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ASH v. GAF CORP.

July 9, 1982

RICHARD A. ASH
v.
GAF CORPORATION



The opinion of the court was delivered by: NEWCOMER

 Newcomer, District Judge.

 Plaintiff Ash alleges that GAF has violated Rule 14a-3(b), 17 C.F.R. § 240.14a-3(b), promulgated by the Securities and Exchange Commission ("Commission") under Section 14a of the Securities and Exchange Act of 1934 ("Act"), 15 U.S.C. 78n(a). Plaintiff complains that a third-class mailing of the annual report, four (or five) days in advance of a proxy solicitation, does not satisfy the requirement of Rule 14a-3(b) that the annual report "precede" the proxy solicitation and statement issued for the purposes of an annual meeting at which directors are to be elected.

 Defendant GAF moves for summary judgment, arguing that there are no material facts at issue, that plaintiff suffered no injury, that the question is moot since the election has been held, and that, therefore as a matter of law, judgment should be entered in its favor.

 The facts and averments are the following: In anticipation of its annual meeting, GAF began the process of mailing copies of its annual report to its stockholders. Some were sent on March 16, 1982. Others were sent on March 17, 1982. They were sent by third-class mail. According to filed affidavits, the reports were mailed from Paramus, New Jersey. On March 21, 1982, GAF then mailed its proxy statement, proxy solicitation, and a cover letter, dated March 24, 1982, from Jesse Werner, chairman and chief executive officer of GAF, which urged a prompt return of the proxy solicitation. This second mailing by first-class mail was also sent from Paramus, New Jersey. On April 27, 1982, the annual meeting was held as scheduled, and a slate of directors proposed by the board of directors was elected at an uncontested election and the selection of auditors was approved.

 Plaintiff Ash alleges in his complaint that he received his proxy solicitation on March 23, 1982, and his copy of the annual report on March 25, 1982 -- a reverse sequence from the order in which they were sent. Plaintiff has submitted material (and is willing to produce testimony from officials of the U.S. Postal Service) to show that the normal time required for the delivery of third-class mail is ten to fourteen days. For this reason, he contends that solicitations sent by first-class mail, albeit after the third-class mailing of the annual report, would be expected to arrive before the report. I have no reason for purposes of this motion not to accept these facts and averments.

 I should make clear from the outset what is not at issue in this case. There is no need to interpret Rule 14a-3(b) in light of the language of Rule 14a-3(a). *fn1" Rule 14a-3(a) refers only to the relationship of written proxy statements and solicitation requests. In this case the proxy statement was "furnished" concurrently with the solicitation request since they both arrived in the same envelope. For this reason, I need not dwell on the meaning of the verb "furnish," as plaintiff suggests.

 Neither is the issue clearly moot, as defendant argues. Even though the election has already occurred, if the damage done to corporate suffrage is sufficient, a federal court must consider applying those remedies necessary to redress the injury. J.I. Case v. Borak, 377 U.S. 426, 433-434, 12 L. Ed. 2d 423, 84 S. Ct. 1555 (1964).

 Although there have been some few passing discussions of Rule 14a-3(b), there has been no judicial decision based on it. However, there have been a number of significant appraisals of the scope and intent of Section 14a of the Act and of other rules designed under that section by the Commission to implement its underlying logic and purpose. Most notable have been the Supreme Court rulings on cases concerned with Rule 14a-9, the bar to the use of false or misleading proxy statements.

 Section 14a has been held to have a prophylactic purpose. It is a means of preventing "management or others from obtaining authorization for corporate action by means of deceptive or inadequate disclosure in proxy solicitation." Borak, 377 U.S. at 431. See also TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 448, 48 L. Ed. 2d 757, 96 S. Ct. 2126 (1976). An equally important purpose (separable from the first) is the safeguard of the corporate suffrage of shareholders. Section 14a "was intended to promote 'the free exercise of the voting rights of stockholders' by ensuring that proxies would be solicited with 'explanation to the stockholder of the real nature of the questions for which authority to cast his vote is sought.'" Mills v. Electric Auto-Lite Co., 396 U.S. 375, 381, 24 L. Ed. 2d 593, 90 S. Ct. 616 (1970) (quoting H.R. Rep. No. 1383, 73rd Cong., 2d Sess. 14 (1934); S. Rep. No. 792, 73d Cong., 2d Sess. 12 (1934)). Accord TSC Industries, 426 U.S. at 444.

 In defining the right of corporate suffrage, the Supreme Court found a private right of action for those appropriately placed to sustain injury. "The injury which a stockholder suffers from corporate action pursuant to a deceptive proxy solicitation ordinarily flows from the damage done the corporation, rather than from the damage inflicted directly upon the stockholder. The damage suffered results not from the deceit practiced on him alone but rather on the stockholders as a group." Borak, 377 U.S. at 432. Following this logic, courts have held that, as is the case here, a nontendering shareholder may complain derivately of injury to the target company. Smallwood v. Pearl Brewing Co., 489 F.2d 579, 596 (5th Cir. 1974) (interpreting Section 14(e)).

 The showing of injury is not by itself sufficient. Not all corporate missteps lead necessarily to corporate liability, even when it can be shown that rules promulgated under Section 14a have not been obeyed with care and attention. Misstatements or omissions must not only be material but also must be significant before they can be considered to permit a cause of action against the corporation. "[A] cause of action cannot be established by proof of a defect so trivial, or so unrelated to the transaction for which approval is sought, that correction of the defect or imposition of liability would not further the interests protected by § 14(a)." Mills, 396 U.S. at 384.

 Recently, the Supreme Court, re-emphasized the required relationship between breach and injury. In addition to a showing that the proxy rules have been materially breached, "the plaintiff must also show that he was injured and prove damages." Parklane Hosiery v. Shore, 439 U.S. 322, 558, 58 L. Ed. 2d 552, 99 S. Ct. 645, n. 2 (1979). I take this to mean that not only the breach but the injury and the resulting damages must be real not fancied. The injury claimed must not result merely from a technical misadventure; it must undermine the purposes upon which the rule is based and actual damage must be susceptible to proof. Generally in actions brought under Section 14a and the rules promulgated pursuant to that section, courts in this circuit, as well as in other circuits, have rejected the principle that a violation of the rules is sufficient in itself. Something more must be shown: that the integrity of the election was impaired. Malhas v. Shinn, 597 F.2d 28, 31 (2nd Cir. 1979). See Ash v. LFE Corporation, 525 F.2d 215, 219 (3rd Cir. 1975). See also Maldonado v. Flynn, 597 F.2d 789, 796 (2nd Cir. 1979).

 Helpful as Borak, Mills and TSC Industries are as glosses to Section 14a of the Act, in this case their reach is limited. They are based upon interpretations of section 14a drawn in the light of Rule 14a-9. Rule 14a-9, directed at safeguarding stock-holders from false and misleading proxy statements, is at the heart of the Act. The rule was designed to protect stockholders when they must endorse those explicit transactions that have the potential of altering the value of their property rights. "Corporate suffrage" is therefore not an abstract concept, importing principles of political equity into the corporate forum. It is singularly economic in its purpose and requires a straightforward and pragmatic analysis. For this reason, although the Supreme Court has found that Rule 14a-9 and Section 14a contain the guarantee of suffrage and the principle of deterrence, it has imposed a heavy burden on plaintiffs: the burden of proving the materiality of the defect as it might ...


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