Before: WALD and EDWARDS, Circuit Judges, and KOZINSKI* , Circuit Judge, United States Court of Appeals for the Ninth Circuit.
UNITED STATES COURT OF APPEALS FOR THE DISTRICT OF COLUMBIA CIRCUIT 1986.CDC.249
DECISION OF THE COURT DELIVERED BY THE HONORABLE JUDGE WALD
Opinion for the Court filed by Circuit Judge WALD.
WALD, Circuit Judge: In August of 1982, Financial General Bankshares, Inc. (Financial General), a registered bank holding company, became a wholly-owned subsidiary of FGB Holding Corporation by means of a corporate merger.*fn1 Under the merger agreement, the two publicly traded classes of voting stock of Financial General were eliminated. The Class A common stock was cancelled at $28.00 a share while the regular common stock received $33.80 a share. Stephen Berg and 45 other owners of Class A common stock (hereinafter collectively referred to as Berg) brought an action for money damages alleging that certain defects in the proxy statement issued by Financial General in connection with the merger violated the Securities Exchange Act of 1934. The plaintiffs also sought damages for a violation of the Racketeer Influenced and Corrupt Organizations Act , as well as common-law fraud and breach of fiduciary duty in connection with the merger. After extensive pretrial discovery, the District Court granted the defendants' motion to dismiss or in the alternative for summary judgment on the ground that the alleged defects in the proxy statement were immaterial as a matter of law. The Court also dismissed the RICO claim. For the reasons stated herein, we affirm the District Court's dismissal of all claims against the defendants. I. EVENTS LEADING UP TO THE MERGER
Prior to becoming a wholly-owned subsidiary of FGB Holding Corporation, Financial General had two classes of voting stock, Class A common and regular common. *fn2 The Class A common stock had an $11 per share preference over the regular common in the event of liquidation and a 30 cent preference on cash dividends. The two classes of stock also differed in terms of their voting power. Each share of Class A common stock carried one vote, while each share of regular common stock carried ten votes. There were, furthermore, over ten times as many outstanding shares of regular common as of Class A common stock, and thus the regular common stock represented approximately 99% of Financial General's total voting equity.
In December of 1977 and January of 1978, three Middle Eastern investors, Kamal Adham, Faisal Saud al Fulaij and Abdullah Darwaish ("the Investors"), each acquired a substantial number of shares of Financial General's regular common stock. In February of 1978, Financial General filed suit against the Investors, alleging that they had purchased their shares without making appropriate filings with the Securities and Exchange Commission in violation of section 13(d) of the Securities Exchange Act of 1934. See 15 U.S.C. § 78m(d). Financial General sought, among other things, to enjoin the Investors from making a tender offer for any additional shares of the company. A month later, on March 17, 1978, the SEC also instituted a lawsuit against the Investors alleging a violation of section 13(d) in connection with the Investors' purchase of shares. Pursuant to a consent judgment entered into between the SEC and the Investors on the day the SEC's suit was filed, the Investors, without admitting or denying the SEC's allegations, agreed to acquire additional shares of Financial General's common stock only through a cash tender offer at a price of at least $15 per share.
The management of Financial General, however, continued to oppose the Investors' attempts to acquire control of Financial General. Finally, after a proxy contest waged by Adham in the spring of 1980 and after the Investors agreed to raise their offering price to $28.50 per share for the regular common stock, Financial General and the Investors entered into a Definitive Agreement on July 25, 1980. This agreement settled all existing litigation between the company and the Investors. The agreement further provided that if the necessary regulatory approvals for the tender offer were not obtained before the end of 1980, the tender offer price for the regular common stock would increase or decrease in accordance with a multiplier representing the ratio between the $28.50 price and the per share book value of the regular common stock. Because the tender offer for the regular common stock did not take place until March of 1982, the Investors under this formula were obliged to offer $33.80 per share.
To carry out the tender offer for Financial General's regular common stock, an entity called FGB Holding Corporation was established in June of 1981. FGB Holding Corporation was a wholly-owned subsidiary of Credit and Commerce American Investment, B.V. , a Netherlands corporation that was in turn a wholly-owned subsidiary of Credit and Commerce American Holdings, N.V. , a Netherlands Antilles corporation. The shareholders of CCAH were the three Middle Eastern Investors. FGB Holding Corporation commenced its tender offer for the regular common stock of Financial General on March 3, 1982 and eventually obtained 96% of it. This gave FGB Holding Corporation 95% of the voting equity of Financial General. FGB Holding Corporation promptly reduced the size of Financial General's board of directors and elected several new directors to the board.
