weaknesses of the complaint, giving plaintiff an ample opportunity to refine and clarify his allegations. However, plaintiff indicated his intent to rest upon his complaint. In response to the proxy material offered by defendants, plaintiff has submitted only his own affidavit, which states that the allegations in the complaint are derived from discussions he had with Max Hankin, a non-defendant shareholder.
Summary judgment has been called a "drastic remedy" which should only be granted when there are no genuine issues of material fact so as to entitle one party to judgment as a matter of law. See Continental Insurance Co. v. Bodie, 682 F.2d 436, 438-39 (3d Cir. 1982); Hollinger v. Wagner Mining Equipment Co., 667 F.2d 402, 405 (3d Cir. 1981). When considering the motion, the court must resolve all reasonable inferences in favor of the non-moving party. Bearing this standard in mind, I must measure the allegations in plaintiff's complaint against the proxy materials.
A. Count I: The Federal Securities Claims
Full and fair disclosure is the gravamen of section 14(a) and Rule 14a-9, and hence of section 12(i) as well. To protect the value of corporate suffrage, shareholders must be educated about the issues on which they will be expected to vote. Only when they are armed with all relevant facts can shareholders make an informed and effective choice. See Mills v. Electric Auto-Lite, Co., 396 U.S. 375, 381, 384-85, 90 S. Ct. 616, 24 L. Ed. 2d 593 (1970); J.I. Case Co. v. Borak, 377 U.S. 426, 431, 12 L. Ed. 2d 423, 84 S. Ct. 1555 (1964). The Congressional intent behind section 14(a) was 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, 396 U.S. at 381 (quoting H.R. Rep. No. 1383, 73d Cong., 2d Sess., 14; S.Rep. No. 792, 73d Cong., 2d Sess. at 12). To this end, section 14(a) and its implementing rule 14a-9, prohibit the use of false or misleading statements or omissions of material fact in the solicitation of proxies.
The determination of whether these anti-fraud provisions have been violated involves a two-step process. In the first instance, there is the more obvious issue of whether there was a misstatement or omission. The more problematic issue is whether the omission is "material." The United States Supreme Court has held that facts are material if 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, 48 L. Ed. 2d 757, 96 S. Ct. 2126 (1976). As the Court stated: "put another way, there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the 'total mix' of the information made available." Id. at 449.
The concept of materiality is used to delineate what should and what should not be actionable under the federal securities laws. In the 10b-5 area, for example, the Supreme Court has clearly held that the securities laws are not the appropriate vehicle for the redress of breaches of fiduciary duties. See Santa Fe Industries, Inc. v. Green, 430 U.S. 462, 476, 51 L. Ed. 2d 480, 97 S. Ct. 1292 (1977). Although this broad proposition does not apply under section 14(a), there is a parallel. In the section 14(a) area, some courts distinguish between director misconduct involving self dealing and misconduct which is little more than the breach of a fiduciary duty or the waste of corporate assets. Non-disclosure of the former is held to be presumptively material; the latter is never material. See, e.g., Gaines v. Haughton, 645 F.2d 761, 776-77 (9th Cir. 1981), cert. denied, 454 U.S. 1145, 102 S. Ct. 1006, 71 L. Ed. 2d 297 (1982); Weisberg v. Coastal States Gas Corp., 609 F.2d 650, 655 (2d Cir. 1979), cert. denied, 445 U.S. 951, 63 L. Ed. 2d 786, 100 S. Ct. 1600 (1980); Maldonado v. Flynn, 597 F.2d 789, 796-97 (2d Cir. 1979). As one court noted; "no case [has] held that the proxy rules are violated because management has allegedly mismanaged the company, and the proxy statement does not say so." Goldberger v. Baker, 442 F. Supp. 659, 667 (S.D.N.Y. 1977) (quoting Markewich v. Adikes, 422 F. Supp. 1144, 1147 (E.D.N.Y. 1976). See also, Selk v. St. Paul Ammonia Products, Inc., 597 F.2d 635, 639 (8th Cir. 1979) (federal securities laws do not cover all breaches of fiduciary duties or instances of mismanagement). This approach, which will have import here, strikes a sound balance. Shareholders are permitted to recover when they are kept in the dark about a director who has been self-dealing without totally transforming the securities laws into an enforcement mechanism for all state created breaches of fiduciary duties.
1. Change in the Size of the Board of Directors
In paragraph 25(a) of the complaint, plaintiff alleges a material omission in the defendants' failure to disclose the reason behind the reduction in the size of the Bank's Board of Directors. In 1977, the size of the Board was increased from nine to fourteen members. The 1978 proxy materials contained a proposal which would set the number of directors at five. Plaintiff claims that this was done because the large number of directors made it difficult for the defendants "to carry out the Bank's business for their principle benefit." Complaint para. 25(a). However, as I pointed out in my Bench Opinion, the 1978 proxy materials do detail the reasons for the reduction in size with some candor. They outline the rather intense disagreements between ten defendant directors and the remaining four directors. The proxy statement noted that the relationships had "deteriorated to the point that the disagreements are disruptive and divisive and detract from reasoned deliberation in handling affairs of the Bank." 1978 Proxy Statement at 4. The decrease was also stated to be in the best interest of the Bank and would facilitate more frequent meetings of the Board.
Plaintiff argues that this disclosure was insufficient in that it failed to explain that the defendant directors wished to perpetuate their control of the Bank. This motive is rather obvious; it is human nature to desire to keep one's job and continue in a position of control. As one court noted; "management need not disclose its motives . . . especially . . . where the undisclosed motivation is an obvious one, such as management's desire to perpetuate itself in office." Bertoglio v. Texas International Co., 488 F. Supp. 630, 650 (D. Del. 1980). This Circuit has explained:
The securities laws, while their central insistence is upon disclosure, were never intended to attempt any such measures of psychoanalysis or reported self-analysis. The unclean heart of a director is not actionable, whether or not it is "disclosed," unless the impurities are translated into actionable deeds or omissions both objective and external.