New Plan, some familiarity with its terms is essential to an understanding of the disputed proxy materials. The New Notes, which like the Extension Notes are payable in Swiss francs, will be issued by International and unconditionally guaranteed by the Company. They will mature on June 1, 1986, subject to a mandatory sinking fund beginning June 1, 1982, and will bear simple interest at the rate of 7 1/2% per year. Cash interest will not be payable until 1976, although interest will accrue from June 1, 1972. The New Notes will be secured by 35% of the common stock of the Penn Central Transportation Company, 100% of which is the Company's principal asset; by assignment of International's claims against two leased-line subsidiaries of the Penn Central Transportation Company arising from the issuance of the original 1970 Notes; and by funds from which the Company's operating expenses are currently being paid and will continue to be paid under the New Plan. The Noteholders will receive warrants which will enable them to acquire an equity interest in 10% of the Company's outstanding common stock upon exercising the warrants at $5.50 per share. The principal amount and accrued interest of the New Notes may be applied to the purchase price.
The New Plan also provides that unless they obtain the prior consent of the Noteholders, the Company and International may not (in the words of the proxy statement) "declare dividends, sell or acquire assets, merge, issue new shares of stock, incur liabilities outside the ordinary course of business, engage in new business, incur new debt or encumber their assets." Proxy Statement at 11. Some of these restrictions will be removed when and if 70% of the New Notes are retired.
"* * * any statement which, at the time and in 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.
The Supreme Court, in Mills v. Electric Auto-Lite Co., 396 U.S. 375, 90 S. Ct. 616, 24 L. Ed. 2d 593 (1970), has established the test for determining whether a fact misstated or omitted in a proxy statement is material. To find materiality a court must find that "the defect was of such a character that it might have been considered important by a reasonable shareholder who was in the process of deciding how to vote." Mills v. Electric Auto-Lite Co., at 384, 90 S. Ct. at 621. The central question is not whether the defect actually had a decisive effect, but rather whether it has a "significant propensity to affect the voting process." [Emphasis in original.] Id.
It is easy to find small errors and trivial omissions in any proxy statement, but "[reasonable] latitude in this area is important if nit-picking is not to become the name of the game." Kohn v. American Metal Climax, Inc., 458 F.2d 255, 267 (C.A.3, 1972). It is at least equally important, however, that shareholders not be deprived of adequate and honest information through the cleverness of corporate draftsmen and their legal advisers. The standards of the 1934 Act and Rule 14a-9 will not be met by a proxy statement which is free of major misstatements but which, when read as a whole by a reasonable shareholder, conceals the real nature of the proposal for which the shareholder's vote is being sought. Gould v. American Hawaiian Steamship Co., 319 F. Supp. 795, 810 (D.C.Del.1970). The proxy material must, subject to the inherent limitations of the art, convey an honest and candid picture of the proposal.
Plaintiff has vigorously argued that the New Plan is a bad one. We decline, however, to express any opinion on the substance of the plan. Nowhere in the language of § 14(a) or Rule 14a-9 can we find the slightest hint of a mandate for the courts to pass on the wisdom of a position for which proxies have been solicited. The only issue in an action arising under § 14(a) is the sufficiency of the proxy material itself. A court must determine whether the shareholders have been given sufficient information to make a rational, well-informed choice; if they have, the court may not substitute its own judgment for that of the shareholders. To reach a decision on the merits of the New Plan of Refinancing would make as much a mockery of the ideal of corporate democracy as does the sort of false and misleading proxy statement which § 14(a) and Rule 14a-9 were designed to outlaw. See, Mills v. Electric Auto-Lite Co., supra ; Colonial Realty Corp. v. Baldwin-Montrose Chem. Co., 312 F. Supp. 1296, 1299 (E.D.Pa.1970).
We therefore consider only plaintiff's allegations of deficiencies in the proxy statement and supplement.