Soon after FGB Holding Corporation gained voting control of Financial General, Financial General's board of directors approved a proposed merger with FGB Subsidiary, Inc. (FGB Sub), a wholly-owned subsidiary of FGB Holding Corporation. Under the merger proposal Financial General would become a wholly-owned subsidiary of FGB Holding Corporation, and the public shareholders would receive cash for their shares. The merger agreement proposed that holders of regular common stock not previously tendered would be entitled to receive $33.80 per share, while the holders of the Class A common stock would be entitled to receive $28.00 per share. FGB Holding Corporation's control of 95% of the voting power of the company ensured that the merger agreement itself would be approved by the requisite two-thirds vote of the regular and Class A common stock voting together. Under Virginia law and Financial General's own Articles of Incorporation, however, the cancellation of the Class A shares also required a two-thirds vote of the Class A shares voting separately as a class. The merger agreement provided that if Class A approval was not given, the Class A shares would remain outstanding after the merger. On July 9, 1982, Financial General issued a proxy statement in connection with the proposed merger and cancellation of the Class A shares. At the annual meeting of shareholders on August 11, 1982, 70.6% of the Class A shares voted to cancel the Class A stock. II. BERG'S SECURITIES CLAIMS
Berg's Amended Complaint alleges violations of sections 10(b), 13(e) and 14(a) of the Securities Exchange Act of 1934 in connection with the August 1982 merger of Financial General and FGB Sub. Only two of these statutory provisions are still at issue in this appeal. *fn3 Berg charges that Financial General issued a materially false and deceptive proxy statement in violation of sections 10(b) *fn4 and 14(a) *fn5 of the Securities Exchange Act of 1934 and Rules 10b-56 and 14a-97 promulgated thereunder. The majority of the alleged omissions and misstatements occur in the single paragraph on page 8 of the proxy statement. That paragraph stated that Eugene B. Casey, a director of Financial General and the largest Class A shareholder, supported the cancellation of the Class A shares at $28 per share and intended to vote his shares in favor of the merger. The paragraph went on to set forth reasons why Casey thought that the $28 price was fair. The challenged portion of the paragraph reads:
On June 3, 1982, representatives of FGBHC [ i.e., FGB Holding Corporation] proposed to Eugene B. Casey, who holds approximately 30.5% of the outstanding Class A Shares and is the largest single holder of Class A Shares, that FGBH acquire all of the Class A Shares as well as the [regular common] Shares in the Merger. After discussion, FGBHC and Mr. Casey agreed that a price of $28.00 per Class A Share in cash would be fair. In reaching such agreement, FGBHC and Mr. Casey considered, among other things, the historical market prices of the Class A Shares, the book value of the Class A Shares, the fact that the 592,569 Class A Shares currently outstanding represent only approximately 1% of the combined voting power of the Company (except with respect to matters requiring the Class A Approval . . .), the fact that each Class A Share is entitled to only one vote while each Share [of regular common] is entitled to 10 votes on matters on which the [regular common] Shares and Class A Shares vote together as a class and the price to be paid to holders of [regular common] Shares in the Merger.
Proxy Statement at 8. Berg argues that this paragraph materially misrepresents both the real basis for Casey's decision to support the cancellation of the Class A shares and the substance of the discussion between Casey and FGB Holding Corporation.
Berg also alleges that, irrespective of Casey's involvement, the proxy statement's discussion of historical market prices, voting power and book value as factors supporting the fairness of the $28 price for the Class A shares was materially misleading. Finally, Berg contends that the proxy statement failed to disclose certain facts surrounding the preparation of a fairness opinion by First Boston Corporation, the professional investment advisor to Financial General, that severely limited the worth of that opinion. The District Court granted the defendants' motion to dismiss, concluding that the proxy statement contained no material misrepresentations or omissions, and Berg appealed. After setting forth the standard governing our review of the District Court's assessments of materiality, we will proceed to evaluate each of the District Court's materiality determinations. III. THE STANDARD OF REVIEW
Only material misrepresentations or omissions in a proxy statement are actionable under section 14(a) and section 10(b) of the Securities Exchange Act of 1934.The Supreme Court has enunciated the standard of materiality under section 14(a) as follows:
An omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote . . . . It does not require proof of a substantial likelihood that disclosure of the omitted fact would have caused the reasonable investor to change his vote. What the standard does contemplate is a showing of a substantial likelihood that, under all the circumstances, the omitted fact would have assumed actual significance in the deliberations of the reasonable shareholder. 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 information made available.
TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449, 48 L. Ed. 2d 757, 96 S. Ct. 2126 (1976) (footnote omitted).
This standard of materiality also governs section 10(b). Facts are material if a substantial likelihood exists that a reasonable shareholder would consider them important in making an investment decision. See, e.g., Austin v. Loftsgaarden, 675 F.2d 168. 176 & n.17 (8th Cir. 1982); Bell v. Cameron Meadows Land Company, 669 F.2d 1278, 1281 (9th Cir. 1982); Panter v. Marshall Field & Co., 646 F.2d 271, 289 (7th Cir.), cert. denied, 454 U.S. 1092, 70 L. Ed. 2d 631, 102 S. Ct. 658 (1981).
The issue of materiality is inevitably a mixed question of law and fact. It involves a delicate assessment of the inferences a reasonable shareholder would draw from a proxy statement and a projection of the significance of these inferences to the hypothetical reasonable shareholder. Only if the alleged misrepresentations or omissions are so clearly unimportant to an investment decision that reasonable minds cannot differ should the issue of materiality appropriately be resolved as a matter of law by summary judgment or motion to dismiss. See TSC Industries v. Northway, 426 U.S. at 450. This is the stringent standard under which we must ...